CONTRACTS - whether the parties intended to create a legally binding arrangement between them - Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd

22 On 16 May 2009, Andrew John Saker, Darren Gordon Weaver and the plaintiffs were appointed administrators of each of the Great Southern Group companies. 23 On 19 November 2009, Andrew John Saker, Darren Gordon Weaver and the plaintiffs were appointed liquidators of each of the Joint Obligors, except Great Southern Infrastructure Pty Ltd (ACN 126 069 314). 24 The Joint Debt has been paid. In the discharge of the Joint Debt, GSL paid $142,620,071 and GSF paid nothing. 25 The only Joint Obligors able presently to make any payment to GSL on account of GSL having paid more than its fair share of the Joint Debt are GSF and Great Southern HVT Holdings Pty Ltd (in liquidation) (ACN 123 433 778) (GSHVT). 26 As at 16 September 2015, the plaintiffs held $8,035,420, being cash at bank, in the winding-up of GSF. 27 After meeting the costs of its liquidation, GSF will have approximately $7,750,000 available for distribution to its unsecured creditors. The liquidators have received informal proofs of debt from claimed unsecured creditors of GSF totalling $20,973,396.57. In addition, the books and records of GSL and GSF indicate that, as at the commencement of the winding-up of GSF, GSF owed $148,230,149 to GSL on account of an intercompany loan consisting of sums advanced to GSL from other companies in the Great Southern Group, which were accounted for as loans (Intercompany Loan). 28 After meeting the costs of its liquidation, GSHVT may have approximately $20,000 available for distribution to its unsecured creditors. The claims of unsecured creditors against GSHVT total $81,304,605. Of the Joint Debt, GSHVT paid $552,355. 29 GSL has, or may have, against GSF: (a) a claim or claims founded upon rights of contribution because GSL paid more than its just proportion or proper proportionate share of the Joint Debt and GSF paid nothing; and (b) a claim upon the Intercompany Loan.

What is a just proportion or a proper proportionate share of a joint obligation? 30 For the purposes of both contribution and statutory subrogation, it is necessary to determine both GSL's and GSF's just proportion or proper proportionate share of the common obligation - here, the Joint Debt. 31 A just proportion or proper proportionate share has been described as follows by G. L. Williams in Joint Obligations; A Treatise on Joint and Joint and Several Liability in Contract, Quasi-Contract and Trusts in England, Ireland and the Common-Law Dominions (1949) 166 [86]: All co-debtors must contribute in equal proportions to the sum payable by way of contribution, and no one is liable for more than his proportion. Thus ... if there are twelve co-debtors, of whom two die, a debtor who pays the whole debt is entitled to recover one-twelfth and no more from each of his fellow debtors who is living and from the personal representatives of those who are dead. There is one exception to this principle and that is in the case of insolvency of a co-debtor. If one co-debtor is insolvent the loss resulting from his insolvency is spread equally over the solvent debtors. 32 However, the obligation upon a co-obligor to make contribution is not discharged by mere insolvency. The true principle, in my opinion, and as the plaintiffs submitted, is that the obligation to pay contribution exists for as long as the relevant co-obligor is able to pay whether insolvent or not: Hitchman v Stewart (1855) 3 Drewry 271, 275; Lowe & Sons v Dixon & Sons (1885) 16 QBD 455, 458; Re TVSN Ltd [2005] NSWSC 692 [55]-[65]; see also O'Donovan and Phillips, The Modern Contract of Guarantee (Sweet & Maxwell, 3rd ed, 2016) 629-630. 33 To the extent to which any co-obligor is unable to pay the whole or any part of its liability, the other co-obligors are liable to contribute to the "shortfall": AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481, 490.

What are GSL's and GSF's just proportions or proper proportionate shares of the Joint Debt? 34 As explained above, GSL and GSF each bore a primary obligation as a borrower under the: (a) ANZ Facility Agreement, jointly and severally with the other borrowers under that agreement; (b) CBA Facility Agreement, jointly and severally with the other borrowers under that agreement; (c) BankWest Facility Agreement, jointly and severally with the other borrowers under that agreement; and (d) Mizuho Facility Agreement, jointly and severally with the other borrowers under that agreement. 35 The plaintiffs submitted, correctly in my opinion, that accordingly, each of GSL's and GSF's just proportion or proper proportionate share of the Joint Debt is, at the least, as follows: (a) in respect of the debt owed to ANZ, 1/17th of the whole debt, in the amount of $130 million plus interest and costs; (b) in respect of the debt owed to BankWest, 1/12th of the whole debt, in the amount of $50 million plus interest and costs; (c) in respect of the debt owed to CBA, 1/12th of the whole debt, in the amount of $125 million plus interest and costs; and (d) in respect of the debt owed to Mizuho, 1/11th of the whole debt, in the amount of $75 million plus interest and costs. 36 As I have earlier discussed in these reasons, in the discharge of the Joint Debt, GSL paid $142,620,071 (that is, more than its just proportion or proper proportionate share) and GSF paid nothing. GSL's right to lodge a proof of debt in GSF's winding up to recover what it paid in excess of its just proportion or proper proportionate share, it contends, is grounded both in statute, and at law and equity.

Statutory rights 37 The statutory right to contribution, as applicable in the present case, has its basis in the the Imperial Acts Adopting Ordinance 1867 (WA), which adopted the Mercantile Law Amendment Act 1856 (Imp). Section 5 of the Mercantile Law Amendment Act 1856 (Imp) provides, relevantly, that: Every Person who ... being liable with another for any Debt ... shall pay such Debt ... shall be entitled to stand in the Place of the Creditor, and to use all the Remedies, and, if need be ... to use the name of the Creditor, in any action or other proceeding, at law or in equity, in order to obtain from the ... Co-Debtor ... Indemnification for the Advances made and Loss sustained by the Person who shall have so paid such Debt ... Provided always, that no ... Co-Debtor shall be entitled to recover from any other ... Co-Debtor, by the means aforesaid, more than the just Proportion to which, as between those Parties themselves, such last-mentioned Person shall be justly liable. 38 Thus the statutory right is subject to a proviso that the person exercising the right cannot recover from any other person more than the just proportion to which, as between those parties, the other person is justly liable. 39 As in equity, the statute requires the debt to be paid in full before the right arises and the surety who paid the monies stands in the place of the creditor and if need be, upon a proper indemnity, may use the name of the creditor and to sue for the whole debt: Re Parker; Morgan v Hill [1894] 3 CH 400, 404 per Kekewich J. 40 The judgment of Kekewich J in Re Parker was affirmed in the United Kingdom Court of Appeal. Lindley LJ (with whom Lopes and Davey LLJ agreed) said: In Ex parte Stokes Lord Justice Knight Bruce said: "The question then substantially is, whether, as between the estates of the two sureties, when (one of them having become bankrupt) the creditor has proved the debt under the fiat, and has afterwards been paid in full, partly by the principal debtor, and partly by the surety, not a bankrupt, - the latter has a right to use the proof for the purpose of obtaining from the bankrupt's estate that amount of contribution to which the bankrupt is, or but for the bankruptcy would have been liable, so far as the proof can furnish means for that end; and I think that he has." That judgment has been acted upon ever since. I think, therefore, that the order appealed from is right, and that the sureties are entitled to prove for the whole debt, but can only recover dividends out of the estate to the amount to which Parker is liable to them: [1894] 3 Ch 400, 406. 41 Davey LJ said further that: They therefore can prove for the whole debt against their co-surety's estate, but can only recover so much as will recoup themselves what they have paid beyond their proper share: Re Parker [1894] 3 Ch 400, 407. 42 When considering s 5 of the Mercantile Law Amendment Act 1856 (Imp), Oliver LJ (with whom Parker and Balcombe LJJ agreed) in Brown v Cork [[1986] PCC 78, 91-92 referred with approval to the observations concerning it made by Kekewich J in Re Parker [1894] 3 CH 400. 43 Applied here, this accepted principle would allow GSL to lodge a proof of debt in GSF's winding up for the whole debt owed by GSF in relation to the payment of the Joint Debt.

Rights at law and in equity 44 The plaintiffs submitted further, and in any event, that GSL has legal and equitable rights to receive from GSF contribution in respect of GSL's payment of more than its just proportion or proper proportionate share of the Joint Debt. 45 Persons who are under co-ordinate liabilities to make good the one loss must share the burden pro-rata, and where one co-obligor discharges a debt, or pays more than its rateable share, it is entitled to contribution from its co-obligors to equalise the burden: Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342, 350-351 per Kitto J (with whom Windeyer J agreed); Friend v Booker (2009) 239 CLR 129, 148-149 [38]-[43] per French CJ, Gummow, Hayne and Bell JJ; and Lavin v Toppi (2015) 254 CLR 459, 469 [32]. 46 Accordingly and alternatively, the plaintiffs submitted that in these circumstances it is open to conclude that, a right to contribution lies between GSL and GSF in equity, pursuant to which GSL is entitled to contribution from GSF such that the burdens of meeting their co-ordinate liabilities are shared equitably between them. 47 The plaintiffs' submission, which, subject to the issue of 'benefit' I accept, is that, in these circumstances it is open upon either basis to conclude that GSL should: (a) together with the borrowers who paid the debt owed to ANZ pursuant to the ANZ Facility Agreement, lodge a proof of debt in the winding up of GSF in the name of ANZ for that whole debt; (b) together with the borrowers who paid the debt owed to BankWest pursuant to the BankWest Facility Agreement, lodge a proof of debt in the winding up of GSF in the name of BankWest for that whole debt; (c) together with the borrowers who paid the debt owed to CBA pursuant to the CBA Facility Agreement, lodge a proof of debt in the winding up of GSF in the name of CBA for that whole debt; and (d) together with the borrowers who paid the debt owed to Mizuho pursuant to the Mizuho Facility Agreement, lodge a proof of debt in the winding up of GSF in the name of Mizuho for that whole debt. 48 It is sufficient to dispose of this issue upon the basis of the statutory claim to contribution. 49 Bendigo submitted that whether it is framed in statute or equity no right to contribution arises because GSF received no benefit from the monies borrowed. I will now turn to that issue.

Did GSF receive any benefit? 50 The question as to whether GSF received any such benefit is one of fact. 51 Where one co-obligor derives the sole benefit from a guarantee or loan, his or her co-obligor will not be liable to contribute to the common debt because equity will not permit rights of contribution to be enforced where it would be inequitable to do so. In this context, for example, as between two co-debtors, one of which only takes the benefit of a loan, the other co-debtor may be regarded as, in effect, a surety for this purpose with the result that the right of contribution will be denied: Ogilvie v Ferry [2010] NSWSC 379 [83]-[84]; Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116, 125-128; Israel v Foreshore Properties Pty Ltd (1980) 30 ALR 631, 636. The Court may look beyond the terms of documents to identify the true relationship between the parties: Citibank 38 NSWLR 116, 119-120; 135. 52 Bendigo submitted that the plaintiffs should demonstrate that GSF received a relevant benefit from the loan in respect of which GSL claims a right of contribution and that absent any such benefit, no right of contribution can arise. It submitted that it is not evident from either the evidence relied upon by the plaintiffs or their submissions as to what relevant benefit, if any, GSF received and further, that the evidence leaves open the possibility that no benefit was actually received. 53 Bendigo submitted that in this case, the general rule should not be applied, because notwithstanding the terms of the Restatement Deed and Deed of Common Provisions, GSF is, in substance, only a surety for GSL's debt to the Club Banks because GSF did not receive any funds from the Club Banks. 54 Further, it submitted, to the extent GSF received funds from companies in the Great Southern Group, the advances of those funds were accounted for as loans to GSF from those companies which loans GSF was required to repay. This, it contends, was how GSF's Intercompany Loan liability of $148,230,149 arose. 55 Bendigo submitted, in other words, that GSF received those funds, the subject of the Intercompany Loan, by a different arrangement to that involving the Club Banks for which GSF incurred a separate and distinct obligation to the related company making the advance, an obligation which was additional to the obligation GSF assumed to the Club Banks. 56 Bendigo contended that even if GSF received a relevant benefit, the evidence relied upon by the liquidators supports the conclusion that GSL's right of contribution against GSF is limited to $26,274,267.35 and in exercise of that right alone, it should be entitled to lodge a proof in GSF's liquidation for that amount. 57 Finally, Bendigo submitted that because GSF must account to GSL for the Intercompany Loan liability of $148,230,149, GSL has received a relevant benefit to that extent which must be taken into account for the purposes of contribution. 58 I do not accept these submissions.

The benefit question - generally 59 Bendigo submitted that GSF derived no benefit whatsoever under the Club Banks Facility Agreements. Bendigo submitted that this conclusion may be inferred from the evidence that GSF did not receive any funds from the Club Banks. 60 In Mr Martin's Second Affidavit, he gave evidence of what were said to be some benefits received by GSF. Bendigo makes the following submissions as to these: (a) the reference in paragraph 10 of Mr Martin's Second Affidavit to the availability of the Club Banks facilities to the group as a whole to meet its general corporate requirements is merely a statement of the contractual position set out in the Restatement Deed and the Deed of Common Provisions and does not accurately reflect the actual flow of funds on the basis of the evidence referred to above; (b) based on all the evidence, the reference in paragraph 11 of Mr Martin's Second Affidavit to GSF receiving funding from time to time from other members of the group is a reference to the Intercompany Loan liabilities recorded in the financial statements and not to the funding received by GSL from the Club Banks; (c) the reference in paragraph 12 of Mr Martin's Second Affidavit to financial assistance is a reference to the subordination of GSF's Intercompany Loan liability to GSMAL, alternatively GSL by the set-off arrangement and not to the funding received by GSL from the Club Banks; and (d) the reference in paragraph 13 of Mr Martin's Second Affidavit to the consequence that without the support of the Club Banks, there would be significant uncertainty as to whether the group and therefore GSF would continue as a going concern does not constitute a relevant benefit for the purposes of contribution for the reasons set out in paragraphs 23 to 28 below. 61 I do not accept these submissions. 62 The contractual position, whilst relevant, is not determinative of the relationship and circumstances existing going to the issue whether GSF received a relevant benefit. 63 Nonetheless, by cl 2.1 of the Deed of Common Provisions - Financing Arrangements for Great Southern Limited, each of the Club Banks agreed to provide certain financial accommodation to the borrowers (which included GSL and GSF). Clause 2.2 required that accommodation only to be applied to the "Approved Purpose", defined, relevantly, to be "assistance with general corporate and hedging requirements of the borrowers including the acquisition of land for development into future Managed Investment Scheme projects" or for the purposes of rural funds". 64 The evidence does not support a conclusion that GSF did not receive the benefit of any of the borrowed funds. It does not support the proposition that the borrowed funds were applied only for the benefit of GSL. This case is far removed from cases such as Ogilvie and Citibank amongst others to which Bendigo referred in a general way. 65 Indeed in Mr Martin's Second Affidavit, he stated: Whilst I don't recall the exact application of the funds, I believe that they were, amongst other things, used as working capital for the Great Southern Group, including for GSF and other subsidiaries of GSL: [9]. This of itself constitutes a relevant benefit. 66 Mr Martin went on to state that: [t]he facilities provided by the Club Banks benefitted the Great Southern Group as a whole, including GSF, because, as detailed in the Club Bank deed of common provisions, the facilities were available to the group to, amongst other things, meet general corporate requirements: [10]. 67 Mr Martin deposed that whilst he did not recall specific transactions, both before and after the provision of the facilities, to the best of his recollection - recalling that he was the chief financial officer form November 2003 through to May 2009: …GSF received funding from time to time from other members of the group, including the parent, GSL: [11]. 68 By reference to financial statements, Mr Martin then stated: …during the period from July 2006 to September 2008, GSF had a working capital deficiency and received assistance from, in the first instance, GSMAL, and, then later, GSL: [12]. 69 Then, by reference to accounts of the relevant companies, Mr Martin explained that in 2006 GSF had a working capital deficiency of $66 million which continued into 2007 although it received assistance from GSL. He then stated that in 2008 GSF had a working capital deficiency of $132 million but again received assistance from GSL in the form of an undertaking. 70 Mr Martin explained, by reference to the final accounts that were prepared for GSF, for the year ended 30 September 2008 that: [t]he note recorded that if the ongoing support of the [Club Banks] were not forthcoming there would be significant uncertainty as to whether the group and, therefore, GSF could continue as a going concern. 71 I infer from this evidence, as the plaintiffs submitted, that GSF was being propped up by the Club Banks, whether it be directly or indirectly, which constituted a relevant benefit. GSL was able to give the undertaking because it was in receipt of the funds from the Club Banks. 72 Finally Mr Martin deposed that the final drawdown of funds in the amount of about $30 million from the banks took place in November 2008, and, to the best of his recollection, the group including GSL and GSF required the last drawdown to meet general corporate requirements for cash flow management purposes and so forth. 73 Accordingly, having regard to the accumulation of this evidence, I find that GSF did derive a benefit from the Club Bank Facilities. The Great Southern Group, I accept, was a sophisticated corporate group. GSF was an integral part of the group's business, operating a lending services division which was dependent on the success of the managed investment scheme business and vice versa. Indeed, in its submissions concerning the separate issue of subordination considered later in these reasons, Bendigo stated that GSF played an "integral role" in the Great Southern Group. It also submitted that, for example, the financial report for GSF for the period ended 30 September 2008 evidences the interdependence between all the companies in the Great Southern Group, including GSF and GSL. 74 The Club Bank Facilities were used for the benefit of the Great Southern Group as a whole, particularly in the ways I have explained, for working capital requirements of the group, including GSF and GSL's other subsidiaries. It is self-evident that the ability of GSF to continue operating as a going concern was a valuable benefit to GSF. 75 There is no reasonable basis for allocating disparate liability to the Club Banks as between the co-obligors, including as between GSL and GSF. 76 In my opinion, GSL and GSF stand in the same position as each other in relation to the question of contribution.

The benefit question - the Intercompany Loan liability 77 Information concerning the Intercompany Loan liability was adduced during the hearing without objection from Bendigo. This information was derived from the ledgers of the Great Southern Group. Copies of the relevant documents were annexed to Ms Khoo's Supplementary Affidavit. These showed changes in Intercompany Loan balances affecting GSL, GSF and GSMAL. 78 These documents disclose that: (a) as at 31 August 2007 GSL owed approximately $59 million to GSF; (b) at the end of August 2007 by means of an Intercompany Loan adjustment GSF assumed liability for $211 million which, when netted off against the $59 million receivable, left GSF with a net obligation of $152 million to GSL. GSF prior to the adjustment had owed the $211 million to GSMAL; and (c) between 31 August 2007 and the commencement of the administration in mid-May 2009 GSF's debt to GSL waxed and waned within a relatively narrow band rising to about $163 million on 30 September 2007 and falling to approximately $144.2 million on 31 March 2009 and culminating in the $148.2 million debt that existed at the commencement of the administration. 79 I would not infer from this that any of the monies borrowed from the Club Banks is represented by the indebtedness of GSF to GSL. The Club Banks Facility Agreements for the loans to the Great Southern Group companies were not entered into until 26 September 2008. The Intercompany Loan I have described was in place before then.

Contractual bar to proof 80 Bendigo submitted in the alternative, that if, which is not accepted, GSL is entitled to assert a right of contribution (with or without a right of subrogation) as a guarantor, then GSL is not entitled to lodge a proof of debt in the liquidation of GSF on account of clause 17.13 of the Deed of Common Provisions, which provides: No Guarantor shall exercise a right of proof in any form of administration of an Obligor (including liquidation, winding up, bankruptcy, voluntary administration, dissolution or receivership or any analogous process) independently of an attorney appointed under clause 17.15. 81 Clause 17.13, in my opinion, has no application to this case as GSL made payment in its capacity as a borrower, not as a guarantor. 82 Further, Bendigo's submission that cl 17.13 of the Facility Agreement prohibits GSL lodging a proof of debt in the liquidation of GSF assumes that clause continues to operate after the Club Banks have been repaid. I reject such a construction. Clause 17.12(2) of that agreement, expressly limits the right of contribution between Joint Obligors only until such time as "all amounts which may be or become payable by the Joint Obligors under or in connection with the Transaction Documents have been irrevocably paid in full". 83 I accept the submission that no purpose would be served by the prohibition on lodging a proof of debt in the administration of an Obligor continuing to operate after the principal debt had been repaid in full. I find that the objective intention of the parties was that cl 17.13 would cease to have effect once repayment was irrevocably made to the Club Banks. 84 As a result, GSL would be able to lodge proofs in the winding up of GSF on the basis of its contribution for the Joint Debt and the Intercompany Loan, with no applicable contractual bar to proof. However, GSL's right to lodge proofs, and the sums for which it may do so, may be subject to an agreement between GSL and GSF, which I will consider next.

Are any, and if so which, of the debts owed to GSL by GSF subject to an enforceable debt subordination agreement or declaration? 85 As I mentioned earlier, at the commencement its winding-up, GSF owed $148,230,149 to GSL on account of an Intercompany Loan. The question, now, is whether an enforceable debt subordination agreement or declaration relating to the Intercompany Loan debts existed between the parties, at the date of commencement of the administration of GSF. 86 The plaintiffs and Mr Rhodes and Mr Butlin contend that there was such an enforceable debt subordination agreement in existence. Bendigo contends to the contrary. The terms of the subordination agreement, for which the plaintiffs and Mr Rhodes and Mr Butlin contend, was that repayment of payables by GSF to GSL would be deferred if any such payment would prevent GSF from paying any other debts as they became due.

Background to Question 2 87 As to the question of whether such an agreement existed, it is necessary to consider 3 letters emanating from GSL to the directors of GSF, as well as a resolution by the directors of GSL, to which I will now turn. 88 On or about 19 December 2007, Mr Rhodes signed a letter from GSL to the directors of GSF which stated that: We refer to the outstanding payable of $151,416,034.34 owing to Great Southern Limited (GSL) from Great Southern Finance Pty Ltd (GSF) as at 30 September 2007. This letter confirms that the directors of GSL have previously agreed to provide all subsidiaries of GSL, which includes GSF, with the undertaking that repayment of payables to GSL, by any of its subsidiaries can be deferred if any such payment would prevent GSF from paying any other debts as they come due. 89 At a meeting of the directors of GSL held on 27 February 2008, GSL's directors: RESOLVED to all wholly owned subsidiaries of the Company that: 1. repayment of all Inter-Company Loans are subordinated in favour of all other creditors, and 2. the Company accepts responsibility of providing and undertakes to provide sufficient financial assistance to all wholly owned subsidiaries as and when it is needed to enable these entities to continue its operations and fulfil all of their financial obligations now and in the future. 90 On 4 March 2008, Mr Rhodes signed a letter which stated that: We being the directors of Great Southern Ltd (the Company) hereby acknowledge to all wholly owned subsidiaries of the Company that: repayment of all Inter-Company Loans are subordinated in favour of all other creditors, and the Company accepts responsibility of providing and undertakes to provide sufficient financial assistance to all wholly owned subsidiaries as and when it is needed to enable these entities to continue its operations and fulfil all of its financial obligations now and in the future. This undertaking is provided for a minimum period of thirteen months from the date of this letter. 91 On or about 30 January 2009, Mr Rhodes signed a letter entitled "Re: Financial Support from [GSL] to [GSF]" which stated that: The Board of Great Southern Limited (GSL) has in place a resolution to provide financial support to its subsidiaries. Great Southern Finance Pty Ltd (GSFPL) has a working capital deficiency and in accordance with the above resolution the directors of GSL have given an undertaking that repayment by GSFPL of loans to GSL will be deferred if any such payment would prevent the company from paying any other debts as they come due. 92 True it is that the purpose of these letters and the resolution (together, the Subordination Documents) was to enable the auditors of the group to be satisfied that the subsidiaries, including GSF, were a going concern. However, contrary to submissions put by Mr Rhodes and Mr Butlin it was not the only purpose. Another vital purpose was to ensure the ongoing financial viability and regulatory integrity of the entire Great Southern Group. 93 Section 563C(2) of the Corporations Act provides that a debt subordination agreement or declaration is: an agreement or declaration by a creditor of a company, however expressed, to the effect that, in specified circumstances: (a) a specified debt that the company owes the creditor; or (b) a specified part of such a debt; will not be repaid until other specified debts that the company owes are repaid to a specified extent. 94 An enforceable debt subordination agreement or declaration may operate despite the fundamental rule that all unsecured non-priority debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately: Corporations Act ss 555, 563C. Analogous statutory provisions forerunning ss 555 and 563C of the Corporations Act in Victoria (Companies Act (Vic) s 440) and New South Wales (Companies Act (NSW) s 440) were similarly interpreted and applied in, respectively, Horne v Chester and Fein Property Developments Pty Ltd [1987] VR 913, and United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131, 139-143. 95 There is no serious dispute between the parties as to whether there exists one debt subordination agreement or a series of agreements. I do not think that it matters, particularly given that the letter of 30 January 2009 was still in effect when the companies were under administration. None of the Subordination Documents, with the exception of the letter of 4 March 2008, had a temporal element. In that case, the undertaking was for a minimum thirteen month period. Prior to reaching that minimum period, the letter of 30 January 2009 was executed, continuing the undertaking. 96 The plaintiffs submitted that s 553C of the Corporations Act also extends to declarations, and that if the subordination letters and resolution do not evidence an implied legally enforceable agreement, they amount to a declaration which has force under s 553C. The alternative argument that the Subordination Documents were together a declaration was only faintly put. I have not considered this alternative in length, and have instead focussed on whether it is possible to infer a legally enforceable debt subordination agreement.

Circumstances giving rise to Subordination Documents 97 Bendigo points to the following circumstances as giving rise to the Subordination Documents. 98 GSF played an integral role in the Great Southern Group of companies in respect of which GSL was the parent entity. GSF provided loans to investors wishing to borrow to invest in the Great Southern Group's managed investment schemes. 99 The financial report for GSF for the period ended 30 September 2008 evidences the interdependence between all the companies in the Great Southern Group, including GSF and GSL. The discussion in the report in relation to the preparation of the report on a going concern basis implicitly asserts that all the companies will rise or fall together. 100 Note 1(b) of the report, as well as the qualification to the audit opinion, also evidences the significant financial stress which the Great Southern Group of companies was under at the time. This is supported by Ms McCleary's affidavit to the extent reference is made to cash flow difficulties and the effects of the global financial crisis experienced by the group. Later, the group did actually collapse. 101 I accept the submission that from this it may be inferred that it was of fundamental importance for GSF to be supported by GSL so as not to bring about a collapse of the group and to clearly demonstrate that such support had been provided. 102 The following further matters referred to by Bendigo are not contentious. 103 The issue of subordination first arose to address a concern expressed by the auditors of GSF, namely Ernst & Young, over the fact that GSF's then current liabilities exceeded its current assets. 104 Ultimately, Ernst & Young gave a qualified audit opinion in relation to GSF, but not on account of GSF's liability to GSL. That liability was addressed in Note 1(a) (page 9) of the financial report in the following terms: As at 30 September 2008, the company has a working capital deficiency of $132,520,000 (2007: $66,321,000). Included in the company's current liabilities are amounts totalling $151,150,000 (2007: $151,416,000) which represent payables to the parent entity, Great Southern Limited (GSL). The directors of GSL have given an undertaking that repayment of these amounts wilI be deferred if any such payment would prevent the company from paying any other debts as they come due. (emphasis added) 105 The financial statements of GSF reveal that if GSL demanded payment of the Intercompany Loan liability which GSF owed to GSL, GSF would be unable to pay its debts as and when they fell due for payment and would no longer be a going concern. That consequence would have been fatal for the continued existence of the group and it was imperative for that consequence to be avoided. Total current assets were approximately $35 million against the Intercompany Loan of approximately $151 million (Note: 13). There was also a net asset deficiency of approximately $8.7 and negative equity of the same amount. 106 Despite this, the financial statements were prepared by the directors of GSF on a going concern basis and this was regarded by the directors of GSF and (subject to a qualification which is not relevant to the Intercompany Loan liability) its auditors, to reflect a true and fair view of the company's financial position and of its performance. 107 More specifically, the Board of GSF resolved and subsequently declared that, relevantly, in the directors' opinion: (a) The financial statements and notes set out on pages 5 to 32 are in accordance with the Corporations Act 2001, including: (i) complying with accounting standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) give a true and fair view of the company's financial position as at 30 September 2008 and of its performance, as represented by the results of its operations, changes in equity and its cash flows, for the financial period ended on that date (b) Subject to the qualification referred to above, a similar opinion was expressed by Ernst & Young as auditor. 108 Again, I accept that from this it may be inferred that a potentially critical issue concerning the solvency of GSF was satisfactorily resolved by the Subordination Documents and that, consistent with this conclusion, the financial report for GSL shows that the Intercompany Loan due to it from GSF was moved from current assets for the period ended 30 September 2007 to non-current assets for the period ended 30 September 2008. 109 Furthermore, note 40 to the financial report for GSL states: Loans between Great Southern Limited and entities in the wholly owned Group are repayable at call. Interest is not charged on at call Inter-Company Loans. At call related party receivables are classified as non-current in the financial statements based upon current expectations of loan repayment whereas at call related party payables are classified as current. 110 It follows from this statement and the movement of GSL's Intercompany Loan receivables from current to non-current, that it is consistent with a subordination of that receivable. The question remains whether it was an enforceable subordination agreement or declaration. 111 The plaintiffs submitted that, having regard to the terms of the Subordination Documents, it is open to conclude that at the time of the commencement of the winding-up of GSF there was in existence an enforceable debt subordination agreement or declaration binding upon GSL, the effect of which is that GSF is not obliged to repay the Intercompany Loan unless and until all other debts of GSF are paid in full. 112 Bendigo submitted that the background outlined above supports a construction of the words "payables" and "loans" to mean any present or future intercompany indebtedness, however that may arise. Such a construction, it contends, means that not only would any Intercompany Loan recorded in the accounts be subordinated, but also any indebtedness arising from any right of contribution that GSL might be able to enforce against GSF. In other words, all amounts payable by GSF to GSL are subordinated. 113 Accordingly, Bendigo submitted that no dividend ought to be paid on any proof of debt lodged by GSL in the liquidation of GSF for any amount unless or until the claims of all other unsecured creditors of GSF are paid in full. 114 I reject these submissions as the Subordination Documents were each concerned with the Intercompany Loan made by GSL to its subsidiaries including GSF. 115 Mr Butlin and Mr Rhodes made some threshold submissions. As to these I do not accept the submission put by Mr Rhodes and Mr Butlin that the efficacy of the resolution is undermined by the absence of direct evidence that the letter was considered or authorised by the Board of GSL or that there were no documents in the board pack or the Chief Financial Officer Report that refer to the resolution, the subject matter of the resolution, the subordination of GSL's Intercompany Loan, or the financial support to be provided by GSL to its subsidiaries. Nor does the fact that no legal or accounting advice was provided to the GSL board regarding the effect of subordinating debts due to GSL by its subsidiaries or that there was no audit committee meeting or that the resolution was never scrutinised by the audit committee affect its validity. 116 Although Ms McCleary has no recollection of any management presentation or discussion at the relevant board meeting concerning the resolution, there is no dispute that the resolution was duly passed.

Was there a legally enforceable debt subordination agreement between GSL and GSF? 117 Mr Rhodes and Mr Butlin submitted that, the evidence does not support the conclusions contended for either by the plaintiffs or Bendigo for at least the following reasons: (a) there was no objective intention on the part of GSL to create legally binding relations; (b) no consideration passed from GSF to GSL; and (c) the evidence does not disclose the essential terms of such an agreement. 118 Mr Rhodes and Mr Butlin submitted that section 563C does not confer upon an "agreement" or "declaration" any legal effect which it does not otherwise possess and that the purpose of the section is to ensure that a private subordination agreement is not invalidated merely because of the pari passu rule given statutory effect in section 555 of the Act: Re NIAA Corp Ltd (in liq) (1993) 33 NSWLR 344, 357-358. 119 Further Mr Rhodes and Mr Butlin submitted that even if there were such an agreement existence, the terms of it were not that GSF's debt to GSL would be subordinated in favour of GSF's other creditors in circumstances where GSF had ceased to trade. 120 I will address each of these aspects of the purported debt subordination agreement between GSL and GSF in turn.

Was there an intention to create legal relations? 121 Whether an intention to create legal relations can be inferred is to be determined objectively, having regard to the "the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding considerations": Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, 105 [24]-[25]. The surrounding considerations include, of course, the communications of the parties and other conduct: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1, 324 [2657]. 122 As the Victorian Court of Appeal stated in Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (In Liq) (2009) 25 VR 411, 424 [44], …the existence and effect of a legally binding agreement is to be determined objectively according to what a reasonable person would take to be the intent of the parties as evidenced by their actions in the circumstances of the case, and not according to the subjective interpretations of the parties. 123 Mr Butlin and Mr Rhodes submitted that the evidence does not disclose any objective intention on the part of GSL to create a legally binding arrangement as opposed to a non-binding assurance, and that in this respect the facts are substantially similar to those in Atco. Atco concerned the enforceability of letters of support provided by a parent company to a subsidiary. 124 I do not agree with this submission. 125 In several respects the facts in Atco differ from the present case. Most important and critical, in my opinion, is the fact in Atco as to the existence of formal contractual documents including a debenture granted to Atco by its subsidiary for the monies owed. This was, it seems, decisive in the conclusion of the Victorian Court of Appeal where it stated that: It is trite that the significance of the conduct displayed by and in the letters of support was to be assessed objectively in light of the circumstances known to both parties at the times at which the letters were provided. Those circumstances included the deeds of postponement, priority and guarantee and, most importantly, the debenture. The exercise was thus to be approached on the basis that both parties were aware of the rights and obligations which those documents conferred and imposed on them and so knew that the debenture conferred extensive powers on Atco to call up Newtronics' indebtedness on demand and in the event of a range of circumstances deemed inimical to the value of Atco's security: Atco 25 VR 411, 425-426 [49]. 126 Although Atco provided to its subsidiary in certain years a letter of support as well as a financial support agreement, this has to be seen in the overall factual matrix. As the Court of Appeal stated: Admittedly, as the judge found, it was important to Atco that Newtronics continue in business. For that reason, it is not surprising that Atco should have provided Newtronics with support and, at least in some financial years, confirmed its intention to continue to do so for the following year by means of a letter of support. It may also be accepted that the alleged continuing security agreement, and for that matter the alleged financial support agreement, were not inconsistent with the debenture in the sense that the former was not in terms incapable of co-existing with the latter. But since the debenture was executed for the purpose of securing the repayment of such support as was provided, and since a binding legal obligation to continue to provide support in the form of either the continuing support agreement or the financial support agreement would have had the potential to destroy the efficacy of Atco's security vis-à-vis Newtronics, and indeed to put Atco at risk of default under its obligations to ANZ, it strikes us as inherently unlikely that Atco would have intended to bind itself to such an obligation or that Newtronics would have believed that it had done so: Atco (2009) 25 VR 411, 426 [50]. 127 Indeed as the Court of Appeal noted, the comparison between the "informality and insouciance" of the asserted contract by the subsidiary was at odds with the degree of formality evidenced in the deeds of postponement, debenture, priority and guarantee by which Atco and its subsidiaries had otherwise regulated their intercompany financing arrangements: Atco (2009) 25 VR 411, 425 [46]; 435 [89]. The factual circumstances in this present case are far removed from those in Atco. 128 Bendigo submitted that an intention to create legal relations may be objectively inferred from the following: (a) The need for GSL to support GSF to prevent the collapse of the group. To do so, GSL could not make a call on the Intercompany Loan debt. If it did, GSF could not continue as a going concern. (b) The existence, or presumed existence, of previous undertakings of support which, at least implicitly, were not considered sufficient - otherwise nothing further would have been done. (c) The preparation of not just one, but three successive letters subordinating the debt. (d) The formalisation of the subordination by way of a board resolution of GSL. (e) The use of the words "agreed", "undertaking", "undertakes", "are subordinated" "accepts responsibility" and "acknowledge" which is language consistent with an intention to create a binding legal relationship rather than merely a moral obligation. More generally, the terms of the letters and resolution are promissory in nature. (f) The absence of evidence of language which could be characterised in terms of "offer" and "acceptance" or statements to the effect of "we agree to be bound" can be explained by the common directorship between GSF and GSL. More particularly, any such language, if it existed, would have had to arise in the context of Mr Rhodes, or Mr Butlin having a conversation with themselves in multiple capacities. It is unlikely that this would have occurred in any event. (g) The terms of the financial statements which are consistent with a legally enforceable obligation existing. 129 These submissions, taken together with the contextual background which I set out at some length earlier, are compelling and, subject to the issue of consideration, I have concluded on the objective evidence that there was an intention on the part of both GSL and GSF to create a legally binding subordination agreement. The subordination of its receivables from relevantly, GSF, was not, contrary to what Mr Rhodes and Mr Butlin submitted, merely concerned with the internal management of GSL. I would infer that, as common directors of each company, Mr Rhodes and Mr Butlin both gave and received the undertakings and reached agreement for the respective companies. It would defy credulity to suppose otherwise.

Was there consideration? 130 Mr Rhodes and Mr Butlin submitted that the asserted agreement was devoid of consideration. 131 In particular, Mr Rhodes and Mr Butlin submitted that there is no evidence that consideration passed to GSL from GSF in return for any agreement by GSL to subordinate its debt and, as in Atco, there is nothing in the evidence to indicate that GSL requested the subsidiaries to continue to trade: Atco (2009) 25 VR 411, 429-431 [61]-[68]; Norman and Another v FEA Plantations and Another (2011) 195 FCR 97, 111 [122]-[124]. 132 In Atco, it was held that to establish the existence of good consideration, it must be made to appear that the promise was really offered as the price or quid pro quo for the action taken. The case, as I mentioned before, concerned the enforceability of letters of support provided by a parent company to a subsidiary. The Victorian Court of Appeal held that it was necessary to show that that the parent company, in effect, requested the subsidiary to continue to trade in return for the undertaking of continued support and that the subsidiary was moved by that request. The Court also held that the request need not be express and may be implied. On the facts of that case, the Court found that there was no such express or implied request. 133 Bendigo submitted that the position is different here because although there is no evidence of an express request, it is implied. It referred to Norman which concerned the enforceability of a commitment letter provided from one company (FEA) to another (FEAP), both of which were part of a group of companies conducting managed investment schemes. In that case, Finkelstein J held that it is possible to infer that the request for the commitment letter was premised on the proposition that, without it, FEAP would no longer act as responsible entity. The inference was drawn because, in the absence of the commitment letter, FEAP could not, consistently with its licence conditions act as responsible entity of the schemes. This finding was upheld on appeal. 134 Although GSF was not the responsible entity of the managed investment schemes in the present case, it played an integral role in the group. The preamble to GSL's board resolution recited that the purpose of the resolution was to, among other things, "establish continuing support for Australian Financial Services Licence (AFSL) obligations". 135 The importance of the AFSL obligations is disclosed in GSL's financial reports as a matter concerning "capital risk management" and it is submitted that this affected the group as a whole. 136 I accept Bendigo's submission that the integrity of the group as a whole depended on the continued existence of its constituent parts, of which GSF was one. Without subordination, as I earlier explained, GSF would have ceased to be a going concern and could no longer have fulfilled an important function which it was required to perform in the group, namely to provide loans to investors wishing to borrow to invest in the group's managed investment schemes. 137 The evidence to which Bendigo referred supports the implication that, GSL, in effect, requested GSF to continue to trade in return for the subordination and GSF was moved by that request. I am satisfied that the requirement of consideration was satisfied.

Were the essential terms disclosed? 138 Mr Rhodes and Mr Butlin submitted that the term "subordination" is not a term of art, such that the use of the term implies the incorporation of some form of standard terms: Bell Group (2008) 39 WAR 1, 341 [3301]-[3302]. Further, they submitted that only the 4 March 2008 letter could arguably be said to disclose the essential terms relating to the period and circumstances in which GSF's debt to GSL was to be subordinated: Atco (2009) 25 VR 411, 432 [73]. 139 The question whether a contract can be implied requires a consideration of the circumstances as a whole. The inquiry may include but does not inevitably demand for its resolution the construction of particular words in one or more of the letters or the resolution without regard to the circumstances as a whole. The letters were written and the resolution drafted and passed by lay persons. There was no evidence that lawyers were involved. 140 Nonetheless the terms concerning the Intercompany Loan owed by GSF to GSL are clear enough in the Subordination Documents; it was to be deferred in favour of all other creditors if any such payment would prevent GSF from paying any other debts as they become due.

Did any agreement extend to insolvency? 141 Mr Rhodes and Mr Butlin submitted that to the extent that a debt subordination agreement between GSL and GSF can be articulated, the evidence suggests that any such agreement was not intended to operate in circumstances where GSF had ceased to trade. 142 They make that submission for the following reasons: (1) Each of the 19 December 2007 letter and the January 2009 letter refer to the directors of GSL having given an "undertaking" to the effect that GSF could defer the repayment of "payables" (in the first letter) and "loans" (in the second) to GSL where payment would prevent GSF from paying other debts as they came due. (2) Each letter was therefore concerned with GSF being able to meet its debts as and when they became due, with the evident intention that GSF continue to trade as a going concern. Upon GSF's insolvency, it was no longer able to pay its other creditors as those debts became due, and the condition on which GSL agreed (always assuming either of the letters to constitute an enforceable arrangement) to permit GSF to defer payment of its debts was no longer satisfied. (3) At that point, GSF was no longer entitled to defer payment of its debt to GSL. As a matter of construction, therefore, neither letter operates as a debt subordination in GSF's insolvency. As a consequence, GSL is entitled to prove for the Intercompany Loan of $148,230,149 due to it by GSF in the winding up of GSF. (4) As for the letter dated 4 March 2008, there is nothing to indicate that its operation was not terminated by the letter dated January 2009, which was in materially different terms. Although the March 2008 letter provided that the "undertaking" or "acknowledgment" contained therein was to remain in place until at least April 2009, there is nothing in the terms of that letter which would have prohibited GSL and GSF replacing or varying that arrangement. 143 I do not accept their submissions. 144 The terms neither expressly nor by implication provide for the termination of the subordination agreement upon the voluntary administration, liquidation or insolvency of GSF or GSL or either of those entities ceasing to trade. It was upon the basis of the Subordination Documents that GSF was able to incur debts to third parties knowing it was able to discharge those debts in priority to its loan from GSL. It would subvert the objective intention of the agreements made to regard administration as terminating the effect of the agreements.

Was there a legally enforceable debt subordination declaration between GSL and GSF? 145 The plaintiffs' submission that, if there were no agreements then, alternatively, there were declarations within the meaning of s 563C(2) was rather faintly put. No submission was put as to just what constituted, for this purpose, a declaration. 146 Nonetheless, even if the Subordination Documents did not constitute an enforceable debt subordination agreement or agreements as I have found, they would still constitute, for the purposes of s 563C of the Corporations Act, relevant declarations.

Conclusion 147 I would for these reasons determine and direct as follows:

1. The plaintiffs would be acting properly and justified in causing Great Southern Ltd (in liquidation) (ACN 052 046 536) to: (a) join with the other borrowers, identified in the Facility Agreement between Australia and New Zealand Banking Group Ltd (ACN 005 357 552) (ANZ) and others, dated 26 September 2008, who paid the whole debt owed to ANZ pursuant to that agreement, in lodging a proof of debt in the winding up of Great Southern Finance Pty Ltd (in liquidation) (ACN 009 235 143) (GSF) for $172,684,554.28; (b) join with the other borrowers, identified in the Facility Agreement between Bank of Western Australia Ltd (ACN 050 494 454) (BankWest) and others, dated 26 September 2008, who paid the whole debt owed to BankWest pursuant to that agreement, in lodging a proof of debt in the winding up of GSF for $166,021,484.66; (c) join with the other borrowers, identified in the Facility Agreement between Commonwealth Bank of Australia (ACN 123 123 124) (CBA) and others, dated 26 September 2008, who paid the whole debt owed to CBA pursuant to that agreement, in lodging a proof of debt in the winding up of GSF for $66,428,784.98; and (d) join with the other borrowers, identified in the Facility Agreement between Mizuho Corporate Bank Ltd (ACN 099 031 106) (Mizuho) and others, dated 1 October 2008, who paid the whole debt owed to Mizuho pursuant to that agreement, in lodging a proof of debt in the winding up of GSF for $99,643,177.48.
2. The plaintiffs, in their capacity as liquidators of GSF, would be acting properly and justified in admitting in full each of the proofs referred to in paragraph 1 above in the winding up of GSF.
3. The plaintiffs, in their capacity as liquidators of GSF, would be acting properly and justified in distributing the assets of GSF on the basis that the part of GSL's claim against GSF that is founded upon the loan from GSL to GSF (in the amount of $148,230,149) is subordinated to all other claims of creditors of GSF.
4. The plaintiffs', Cameron Arthur Rhodes's, Phillip Charles Butlin's and Bendigo and Adelaide Bank Ltd's costs and expenses of this application be costs and expenses in the winding up of GSL and GSF. I certify that the preceding one hundred and forty-seven (147) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.