ALF was the ultimate holding company of Dial-A-Dump Industries Pty Ltd which, at the relevant time, conducted waste recycling operations at a facility at Eastern Creek. The second respondent and second cross-appellant, Mr Ian Raymond Malouf (Mr Malouf), was the managing director and the principal shareholder of ALF.
The site on which the recycling operations were conducted was acquired from Valad Funds Management Ltd (Valad) in 2006. Valad provided vendor finance for the purchase pursuant to a loan facility agreement. The loan facility agreement provided for advances of $72,050,000 and $10,350,000. Each of the advances was secured by secured notes issued by ALF. The first (the first notes), issued in respect of the $72,050,000 advance, obliged ALF to pay the sum of $112,948,000 in various instalments, the final instalment of $82,762,000 being payable on 30 September 2009. The second (the second notes), issued in respect of the $10,350,000 advance, obliged ALF to pay $10,350,000 on 30 September 2009.
On 29 January 2009, Valad sent a letter to ALF confirming that at the commencement of 2009, $82,762,000 was owing in respect of the first notes and $10,350,000 remained outstanding in respect of the second notes.
On 5 January 2009, the arrangements between ALF and Valad were restructured. An early repayment of $45 million was advanced against the first and second notes on that day. The payment was effected in part by the issue by ALF to Valad of $20 million worth of convertible notes on 5 January 2009 and by the entry into an agreement to transfer to Valad a parcel of land at the site, valued by the parties at $5 million. The balance of the $45 million was made up of a cash payment of $10 million and an irrevocable bankers undertaking for $10 million, to be drawn in February 2009.
On the same day, in consideration of $20 million, the balance of the loan was assigned by Valad to Carlewie Pty Ltd (Carlewie), an associated company of ALF. The total amount received by Valad was thus $65 million.
To fund the transaction, ALF issued convertible notes having a total face value of between $29 to $31.9 million to private investors. These, and the $20 million convertible notes issued to Valad, were described as the Tranche 1 notes.
To enable the issue of the convertible notes, ALF, Mr Malouf and certain other parties entered into a Deed Poll on 5 January 2009.
The Deed Poll recited that ALF may issue convertible notes from time to time on the terms and conditions contained in the Deed Poll and the Terms of Issue of the notes (the Terms of Issue). It also recited that upon conversion of convertible notes, a shareholders agreement would be entered into. The operative part of the Deed Poll provided that each convertible note was a debt obligation of ALF (cl 2(a)). It also contained a covenant by Mr Malouf that if convertible notes were issued and were to be converted into shares in ALF, he would execute the proposed shareholders agreement on his own behalf, on behalf of ALF and as attorney for and on behalf of noteholders of "Note Holders Shares" (cl 3).
The Terms of Issue contained the following definitions relevant to the proceedings:
"'Enterprise' means the ordinary conduct of the Business of the Group including:
(a) the bin collection and plant hire business, including growth of that business by utilisation of the Eastern Creek site;
(b) 15 hectares of land at St Peters, contained Lot 11 DP 1013168 and Lot 1 DP 10110128 and the associated waste transfer station and tip; and
(c) 109 hectares of land (being the Security Land), waste transfer station and tip at Eastern Creek capable of receiving up to 2 million tons of waste per annum"
"'Exit' means:
(a) the admission of the entire share capital of Alexandria Landfill to the official list of ASX Limited or other stock exchange;
(b) the sale of all of the ordinary Shares on issue in Alexandria Landfill; or
(c) the sale of the whole or substantially all of the business carried on from time to time by the Group."
"'Issue Date' means the date on which a Convertible Note is issued."
"'Maturity Date means 1 January 2013.
"'Organic Debt' means any amounts borrowed by any member of the Group for the general business of the Enterprise, including existing bank debt of about $50 million and any debt used to complete the purchase and establishment of the waste site at Eastern Creek."
"'Project Debt' means any amounts borrowed by any member of the Group to fund activities which are not funded by Organic Debt."
"'Redemption' means the redemption of a Convertible Note in accordance with Clause 8 (and 'Redeem' has a corresponding meaning)."
"'Security' means a first registered Mortgage granted in favour of each Note Holder, or a nominee company or a security trust nominated by all Note Holders over the Security Land."
"'Security Land' means land currently owned by: ACN 114 843 453 over the land contained in certificates of title folio identifiers 2/262213; and by ThaQuarry over 1/400697, W/419612, and 10/241859."
"'Trust Security' means any security which the Trustee is described as holding as agent on behalf of the Note Holders in respect of the Transaction, any other security transferred or granted to the Trustee to be held on behalf of the Note Holders in respect of the Transaction, and any money received by the Trustee pursuant to or upon realisation of such security."
"'Valad Lot' means a ten hectare parcel of the Security Land to be agreed between Valad Funds Management Limited or nominee and Alexandria Landfill (who will procure that the legal owner of the land subdivides the land and transfers the subdivided parcel)."
Clause 2 of the Terms of Issue dealt with the nature and form of the convertible notes. Clause 2.1 provided that each convertible note was a debt obligation of ALF. Clause 2.2 provided that each note had a face value as shown on the note at the time of issue and that notes would be issued in denominations of $1 million or more. Clause 2.6 provided that noteholders would not have any right to vote at or attend general meetings of ALF, unless or until they owned shares.
Clause 3.1 provided that each convertible note would bear interest from and including the issue date at the rate of 6% per annum of its face value, calculated on a daily basis up to the date on which conversion or redemption occured. Clause 3.2 provided that interest was to be paid quarterly and cl 3.3 provided that a note would cease to bear interest when redeemed, converted or otherwise repaid.
Clause 4 provided for an election to redeem and for the payment of bonus interest if such an election was made. Relevantly, it provided as follows:
"4.1 Bonus Interest Election
(a) A Note Holder may give Alexandria Landfill a notice in writing electing to have the Convertible Note Redeemed, and not Converted, on the Maturity Date ('Bonus Interest Election').
(b) An application form for issue of a convertible Note may include such an election.
(c) A Bonus Interest Election may be given at any time prior to the later of:
(i) 12 months prior to the Maturity Date; and
(ii) one month after Alexandria Landfill gives the Note Holder a written notice reminding the Note Holder of the option to make a Bonus Election, which notice must not be given prior to 14 months prior to the Maturity Date.
…
4.3 Bonus Interest payment on Redemption
If a Convertible Note is Redeemed at the Maturity Date pursuant to clause 8.2 because a valid Bonus Interest Election has been made in respect of that Convertible Note in accordance with these Terms of Issue, Alexandria Landfill will pay, in addition to and at the same time as its repayment of the Face Value pursuant to clause 8.2, a Bonus Interest payment ('Bonus Interest') in respect of that Convertible Note for the period from and including the Issue Date until but excluding the Maturity Date at 4 percent per annum, calculated by reference to the Face Value of the Convertible Notes."
Clause 5 provided for registered security to the noteholders. Clause 5.1 envisaged each noteholder being granted a mortgage over the security land or a mortgage being granted to a nominee company nominated by all noteholders. Clause 5.2 provided for the discharge of the mortgage upon redemption or conversion. Clause 5.3 made provision for subdivision and release of the Valad Lot from the security and its transfer to Valad. This transfer was to be made pursuant to the agreement reached with Valad on 5 January 2009, to which I have referred in par [5] above.
Clause 7 is of central importance in the cross-appeal. So far as relevant, it provided as follows:
"7.1 General
Unless Alexandria Landfill and a Note Holder otherwise agree, a Convertible Note may not be converted other than in accordance with this clause 7.
7.2 Maximum Limit on Capital of the Company
(a) Alexandria Landfill and Malouf covenant that until all Notes which are to Convert pursuant to these Terms of issue have converted no further Shares in the capital of the Company will be issued to any other person without the consent in writing of all Note Holders.
(b) Alexandria Landfill may issue Convertible Notes pursuant to this document having a maximum aggregate Face Value of up to $70 million.
7.3 Entitlements on Conversion
(a) Malouf will be entitled to profits of the Group from the ordinary conduct of the Enterprise derived on or prior to the Maturity Date or such other date as Conversion occurs. For this purpose, a special class of Share may be issued to Malouf or his nominee or other appropriate payments made to achieve this objective.
(b) Profits derived other than from the ordinary conduct of the Enterprise (for example, the sale of part of the assets, new projects, the capital growth of the assets of the Group) will be retained by the Group and form part of the assets owned by the Group at the time of Conversion and will form part of the assets owned by the Note Holders pursuant to their Shares.
7.4 Issue of 'Shares' on Conversion of Convertible Notes
Convertible Notes which are to Convert pursuant to these Terms of issue will Convert into fully paid preference Shares in Alexandria Landfill. These preference Shares will rank in priority to all other Shares on winding up, but will rank pari passu with all other Shares for dividends and other entitlements.
7.5 Conversion
(a) A Note Holder will receive on Conversion Preference Shares so that its holding in Alexandria Landfill is represented by the formula A/B where:
A is the Face Value of the Note Holder's Convertible Notes; and
B is $280 million (being the agreed value of the Group) less any Organic Debt.
Under no circumstances will a Note Holder receive less than 1/280million ownership in the Group for each $1.00 Face Value.
(b) Alexandria Landfill does not at the date of this document own all the Group and all the parties to the Deed Poll other than the Note Holders each covenant with the Note Holders that they will after the Issue date and before Conversion either consolidate all the interests of the Group so they are ultimately owned by Alexandria Landfill or in the alternative to otherwise ensure that the Note Holders upon Conversion obtain the same economic benefit as if all the interests of the Group are ultimately owned by Alexandria Landfill.
(c) Nothing in clause 7.3(b) or otherwise in these Terms permits any dilution or reduction of the prospective interest of the Note Holders in the Group on Conversion, and the parties to the Deed Poll must ensure no such dilution occurs.
(d) Alexandria Landfill covenants with the Note Holders that between the Issue Date and the Maturity Date it will not incur any material liabilities if the economic effect of those liabilities (when aggregated) on the Group would be to reduce the value of the Group to less than $280 Million.
…
7.7 Becoming a shareholder
If Conversion occurs, each Note Holder whose Convertible Notes are to be Converted:
(a) agrees it will become a member of the Company and agrees to have its name entered in the applicable Share register; and
(b) accepts the preference Shares issued upon Conversion on the terms and conditions of the constitution of Company and the Proposed Shareholders Agreement, and agrees to be bound by the constitution of the Company and the Proposed Shareholders Agreement without the need for any further act by them.
7.8 Entering the Proposed Shareholders Agreement
If Conversion occurs, each Note Holder whose Convertible Notes are to be Converted will, through the Attorney appointed pursuant to clause 13, enter into the Proposed Shareholders Agreement.
…
7.11 Warranties
The parties to the Deed Poll warrant and agree as follows:
…
(h) the prior written consent of at least 60% of the Note Holders will be obtained prior to:
…
(v) incurring any Project Debt.
7.12 Warranties by Ian Malouf
Malouf warrants as follows:
…
(g) he will endeavour to have the Group open a waste transfer station and refuse tip at Eastern Creek, have the Group borrow money for the establishment of that facility, and retire that debt by the Maturity Date."
Clause 8 dealt with the redemption of convertible notes. The following provisions are relevant:
"8.1 General
Unless Alexandria Landfill and Note Holder otherwise agree, a Convertible Note may not be redeemed other than in accordance with this clause 8.
8.2 Redemption following Bonus Interest Election
If Alexandria Landfill has received a valid Bonus Interest Election in respect of Convertible Notes, those Convertible Notes will not be Converted, but, on issue on the Maturity Date, will be Redeemed on that date for an amount in cash equal to the aggregate Face Value of those Convertible Notes, and Alexandria Landfill must pay that amount (in addition to Bonus Interest payable under clause 4 and the final interest payment payable pursuant to clause 3) to the relevant Note Holders on the Maturity Date in accordance with clause 11.
8.3 Redemption on Exit prior to the Maturity Date
The provisions of this clause apply if there is an Exit prior to the Maturity Date.
(a) in respect of those Convertible Notes for which a Bonus Interest Election has been made, upon the occurrence of an Exit Alexandria Landfill must Redeem all of those Convertible Notes and pay to the Note Holder the Face Value plus Interest upon the Note calculated up to the Maturity Date (including Bonus Interest).
(b) In respect of those Convertible Notes for which a Bonus Interest Election has not been made, upon the occurrence of an Exit Alexandria Landfill must Convert the Convertible Notes whereupon the relevant Note Holders will be entitled to participate in the Exit as shareholders.
(c) Instead of Redeeming Convertible Notes pursuant to clause 8.3(a), Alexandria Landfill may procure a third party to acquire all of the Convertible Notes as part of or in conjunction with an Exit, provided that the Note Holders are paid at least the amount they would be entitled to be paid had their Convertible Notes been Redeemed pursuant to clause 8.3(a) as applicable.
…
8.5 Effect of Redemption
Upon Redemption of a Convertible Note in accordance with this clause 8, the liability of Alexandria Landfill in respect of the Convertible Notes Redeemed shall be satisfied and reduced to zero."
It can be seen that cl 8 makes no provision for redemption, as distinct from conversion, in respect of notes other than those in respect to which a bonus interest election had been made under cl 4.
Clause 14 prohibited the transfer of notes without the consent of ALF, except in the case of notes in respect to which a bonus election had been made, or in respect of a transfer to other noteholders or family members or related corporations.
Clause 15 provided that any amendment to the Terms of Issue or the Deed Poll had to be authorised by noteholders who together held more than 75% by value of all convertible notes on issue.
It is unnecessary to refer to the shareholders agreement in any detail. However, it contained definitions of organic debt and project debt in similar terms to the Terms of Issue. It also contained restrictions on transfers of shares and provided that project debt could not be incurred without the consent of at least 80% of the shareholders.
The primary judge found that between 5 January 2009 and 14 December 2009, ALF issued Tranche 1 notes to other investors, which were principally used to repay Valad.
In late 2010, ALF required further funds to redeem the remaining Valad convertible notes.
In December 2010, ALF entered into an agreement with BB, pursuant to which BB agreed to subscribe for convertible notes having a face value of $30 million. The agreement was contained in a deed dated 1 December 2010 between BB, Mr Malouf and ALF (the put option deed). In broad terms, BB agreed to subscribe for notes having a face value of $30 million and was granted a put option to sell 20 million preference shares issued on conversion of the notes to Mr Malouf, the exercise price being $29,966,285, less any amount previously paid to BB as a capital distribution from the proceeds of the sale of a capital asset of ALF valued at over $5 million.
The put option deed contained the following recital:
"Background
1 BBRC will be the legal and beneficial owner of the Specified Option Preference Shares in the issued capital of the Company upon conversion of the BBRC Convertible Notes with a face value of $20 million.
2 IRM has agreed to grant the Put Option to BBRC on the terms and conditions set out in this deed."
The put option deed contained the following definitions:
"BBRC Convertible Notes
means the Convertible Notes subscribed for by BBRC in accordance with clause 10a)."
"Convertible Note Terms of Issue
the convertible note terms of issue annexed as Schedule 1 to the Deed Poll."
"Exercise Price
Twenty nine million, nine hundred and sixty six thousand, two hundred and eighty five dollars($29,966,285 less any amount previously paid to BBRC as a capital distribution from the proceeds arising from the sale of a capital asset of the Company valued at more than $5Million."
"Option Period
has the meaning in clause 4.2."
"Specified Option Preference Shares
Twenty million preference shares in the issued capital of the Company."
Clause 1.6 provided that, to the extent that there was inconsistency between the put option deed and the Terms of Issue, the put option deed prevailed.
Clause 3 provided that the put option lapsed on an Exit occurring in according with the Terms of Issue or lapsed on 15 March 2016.
Clause 4 dealt in detail with the terms of the put option. Relevantly, it provided as follows (IRM refers to Mr Malouf and BBRC to BB):
"4.1 Put Option
(a) In consideration of the subscription by BBRC for the BBRC Convertible Notes, IRM irrevocably grants to BBRC the option to require IRM to purchase the Specified Option Preference Shares for the Exercise Price.
4.2 Option Periods
BBRC may, subject to clause 4.4a), exercise the Put Option during either of the following periods:
(a) if an Exit in accordance with the Convertible Note Terms of Issue has not occurred prior to 30 June 2015, the period from and including 1 July 2015 until and including 30 September 2015; and
(b) if:
1) an Exit in accordance with the Convertible Note Terms of Issue has not occurred prior to 15 December 2015; and
2) BBRC has not exercised the Put Option during the period referred to in clause 4.20a),
the period from and including 15 December 2015 and including 15 March 2016, (each, an Option Period).
4.3 Supplementary Option Provision
(a) Subject to clause 4.3c), if, prior to the Maturity Date, IRM dies, suffers total incapacity or, in BBRC's reasonable opinion, ceases to be in active direct management control of the operational, financial and strategic direction of the Business Enterprise, BBRC may elect to require the BBRC Convertible Notes to be redeemed on the Maturity Date in accordance with clause 8.2 of the Convertible Note Terms of Issue. This right is without prejudice to BBRC's rights under clause 8.3 of the Convertible Notes Terms of Issue.
(b) Subject to clause 4.3c), if, after the Maturity Date, IRM dies, suffers total incapacity or, in BBRC's reasonable opinion, ceases to be in active direct management control of the operational, financial and strategic direction of the Business Enterprise, BBRC may exercise the Put Option at a price equal to the amount of the Exercise Price less $9,194 per day for each day between the date of exercise of the Put Option and 1 July 2015."
Clause 9 provided for a facility fee and interest payment. It was in the following terms:
"9 Facility Fee and Interest Payment
In consideration of BBRC subscribing for the BBRC Convertible Notes, the Company covenants and agrees to pay to BBRC as follows:
(a) the Facility Fee upon the execution and exchange of this deed; and
(b) the amount of $320,000 on 21 March 2012 representing supplementary interest on the BBRC Convertible Notes."
Clauses 10 and 11 dealt with the terms on which the convertible notes were to be subscribed for and issued to BB. Relevantly, they provided as follows:
"10 Conditions precedent to Subscription for BBRC Convertible Notes
(a) Subject to satisfaction of the conditions precedent set out in clause 10b), BBRC must subscribe for BBRC Convertible Notes. Upon subscription IRM must procure that the BBRC Convertible Notes are issued pursuant to the Convertible Note Terms of Issue, the Deed Poll and the terms of this deed. Upon subscription, the BBRC Convertible Notes must be subscribed for and issued on those terms and the terms of this deed and on the basis that BBRC enjoys the benefit of the Convertible Note Terms of Issue, the Deed Poll and the warranties in the Convertible Note Terms of Issue, in the following tranches:
30th November Tranche A - $10Million
Tranche B $20 Million as follows.
30th November 2010 $5,000,000
21st January 2011 $5,000,000
21st February 2011 $3,000,000
21st March 2011 $3,000,000
21st April 2011 $1,000,000
20th May 2011 $3,000,000
(b) Any subscription by BBRC for the BBRC Convertible Notes is conditional upon:
1) the consent of the existing Noteholders to BBRC obtaining a first priority registered mortgage over the land described in folio identifier 2/DP 1145808;
2) a registered mortgage over the land described in folio identifier 2/DP 1145808 in favour of BBRC; and
3) execution of the Priority Deed by each party to that deed.
11 Undertaking
…
1) all amendments required to ensure there are no restrictions under the terms of the Proposed Shareholders Agreement to the transactions contemplated by this deed including the transfer of the Specified Option Preference Shares from BBRC to IRM on Completion"
Clause 15.6 contained an entire agreement clause.
The form of application for the 10 million notes described in the put option deed as the Tranche A convertible notes was not in evidence. However, the application forms for the notes described as Tranche B convertible notes expressly provided that the bonus interest election contained in cl 4 of the Terms of Issue was not available to BB in respect of those notes.
It should be noted that on the same day, 1 December 2010, pursuant to a call option deed, a call option was granted by BB to Mr Malouf over 20 million preference shares, to be issued on conversion. The call option was exercisable between 16 March 2016 and 16 November 2016, the exercise price being $32,328,142.86. However, on the day that the call option deed was executed, Mr Malouf waived his rights to exercise this option.
On 4 November 2011, Mr Malouf informed noteholders that there would likely be a debt owing at the time of conversion and requested noteholders to agree to convert their notes at 110% of face value rather than pursuant to the formula in cl 7.5(a) of the Terms of Issue. That proposal was rejected.
On 30 November 2012, Mr Malouf informed convertible noteholders that the level of organic debt was well above the levels previously forecasted. He proposed that on conversion, each shareholder be issued with one share for each $1 value of notes held, plus a cash payment of 15% of the face value of the convertible notes.
On 20 December 2012, Mr Malouf proposed that noteholders be issued with one convertible preference share for each $1 of convertible notes held, plus a proportionate share of the 10.3 million notes being redeemed, plus a 15% uplift in cash or further shares, plus an additional 7.5% bonus in cash or additional shares. Many noteholders accepted this offer. BB rejected this proposal.
Under the Terms of Issue, the notes were convertible on 1 January 2013 (the Maturity Date). On 31 December 2012, ALF resolved to issue shares in accordance with the proposal made by Mr Malouf to noteholders on 20 December 2012. BB received 37,857,858 preference shares. On conversion, no distinction was made between the Tranche A and Tranche B notes.
[2]
The issues
There was no issue between the parties that the notes described as Tranche A notes in the put option deed were to be converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. However, ALF and Mr Malouf contended that the Tranche B notes were to be converted on the basis of one preference share for each $1 of notes. The primary judge found, in favour of BB, that the Tranche B notes were to be converted at the rate specified in cl 7.5(a). This is the subject of the cross-appeal.
There was no issue that there was some organic debt at the conversion date. However, the primary judge concluded that borrowing to raise funds to redeem convertible notes, totalling $11.8 million, and an increase in a bank overdraft of $2.9 million, used for the same purpose, did not constitute organic debt for the purpose of the formula. This conclusion is the subject of the appeal.
[3]
The admissibility issue
In support of its contention that the 20 million Tranche B notes issued to BB were to be converted on a one-to-one basis, ALF sought to rely on correspondence which passed between ALF and BB in the period leading up to the execution of the put option deed.
The first of these documents was an email dated 14 November 2010 from Mr Bundy of BB to Mr Malouf, making a proposal to subscribe for $30 million convertible notes. He proposed subscribing for $20 million of those notes over the period from February to July 2011, in respect of which there would be what was described as a predetermined exit option. The calculation of this exit option was said to be based on a forecast EBITDA for the business conducted by ALF's subsidiaries as at June 2013, of $66,132,000 at a multiple of 3.75%, plus a value of the land component, of $155 million at multiples ranging between 4% and 5%, depending on the date of the exercise of the option.
The email from Mr Malouf in response, dated 15 November 2010, commented and crossed out some of these proposals. The exercise date for the put option was varied, the multiples for the land component were crossed out and amendments to the dates on which the notes were to be issued were proposed.
On 17 November 2010, BB provided ALF with a draft term sheet. The following sections are relevant for the purpose of the appeal on this issue:
"Amount
$20,000,000 is available to be drawdown as per the following schedule:
November 2010 $5,000,000
January 2011 $5,000,000
February 2011 $3,000,000
March 2011 $3,000,000
April 2011 $1,000,000
May 2011 $3,000,000
[4]
Drawdown cannot occur earlier than the 20th of the month as specified above."
"Conversion
Conversion Date: This note is convertible to shares in November 2012
Rate of Conversion: the note will convert to equity at a rate of $1.00 per share per $1.00 of the value of the note.
DADI Shares outstanding at conversion date: 280 Million"
"Pre-determined Exit
Dealt with by side agreement will require one other, so I don't forget
In the event that a sale of the business does not occur prior, both parties agree to the following options exercisable at June 30 2015:
BBRC: put option to sell their proportion of shares based on a value of the business of 4x multiple of a pre-determined valuation.
DADI: call option to buy BBRC shares based on a value of the business of 4.5x multiple of a pre-determined valuation
Where the pre-determined valuation is equal to the June 30, 2013 forecast of EBITDA plus $155,000,000 for the land component. Any sale amount would be equal to BBRC % holding of the total value."
"Other
In addition to this Senior Convertible Note, BBRC will provide a further $10M as existing Convertible Notes payable upon signing on X November 2011
BBRC will be granted the same terms and conditions as the existing note"
On 18 November 2010, Mr Malouf replied, enclosing a document he described as "Terms Sheet/Heads of agreement". The following portions are said to be relevant for the purpose of the cross-appeal:
"1 On 24th November 2010 will pay and subscribe for $10 Million in T2 Convertible Notes in Alexandria Landfill Pty Ltd.
2 BBRC will make additional payments as subscriptions totalling $20 Million in T2 Convertible Notes in Alexandria Landfill Pty Ltd on the following dates
24th November 2010 $5,000,000
21st January 2011 $5,000,000
21st February 2011 $3,000,000
21st March 2011 $3,000,000
21st April 2011 $1,000,000
20th May 2011 $3,000,000"
"Conversion Date
All Notes will convert to shares on January 1st 2013"
"Rate of Conversion
Each $1.00 of Note value will convert to one share in Alexandria Landfill Pty Ltd. Issued Shares in Alexandria Landfill Pty Ltd at conversion date will be 280 Million."
"Separate Deed granting Put Call Options as follows,
In the event that, a sale of the business does not occur prior to June 30th 2015 then BBRC has a Put option to sell their 20Million shares back to Malouf for $29,966,285.
At 1st July 2015 and if BBRC has not exercised the Put Option then Malouf can exercise a Call option to buy BBRC 20 Million shares back for $32,328,142."
The primary judge rejected the admissibility of this material: BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2014] NSWSC 1363 (the Trial Judgment). He concluded that it contained evidence of prior negotiations, which was not admissible on the question of the construction of the contract, holding that the documents contained statements reflective of the parties actual intentions and expectations. As part of its cross-appeal, ALF appealed against the rejection of this evidence.
[5]
The primary judgment
The primary judge emphasised the use of the words, unless ALF and a noteholder "otherwise agree", in cll 7.1 and 8.1 of the Terms of Issue and that it was "common ground that the effect of cl 4.3 of the [put option deed] is that the parties did 'otherwise agree' [on redemption] for the purpose of cl 8.1 of the Terms of Issue": Trial Judgment at [78].
The primary judge rejected the submission by ALF that the recital in the put option deed, to which I have referred in par [24] above, led to the conclusion that BB would only be entitled to 20 million shares on conversion. He pointed to the fact that the language used in cl 4.3(c) of the put option deed showed that the parties were aware of the need to be "quite specific" about any agreement to vary the Terms of Issue: Trial Judgment at [86]. He said that had the parties intended to vary the conversion ratio, they would have done more than simply make the reference contained alongside the heading "Background".
The primary judge pointed out that the statement in the "Background" recital was followed immediately by the statement that Mr Malouf had granted the put option in respect of the same number of shares. He pointed out that this was the minimum number of preference shares that could be issued to BB in respect of the $20 million convertible notes.
In these circumstances, the primary judge concluded that the "Background" recital was no more than a statement of what would inevitably be available to be the subject of the put option. He also pointed to cl 7.12(g) of the Terms of Issue, stating that, having regard to the warranty by Mr Malouf, it appeared to be the expectation of the parties that there would be no organic debt at the time of conversion.
As I indicated, the primary judge ruled that the material to which I have referred in pars [41]-[44] above was inadmissible. He also concluded that even if it was admissible, it would not have altered his views. He pointed to the fact that the term sheets supplied by Mr Malouf (see par [44] above) referred to both the 10 million and 20 million convertible notes as being "T2 Convertible Notes". He pointed to the fact that ALF accepted that the 10 million convertible notes issued to BB and similar notes to be issued to other investors converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. In those circumstances, he concluded that the description of the notes in the 18 November term sheet shed no light on whether the parties intended to modify the conversion ratio in cl 7 of the Terms of Issue in respect of the 20 million T2 convertible notes.
So far as the organic debt issue was concerned, the primary judge stated that ALF borrowed $11.8 million from three investors, which was used to redeem the Tranche 1 convertible notes, which he said were, in turn, issued for the purpose of repaying the vendor finance provided by Valad. He concluded however that he could not be satisfied that the borrowings were themselves organic debt. He said that the Valad debt was organic debt because it fell within the second limb of the definition of such debt, namely, "debt used to complete the purchase and establishment of the waste site". He said that the question of whether a refinance was itself organic debt depended on whether the amount borrowed fell within the first limb of the definition, namely, whether it was for the "general business" of ALF. The primary judge stated that that depended on the circumstances in which the debt was incurred and there was no evidence to satisfy him that the borrowing fell within the first limb of the definition.
His Honour reached a similar conclusion in respect of the $2.9 million short term funding facility obtained from Westpac for the purpose of redeeming convertible notes.
[6]
The conversion ratio for the 20 million Tranche B convertible notes issued to BB and the admissibility issue
Although these issues were the subject of the cross-appeal, it is convenient to deal with them prior to dealing with the organic debt issue.
[7]
The parties' submissions
In relation to the admissibility issue, ALF submitted that the material rejected by the primary judge was admissible, not on the basis that it reflected the actual intention and expectations of the parties, but rather because it disclosed the commercial purpose of the transaction the subject of the put option deed and revealed the manner in which the parties had calculated the exercise price for the put and call options. As it emerged, particular reliance was placed on the latter matter by ALF in support of its submissions on the conversion issue.
In its submissions, ALF described the structure of the arrangement between it and BB as containing a covenant by BB to subscribe for $20 million of convertible notes, on the assumption that there would be 280 million shares on issue at the conversion date, each having a face value of $1. It submitted that the put option exercise price of $29,966,285 bore a ratio of 7.1% to the value of the company, which the parties had stipulated in their email negotiations, a similar ratio to that which 20 million shares would bear to a total issue capital of 280 million shares. Senior counsel for ALF elaborated on this issue demonstrating that the figure of $29,966,285 was 7.14% of the value of the business, using the June 2013 forecast of EBITDA, namely, four times $66,132,000 EBITDA ($264,528,000) plus $155 million in respect of the land component. He stated that the call option price could be calculated in a similar way but using a multiple of 4.5 EBITDA. In that context, ALF identified the issue between the parties as whether "the documents" objectively demonstrated that the options related to the whole of the shares derived from conversion and hence compelled a conversion rate of 1 to 1, or whether "the documents" left open the possibility that a residual parcel of shares would remain with BB after the exercise of the options.
ALF submitted that if the 20 million Tranche B notes converted according to the formula in the Terms of Issue, BB would receive more than $20 million shares if there was organic debt at the time of conversion. It submitted that if BB was then to exercise the put option, it would have received interest during the term of the notes, plus dividends on the shares after conversion, plus a return of the amount originally invested by it, plus the balance of the exercise price (presumably the difference between $29,966,285 and $20 million), together with an additional parcel of shares calculated by reference to the formula.
Senior counsel for ALF submitted that such a result could not have been the parties intention. He submitted that it resulted in BB obtaining more shares as the position of ALF weakened, yet being entitled to be paid out the full value of the company based on the forecast. He submitted that this would "make little commercial sense". However, he accepted in that context that, subject to an Exit occurring, the exercise date at which the option could be exercised would be in excess of two years after conversion and that if there was organic debt, BB would receive fewer shares than other noteholders, but be compensated by an option exercisable more than two years thereafter.
ALF submitted that its construction was supported by a proper reading of the put option deed, including the definition of "specified option preference shares". Senior counsel for ALF stated that it was not necessary for the put option deed to expressly state that what was agreed was different from the terms of issue. Rather, he submitted that a contrary agreement could be construed by necessary implication from the words used. In that context, he pointed to cl 1.6 of the put option deed, which provided that the deed prevailed over the Terms of Issue to the extent of any inconsistency.
BB submitted that the task of the primary judge was not to construe an ambiguous conversion clause to determine the parties' true intention but was rather limited to determining, as a question of fact, whether ALF and BB had made an agreement to vary the rate of conversion. It submitted, in these circumstances, that reference to an implied agreement was "apt to confuse". However, it accepted that no particular form of words was required to evidence such an agreement. Senior counsel for BB submitted that what was required was a consensus contrary to the consensus in the Terms of Issue. He pointed to the material ruled inadmissible by the primary judge and submitted that the one thing that was clear from those documents was that the $10 million notes and the $20 million notes were to be converted at the same rate.
BB submitted that the terms of the put option deed demonstrated that the parties were well aware of the need to make provision to vary the Terms of Issue when that was required to give effect to their bargain. In addition to cl 4.3(a), it pointed to cl 9(b), which provided for a supplementary interest payment not provided for in cl 3 of the Terms of Issue. Senior counsel for BB submitted that it was unlikely that a central matter such as the conversion ratio would be left to a process of inference or imputation. He also pointed to the entire agreement clause.
Senior counsel for BB submitted that the definition of "Specified Option Preference Shares" in the deed did not refer to any particular preference shares resulting from conversion. In those circumstances, he submitted that it was simply stating that on conversion, BB would be the holder of at least 20 million shares. He pointed out that even on the construction advanced by ALF, BB would hold 30 million shares, more if there was organic debt, as the formula in the Terms of Issue applied to the 10 million Tranche A notes.
BB also pointed out that the put option deed was not limited to the 20 million Tranche B convertible notes, but applied to the whole 30 million notes to be acquired by BB. It pointed out that the supplementary interest provided for in cl 9(b) related to the whole of the notes and the definition of Exercise Price in the put option deed included an offset for capital distribution from sales of assets, which would include a return of capital on the entirety of the preference shares received by BB on conversion (at least 30 million). It submitted that these provisions were inconsistent with the 20 million notes being treated differently to the 10 million notes on conversion.
In dealing with the documents ruled inadmissible, senior counsel for BB submitted that the fact that an exercise price of 7.1% of EBITDA plus the land component was determined said nothing about the conversion rate, because it was calculated by reference to the fact the option was over 7.1% of the estimated issued capital of the Group. He emphasised that there was nothing to suggest that conversion would take place other than on a common basis for all notes, stating that there was no evidence of a contrary agreement and that the agreement he contended for could not be one which was described as uncommercial.
[8]
Consideration
The admissibility issue can be dealt with shortly.
ALF was correct in pointing out that evidence of negotiations may be admissible in construing a contract, not on the basis that such evidence shows the subjective expectations and intentions of the parties but rather that it shows the context in which the agreement was made and the surrounding circumstances objectively known to the parties: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 at 352; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; 240 CLR 45 at [30]. Further, as Emmett JA recently pointed out in Righi v Kissane Family Pty Ltd [2015] NSWCA 238 at [48], Ward and Gleeson JJA agreeing, the line between using extrinsic evidence of negotiations to show the context in which the agreement was made or using such evidence to show the subjective intention of the parties as an aid to construction can be blurred.
If, in the present case, the basis of tender was to demonstrate, for example, that it was known to both parties that the forecast EBITDA for the business of ALF as at June 2013 was $66,132,000, then the documents would have been admissible to prove that fact. However, the purpose of the tender was to demonstrate the manner of calculation of the exercise price for the put and call options.
It does not seem to me that the material is admissible for that purpose. To use the material to demonstrate, through the negotiations between the parties, how the put option exercise price was arrived at, is to go beyond using the material to provide context or evidence of surrounding circumstances. Rather, this is seeking to rely on the manner to which the parties negotiated the agreement as an aid to construction. In my opinion, the primary judge was correct in rejecting the tender in these circumstances.
However, for the reasons which appear below, the admission of the material would not have affected my view of the correct construction of the put option deed.
It was not suggested by ALF that the conversion ratio in the Terms of Issue was varied by an agreement separate to the put option deed. What was put was that the variation arose by necessary implication from the words used in that deed. I am unable to agree.
It is important to note at the outset that the put option deed contained a covenant by BB to subscribe for 30 million notes. If it was intended that any of them were to convert in accordance with a formula different to that contained in the Terms of Issue, that would be a matter which it would be expected would be clearly stated in the agreement.
I do not think that the recital under the heading "Background" alters the position. It states what is clear, namely, that at the time of conversion, BB would be the holder of 20 million notes. That follows inevitably from the fact that BB had no entitlement to redeem at least the Tranche B notes.
In that context, the definition of "Specified Option Preference Shares" was quite generic. It did not refer to the shares in question, namely, those shares obtained on conversion of the Tranche B notes, as distinct from the other preference shares to which BB may be entitled. The option could be exercised utilising, at least in part, shares issued as a result of the conversion of the Tranche A notes.
Similarly, the supplementary option provision in cl 4.3 entitling redemption in particular circumstances was not limited to the Tranche B notes. Further, the adjustment to the option price resulting from a capital distribution was not limited to a capital distribution in respect of the Tranche B notes, or in respect of shares issued as a result of conversion of those notes.
Once it is recognised that the put option deed did not distinguish in any way between the Tranche A and Tranche B notes, it is difficult to see how the put option deed, by implication, required that the notes be treated differently on conversion. As the primary judge pointed out, the parties would have been aware of the express provisions of cl 7.1, to which I have referred in par [15] above. If the parties intended to vary the conversion ratio, it would be surprising if they did not do so expressly, but rather did so as a matter of necessary implication.
ALF's primary argument was based on the fact that the put option protected BB in respect of its initial investment of $20 million subscription money for the Tranche B convertible notes, plus, having regard to the put option price, provided it with additional funds over that amount. I have set out this argument in pars [56]-[57] above. In essence, ALF submitted that if the construction contended for by BB was correct, then as the company's position weakened, BB would receive more shares as well as the put option price, something which it suggested made no commercial sense.
It should be noted that this argument does not depend on the documents ruled inadmissible, but rather depends on the existence of the put option and its exercise price.
However, the submission that the construction urged by BB is one that produces commercial nonsense overlooks the fact that at least the Tranche B notes were issued on the condition that the election to redeem in cl 4.1 was not available. This option, available to noteholders who made the election within the time prescribed in cl 4.1(b) and (c), not only meant that they would receive cash on maturity, but also the further interest provided for in cl 4.3 of the Terms of Issue.
By contrast, as I have pointed out, except in the circumstances prescribed in cl 4.3 of the put option deed, BB had no right to redeem the Tranche B notes, but merely the right to put the shares resulting from conversion of those notes to Mr Malouf, at the earliest 30 months after conversion.
Taking these matters into account, it could not be said that the construction preferred by the primary judge was commercially nonsensical or arbitrary and capricious: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109.
In these circumstances, the primary judge was correct in concluding that there was no agreement that the Tranche B convertible notes would convert on a different basis to that contained in the Terms of Issue.
Even if the correspondence leading up to the entry into the put option deed was admitted, the position, in my view, would remain the same.
At most, the correspondence showed the basis upon which the issue price for the put option was arrived at. Even if this did demonstrate that the price represented the value of 20 million shares, based on the EBIDTA assumption and particular multiples, it did not provide any basis for the conclusion that the agreement itself contained, by necessary implication, the term contended for by ALF. Significantly, the term sheet supplied by Mr Malouf during the course of negotiations did not itself suggest that the Tranche A and Tranche B notes would convert on a different basis.
Further, the fact that the parties adopted a particular methodology to determine the put option price did not lead to the result that the conclusion arrived at by the primary judge on the application of the conversion formula was arbitrary and capricious or uncommercial.
[9]
The organic debt issue
As I indicated, the primary judge concluded that the $14.7 million debt (made up of the $11.8 million borrowed from three investors and the $2.9 million short term funding facility obtained from Westpac), whose characterisation was in dispute, was used to redeem Tranche 1 convertible notes, which were, in turn, issued to refinance the Valad debt. While supporting the finding of the primary judge that the debts did not fall within the definition of "Organic Debt", ALF, by notice of contention, challenged his finding that the proceeds of the Tranche 1 notes were in fact used to refinance the Valad debt. In these circumstances, it is necessary to deal with the transactions of January 2009, to which I have referred in pars [5]-[7] above, in more detail.
The debt in question was made up first of $11.8 million, incurred to redeem the notes of three investors. The first, a Mr Mark Ellis, redeemed his notes in consideration of the issue of a secured bond for $6 million. The second, a Ms Raelynn Malouf, redeemed her notes in consideration of a secured bond of $4.5 million. The third investor, Ralph Lauren Pty Ltd, agreed to loan $1.3 million for 12 months to enable its notes to be redeemed.
There was no issue between the parties that the $2.9 million short term facility from Westpac was used to redeem Tranche 1 convertible notes.
Neither party disputed that the borrowings in question were used to redeem notes held by investors who were entitled to redeem their notes, or that the notes were issued at the time of the restructure of the Valad arrangements, to which I have referred above. However, the parties did not agree as to the manner of the application of the funds raised as a result of the issue of the Tranche 1 convertible notes. BB supported the conclusion of the primary judge that they were used as part of the Valad refinancing. ALF contended that the primary judge was incorrect in so concluding.
The precise flow of funds to Valad is not entirely clear. Both parties placed reliance on a submission made by ALF to the Australian Taxation Office on 6 February 2011. That submission referred to the fact that in 2008, ALF had an opportunity to remove the Valad loan facility and to facilitate the offer to private investors of an opportunity to invest in the waste facility project. The submission pointed out that with $45 million being provided by ALF, and $20 million by Carlewie, Valad received $65 million in satisfaction of a debt of $93,112,000 payable if the facility had run its full term.
The submission also stated that Carlewie did not have the requisite funds to pay the consideration for the assignment of the Valad debt. It stated that external funds, raised by the issue of the convertible notes, enabled ALF to repay the inter-company loans it owed. As a consequence, money flowed to Carlewie which enabled it to provide consideration for the assignment.
The document also stated that, in fact, the $20 million consideration for the assignment was paid directly out of ALF's account and recorded as a loan by ALF to Carlewie.
So much appears to have been common ground. Senior counsel for ALF accepted that between $29 to $31 million was raised by the issue of Tranche 1 convertible notes. ALF also accepted that $20 million was advanced by ALF to Carlewie, which was utilised in acquiring the Valad facility. It also seemed to accept that the balance of the Tranche 1 notes were used by ALF, together with $11 million of its own funds, to meet the other obligations to Valad under the restructuring arrangements.
In these circumstances, ALF submitted that while funds received from the Tranche 1 convertible notes indirectly aided the refinancing, there was no direct refinancing. Senior counsel for ALF accepted however that the funds raised by the notes issue were used for the general business of the company.
Senior counsel for BB stated that the effect of the finding of the primary judge was that the Tranche 1 notes were not used directly to discharge the Valad debt, but rather were used to fund the transaction which enabled the restructuring to take place.
It seems to me that on the material to which I have referred above, it is not possible to state that any particular funds raised from the issue of the Tranche 1 notes were paid directly to Valad in discharge of ALF's liability. What is clear, however, is the fact that funds were raised to enable completion of the restructure and used directly or indirectly for that purpose.
[10]
The parties' submissions
BB submitted that the question of whether the borrowing was for the general business of the ALF Group did "not depend on the form of the borrowing but on the intended use or application of the proceeds". It submitted that the character of the borrowing was to be determined by the use to which the funds were put in the conduct of the business. It submitted that ALF had a contractual obligation to redeem the Tranche 1 convertible notes and the redemption was in the ordinary course of business.
Senior counsel for BB submitted that the debt was either organic debt or project debt. He pointed to the width of the word "activities" in the definition of project debt, submitting that if a liability incurred to redeem the notes was not organic debt, then it was a debt incurred in the activity of redeeming a note and therefore project debt, something in respect of which approval of 75% of convertible noteholders was required.
In these circumstances, senior counsel for BB submitted that if a company chooses to discharge an obligation by raising funds, the debt is for the general business of the enterprise and thus organic debt.
ALF submitted that once it was accepted that the proceeds of the notes issue were not used directly to refinance the Valad debt, it was necessary to examine the purpose behind the actual obligation incurred. It stated that this purpose was to redeem convertible notes. It submitted, relying on the decision in Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (1988) 14 NSWLR 460 (Fire Nymph), that the transaction was not one for the "general business of the ordinary conduct of the business of the Group".
Senior counsel for ALF, in submitting that the borrowing did not fall within the definition of organic debt, pointed out that the definition referred to amounts borrowed by any member of the Group. He submitted that an indebtedness brought about by the exercise of an election to redeem did not fit readily within the definition of having been borrowed.
Senior counsel for ALF pointed to the fact that if the notes were converted, no organic debt would arise as a result. He submitted that if the debt incurred to redeem the notes was organic debt, then noteholders would be given the benefit of an increase in shareholding on conversion. He said that it would produce an "anomalous commercial outcome" if there would be a different number of shares issued depending on whether noteholders redeemed rather than converted. In these circumstances, he submitted that the debt was not organic debt.
[11]
Consideration
As I indicated (at par [92] above), ALF accepted that the proceeds of the notes issue were used for the general business of the company. Incorporating the definition of "Enterprise" into the definition of "Organic Debt", the question is whether the incurring of debt to redeem Tranche 1 notes fell within the general business of the ordinary business of the company.
In Fire Nymph at 464, Rogers CJ of Comm D pointed out that the expression "ordinary course of ordinary business" was designed to overcome the conclusion by Mahoney JA, in Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 at 427, that the expression "ordinary course of business" could include transactions that were "exceptional or unprecedented". Rogers CJ of Comm D stated that the expression "ordinary course of ordinary business" did not include something "unusual or exceptional" but "something ordinarily done in the course of the particular business of the company".
His Honour's judgment was affirmed on appeal: Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (in liq) (1992) 7 ACSR 365. In the course of his judgment, at 370-371, Gleeson CJ cited with approval the statement in Francis Beaufort Palmer, AF Topham, Palmers Company Precedents, (16th ed 1951, Stevens) at 51, to the effect that the phrase "ordinary business" includes "sales, leases, mortgages, charges, payments of debts, discharge of liabilities, and other transactions with a view to carrying on the concern".
Raising funds to repay debts, in my opinion, would fall within the ordinary course of a company's business. However, having regard to the incorporation of the definition of "Enterprise" in the definition of "Organic Debt" in the Terms of Issue, the question is whether the raising of funds to redeem the notes fell within the general business of the ordinary business of the company.
It is difficult to see what the expression "general business of the ordinary business" adds to the expression "ordinary business". However, if it is read to exclude transactions which were exceptional or unprecedented, the raising of funds to redeem convertible notes would not fall within that category. The Terms of Issue clearly contemplated that the notes may have been redeemed (cl 8.1). Once that is recognised, the raising of funds to meet that liability on redemption could hardly be described as exceptional or unprecedented.
As I indicated, it was submitted that an indebtedness brought about by an election to redeem did not fall comfortably within the definition of organic debt as money having been borrowed. There are two difficulties with this submission. First, the amount said to be organic debt was not the liability to redeem, but the amount borrowed to meet that liability. Second, to the extent that it is relevant, the notes themselves were described as a debt obligation.
Finally, ALF relied on what it described as the "anomalous commercial outcome", saying that it could not have been intended that a different number of shares would issue depending on whether notes were redeemed with borrowed funds rather than otherwise. There is no reason to suggest that such a result is uncommercial when it is borne in mind that the capital structure would be different if shares were redeemed rather than converted, particularly if they were redeemed with borrowed funds. Further, redemption, whether effected through borrowed funds or otherwise, did not operate to dilute Mr Malouf's interests in the capital of the company to below the 75% threshold which would be achieved if no shares were redeemed and there was no organic debt. This can be shown by a simple example. If all notes were converted, Mr Malouf's interests would hold 75% of the capital of the company and noteholders would hold 25%. As BB held 30 million of the 70 million notes on conversion, it would hold 10.71% of the company. If all notes other than the BB notes were redeemed out of borrowed funds, BB would hold 12.5% of the capital of the company on conversion (30 million divided by (280 million minus 40 million) multiplied by 100), whilst Mr Malouf's interests would hold 87.5% of the capital (this assumes that bonus interest is paid on redemption out of cash on hand). If all notes were redeemed out of cash on hand, BB would hold 10.71% of the capital of the company, whilst Mr Malouf's interests would hold 89.29%. There is nothing uncommercial about any of these results. As I indicated, they simply reflect different capital structures on conversion.
In these circumstances, in my respectful submission, the primary judge erred in concluding that the $14.7 million debt was not organic debt for the purpose of the conversion ratio.
[12]
Conclusion
In the result, the appeal should be allowed and the cross-appeal dismissed. The parties should be directed to bring in short minutes of any consequential orders required to give effect to this judgment. BB should have its costs of the appeal and the proceedings below. It is common ground that any such costs orders should be made against Mr Malouf rather than ALF.
The orders I would make are as follow:
1. Appeal allowed.
2. Cross-appeal dismissed.
3. Set aside the orders made by Stevenson J on 23 October 2014.
4. Order that the second respondent pay the appellant's costs of the appeal and cross-appeal and have a certificate under the Suitors' Fund Act 1951 (NSW), if eligible.
5. Order that the second respondent pay the appellant's costs of the proceedings in the Court below.
6. Direct the parties to bring in short minutes of any consequential orders required to give effect to these reasons.
BEAZLEY P: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with his Honour's reasons and with the orders he proposes.
MACFARLAN JA: I agree with the judgment of Bathurst CJ and add the following observations.
[13]
The cross appeal - terms of conversion of Notes
The Deed of 1 December 2010 between the parties (the "December Deed") provided for BB to subscribe for ALF Convertible Notes of a face value of $30 million on terms that they would be convertible in accordance with the Deed Poll of 5 January 2009 and the Terms of Issue contained in Schedule 1 to it.
Clause 7.1 of the Terms of Issue provided for conversion of Convertible Notes in accordance with the formula for conversion specified in Clause 7.5, unless ALF and a note-holder otherwise agreed.
ALF contended in the proceedings that the December Deed contained an implied agreement "otherwise". It argued that unless the $20 million Tranche B notes were to be converted on a 1:1 basis, rather than according to the formula in Clause 7.5 of the Terms of Issue, the terms of conversion of those notes would be inconsistent with the terms of the put option provided for in the December Deed. However, there was to be a period of in excess of two years between the date for conversion of the notes (1 January 2013) and the commencement of the period for exercise of the put option (1 July 2015). The potential for changes in ALF's value during this period means that there is no obvious reason why the terms of conversion should necessarily have equated in financial terms to the terms on which the put option could have been exercised.
It would not have been sufficient for ALF to demonstrate that the implied agreement for which it contended would have given rise to a fairer or more business-like result. In the absence of an express agreement that conversion was to be at a rate other than that specified in the Terms of Issue, ALF would have had to demonstrate that that was the only conclusion consistent with the December Deed. An analogy can be drawn with cases in which agreements are alleged to have been made by conduct. In such cases, the conduct relied on must unambiguously indicate that the parties intended to contract. It must be "of such a character as necessarily to lead to the inference" that an offer has been accepted (Brogden v Metropolitan Railway Co [1877] 2 App Cas 666 at 686; cited in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153 at [162]). In the present case, it was thus necessary for ALF to identify the provisions of the December Deed that necessarily indicated that the parties had reached an implied agreement of the type contemplated by the proviso to Clause 7.1. Neither the terms of the put option nor any of the other provisions of the December Deed did this.
[14]
The appeal - the meaning of "Organic Debt"
I agree with Bathurst CJ that BB did not establish that the debts in question were debts "used to complete the purchase and establishment of the waste site at Eastern Creek" within the last part of the definition of "Organic Debt" in the December Deed. If it had done that it would in my view have been unnecessary for it to establish that the debts were also within the first part of that definition (compare Trial Judgment at [143]) as the word "including", joining the two parts of the definition, had the effect of deeming debts within the second part to fall also within the first part.
I also agree with Bathurst CJ that the subject debts nevertheless fell within the first part of the definition of "Organic Debt" because they represented amounts borrowed by members of the group "for the general business of the Enterprise". I do not consider that the definition of "Enterprise", referring to the "ordinary conduct of the business of the Group" had the effect of excluding transactions which were exceptional or unprecedented from the definition of "Organic Debt". As I see it, the references to "general business of the Enterprise" and "the ordinary conduct of the business of the Group" in the definitions of "Organic Debt" and "Enterprise" respectively are essentially repetitive. The position thus differs from that in Fire Nymph Products Pty Ltd v Heating Centre (1988) 14 NSWLR 460 where two similar expressions in the one phrase ("ordinary course of ordinary business") had the effect of limiting relevant transactions to those that were not only part of the "ordinary business" but were also effected in the "ordinary course" of that business, thus excluding exceptional or unprecedented transactions. The different structure adopted in the December Deed did not impose the same double limitation.
In any event, as Bathurst CJ concludes, even if exceptional or unprecedented transactions are excluded, "the raising of funds to redeem convertible notes would not fall within that category" (see par [105] above).
[15]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 15 October 2015
Parties
Applicant/Plaintiff:
BB Retail Capital Pty Ltd
Respondent/Defendant:
Alexandria Landfill Pty Ltd
Legislation Cited (1)
Suitors' Fund Act 1951(NSW)
Cases Cited (8)
Solicitors:
Gilbert and Tobin (Appellant and Cross-Respondent)
Pigott Stinson (First and Second Respondents and First and Second Cross-Appellants)
File Number(s): 2014/334190
Decision under appeal Court or tribunal: Supreme Court of NSW
Jurisdiction: Equity Division - Commercial List
Citation: [2014] NSWSC 1363
Date of Decision: 3 October 2014
Before: Stevenson J
File Number(s): 2013/68976
[This headnote is not to be read as part of the judgment]
The respondent and first cross-appellant, Alexandria Landfill Pty Limited (ALF) was the ultimate holding company of a waste recycling operator. The second respondent and second cross-appellant, Mr Ian Raymond Malouf (Mr Malouf), was the managing director and principal shareholder of ALF. In 2009, ALF, Mr Malouf and certain other parties entered into a Deed Poll that enabled ALF to issue convertible notes on the terms and conditions contained in it and the Terms of Issue of the notes.
Clause 7.5(a) of the Terms of Issue provided that on conversion, a note holder would receive preference shares in ALF equivalent to A (the face value of the convertible notes) / B ($280 million less any organic debt). The Terms of Issue defined organic debt as amounts borrowed from a member of the group "for the general business of the Enterprise".
In 2010, ALF entered into an agreement with the appellant and cross-respondent, BB Retail Capital Pty Limited (BB), for BB to subscribe to convertible notes with a face value of $30 million and for BB to be granted a put option to sell 20 million preference shares, issued on conversion, to Mr Malouf (the put option deed). The put option deed provided that BB would subscribe for $10 million Tranche A convertible notes and $20 million Tranche B convertible notes.
There was no issue between the parties that the Tranche A notes were to be converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. However, the parties disagreed on the conversion rate of the Tranche B notes. ALF and Mr Malouf contended that the Tranche B notes were to be converted on the basis of one preference share for each $1 of notes. In support of this contention, ALF sought to rely on correspondence between it and BB in the period leading up to the execution of the put option deed. BB contended that the Tranche B notes were to be converted at the rate specified in cl 7.5(a).
It was common ground that in order to raise funds to redeem convertible notes, ALF borrowed $11.8 million from three investors and borrowed $2.9 million from Westpac by increasing its bank overdraft. However, the parties did not agree as to the manner of the application of the funds raised. BB contended that they were used as part of a refinancing arrangement with a creditor of ALF and were thus organic debt. ALF contended that although the funds indirectly aided the refinancing, there was no direct refinancing and thus, the borrowing was not organic debt.
In regard to the conversion issue, the primary judge found, in favour of BB, that the notes were to be converted at the rate specified in cl 7.5(a) of the Terms of Issue. The primary judge also found that the documents of correspondence between ALF and BB were inadmissible on the question of the construction of the contract. These findings were the subject of the cross-appeal.
In regard to the organic debt issue, the primary judge found, in favour of ALF, that the $14.7 million borrowing did not constitute organic debt. BB appealed against this.
Held (Bathurst CJ, Beazley P agreeing, Macfarlan JA writing separately), appeal allowed and cross-appeal dismissed:
A The conversion issue
(i) Evidence of negotiations may be admissible in construing a contract, not on the basis that such evidence shows the subjective expectations and intentions of the parties but rather that it shows the context in which the agreement was made and the surrounding circumstances objectively known to the parties. ([65] (Bathurst CJ); [111] (Beazley P); [112] (Macfarlan JA))
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; 240 CLR 45, applied.
(ii) The purpose of the tender of the pre-contractual documents was to demonstrate, through the negotiations between the parties, how the put option exercise price was arrived at. As this purpose went beyond using the material to provide context or evidence of surrounding circumstances, and sought to rely on the manner to which the parties negotiated the agreement as an aid to construction, the material was inadmissible. ([66]-[67] (Bathurst CJ); [111] (Beazley P); [112] (Macfarlan JA))
(iii) There was no variation of the Terms of Issue by the put option deed or by necessary implication. Thus, the Tranche B notes held by BB converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. ([80] (Bathurst CJ); [111] (Beazley P); [115]-[116] (Macfarlan JA))
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99; Brogden v Metropolitan Railway Co [1877] 2 App Cas 666; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153, considered.
B The organic debt issue
(i) The $14.7 million of borrowings were funds raised to enable the completion of a refinancing with a creditor of ALF and were used directly or indirectly for that purpose. Raising funds to repay debts falls within the ordinary course of a company's business and is not exceptional or unprecedented. Thus, the $14.7 million of borrowings fell within the definition of organic debt in the Terms of Issue for the purposes of the formula in cl 7.5(a). ([105], [108] (Bathurst CJ); [111] (Beazley P); [118]-[119] (Macfarlan JA))
Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (1988) 14 NSWLR 460, considered.