GTW Investments (Aust) Pty Ltd v Pacreef Investments Pty Ltd [2023] VSCA 291

GTW Investments (Aust) Pty Ltd v Pacreef Investments Pty Ltd [2023] VSCA 291 | Case summary | Zoe

[29]

The judge stated that recitals may only be used to assist with the proper construction of the contract if they are capable of being read consistently with the operative part of the contract. He noted that where words in the relevant provision of the contract are clear and unambiguous, they cannot be controlled by the recitals.[9] The judge stated that GTW was in effect urging the implication of a further term into the contract; that is, that its obligation only arose if there was a capital raising by Pac Bio first. He concluded that this was precluded by the introductory words to cl 2.1 which state that GTW's obligations are conditional only on the three events set out in paragraphs (a)-(c) of that clause. In any event, the judge was of the view that the contract was effective without the implication of such a term and consequently, it was not necessary to imply it.[10]
The judge also rejected GTW's submission that the principle that contractual provisions in a guarantee will be construed in favour of the guarantor was to be applied.[11] The judge held that the contract was not one of suretyship.[12] First, payment by GTW under the Guarantee Arrangement was not a payment to Pacreef but rather was payment by way of subscription for shares which facilitates the redemption by Pac Bio of the A Class Shares.[13] Second, GTW had no right of reimbursement against Pac Bio. Rather, GTW received shares in consideration for this payment to Pac Bio.[14] The judge concluded that despite its title, the substance of the Guarantee Arrangement was not at law a guarantee.[15]
GTW contends that the judge erroneously treated the Guarantee Arrangement as if it were a put option in favour of Pacreef. GTW submits that its obligations were more akin to those of an underwriter of a share issue undertaken for the purpose of satisfying the redemption of the A Class Shares.
GTW submits that cl 2.1(b) is clear. In its submission, the condition is satisfied if Pac Bio 'does not raise all of the capital required... from a new issue of... shares... carried out' to satisfy the redemption request within the three month period. It argues that there are two things that are evident from the language. First, a share issue must be undertaken (carried out). Second, that the share issue may not raise sufficient funds to meet the redemption request. On this basis it says, it is only if both events occur that the condition is satisfied. GTW contends that the judge ignored and gave no meaning to some of the words in cl 2.1(b). An example of this is that the judge construed the opening phrase as if it read 'does not raise the capital' or 'does not raise any of the capital' rather than as it appears in the document - 'does not raise all of the capital'. GTW submitted, if the intended condition in cl 2.1(b) was that the redemption request was not satisfied within three months, it could simply have said that. Moreover, it contends that a construction which would permit Pac Bio to do nothing and still require GTW to comply with the Guarantee Arrangement is contradicted by the language in cl 2.1(b), is inconsistent with recital 2, and is contrary to common sense.
GTW also points to Pac Bio's obligations once Pacreef served a redemption notice. It contends that Pac Bio had to pay Pacreef $1 for each share redeemed within 28 days of receipt of a redemption notice and the funds to make that payment had to be raised by a new share issue made for that purpose. Under cl 2.2 of the Guarantee Arrangement, Pac Bio had to take steps within its control to undertake a capital raising for the purpose of satisfying the redemption request. That clause provides:

[38]

Those rules have been applied on numerous occasions by this Court and others.[20]
In my view, cl 2.1(b) is clear - before GTW's obligations under cl 3 arise, there must be a capital raising and that capital raising must raise less than the amount required to redeem the A Class Shares within three months.
Read as a whole and in context, cl 2.1(b) clearly presumes that there will be a capital raising carried out by Pac Bio. The language focuses on the capital raising as the means by which Pac Bio is to satisfy any redemption request as a first step and those words have to be given some content and meaning. In essence, the construction contended for by Pacreef would see the clause read as if all that is required for GTW's obligations to be enlivened is that Pac Bio does not satisfy the redemption request within three months of it being made. But that is not what the clause says. In my view, it is unnecessary to add more explicit language specifying the need for a capital raising to be undertaken. It is implicit in the words that are used and is foundational before GTW's obligations are triggered.
The inclusion of the word 'only' in the introductory phrase of cl 2.1 does not alter this analysis. As discussed above, the necessity for a capital raising is embedded in the language of paragraph (b). The word 'only' does not exclude the capital raising requirement.
The reference to the Subscription Agreement in cl 2.1(c) and its absence from cl 2.1(b) is not significant. The reference in paragraph (c) is necessary to establish the relevant date for assessment of whether an insolvency event subsists. Under the Subscription Agreement, the relevant date was 28 days after the redemption request. Other than by reference to the Subscription Agreement, that date could not be calculated for the purposes of cl 2.1(c). By contrast, the time period of three months set for the purposes of cl 2.1(b) is specified in that paragraph.
That the two time periods (28 days/three months) are different does not influence the meaning of cl 2.1(b). The parties could have had any number of reasons for not making the obligations of GTW immediate upon the 28 day period expiring.
As they do in this case, the recitals in an agreement often provide much of the context and can give a good guide to the circumstances that are to be addressed by the contract. In some senses, the recitals are like an introduction telling the reader in broad terms what is to come later in the document and what is to be achieved by the document. It is the parties' summary of the context and purpose of the contract. Importantly, the construction task involves consideration of the words used by the parties to make their bargain bearing in mind the context and the purpose of the contract.
It is worth setting out the recitals in full. They provide:
1. [Pac Bio and related entities] and Pacreef propose to enter into a share sale agreement (SPA) pursuant to which [one of Pac Bio's related entities] will acquire shares from Pacreef and [another entity] on the terms and conditions of that agreement (the Transaction). As part of the Transaction, Pacreef will be issued 15 million A Class Shares in [Pac Bio] which may be redeemed in accordance with the Subscription Agreement.
2. GTW has agreed to guarantee any capital raising by [Pac Bio] to satisfy any redemption of the A Class Shares by Pacreef on the terms and conditions of this deed.
3. In consideration of GTW entering into this deed, [Pac Bio] has agreed to grant the Initial Option and the Subsequent Option to GTW to purchase the Initial Option Shares and the Subsequent Option Shares on the terms and conditions of this deed.
The words, 'any' and 'by' in recital 2 make it clear that a capital raising was to be undertaken. If the capital raising was not undertaken, the recital reveals a clear intention that the guarantee would not operate.
Having regard to this, the Guarantee Arrangement was made in the following context:
- the arrangement is part of a broader transaction involving the purchase of shares from Pacreef and the issue of A Class Shares in Pac Bio to Pacreef;
- the A Class Shares were intended to be redeemable on terms set out in another agreement;
- Pac Bio was required to undertake a capital raising to satisfy any redemption of those shares;
- GTW guaranteed any shortfall in the capital raising and the basis on which it did so were set out later in the Guarantee Arrangement;
- as part of the bargain, GTW was entitled to purchase shares on terms set out in the Guarantee Arrangement.
This context reinforces my view that the meaning of cl 2.1(b) that I have set out above is to be preferred to that contended for by Pacreef and that which was found by the judge. In this regard, the commercial context of an intention that a request by Pacreef to redeem the A Class Shares would be satisfied by Pac Bio undertaking a capital raising that GTW guaranteed is important. This is not a case where there is an attempt for the recitals to control the meaning of cl 2.1(b) contrary to the rules described by Lord Esher MR in Ex Parte Dawes; In Re Moon.[21] Rather, both the recitals and cl 2.1(b) are consistent with each other and the recitals give context for that clause.
Reading the contract as a whole, it seems clear that one of the objects of the Guarantee Arrangement was to provide some fall back mechanism which would operate should the presumed capital raising be undertaken but fail to raise sufficient funds to meet a redemption request fully. It does not seem to me that there was a broader objective in the Guarantee Arrangement of ensuring that Pacreef's request would be met in all circumstances, regardless of whether Pac Bio met its obligations to undertake a capital raising. As to Pacreef's submission based on an earlier draft of the agreement, even if it were permissible to have regard to it,[22] it does not assist Pacreef. As GTW submitted, the omission of a reference to the use of reasonable endeavours to raise capital from the final form of the Guarantee Arrangement is because there is a mandatory obligation on Pac Bio to undertake a capital raising. That is in accord with the Subscription Agreement which requires Pac Bio to pay the amount to be redeemed out of the proceeds of a new issue of shares within 28 days of receipt of a redemption notice.
In view of the conclusion which I have reached, it is not necessary to consider the principle of construction that applies to guarantees and favours the guarantor.
I would grant leave to appeal on ground 1 and would uphold that ground.

[43]

(a) in about December 2018, Pac Bio engaged an investment bank, Greenhill & Co, to advise Pac Bio on a strategy for the proposed recapitalisation. On 7 December 2018, Pac Bio's chief executive officer emailed the directors to convene a board meeting in part for the purpose of introducing the board to Greenhill's representative, Mr Collett;

(b) on 18 December 2018, the members of the board received a document titled 'Strategic Plan Update' which referred to the proposed recapitalisation;

(c) before the Pac Bio board meeting on 21 December 2018, the board members received a document prepared by Greenhill titled 'Project Poseidon - Discussion Materials'. In that document, Greenhill identified a set of preliminary recommendations in relation to the structure of the proposed recapitalisation, including testing multiple sources of funding, seeking early investors, and pursuing a rights issue to the extent possible alongside a broader equity raising to be conducted in parallel;

(d) before a board meeting which was to be held on 22 January 2019, the board members received a document titled 'Recapitalisation Strategy - Update', apparently prepared by Greenhill. The document set out two key options for raising capital, a private option and public option, and set out management's current thinking in relation to the strategy for the proposed recapitalisation. It was contemplated that $78.1m of capital was required: $24.8m for expansion capital (including the acquisition of Australian Prawn Farms Pty Ltd) and $53.3m for 'debt refinancing' which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes. A detailed presentation was given by Greenhill at the meeting of the board held on 22 January 2019;

(e) before the Pac Bio board meeting on 20 February 2019, board members received a further document prepared by Greenhill titled 'Project Poseidon - Recapitalisation Structure and Key Terms'. The key elements of the proposed recapitalisation strategy included a new equity investment by a cornerstone investor, the replacement of some short term debt with longer term debt, a rights issue and the proposed acquisition of Australian Prawn Farms Pty Ltd. In this document, Greenhill identified that $79.2m of capital was required: $25.9m for expansion capital (including $5m for working capital) and $53.3m for 'debt refinancing' which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes;

(f) before the Pac Bio board meeting on 20 March 2019, board members received a further document prepared by Greenhill which identified that $86.3m of capital was required: $28.9m for expansion capital (including $8.1m for working capital) and $57.3m for 'debt refinancing' which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes. A detailed presentation was given by Greenhill at the 20 March 2019 board meeting;

(g) on 11 April 2019, draft term sheets were received from private investors Tsing Capital Pty Ltd and Orana Agriculture Pty Ltd (as trustee for the Tiverton Agriculture Impact Fund) ('Tiverton'). Separate signed non-binding and conditional term sheets were entered into with each of Tsing Capital and Tiverton on 8 May 2019 respectively, and on 17 July 2019, Pac Bio entered into convertible loan agreements with Tsing, for $25 million, and Tiverton, for $15 million. Ultimately, funding from these cornerstone investors was never provided;

(h) in about July 2019, Pac Bio and GTW entered into a further variation of the GTW Facility Agreement. The variation increased the amount of the facility to $9 million.

[46]

The judge then held that there was nothing in the Guarantee Arrangement that required a singular and sole purpose capital raising to be undertaken by Pac Bio for GTW's obligations under the Guarantee Arrangement to arise.[30] The judge went on to note that Mr Graeme Wood was a director of Pac Bio, including when the directors unanimously appeared to endorse the recapitalisation strategy.[31] GTW is a company associated with Mr Wood. Further, he observed that GTW would benefit from the strategy because if successfully implemented, it would mean that GTW did not have to subscribe for the shares at the price of $1 under the terms of the Guarantee Arrangement and would instead be able to participate in the anticipated rights issue at a price expected to be lower.[32] The judge described how the strategy was aimed at enhancing the value of the shares held by shareholders, including GTW.[33] Moreover, convertible notes issued under agreements entered into in 2017 and 2018 between Pac Bio and GTW were either to be paid out or converted into equity under the recapitalisation strategy and the debt under the GTW Facility Agreement was to be repaid.[34]
The judge stated that GTW's submission that 'Pac Bio did not, for the purposes of [2.1(b)], attempt a capital raise sufficient to satisfy the redemption request from a new issue of fully paid ordinary shares carried out for the purpose of satisfying the redemption request is without substance'.[35]
GTW submits that Pac Bio's board did not take any steps which were necessary under its constitution or the Corporations Act 2001 (Cth) for a capital listing to occur. In this regard, it says that the facts relied upon by the judge show that although Pac Bio's board considered possible steps which could be undertaken to raise capital, the board did not approve a capital raising nor take steps capable of constituting a capital raising. In relation to this latter point, GTW submits that at least, a proposed board resolution to issue shares was necessary and likely also the preparation of a prospectus or similar disclosure document which complied with the obligations under the Corporations Act. GTW contends that some of the steps considered by the board were to give effect to the Implementation Deed pending Pac Bio effecting a proposed recapitalisation. But, it says, there was no failed rights issue or failed capital raising more generally.
Pacreef submits that the evidence of the design and attempt to raise capital was overwhelming, as found by the judge. It notes that in opening its case before the judge, GTW focussed on an argument that the capital raising had to be for the sole purpose of satisfying the redemption request. That argument was correctly rejected by the judge. Pacreef says that the evidence established that lawyers were engaged to prepare a prospectus for a rights issue and that it was only on 12 April 2019 that a decision was made to pause preparation of a prospectus to raise capital with a different path then being followed. In its submission, this was sufficient to satisfy the requirement in cl 2.1(b).
The judge was correct in his finding that it was not necessary for the capital raising to be for the sole purpose of satisfying the redemption request. However, in my opinion, more than contemplation of or preparation for a capital raising was required to satisfy cl 2.1(b). For example, it would at least require a resolution of the board to approve a capital raising. Dependent upon how the company proposed to raise the capital, one would likely also expect the issue of a prospectus or some type of disclosure document. None of those things were done. While the board was briefed on strategies for recapitalisation and was updated from time to time on management's current thinking on those strategies, there was never any fully formed and implemented capital raising process. Clause 2.1(b) required there to be something concrete and in existence that could lead to the necessary capital being raised. It was not sufficient to have plans for such an eventuality or to have taken some steps towards it. A capital raising must have been attempted and failed. That was not the position.
I would grant leave and uphold this ground of appeal.

[52]

The End Date under the Implementation Deed was 5:00 pm on 31 March 2019, or such later date as may be agreed in writing by all parties.
Under the Implementation Deed, Pacreef agreed that it would not issue a redemption notice until the earlier of the completion of the Proposed Recapitalisation or 5:00 pm on 31 December 2018. Any notice given earlier than this was deemed to be of no force or effect. This captured, a notice of redemption which had been given earlier (in July 2018).
As set out above, the Proposed Recapitalisation was defined as the issue of securities proposed to be undertaken. Pacreef argued before the judge at trial that by cl 9.5 the parties (including Pac Bio, GTW and Pacreef) agreed that the Proposed Recapitalisation (in contrast to the actual issue of shares) would be treated as a new issue of fully paid ordinary shares in Pac Bio carried out for the purposes of satisfying the redemption request condition in cl 2.1(a) of the Guarantee Arrangement.
The judge rejected that submission. He held that the words commencing 'such that' in cl 9.5 could not be ignored or read to address a different circumstance.[37] In the judge's view, the purpose of cl 9.5 was twofold; (a) if there were sufficient shares from the Proposed Recapitalisation to redeem the A Class Shares, then a redemption notice did not need to be served; and (b) GTW's obligations under the Guarantee Arrangement would not be enlivened if Pac Bio raised sufficient ordinary shares from the Proposed Recapitalisation but did not use the money raised to redeem the A Class Shares.[38]
Pacreef contends that the judge erred. Pacreef noted that under the Implementation Deed, the redemption notice given in July 2018 was deemed to be of no effect and it had agreed not to issue another redemption notice before 31 December 2018. However, Pac Bio was to complete the Proposed Recapitalisation by 31 March 2019. It follows, Pacreef contends, that cl 9.5 contemplated and assumed there would be a further redemption notice, otherwise the clause would have no utility.
In aid of the construction for which it contends, Pacreef relies on the context in which the Implementation Deed was entered into which included:

[54]

Although not required to do so, Pac Bio was permitted to implement the Proposed Recapitalisation by way of a rights issue. In this regard, Pacreef submits that cl 9.5 was not limited to a rights issue, but was linked to the Proposed Recapitalisation of which a rights issue was one option.
Pacreef contends that the words 'such that' and those which follow make plain that if the Proposed Recapitalisation results in the issue of new shares (as was required by the Subscription Agreement) then condition 2.1(b) will be satisfied. It says, that if the portion of the clause from 'such that' and continuing is only effective if an issue of new ordinary shares was sufficient to redeem all of the A Class Shares then the acknowledgment and agreement up to but excluding 'such that...' have no work to do.
So Pacreef contends, on the proper construction of cl 9.5 of the Implementation Deed, any attempt to raise capital in accordance with the Implementation Deed was sufficient to satisfy the condition in cl 2.1(b) of the Guarantee Arrangement. In its view, the evidence was overwhelming that this occurred.
In my view, the judge was correct in his conclusion that cl 9.5 of the Implementation Deed did not satisfy the requirement in cl 2.1(b) of the Guarantee Arrangement.
It may be accepted that the form of the capital raising contemplated by the Proposed Recapitalisation was not limited to a rights issue. However, that does not take matters far. Clause 9.5 makes clear that it was the particular issue of shares through the Proposed Recapitalisation (in whatever form it may take) that if fulfilled would equate to 'a new issue of fully paid ordinary shares' for the purpose of and referred to in cl 2.1(b) of the Guarantee Arrangement.
Clause 9.5 provides for a situation where there is an actual issue of shares, not just a proposal for or an attempt at the issue of shares. In this regard, the definition of Proposed Recapitalisation is important. It is directed to 'one or more issue(s) of securities' albeit that the definition goes on to describe when that issue of securities is intended to occur - by 31 March 2019 - and how - on terms to be determined by Pac Bio. By reference to cl 3.4 of the Implementation Deed, the definition of Proposed Recapitalisation also links the issue of the shares to the redemption of the A Class Shares (among other things). It is not just any share issue but rather one which is directed to the redemption of shares (including the A Class Shares) and repayment of debt. In this regard, cl 3.4 provides that Pac Bio agrees to use its 'best endeavours' to ensure that the amount raised through the Proposed Recapitalisation is sufficient to redeem in full the A Class Shares and B Class Shares and repay amounts outstanding under various loan agreements and the like. An actual issue of shares is essential before cl 9.5 has work to do.
Read as a whole and in context, both the words before and after 'such that' in cl 9.5 work harmoniously. The first part of the clause picks up the words 'a new issue of fully paid ordinary shares in [Pac Bio] carried out for the purpose of satisfying a redemption request' from cl 2.1(b). So it is that if the Proposed Recapitalisation took place, it would be regarded as fulfilling cl 2.1(a) (the requirement for service of a redemption notice) and that part of cl 2.1(b) in which those words appear would be satisfied. It would then be necessary to see if another component of cl 2.1(b) was satisfied; that is, whether sufficient shares had been issued to redeem the A Class Shares. If they had, then the precondition to GTW's liability would not be satisfied.
As the judge observed, cl 9.5 does not address the situation where there is no issue of shares.
In light of the conclusions which I have reached in respect of grounds 1 and 2 and Notice of Contention ground 1, it is unnecessary to deal with the other proposed grounds of appeal and grounds 2 and 3 of the Notice of Contention. Nevertheless, I will address some of those matters for completeness.

[60]

'Redeemable preference share' is defined in s 9 of the Corporations Act as meaning 'a preference share in a body corporate that is, or at the body's option is to be, liable to be redeemed'. There is no definition of 'preference share'.
Sections 254J and 254K permit the redemption of fully paid redeemable preference shares out of profits or the proceeds of a new issue of shares made for the purpose of the redemption and on the terms on which they are on issue.
As noted above, part of the consideration Pacreef was to receive under the terms of the Share Sale Agreement was 15 million fully paid A Class Shares in Pac Bio at an issue price of $1 each. Under the terms of the Share Sale Agreement, completion was not to occur until a number of conditions were satisfied or waived. One of those conditions was that the requisite shareholder approval was obtained to issue the A Class Shares to Pacreef in accordance with the terms of the Subscription Agreement, Pac Bio's constitution and the Corporations Act. Among other things, on completion, Pacreef was obliged to apply for and accept the A Class Shares.
The Subscription Agreement provided that the A Class Shares would be governed by the Terms of Issue which were set out in Schedule 3. As noted above, the A Class Shares carried no rights to dividends or distributions; no voting rights; and were not transferrable. There was a right until 3 July 2018 to convert the A Class Shares to ordinary shares. If they were not converted by that date and the ordinary shares had not been listed, then the A Class Shares could be redeemed by serving a redemption notice.
A general meeting of the shareholders of Pac Bio was convened on 10 August 2017 for the purpose of considering and passing special resolutions including a special resolution approving the issue of the A Class Shares. The notice of meeting was accompanied by an Explanatory Memorandum which referred to s 254A(2) and recited that a company could 'only issue preference shares if the rights attached to the preference shares (including redeemable preference shares) in relation to particular matters are set out in the company's constitution, or have been otherwise approved by special resolution of the company'. Relevantly, the Explanatory Memorandum went on to state that the Board was seeking shareholder approval, by special resolution, for the proposed terms of the A Class Shares and their issue to Pacreef. The rights attached to the A Class Shares were described in the Explanatory Memorandum and reflected the rights that had been included in the Terms of Issue. In relation to redemption, the Explanatory Memorandum stated:

[64]

The Explanatory Memorandum noted that the directors unanimously recommended passing the special resolution. As noted above, those directors included Mr Wood who was associated with GTW.
The special resolution was passed with 94.56% of shareholders (including GTW) voting in favour.
The first question that the judge addressed was whether the A Class Shares were preference shares. Having reviewed a number of authorities, the judge noted that the right of redemption enjoyed by Pacreef in respect of the A Class Shares was a right that was not enjoyed by the ordinary shareholders.[40] By reference to s 254A(2)(b) and (e) of the Corporations Act, the judge stated that rights to repayment of capital, participation in surplus assets and profits and priority of payment of capital (and dividends) are all separate features. He reasoned that if those rights were set out in the company's constitution or approved by special resolution and they confer an advantage over the holders of ordinary shares, then the shares could be regarded as preference shares.[41] He concluded that Pacreef as the holder of the A Class Shares has a right to repayment of capital (that is, the capital that Pacreef had paid of $1 per share) which is not enjoyed by the holders of ordinary shares.[42] He reasoned that not all redemption mechanisms represent an advantage to the shareholder; for example, when redemption is at the company's option or at a fixed time.[43] Originally, preference shares were only redeemable at the option of the company and the judge said that this explains the need for the distinct concepts of redeemability and preference and in part explains their distinction in the text of the statute.[44] The judge also referred to the language of 'redeemable preference shares' reflecting the historical development of statutory redemption mechanisms rather than 'any deliberate intent on the part of the legislature to keep the characteristics of redeemability and preference strictly separate'.[45] The judge concluded that there is little reason now to read in a strict distinction between the characteristics of redeemability and preference. And, in the judge's view, while redeemability will not always constitute a preference, when it is at the option of the shareholder it may do, at least in circumstances like those here where the redemption amounts to a repayment of capital.[46]
GTW's contention is straightforward; the share must be a preference share first before it can be a redeemable preference share. The characteristic of redeemability is the additional entitlement that distinguishes a 'redeemable preference share' from a 'preference share'; that characteristic cannot be the entitlement that makes the share a 'preference share'. Were it so, s 254A(3) would have no work to do. GTW relies in particular on a decision of Barrett J, Re Capel Finance Ltd.[47] The judge distinguished that decision and GTW is critical of the judge's reasoning in this regard. I will consider Barrett J's decision below.
GTW contended that it was important to focus on the rights that attached to the share when considering whether it was preferential and this was to be distinguished from the enjoyment of those rights.[48]
In any event, GTW contends that, even if redeemability were sufficient to satisfy the preferential requirement, the A Class Shares are not preferential to the rights of the ordinary shareholders. GTW submits that the holder of the A Class Shares is only entitled to the return of capital while in due course shareholders of ordinary shares are entitled to a return not only of capital but also any accumulated capital and income.
Pacreef submits that the judge was correct in his analysis. It contends that the A Class Shares do enjoy preferences over other shares - they enjoyed the right to repayment of capital at a fixed price of $1 per share which could benefit the holder by protecting them from unfavourable movements in price. In addition, the A Class Shares were part of the sale transaction and carried with them the benefit of the Guarantee Arrangement. A term of that agreement was that Pac Bio must not pay dividends or other distributions from its profits. Pacreef contends that this was a protection that was not available for the B Class Shares.
Capel concerned an application for the convening of a meeting of shareholders for the purposes of considering a proposed scheme of arrangement. The proposed scheme involved the cancellation of existing shares (other than those held by two nominated shareholders). The cancellation of the shares involved a reduction of capital. The shares to be cancelled were referred to as 'scheme shares'. It was proposed that the holders of scheme shares would be entitled to elect whether they received new shares, cash (of 8.4 cents for each share) or a combination of new shares and cash. The cash was to come from the company's cash resources. The new shares were described as 'redeemable preference shares'. The proposed terms of issue entitled redeemable preference shareholders to redeem their shares by notice to the company. The terms also provided that there was no right of priority against other current or future shareholders to repayment of capital or during the winding up of the company; there was no right of participation in profits; there were no voting rights attached to the shares; there was no right to attend or address general meetings.
Justice Barrett held that the proposed shares were not redeemable preference shares at all because the shares would not be preference shares and therefore would not have one of the two essential characteristics specified in the s 9 definition.[49] His Honour noted that although not defined, 'preference share' is a well understood concept and such a share can 'only exist by way of juxtaposition with other shares' requiring some preference or priority over ordinary shares.[50] That preference or priority is 'commonly with respect to one or more of the matters referred to in s 254A(2)'.[51] In the case before him, Barrett J noted that by comparison with other shares, there was no priority afforded to the 'redeemable preference shares' in respect of repayment of capital, on a winding up, participation in profits, voting rights, attendance and speaking at general meetings.[52] The shares could not properly be regarded as 'preference shares' because they would not carry priority in respect of any of the matters listed in s 254A(2).[53] Justice Barrett continued:

[66]

To be a preference share, the holder of the share must enjoy a preference or priority over ordinary shareholders with respect to dividends or repayment of capital or voting rights or combinations of those things.[55]
It is necessary to look at the matters in s 254(2)(a)-(e) to see if a class of shareholder is preferred over ordinary shareholders in respect of any of those matters - repayment of capital; participation in profits; dividends; voting rights; priority of payment of capital or dividends. Here, as the judge correctly identified,[56] Pacreef's right on the happening of a redemption event (as defined) to repayment of capital at the price of $1 per share (that being the price paid by Pacreef to acquire the shares) is a right not enjoyed by the ordinary shareholders. That is a right captured within the scope of s 254A(2)(a) - repayment of capital. It is a right that existed on the issue of the shares albeit that the right could only be exercised in the future on the happening of a particular event. Indeed, a preference or priority in respect of repayment of capital will by its very nature always be a right that can only be enjoyed at some future time.
There is nothing in the text of the Corporations Act that militates against the conclusion that the A Class Shares were preference shares. As the judge observed,[57] a redeemable share will not always provide an advantage over ordinary shareholders. For example, shares may be redeemable at the option of the company rather than the shareholder or they may be redeemable at a price less than what was paid for them.
If a shareholder has priority over ordinary shareholders with respect to repayment of capital, then that share will be a preference share. It is the right to repayment of capital in priority that determines its preferential status; not the redemption mechanism to unlock it. In and of itself, a redemption right does not provide priority.
The s 9 definition of 'redeemable preference share' and s 254A(3) both require consideration first of whether the share is a preference share; that is, one giving priority over ordinary shares. For example, the preference may give an entitlement to payment of capital in priority on a winding up, without any right to require the company to redeem the shares. As noted above, however, the preference may, not necessarily must, be unlocked through a redemption process, as is the case here. Either way, once the preference is established, the second consideration is whether the share is redeemable. In the first example, (entitlement to payment of capital in priority on winding up with no right to redemption) the share would be a preference share, but not a redeemable preference share. In the second example (the case here) the share is both a preference share and a redeemable preference share.
Moreover, in my opinion, there is nothing in the decision in Capel that detracts from this reasoning. The facts here are in contrast to those in Capel, where it was specifically provided that the proposed redeemable shares carried no right of priority against other shareholders to repayment of capital. They also carried no right of priority in respect of the other matters listed in s 254A(2)(b)-(e). It is unsurprising that in Capel, Barrett J held that redeemability, of itself, did not afford a preference to the proposed 'redeemable shareholders'.
I would grant leave to appeal in respect of ground 3. Had it been necessary to decide, I would have dismissed the appeal on that ground.
In light of this conclusion, it is unnecessary to consider grounds 2 and 3 set out in Pacreef's notice of contention.[58]

[68]

Ground 4 is founded on the assumption that the A Class Shares were not preference shares. If that were the position, (which it is not for the reasons given above) there would be an issue as to whether GTW was nevertheless liable under the Guarantee Arrangement. Although it is strictly not necessary to consider this ground, I will address it briefly.
In case he was wrong, the judge first considered whether the A Class Shares were redeemable if they were not preference shares.
Section 254K provides that a company may only redeem redeemable preference shares if they are fully paid-up and the payment is made out of the profits or the proceeds of a new issue of shares made for the purpose of the redemption. GTW contended that if the A Class Shares were not preference shares, then the most that could be sought by Pacreef was a reduction of capital procedure (ss 256B and 256C of the Corporations Act) or a share buyback (s 257A of the Corporations Act). GTW argued that neither of those avenues enlivened its obligations under the Guarantee Arrangement. The judge rejected these arguments. He observed that under the Subscription Agreement and Terms of Issue, as a matter of contract Pac Bio was to effect the redemption out of a new issue of shares made for the purpose of the redemption with GTW to subscribe for those new shares with the effect that Pac Bio's capital would be maintained.[60] It followed, the judge stated, that the reduction of capital and buyback procedures did not have any application to the contract between Pacreef and Pac Bio.[61]
The judge next dealt with GTW's submission that it would be unlawful to effect a redemption of the A Class Shares otherwise than in accordance with the Corporations Act with the consequence that Pacreef had no redress in contract. Having considered the principle of illegality, the judge stated that there was no ground to construe the Corporations Act as prohibiting the redemption of shares even if they were not preference shares provided the redemption did not result in a reduction of the company's capital.[62] The judge referred to s 254L of the Corporations Act. In part, s 254L(1) provides that a contravention of s 254J or s 254K 'does not affect the validity of the redemption or of any contract or transaction connected with it' and 'the company is not guilty of an offence'. Section 254L(2) is a civil penalty provision that applies to a person involved in a company's contravention of s 254J or s 254K. If the involvement is dishonest, then the person commits an offence.[63]
The judge concluded that there was nothing in the scheme of the Corporations Act which would suggest that in this case there could be no redemption to give effect to the contractual obligations between the parties, particularly as the redemption was to be facilitated by a new issue of shares.[64] The judge stated:

[77]

GTW also submitted that the judge's reliance on s 254E was misplaced as that provision does not permit or give the court some broad powers to remedy issues; it does not give the court power to do things not permitted by the Corporations Act such as to create a new class of share that does not exist. Rather, GTW submitted s 254E is directed to addressing concerns with the issue of shares that fall within the existing regimes in the Corporations Act.
The second limb of GTW's argument is that if Pac Bio cannot redeem the A Class Shares because doing so would subvert the operation of the Corporations Act, the Guarantee Arrangement necessarily fails and GTW would not be liable. First, GTW relies on cl 3.1(a) of the Guarantee Arrangement. It focuses on the words 'as required to fully satisfy the redemption request'. It says that as the shares cannot be redeemed (which is assumed for this part of the argument) there are no moneys required and no liability arises under cl 3.1(a).
GTW pointed to cl 3.1(c) of the Guarantee Arrangement which obliged Pacreef to '...hold the Subscription Price on trust for the benefit of Pacreef for the sole purpose of redeeming the A Class Shares in accordance with the Subscription Agreement'. It says that this clause affirms the construction it identifies for cl 3.1(a). Further, it says that as that cannot occur, Pacreef has no claim against it. In GTW's submission, the money Pacreef would claim could never go to it because Pacreef cannot redeem the A Class Shares. As a consequence, GTW says, cl 3.1(d) is of no assistance to Pacreef. There is no release or exoneration of GTW; it is simply a case of the mechanism for payment failing.
In any event, GTW contends, the parties to a contract cannot agree to subvert the operation of the Corporations Act and equity will not grant relief in respect of conduct not permitted by statute.[73]
Pacreef submits that s 254L is not limited to redemption of redeemable preference shares. Pacreef contends that while ss 254J and 254K are concerned with redeemable preference shares only, s 254L is not so limited and the word 'preference' is omitted from that provision.
Pacreef submits that GTW makes no reference to the introductory words to cl 2.1 - that is that GTW's obligations were conditional only on the three matters set out in paragraphs (a) to (c) of that clause. Pacreef also submits that GTW's submissions do not take into account cl 3.1(d), in particular, para (4). Pacreef submits that GTW is liable even if it, GTW or Pac Bio is subject to a legal incapacity in carrying out the redemption.
Pacreef contends that there is nothing in cl 2.1 that limits GTW's liability if Pacreef is unable to enforce the redemption against Pac Bio and that it is not correct that redeeming the A Class Shares would subvert the operation of the Corporations Act. GTW (as a shareholder and person whose interest may be affected) did not at any time avail itself of s 254E to seek an order invalidating the issue of the A Class Shares and in the current proceeding it has no standing to allege illegality between Pacreef and Pac Bio. GTW and Mr Wood did not object to the issue of the A Class Shares and in fact supported the resolution for their issue. Consequently, Pacreef contends, it is unrealistic and disingenuous for GTW to contend in this proceeding that the A Class Shares were not redeemable preference shares or were not able to be redeemed by Pac Bio.
The judge proceeded on the basis that it would be permissible for Pac Bio to redeem the shares if they were not preference shares provided that there was no reduction in capital.[74] In my view, the judge proceeded on a false basis. When a share is redeemed, it is cancelled and there is a reduction in capital.[75] The fact that shares of an equivalent value might be issued to cancel out (in a practical sense) the effect of the diminution of capital which results from a redemption of shares does not provide an answer. The scheme of the Corporations Act is that the only redemption of shares which is permissible is the redemption of redeemable preference shares in accordance with ss 254J and 254K. There is no authority for redemption of ordinary shares. The permissible alternatives to redemption are share capital reductions in accordance with s 256B or through an authorised buy back of shares in accordance with s 257A.
The judge considered that if the redemption of shares was not authorised by the Corporations Act, that s 254L would mean that the contravention would not adversely affect the operation of the contractual obligation Pac Bio had to redeem the shares.[76] However, s 254L only operates if there is a contravention of either s 254J or s 254K. Those sections only concern redeemable preference shares. It is only if there has been a contravention of the requirements for the redemption of redeemable preference shares that the curative effect of s 254L operates. It does not operate in respect of the redemption of other shares.
Section 254E is of no assistance to Pacreef. That section is directed to validation of an issue of shares not to confirmation of invalidity. Pacreef may have attempted to take advantage of that provision, but no application was made by it or by any other person. Consequently, it has no operation in this case.
If the shares could not be redeemed, cl 3.1(a) of the Guarantee Arrangement would not take effect. The underlying substratum for that provision fails. The clause is based on the requirement for Pac Bio to meet a redemption request by Pacreef. On the scenario relevant to this part of ground 4, this could not occur because the shares are not redeemable. As GTW contends, the words 'such number of fully paid ordinary shares... as is required to fully satisfy the Redemption Request' are important. There can be no satisfaction of a redemption request because this would not be permissible. Pacreef's reliance on cl 3.1(d)(4) does not assist. As GTW contends, in the scenario posited, there is no release or exoneration of GTW; it is rather a case where the mechanism for payment fails.
As noted above, the judge relied on the introductory words to cl 2.1 that GTW's obligations were conditional 'only on' the three matters specified in that clause.[77] However, this does not take account of what GTW's obligations were. For the reasons given above, those obligations (to subscribe for shares to fully satisfy a redemption request) could not come into effect.
Were it necessary to decide, ground 4 would have been made out.

[84]

In construing the definition of Insolvency Event, the judge was called on to consider the meaning of 'due' and 'due and payable'. GTW contended that those terms were different to one another. The judge reviewed a number of authorities and concluded that there was no difference in approach to what is 'due' and what is 'due and payable'.[80] Additionally, the judge noted that it was known to the parties that both GTW and Pacreef would have nominee directors on the board of Pac Bio. Those directors would be familiar with Pac Bio's financial position; would be aware of the risks of the company trading while insolvent; would be aware of Pac Bio's obligations to prepare financial reports; would be aware of the obligation of directors to approve financial reports and make appropriate accompanying directors' resolutions.[81] The judge concluded that reasonable business people in the position of GTW and Pacreef would not consider Item 1 and s 95A of the Corporations Act to have different meanings.[82] If that were not so, a strange position could be reached - the nominee directors could resolve that Pac Bio was solvent because of the existence of reasonable grounds for a belief that Pac Bio was able to pay its debts as they became due and payable with the meaning of s 95A of the Corporations Act; and yet on the same day, those same directors could argue that Pac Bio was insolvent because it was unable to pay its debts as and when they fell due within the meaning of Item 1.[83]
The judge observed that one possible construction is that because of the inclusion of Item 1 (an inability to pay debts as and when they fall due), the reference to an applicable law in Item 7 might not include s 95A of the Corporations Act but rather may be intended to pick up instances where a court has made a declaration of insolvency or instances where, under the force of an applicable law, the entity is taken to be or deemed to be insolvent.[84] In addition, pointing to Items 2 to 6 of the definition of Insolvency Event, the judge reasoned that it could be presumed that the parties intended that whether cl 2.1(c) of the Guarantee Arrangement had been satisfied would be a matter which could be ascertained with objective certainty.[85] The judge concluded that, properly construed, Item 7 asks whether any relevant declaration of insolvency had been made in respect of Pac Bio and whether any relevant legislation deemed Pac Bio insolvent by operation of law.[86]
The judge observed that the combination of the Item 1 definition and cl 2.1(c) of the Guarantee Arrangement meant that what was required was an assessment of Pac Bio's inability 'to pay debts as and when they fall due' at a particular date (the date the A Class Shares were to be redeemed).[87] He reasoned that this text provided a strong indication that the assessment to be undertaken on the relevant date was one requiring the capacity of Pac Bio to pay debts payable on that date.[88] In the judge's view, the phrase 'unable to pay' in Item 1 gave further support for this construction.[89]
The judge concluded that:

[86]

GTW contends that the judge erred by construing Item 1 as debts that were 'due and payable' and by finding that (based on authorities concerning s 95A) it was necessary to consider 'commercial realities' including whether the creditors in question required payment of the debt. GTW submits that on the judge's construction, Item 7 has no work to do. GTW also submits that the judge should have examined what debts were 'due' or 'owing' at the relevant date consistently with the approach taken in authorities considering insolvency outside the context of s 95A of the Corporations Act.
The meaning of 'Insolvency Event' must be considered having regard to the words used, the purpose of the Guarantee Arrangement and its context.
First, the label 'Insolvency Event' is a guide as to what is core to the term. It is a question concerning whether Pac Bio was insolvent at the relevant date rather than simply whether debts or amounts are 'due' in a non-insolvency context.
Second, the items in the definition are relevant to the financial ability of the company to carry on its business.
Third, the Guarantee Arrangement is a commercial agreement and reasonable business people would not expect two different approaches to be taken to determining insolvency for the purposes of the agreement. Thus, reasonable business people would not expect Item 1 to be construed as encompassing known debts to be paid at some long distant future date but not payable in the short term, with Item 7 being construed as only encompassing debts that are due and payable on the relevant date or in the near future. As the judge correctly observed,[91] leaving to one side s 95A, Item 7 could encompass other statutory provisions such as those deeming a company to be insolvent; for example, s 588E(4) of the Corporations Act where there is a failure to keep records. It is therefore not correct to say (as GTW contends) that Item 7 has no work to do if Item 1 is construed as covering debts that are due and payable. Indeed, on its proper construction, Item 7 is a catch all for statutory insolvency events including those not otherwise captured in Items 1 to 6. The structure of the items in the definition is such that there may well be overlap between them. For example, an entity that is unable to pay its debts as and when they fall due (Item 1) may also be one which goes into liquidation (Item 2) or receivership or administration (Item 5).
Fourth, reasonable business people are likely to understand insolvency as involving a cash flow test. That is the test that directors must apply in considering whether a company is solvent. Essential to cash flow is consideration of the time for payment of debts rather than a static look at the total amount of debt (regardless of when payment has to be made). A more stringent and narrower construction of Item 1 to include debts on the books but not payable at the relevant date has little to recommend it. It does not accord with the common approach to assessing insolvency in a corporate context - an approach with which the relevant people (as company directors) would be expected to be familiar.
GTW relied on a number of authorities concerning the meaning of 'due' and 'due and payable'. Most of those authorities were summarised and considered by the judge.[92] They do not assist GTW. What is important is to construe the definition of Insolvency Event in the contract in question here; that is, in the Guarantee Arrangement. How the same or similar phrases have been construed or interpreted in other contracts or legislative provisions cannot simply be picked up and adopted in this case. That is particularly so when the context of each provision is quite different and when what is to be determined is whether a particular amount is due rather than whether insolvency has been established.[93]
One of the cases relied on by GTW, Melbase Corporation Pty Ltd v Segenhoe Ltd[94] did concern insolvency in a corporate context. In that case, a shareholder (Melbase) sought leave under s 459P of the Corporations Law to apply for the winding up of a company (Segenhoe). Section 459P(3) provided that leave may be granted if the court was satisfied that there is a prima facie case that the company was insolvent. Justice Lindgren noted that the determination under s 459P(3) 'is of a preliminary nature and is to be distinguished from the determination as to insolvency called for on a final hearing.'[95] His Honour proceeded on the basis that a creditor (Akron) which was owed in excess of $30 million had reserved its right to call for payment at any time after 23 March 1995 but that Akron's chairman had given evidence that Akron had not contemplated calling for the debt and would not be reviewing that position in the current financial year (ending 30 June 1995). Justice Lindgren delivered his reasons on 1 May 1995. His Honour determined that on the evidence, on the face of it, the debt would be due and payable following 30 June 1995 at the latest and that on the application before him it was appropriate to look forward at least as far as that date.[96] His Honour found that for the purposes of s 459P(3), it had been established that prima facie Sengenhoe was unable to pay all its debts as they become due and payable.[97] That case does not assist GTW. As is clear, the case concerned an application for leave based on a preliminary assessment of insolvency that would be tested more rigorously on the actual application for winding up. It is unsurprising in those circumstances that Lindgren J found it appropriate on the facts before him to look forward a month or two when considering the company's ability to pay its debts.
Some of the cases relied on by GTW[98] go to the proposition that, in the absence of evidence to the contrary, when a court is assessing insolvency it does so on the basis that contractual debts are payable at the time stipulated. Again, there is nothing surprising in that.
On the proper construction of the definition of Insolvency Event, the question to be determined by the judge was whether at the date the A Class Shares were to be redeemed, Pac Bio was able to pay its debts as and when they became payable.
This required the judge to consider two debts in particular. The first was the debt under the Vendor Finance Deeds.
The facts concerning the debt require some consideration. As noted above, a small part of the purchase price was funded by a loan by Pacreef to Pac Bio. In addition, Pac Bio funded an adjustment payment due to Pacreef by a further deed of indebtedness. The Vendor Finance Deeds were in relevantly identical terms. An acknowledgement of debt is included in each and in the initial deed for $3 million provides:

[109]

The judge rejected Mr Meredith's evidence that the debt under the Vendor Finance Deeds of $3.5 million was a debt giving rise to an Insolvency Event as at 7 April 2019.[105]
As part of ground 6, GTW says that the judge misconstrued the definition of 'Repayment Date' in the Vendor Finance Deeds such that the judge was incorrect in finding that Pacreef had to give written notice to Pac Bio under those deeds.
GTW contends that the judge ought to have found, consistent with the expert evidence at trial, that taking into account all of Pac Bio's debts, there was an Insolvency Event as defined at the relevant date.
First I will deal with the Vendor Finance Deeds. The Proposed Recapitalisation did not eventuate. This meant that the repayment date (as defined) was in effect 31 March 2019. But that only takes matters so far.
While payment was to be made by 31 March 2019, before any action to enforce that debt could be brought, a notice had to be served declaring that the amount owing was immediately due and payable. That was the mechanism provided in the default provision in the Vendor Finance Deeds: first the debt had to be paid by 31 March 2019; if it was not paid by that date, default interest at the rate of 15% began to accrue on the debt and there was a Default (as provided for in paragraph (b) of the definition); a Default gave rise to a right to declare by notice that 'the Money Owing is immediately due and payable, in which case [Pac Bio] must immediately pay to [Pacreef] the Money Owing'.
No notice was given and was unlikely to be given in the short term. As the judge observed, there was evidence that Pacreef did not intend to call for payment under the Vendor Finance Deeds and had instead opted to receive default interest.[106] The debts under the Vendor Finance Deeds were not due and payable in the relevant sense until a notice was served. Even if a notice was not necessary, the evidence that Pacreef did not intend to enforce the debt at the relevant time leads to the conclusion that the debt was not one that was due and payable for the purpose of determining whether there was an Insolvency Event (as defined in the Guarantee Arrangement).
The same analysis applies to the GTW Facility debt.
Neither debt was payable at the relevant time. As the judge correctly observed:

[136]

GTW submits that the judge's construction does not lead to a sensible commercial outcome because on that construction if GTW's obligations are triggered then the date for assessing solvency (being 28 days after the redemption notice) is different from the date for redemption (being at least three months after the redemption notice). By way of example, GTW suggested that this would lead to a situation where Pac Bio was 'not insolvent' as at day 28 but in external administration by day 90 when GTW had its obligations under cl 3.1 to subscribe for shares. In that event, the condition in cl 2.1(c) would be satisfied but the share issue to GTW could not occur (and neither could the redemption of the A Class Shares).
Finally, GTW relies on the principle that contractual provisions in a guarantee will be construed in favour of the guarantor and this principle compels a construction of cl 2.1(b) in favour of GTW.
In my opinion, the judge was correct to find that the date the existence of an Insolvency Event was to be determined was 4 February 2019.
Clause 2.1(c) is the starting point. That clause is directed to the date that the A Class shares are to be redeemed and directs attention to the Subscription Agreement to determine the answer to that question. In this regard, the relevant part of the Subscription Agreement is to be found in cl 8.1. Clause 8.1(b) is predominantly concerned with the time for redemption - within 28 days after receipt of a redemption notice. The fact that the clause is subject to cl 8.3 does not change that timeframe. Rather, those introductory words, the first sentence of cl 8.3(a) and cl 8.1(d) concern the origination of the funds to meet the redemption request; that is, Pac Bio's obligation was to fund the redemption from a capital raising. The balance of cl 8.3(a) provides for a situation that the parties foresaw might arise. That situation was one where certain shareholders acquired shares through the capital raising. In that situation, the parties anticipated that this may result in a breach of the takeover provisions in the Corporations Act. In cl 8.3(a) they sought to address that possibility by providing for payments to Pacreef by instalments to give time for compliance with one of the exemptions to the takeover provisions. In that circumstance, the time for payment would be extended to the earlier of two events to occur - the earliest date that could be complied with for the exemptions to operate or nine months after the receipt of the redemption notice. It is in that situation of the issue of shares to certain shareholders that cl 8.3(a) is directed and that situation did not eventuate in this case.
It should be remembered that, so far as is relevant in this case, the Subscription Agreement regulated relations between Pacreef and Pac Bio. It also had a role to play in setting the date that was picked up for the purposes of cl 2.1(c) of the Guarantee Arrangement, but it did not regulate the relationship between Pacreef and GTW under the Guarantee Arrangement. How Pac Bio was to meet its obligations (that is, through a capital raising that did not in one way or another offend the provisions of the Corporations Act) had nothing to do with setting a date for determination of the solvency of Pac Bio. That is something completely different. As the judge said correctly, what recourse Pacreef may have against Pac Bio under the Subscription Agreement is a separate question as between those parties.
Part of the context for considering the proper construction of cl 2.1(c) is cl 2.1(b). As the judge correctly pointed out, different language was used in each clause and if it had been the intention of the parties to set the date in cl 2.1(b) in the way contended for by GTW, it would have been a simple matter for them to use the same wording as was used in cl 2.1(c).[125] Even more so, if the date for both cl 2.1(c) and cl 2.1(b) was intended to be the date three months after the redemption notice, one would expect the same language or mechanism to have been employed by the parties, but it was not.
As for GTW's posited hypothetical about no insolvency event at day 28 but one at the date three months after the redemption notice, there may be many reasons why the parties bargained for the risk of Pac Bio's insolvency after the 28th day to lie with GTW rather than Pacreef.
For completeness and leaving to one side the question of whether the Guarantee Arrangement was one attracting the principle of construction in favour of guarantors, in construing cl 2.1(c) of the Guarantee Arrangement, there is no room for that principle to play any part. For the reasons given above, the proper construction of the Guarantee Arrangement, and in particular, cl 2.1(c) is clear.
Were it necessary to decide, ground 5 would fail.

[142]

In respect of the second component, GTW contends that cl 2.1(b) imposes a condition in the form of an obligation on Pac Bio to 'carry out' the share issue. On that view, the Conditions are not satisfied unless and until Pac Bio 'carries out' a share issue.
The first notable feature about cl 2.1 is that each of the Conditions describe a state of affairs rather than being expressed in terms that are redolent of obligation. It is not couched in terms that seek to impose a liability on GTW for a breach of obligation, as is often the case in respect of guarantees and indemnities. In short, cl 2.1 does not expressly incorporate the obligation for which GTW contends, and to read it that way does no comfort to the structure of the clause as a whole.
Secondly, as a matter of text, cl 2.1(b) does not readily divide into three discrete components. In my view, the middle part of the clause is not intended to refer to an obligation, but is merely descriptive of what goes before. It is to be recalled that in order to redeem the preference shares, Pac Bio had to raise capital from a particular source, namely a share issue undertaken for that purpose. The words on which GTW relies serve to emphasise that the capital that Pac Bio would rely on to meet the Redemption Request must come from that source and no other. They ensure that any capital paid by Pac Bio to meet the redemption was obtained in accordance with the terms of issue of the redemption shares and s 254K of the Corporations Act.
Thirdly, GTW's construction does not advance the evident purpose of the Guarantee Arrangement. The redemption shares were issued in the context of a sale of shares. Pacreef was entitled to redeem the shares at $1 per share. The purpose of the Guarantee Arrangement was to protect Pacreef against the risk that Pac Bio was not in a position to redeem the shares. It would neuter the protection that the Guarantee Arrangement was designed to provide if Pacreef had no claim against GTW in the event that Pac Bio took no steps, or inadequate steps, to raise the capital. On the other hand, the obligation plainly arises if Pac Bio fails to raise the capital, and in those circumstances it would be anomalous if the condition is not satisfied where Pac Bio completely fails to get past first base. It seems to me that that was part of the risk that the Guarantee Arrangement was designed to guard against.
GTW contends that an underlying commercial imperative was that there would be a capital raising as a condition of its liability in which it could participate before any prospect of a call under cl 3. I do not find that argument persuasive. I accept that it was contemplated that there would be a capital raising in answer to a redemption request. Pac Bio had bound itself to conduct a capital raising. The issue however is where, objectively ascertained, the risk of non-compliance with that obligation rests. In my view, the purpose of cls 2 and 3 of the Guarantee Arrangement was to shift the risk to GTW. For reasons already explained, that conclusion follows from the text and structure of cl 2. It would also preference the commercial imperative of GTW over that of Pacreef, which, given the broader context of using the preference shares as a means to finance the share sale, is unlikely. Moreover, although a relatively small shareholder, GTW was better placed to have a measure of control or at least influence over the performance of Pac Bio's obligation to conduct the share issue necessary to answer the redemption request.
Fourth, and relatedly, the construction advanced by GTW gives rise to an uncertainty of meaning. At what point is the share issue carried out? On the other hand, the construction adopted by the judge construes cl 2.1(b) as imposing a condition that reflects a state of affairs or fact that does not require any qualitative assessment.
I do not regard cls 2.2 and 2.3 as assisting GTW.
When regard is had to the text of cl 2.1, cl 2.2 is oddly drafted. Starting with cl 2.1(a), which is the only condition in the control of Pacreef, it makes no sense to describe it as being obliged to take steps to fulfil that condition. Pacreef was under no obligation to redeem the shares and could, for example, decide to convert them to ordinary shares.
The conditions in cls 2.1(b) and (c) are expressed in the negative, which presents linguistic difficulty in describing the conditions as being 'fulfilled'. Dealing with cl 2.1(b), it cannot have been intended that Pac Bio was required to take all steps to ensure that it did not raise all of the capital required to meet the request. It might be thought that what was intended by cl 2.2 was that Pac Bio take all steps within its capacity to carry out a capital raising in answer to a redemption request. If that is the correct construction then, to my mind, that presents another impediment to GTW's construction of cl 2.1(b).
Having regard to the opening words of cl 2.1, which makes it clear that the obligations of GTW under cl 3 are conditional only on the three stipulated conditions, it could not have been intended that compliance with cl 2.2 would present an additional condition. Yet to construe cl 2.1(b) as imposing a condition that Pac Bio was required to carry out

[153]

I also disagree with the first of the two conclusions set out at [226] above.
The A Class Shares in this case were expressly stated to have no preference or priority to the return of capital in the event of a winding up of the company. This limitation is slightly (although not significantly) different to the limitation expressed in the terms of issue of the shares in Capel. In that case the relevant shares were stipulated to have no preference or priority to 'the repayment of capital in Capel Finance or during the winding up of Capel Finance'. True it is that the limitation in the present case does not explicitly exclude any priority to the 'repayment of capital' outside of a winding up, but neither does the Explanatory Memorandum expressly confer any priority to the holder of the A Class Shares to the repayment of capital in Pac Bio outside of a winding up. In my view, the absence of such an express exclusion is not a relevant point of distinction.
Gageler J in Beck[132] expressly endorsed a passage in Capel in which Barrett J described the characteristic of a preference share as being something which entitles the holder to some 'priority or superior position' or 'comparative advantage' over and above ordinary shareholders.[133]
In Beck, the plurality (Hayne, Crennan and Kiefel JJ) also emphasised the importance of the rights attaching to the shares at the time of issue as compared with the time when those rights are to be enjoyed. It was the nature of the rights at the time of issue which determined whether or not shares were preference shares.[134] This point was reinforced by the plurality emphasising the importance of the 'constituent documents' which define the rights attached to the share at issue.[135]
The question in Beck was whether for a share to have preference attributes another class of shares had to have been issued against which the attributes of the so-called preference share could be compared. The alternative position was that it was sufficient to assess the preferential nature of a particular share from the constituent documents regardless of whether or not any of the comparator class of shares had yet been issued. The court held that it was unnecessary that there be another class of shares issued so long as the preferential character of the subject shares could be seen from the constituent documents at the time of issue.
In this case, the A Class Shares do not confer on a holder any priority, superior position or competitive advantage in the repayment of capital, compared to a holder of other shares, over and above their characteristic of being redeemable.
As stated in Beck, the preferential nature of redeemable preference shares must be judged at the time of their issue, not at the time of the redemption (that is, the time of the enjoyment of the right). Logically, that must mean that the preferential character of the share is ascertainable at the time of its issue from the terms of the constituent documents.
As stated in s 254(3), a redeemable preference share may be redeemable either at the option of the shareholder, or of the company, or at a fixed time or on the happening of a particular event.
A share that is redeemed at the option of the shareholder might put that shareholder in a superior position to the holder of an ordinary share because, at the time chosen by the shareholder, the price fixed for redemption is higher than the value that would be obtained by an ordinary shareholder on a winding up or, say, a reduction of capital. But a share redeemed at the option of the company is unlikely to put that shareholder in a superior position to ordinary shareholders. A share redeemed at a fixed time or on the happening of a particular event could go either way. An attribute which may well deliver a competitive disadvantage to a shareholder - namely, redeemability at the option of the company - cannot be taken as attributing to that share a preferential character.
There is no statutory support for the view that a redeemable preference share is a preference share depending upon the circumstance of its redemption. If a share gains its preferential character due to it being redeemable, its preferential character must be ascertainable at the time of the share's issue rather than being dependent upon the circumstances - later to be determined - of the share's redemption. Further, it is difficult to see how ss 9 and 254(3) can be construed as if the preferential character of a share hinges upon the election of the person at whose option, or the event upon which, a share may be redeemed. That a share is redeemable, by any or all of these means, must equally confer a preference, or equally be agnostic as to the conferral of preference status.
For the reasons stated, that position is not improved by observing that a shareholder who can require the company to redeem the shares enjoys a competitive advantage over other shareholders because they may be able to elect to have the return of their capital at a nominated value per share. An advantage may accrue because the distribution of capital upon redemption could result in a higher return than an ordinary shareholder would receive on a winding up or a reduction of capital. Such an outcome is simply the function of redemption at the election of a shareholder, being one of the three mechanisms by which a share may be made redeemable.
In substance, the approach preferred by the trial judge construes s254A(3) as if it contained the following words inserted in italics: 'Redeemable preference shares are shares that are preference shares because they are issued on terms that they are liable to be redeemed'. In other words, it adopts the argument, rejected by Barrett J in Capel, that there is effectively only one attribute that is necessary for a redeemable preference share, namely that it is redeemable. This approach holds that because a share is redeemable, it will necessarily be preferential.
I reject this thinking. In my view, it distorts the plain statutory words. It also means that on account of an attribute which may well deliver a competitive disadvantage to a shareholder - namely, redemption at the option of the company, which may result in the shareholder receiving less than what the holder of other shares might receive on a repayment of capital in a winding up - a shareholder is nonetheless to be taken as holding a preference share.
The historical analysis provided by the judge is interesting and informative.[136] But, in my view, it does not support the result he reached.
First, the fact that preference shares were historically regarded as redeemable at the company's option does not of itself supply a reason for thinking that, today, redeemable shares are therefore preferential. In other words, that a preference share was historically, by virtue of that fact, redeemable at the company's option does not mean that a share that is now by statute permitted to be redeemable is necessarily preferential.
Secondly, the statute has expressly widened the mechanisms for the redemption of shares. Formerly, redemption only lay at the option of the company. It now may be granted at the option of the shareholder or by reference to some date or to the happening of an event. Hence, the historical rationale for equating redeemability with the preferential nature of the share - because a company was permitted to cancel shares which conferred preferential rights upon certain classes of shareholders by buying them back - can no longer account for the additional mechanisms of redeemability for which Parliament has specifically provided.
Thirdly, and relatedly, whatever may have been the historical rationale for redeemable preference shares, Parliament has chosen to express the qualifications for a share to be a redeemable preference share in quite new language. An understanding of the previous rationale for affording redeemability to a preference share cannot supplant or distort what is the plain meaning of the statute.
In my opinion, Barrett J was correct in Capel. That decision is not relevantly distinguishable from the present case. What Barrett J said, as set out above at [229], is the complete answer to this ground. It should be upheld.

At a glance

Court

Decision date

Before

Source

Judgment (198 paragraphs)

GTW Investments (Aust) Pty Ltd v Pacreef Investments Pty Ltd [2023] VSCA 291 (7 December 2023)

Parties

Legislation Cited (2)

Cases Cited (16)