Electricity Generation Corporation v Woodside Energy Ltd

Factual background

1. By way of background, as it emerges from the affidavit evidence and Counsel's helpful submissions, OR is a wholly owned subsidiary of ORI (Davis 17.12.18 [8]). The Companies commenced business in about 2010 and their operations involved the design, development and marketing of smart lighting control systems (Davis 17.12.18 [15]-[17]). ORI held patents, trademarks and other intellectual property in the products developed by the Companies and OR was an operating entity and employed staff, contracted with customers and engaged sub-contractors and suppliers (Davis 17.12.18 [18]-[19]). ORI was the funding entity for the business of the Group, and externally sourced capital (in the form of equity, debt and convertible instruments) was raised by ORI and transferred to OR to pay for expenses (Davis 17.12.18 [20]-[21]).
2. The first convertible note issue took place under the Note Deed (Ex J1, 62) under which ORI issued 80,000 notes to the Noteholders with a face value of $10 per note, raising $800,000 (Davis 17.12.18 [39]-[40]). On 12 June 2015, ORI entered into the E.ON Loan Agreement with E.ON, by which E.ON advanced €1,000,000 to ORI, by way of an unsecured loan (Davis 17.12.18 [43]; Ex J1, 71). On 13 January 2016, ORI entered into the Constellation Loan Agreement with Constellation, by which Constellation advanced US$2,000,000, by way of an unsecured loan (Davis 17.12.18 [44]; Ex J1, 93). The convertible notes issued under those arrangements could, either automatically on a particular event occurring or at the request of the creditor and on certain conditions, convert to preferred share capital in ORI (although that did not relevantly occur in respect of any of the three relevant debt instruments) (Davis 17.12.18 [36]).
3. On 24 February 2017, Messrs Davis and Morgan were appointed as joint and several administrators of the Companies by resolutions of the Companies' directors under s 436A of the Corporations Act (Davis 17.12.18 [9]). On 3 April 2017, at the second meeting of creditors, the creditors of each of ORI and OR resolved to wind up each company and Messrs Davis and Morgan were appointed as liquidators (Davis 17.12.18 [12]). The assets of the Companies (including specified plant and equipment, intellectual property, the internet domain name of the business and particular documentary records) were then sold on 3 April 2017 in the winding up (Davis 17.12.18 [28]). A pooling determination was made by the Liquidators that the Companies' assets be pooled and that the inter-company debts between them be extinguished and, on 10 July 2018, the creditors of each of the Companies approved that determination (Davis 17.12.18 [34]-[35]).
4. Mr Davis' evidence is that an issue has now arisen as to whether, under the Note Deed, the E.ON Loan Agreement and/or the Constellation Loan Agreement, it was agreed that the debts owed by ORI to one or more of the Noteholders, E.ON or Constellation was subordinated to the debts of the ordinary creditors of ORI (and/or to each other) under s 563C of the Corporations Act (Davis 17.12.18 [46]). Mr Davis also refers to provisions of the Note Deed, the E.ON Loan Agreement and the Constellation Loan Agreement which were relevant to that issue, to which I will refer below, and to the Liquidators' view that there was "at least potential uncertainty" in the construction of the Note Deed, the E.ON Loan Agreement and the Constellation Loan Agreement, particularly in respect of the question whether the relevant debts are subordinated (Davis 17.12.18 [53]). He also noted that, subject to the Court's directions, the Liquidators propose to treat the debts owed by ORI to the Noteholders as subordinated to the debts owed to ordinary creditors of ORI including the debts owed to E.ON and Constellation; and the debts owed by ORI to E.ON and Constellation as ranking equally with debts owed to ordinary creditors of ORI (Davis 17.12.18 [54]). Mr Davis also noted, and it is not controversial that, the Liquidators will not distinguish between creditors of OR and ORI and will treat the assets and creditors of the Companies collectively by reason of the pooling determination (Davis 17.12.18 [55]). Mr Davis also referred to the matters which he considered supported the Liquidators' position, to which I will refer below, and to correspondence with creditors and the reasons that directions were sought from the Court.

Applicable principles

1. There is no controversy in this application that s 563C of the Corporations Act permits contractual subordination of the debts of specified creditors to the debts of ordinary creditors of the company in a winding up. That section provides that: "(1) Nothing in this Division renders a debt subordination by a creditor of a company unlawful or unenforceable, except so far as the debt subordination would disadvantage any creditor of the company who was not a party to, or otherwise concerned in, the debt subordination. (2) In this section: debt subordination means 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."
2. As Mr Krochmalik points out, even apart from that section, debts in respect of convertible unsecured notes may properly be contractually subordinated to liabilities due to a company's other creditors: Kershaw in his capacity as liquidator of Equiticorp Tasman Ltd [2005] NSWSC 313; (2005) 54 ACSR 214 at [44]-[47].
3. The issues as to construction that arise out of the Note Deed, the E.ON Loan Agreement and the Constellation Loan Agreement are to be determined by reference to well-established principles applicable to the construction of commercial contracts. Mr Krochmalik submits that the construction of a contract is determined objectively, by reference to its text, context and purpose and, in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean, and that that task requires consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
4. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40], a unanimous High Court observed that: "This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." [citations omitted]
5. In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35], French CJ, Hayne, Crennan and Kiefel JJ in turn observed that: "[t]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating"." [citations omitted]
6. The High Court also reviewed the principles of construction applicable to commercial agreements in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 (at [46]-[51]) where French CJ, Nettle and Gordon JJ observed that: "The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties … intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience"." [citations omitted]
7. In Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 at [44], Kiefel CJ, Gageler, Nettle and Gordon JJ similarly observed that: "It is well established that a commercial contract should be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract." [citations omitted]
8. Mr Krochmalik also drew attention to the observations of Leeming JA in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [128]-[135] as follows: "First, it is axiomatic that a contract can have but one legal meaning ... [t]hat is not to say that the application of that legal meaning to the facts may not be uncertain in a particular case ... [h]owever, the way in which the question arises in this litigation, on agreed facts, means that any difficulties of application fall away. Secondly, it is axiomatic that (a) the words in a sentence are not building blocks whose meaning is unaffected by the rest of the sentence, (b) the sentence is the unit of communication by which language works, and (c) the significance of individual words is affected by other words and the syntax of the whole sentence ... [t]he task is not to find the legal meaning of particular words within the clause, but the clause as a whole. … Fourthly, the task of identifying the single legal meaning of the clause is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose. … Fifthly, as the High Court said in Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [82]: "It was necessary to construe the [contract] so as to avoid it making commercial nonsense or working commercial inconvenience. Its commercial purpose … was relevant. That, in turn, required attention to 'the genesis of the transaction, the background, the context, the market' in which the parties were operating, as known to both parties." [Citations omitted.] Sixthly, it is open to the parties to confine the material available to the Court for the purpose of identifying the legal meaning. For example, the parties may choose not to adduce evidence of surrounding circumstances or commercial purpose which would otherwise be admissible on the question of construction. … Seventhly, it is trite that the contract must be construed as a whole, with a view to the legal meaning reflecting a measure of internal coherence … [t]he process of working through the consequences of the competing literal or grammatical meanings enables a court to assess whether either party's preferred legal meaning gives rise to a result that is more or less internally consistent and avoids commercial absurdity. What is more, in complex cases such as the present, it is likely that there will be internal inconsistencies or infelicities on any construction. It is important therefore not to conclude the evaluation too soon. Just because one party's preferred construction leads to a result which is internally inconsistent does not mean that the other party's competing construction is the legal meaning. The other construction may, on analysis, involve a more serious internal inconsistency." [citations omitted]
9. Mr Golledge did not take issue with the Liquidators' summary of the relevant principles of construction. However, he emphasised, and I accept, that the process of construction also allows for the rejection, substitution or addition of words so as to correct plain or obvious errors in the text as part of the process of construction: Fitzgerald v Masters (1956) 95 CLR 420; Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486; Noon v Bondi Beach Astra Retirement Village Pty Ltd [2010] NSWCA 202.

Declaration as to Note Deed

1. The first declaration sought by the Liquidators and the Companies is a declaration that, on the proper construction of the Note Deed, ORI agreed that the debts owed by ORI to the Noteholders are subordinated to the debts owed to ordinary creditors of ORI for the purposes of s 563C of the Corporations Act. Mr Krochmalik submits, and I accept that, where Mr Duffield was joined as a representative of the Noteholders, the Court may make declarations and orders which will bind the Noteholders as to the proper construction of the Note Deed: Re Broens Pty Limited (in liq) [2018] NSWSC 1747 at [52]. This declaration raises a question of construction, as to which there was ultimately no contest between the parties, although the Court must still satisfy itself as to whether it may properly make that declaration on the merits.
2. Clause 3.2 of the Note Deed relevantly provides that: "(a) The Convertible Notes are direct, unsecured and subordinated debt obligations of [ORI]. (b) Each Convertible Note ranks for payment in a Winding Up of [ORI]: 1) after all Senior Ranking Obligations; 2) equally with each other Convertible Notes and all Equal Ranking Obligations; and 3) ahead of all Junior Ranking Obligations."
3. Paragraph (a) of this clause plainly recognises that the relevant notes are subordinated, but the content of that subordination will turn on the relevant definitions. The terms "Senior Ranking Obligations", "Equal Ranking Obligations" and "Junior Ranking Obligations" are defined as follows: "Senior Ranking Obligations: any obligation in relation to claims of any creditors (including subordinated creditors) of [ORI], the Holders, the holders of Equal Ranking Obligations and the holders of Junior Ranking Obligations." "Equal Ranking Obligations: any obligation in relation to claims of an unsecured, subordinated creditor of [ORI], or claims of any holder of a preference share in the capital of [ORI], which claims are expressed to rank equally with [ORI's] obligations under the Convertible Notes." "Junior Ranking Obligations: any obligation in relation to claims of any unsecured, subordinated creditor of [ORI] which claims are expressed to rank after [ORI's] obligations in respect of the Convertible Notes."
4. Mr Krochmalik rightly points out that the definition of "Senior Ranking Obligations" causes difficulty, so far as it appears to define those obligations as the claims of any creditors including subordinated creditors, and specifically refers to both Equal Ranking Obligations and Junior Ranking Obligations. Mr Krochmalik rightly submits that: "It simply does not make sense that the holders of the Convertible Notes are senior ranking obligations. That is because the language of clause 3.2(b)(2) and the definition of 'Equal Ranking Obligations' appear to provide in express terms that the debts owed to the Noteholders rank after the senior ranking obligations."
5. Mr Krochmalik also points to several matters that favour the conclusion that the definition of "Senior Ranking Obligations" includes ordinary unsecured debts of ORI, with the consequence that the debts to the Noteholders under the Note Deed are subordinated to those ordinary debts. He points out that, as I noted above, cl 3.2(a) of the Note Deed expressly refers to the debts owing to Noteholders under the Note Deed as being "subordinated debt obligations" of ORI; that cl 3.2(b)(2) and the definition of "Equal Ranking Obligations" indicates that the debts owing to Noteholders under the Note Deed are intended to be treated in the same way as preference shares in ORI, and a preference share is ordinarily a form of preferred equity that ranks ahead of ordinary shares but behind a company's debts; and there is no indication in a Convertible Note Offer Document (Ex J1, 152) or an Information Memorandum (Ex J1, 158), which were prepared before the issue of the convertible notes, that they ranked equally with ordinary debt.
6. Mr Golledge in turn recognises that cl 3.2(a) of the Note Deed describes the debts owed to the Noteholders as "direct, unsecured and subordinated debt obligations" of ORI and that the use of the term "subordinated" suggests that payment of those debts is to be deferred to payment of other debts, as determined by cl 3.2(b) which establishes the relative rankings as between "Senior Ranking Obligations", "Equal Ranking Obligations" and "Junior Ranking Obligations" as defined. Mr Golledge submits that the ranking of those obligations is determined by the comparative relationship established, by those three definitions, between the various categories of creditor claims.
7. Mr Golledge also recognises that the definition of "Senior Ranking Obligations" cannot operate according to its terms, if the concluding words to that definition describe types of debt which come within the definition of "Senior Ranking Obligations". He recognises that would incorporate, as "Senior Ranking Obligations", debts which would have lower priority under cl 3.2(b), and that cll 3.2(b)(2) and 3.2(b)(3) proceed on the basis of an assumption that debts within those paragraphs are to be treated differently from each other and differently from senior ranking debts.
8. Mr Golledge also submits, and I accept, that the Note Deed can only operate sensibly if the words "…, the Holders, the holders of Equal Ranking Obligations and the holders of Junior Ranking Obligations" in the definition of "Senior Ranking Obligations" is intended to identify claims which are excluded from the wider class rather than included within it. On that basis, Mr Golledge submits, and I also accept, that: "The only way to make sense of the first and second phrases in the definition of Senior Ranking Obligations, the respective definitions of Equal and Junior Ranking Obligations and to the priority regime established by clause 3.2, is to recognise that the two clauses in the definition should be construed as if separated by a word such as "excluding" or the phrase "apart from" so that the full definition would read as follows: "Senior Ranking Obligations: any obligations in relation to claims of any creditors (including subordinated creditors) of the Issuer, excluding the Holders, the holders of Equal Ranking Obligations and the holders of Junior ranking Obligations.""
9. Mr Golledge submits, and I accept, that that omission or error in the definition of "Senior Ranking Obligations" can be corrected as a matter of construction, so as to make sense of the Note Deed considered as a whole, in accordance with the principles established in Fitzgerald v Masters above and Noon v Bondi Beach Astra Retirement Village Pty Ltd above.
10. In summary, it seems to me that, as both Mr Krochmalik and Mr Golledge accepted, there is a fundamental difficulty with the definition of "Senior Ranking Obligations" in the Note Deed so far as it appears to include subordinated creditors of ORI or holders of "Equal Ranking Obligations" and holders of "Junior Ranking Obligations" within that concept. That approach would plainly be inconsistent with cl 3.2(b) of the Note Deed and with the definitions of "Equal Ranking Obligations" and "Junior Ranking Obligations". In my view, Counsel are correct in the view they have formed that the claims of Noteholders under the Note Deed are subordinated to other debts of the Companies, where cl 3.2(a) of the Note Deed expressly states that the debts owing under the convertible notes are "subordinated debt obligations" of ORI, and cl 3.2(b)(2) of the Note Deed in turn suggests that claims under such notes rank with "Equal Ranking Obligations" (as defined) including claims of holders of preference shares. I will therefore make the declaration sought by the Liquidators and the Companies in respect of the Note Deed.

Declaration as to E.ON Loan Agreement and Constellation Loan Agreement

1. The second declaration sought by the Liquidators and the Companies is that, on the proper construction of the E.ON Loan Agreement and the Constellation Loan Agreement, ORI agreed with each of E.ON and Constellation that the debts owed by ORI to each of them rank equally with the debts owed to ordinary creditors of ORI. E.ON and Constellation were not joined as party to the proceedings and did not seek to appear in them. The Liquidators and the Companies fairly accepted that the Court therefore would not make the declarations sought in a manner that would bind E.ON and Constellation without their having had an opportunity to be heard. I will nonetheless address the issues of construction which arise in respect of the E.ON Loan Agreement and the Constellation Loan Agreement, which are relevant to the directions sought by the Liquidators which I address below.
2. Prior to the execution of the E.ON Loan Agreement, a memorandum of terms dated 29 May 2015 in respect of the issue of the convertible note to E.ON dealt with the ranking of that loan, in terms that broadly correspond with cl 3.2 of the E.ON Loan Agreement as follows: "Ranking: Equal ranking with all convertible notes and any obligation in relation to claims of an unsecured, subordinated creditor of the issuer, or claims of any holder of a preference share in the capital of the issuer, which claims are expressed to rank equally with [ORI's] obligations under the Convertible Loan: (a) The Convertible Loan is direct, unsecured and subordinated debt obligations of [ORI]; (b) The Loan ranks for payment in a Winding-Up of [ORI]: a. after all Senior Ranking Obligations; b. equally with each other Convertible Notes and all Equal Ranking Obligations; and c. ahead of all Junior Ranking Obligations." ([Ex J1, 358)
3. Plainly, that provision suggests that the then common intent of the parties was that the notes issued under the E.ON Loan Agreement would rank equally with other convertible notes, including the convertible notes issued under the Note Deed. After the term sheet was signed, there were further exchanges of correspondence between ORI and E.ON's legal representatives (for example, Ex J1, 532), which, at least so far as the documents in evidence go, do not appear to have expressly addressed the question of subordination. There was also correspondence between ORI and Noteholders holding the notes issued under the Note Deed, which sought their approval to the entry into the E.ON Loan Agreement and the Constellation Loan Agreement on the basis that its ranking and commercial terms were equivalent to the previous convertible notes (for example, Ex J1, 376). It does not seem to me that that correspondence is admissible in respect of the construction of the E.ON Loan Agreement and the Constellation Loan Agreement, where neither Constellation or E.ON was party to it, nor is there any suggestion that it was known to them. That correspondence may give rise to other claims by Noteholders, for example, for estoppel, misrepresentation or misleading conduct.
4. Mr Krochmalik and Mr Golledge recognise that the E.ON Loan Agreement and the Constellation Loan Agreement are in relevantly identical terms, and the question of the priority of E.ON's and Constellation's claims can be dealt with together. Mr Golledge also submits, and I accept, that it is apparent that the parties to those Loan Agreements were aware of the existence of the notes issued under the Note Deed, and the definition of "Convertible Notes" in cl 1.1 of those Loan Agreements refers to those notes.
5. Clauses 3.2(a)-(b) of the E.ON Loan Agreement and the Constellation Loan Agreement are in the same form, and provide as follows: "(a) The Convertible Loan is a convertible and unsecured loan constituted by this Agreement. (b) The Convertible Loan ranks for payment in a Winding Up of [ORI]: 1) after all Senior Ranking Obligations; 2) equally with all Equal Ranking Obligations; and 3) ahead of all Junior Ranking Obligations."
6. Clause 3.2(c) of the E.ON Loan Agreement and the Constellation Loan Agreement are in somewhat different terms. Clause 3.2(c) of the E.ON Loan Agreement provides that: "To the extent that and for as long as any assertion of [E.ON's] claims under the Convertible Loan Agreement would lead to bankruptcy proceedings of [ORI], [E.ON's] claims under the Convertible Loan Agreement shall be subordinated to any claims of [ORI's] other creditors and [E.ON] shall not satisfy such claims. Apart from that [E.ON] is fully authorised to assert its rights under this agreement and to demand satisfaction of its claims. This subordination shall not constitute a waiver or remission of the subordinated claims."
7. Clause 3.2(c) of the Constellation Loan Agreement in turn provides that: "To the extent that and for as long as any Senior Ranking Obligations exist and remain outstanding and any assertion of [Constellation's] claims under this Agreement would lead to bankruptcy proceedings against [ORI], then [Constellation's] claims under this Agreement shall be subordinated to any claims of [ORI's] Senior Ranking Obligations. Apart from that, [Constellation] is fully authorised to assert its rights under this Agreement and to demand satisfaction of its claims. This subordination shall not constitute a waiver or remission of the subordinated claims."
8. These provisions again use the terms "Senior Ranking Obligations", "Equal Ranking Obligations" and "Junior Ranking Obligations" although these definitions are in somewhat simpler terms in these agreements than in the Note Deed. The definition in the E.ON Loan Agreement, which is in substantially similar terms to that found in the Constellation Loan Agreement, is as follows: "Senior Ranking Obligations: any obligation in relation to claims of any senior creditors of [ORI]" "Equal Ranking Obligations: any obligation in relation to claims of an unsecured creditor of [ORI], or claims of any holder of a preference share in the capital of [ORI], which claims are expressed to rank equally with [ORI's] obligations under the Convertible Loan and includes the Convertible Notes." "Junior Ranking Obligations: any obligation other than the Senior Ranking Obligations or the Equal Ranking Obligations, including in relation to claims of any unsecured, subordinated creditor or ordinary shareholder of [ORI] which claims are expressed to rank after [ORI's] obligations in respect of the Convertible Loan and the Convertible Notes."
9. Mr Krochmalik submits that there are several reasons why the debt owed to E.ON and Constellation is not subordinated to other unsecured creditors of ORI and ranks in priority to claims of Noteholders under the Note Deed. By contrast, Mr Golledge submits that the debts owed to E.ON and Constellation rank, in the winding up, equally with the debts payable to the claims of Noteholders under the Note Deed and behind ordinary creditors.
10. Mr Krochmalik recognises that the recitals to the E.ON Loan Agreement and the Constellation Loan Agreement do not refer to the loans as being subordinated and that, by contrast with cl 3.2(a) of the Note Deed, clause 3.2(a) of the E.ON Loan Agreement and the Constellation Loan Agreement do not make any reference to these loans being a subordinated debt. I give limited weight to that matter, where the extent of the subordination of the relevant loans is dealt with by more specific provisions, and the loans were plainly subordinated at least to the extent of cl 3.2(c) of the Loan Agreements. Mr Golledge also recognises that cl 3.2(a) of the E.ON Loan Agreement provides that that loan is a "convertible and unsecured loan" and that such a debt would, absent any subordination arrangement, be provable at the same level as ordinary creditors in the winding up, and behind priority creditors expressly referred to in s 556 of the Corporations Act. However, he submits that cl 3.2 provides for subordination and is, relevantly, in the same terms as appears in the Note Deed. However, there are several differences in the relevant definitions (including that of "Senior Ranking Obligations") and in cl 3.2(c) of the E.ON Loan Agreement and the Constellation Loan Agreement from the Note Deed.
11. Mr Krochmalik also points out that the definition of "Senior Ranking Obligations" in cl 3.2(b)(1) of the E.ON Loan Agreement and the Constellation Loan Agreement does not refer to ordinary creditors of ORI but to "senior creditors" of ORI and submits that the ordinary meaning of that term suggests a reference to creditors with debts that have priority over those owing to ordinary creditors. Mr Golledge also recognises that cl 3.2(b)(1) provides that the loan debts under the E.ON Loan Agreement and the Constellation Loan Agreement will rank for payment after all "Senior Ranking Obligations" and that the term "senior creditors" is not defined. It seems to me that the definition of "Senior Ranking Obligations", read together with cl 3.2(b)(1) of the E.ON Loan Agreement and the Constellation Loan Agreement, does not support a view that the loans by E.ON and Constellation are subordinated to ordinary or trade creditors of ORI generally, where the definition of "Senior Ranking Obligations" refers to "senior creditors" without further definition and in a manner that is not suggestive of ordinary creditors of ORI.
12. Both Mr Krochmalik and Mr Golledge refer, at some length, to a preliminary issue of construction as to the definition of "Equal Ranking Obligations" in the E.ON Loan Agreement and the Constellation Loan Agreement. Mr Krochmalik points out that the words "which claims are expressed to rank equally with the Borrower's obligations under the Convertible Loan and includes the Convertible Notes" in that definition could be read either as qualifying the immediately preceding words ("claims of any holder of a preference share in the capital of [ORI]") or alternatively as also qualifying the opening words of the definition ("any obligation in relation to claims of an unsecured creditor of [ORI]"). He submits that difference does not necessarily lead to a different result, for reasons that I need not address given the views I have reached below. He submits that those words should be read as qualifying only the words "claims of any holder of a preference share in the capital of [ORI]", in order to construe the parts of the agreement being (as far as possible) internally coherent. He refers to several other issues of construction which I address below in support of that reading.
13. Mr Golledge in turn submits that the first clause in the definition of "Equal Ranking Obligations" commences with the word "any" and ends with the words "unsecured creditor of [ORI]" followed by a comma; the second clause commences with the word "or" and ends with the words "in the capital of [ORI]" followed by a comma; the comma in each case marks the end of the clause, and the subject of both of those clauses are "claims" against or in respect of ORI either as creditor or shareholder; and the third and final clause in the definition, which commences with the words "which claims are expressed" identify the feature which the claims referred to in both previous clauses must have to qualify as an "Equal Ranking Obligation". Mr Golledge submits that the third clause qualifies both previous clauses and, if the Liquidators' construction was correct, then there would only have been a need for two clauses in the paragraph, not three; and both the comma in the third line and the reference to "claims" in the third line of the paragraph would be otiose. I recognise the subtlety of that argument, but I am not persuaded by it. First, it assumes a sophistication of drafting which the Loan Agreements do not otherwise possess; second, there is no grammatical link between the first and third clauses; and, third, preference shares would ordinarily have terms in which the contemplated provision could readily be included.
14. It seems to me that, as Mr Krochmalik submits, the definition of "Equal Ranking Obligations" must be read as containing two aspects, the first referring to obligations in relation to claims of an unsecured creditor, and the second referring to claims of a holder of a preference share that is expressed to rank equally with ORI's obligations under the relevant convertible loan and convertible note (although the words "expressed to" which are found in the Note Deed are omitted in the E.ON Loan Agreement and the Constellation Loan Agreement). That conclusion in turn affects the result that I reach below.
15. Mr Krochmalik also submits that cl 3.2(c) of each of the E.ON Loan Agreement and the Constellation Loan Agreement refers to the debts owing to E.ON and Constellation as being subordinated to the debts of ordinary creditors but only in circumstances where, without subordination, that would lead to "bankruptcy proceedings" against ORI. He submits that, if the debts to E.ON and Constellation were to be subordinated generally (that is, upon a winding up), then cl 3.2(c) would not have expressly prescribed the far more limited circumstances in which subordination was to operate. There is substantial force in that submission. Mr Krochmalik also points out that the limited subordination under cl 3.2(c) of the Constellation Loan Agreement only applied to debts that constituted "Senior Ranking Obligations" which, on the construction of that term for which he contends, did not include the debts of ordinary creditors. It seems to me that cl 3.2(c) does not presently bring about any subordination of the obligations to E.ON or Constellation, because an assertion of E.ON's or Constellation's claims would not lead to bankruptcy proceedings of ORI, where ORI is already in winding up. This provision was directed to avoiding the result that E.ON's or Constellation's claims would bring about a winding up of ORI, not to dealing with the position when such a winding up had already occurred.
16. Mr Krochmalik points out that cl 3.3 of the E.ON Loan Agreement and the Constellation Loan Agreement provide that ORI would not incur any future indebtedness for further monies borrowed that would constitute a "Senior Ranking Obligation". He submits that it could not be expected that ORI would warrant that it would not incur ordinary debts, and that supports the proposition that "Senior Ranking Obligations" did not include such ordinary debts to creditors. Mr Krochmalik also points out that cl 8.1(n) of the Constellation Loan Agreement also includes a warranty by ORI that no "Senior Ranking Obligations" existed, at a time that ORI had ordinary creditors (Davis 17.6.19 [10]-[11]). He submits that (at least unless that warranty was false when given) "Senior Ranking Obligations" must mean something other than ordinary debts, and that the term "Equal Ranking Obligations" instead includes ordinary debts.
17. Mr Krochmalik fairly recognises that there are countervailing factors that favour a conclusion that the debts owed to E.ON and Constellation are, similarly to the debts to Noteholders under the Note Deed, subordinated to the debts owed to ordinary creditors, and Mr Golledge in turn emphasises those factors. Mr Krochmalik acknowledges that the definition of "Equal Ranking Obligations" appears to include ORI's obligations under notes issued under the Note Deed, by the concluding words "and includes the Convertible Notes" and, on its face, would provide that they rank equally with the debts pursuant to the E.ON Loan Agreement and the Constellation Loan Agreement. He recognises that, where the debts to the Noteholders under the Note Deed are subordinated to the debts owed by ORI to its ordinary creditors, this would favour the suggestion that the debts to E.ON and Constellation are also subordinated to debts owed to ordinary creditors. He seeks to displace that conclusion by pointing out that there are different parties to the Note Deed, the E.ON Loan Agreement and the Constellation Loan Agreement and they do not form part of the same transaction. He also points out that the documents developed differently, since the Note Deed was prepared by employees of the Companies and was not the product of any negotiation and the terms of the E.ON Loan Agreement were negotiated with lawyers acting for E.ON (Duffield 17.5.19 [17], [26.4], [26.19]-[26.20]).
18. Mr Golledge submits that the ranking of the loan debts under the E.ON Loan Agreement and the Constellation Loan Agreement is determined by cl 3.2(b)(2) and the definition of "Equal Ranking Obligations", to which I have referred above. Mr Golledge relies on the concluding words of that definition to submit that the definition of "Equal Ranking Obligations" includes the claims under the notes issued under the Note Deed. Mr Golledge submits that: "The combination of that final phrase in the definition of Equal Ranking Obligations and the words in clause 3.2(b) produce the result that the debts payable to the Lenders will rank, in a winding up, equally with the debts payable to the Noteholders. Given that, for the reasons previously outlined, the Noteholder debts rank behind the claims of what are described as the ordinary creditors in the liquidation, then so do the debts owed to the lenders under the Loan agreements."
19. On its face, the definition of "Equal Ranking Obligations", which refers to claims of unsecured creditors of the borrower as having the same ranking as E.ON's and Constellation's obligations under the Loan Agreements could provide support for the view that E.ON's and Constellation's obligations are not subordinated to other unsecured creditors of ORI on a winding up. However, notwithstanding the words "and includes the Convertible Notes" at the end of the definition of "Equal Ranking Obligations", and the definition of "Convertible Notes" as those issued under the Note Deed, it seems to me that the definition of "Equal Ranking Obligations" cannot be read as having the consequence that any obligation in relation to claims of unsecured creditors of ORI and any obligation under the convertible notes as issued under the Note Deed rank equally, because the Note Deed has the consequence that they do not rank equally for the reasons noted above.
20. Mr Krochmalik also recognises that contemporaneous communications between the Companies and the Noteholders, prior to ORI's entry into the agreements with E.ON and Constellation (Ex J1, 381, 390-392, 418, 441-465, 633, 662), indicate that ORI understood, or at least advised Noteholders, that the debts owed to E.ON and Constellation would rank equally with the debts owed to the Noteholders and that all these debts would be subordinated. Mr Krochmalik submits that that reflected no more than the subjective intention of ORI, which is not relevant for the purposes of determining the proper construction of the documents: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd above at [40].
21. The issues of construction of the E.ON Loan Agreement and the Constellation Loan Agreement are, as Counsel recognised, difficult. During oral submissions, I was initially attracted to the view that the reference to the Convertible Notes in the definition of "Equal Ranking Obligations" indicated that the debts owed to Noteholders, E.ON and Constellation ranked equally, and were subordinated to claims of other unsecured creditors, and outweighed the indications to the contrary. However, I have ultimately reached the contrary view by reason of the matters noted above, including the fact that the undefined term "senior debt" in the definition of "Senior Ranking Obligations" is not likely to refer to unsecured debts; the definition of "Equal Ranking Obligations" cannot be read as having the consequence that any obligation in relation to claims of an unsecured creditor of ORI and any obligation under the Convertible Notes as issued under the Note Deed rank equally, where that would be inconsistent with the Note Deed; the limited subordination provision in cl 3.2(c) would not take its present form if wider subordination was intended; and the construction for which Mr Golledge contends would cause difficulties at least with trade creditors under cl 3.3 of the E.ON Loan Agreement and the Constellation Loan Agreement and would plainly be inconsistent with the warranty in cl 8.1(n) of the Constellation Loan Agreement.
22. My attention was also drawn to a letter dated 12 February 2019 from Mr Halen, a Noteholder, to the Liquidators which was identified as a submission for consideration by the Court. That submission referred to information provided to Noteholders by ORI in respect of the ranking of notes to be issued to E.ON, in requesting Noteholders' approval for that transaction which, as I noted above, had referred to the equal ranking of the notes issued to E.ON with the notes issued under the Note Deed. That submission also referred to similar correspondence with Noteholders in respect of the note issue to Constellation. Those matters are not admissible in respect of the construction of the E.ON Loan Agreement or the Constellation Loan Agreement, as both Counsel accepted in submissions, although they may support a claim for estoppel, misrepresentation or misleading and deceptive conduct by Noteholders, as I noted above.

Directions sought by the Liquidators

1. As I noted above, the Liquidators sought an order or direction under s 90-15 of the Insolvency Practice Schedule (Corporations) or under former s 511 of the Corporations Act (as preserved by transitional provisions) that they would be justified in paying any dividend in the winding up of the Companies on the basis that: (a) The debts owing by ORI to E.ON and Constellation are not subordinated to the debts owing to ordinary creditors of ORI (such that E.ON and Constellation are to be treated in the same way as ordinary creditors of the Companies); and (b) The debts owing to the Noteholders are, for the purposes of s 563C of the Act, subordinated to the debts owing to ordinary creditors of ORI, such that the Noteholders are only entitled to receive a distribution in the winding up of the Companies to the extent that the debts of ordinary creditors are first satisfied in full and, therefore, there remains available proceeds in the winding up of the Companies to pay a further dividend to the Noteholders.
2. Mr Krochmalik refers to my summary of the principles as to the Court's power to give directions to a liquidator in a creditors' voluntary winding up under former s 511 of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7]-[8] and to insolvency practitioners under s 90-15 of the Insolvency Practice Schedule (Corporations) in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9]. He submits, and I accept, that such a direction would protect the Liquidators from liability for breach of duty or an allegation of unreasonable behaviour in acting on that direction, if full disclosure is made to the Court: Re Ansett Australia Ltd [2001] FCA 1439; (2001) 39 ACSR 355 at [59]-[62]; Re Dungowan Manly Pty Ltd (in liq) [2017] NSWSC 1771; (2017) 124 ACSR 218 at [3]. He also submits, and I also accept, that the issues in respect of which directions are sought in this application do not involve business decisions or matters of commercial judgement, and instead concern questions of law and the reasonableness of the Liquidators' proposed course of conduct in treating the debts owed to E.ON and Constellation as ranking equally with the debts owed to ordinary creditors (or, if the Court determines otherwise, that those particular debts are subordinated to those of the creditors generally): Re MF Global Australia Pty Ltd (above) at [7]; Re Direct Acceptance Corporation Ltd (rec apptd) (in liq) [2019] NSWSC 395 at [36].
3. Paragraph (a) of the directions sought by the Liquidators is consistent with my finding above that the debts owing by ORI to E.ON and Constellation are not, as a matter of construction, subordinated to the debts owing to ordinary creditors of ORI. However, neither that direction nor the direction in the last paragraph can be given on such a narrow basis, since a finding that the debts owing to E.ON and Constellation were not subordinated would not have the consequence that Noteholders were only entitled to receive a distribution after the debts of ordinary creditors were satisfied in full. Noteholders might well have claims in estoppel, or for misrepresentation or for misleading and deceptive conduct, in respect of representations made to them as to the status of their notes, and any compensation due to them would be payable to them as ordinary creditors in respect of the winding up. There would be a further difficulty in giving the directions sought, where there is no evidence that the Liquidators have conducted an assessment of the extent of compensation which would be payable to Noteholders on that basis, so as to reach any determination whether creditors' interests generally would be advanced, or not, by proceeding on that basis. Paragraph (b) of the directions, without the following paragraph, accurately reflects the conclusion that I have reached above in respect of the debts owing to Noteholders and could be made where there is no suggestion that their relationship with the Companies involves any issue extending beyond the terms of the Note Deed.

Orders

1. I will hear the parties as to the form of any orders that should be made to give effect to this judgment.

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: 14 July 2019