ICM Investments Pty Ltd v San Miguel Corporation and Anor

CONTRACT - Interpretation - Principles relating to construction of commercial contracts - Transaction documents comprising the contractual duties and obligations inter-connected - Commercial object and purpose of transaction - Obligation to do everything reasonably necessary to give full effect to the transaction - Deed to facilitate settlement did not alter substantive contractual rights - Burden of proof in establishing loss and damage - Breach of "co-operation" clause - Breaches of contract under Put and call Option Deed and Shareholders Agreement - Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567 considered and applied as to burden of proof - Burden of proof as to contractual proviso - Burden of proof as to loss and damage claimed - No loss or damage proved to have been caused.

1 This proceeding arises from the acquisition by the first defendant, San Miguel Corporation ("San Miguel" or "SMC"), of shares owned by the plaintiff, ICM Investments Pty Ltd ("ICM"), in Berri Ltd ("Berri").

2 San Miguel is a large and well established publicly listed food, beverage and packaging company. It is based in Mandaluyong City, Philippines[1] and conducts its businesses throughout Southeast Asia and Australasia.

3 Berri is an Australian company. It was at all relevant times a public company and the successor of the Berri Fruit Juices Cooperative. The principal activity of Berri in 2005 and preceding years was the manufacturing and marketing of fruit juices and other beverages. The Cooperative's activities were transferred to Berri on 4 July 1985 by an order made under s 60 of the Co-operatives Act 1983 (SA). The effect of the order was that the undertaking of the Cooperative and all its property, rights and liabilities became the property, rights and liabilities of Berri.

4 A schedule of natural persons involved in the proceeding, together with relevant position descriptions in each case, is attached ("Schedule of Natural Persons").

5 In 2004, a majority of the issued shares in Berri were owned by companies associated with ICM. ICM formed part of the Shears Group of companies (the "Shears Group"). The group operated under the chairmanship of Douglas Shears ("Shears" or "DSS") as a privately owned agribusiness group based in Australia, with interests in food and beverage manufacturing and processing. For present purposes, the Shears Group consisted of ICM together with three other corporate entities, namely Agrifood Investments Pty Ltd ("AI"), Agribusiness Investment Management Pty Ltd ("AIM") and Sixty Jolimont Street Pty Ltd ("Sixty Jolimont Street").

6 National Foods Limited ("National Foods") is a large dairy food and fruit juice manufacturing company, with its core activities in Australia. In 2004, National Foods was acquired by San Miguel, a transaction which was completed in mid-2005.

7 In 2004, San Miguel also set about acquiring Berri. It did this through a transaction which involved the progressive purchase of ICM's shares in Berri. The acquisition spanned the period August 2004 to December 2005. During this period, San Miguel initially acquired 50% of the issued shares in Berri, and then increased its holding to 51% following the exercise of an option. ICM then exercised a put option, which initiated a transaction that resulted in San Miguel achieving 100% ownership of Berri. This was secured by the end of 2005. It is this final element of the transaction, the exercise of the put option, which gives rise to the present litigation.

8 ICM sues San Miguel and Berri for part of the consideration it claims is due to it pursuant to the sale of its final parcel of shares representing 49% of Berri's issued capital. This part of the consideration comprised an interim dividend which ICM claims ought to have been declared and paid by Berri in respect of the period commencing 1 July 2005 and ending on settlement of the purchase in December 2005, which was initially scheduled for 16 December, but was finally completed on 28 December 2005.

9 San Miguel's acquisition of Berri was part of an integration program initiated by San Miguel in 2005 to integrate the business of National Foods, which it had earlier acquired, with that of Berri, which it was in the process of acquiring. The object was to maximise the "synergies" between the two enterprises. The integration program was called "Project Eureka".

10 San Miguel's acquisition of ICM's shares in Berri was effected through a transaction which was principally recorded in three executed documents, which together are described as the "Transaction Documents".

11 On 5 August 2004, ICM and San Miguel and others entered into a Share Sale Agreement pursuant to which San Miguel (through a wholly owned subsidiary) acquired a 50% interest in Berri (the "Share Sale Agreement"). The shares were sold at $13.75 per share, as adjusted pursuant to the terms of the agreement.

12 At the same time, San Miguel, Berri, ICM and its associates (Shears, AI and AIM) entered into a Shareholders Agreement (the "Shareholders Agreement").

13 As part of the transaction, ICM and its associates (Shears, AI and AIM) also entered into a Put and Call Option Deed with San Miguel dated 5 August 2004 (the "Put and Call Option Deed") under which:

(a) ICM and its associated companies granted San Miguel the right to acquire from them a further 1% of the issued shares in Berri (the "First Call Option");

(b) ICM and its associates granted San Miguel the right to acquire the balance of their shares in Berri (the "Second Call Option"); and

(c) San Miguel granted to ICM and its associates the right to require San Miguel to acquire the balance of their shares in Berri (the "Put Option").

14 The Put and Call Option Deed was subsequently amended by deed dated 18 July 2005 (the "Amending Deed").

15 The initial parcel of shares in Berri sold under the Share Sale Agreement was transferred on or about 11 August 2004. Thereafter, ICM and companies associated with it in the Shears Group continued, at least for the time being, to hold the remaining 50% of the issued shares. In particular, ICM held 11.53%, AI 31.28%, and AIM 7.19%, while San Miguel held the balance of 50% of the issued shares in Berri.

16 On or about 5 November 2004, San Miguel exercised the First Call Option and by this means acquired a further 1% of the issued shares in Berri. This increased San Miguel's holding (through a wholly owned subsidiary) to 51%, leaving ICM and its associates in the Shears Group holding the remaining 49%.

17 On or about 11 April 2005, ICM's associates transferred all their remaining shares in Berri to ICM. The result was that, until ICM exercised its Put Option as described below, ICM alone held 49% of the issued shares in Berri and San Miguel held 51%.

18 On 29 April 2005, Berri paid dividends of $7,456,224 in respect of its results for the six months ending 31 December 2004. Those dividends comprised:

(a) dividends of $7,196,752 declared in December 2004; and

19 Berri's profit for the six months ending 30 June 2005 was between about $8.7 million and $9.1 million.

20 In July 2005, Berri declared, out of its year to date financial earnings, dividends of $7,658,393 in respect of its results for the six months ending 30 June 2005 (the "July Interim Dividend"). The July Interim Dividend was calculated pursuant to a formula provided under clause 10 of the Shareholders Agreement as follows:

Purchase price = $13.75 per share

No. of shares = 19,450,682

Average 180-day BBSY rate over the period = 5.7745% (rounded to the required 4 decimal places)

Number of days in period = 181 days

The calculation was as follows:

5.7745% x $13.75 x 19,450,682 x (181/365) = $7,658,392.63

21 The July Interim Dividend was fully franked and was subsequently paid on 27 October 2005 to its then shareholders, San Miguel and ICM, in proportion to their respective shareholdings.

22 On 18 July 2005, the parties to the Put and Call Option Deed executed the Amending Deed. The Amending Deed did two things of significance. First it brought forward the date for the exercise of the Put Option and the Second Call Option and, second, it increased the base purchase price of the remaining shares held by ICM. Whereas in the Put and Call Option Deed the price per share was the higher of $13.75 or a more complicated calculation involving "Relevant Equity Value", the Amending Deed fixed a price of $17.83 per share. The total difference between the price of $13.75 and $17.83, when applied to ICM's remaining 49% interest in Berri, amounted to $38.8 million.

23 The integration program "Project Eureka", involving Berri and National Foods, commenced in about July or August 2005 following the completion of the acquisition of National Foods by San Miguel. Significant steps in relation to the integration were taken between the commencement of the project and the end of December 2005: finance and administration were combined into one group; grocery sales were combined into one group; the food service sales force was combined into one group; and, although the IT functions were not combined, there was significant evaluation of the two IT systems undertaken and a plan was proposed to work towards a common system.

24 On 11 November 2005, ICM exercised its Put Option so as to require San Miguel to acquire ICM's remaining shares in Berri. The effect of the exercise of the Put Option was that San Miguel was obliged to complete the purchase of ICM's 49% holding on 5 December 2005. However, following discussions between ICM and San Miguel, San Miguel initially agreed to complete the purchase of the shares on 16 December 2005, which was a little later than the time allowed for completion under the Transaction Documents.

25 It was ICM's case that settlement of the transaction contemplated by the exercise of the Put Option was required by 16 December 2005. Settlement did not occur on that date. The further interim dividend for the 2005 year (the "Second Interim Dividend") which ICM claimed to be payable to it on completion of the sale on 16 December 2005 was the subject of discussions between ICM and San Miguel. The dividend was calculated by ICM to be $3,472,198, which was required to be franked at the tax rate of 30%, thereby distributing $1,488,085 in franking credits to ICM.

26 However, San Miguel failed to complete the acquisition of ICM's shares on 16 December 2005.

27 Further discussions took place between the parties regarding completion of the transaction and payment of the Second Interim Dividend. This included an exchange of emails between Francis Jardeleza of San Miguel and Trevor Mackey of ICM on 19 December 2005. The email exchange is alleged by ICM to constitute a "Compromise Agreement", to which Berri is also alleged to have been a party. By their email exchange San Miguel and ICM arranged for settlement to take place on 30 December 2005.

28 Following further discussions and by agreement, the completion of the sale of ICM's shares to San Miguel was brought forward by two days to 28 December 2005.

29 Prior to completion on the agreed date, the parties, including ICM, San Miguel and Berri, entered into a deed (the "28 December Deed"). The 28 December Deed in effect permitted the completion of the share sale to proceed on 28 December 2005 but reserved the right of ICM to claim payment of the Second Interim Dividend pursuant to the Transaction Documents "pending the outcome of further discussions between them." The terms of the 28 December Deed reflected earlier email exchanges between the parties.

30 Completion of the acquisition by San Miguel of ICM's remaining 49% interest in Berri took place on 28 December 2005. Thereafter, ICM did not hold any shares in Berri.

31 No Second Interim Dividend, or any part of it, was declared or paid by Berri.

32 Berri's financial statements for the 12 month period ending 31 December 2005 were adopted by the Berri Board (the "Berri Board") on 26 April 2006.

33 The Berri Board did not convene in late 2005 to consider the declaration or payment of any further interim dividend for the six months ended 31 December 2005. However, on 21 April 2006 the Berri Board met and resolved not to declare any further dividend for that period.

34 ICM's claim in the proceeding is that, pursuant to the Transaction Documents described, the Second Interim Dividend became due and payable to ICM in the amount of $3,472,198 (which was required to be franked at the tax rate of 30%, which would have distributed $1,488,085 in franking credits to ICM).

35 As against San Miguel and Berri, ICM claims damages in the amount of the "dividend entitlement", or so much of that amount as Berri had sufficient distributable profits to pay, plus damages in respect of associated franking credits. The claim is founded on alleged breaches of contract. The total damages claimed by ICM amount to $4,960,283, comprising:

a) $3,472,198, being the claimed Second Interim Dividend entitlement. This amount represents 49% of $7,086,118; the total interim dividend ICM claims ought to have been declared; and

b) $1,488,085, being the claimed associated franking credits.

36 Whether the transaction documents gave rise to this claimed entitlement, as against one or both of San Miguel and Berri, is a central matter in dispute.

37 The claim is further grounded in the factual allegation by ICM that Berri had available sufficient distributable profits as at 16 and 28 December 2005 to pay ICM the Second Interim Dividend. This too is a central matter in dispute.

38 By way of summary, the following principal issues present themselves for determination:

1. Pursuant to the Transaction Documents, was Berri required to pay, and San Miguel required to cause Berri to pay, a dividend of $3,472,198 (with associated franking credits) to ICM at the time of completion of the sale of ICM's shares in Berri to San Miguel on 16 or 28 December 2005?
2. Did Berri and San Miguel breach their respective obligations on 16 or 28 December 2005 by not paying the required dividend, or by not doing everything reasonably necessary to pay it, including the convening of the Berri Board to consider the matter? and
3. Had the Berri Board convened in late 2005 to consider the matter, would it have properly determined to declare and pay the required dividend (if any) on 16 or 28 December 2005?

39 The Transaction Documents comprise the Share Sale Agreement, the Shareholders Agreement and the Put and Call Option Deed and later an Amending Deed.

40 I make the following findings in relation to the Transaction Documents generally:

(a) They were entered into on the same day, 5 August 2004;

(b) Each are cross-referenced and contain intersecting provisions;

(c) Under the Share Sale Agreement, ICM and its associates sold a 50% shareholding in Berri to San Miguel. Thereafter, pursuant to clause 4.5 of the Share Sale Agreement, ICM and its associates and San Miguel continued for a period to be shareholders of Berri and among them were entitled to all dividends declared by Berri from 1 July 2004;

(d) Berri was to be conducted as a joint venture company from 1 July 2004 until San Miguel acquired the remaining shares in Berri pursuant to the provisions of the Put and Call Option Deed. The Shareholders Agreement provided for the governance and conduct of Berri as an incorporated joint venture until ICM and its associates ceased to hold any shares in Berri;

(e) The effect of the options provided for in the Put and Call Option Deed, being the First Call Option and the Second Call Option granted to San Miguel, and the Put Option granted to ICM, was that the balance of ICM's shares in Berri were to be transferred to San Miguel over a period of time. Effectively the Put and Call Option Deed made provision for a deferred sale of ICM's remaining 50% shareholding in Berri to San Miguel.

41 I will now proceed to deal with the essential terms of each of the Transaction Documents which are relevant to the determination of the issues in dispute.

42 The Share Sale Agreement executed on 5 August 2004 included the following terms of relevance:

(a) Pursuant to clause 4.5, the parties acknowledged and agreed that San Miguel (as the purchaser) and the Shears Group (which was defined to mean ICM, AI, AIM and Sixty Jolimont Street), "as the continuing members of the company" (Berri), were entitled to "all profits derived by, and must bear the burden of all losses suffered by, the Group [defined to be Berri and its subsidiaries] from 1 July 2004";

(c) "Sale Shares" was defined in clause 1.1 to mean the shares in Berri "set out in Schedule 2 that are to be sold by the Vendors under this agreement and amounting to 50% of the issued Shares".

43 At the time of entry into the Share Sale Agreement on 5 August 2004, San Miguel, Berri, ICM and its associated companies (together comprising ICM, AI and AIM) and Shears in his personal capacity, entered into the Shareholders Agreement.

44 Under clause 1.1 of the Shareholders Agreement, "Transaction Documents", when used in the Shareholders Agreement, means:

(a) this agreement;

(b) the Company's constitution [i.e. that of Berri Ltd];

(c) the SSA [i.e. the Share Sale Agreement];

(d) the Option Deed; and

(e) any other agreement or document that the parties agree is a Transaction Document.

45 Pursuant to this definition of "Transaction Documents", a direct link was created with the other Transaction Documents referred to.

46 The Shareholders Agreement was stated pursuant to clause 1.6 to "come into force and effect on the Completion date, conditional on Completion occurring in accordance with the Share Sale Agreement", thus providing a further direct link between the two agreements.

47 The Shareholders Agreement also made provision for the operation of the business of Berri and the involvement of the continuing shareholders in the operation of the business.

48 Clause 2 noted that the objectives of Berri included the development and expansion of its business in accordance with a business plan. Further, to give effect to this objective "and to the Option Deed", it was agreed that the business and the Berri Group would operate on a "stand-alone" basis in relation to San Miguel and its business interests. Clause 2(b) was in the following terms:

(b) In giving effect to clause 2(a) and to the Option Deed, the Business will be conducted and the Group operate on a 'stand alone' basis so far as any other business interests of SMC and its Affiliates are concerned (except as otherwise agreed between the Shareholders).

49 Under clause 3 and Schedule 2 each shareholder was entitled to appoint the following directors to the board of Berri: San Miguel - 2-4 directors; and the Shears Group - 1 director. Voting rights on the board were agreed to be exercised proportionately to the shareholdings of San Miguel and the Shears Group. By this means San Miguel established and maintained control of the Berri Board.

50 Pursuant to clause 4, the management of Berri was vested in the board of the company, and under clause 5 certain decisions listed in Schedule 3 required the unanimous approval of the directors on the Berri Board.

51 Clause 10 of the Shareholders Agreement provided that:

(a) Subject to clause 10(c), unless resolved otherwise by the Board by Unanimous Approval, the Company will declare and pay by 30 April and 31 October each year, in respect of the results of the prior six months ending 31 December and 30 June respectively as shown in the Company's accounts for that period, a minimum cash dividend. The minimum amount of the dividend per Share will equal the product of the Rate multiplied by the Purchase Price (as defined and determined in accordance with the [Share Sale Agreement]) and then pro-rated as necessary to take account of the period in respect of which the dividend is being determined to determine the dividend per Share and the resulting amount paid as a cash dividend to Shareholders.

(b) Unless resolved otherwise by the Board by Unanimous Approval, all such dividends will be franked to the maximum extent permitted at law.

(i) The Company does not have sufficient distributable profits from which to pay a dividend required to be paid under clause 10(a); and/or

(ii) The Company's obligations under its financing arrangements with its principal financier prevent such a dividend being paid,

52 Clause 17.1(b) of the Shareholders Agreement provided for the agreement to terminate automatically in respect of a shareholder when that shareholder ceases to hold any shares in Berri, at which time the shareholder retains no further rights or obligations under the agreement, save under clause 17.2 which preserved any accrued rights of the parties. This meant that on the transfer of ICM's remaining 49% of the shares in Berri to San Miguel on 28 December 2005, the Shareholders Agreement would terminate. Clause 17.1(b) relevantly provided:

Subject to clause 17.2, this agreement terminates automatically:

...

(b) for a Shareholder, when it ceases to hold any Shares, at which time the Shareholder has no further rights or obligations (except under clause 16) under this agreement;

...

53 Clause 17.2 preserved accrued rights on a termination under clause 17(b) so that the transfer of the remaining 49% parcel of shares by ICM to San Miguel did not affect those rights or bring about a merger of those rights through any settlement of the transaction. Clause 17.2 provided:

Termination of this agreement (in whole or with respect to any party) is without prejudice to any accrued rights of the parties.

54 Clause 17.2 was reinforced by clause 21.7 which provided:

The rights and obligations of the parties under this agreement do not merge on completion of any transaction contemplated by this agreement.

(a) This agreement, together with the other Transaction Documents, constitutes the entire agreement between the parties in connection with its subject matter and supersedes all previous agreements or understandings between the parties in connection with its subject matter.

(b) To the extent of any inconsistency between any of the Transaction Documents, they will be resolved in the following priority (with a document or clause listed before another taking precedence over the other):

(i) clause 21.8;

(ii) the SSA [ie. the Share Sale Agreement];

(iii) the Option Deed;

(iv) this agreement other than clause 21.8;

(v) the Constitution [ie. that of Berri Ltd];

Clause 21.8(b) therefore established a priority of documents to be used as an aid to resolving inconsistencies among the suite of documents comprising the Transaction Documents.

56 Clause 21.9 of the Shareholders Agreement critically provided that:

Each party must do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to this agreement and transactions contemplated by it.

57 Finally, clause 21.11 provided for a no waiver facility in the following terms:

A party does not waive a right, power or remedy if it fails to exercise or delays in exercising the right, power or remedy. A single or partial exercise of a right, power or remedy does not prevent another or further exercise of that or another right, power or remedy. A waiver of a right, power or remedy must be in writing and signed by the party giving the waiver.

58 As also noted above, on 5 August 2004, ICM and others (AI, AIM and Shears) entered into the Put and Call Option Deed with San Miguel dated 5 August 2004. Berri was not a party to this instrument.

59 Under the original Put and Call Option Deed, the Put Option could be exercised during the "Put Option Period" being "the period starting on 1 January 2006 and ending on the date on which no member of the Shears Group holds any shares". The Second Call Option could be exercised during the same period.

60 The Amending Deed entered into on 18 July 2005 changed the start of the period during which the Put Option and the Second Call Option could be exercised, from 1 January 2006 to 3 October 2005.

61 On 11 November 2005 ICM exercised its Put Option by forwarding to San Miguel a Put Option notice in relation to its remaining shares in Berri.

62 Clause 7.7 of the Put and Call Option Deed provided that:

(a) On the exercise of either the Put Option (which may occur on two occasions) or the Second Call Option, the member of the Shears Group holding the Shares comprising the Entire Parcel to be acquired on such exercise will be entitled to all dividends in the period from the last declared and paid dividend until completion of that acquisition, the amount of such dividend to be determined in accordance with clause 10 of the Shareholders Agreement. The parties must procure that the Company pays this dividend entitlement to the holder of the Shares immediately prior to their transfer to SMC as a dividend determined in accordance with clause 10 of the Shareholders Agreement.

(b) Clause 7.7(a) has no operation in respect of any exercise of the First Call Option.

63 Clause 11.8 provided a "no merger" facility. It was expressed in the same terms as clause 21.7 of the Shareholders Agreement.

64 Clause 11.9 of the Put and Call Option Deed provided that:

Each party must do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to this deed and any transactions contemplated by it.

Although no reliance was placed on clause 11.9 of the Put and Call Option Deed by ICM, it will be noted that it is precisely to the same effect as clause 21.9 of the Shareholders Agreement.

65 Clause 11.11 provided for a "no waiver" term, following precisely clause 21.11 of the Shareholders Agreement.

66 ICM relied upon an exchange of emails between Francis Jardeleza of San Miguel and Trevor Mackey of ICM on 19 December 2005 which it says constituted a binding compromise agreement between ICM, San Miguel and Berri to the following effect:

(a) completion of the acquisition of shares under the Put Option would occur on 30 December 2005;

(b) at completion the Second Defendant would declare and pay the dividend entitlement to the Plaintiff calculated up to 16 December 2005; and

(c) the First Defendant would pay interest to the Plaintiff from 16 December 2005 to the date of completion at the same rate that applied to the calculation of the dividend payable by the Second Defendant.

(the "Compromise Agreement").

67 Completion of the transaction contemplated by the exercise of the Put Option, pursuant to which ICM transferred its remaining 49% shareholding in Berri to San Miguel, was arranged to take place on the extended date of 28 December 2005. This was reflected in a deed entered into on 28 December 2005 by ICM, the Shears Group, Shears, San Miguel, National Foods and Berri (the "28 December Deed").

68 ICM contends that the 28 December Deed gave rise to substantive changes to the transaction originally contemplated by the Transaction Documents.

Construction of Commercial Contracts - Legal Principles

69 The relevant legal principles to be applied in the interpretation of commercial contracts are relatively clear. They have recently been restated by the Court of Appeal in Plenary Research Pty Ltd v Biosciences Research Centre Pty Ltd.[2]

70 The provisions of commercial agreements are to be construed according to what a reasonable person would have understood them to mean, having regard to the surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.[3]

71 This principle is often stated in terms of a necessity to construe commercial agreements so as to accord with "business commonsense" or "commercial reality".

72 In Antaios Compania Naviera SA v Salen Rederierna AB,[4] Lord Diplock said that:

... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.

73 To like effect, Marks J said in Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd:[5]

In recent times, the courts have with increasing frequency and emphasis interpreted commercial contracts so that they accord with commercial reality and where necessary imply such words for that purpose as appear necessary. See Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VicRp 74; [1990] VR 834 per McGarvie J, at pp 840 and 845, and the authorities there mentioned. See also David Leahey, at p 387, per Murphy J and Doyle v Mount Kidston Mining and Exploration Pty Ltd [1984] 2 Qd R 386 per MacPherson J, at p 392.

74 As Gleeson CJ said in International Air Transport Association v Ansett Australia Holdings Limited:[6]

In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market.

75 However, a statement of this principle of construction belies practical difficulty which may be incurred in its application. In Maggbury Pty Ltd v Hafele Australia Pty Ltd,[7] Gleeson CJ, Gummow and Hayne JJ identified the potential problem of identifying what, in respect of any particular contract, comprised "business commonsense":

Upon the proper construction of the agreements, did the restraints upon use continue to operate after the public disclosure and the collapse of negotiations? It was said by Lord Diplock that:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'

Of course, what in respect of a particular contract comprises 'business commonsense', as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible. Here the difficulty arises not from the need for detailed semantic and syntactical analysis of the language used in the agreements, but from the use therein of simple terms such as 'at any time hereafter' and 'forever'. Is this a case where 'something must have gone wrong with the language'?

76 In the application of these principles, the Court will also consider the reasonableness of the result of the particular constructions that are advanced. The more unreasonable a result, the less likely it is that the parties intended it. The Court will also have regard to all of the words used in the agreement so as to, as far as possible, render them all harmonious: see International Fina Services AG v Katrina Shipping Limited;[8] and ABC v Australasian Performing Right Association Ltd.[9]

77 In Spunwill Pty Ltd v BAB Pty Ltd,[10] Santow J helpfully listed a number of settled approaches to the interpretation of written documents, which support the principles that I have described in relation to the construction of commercial agreements. Set out below are those of significance to the construction of the Transaction Documents:

1. In construing a written document, the object is to discover and give effect to the contractual obligations that reasonable persons in the position of the parties would objectively have intended the document's language to create. The emphasis is thus on giving effect to the apparent intention of the parties, and direct evidence of the parties' actual subjective intentions and expectations is inadmissible for purposes of construction: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd.
2. The language of a term is generally assigned its natural and ordinary meaning, read in the light of the contract as a whole but where it is ambiguous surrounding circumstances may be taken into account in assigning the presumed meaning. The surrounding circumstances include the matrix of mutually known facts, and the background, object, context and commercial purpose of the transaction, in the objective sense of what reasonable persons in the position of the parties would have had in mind: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd; Manufacturers' Mutual Insurance Ltd v Withers.
3. The consequences of alternative interpretations are not immaterial, and where the meaning of language in a contract is ambiguous, that interpretation will be preferred which avoids consequences which are in the circumstances capricious, unreasonable, unjust or not consonant with business efficacy: Australian Broadcasting Commission v Australasian Performing Right Association Ltd; Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland; Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd.
4. Every passage of a document must be read as part of the whole instrument. This may justify departing from what had seemed the plain meaning of a clause considered in isolation: The Metropolitan Gas Co v Federated Gas Employees' Industrial Union.
5. Where a court can discern the intent of the parties from an examination of the document as a whole, words may be supplied, omitted or corrected in the instrument, where it is clearly necessary in order to avoid absurdity or inconsistency: Fitzgerald v Masters. In such cases rectification of the document is not required: Re United Pacific Transport Pty Ltd; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.
6. If, by any reasonable construction, the intention of the parties can clearly be arrived at from the document itself, then the court will give effect to that intention even though this involves departing from or qualifying particular words used. So the court will be prepared to restrict, transpose, modify, supply or reject words or terms in the documents, provided the intention of the parties is plain in spite of the words: Chitty on Contracts; Tropwood AG of Zug v Jade Enterprises Ltd (The Tropwind).[11]

78 I will apply these principles when construing the Transaction Documents.

Contentions of Parties on Construction of the Transaction Documents

79 ICM advances two basic contentions on the construction issue:

1. Clause 7.7(a) of the Put and Call Option Deed obliged San Miguel to procure the payment of a dividend to ICM immediately prior to the transfer of ICM's shares in Berri to it, and the amount of the dividend was to be determined in accordance with clause 10 of the Shareholders Agreement;
2. Clause 21.9 of the Shareholders Agreement obliged each of San Miguel and Berri to do everything reasonably necessary to ensure the payment of the dividend required by clause 7.7(a).

80 On this basis, ICM claims that it is entitled to payment of the Second Interim Dividend of $3,472,198.04. This was calculated by ICM applying its construction of the quantification formula under clause 10 of the Shareholders Agreement, using a start date of 1 July 2005, an end date of 16 December 2005, a "Purchase Price" of $131,048,967.50 and a "Rate" of 5.722384615% per annum. The dividend entitlement claimed by ICM on completion of the sale pursuant to the Put Option was also required to be franked at the tax rate of 30%. Accordingly, ICM claimed that if the claimed Second Interim Dividend had been paid, ICM should also have received $1,488,084.87 in franking credits.

81 ICM claims against San Miguel for breach of clause 7.7(a) of the Option Deed, both as at 16 December 2005 and 28 December 2005. It makes no such claim against Berri because Berri was not a party to that deed.

82 ICM claims against Berri and San Miguel pursuant to clause 21.9 of the Shareholders Agreement and pursuant to the Compromise Agreement. Specifically, ICM claims that, in breach of both agreements, Berri failed to declare and pay the Second Interim Dividend on 28 December 2005, and San Miguel failed to procure Berri to do so.

83 ICM submits that clause 10 of the Shareholders Agreement is relevant to the calculation of the amount of the dividend that is payable under clause 7.7(a) of the Put and Call Option Deed (which I will call the "dividend quantification formula"). ICM says that the effect of clause 10 is that the amount of the Second Interim Dividend was to be calculated under the dividend quantification formula by applying an interest rate to the outstanding purchase price which, in effect, was compensation for the deferred payment by San Miguel of the purchase price for the remaining 49% holding. Relevantly for present purposes, Berri was only to be excused under clause 10(c)(i) of the Shareholders Agreement from paying the dividend to the extent that it did not have sufficient distributable profits to do so.[12]

84 Pursuant to clause 21.9 of the Shareholders Agreement ICM contends that San Miguel was obliged to do everything reasonably necessary to ensure that the dividend entitlement was paid to ICM by Berri in accordance with clause 7.7(a) of the Put and Call Option Deed.

85 ICM contends that the Put and Call Option Deed was a Transaction Document for the purposes of the Shareholders Agreement and the exercise of the Put Option and the payment of the Second Interim Dividend to ICM on completion were therefore transactions contemplated by the Shareholders Agreement. Consequently, it says that Berri, as a party to the Shareholders Agreement, was also contractually bound to do everything reasonably necessary to effect payment of the dividend under clause 7.7(a) of the Option Deed.

a) the combined effect of clause 7.7(a) of the Put and Call Option Deed and clause 21.9 of the Shareholders Agreement was that San Miguel was obliged to procure payment of the Second Interim Dividend by Berri to ICM immediately prior to the transfer of the 49% shareholding by ICM to San Miguel. The Second Interim Dividend was an additional dividend to that specifically addressed in clause 10 of the Shareholders Agreement, but calculated in accordance with the dividend quantification formula expressed in clause 10, subject only to the exceptions stated in clause 10; and

b) Berri, as a party to the Shareholders Agreement, was contractually bound by clause 21.9 of the Shareholders Agreement to do everything reasonably necessary to effect payment of the dividend under clause 7.7(a) of the Put and Call Option Deed.

Summary of Defendants' Construction Submissions

87 Both defendants advanced cogent cases on the text of clause 7.7(a) which pointed to a different conclusion. In essence, they advanced a case that clause 10 of the Shareholders Agreement, where it was referenced in clause 7.7(a) of the Put and Call Option Deed, made it clear that clause 7.7(a) related only to dividends declared strictly in accordance with clause 10. In other words, clause 7.7(a) gave rise to an obligation in San Miguel only in respect of the declaration and payment of dividends by Berri "by 30 April and 31 October each year, in respect of the results of the prior six months ending 31 December and 30 June respectively".

88 The consequence which is contended for by the defendants is that clause 7.7(a) does not give ICM any separate or additional right or entitlement to be paid any interim dividend in respect of the final period immediately preceding the transfer by it of the remaining 49% parcel to San Miguel. They submit that clause 7.7(a) operates only when and if a dividend as defined in clause 10 has already been declared.

89 On this basis, the defendants contended that it was not open to construe clause 7.7(a) of the Put and Call Option Deed in combination with clause 10 of the Shareholders Agreement so as to produce a separate and additional source of entitlement in ICM to be paid a dividend other than that strictly delimited by clause 10 of the Shareholders Agreement.

Summary of San Miguel Construction Submissions

90 San Miguel contended that the proper construction of the Transaction Documents reveals a transaction to this effect: after the completion of the sale of the initial 50% holding to San Miguel, Berri had an obligation, subject to certain conditions, to declare and pay dividends twice a year in respect of results of the prior 6 months of trading. Further, if ICM and its related companies exercised the Put Option and the resulting transaction was completed at a time when those dividends had been declared but not paid, then all parties to the Put and Call Option Deed had an obligation to procure the payment of those dividends to the relevant ICM related parties.

91 San Miguel contended that the primary obligation was on Berri, and the Court must look first to the Shareholders Agreement, which contains Berri's only contractual obligation in respect of dividends. This obligation is found in clause 10 of the Shareholders Agreement.

92 Under clause 10, Berri assumed an obligation to declare and pay dividends by 30 April for the half year ended 31 December and by 31 October for the half year ended 30 June. This allowed Berri the time to determine the results of that half year period. The dividend was to be declared in respect of the results as shown in Berri's accounts "for that [six month] period", not some shorter period.

93 The obligation on Berri was, subject to the qualifications in clause 10, to declare and pay a "minimum" cash dividend. It was submitted that dividends were required to be declared and paid only after the six month period had ended, not in the middle of the period.

94 It was submitted that clause 7.7 of the Put and Call Option Deed merely referred to whatever dividends were actually declared under clause 10 of the Shareholders Agreement, but not paid, and that clause 7.7 imposed no "additional" obligation to pay any dividend beyond that expressly provided for in clause 10.

95 According to San Miguel's submissions, if its construction of the Transaction Documents is correct, there was no relevant breach of any agreement regarding the payment of a dividend. This is primarily because Berri was not obliged by the Put and Call Option Deed to pay the "additional dividend", being the Second Interim Dividend, as claimed by ICM.

96 San Miguel relied upon nine grounds which it submitted established that the construction contended for by ICM was untenable. The grounds were:

(a) First, if the parties had wanted to ensure that Berri made dividend payments to the ICM entities for part of a six month period they could have easily included such an obligation in the Shareholders Agreement to which Berri was a party, but did not.

(b) Second, an obligation imposed on Berri to pay a dividend does not naturally arise out of an obligation imposed on San Miguel to procure a dividend.

(c) Third, clause 21.9 of the Shareholders Agreement has no operation in respect of the Put and Call Option Deed, being a different agreement to which Berri is not a party, and ICM's construction therefore fails entirely. In the absence of a relevant primary obligation on Berri to declare and pay a dividend, San Miguel can have no obligation to procure anything. Indeed, San Miguel emphasised that ICM advanced no case that, pursuant to clause 7.7 of the Put and Call Option Deed, ICM (and its related entities) and San Miguel were obliged to procure Berri to pay to themselves a dividend which Berri otherwise had no obligation to provide. It was submitted that if this were the case, it would have required both the San Miguel and ICM representatives on the Berri Board to make decisions directly contrary to Berri's interests, and therefore contrary to their obligations to Berri as directors.

(d) Fourth, it was submitted that clause 7.7 of the Put and Call Option Deed does not create an entitlement in ICM to some new or additional dividend. It speaks of an entitlement to "all dividends".

(e) Fifth, if clause 10 is merely referred to in order to calculate the dividend entitlement, why does clause 7.7 not say that?

(f) Sixth, how can clause 10 operate in respect of a period of less than six months when it expressly states that it only applies to six month periods?

(g) Seventh, how can clause 10 operate within a six month period when it expressly states that it only operates after the expiration of the relevant six month period?

(h) Eighth, the literal construction of the second (and last) sentence of clause 7.7(a) is that it is only intended to ensure that the correct shareholder gets the dividend.

(i) Ninth, clause 7.7(a) is entirely related to the "entitlement", which contemplates an existing entitlement. There is no reference to "declare" in the procurement obligation. However, on ICM's construction the procurement obligation must be to have Berri "declare and pay" a new dividend. Clearly, this is not what the clause says. It simply uses the word "pays".

97 In short, San Miguel submitted that clause 7.7(a) of the Put and Call Option Deed did not impose an obligation on the parties, San Miguel, ICM, Shears personally, Agrifood and/or Agribusiness, to procure the Berri Board to declare any dividend, let alone any new or additional dividend to that specifically addressed in clause 10 of the Shareholders Agreement.

98 An alternative argument was advanced by San Miguel. The period referred to in clause 7.7(a) of the Put and Call Option Deed was expressed to commence "from the last declared and paid dividend" and extended to the completion of the acquisition. Although the last dividend was declared in July 2005, it was not paid until 27 October 2005. ICM received the benefit of that dividend payment at about this time to the extent of 49% in accordance with its shareholding. The correct period, if ICM had any entitlement to a further dividend under clause 7.7(a) was, according to the alternative argument, in respect of the period 27 October 2005 to 16 (the first agreed date for completion) or 28 December 2005 (the date of actual completion).

99 San Miguel also submitted that clause 10(a) of the Shareholders Agreement is confined to the declaration of dividends out of current trading profits.

100 It was said that the limitation to trading profits for which it contends is to be found in the words in clause 10(a) of the Shareholders Agreement, namely: "in respect of the results of the prior six months ..." San Miguel submits that the reference to "results" excludes capital profits, including capital profits carried to reserves in previous years, and also excludes trading profits from past years that remain available for distribution.

101 In relation to the alleged Compromise Agreement, San Miguel submitted that the claim against it based on the exchange of emails between Francis Jardeleza of San Miguel and Trevor Mackey of ICM on 19 December 2005 should fail for the following reasons:

(a) There was no so called "Compromise Agreement": the email relied upon was merely an administrative communication directed to completion of the transaction the subject of the Put and Call Option Deed;

(b) San Miguel has done all ICM alleges it had to do pursuant to the Compromise Agreement;

(c) ICM makes no allegation that the Compromise Agreement contained a term obliging San Miguel to "procure" Berri to pay a dividend to ICM, so the allegation that San Miguel breached such a term is without foundation;

(d) The alleged "Compromise Agreement" did not oblige Berri to declare or pay a minimum dividend, or San Miguel to procure Berri to do so;

(e) If the alleged "Compromise Agreement" ever existed it was superseded by the 28 December Deed; and

(f) If such a term had been pleaded and proved, it would have the effect that Berri was obliged to declare and pay a dividend to ICM (and also to San Miguel as owner of the other 51% shareholding) irrespective of whether there were sufficient distributable profits from which to pay the dividend. It would also have the effect that San Miguel was obliged to procure this payment. Such an outcome would amount to either an impermissible variation of both the Put and Call Option Deed and the Shareholders Agreement, or a contract collateral to the Put and Call Option Deed and Shareholders Agreement but fundamentally inconsistent with both.

102 Berri points out that the only claims made by ICM in its pleading against Berri are that Berri breached clause 21.9 of the Shareholders Agreement and/or the alleged Compromise Agreement by failing to declare and pay the alleged "dividend entitlement", or alternatively so much of the "dividend entitlement" as Berri had sufficient distributable profits to pay, on 28 December 2005. ICM makes no claim against Berri for breach of the Put and Call Option Deed, because Berri was not a party to that deed. However, ICM makes that claim against San Miguel, both as at 16 December 2005 and 28 December 2005.

103 Berri submitted that clause 21.9 of the Shareholders Agreement had no application to the circumstances of this case and did not give rise to any liability in Berri.

104 It submitted that clause 21.9 of the Shareholders Agreement (to which Berri was a party) only imposed upon Berri an obligation to do everything reasonably necessary to give full effect to the Shareholders Agreement and transactions contemplated by "it", that is, the Shareholders Agreement and no other.

105 The claimed "dividend entitlement" under clause 7.7 of the Put and Call Option Deed (including the claimed obligation on ICM and San Miguel under that deed to procure Berri to pay the "dividend entitlement" to ICM), was not a "transaction contemplated by" the Shareholders Agreement for the purposes of clause 21.9.

106 Had clause 21.9 of the Shareholders Agreement been intended to have a broader operation, it would have been drawn to say so. The parties to the Shareholders Agreement specifically referred to other agreements for the purposes of other clauses in the Shareholders Agreement (for example, in clauses 21.4, 21.8 and 21.14) when that was intended, but this was not the case with clause 21.9.

107 It was further submitted that clause 21.9 was no more than a further assurance clause for the purposes of the Shareholders Agreement. It was incapable of expanding the scope of Berri's obligations to declare and pay a dividend beyond those set out in clause 10 of the Shareholders Agreement.

108 Further and in any event, even if, contrary to Berri's case, the Court were to hold that clause 21.9 of the Shareholders Agreement operated beyond the Shareholders Agreement and extended to any "dividend entitlement" which might be held to have arisen under clause 7.7 of the Put and Call Option Deed (to which Berri was not a party), then it was submitted that clause 21.9 would only have required Berri to do everything reasonably necessary to "give full effect" to the "dividend entitlement".

109 It was further submitted by Berri that clause 21.9 did not impose a primary obligation upon Berri - it only imposed an obligation upon Berri to give effect to the dividend entitlement once the parties to the Put and Call Option Deed had taken the step of procuring Berri to pay the dividend entitlement. In the absence of the parties to the Put and Call Option Deed (namely ICM and San Miguel) procuring Berri to act, there was nothing to which Berri was required to give effect.

110 As to clause 7.7(a) of the Put and Call Option Deed, Berri contended that, notwithstanding that Berri was not a party to the deed and that ICM makes no claim against Berri pursuant to it, ICM's construction of clause 7.7(a) of the deed was incorrect.

111 The Put and Call Option Deed between ICM and San Miguel was entered into at the same time as the Shareholders Agreement. However, Berri submitted that, whereas the Shareholders Agreement (to which all the shareholders and Berri were parties) was concerned with the manner in which Berri would be managed and controlled (and contained, for example, the Dividend Policy that was to apply, in clause 10), the Put and Call Option Deed was between the shareholders only (ICM and San Miguel). The Put and Call Option Deed was concerned with the subsequent transfer by ICM to San Miguel of the remaining shares in Berri pursuant to the exercise of Put or Call Options which were granted under the deed.

112 Clause 7.7(a) of the Put and Call Option Deed was said to be one of several provisions relating to the exercise of the options. It provided a mechanism as to how a dividend declared by Berri pursuant to clause 10 of the Shareholders Agreement would be dealt with as between ICM and San Miguel (as Berri's shareholders). The mechanism applied in the event of a sale and transfer of shares in Berri from ICM to San Miguel (or its nominee) pursuant to the exercise of either the Put Option (by ICM) or the Second Call Option (by San Miguel).

113 Accordingly, it was submitted by Berri that clause 7.7(a) simply meant that ICM (as the outgoing shareholder) would be paid (in relation to the shares transferred) all dividends declared by Berri. That is, dividends declared pursuant to clause 10 of the Shareholders Agreement in respect of the period from the last dividend declared and paid prior to the exercise of the Option, and until completion of the share transfer. Clause 7.7(a) was not a separate and additional source of a dividend right or obligation as contended by ICM. It did not entitle ICM to require Berri to declare a further dividend in addition to those declared pursuant to clause 10 of the Shareholders Agreement. It also did not entitle ICM to require San Miguel to cause Berri to do so.

114 In support of its contention in respect of clause 7.7(a), Berri submitted that the second sentence of clause 7.7(a) was merely mechanical in operation. It did no more than provide a means for payment by Berri to ICM of any dividend declared by Berri under clause 10 of the Shareholders Agreement. The mechanism was necessary because, by reason of the share transfer to San Miguel pursuant to the exercise of the Put Option or the Second Call Option, ICM would no longer be a shareholder of Berri (and therefore would be someone to whom Berri would have no obligation to pay the dividend).

115 On this basis, Berri submitted that there is no proper basis for ICM to construe clause 7.7(a) of the Put and Call Option Deed so as to assert a "dividend entitlement". This is particularly so given ICM's construction incorporates only some parts of clause 10 of the Shareholders Agreement, to suit its own convenience after the event.

116 In relation to the alleged Compromise Agreement, Berri, in common with San Miguel, submits that the exchange of emails between Francis Jardeleza of San Miguel and Trevor Mackey of ICM on 19 December 2005 does not constitute a binding agreement which is enforceable against Berri. The claim against Berri founded on the Compromise Agreement should therefore be rejected. Berri makes this submission on the following grounds:

(a) the emails said to comprise the Compromise Agreement were exchanged between representatives of ICM and San Miguel, and if there was any such agreement, Berri was not a party to it;

(b) Mr Jardeleza was not authorised by Berri to enter into the alleged Compromise Agreement on its behalf;

(c) the emails could not constitute an amendment to the Shareholders Agreement which was binding upon Berri, since they did not comply with the necessary requirements for such an amendment. That is, they were not in writing signed by each party and there was no unanimous approval of the directors of Berri to amend the Shareholders Agreement; and

(d) even if the Court were to hold that there was a Compromise Agreement to which Berri was a party, any such agreement did not vary the parties' rights and obligations under the Shareholders Agreement and the Put and Call Option Deed.

Conclusions on Construction of the Transaction Documents

117 The three agreements comprising the Transaction Documents, namely the Share Sale Agreement, the Shareholders Agreement and the Put and Call Option Deed, are interconnected. Not only were they all entered into on the same day, 5 August 2004, the interconnection is also plainly apparent from the express terms which have already been referred to, namely: the Shareholders Agreement clauses 1.1; 1.6; 2(b); 10(a) (which specified that the Purchase Price was that "defined and determined in accordance with the [Share Sale Agreement]"); and 21.8; and the Put and Call Option Deed clause 7.7(a) (which specifically made reference to clause 10 of the Shareholders Agreement); and the Share Sale Agreement clause 1.1 (Defined terms - definition of "Purchase Price"); and clause 3 (calculation of the Purchase Price).

118 In particular, clause 21.8(a) of the Shareholders Agreement, to which ICM, San Miguel and Berri were all parties, strongly points to the interconnection of the three Transaction Documents. These in turn were defined in clause 1.1 to include the Shareholders Agreement, the Share Sale Agreement and the Put and Call Option Deed. Further, clause 21.8(a) provided that the Shareholders Agreement "together with the other Transaction Documents" constituted the "entire agreement between the parties in connection with its subject matter".

Commercial Object and Purpose of the Dividend Provisions

119 I find that the commercial object or purpose of the dividend provisions found in the Transaction Documents was that both the six monthly dividends and the final dividend payable by Berri to ICM were commercial compensation - in effect interest - for the deferred payment of the purchase price. This can be discerned from the following circumstances: The Put and Call Option Deed granted a Put Option capable of being exercised by ICM and Call Options capable of being exercised by San Miguel. The effect of those options was that the balance of ICM's shares in Berri were proposed to be transferred to San Miguel over a period of time. In effect, the Put and Call Option Deed provided for the deferred sale of the remaining 50% of ICM's shareholding in Berri to San Miguel. This also had the effect of deferring payment of the purchase price due to ICM for the balance of its shares. At the same time, ICM bound itself by the Put and Call Option Deed not to sell the remainder of its shares, or any part thereof, to any other party, for as long as the options granted in favour of San Miguel were capable of being exercised by it.

120 In this context, the commercial object and purpose of these provisions contained in the Transaction Documents as I have found it to be becomes apparent. The dividends were calculated by applying a commercial interest rate - the bank bill swap rate - to the relevant component of the outstanding purchase price. It can be inferred that it was more advantageous to ICM to receive franked dividends at this rate, rather than receiving interest payments on the deferred purchase price, as the latter would likely have been taxed to the full extent.

121 This conclusion as to the commercial purpose of the relevant provisions is supported by the context in which the transactions took place and the nature of those transactions when considered as a whole. The transactions were directed to facilitating ICM selling its entire shareholding in Berri to San Miguel over an extended period of time.

122 The conclusion as to the commercial purpose also draws support from the quantification formula which appears in clause 10(a) of the Shareholders Agreement.

123 Pursuant to clause 10(a), the calculation of the dividend was to be undertaken, in effect, by applying a bank bill rate to the outstanding purchase price, and then pro-rated for the period in respect of which the dividend was declared. The quantification formula expressed in clause 10(a) was: "The minimum amount of the dividend per Share will equal the product of the Rate multiplied by the Purchase Price (as defined and determined in accordance with the [Share Sale Agreement]) and then pro-rated as necessary to take account of the period in respect of which the dividend is being determined ..." The "Rate" was further defined in the defined terms of the Shareholders Agreement as:

... the rate, expressed as a yield per cent per annum (rounded up if necessary to four decimal places) that is quoted as the average bid rate on the Reuters monitor system page "BBSY" (or any page that replaces that page) at about 10.30 am (Melbourne time) on the relevant date for bank bills that have a tenor equal to (or no more than two Business Days shorter or longer than) 180 days. If no average bid rate is published, the average of bid rates quoted to the Company at about 11.00 am (Melbourne time) on that day by 'Banks for Bank Bills' of Commonwealth bank of Australia, ANZ Banking Group Limited, National Australia Bank Limited and Westpac Banking Group that have a tenor of 180 days.

The Purchase Price was that "defined and determined in accordance with the [Share Sale Agreement]". The Share Sale Agreement in turn, by clause 1.1 (Defined terms - definition of "Purchase Price") and clause 3 (calculation of the Purchase Price), specified what the Purchase Price was to be for the purposes of clause 10(a) of the Shareholders Agreement.

124 Clause 10(a) of the Shareholders Agreement therefore employed the following inputs in the quantification formula in order to arrive at a total dividend entitlement: a start date, an end date, a "Purchase Price", and a "Rate".

125 The quantification formula for the calculation of the dividend in clause 10(a) of the Shareholders Agreement was therefore linked directly to the Purchase Price for ICM's shares in Berri that were to be acquired by San Miguel. The formula was also linked to the period from the last dividend declared and paid to the completion of the transaction. Finally, a bank bill rate was applied.

126 In its opening, San Miguel relied on clause 4.5 of the Share Sale Agreement. It sought to use clause 4.5 to support a construction that clause 10 of the Shareholders Agreement only permitted dividends to be paid out of profits earned in a relevant six month period defined in clause 10, but not otherwise.

127 Clause 4.5 of the Share Sale Agreement provided that:

Notwithstanding that Completion occurs after 30 June 2004, the parties [San Miguel, the Shears Group companies and the numerous institutional vendors listed in schedule 1 to the agreement] acknowledge and agree that the Purchaser [San Miguel] and the Shears Group [ICM and related companies], as the continuing members of the Company, are entitled to all profits derived by, and must bear the burden of all losses incurred by, the Group from 1 July 2004.

128 I find that clause 4.5 is of no assistance. Clause 4.5 simply underscores the position that notwithstanding that the Share Sale Agreement was executed on 5 August 2004, San Miguel and members of the Shears Group (including ICM) continue to be entitled to all profits derived by the Berri Group after 1 July 2004 (and must also bear the burden of all losses incurred after that time).

129 It does not bear the meaning contended for by San Miguel.

Whether Dividends to be Paid out of "current trading profits"

130 San Miguel submitted that clause 10(a) of the Shareholders Agreement is confined to the declaration of dividends out of current trading profits.

131 Whether or not this is so depends in part on whether dividends can be declared out of both capital and trading profits, and whether capital profits carried to a reserve in previous years are available for the payment of a dividend in a later year. This will be discussed in detail below. San Miguel points to the text of clause 10(a) of the Shareholders Agreement, namely: "in respect of the results of the prior six months ..." San Miguel argues that by using the word "results", clause 10(a) excludes capital profits, capital profits carried to reserves in previous years, and trading profits from past years that remain available for distribution.

133 First, the phrase "in respect of the results" has a wide meaning. "Results" can equally refer to and include the status of reserves. The words "in respect of" are of wide import and point to an inclusive, rather that an exclusive, construction.

134 Second, clause 10(a) must also be read in the context of clause 10(c) of the Shareholders Agreement. Clause 10(c) excuses the company from paying a dividend calculated in accordance with clause 10(a) to the extent that the company does not have "sufficient distributable profits". This provision embraces the established legal position that distributable profits include capital and trading profits from previous years, including capital profits that have been carried to reserves.

135 Accordingly, in my opinion, there is no warrant for confining clause 10(a) of the Shareholders Agreement to the declaration of dividends out of current trading profits. The clause also contemplates declaring dividends out of capital and trading profits from previous years, including capital profits that have been carried to reserves.

136 I do not accept the contentions of the defendants as to the construction of clause 7.7(a) of the Put and Call Option Deed. On its proper construction, clause 7.7(a) creates a dividend "entitlement" for ICM. The dividend entitlement was for ICM to be paid its share of any dividend declared in respect of profits for the period to the final settlement in late December 2005.

137 Reading the clause as a whole, and in the wider context of its commercial purpose within the suite of Transaction Documents, San Miguel and ICM agreed that ICM was to have a dividend entitlement. The entitlement was in respect of the final period leading up to the completion of the full acquisition of ICM's shares in Berri, following the exercise of either the Put Option or the Second Call Option. Further, they agreed that ICM and San Miguel must procure that Berri pays that dividend to ICM immediately prior to the transfer of ICM's remaining shares to San Miguel.

138 The text of clause 7.7(a) establishes a number of points of relevance to this analysis.

139 First, the exercise of the Put Option triggered the entitlement to the final dividend because the entitlement was expressed to arise under clause 7.7(a) "on the exercise of the ... Put Option", which occurred on 11 November 2005.

140 Second, the party that was granted the dividend entitlement and the party to whom the dividends were to be paid was ICM, being "the member of the Shears Group holding the Shares to be acquired on the exercise of the Put Option".

141 Third, the period in respect of which the final dividend entitlement was payable was expressed to be "the period from the last declared and paid dividend until completion of that acquisition". That means the period from the declaration and payment of the last Berri dividend until ICM transfers the last parcel of its shares in Berri to San Miguel. The Put and Call Option Deed (as amended) allowed the Put Option to be exercised at any time after 3 October 2005. San Miguel was required to acquire the shares 15 Business Days after delivery of the Put Option notice. The Put Option Notice was given on 11 November 2005. The effect of the exercise of the Put Option was that San Miguel was obliged to complete the purchase of ICM's 49% remaining shares on 5 December 2005. By agreement, the contractual completion date was extended to 16 December and then to 28 December 2005.

142 The period in respect of which the additional or separate dividend was payable under clause 7.7(a) of the Put and Call Option Deed, commenced from the declaration of the last paid Berri dividend in 2005. The period commenced either in July 2005, when a dividend was declared in respect of the six months ending 30 June 2005. The period ended on either the proposed completion date of 16 December 2005 or the actual completion date on 28 December 2005.

143 These periods are different periods to the period addressed by clause 10 of the Shareholders Agreement. The period expressed in clause 10 addresses a different situation. It has no direct application to the present circumstances in issue because it applies in respect of completed periods of six months and to the position of continuing ownership. The period expressed in clause 10 does not apply to the completion of the transfer of ICM's remaining shares in Berri to San Miguel following the exercise of one of the options in the Put and Call Option Deed.

144 For present purposes, clause 10 is limited to providing the quantification formula of the calculation of the dividend which may become payable under clause 7.7(a) of the Put and Call Option Deed. The "period" for this calculation is governed not by the period expressed in clause 10, which served a different purpose, but is established by taking the date of the "last declared and paid dividend" as the start point, and "completion" of the "acquisition" as the end date.

145 Fourth, the concluding words for the first sentence in clause 7.7(a) provide for the calculation of the amount of the clause 7.7(a) dividend by the use of the expression "the amount of such dividend is to be determined in accordance with clause 10 of the Shareholders Agreement". The ordinary and natural meaning of this language in its context is that clause 10 establishes the quantification formula for the calculation of the dividend - which is precisely what it does.

146 Fifth, as has been earlier observed, the first sentence of clause 7.7(a) also provides that the relevant member of the Shears group of companies (in this case, ICM) will be entitled to "all dividends in the period from the last declared and paid dividend until completion of the Acquisition". This does not impose on obligation to declare a dividend in disregard of the legal obligations on the directors of Berri to do so in accordance with the relevant legal principles which will be later discussed.

147 Sixth, the second sentence of clause 7.7(a) uses unequivocal language to impose an obligation on both ICM and San Miguel. This part of the clause is expressed in mandatory terms. Both "must procure" that Berri pays the dividend entitlement to ICM. It is by this means that the entitlement arises.

148 Finally, the dividend payment is to be made immediately prior to the transfer of the final 49% share parcel from ICM to San Miguel. The words employed in clause 7.7(a) "immediately prior to their transfer to SMC" provide for the time at which Berri must pay the required dividend to ICM.

149 The construction of clause 7.7(a) that I have found gives effect to the commercial purpose of the agreements. It ensures that ICM as far as possible within the confines of the Transaction Documents and the general law, receives a commercial return on the deferred purchase price, by way of an interim dividend. This would be subject to the Berri Board being in a position legitimately to declare and pay such a dividend. In the event that an interim dividend were so declared, its quantification was to be calculated in accordance with clause 10 of the Shareholders Agreement. There was an element of commercial risk for ICM that no such dividend would be declared, because the Berri Board was not in a position to take this course, but nevertheless, that is what the parties agreed should happen.

150 To the extent that any difficulty arises for this construction from the use of simple individual words in some of the terms of the Transaction Documents, any such words must yield to business commonsense. The Court is able to discern the intent of the parties from an examination of the Transaction Documents as a whole. Accordingly, to the extent that particular words appear to be at odds with this intent, words may be supplied, omitted or corrected in the relevant instrument, where it is clearly necessary in order to avoid inconsistency. In these circumstances, the Court is bound to give effect to the intention of the parties as revealed in the Transaction Documents. In this case, any departure from or qualification to individual words used in clause 7.7(a) in order to give effect to the commercial purpose of the transaction is justified.

151 I accept that clause 10 of the Shareholders Agreement is directed at the payment of twice yearly dividends by Berri. Those dividends relate to completed six month periods. In respect of those periods, Berri's obligation under clause 10 is to declare and pay the dividend by the following 30 April and 31 October. There is no obligation under clause 10 to pay any separate or additional dividend before the completion date for the sale of ICM's final 49% shareholding in Berri to San Miguel.

152 The second sentence of clause 10(a) provides the quantification formula which is to be used to calculate the minimum amount of the dividend per share. The text specifically contemplates that the formula can be applied "pro-rated" (or pro-rata) to periods of less than six months.

153 As ICM contends, this cannot happen under clause 10, but it can happen when the quantification formula is incorporated by reference into clause 7.7 of the Put and Call Option Deed and used to calculate the amount of the final dividend entitlement prior to completion of the share sale by ICM to San Miguel.

154 Clause 10(b) further provides that all dividends are to be franked to the maximum extent permitted at law. As ICM submits, this forms part of the determination of the amount of the dividend that is referred to in clause 7.7(a).

155 Clause 10(c) further provides that Berri is only to be excused from its obligation to pay the minimum dividend specified in clause 10(a) "to the extent it did not have sufficient distributable profits from which to pay a dividend required to be paid under clause 10(a)". This provision reflects the company's legal obligation only to declare dividends out of profits. The same result would have been produced by s 254T of the Corporations Act 2001, as it stood in December 2005,[13] which also would have applied to any separate or additional dividends proposed to be declared under clause 7.7(a) of the Put and Call Option Deed.

The Period in Respect of Which the Second Interim Dividend Was Payable

156 I will now address an alternative argument advanced by San Miguel.

157 The period referred to in clause 7.7(a) of the Put and Call Option Deed was expressed to commence "from the last declared and paid dividend" and end at the completion of the acquisition. Although the last dividend was declared in July 2005 (the July Interim Dividend), it was not paid until 27 October 2005. ICM received the benefit of that dividend payment at about this time to the extent of 49% in accordance with its shareholding.

158 On this basis, it was submitted by San Miguel that, if ICM had any entitlement to a further dividend under clause 7.7(a) (ie. to the Second Interim Dividend), the correct period for this calculation was the period 27 October 2005 to 16 (the first agreed date for completion) or 28 December 2005 (the date of actual completion).

159 In my opinion, this submission does not have merit. Although it seeks to give a directly operative meaning to the word "paid" in the phrase "from the last declared and paid dividend", as found in the text of clause 7.7(a), so as to set this as the start date for the period of the interim dividend calculation, in my opinion, in the context of the clause this is a strained construction.

160 I prefer a construction which is to the following effect: the interim dividend, which is to be calculated pursuant to clause 7.7(a), is to be calculated in respect of the whole of the period from the declaration of the last interim dividend which was paid, until ICM transferred the final parcel of its shares to San Miguel.

161 If the alternative construction advanced by San Miguel were to be accepted, with the result that the start date for the calculation of any further interim dividend was the date of payment of the last dividend rather than the date of its declaration, an anomaly would result. The alternative construction would result in an accounting period between the declaration of the last interim dividend and the payment of that dividend being ignored for the purpose of calculating the anticipated compensatory further interim dividend payment. I cannot see any commercial purpose in such a regime, and I find it was not the intention of the parties to the agreement to effect this outcome.

162 On the other hand, the construction which I have found gives better effect to the commercial purpose identified. It again ensures that ICM, as far as possible within the confines of the Transaction Documents and the general law, receives a commercial return on the deferred purchase price, by way of an interim dividend. Any such dividend, if so declared by the Berri Board and paid, is to be calculated in respect of the whole of the period from the declaration of the last interim dividend which was paid until ICM transfers the final parcel of its shares to San Miguel.

Whether Part Only of the Second Interim Dividend Payable

163 ICM submitted that the effect of clause 7.7(a) of the Put and Call Option Deed was that, if there are insufficient distributable profits to pay both the full amount of the Second Interim Dividend entitlement to ICM, and a pro-rata entitlement to San Miguel as a holder of 51% of the shares, then San Miguel would forego all or part of its dividend entitlement. ICM submitted that under clause 7.7(a) San Miguel agreed and directed that the dividend to which it would otherwise be entitled should be paid and applied in favour of ICM so as to ensure that ICM received the full amount of its dividend entitlement. It was put that this necessarily followed from the fact that ICM and San Miguel agreed that ICM would be entitled to "all dividends" in the final period up to the amount of its Second Interim Dividend entitlement determined in accordance with clause 10 of the Shareholders Agreement.

165 The outcome contended for by ICM could potentially involve San Miguel sacrificing its entitlement to a significant dividend payment. In my opinion, clear words would be required in the Transaction Documents to effect this. The words "all dividends" found in clause 7.7(a) of the Put and Call Option Deed are not sufficiently definitive to achieve this and do not point to an intention on the part of the parties to effect this result.

166 By clause 25.1(a) of the Berri Constitution, dividends are required to be distributed "to the Members of the company according to their respective rights and interests", and by clause 25.1(b) interim dividends are required to be paid "to the Members". This is an important entitlement of the shareholders. If it had been intended by the parties to qualify this entitlement in respect of the majority shareholder San Miguel, a clause in the Transaction Documents specifically directed to the matter would be expected. There was no such clause.

167 In my view, it is reading too much into clause 7.7(a) of the Put and Call Option Deed to achieve the outcome contended for by ICM.

168 Clause 21.9 of the Shareholders Agreement is important because it imposes an obligation on Berri.

169 Clause 21.9 required both San Miguel and Berri to do everything reasonably necessary (including executing documents) to give full effect to "this agreement and transactions contemplated by it".

170 The defendants submit that the words "contemplated by it" refer only to those transactions contemplated by the Shareholders Agreement itself, and to no other transactions within the suite of Transaction Documents. This argument should be rejected.

171 In the defined terms in clause 1.1 of the Shareholders Agreement, "Transaction Documents" receives specific attention. As earlier observed, "Transaction Documents" in the Shareholders Agreement means:

(a) this agreement;

(b) the Company's constitution [ie. that of Berri Ltd];

(c) the SSA [ie. the Share Sale Agreement];

(d) the Option Deed; and

(e) any other agreement or document that the parties agree is a Transaction Document.

172 Further, the Shareholders Agreement, by clause 21.8(a), as earlier referred to, states that "This agreement, together with the other Transaction Documents" constitutes "the entire agreement between the parties in connection with its subject matter ..." Clause 21.8 clearly provides that the three Agreements comprising the Transaction Documents should be regarded as interconnected and comprising one entire agreement. This further supports the view that the transactions provided for in the Put and Call Option Deed are "contemplated" by the Shareholders Agreement.

173 Transactions pursuant to the Put and Call Option Deed are therefore transactions contemplated under clause 21.9 of the Shareholders Agreement. The payment of a dividend under clause 7.7(a) of the Put and Call Option Deed is a transaction contemplated by clause 21.9 of the Shareholders Agreement.

174 Thus, under clause 21.9 of the Shareholders Agreement, San Miguel and Berri were obliged to do everything reasonably necessary to ensure payment of any final dividend under and in accordance with clause 7.7(a) of the Put and Call Option Deed.

175 In the present case, clause 21.9 in the Shareholders Agreement is akin to a good faith obligation. The clause indicated the content and the limits of the duty. See: Overlook Management BV v Foxtel Management Pty Ltd.[14]

176 The obligation in clause 21.9 is expressed in terms of a positive range of duties which are generally defined as requiring the parties to do "everything reasonably necessary ... to give full effect to [the] agreement and the transactions contemplated by it".[15] However, in my opinion, the clause 21.9 obligation in a practical sense also carried with it a duty to avoid engaging in conduct which would work to frustrate any significant element of the agreement and the transactions contemplated by it. Engaging in such conduct would constitute a breach of the positive obligation.

177 In this way, a concomitant of the positive obligation found in clause 21.9 of the Shareholders Agreement is that both San Miguel and Berri would be in breach of the clause if they failed to take the required positive steps to ensure that the potential benefits conferred on ICM by clause 7.7(a) of the Put and Call Option Deed flowed to ICM. But, they would also find themselves in breach if they engaged in conduct that gave rise to unreasonable interference with or frustration of those potential benefits.

Background and Submissions in Relation to the Compromise Agreement

178 The background to the Compromise Agreement starts with the Notice of Exercise of the Put Option on 11 November 2005. Its contractual effect was that San Miguel was obliged to complete the purchase of the shares, initially on 5 December 2005.

179 After an exchange of correspondence between ICM and San Miguel, the completion date was deferred and San Miguel agreed to complete the purchase of the shares no later than 16 December 2005.

180 However, San Miguel defaulted in the performance of its obligation to complete on 16 December 2005.

181 The Compromise Agreement relied upon by ICM was alleged to have been made by an exchange of emails on 19 December 2005.

182 The relevant parts of the emails which are alleged to evidence the Compromise Agreement are as follows:

From: Trevor Mackey

To: fjardeleza@smg.sanmiguel.com.ph

Francis

I am advised that Mr Ang and Mr Shears spoke last night and have agreed to settle the purchase of the final 49% interest in Berri on 28 December 2005.

Mr Shears has undertaken to arrange his affairs to accommodate this further settlement extension and Mr Ang has committed to settle on 28 December even if FIRB is not available (ie he has advised that SMC will use alternative funds available to it to complete the acquisition of the Berri shares if the absence of FIRB approval prevents the use of the loan facility SMC has arranged). In any event, I note that a settlement date is consistent with prior comments to Mr Shears and me that FIRB approval will be available this Friday, 23 December 2005.

Before Mr Shears takes the steps needed to accommodate settlement on 28 December 2005, please confirm in writing the following by 5.00pm today our time:

1. settlement will occur on 28 December 2005 regardless of whether or not FIRB approval has been advised to SMC;
2. at this time, the purchase price for the Berri shares and the Botanical Loan will be 'set off' by way of the direction notices previously forwarded to you - so that only one net amount need be paid; and
3. in addition, Berri will declare and pay the required dividend to ICM Investments (as the sole shareholder in respect of the 49% parcel of shares) calculated up to 16 December 2005, and SMC will pay interest from that date until settlement on the gross purchase price for the shares at the same rate that applies to calculation of the Berri dividend.

I believe that all is in order concerning the release of the ANZ security over the Berri shares. Please advise if there is anything outstanding so far as SMC is concerned.

It is very important that I receive your confirmation before 5:00pm today our time.

Regards Trevor Mackey

.........................................................................................................

From: fjardeleza@smg.sanmiguel.com.ph

To: Trevor J. Mackey

We confirm that the settlement of the purchase of the final 49% interest in Berri will be on December 30, 2005. We hope that you will understand that we need to give 2 days notice to the lending banks before we can draw, and since December 26 and 27 are holidays in Australia, settlement cannot be earlier than December 30.

We also confirm that:

1. settlement will occur on 30 December 2005 regardless of whether or not FIRB approval has been advised to SMC;
2. at this time, the purchase price for the Berri shares and the Botanical Loan will be 'set off' by way of the direction notices previously forwarded to SMC - so that only one net amount need be paid; and
3. in addition, Berri will declare and pay the required dividend to ICM Investments (as the sole shareholder in respect of the 49% parcel of shares) calculated up to 16 December 2005, and SMC will pay interest from December 16-30, 2005 on the gross purchase price for the shares at the same rate that applies to calculation for the Berri dividend.

Sincerely, Francis

..........................................................................................................

From: Trevor Mackey [tjm@icm.com.au]

To: fjardeleza@smg.sanmiguel.com.ph

Dear Frances,

Thank you for your prompt response and I acknowledge and accept the terms therein.

Regards Trevor.

183 A later email on the same day was sent by Michael Read of National Foods to Emmanuel Erana of San Miguel concerning the proposed settlement. It said:

From: Read Michael

To: Emmanuel Erana, Kearney Neil, Linton Joy

Manny

Regarding the note below, it should be clear on the following points:

• Settlement can occur earlier, if FIRB is received, and we should have flexibility to do so
• Can an earlier day than 30th be selected, to avoid settlement hitches with the bank system prior to a major holiday
• Set off of the payment due can only be agreed if the documentation is re worked. The present form is not adequate and cannot be agreed to, not to mention the significant legal issues
• In respect to a dividend payment, there are insufficient retained earnings to make a dividend payment. It is not appropriate for commitments to be made regarding a dividend, where all criteria cannot be met. I will forward my dividend recommendation paper tomorrow.

184 The alleged Compromise Agreement between ICM, Berri and San Miguel was pleaded by ICM in its amended statement of claim to have had the following effect:

(a) completion of the acquisition of shares under the Put Option would occur on 30 December 2005;

(b) at completion Berri would declare and pay the dividend entitlement to the Plaintiff calculated up to 16 December 2005; and

(c) San Miguel would pay interest to the Plaintiff from 16 December 2005 to the date of completion at the same rate that applied to the calculation of the dividend payable by Berri.

185 ICM submits that this was a distinct and separate agreement, which sprang up independently from the agreement contained in the Transaction Documents. This separate agreement was to pay the claimed additional dividend entitlement referred to in clause 7.7(a) of the Put and Call Option Deed immediately prior to completion of that transaction.

186 It submitted that the agreement made by the exchange of emails was not merely a mechanical exercise, entered into in aid of the proposed settlement. ICM says that the Compromise Agreement arose from San Miguel's breach of its obligations to complete the acquisition and to pay the dividend on 16 December 2005, and was a compromise arrived at following the breach. Importantly, on ICM's submission, the language of the Compromise Agreement embraced an obligation on the part of San Miguel to procure payment of the dividend. It was expressed as an obligation to pay the dividend referred to in clause 7.7(a) of the Put and Call Option Deed.

187 ICM says further that the Compromise Agreement was made by Berri's secretary, Mr Jardeleza, in circumstances where Berri was to be the payer of the dividend, and Berri had a contractual obligation under clause 21.9 of the Shareholders Agreement to do everything reasonably necessary to ensure payment of the dividend immediately prior to completion.

188 ICM points to the fact that the Compromise Agreement upon which it relies, was in writing. It says that it resolved all issues about ICM's entitlement to the dividend by providing that San Miguel would complete on 30 December 2005 and would pay the dividend immediately prior to completion, calculated up to 16 December 2005. The dividend was calculated up to 16 December 2005, because the dividend was payable on that date under the Put and Call Option Deed.

189 San Miguel however submitted that the Compromise Agreement would involve an unwritten alteration of the Shareholders Agreement contrary to the clear text of clause 21.1, which provided that: "This agreement may only be altered in writing signed by each party".

190 San Miguel also argued that there was no term in the Compromise Agreement obliging it to procure payment of the dividend.

Conclusions in Relation to the Compromise Agreement

191 In my opinion, no binding Compromise Agreement arose as claimed by ICM or at all. There was no agreement that supplanted the obligations of the defendants under the Transaction Documents which I have found.

192 The exchange of emails between Francis Jardeleza of San Miguel and Trevor Mackey of ICM on 19 December 2005 which is relied upon to constitute the Compromise Agreement evidences no more than a confirmation of an existing set of obligations in relation to the making of the dividend payment at settlement. The exchange merely clarified that the dividend for the purposes of the settlement would be calculated up to 16 December 2005, and provided a facility for the completion of the transaction to proceed on the revised settlement date of 30 December 2005.

193 A mechanical arrangement was reflected in the emails, which did not evidence an intention to alter or supplement or replace any of the substantive rights and obligations contained in the Transaction Documents.

194 Further, even if a binding agreement giving rise to substantive rights did arise under the alleged Compromise Agreement, it was soon superseded by the Settlement Deed dated 28 December 2005, the 28 December Deed.

195 On Friday 23 December 2005, Mr Mackey of ICM wrote to Berri's secretary Mr Jardeleza reserving all of ICM's rights under the Shareholders Agreement and the Put and Call Option Deed in respect of the dividend.

196 Subsequently, on 28 December 2005, a board meeting of Berri was convened. Shears presided as Chairman. The board approved a settlement deed to be entered into between ICM, San Miguel, National Foods and Berri. The 28 December Deed was entered into on that day.

197 Under clause 6 of the 28 December Deed, all of the signatories expressly reserved their "respective rights, in relation to such dividend (or the right to seek damages or compensation for the failure to pay such dividend prior to completion)".

198 The 28 December Deed also confirmed the effect of clause 17.1 of the Shareholders Agreement, which provided that the Shareholders Agreement would terminate on transfer of the final 49%. Clause 5 of the 28 December Deed confirmed that the Shareholders Agreement would in fact terminate with effect from completion.

199 Clause 6 of the 28 December Deed also confirmed the effect of clause 17.2 of the Shareholders Agreement, that any such termination on the settlement and transfer of the remaining 49% parcel of ICM shares would be without prejudice to the accrued rights of the parties.

200 The last mentioned provisions of the 28 December Deed concerning termination of the Shareholders Agreement and the retention of accrued rights merely reflected the existing provisions of the Shareholders Agreement.

201 Clause 6 of the 28 December Deed added that the agreement in paragraph 5 in no way limited the obligations under clause 7.7 of the Put and Call Option Deed and clause 10 of the Shareholders Agreement with respect to the payment of a dividend to ICM. Clause 6 provided:

Paragraph 5 above in no way limits the obligations (if any) under clause 7.7 of the Deed [being the Put and Call Option Deed dated 5 August 2004] and clause 10 of the Shareholders Agreement paying a dividend to ICM for the period from 1 July 2005 to the Completion Date, which dividend (if payable in accordance with the terms of those documents) will be calculated at the Rate multiplied by the Purchase Price (as each term is defined in clause 10(a) of the Shareholders Agreement) and if payable, will be payable as soon as practicable after the Completion Date. The signatories who are parties to the Deed acknowledge that their respective rights I relation to such dividend (or the right to seek damages or compensation for the failure to pay such dividend prior to Completion) are expressly reserved, pending the outcome of further discussions between them.

202 The Completion date was specified in clause 2 of the 28 December Deed to be 28 December 2005. This revised the settlement date which had previously been arranged for 30 December 2005 pursuant to the emails of 19 December 2005.

203 In my opinion, the 28 December Deed was little more than an expedient mechanism entered into by the parties to enable the settlement of the transaction contemplated by the exercise of the Put Option, to proceed on 28 December 2005. Entry into the deed did not have any material bearing on the issues before the Court in this proceeding. It was unnecessary for ICM to reserve its rights. Completion of the transfer did not involve any election between inconsistent rights. Under the terms of the Transaction Documents, the completion of the transfer did not affect ICM's accrued rights in respect of the payment of a dividend, if such a payment was due to it. Nor did it affect any accrued rights in respect of the breach of the "Compromise Agreement". The 28 December Deed no doubt served a purpose by providing a measure of comfort to the parties to enable them to proceed to complete the transaction contemplated by the Transaction Documents. By this time, however, it was known to the parties that no dividend was proposed to be paid to ICM at the settlement fixed for 28 December 2005.

204 Importantly, the 28 December Deed did not vary or replace any substantive duty or obligation which arose under the Transaction Documents.

205 To the extent that it confirmed existing rights, the 28 December Deed acknowledged that ICM was entitled to proceed to press a claim for payment of a dividend under clause 7.7 of the Put and Call Option Deed and clause 10 of the Shareholders Agreement in respect of the period from 1 July 2005 to the Completion Date. Further, it was acknowledged that, if any such dividend was payable in accordance with the terms of the Transaction Documents, any such dividend would be calculated at the Rate multiplied by the Purchase Price as those terms were defined in clause 10(a) of the Shareholders Agreement.

206 Thus the 28 December Deed did not constitute an abandonment of rights secured under the Transaction Documents through an agreement by way of settlement. It confirmed the preservation of those rights, including those of ICM. Consequently and contrary to the submissions of San Miguel on the issue, if there were any breaches of the obligations established under the Transaction Documents, ICM's rights to prosecute the breaches was confirmed to remain intact. ICM's rights were not to be merged and thereby lost on the completion of the transaction on 28 December 2005, which was proposed to proceed without payment of any dividend to ICM.

The Berri Constitution (Dividends and Interim Dividends)

207 The Berri Constitution (dated May 1997)[16] is relevant to the determination of the issues in this case.

208 Berri's constitution provides, among other things, for the declaration of dividends and interim dividends. Relevant provisions include the following:

1.1 Definitions

"Dividend" means any distribution to Members in relation to shares as a dividend or interim dividend of any property (including, without limitation, money and paid up shares or other marketable securities of the Company or of any other body corporate (and includes any bonus);

19.1 Except as otherwise required by the Law and by the Listing Rules (if the Company is listed) or by any other applicable law or another provision of these Articles:

(a) the business of the Company is to be managed by the Board; and

(b) the Board may exercise each and every right, power or capacity of the Company,

to the exclusion of the Company in general meeting and the Members.

...

20.6 Convening of Board Meeting

A Director may at any time, and the Secretary must on request from a Director, convene a meeting of the Board.

...

20.11 Exercise of Powers by Board

A power of the Board unless and while it has been conferred exclusively under Article 18.5 or Article 19.3 were delegated exclusively to a committee of the Board under Article 20.12, is exercisable only:

(a) by resolution at a meeting of the Board at which a quorum is present; or

(b) by a resolution of the Directors under Article 20.14.

...

24.3 Accumulation of Reserves

The Board may do any or all of the following with the profits of the Company before declaring any Dividend to the Members from them:

(a) set aside any sum the Board determines as reserves to be applied, in the discretion of the Board, for any purpose it considers to be appropriate and use any sum so set aside in the business of the Company or invest any such sum in investments (which the Board may vary and deal with as it determines) which the Board determines; and

(b) carry forward any amount from them which the Board considers ought not to be distributed as dividends without transferring those amounts to a reserve.

25.1 Declaration of Dividends and Interim Dividends

The Board may:

(a) declare and authorise the distribution from the profits of the Company a dividend to be distributed to the Members according to their respective rights and interests, determine the property to constitute the dividend and fix the time for distribution; and

(b) authorise the distribution to the Members of an interim dividend if and to the extent that it appears justified by the position of the Company, determine the property to constitute the dividend and fix the time for distribution.

25.2 No interest on Dividends

No Dividend (whether in money or otherwise) bears interest as against the Company.

25.3 Obligation to Distribute

Where the Board declares a Dividend under Article 25.1 the obligation of the Company to make the distribution only arises where the Dividend is declared under Article 25.1(a), the Board fixes the time for distribution and that time has arrived and, if the Dividend is a distribution of money, no debt arises in respect of the Dividend until that time.

...

25.12 Declaration of Profits

For the purpose of Article 25.1, the declaration of the Board as to the amount of the profits of the Company and as to the amount of those profits available for distribution is conclusive.

...

25.14 Entitlement to Dividend pending Registration

The right to any Dividend declared on a share does not pass until the transfer of that share has been registered and the name of the transferee is entered in the Register.

209 San Miguel relied upon Article 25.12 of the Berri Constitution, which provides that a declaration of the Berri Board as to the amount of the profits of the company available for distribution is conclusive. This provision has no application. The Berri Board never made a declaration in December 2005 as to the amount of profits that Berri had available for distribution. In any event, ICM was not a shareholder in April 2006 so it cannot be bound by any declaration that was made at that time, even if such a declaration was made, and there is no evidence that any was made. In any event, clause 21.8 of the Shareholders Agreement could have been called in aid to govern any problem of inconsistency between the Transaction Documents, which are defined to include the Berri Constitution. The Put and Call Option Deed and the Shareholders Agreement are expressed to take priority over the Berri Constitution.

210 San Miguel and Berri also placed some reliance on Article 25.14, which provided that the right to any dividend declared on a share does not pass until the transfer of that share has been registered and the name of the transferee is entered on the register. This provision does not assist the defendants. No dividend was declared, whether interim or otherwise. ICM's claim is for damages for breach of contract which occurred prior to or contemporaneously with the transfer of the 49% shareholding.

211 ICM has adduced evidence of facts and circumstances that existed on 16 and 28 December 2005. It says that this body of evidence supports the conclusion that there were sufficient profits available to pay the required dividend.

212 ICM also submits, based on the observations of Jacobs J in Industrial Equity Ltd v Blackburn ("Blackburn"),[17] that the defendants bear the onus of rebutting that evidence.

213 Blackburn involved the High Court considering an application by the respondents, who were shareholders in the appellant, Industrial Equity Ltd, for a declaration that a "special distribution" declared by the company to its shareholders was not authorised by the company's constitution. The question was whether the company had profits at the relevant time in respect of which a dividend could properly be declared and paid. It was held in Blackburn that, in the situation of a company group, the relevant profits earned of a holding company must be profits in the company that is distributing the dividend. Group profits disclosed in the consolidated accounts of the holding company and its subsidiary companies could not be taken into account for this purpose.

214 As to the onus of proof, the facts of Blackburn were found to be that, although it was the respondents who were the shareholder applicants who were held to bear the onus, the whole of the information upon the subject matter, being its financial position, lay within the company's knowledge. As such, a failure to rebut such evidence as the respondents were able to adduce on the issue, from which an inference was open to be drawn in their favour, in the words of Jacobs J, "gave [the respondent's evidence] greatly added strength".[18]

215 I accept that, given that ICM adduced evidence on the issue of Berri's capacity to pay a further interim dividend at the end of 2005, without more, it may have been open to draw an inference in ICM's favour. This is because the information in relation to Berri's financial position at the relevant time, lay within Berri's and San Miguel's knowledge. As such, Berri and San Miguel bear an evidentiary onus to rebut any inference which may have been drawn in favour of ICM. Had they not rebutted any inference(s), in line with Blackburn, such inference(s) capable of being drawn from the evidence adduced by ICM may have been strengthened.

216 However, both defendants adduced evidence and advanced a body of material in support of their contention that there were no profits in the Berri company at the relevant time in respect of which a further interim dividend could properly be declared and paid. In these circumstances, I am not satisfied that it is open to draw any evidentiary inference, either in favour of or against ICM, from the way in which the case was conducted.

217 Further, it was ICM that pleaded the allegation that San Miguel and Berri breached their contractual obligations owed to it. Central to making good its allegation that it suffered loss and damage caused by the breaches alleged, was its case that Berri had sufficient profits at the relevant time in respect of which a further interim dividend could properly be declared and paid.

218 In Aktieskabet de Dansk Sukkerfrabrikker v Bajamar Compania Naviera SA ("The Torenia")[19] Hobhouse J observed that the "Legal burden of proof arises from the principle: [h]e who alleges must prove" and that the "incidence of the legal burden of proof can therefore be tested by answering the question: [w]hat does each party need to allege?" [20]

219 In my opinion, the issue of the burden of proof may be distilled down to the following: the party that makes the claim (in this case ICM) assumes the legal burden of proving each of the ultimate facts that it alleges. If this is not achieved, its claim fails.

220 ICM bore the legal onus throughout in respect of the ultimate facts it alleged.

221 On the other hand, it will be recalled that clause 10(c)(i) of the Shareholders Agreement provided:

(c) To the extent that:

(i) The Company does not have sufficient distributable profits from which to pay a dividend required to be paid under clause 10(a); and/or

(ii) ...

the Company is not required to pay that dividend.

222 Berri bore the legal burden of bringing itself within the proviso under 10(c)(i) of the Shareholders Agreement. See: Wallaby Grip Ltd v QBE Insurance.[21]

223 No meeting of the Berri Board was convened to consider the payment of any further interim dividend to ICM in late 2005, and no dividend in respect of the period 1 July 2005 to 16 or 28 December 2005 was either declared or paid.

224 San Miguel and Berri took no steps to convene such a board meeting to effect, or even consider an interim dividend declaration. San Miguel did not procure payment of the required dividend by Berri to ICM.

225 It will be recalled that under clause 3 and Schedule 2 each shareholder was entitled to appoint the following directors to the Berri Board: San Miguel - 2-4 directors; and the Shears Group - 1 director. Voting rights on the board were agreed to be exercised proportionately to the shareholdings of San Miguel and the Shears Group. By this means San Miguel established and maintained control of the Berri Board.

226 It will also be recalled that pursuant to clause 20.6 of the Berri Constitution, "A director may at any time, and the Secretary must on request from a Director, convene a meeting of the Board".

227 In the circumstances, the failure on the part of San Miguel to exercise its powers through its appointed directors to convene a meeting of the Berri Board to consider the declaration and payment of the Second Interim Dividend to the Berri shareholders, constituted a breach of clause 21.9 of the Shareholders Agreement.

228 Similarly, the failure on the part of the directors of Berri to convene such a meeting, constituted a concurrent breach on its part.

229 In short, the failure to convene a meeting of the Berri Board for the purpose of considering the declaration and payment of the Second Interim Dividend to the Berri shareholders, including ICM, contravened the obligation in clause 21.9 to do "everything reasonably necessary ... to give full effect to [the] agreement and the transactions contemplated by it".

230 ICM contended further that San Miguel actively took steps to procure the outcome that the Second Interim Dividend would not be paid.

231 ICM founded this allegation principally on the evidence given by Mr Read.

232 I am satisfied that Mr Read took a very clear view that it would not be in the commercial interests of National Foods or its parent San Miguel for Berri, to declare a Second Interim Dividend in favour of ICM in the latter part of 2005.

233 From about 1 September 2005 Mr Read knew that San Miguel "was in the process of acquiring the 49 percent" of Berri, as he described it, and that this transaction was proceeding with the expectation that it would be concluded later in the year.

234 I accept that from at least 7 December 2005 Mr Read was of the view that San Miguel should not agree to payment of the dividend to ICM, so as to maintain the net worth of Berri, the company San Miguel was about to acquire fully. This appeared from a handwritten note made by Mr Read on an email he had received from Mr Erana of San Miguel on 7 December 2005. Mr Erana copied Mr Read into an email he had received from another officer of San Miguel the week before on 29 November 2005 which provided calculations as to the dividend payable in accordance with clause 10 of the Shareholders Agreement. The internal email from Mela Naranjilla to Manny Erana, both of San Miguel, relevantly said:

29 November 2005

Hi Manny

Per the Put and Call Option Deed, DSS[22] is entitled to all dividends in the period from the last declared and paid until completion of SMC's acquisition of his shares. Amount will be determined in accordance with clause 10 of the Shareholders Agreement. Please see attached.

Computation of the dividend amount, as stated in Clause 10 of the Shareholders' Agreement, is as follows:

The minimum amount of the dividend shall equal the product of the Rate multiplied by the Purchase Price and then pro-rated as necessary to take account of the period in respect of which the dividend is being determined.

Rate means the rate, expressed as a yield per cent per annum that is quoted as the average bid rate on the Reuters monitor systme [sic] page "BBSY" at about 10:30am (Melb time) on the relevant date for bank bills that have a tenor equal to (or nor more than 2 business days shorter or longer than) 180 days. If no average bid rate is published, the average of bid rate quoted to the company at about 11:00am (Melb time) on that day by "Banks for Bank Bills' by Commonwealth Bank of Australia, ANZ Banking Group Ltd, national Australia Bank and Westpac Banking Group that have a tenor of 180 days.

Per Shareholders' Agreement, Berri will declare and pay by 30 April and 31 October each year, in respect of the result of the prior six months ending 31 December and 30 June respectively.

Just to give you an idea, below is a sample computation of DSS' dividends.

5.745% per Treasury

Per sec 10 of SA, dividend is com the purchase price and then pro r[illegible] period in respect of which the dividend [illegible] applied the same methodology in [illegible]

Let me know if you have questions.

Thanks,

Mela Naranjilla

Planning & Project Development

Corporate Planning Group

San Miguel Corporation.

235 This internal San Miguel email indicated an acceptance by San Miguel, as at 29 November 2005, that ICM (described in the email by reference to its Chairman, Shears, as "DSS"), was entitled under the terms of the Put and Call Option Deed and the Shareholders Agreement to payment of a dividend calculated in accordance with the terms of those Transaction Documents. That was San Miguel's position as at 29 November 2005.

236 However, the first handwritten note made on the internal San Miguel email by Mr Read of National Foods was: "1. SMC should not accept payment of Dividend to maintain net worth". This indicated that the San Miguel position was not accepted by Mr Read. Mr Read's explanation of this note was that "net worth" as used in his note was a "banking term" that related to finance arrangements which were then in place. I am not satisfied with this explanation of the note. Mr Read was not aware of banking ratios or the "net worth" requirements of Berri ever being put forward by Berri as a reason for not declaring or paying the Second Interim Dividend.

237 There was a co-incidence of commercial interests between Mr Read's position and that of San Miguel. However, I am not positively satisfied that an inference can be drawn from the evidence to the effect that the driving objective behind the failure on the part of San Miguel and Berri to convene a meeting of the Berri Board was to maintain the value of the company for the benefit of San Miguel, when Berri was about to become its wholly owned subsidiary.

238 Rather, I am satisfied that the evidence establishes that no meeting of the Berri Board was convened to consider the matter in late 2005 because it appeared to Mr Read that there would be insufficient distributable profits from which to distribute a further interim dividend. Given the earlier declaration and payment of the July Interim Dividend on 27 October 2005 in the sum of $7,658,393, there were insufficient distributable profits to support another interim dividend. This was made clear in Mr Read's draft dividend recommendation that was prepared for submission to the Berri Board, which will be considered below.

Loss and Damage - Whether Sufficient Distributable Profits

239 Given that the breach of the agreement arose from the failure to call a directors meeting, any loss and damage caused is to be judged by assessing what, in all likelihood would have been determined had such a meeting been convened on the issue.

240 On ICM's case, as Berri had sufficient distributable profits at the relevant time, the breaches as found caused loss and damage for which both defendants are responsible. It followed, so it was put, that the directors, had they convened a meeting on the issue in late 2005, would have determined to declare and pay the further interim dividend claimed by ICM.

241 However, whether it was more likely than not that, had the Berri Board met to decide the issue in late 2005, it would have determined to declare and pay the Second Interim Dividend for the year, falls to be considered by reference to two governing principles:

(a) First, the legal requirements to be observed in the declaration and payment of a valid interim dividend by a corporation; and

(b) Second, the standards to be observed by the board of directors of a corporation in determining whether or not to declare and pay an interim dividend.

242 The content and application of these principles is considered below.

Legal Requirements to be Met by Directors in Declaring and Paying Dividends

Declaration of Company Dividends (Final Dividends)- Section 254T

243 In December 2005, s 254T of the Corporations Act 2001 ("Corporations Act") provided that a company could only pay a dividend "out of profits". The section simply stated:

A dividend may only be paid out of profits of the company.

244 However, a later amendment to the Corporations Act replaced s 254T with a new s 254T. The statutory amendments to dividend law came into effect in respect of all dividends declared after 28 June 2010. The new s 254T replaces the former "profits" test and sets out a "solvency test", pursuant to which a company cannot pay a dividend unless:

(a) immediately before the declaration of a dividend, the assets of the company exceed its liabilities and that excess of assets is sufficient to meet the payment of any dividend declared; and

(b) payment of the dividend is fair and reasonable to the shareholders of the company as a whole; and

(c) payment of the dividend does not materially prejudice the company's ability to pay its creditors, e.g. if the company were to become insolvent as a result of the payment of the dividend.

245 The requirement that dividends be paid only out of profits under the former s 245T accorded with the common law. The principle has been applied numerous times by the courts.[23] It is this body of law that would have applied to the directors of Berri in considering the declaration and payment of a Second Interim Dividend in late 2005, had they been called upon to determine the issue.

246 Returning to s 245T as it was in the Corporations Act in December 2001, the term "profits" was not defined in the Act. Nevertheless, the term has been defined judicially to involve a comparison between the state of a business at two specific dates, with profits representing the amount of gain, if any, between those dates.[24]

247 In Industrial Equity ltd v Blackburn,[25] Mason J considered the rationale for the payment of company dividends out of profits in these passages:

Although s 376 (1) does not explicitly identify the source of the profits to which it refers, it should also be understood as referring to the profits of the company which declares and pays the dividend. The sub-section is not a recent innovation. It has a history in Australian company law dating back to s 48 of the Companies Act 1896 (Vict.), long before consolidated or group accounts became a gleam in the draftsman's eye. It has no statutory counterpart in the United Kingdom, though it is but a reflection of the principle enunciated in the English courts much earlier - see, e.g., Burnes v Pennell; In re National Funds Assurance Co.

The principle, which was certainly designed to protect creditors and, I think, shareholders, more particularly where there is more than one class of shareholder in a company, inhibits the payment by way of dividends out of a company's capital. It is founded on the proposition recognized in Trevor v. Whitworth that a reduction of capital can only be effected in accordance with the statutory procedure and that there can be no return of capital except in accordance with that procedure - In re Exchange Banking Co (Flitcroft's Case). The rule is frequently expressed, as here, in the form of a prohibition against dividends being payable except out of profits. [26]

248 As above, there is no definition of "profits" in the Corporations Act.

249 The definition of "profits" in the case law lacks precision. It has been expressed to be "the amount of gain" made by a business between two specific dates, as stated by Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd:[27]

The word "profits" has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. "Profits" implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. For practical purposes these assets in calculating profits must be valued and not merely enumerated. An enumeration might be of little value. Even if the assets were identical at the two periods it would by no means follow that there had been neither gain or loss, because the market value - the value in exchange - of these assets might have altered greatly in the meanwhile.

250 In Ford's Principles of Corporations Law the following is said about the observations of Fletcher Moulton LJ in Re Spanish Prospecting:[28]

Fletcher Moulton LJ went on to refer to how the comparison of assets could be made. There would have to be due allowance for any capital introduced into or taken out of the business in the period. Because the assets will for the most part exist in the shape of things or rights rather than money there must be a process of valuation. There will be a question whether to include gains or losses not directly connected with the routine conduct of the business, such as a rise in the value of a manufacturing company's factory freehold. Allowance may need to be made for the loss of value of plant which gradually wears out.

If the ascertainment of profit concerned only the proprietors of a business, they would be free to adopt any practice they liked. However, the ascertainment of profit for dividend is a matter of concern for creditors of the company who would not want to be prejudiced by returns of capital to shareholders disguised as dividends. In a company with different classes of shares, preference shareholders having priority for return of capital would also be concerned about disguised return of capital to ordinary shareholders. Hence, Fletcher Moulton LJ's fundamental conception of profits is applied in the context of dividends according to guidelines which later cases have developed.

251 Berri advanced a number of arguments as to why its reserves were not available to pay the required dividend to ICM.

252 It contended that the declaration of a dividend from reserves would reduce the value of the Berri shares being sold by ICM and acquired by San Miguel. However, this is the case whether the dividend is paid from reserves, prior year profits or current year profits. This consideration does not work to alter or qualify the contractual obligations of the parties they assumed under the Transaction Documents.

253 Berri also contended that the reserves were not available because they were originally created by Berri Fruit Juice Cooperative Limited. The Cooperative's activities were transferred to Berri as at 4 July 1985 by an order made under s 60 of the Co-operatives Act 1983 (SA). The effect of the order was that the undertaking of the Cooperative and all its property, rights and liabilities became the property, rights and liabilities of Berri. This did not change the legal character of the assets, reserves or liabilities. What was a profit reserve remained a profit reserve. On the publication of the order, the Cooperative was dissolved.

254 Not only did the legal character of the reserves not change following the assignment of the property of the Cooperative to Berri on 4 July 1985, Berri's audited accounts have since been consistently prepared on the basis that the reserves previously held by the Cooperative became Berri's reserves. Berri prepared its accounts on the basis that it simply stepped into the shoes of the Cooperative. The reserves appeared as such in every set of accounts prepared by Berri's directors and approved by its auditors between 1986 and 2004.

255 The accounting expert called by ICM, Mr Morris, considered this issue. His evidence on the point was not disputed by the accounting expert called by San Miguel, Mr Westworth. Mr Morris concluded that the general reserve arose from operating profits earned by Berri Cooperative, which vested in Berri, and that thereafter Berri had maintained audited accounts recording a general reserve that contained those operating profits. He concluded that the profits were available for distribution as dividends.

Conclusion as to the Availability of Reserves to Pay a Dividend in December 2005

256 I find that both legally and practically, profit reserves were available for Berri to fund an interim dividend in December 2005. The directors of Berri technically could have proceeded on that basis if they had considered the matter, provided that they were able to form the opinion required under the "Marra Test" as later described.

Berri's Submission that Past Losses Should be Offset Prior to Declaration of a Dividend

257 Berri submitted that there was a requirement that past losses be offset before a dividend could legally be declared out of current year profits or out of past year profits.

258 I do not accept this proposition. A dividend can be declared out of current year profits or out of past year profits without first recovering or offsetting accumulated losses from past years. A trading loss made in a previous accounting period does not have to be made good before a trading profit can be distributed as a dividend.[29] Similarly, it is not necessary to set off accumulated losses from past trading periods against capital profits that have been placed in a reserve before the capital profits in that reserve can be used to fund a dividend: see Glenville Pastoral Co Pty Ltd (in liq) v Federal Commissioner of Taxation ('Glenville Pastoral');[30] Marra Developments;[31] and Re Hoare & Co[32] (cf. Re John Fulton & Co Ltd[33]).

259 Further, Berri's practice in past years, consistently prior to 2005, had been to pay a dividend out of current profits notwithstanding the existence of accumulated losses from earlier years.

260 The accounting expert called by San Miguel, Mr Westworth, did not point to any accounting standard or principle requiring past accumulated losses to be offset against current profits or undistributed profits of past years before those profits can be used to pay a dividend. The highest he put the position was that it would be "commercially prudent" and "consistent with good accounting practice" to offset past losses, and although it was a permissible practice employed in the community to proceed otherwise, it was "not necessarily general practice".

261 I find that it was not in the usual case commercially prudent or consistent with good accounting practice to permit profits to be used to pay a dividend without first requiring past accumulated losses be offset against current profits or undistributed profits of past years, and it was not general practice in the commercial community to do so. Accordingly, the Directors of Berri in late 2005, after considering any accounting advice available to them on the issue and the financial position of the company may have adopted the past practice of the company, alternatively in the circumstances existing at the time and acting on any available advice and after considering the financial position of the company, may have declined to do so.

Berri's Submission on Payment of Dividends out of Capital Reserves

262 Berri contended that a dividend can only be paid out of a reserve created from capital profits if the company's equity (excluding reserves) is greater than its paid up capital at the time the dividend is declared.

263 However, this submission is not supported by the authorities.

264 Australasian Oil Exploration Ltd v Lachberg[34] places a reasonable but limited constraint on a company paying a dividend out of a capital profit. The High Court held that a company cannot pay a dividend out of a capital profit made on the sale of a single asset without considering the overall movement in the capital account in the period in question. The Court, comprising Dixon CJ, McTiernan and Taylor JJ, considered an argument put to it that if a company engages in a transaction where it disposes, otherwise than in the course of its trading or business activities, of a single capital asset for a price in excess of the value at which that asset stands in its books, it may lawfully distribute the casual profit so made among its shareholders whatever the capital position of the company might otherwise be. In rejecting this argument, the Court said:

This proposition was emphatically rejected by Wolff J. and we agree with him in thinking that this is not the law. It is enough on this point to say that a company has no capital profits available for dividend purposes unless upon a balance of account it appears that there has been an accretion to the paid-up capital (Lubbock v British Bank of South America (1892) 2 Ch 198, at p 201; Verner v General & Commercial Investment Trust (1894) 2 Ch 239, at pp 265, 266; Foster v New Trinidad Lake Asphalt Co Ltd (1901) 1 Ch 208, at pp 212, 213 and Cross v Imperial Continental Gas Association (1923) 2 Ch 553, at p 565. [35]

265 The effect of Lachberg is that, over the relevant accounting period, usually the financial year, there must have been an increase in capital - that is a profit - not a loss of capital, in order for there to be a distributable capital profit in the period. One profitable transaction within the period on capital account is not sufficient. However, it follows that if there is an overall capital profit achieved during the relevant accounting period, this may be available for a dividend payment.

266 Further, Berri's submission is at odds with the principle, supported by the authorities earlier cited, that profits, including profits carried to a reserve, may be distributed even though a previously incurred loss of paid up capital has not been made good.

267 In any event, Berri had a substantial surplus of equity at all relevant times. This appears from Berri's accounts for the years ended 30 June 2000, 30 June 2001, 30 June 2002, 30 June 2003 and 30 June 2004. For a decision as to a dividend that needed to be made by the directors in December 2005, the relevant balance of account was the balance sheet in the 30 June 2004 accounts. It shows a substantial surplus of shareholders' equity.

268 So far, I have made the following three findings on the payment of dividends out of reserves:

b) dividends may be paid out of current or past profits whether or not past losses have been made good, however, it is not commercially prudent or general practice in the community to do so; and

c) profits, including profits carried to reserve, may be distributed as a dividend as long as an overall capital profit has been achieved during the relevant accounting period.

Relevant Principles as to the Declaration and Payment of Dividends

269 "Final dividends" as used in these reasons, are those dividends declared after the final accounts for the period in question have been prepared for the company and adopted by its board.

270 The following principles relevant to the present case in relation to declaring and paying final dividends may be harvested from the case law.

(a) The starting point under Australian law in relation to the financial capacity of a company to declare dividends is as stated by Kitto, Taylor and Owen JJ in Glenville Pastoral:

Profits may, of course, be distributed by a company while a going concern even though a loss of paid-up capital previously incurred has not been made good. The profits may be distributed as soon as ascertained, or they may be carried to a reserve. Carrying an amount of profits to a reserve is not enough to convert it into capital, and accordingly it continues to be distributable. [36]

(b) Accordingly, dividends may be paid out of any assets of a company that are profits in the legal sense. Profits can be trading profits derived during the current financial year. It is also well-established that profits can be capital profits, in the sense of profits earned on the realisation of capital assets. They are likewise available for distribution as dividends, provided there has been an accretion to the paid up capital: see Glenville Pastoral;[37] Marra Developments;[38] and QBE Insurance Group Ltd v Australian Securities Commission.[39]

(c) Carrying an amount of profits to a reserve is not per se enough to convert it to capital, and accordingly it continues to be distributable.[40]

(d) An undistributed profit may be carried forward to a subsequent accounting period and used for dividend purposes.[41]

(e) Unrealised accretions to the value of a company's capital assets may be available for distribution as a dividend where it is clear that the accretion in value is of a permanent character: see Australasian Oil Exploration Ltd v Lachberg;[42] Marra Developments;[43] Dimbula Valley (Ceylon) Tea Co. Ltd v Laurie per Buckley J;[44] and Industrial Equity Ltd v Blackburn per Jacobs J.[45]

(f) A trading loss made in a previous accounting period does not have to be made good before a trading profit can be distributed as a dividend.[46]

(g) Similarly, it is not necessary to set off accumulated losses from past trading periods against capital profits that have been placed in a reserve before the capital profits in that reserve can be used to fund a dividend: see Glenville Pastoral;[47] and Marra Developments.[48] The same principle applies in England: Re Hoare & Co.[49] (cf. Re John Fulton & Co Ltd[50]). Once capital profits are available, the directors may decide to pay dividends out of those profits or set the profits aside in a reserve.

(h) The profits held in a reserve do not lose their character as profits simply because the company makes subsequent capital (or revenue) losses.

271 As the dividend claimed by ICM to be payable to it in this case would be classified as an "interim dividend", the special considerations relating to the declaration of interim dividends call for some attention.

272 The claimed dividend was an interim dividend, simply because an interim dividend, if it is permitted to be declared under a company constitution, is declared in advance of the preparation of a formally adopted balance sheet or profit and loss statement for the year in question. This would have been the case for Berri in the present circumstances, when under the Transaction Documents, and subject to it having sufficient distributable profits, Berri incurred a liability, as I have found, to declare such a dividend and pay it by 16 or 28 December 2005. This was well prior to the preparation of Berri's financial statements for the 12 month period ending 31 December 2005 which was completed in April 2006.

273 Traditionally, company law has distinguished between a declaration of a final dividend by the company in general meeting or the directors (depending upon whether the company's constitution gives the shareholders or the directors the power to declare a dividend), and a resolution (typically, under the corporate constitution, a resolution of the directors) to pay an interim dividend.[51]

274 The distinction was made in the Berri constitution in clause 25.1 in the following terms:

25.1 Declaration of Dividends and Interim Dividends

The Board may:

(a) declare and authorise the distribution from the profits of the Company a dividend to be distributed to the Members according to their respective rights and interests, determine the property to constitute the dividend and fix the time for distribution; and

(b) authorise the distribution to the Members of an interim dividend if and to the extent it appears justified by the position of the Company, determine the property to constitute the dividend and fix the time for distribution.

275 Before the June 2010 statutory amendments to dividend law, a dividend could be paid only out of profits, which are determined according to annual financial statements adopted by the directors and laid before the company in general meeting.[52]

276 Thus, a final dividend is made after, and reflects the results of, the completed year of trading as expressed in the financial statements.[53]

277 The declaration of a final dividend, as opposed to an interim dividend, gives rise to a debt payable by the company to the shareholder immediately or from a date stipulated for payment.[54]

278 A declaration, resolution or authorisation by the directors of the company as to the payment of an interim dividend is provisional. Prior to the change to dividend law of June 2010, an interim dividend reflected the directors' anticipation of the profits to be disclosed in the final accounts. Since June 2010, an interim dividend has reflected the directors' anticipation that assets will exceed liabilities in the final accounts by at least the amount of the interim dividend, and their belief that payment of the dividend is fair and reasonable to the shareholders of the company as a whole and does not materially prejudice the company's ability to pay its creditors.

279 Unlike in the case of a final dividend, a declaration, resolution or authorisation by directors to pay an interim dividend does not create a debt owed by the company to shareholders. The resolution to pay an interim dividend may be rescinded or varied before the dividend is actually paid. This was confirmed in the early case of Lagunas Nitrate Co v Schroeder,[55] which has some elements in common with the present case. In that case, at a meeting of the directors of the plaintiff company convened on 16 March 1897, it was resolved that an interim dividend be declared for the current year payable on 20 April 1897. On 6 April 1897 the solicitors of the company advised the directors that no profits ought to be distributed until the termination of certain litigation which was then pending. It appeared to Joyce J who heard the matter that the board could then reconsider the matter. Joyce J observed that: "As at present advised I do not see why the board of directors might not before an interim dividend is actually paid, acting bona fide, reconsider the question as to whether it ought to be paid at all". The litigation had ended at the time of the trial, and Joyce J found that as matters then stood, it "would not be proper to pay any interim dividend in respect of the period in question". In these circumstances his Honour did not hesitate to make a declaration that the plaintiff company was not bound to pay the dividend, in spite of the resolution of the directors, and indeed ventured the opinion that "it would be very improper if they did so".

280 Other cases in Australia are to the same effect as Lagunas Nitrate Co v Schroeder.[56] See: Marra Developments;[57] and Brookton Co-operative Society Ltd v FCT.[58]

281 In this case, Article 25.1 of Berri's constitution permitted the Board to authorise the payment to its members of an interim dividend.

282 An interim dividend could be paid out of profits which, at the time of the declaration and payment, the directors genuinely anticipated would be disclosed in the final accounts.[59]

283 The declaration of an interim dividend required that the directors form genuine opinions that there are profits from which it can be paid. In other words, the directors need to be satisfied that there are sufficient available profits. Those profits may be revenue or capital profits and may include past capital profits that have been placed in a reserve. The directors must form a genuine opinion that there are sufficient distributable profits out of which they can pay the interim dividend, and that those profits will be disclosed in the financial statements for the company when they are prepared.[60]

284 In order to declare any interim dividend, the board of a company was required to form a genuine opinion, at the time of declaring the interim dividend, that, when the final accounts are produced, profits would actually exist from which the interim dividend could be paid, although there is scope to withdraw the declaration before the interim dividend is paid.[61]

285 To these observations I add that the formation by the directors of a "genuine" opinion of the kind in question prior to declaring an interim dividend, has a subjective and an objective element. The directors' opinion must be honestly held and based on reasonable grounds.

286 Clause 1.1 of the Berri Constitution defined "Dividends" to include interim dividends. Further, clause 25.1 authorised the Berri Board to make a distribution to the members of an interim dividend if and to the extent that it appears justified by the position of the Company. It also authorised the Berri Board to determine the property to constitute the dividend and fix the time for distribution.

287 The difference between final dividends and interim dividends, both in terms of the definition of each category of dividend and the criteria to be used by a company board in properly declaring a dividend of either variety, was explained in Marra Developments by Hutley JA.[62] His Honour there considered the position in the context of s 376 of the Companies Act 1961, which in similar terms to s 245T of the Corporations Act 2001 read as follows:

(1) No dividend shall be payable to the shareholders of any company except out of profits or pursuant to section 60.

It was contended that the words "payable ... out of profits" could not be understood literally, in that the profits of a company were not a segregated fund from which something was physically extracted for the purpose of distribution. I find no difficulty in giving a literal meaning to the words. Profits of a company, for the purpose of paying a final dividend, can only be understood against the accounts which have to be laid before the company: see Companies Act 1961, s 162. These accounts have to disclose profits and losses, and the directors of the company have the duty to ensure that the profit and loss account gives "a true and fair view of the profit or loss of the company": s 162(11). When s 376(1) provides that no dividend shall be payable except out of profits, what it means, in relation to a final dividend, is that the laying before this company of a profit and loss account and balance sheet which truly and fairly discloses a profit out of which the dividend may be paid is a pre-condition of the shareholders acquiring any right to a dividend. Article 116 requires that this company declare dividends. Subject to the shareholders voting in favour of the directors' recommendation, there is no other condition to their right to the dividend prescribed by s 376. The conditions having admittedly been fulfilled in this case, the dividend was payable out of profits.

The position of an interim dividend is different but, in relation to s 376, may be similarly explained. The profits out of which it is paid may be estimated, not disclosed in a formal balance sheet or profit and loss account: Lucas v Fitzgerald Blackburn v Industrial Equity Ltd. The dividend is wholly provisional and anticipates the profits to be disclosed in the final accounts. Its declaration requires that the directors form opinions that there are profits from which it can be paid. The profits from which an interim dividend is paid are profits which the directors anticipate would be disclosed when the final accounts are produced. The profits out of which it is to be paid are profits which the directors believe will be disclosed in anticipated accounts. In my opinion, s 376(1) can also be applied to interim dividends, with this difference - the profits only have to be disclosed in such accounts as enable the directors to form a genuine opinion that the profits out of which they will be paid will actually exist. In the case of interim dividends, there is no distinction between "payable" and "paid", as only on payment does the shareholder acquire a right: Lagunas Nitrate Co v Schroeder and Co and Schmidt. Even if I am wrong in the way s 376(1) should be applied to interim dividends, the analysis of the way it applies to a final dividend could stand. [63]

289 Thus the valid declaration of a dividend requires that the directors form genuine opinions that there are profits from which it can be paid. In the case of a final dividend that opinion is to be informed by a profit and loss account and balance sheet prepared for the company which truly and fairly discloses a profit out of which the dividend may be paid.

290 However, in the case of an interim dividend, the opinion of the directors can only be informed by what the directors anticipate will be disclosed when the final accounts for the period are produced. Nevertheless, there must be reasonable grounds, whether derived from authoritative preliminary accounts or from other reasonably reliable sources, that enable the directors to form a genuine opinion that the profits out of which an interim dividend are to be paid will actually exist when the final accounts for the period are produced and put before the board. This opinion must be formed at the time the interim dividend is declared, although there is scope to withdraw the declaration before the interim dividend is paid.

291 Applying the test in Marra Developments to the present facts, the question becomes: if they had been called upon to consider the matter on or prior to 16 or 28 December 2005, would the directors of Berri have formed a genuine opinion that when the final accounts for the year were produced, they would disclose actual profits existing in the company at the time when it was proposed that the interim dividend would be declared and paid, out of which the Second Interim Dividend could be paid?

292 As the application of this test is central to the determination of the remaining issues, I will call this the "Marra Test" in the balance of these reasons.

293 The requirement that dividends be paid out of profits takes precedence over, or at least informs the interpretation of, contractual rights held by shareholders to be paid dividends.

294 In Bond v Barrow Haematite Steel Company[64], Farwell J considered a circumstance in which preferential shareholders sought to rely on contractual rights under the company's constitution to be paid dividends. The plaintiffs argued that the provisions restricting payment of dividends out of profits did "not apply to shares on which a fixed preferential dividend is payable". Farwell J responded by holding that:

In my opinion this is not so. The necessity for a declaration of a dividend as a condition precedent to an action to recover is stated in general terms in Lindley on Companies ... and it is obvious that such a declaration is essential, for the shareholder has no right to any payment until the corporate body has determined that the money can be properly paid away.[65]

295 Farwell J went on to find that the directors acted properly in not declaring a dividend. He held that:

The Courts have, no doubt, in many cases, overruled directors who proposed to pay dividends, but I am not aware of any case in which the Court has compelled them to pay when they have expressed their opinion that the state of the accounts did not admit of any such payment. In a matter depending on evidence and expert opinion, it would be a very strong measure for the Court to override the directors in such a manner.[66]

296 These statements of principle apply to what would have been the Second Interim Dividend to be paid by the Berri Board in respect of a period during the financial year ended 30 June 2006. Thus, even assuming they had to consider whether to pay a Second Interim Dividend on 16 or 28 December 2005, there was no legal or contractual basis for the Berri Board to ignore what the profits would be "when the final accounts were produced". Such an approach would have been contrary to law.

297 Further, and in any event, the terms of clause 7.7(a) of the Put and Call Option Deed merely required the payment of all dividends declared in the relevant period. It did not require payment of dividends declared in disregard of the relevant legal principles applicable to the payment of the interim dividends including the application of the "Marra Test".

Sanctions and Penalties for Improper Declarations and Payments of Dividends

298 The Corporations Act and the case law provide for sanctions and penalties in relation to improper declarations and payments of dividends. This serves to underscore the importance of the decision making process in declaring and paying dividends by directors and other senior financial managers who find themselves involved.

299 Leeds Estate, Building, and Investment Company v Shepherd concerned payments of dividends out of capital (not by way of capital reduction). In the course of his reasoning, Stirling J observed:

The law prohibits the payment of dividends out of capital, and it may well be that directors are called upon to exercise greater care when they are in danger of violating such prohibition than when they apply the capital for purposes unquestionably within the objects of the company. [67]

300 The sanctions and penalties which may be imposed in relation to improper declarations and payments of dividends are various.

301 A shareholder who disputes the validity of a declaration of dividend may obtain an injunction to restrain payment.[68]

302 If the dividend is paid in contravention of s 254T and without compliance with the procedure for an authorized reduction of capital, the company contravenes s 256D. That section provides that, while the company is not guilty of an offence, any person who is involved in the company's contravention may be liable under the civil penalty provisions.

303 A director or other officer who authorizes an improper payment of dividend could be in contravention of s 180, which imposes the duty of care and diligence. Even if the contravention were not dishonest, there could be liability to a civil penalty.[69]

304 Under case law directors who authorize payment of a dividend out of capital may be personally liable to repay the amount of the dividend to the company. See: Re Oxford Benefit Building Society;[70] Re City Equitable Fire Insurance Co Ltd;[71] and Mackie v Clough.[72]

305 The payment of a dividend, whether or not it is paid out of profits as required by s 254T, is deemed to involve the company incurring a debt.[73] The debt is taken to be incurred when the dividend is paid or, if the company's constitution allows for the declaration of dividends, when the dividend is declared: s 588G(1A). A director may contravene s 588G if the company is insolvent at the time when the debt is incurred, or becomes insolvent by incurring the debt, where there are reasonable grounds for suspecting that the company is insolvent or would become insolvent in that way. A director is liable to a civil penalty order for contravention of s 588G.

Standards to be Observed by the Board in Declaring an Interim Dividend

306 In Morley v Statewide Tobacco Services Ltd,[74] a case about insolvent trading, Ormiston J pointed to the former company reporting provisions and said that the presence of those provisions meant that:

... Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information either available to him or which he might with fairness demand from the executives or other employees and agents of the company. [75]

307 To similar effect, Tadgell J in Commonwealth Bank of Australia v Friedrich and Ors[76] expressed his agreement with what had been said in Statewide Tobacco Services Ltd v Morley, and added:

As the complexity of commerce has gradually intensified (for better or for worse) the community has of necessity come to expect more than formerly from directors whose task it is to govern the affairs of companies to which large sums of money are committed by way of equity capital or loan. In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. In particular, the stage has been reached when a director is expected to be capable of understanding his company's affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity; Moreover, he is under a statutory obligation to express such an opinion annually. I think it follows that he is required by law to be capable of keeping abreast of the company's affairs ... [77]

308 These passages were cited with approval in Australian Securities and Investments Commission v Healey[78] ("Centro").

309 Centro was about financial reporting and the responsibilities of directors in relation to that task. Middleton J in the course of his reasons also made important observations about the standards to be observed by directors in undertaking their duties generally.

310 Centro also cited with approval the observations of Rogers CJ Comm Div in AWA Ltd v Daniels[79] who said:

A director is obliged to obtain at least a general understanding of the business of the company and the effect that a changing economy may have on that business. Directors should bring an informed and independent judgment to bear on the various matters that come to the Board for decision. [80]

311 Middleton J in Centro also cited the New South Wales Court of Appeal decision of Daniels v Anderson.[81] There, Clarke and Sheller JJA explained that "the modern cases to which we have referred, set in the context of a legislative pattern of imposing greater responsibility upon directors, demonstrate that the director's duty of care is not merely subjective, limited by the director's knowledge and experience or ignorance and inaction". Their Honours went on to endorse[82] observations made in the New Jersey decision of Francis v United Jersey Bank[83] which included the following passage:

Because directors are bound to exercise ordinary care, they cannot set up as a defence lack of the knowledge needed to exercise the requisite degree of care.

...

While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of the financial statements.

... The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements.[84]

312 Deputy Commissioner of Taxation v Clark[85] was also noted in Centro where Spigelman CJ (with whom the other members of the New South Wales Court of Appeal agreed) reviewed the authorities and said that:

What constitutes breach of the standards of care and of diligence, in a particular case, will depend on a wide variety of circumstances including the precise nature of the business conducted by the company and the composition of its board. However, the case law indicates that there is a core, irreducible requirement of involvement in the management of the company.

Although the standard of skill may vary in accordance with the particular skills of the director, the core, irreducible requirement of skill involves an objective test, such as "ordinary competence" (3M Australia Pty Ltd v Kemish (at 373) per Foster J) or "reasonable ability" (Rema Industries & Services Pty Ltd v Coad [1992] FCA 114; (1992) 7 ACSR 251 at 259, per Lockhart J). An equivalent objective test applies to the core, irreducible requirement of diligence, such as "reasonable steps to place themselves in a position to guide and monitor the management of the company", per Rogers J in AWA Ltd v Daniels (at 864), adopted by Clarke JA and Sheller JA on appeal in Daniels v Anderson (at 501).[86]

All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the statutory declaration adopting the company's financial statements. Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company's financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.[87]

314 The case law must also be considered against the backdrop of the statutory standard of care and diligence set for company directors and officers in relation to the conduct of company affairs. Section 180(1) of the Corporations Act provides:

Care and diligence - directors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

315 Drawing these threads together in the present context, in my view the formation of the directors' opinion, if they had been asked to form one at or prior to 16 or 28 December 2005, as to whether the financial statements of Berri when they were prepared would disclose distributable profits in existence as at those dates from which the Second Interim Dividend could be paid, should be assessed against the following standards:

(a) each director would have had a reasonably informed opinion of the company's financial capacity and would have been familiar with its financial status;

(b) each would have kept abreast of the company's affairs and would have possessed a general understanding of the company's business;

(c) if, in the course of making the decision, matters arose which called for further inquiry before the decision was made, those inquiries would be made;

(d) each would bring to the decision an informed and independent judgement;

(e) in the making of the decision, each would exercise a standard of reasonable care and diligence expected of a director in the making of a decision of the type in question;

(f) in advising the board, each senior financial officer charged with the giving of advice would exercise a standard of reasonable care and diligence expected of an officer in that position in the giving of advice of the type in question;

(g) in forming their opinions at the relevant time, in accordance with these standards, the directors would be required to arrive at a genuine opinion, that is an opinion which was honestly held and based on reasonable grounds; and

(h) the directors would form their opinion on the basis of all credible and relevant information available to them at the time, such as reliable monthly management accounts and reliable reports from senior management, if any were available.

Sufficient Distributable Profits under Clause 10(c)(i) Shareholders Agreement

316 It was common ground that any obligation placed on Berri to declare and pay the claimed dividend entitlement was subject to Berri having sufficient distributable profits.

317 It will be recalled that clause 10(c)(i) of the Shareholders Agreement provided that to the extent that Berri did not have sufficient distributable profits from which to pay a dividend required to be paid under clause 10(a), the company was not required to pay that dividend. This provision reflected the company's legal obligation only to declare dividends out of profits. The same result was produced by s 254T of the Corporations Act 2001, as it stood in December 2005.

318 ICM further contended (and Berri denied) that if there were some lesser amount of distributable profits, short of the quantum of the dividend claimed by it, then a smaller dividend was required to be paid.

319 Whether Berri had sufficient distributable profits at the time, is relevant to the question as to what the directors of Berri would have decided as to the declaration and payment of the Second Interim Dividend on or shortly prior to 16 or 28 December 2005, had they been called upon to do so, and had they properly applied the law.

Berri's Factual Contention - No Sufficient Distributable Profits

320 Berri contended that it did not have sufficient distributable profits, either at 16 or at 28 December 2005 to declare and pay the dividend entitlement claimed by ICM.

321 By October 2005, Berri had already paid dividends of $7,918,000 out of its profits for the 2005 financial year.

322 Any dividend declared and paid on or prior to 16 or 28 December 2005 would have been a (further) interim dividend out of Berri's profits for the 2005 financial year.

323 In those circumstances, it was submitted that Berri could not declare and pay the Second Interim Dividend, or any further dividend, out of the profits for the 2005 financial year on or prior to 28 December 2005 unless the Berri Board formed the opinion (in late December 2005) that the final accounts of Berri for the 2005 financial year (when finalised some months later) would disclose a profit for the 2005 financial year of in excess of $7,918,000. Even then, so it was submitted, Berri could only declare a dividend to the extent of such excess. That was so because, in order to declare any interim dividend, the Board was required to form a genuine opinion, at the time of declaring the dividend, that, when the final accounts were produced, profits would actually exist from which that dividend could be paid.[88]

324 Berri submitted that the Board did not and could not have formed the opinion on or prior to 28 December 2005 that the final accounts of Berri for the 2005 financial year would disclose a profit in excess of $7,918,000 for a number of reasons, which included:

(a) the Board was aware that there would be significant adjustments in the finalisation of Berri's accounts for the 2005 financial year due to the integration of the businesses of National Foods and Berri prior to the completion of the financial year;

(b) the Board (or at least some members of it) also knew, and the remaining members of the Board would have known had they been required to consider the authorisation of a payment of a further dividend, that further substantial adjustments to the accounts for the 2005 financial year would be required due to the settlement of a dispute with ACI Operations Pty Ltd ("ACI") and a related dispute with Brickwood Holdings Pty Ltd ("Brickwood");

(c) Berri's operations report for December 2005, prepared shortly after 31 December 2005, showed a net profit for the 2005 financial year of $5.6 million (i.e. an amount less than the July Interim Dividend that had already been declared and paid); and

(d) as at 28 December 2005, there were no finalised or audited accounts of Berri.

ICM's Case on Available Distributable Profits

325 ICM contended that Berri had at least the following actual and forecast profits available for distribution in December 2005:

Capital profits from land and buildings that formed part of the Asset revaluation reserve

Further capital profits attributable to intangibles that formed part of the Asset revaluation reserve

less write off of goodwill on purchase of ACI Riverland

326 ICM submitted further, that if past capital profits attributable to intangibles are put to one side, the distributable profits available to satisfy ICM's dividend of $3.472 million were $20.722 million.

327 It said, on the other hand, if the further accumulated profits that were attributable to intangibles and that formed part of the asset revaluation reserve before it was restated on 21 April 2006 are taken into account, the distributable profits totalled $51.633 million.

328 On either view, ICM submitted that there were ample distributable profits from which Berri could have paid the Second Interim Dividend to ICM.

329 Both ICM and San Miguel called expert accounting evidence which addressed the question of the availability of distributable profits available to Berri in late 2005.

330 ICM called Mr Morris, and San Miguel called Mr Westworth.

331 A central difference between the two experts was their treatment of reserves.

332 The evidence of the experts diverged considerably on the two principal accounting issues:

(a) whether, for the purposes of clause 10(1)(c) of the Shareholders Agreement, there were sufficient distributable profits available to declare and pay a second interim dividend as at 16 or 28 December 2005; and

(b) what the directors of Berri would have decided as to the declaration and payment of a second interim dividend as at 16 or 28 December 2005, had they been called upon to do so, and had they properly applied the law.

333 Mr Morris stopped short of addressing the "Marra Test" in the case, as I have defined it to be. He was asked to give his opinion as to what profits were available to Berri at 16, 28 and 31 December 2005 from which it could pay a dividend, and the source of those profits.

334 On the assumption that Berri had no available reserves from which to pay any interim dividend, Mr Morris concluded that the highest amount that could have been paid as a dividend as at 16 December 2005 was $13.506 million and at 28 and 31 December 2005 was $4.020 million. Berri's financial position at 16 December 2005 differed from its financial position at 28 and 31 December because a provision for costs of $13.551 million arising from a legal dispute with Berri suppliers (ACI and Brickwood) was made on 28 December 2005.

335 On the assumption that Berri had available the "maximum" amount of reserves from which to pay an interim dividend as at 16, 28 and 31 December 2005, Mr Morris was of the opinion that Berri had available to pay a dividend as at 16 December 2005 of $20.650 million; and as at 28 and 31 December 2005 of $11.164 million.

336 Mr Morris also concluded that, in order to fully frank a dividend of $3,472,198.04, Berri required franking credits of $1,488,084.87. Mr Morris noted that Berri's 2005 financial report recorded that franking credits if $6.789 million were available to Berri at 31 December 2005. On the basis of a number of assumptions, Mr Morris was of the opinion that Berri's franking credits would have amounted to $10.854 million as at 16 December 2005. He concluded that a dividend paid at $3,472,198.04 could have been fully franked at each of 16, 28 and 31 December 2005.

337 Mr Westworth, on the other hand, concluded that Berri had no profits available for distribution as at 31 December 2005.

338 Central to his approach was his treatment of reserves, such as the general reserve and the asset realisation reserve.

339 Mr Westworth noted that the asset revaluation reserve arises as a result of the operation of an accounting standard, but traditionally has been seen as available for distribution subject to certain safeguards. Those safeguards include "the use of proper valuation methodologies applied by qualified valuers in determining the revalued amount of assets". He noted that unrealised profit may be seen as part of profits generally.

340 However, in the opinion of Mr Westworth, for the purposes of determining a distribution for payment of a declared dividend, these reserves (whether entered in a general reserve, an asset revaluation reserve or otherwise) should be treated as "part of accumulated profits/losses".

341 Accordingly, Mr Westworth commenced an exercise starting at 30 June 2000, when Berri's accumulated losses were $26.795 million, as represented in the following table:

342 The table above demonstrates that Berri had no reserves, including profits, to carry forward after a period of heavy losses ending in 2000. The general reserve and the asset realisation reserve were both absorbed by these accumulated losses. For the purposes of considering distributable profit from which a dividend, if declared, could be paid, Mr Westworth's table reveals that no funds were available for this purpose at the end of the period, when total net accumulated losses amounted to ($12.346 million).

343 The asset revaluation reserve that stood at $7.305 million in 2000, was outweighed by the losses.

344 The accounting position did not stand still. The reserve accounts experienced various movements in the period 2000 to 2005.

345 The principal change was in respect of the transfer of $4.53 million, which was previously held in the Berri asset revaluation reserve, to an entry in the accounts of Berri to reduce accumulated losses. This resulted in this sum being removed from the asset revaluation reserve. In Mr Westworth's opinion, this did not represent profits available for distribution by Berri at 31 December 2005.

346 Mr Morris, the accounting expert called by ICM, agreed that this part of the Berri asset revaluation reserve was transferred to off-set accumulated losses following a decision by the Berri Board, probably made on 31 December 2004, which was approved by the company auditors. This had the effect of reducing this component of the asset revaluation reserve to zero.

347 To my mind, there was no basis for the directors of Berri, in late 2005, to reverse this entry to enable the Second Interim Dividend to be paid out of what had previously been the asset revaluation reserve.

348 As to the asset realisation reserve of $1.831 million shown in the table, the Berri asset realisation reserve contained profits relating to profits made in past years. Those profits related to assets such as buildings as well as profits attributable to the revaluation of intangibles such as brand names, the latter constituting a relatively small component of the reserve.

349 Mr Westworth did not agree that the part of the Berri asset revaluation reserve which included past capital profits attributable to land and buildings was available in December 2005 to pay a dividend. I accept Mr Westworth's analysis on this point.

350 Mr Westworth concluded that, in his opinion, there were no funds in the reserves available to Berri for the payment of a dividend on either 16, 28 or 31 December 2005, whether from the general reserve or the asset realisation reserve. Such reserves as may otherwise have been available for this purpose, had been subsumed by accumulated losses. The only distributable profits were those profits earned in the current 2005 year.

351 Mr Westworth calculated the accumulated losses from 31 December 2004, immediately before the introduction of the AIFRS accounting standard on 1 January 2005, to the year end, 31 December 2005. The result is illustrated in the following table:

Profits at 31 December 2004 (prior to AIFRS adjustments):

352 As to current year profits, in the opinion of Mr Westworth, the profits available to Berri as at 31 December 2005, would have comprised the following, reduced by dividends already paid and adjustments by reason of transition to the AIFRS standard on 1 January 2005:

353 Mr Westworth calculated that the excess of recorded profits since Berri returned to profitability in 2001 over the dividends paid during the period was $13.107 million ($57.189 - $44.082 = $13.107 million), as reflected in his table above. However, the excess was extinguished by the write-downs and adjustments on the adoption of the AIFRS accounting standard as from 1 January 2005.

354 The calculation shows that for the year ended 31 December 2005, the current year profit would have been in the region of $1.717 million. However, this profit had already been distributed as part of the July Interim Dividend paid to members on 27 October 2005 in the sum of $7.918 million. This produced a negative position in respect of profit available for a dividend distribution by the year's end of $6.201 million.

355 Further, the impact of the introduction of the AIFRS standard on 1 January 2005 is also shown in Mr Westworth's table. In his view, the impact on the assessment of profits available for distribution at 31 December 2005 was to further reduce them by $14.298 million.

356 In the opinion of Mr Westworth, it would have been consistent with good accounting practice to apply undistributed profits of past years towards payment of a dividend, but only to the extent that they exceed accumulated losses.

357 Indeed, based on Mr Westworth's assessment of the reserves available in 2005, the July Interim Dividend, declared in July 2005 to be paid on 27 October 2005, was "imprudent when seen as part of the results for the year as a whole".

358 It was accepted by Mr Westworth in cross-examination that there was no accounting standard which requires accumulated losses from past years to be offset against profits before paying a dividend.

359 Mr Westworth also knew, as was the fact, that Berri's practice in past years was to pay a dividend out of current profits, notwithstanding the existence of accumulated losses from past years, and that this had been the practice for some years prior to 2005, and it was a practice approved by the auditors of Berri. He also acknowledged that it was a practice in the commercial community to do this, although he did not agree that it was commonplace or that it occurred regularly.

360 Nevertheless, I accept as valid the opinions of Mr Westworth and his approach to the matters in issue which I have described. Although other accounting experts may reasonably differ, as Mr Morris did, Mr Westworth's evidence demonstrates the quality and nature of acceptable expert opinion which may have been available to the Berri Board in late 2005, had they sought it on the question as to whether to declare and pay the Second Interim Dividend at that time.

Conclusion as to Distributable Profits for the Purposes of Clause 10(c)(i) of the Shareholders Agreement

361 Berri bore the onus of establishing that it fell within the exception provided for in sub-clause 10(c)(i). See: The Torenia;[89] Wallaby Grip Ltd v QBE Insurance.[90]

362 However, on the evidence adduced, I am not satisfied that as at 16 or 28 December 2005, or shortly prior to those dates, Berri did not have sufficient distributable profits from which to pay the Second Interim Dividend, or indeed, any further interim dividend for the year.

363 Berri not has not discharged its onus and has failed to prove its case under clause 10(c)(i).

364 It follows that Berri cannot avail itself of the exception provided under the sub-clause.

365 The application of the proviso in clause 10(c)(i) of the Shareholders Agreement has not been established to relieve Berri of the obligation to pay the dividend. The question then becomes, did clause 7.7 of the Put and Call Option Deed in combination with clause 10(a) of the Shareholders Agreement operate in law to require payment by Berri of the Second Interim Dividend (or some lesser interim dividend in respect of the latter half of the 2005 year) in favour of ICM?

366 This, in turn, will depend upon whether the "Marra Test" is satisfied.

367 The actual state of the Berri accounts in late 2005 is relevant to the application of the "Marra Test". That is, relevant to any determination of the Berri Board in late 2005 as to whether the financial statements for the company, when they were later produced and adopted, would disclose sufficient distributable profits from which the Second Interim Dividend (or any further interim dividend for the year) could be declared and paid, and whether the directors were then in a position at that time to form a genuine opinion as to that matter, was at the time.

368 I will now turn to the question as to what the Berri accounts, working papers, memoranda and financial documentary records existing in late 2005 disclosed as to the financial position of the company. This will be followed by a brief analysis of the final accounts of Berri for the 2005 year which were audited by KPMG and adopted by the Berri Board on 26 April 2006.

369 ICM relied on the management accounts produced by Berri. Through its solicitors it instructed its accounting expert retained for the case, Mr Morris, to undertake an analysis of Berri's management accounts from November 2005, and then work out whether, as at 16 December 2005, he could justify any further adjustments.

370 ICM contended the best available information to the Berri directors as at 21 December 2005 was that set out in the November Management Report. This November Management Report was provided by Mr Lavery to Mr Read by his email of 21 December 2005. This version of the November Report contains greater details and a fuller breakdown than an earlier report, but it was submitted they were fully consistent.

371 It was said that there was nothing to suggest the report was erroneous, or that events had occurred that required further adjustments, with the exception of the ACI transaction which was entered into on 29 December 2005. In relation to that transaction, it was noted that it was not brought to the attention of the Berri Board prior to completion on 28 December 2005.

372 ICM pointed to Mr Kop's evidence. He was the person responsible within Berri for the preparation of the monthly accounts. ICM referred to the following features of Mr Kop's evidence where he confirmed:

• that in preparing the monthly reports in 2005, he applied the accounting standards, and this included taking into account the impact of AIFRS;

• that the monthly reports were generally prepared within two weeks of the end of the relevant month and that they were the primary mechanism for financially managing the business; and

• under cross-examination, that the monthly management accounts were accurate and that there was "very little in the way of adjustments in arriving at the final audited accounts ... In terms of accuracy, I would say they are pretty much spot on".

373 ICM also referred to the evidence of Mr Mercer where he was asked under cross-examination about the monthly reports and said:

I think the intention always was that the management accounts would, in large part reflect the expected outcome in the final accounts. So if there was a set of final accounts produced as at November 2005, they would conform in large part to the management accounts. If they didn't, there would be a reconciliation from one to the other to identify changes made subsequently.

374 ICM also relied upon the cross-examination of its own expert accounting witness about his reliance on Berri's monthly reports. He said:

In terms of what this document is, it's a management report. If one really wanted to test it carefully, one might compare it to, say, the December management report and then to the December audited accounts and the analysis that I've performed privately in respect of that suggests that save for the matters that announce themselves in note 3 of the audited accounts, in most respects the December 2005 audited accounts of Berri are on all fours with the management report of December 2005 and November 2005. So having regard to the work that I've done on it, I think it's a relatively credible document. It would seem that the management of Berri or the finance people at Berri were doing a pretty good of accounting for their activities on a monthly basis.

375 On this basis, ICM submitted that the directors of Berri could and would have relied on the November Management Report in determining whether or not Berri had sufficient distributable profits to pay a dividend on 16 or 28 December 2005.

Monthly Accounts and ASIC v Rich and Management Accounts

376 Nevertheless, reliance on the Berri November Management Report for the purposes of declaring a further interim dividend for the 2005 year needed to be approached with some caution, given the "Marra Test" to be applied.

377 The November Management Report may have appeared to be reliable on its face. However, its use in December 2005 by the Berri Board as a predictive tool to determine what, if any distributable profits would be revealed in the final accounts when they were produced, was likely to have been attended with more risk than usual. Notwithstanding the level of reliance placed on similar reports in the past, the situation in late 2005 required a cautious approach to the monthly report, given the unique and challenging financial context in which the Berri company operated.

378 The judgment of Austin J in ASIC v Rich[91] provides some guidance as to the general nature and characteristics of management accounts, contrasted with final end of year financial accounting reports. It emphasises differences between the two and concludes with the observation that management accounts are likely to be less reliable than company periodic financial statements. In a detailed analysis, his Honour said:

[6317] Generally speaking, management accounts are used by business managers (sometimes, but not necessarily always, including boards of directors) to assist them to monitor business performance on a regular basis, usually monthly. Normally they are used and circulated internally in the business, and are not externally reported. In contrast with financial accounting reports, which are based on past information, management accounts are forward-looking and often pragmatically computed.

...

[6319] Neither the Australian accounting standards nor the ASX principles of good corporate governance and best practice recommendations expressly say anything about management accounts. The Australian Accounting Standards Board has published a paper called "Framework for the Preparation and Presentation of Financial Statements" (see www.aasb.com.au\\/AASB Standards\/Australian Standards\/Table 1) in which the following is said:

"The management of an entity has the primary responsibility for the preparation and presentation of the financial report of the entity. Management is also interested in the information contained in the financial report even though it has access to additional management and financial information that helps it carry out its planning, decision-making and control responsibilities. Management has the ability to determine the form and content of such additional information in order to meet its own needs .... Nevertheless, published financial reports are based on the information used by management about the financial position, financial performance and cashflows of the entity".

[6320] Notwithstanding the wealth of publications on the subject (for example, K Langfield-Smith, H Thorne and RW Hilton, Management Accounting: an Australian Perspective, McGraw-Hill, Australia, 2006; P Weetman, Financial and Management Accounting: An Introduction, 4th ed, FT Prentice Hall, 2006; J Collis and R Hussey, Business Accounting: An Introduction to Financial and Management Accounting, Palgrave Macmillan, 2007), the concept of "management accounts" is not sufficiently specific to enable one to prescribe standard or uniform component parts and data sources. At least to a degree, it seems that business managers design the scope and contents of "management accounts" to suit the purposes of the particular businesses they manage. According to the literature, the lack of uniform practice seems to extend to public companies. Unfortunately there is no expert evidence in this case about the nature, reliability and use of the management accounts of listed public companies, either generally or in the telecommunications business or in the "start-up" circumstances of One.Tel.

[6321] It is pertinent to note the comments of the learned authors of Management Accounting: an Australian Perspective in the preface to their book:

"Unlike the financial accounting area, there are no accounting standards or legally enforceable practices, and few widely-published debates over appropriate accounting practice. Management accounting takes place within organisations and can be quite specific to each business. Also, to understand the nature of management accounting practice we need to understand the broader aspects of business practice, across a range of areas including strategy, marketing, human resource management, operations management and organisational behaviour. Management accounting both draws on and contributes to these areas".

[6322] Management accounts are not prepared for the purpose of providing a statement of the financial position of the company to external users of financial information (such as shareholders, lenders, investment analysts and trade unions), but instead they are prepared in order to satisfy the needs of internal users (including the need of managers to assess current financial performance): see Weetman, 2006, op cit, pp 426-7; Collis and Hussey, 2007, op cit, pp 9, 210. That being so, one would not expect management accounts to be as reliable as statutory financial reports in stating the company's financial position at a past date. As Langfield-Smith, Thorne and Hilton observe (op cit at 9):

"Relevance and timeliness are considered more important than objectivity and reliability".

[6323] Such case law as there is reflects the concept of management accounts that one gleans from the textbooks. Thus, in Consolidated Constructions Pty Ltd v Satellite Group Ltd [2000] NSWSC 984; BC200006543, where Santow J had to determine the solvency of the company, his Honour remarked (at [22]) that he would have expected to see reasonably up-to-date management accounts but that management accounts, if they existed, would be "no great assurance as to reliable financial information". In Duke Group Ltd (in liq) v Pilmer (1994) 15 ACSR 255; (2006) SASR 364 Mullighan J took the view that while it would be good practice for a company to keep management accounts, there was no requirement under the companies legislation (in particular, under the predecessor of s 286) to keep what his Honour called "interpretive or judgmental reports" (at [13]), a phrase he applied to management accounts.

...

[6325] In the present case there is no issue about the supply of management accounts to a prospective purchaser, implying warranties as to their accuracy. The issues agitated by ASIC relate to the use of documents it claims to be management accounts for purposes of internal management (including management reporting to the board). The cases and literature indicate that such management accounts are less reliable than a company's periodic financial statements for external users, and their contents and formatting are determined by management needs.[92]

San Miguel's Submissions on the November Monthly Management Report

379 San Miguel submitted, and I accept, that it is for good reason that Australian corporations law gives primacy to the audited statutory accounts.

380 San Miguel also referred to the evidence of Mr Mercer, who was the person within Berri who was responsible for preparing the November monthly accounts for the company. Mr Mercer was an accountant who held the position of national management accountant for Berri from 1998 until he assumed a position in National Foods in October 2005 as the senior management accountant - juice division. The juice division was the business that Berri carried on. This was during the merger of the businesses of Berri and National Foods as part of "Project Eureka".

381 Mr Mercer was involved in the production of the monthly management accounts for November 2005. In cross-examination he indicated that the November monthly management accounts had several adjustments missing. He also accepted that monthly accounts were different to "statutory accounts" and said that monthly accounts "wouldn't have to necessarily contain AIFRS adjustments".

382 San Miguel submitted that, in the circumstances, the Berri monthly management accounts did not provide a proper basis for directors to declare dividends.

383 The Corporations Act contains a detailed set of financial reporting requirements contained in Chapter 2M, which include obligations imposed on companies to keep written financial records (s 286) and to have financial reports audited (s 301(1)). These provisions do not apply to management accounts.

384 The reasons for requiring the audit of financial statements are self-evident. An auditor provides independent verification of a company's financial statements, thereby providing a safety net endorsing their reliability. This is reflected in the strength and primacy given to the auditor's role. The auditor's independence is underpinned by the Corporations Act. Further, the Corporations Act confers statutory duties upon auditors. Offences apply to the provision of false and misleading statements. The common law confers liability upon auditors who fail in their duty. Section 1305 of the Corporations Act also provides that "a book kept by a body corporate under a requirement under this Act is admissible in evidence and is prima facie evidence of any matter stated or recorded in the book".

385 In my opinion, the Berri management reports, including the November Monthly Management Report, may well have been used by the directors in late 2005 as a guide to what the audited financial statements may look like when they were ultimately produced after the year end in relation to distributable profits. However, those reports would have to have been considered by the directors in the context of the unique and uncertain accounting environment that Berri was exposed to at the end of 2005.

386 In this particular context, they could not have been taken to be a definitive statement as to the financial capacity of the company to pay the Second Interim Dividend, or indeed any further interim dividend in the 2005 year. Nor could they have been used to provide an authoritative and reliable indicator as to what the financial statements of the company would disclose as to the availability of distributable profits, when they were ultimately prepared.

387 ICM submitted that the Berri Board could and would have had some appreciation of the progress of the business during the course of December. It was suggested that it was likely it would have known that the trading profits of the business during December were well ahead of expectations. In this regard, ICM pointed to the accounts of National Foods for the year ended 31 December 2005 which recorded that its 49% share of Berri's net profit for the three days from 28 December to 31 December 2005 amounted to $797,000. It was put that this indicated that the full net profit of Berri for those days was in the order of $1.5 million, suggesting a profit earning rate during December 2005 that was substantially above expectations.

388 ICM supported its submission as to the healthy trading profits of the Berri business during December by reference to its December Management Report. Although it would only have become available in mid-January 2006, it did record that the actual gross sales for December were ahead of budget ($66.7 million compared with a budget expectation of $62.8 million). The actual result for December was also above the forecast December result in the November Operations Report which was only $61.8 million.

389 I will take these factors into account in determining the application of the "Marra Test" to the facts of this case.

Findings as to Position Berri Executives (and Other Related Persons)

390 Berri in its submissions placed emphasis on the perceptions of its senior executives and those associated with Berri as to Berri's financial position in 2005 leading up to the December period.

391 The perceptions of the Berri senior executives at the relevant time are relevant because it is likely that they would have been directly involved in providing advice to the Berri Board in late 2005, had the Berri Board been convened at that time to consider declaring and paying the Second Interim Dividend, and by this means the Berri senior executives would have been likely to have been strongly influential in any decision to be made by the Berri Board on the matter at that time.

392 I find that in December 2005 senior executives of Berri and those associated with the company, were of the belief, based on reasonable grounds, that there was too much uncertainty about what the accounts would ultimately disclose, when they were eventually produced and audited, as to the capacity to pay a Second Interim Dividend, and if the company had such a capacity, there was uncertainty from which sources of funds within the company, any such Second Interim Dividend could be paid.

393 On this basis, they formed the view that it was inappropriate for Berri to pay a dividend. This uncertainty arose primarily because the accounting adjustments, which were believed to be potentially necessary, had not been finalised.

394 This finding emerges from the events described below, which I find as facts.

395 In August 2005, an Audit Committee Paper was prepared for Berri entitled "Year-End Accounting Review". That paper had been prepared to provide Berri's directors with an overview of the key issues that could be expected to be addressed by the Audit Committee prior to the December 2005 financial statements being finalised. It had been drawn up in the absence of guidance from National Foods or San Miguel regarding the application of new policies that should thereafter be applied to ensure consistency of reporting within the integrated San Miguel/National Foods/Berri group. The paper referred to various accounting issues, later referred to as "Adjustments", which needed to be considered in reviewing the Berri financial position at the time.

396 Mr Kop at the time of the trial was employed by ICM. However, between 4 February 2003 to 28 October 2005 he was a director of Berri and in 2005 until 28 October he was its chief financial officer. Until that date he was responsible for all of the key financial operations of Berri. This included finance, accounting, audit and treasury functions. To that time, he was also responsible for the preparation of monthly management reports. He gave evidence as to the Berri management report for the month of September 2005, and Berri's 2005 budget for which he was also responsible.

397 In 2005, Mr Kop had dealings with Emmanuel Erana of San Miguel and Michael Read of National Foods.

398 Mr Erana (or "Manny" as he is called in emails) today occupies the position of senior vice president and chief financial officer of Petron Corporation, a subsidiary of San Miguel. He had worked for San Miguel in various positions since 1984. In 2005 Mr Erana was posted to a position in Australia where he was responsible for coordinating operations between San Miguel in Manila, Philippines, with National Foods. National Foods had been purchased by San Miguel in April 2005.

399 Mr Read is an accountant. He was employed by National Foods between 1997 and February 2012. He occupied the following positions with National Foods: 1997 - mid-2005 group financial controller; mid-2005 to 2010 general manager finance; and January 2010 to February 2012 director capital management and projects. Mr Read was involved with Project Eureka as a team member of the business services group which looked at how best to integrate the business services functions between Berri and National Foods. San Miguel also had membership on this team.

400 On 30 August 2005, Mr Kop sent an email to Mr Erana and Mr Read providing a list of the possible types of acquisition accounting adjustments that might be applicable for the Berri acquisition. Amongst other issues, this email referred to "plan to phase out [information system] equipment" and "ACI/[Brickwood] costs". Mr Kop accepted in the course of his oral evidence that a number of the items in this email, if they played out as Mr Kop had said was possible, would have an impact on adjustments to Berri's accounts. Many of the possible adjustments referred to by Mr Kop were subsequently included in the spreadsheets prepared by Stephen Lavery of Berri in December 2005 and early January 2006, which are referred to below.

401 Also on 30 August 2005, a meeting of Berri's Audit, Risk and Compliance Committee was held, at which the major subjects discussed included the accounting adjustments that would be necessary as a consequence of the rationalisation and integration program which was then presently underway, the impact of adopting AIFRs, the "rootstock" loan and the ACI/Brickwood legal case.

402 The July Interim Dividend was paid on 27 October 2005.

403 In about early November 2005, Berri prepared the "Berri Australian Operations Review Profit Report October 2005". The document (and subsequent monthly operations reports) referred to the disputes between Berri and ACI and Brickwood, and to "Project Eureka", which was the project for the integration of the operations of National Foods and Berri.

404 On 11 November 2005, ICM exercised its put option under the Put and Call Option Deed. This required San Miguel to purchase ICM's remaining shareholding in Berri. Completion of this transaction was required to occur on 5 December 2005. Nevertheless, Mr Shears of ICM consented to a deferral of the time for completion until the date on which San Miguel had secured its financing arrangements to allow it to pay the purchase price for the remaining ICM shares, which was to be not later than 16 December 2005. This arrangement was confirmed by San Miguel in a letter to Mr Shears dated 16 November 2005.

405 Mr Steven Lavery was a Berri employee who worked in the accounting area.

406 Mr Read, worked closely with Mr Lavery at the relevant time. He gave instructions to Mr Lavery to prepare accounting spreadsheets and had discussions with Mr Lavery with respect to these documents. The spreadsheets were used to manage certain accounting issues which had been identified which had the potential to impact on Berri following an enquiry process that commenced in September 2005. These were issues that Berri needed to investigate and keep abreast of. The spreadsheets produced by Mr Lavery were a management tool designed to assist in this management process.

407 Mr Lavery produced two principal spreadsheets of relevance to the proceeding, in late 2005 dated: 5 December and 13 December. He also produced a third spreadsheet in the series dated 3 January 2006.

408 The spreadsheets were discussed between Mr Lavery and Mr Read when they were produced.

409 The first Lavery spreadsheet in the series was produced on or about 5 December 2005. It described possible provisions to be made in Berri's 2005 accounts and was entitled "Possible provisions (prior to tax effect unless otherwise stated)". This spreadsheet (and the subsequent updated versions of it) referred to the possible effects of various issues upon Berri's accounts and its financial performance for the 2005 financial year (i.e. the 12 months to 31 December 2005).

410 The total estimated pre-tax impact on Berri's 2005 financial performance of the items referred to in Lavery's 5 December spreadsheet was to reduce Berri's profit by more than $5.9 million (or more than $4.1 million after tax).

411 Neil Kearney was employed by the National Foods group of companies between October 1997 and April 2007. He occupied the following positions: October 1997 to January 1999 general manager, international and food service; January 1999 to December 2002 group executive business development manager; December 2002 to June 2005 group executive marketing and innovation manager; and October 2004 to June 2005 project manager in respect of a bid defence resisting a take-over of National Foods; July 2005 to April 2007 chief financial officer of the National Foods group and a director of National Foods. In October 2005 Mr Kearney was appointed as a director of Berri, a position he continued to occupy until 17 April 2007.

412 Mr Kearney reviewed the spreadsheets prepared by Mr Lavery during the last stages of 2005 and they were discussed in meetings between the two during December 2005. The discussions included the potential for a number of adjustments to be made in the accounts of the Berri business. Principal issues included finalising the ACI/Brickwood disputes and issues relating to a loan provided to an Indonesian corporation, Indosari. Implementation of the new AIFRS accounting standards and business integration issues arising from Project Eureka also featured as matters for discussion in this context.

413 Mr Kearney relied upon Mr Read for any detailed financial analysis.

414 Mr Kearney and Mr Read, as persons responsible for the preparation of the accounts of the Berri business, formed the belief that it was likely that they would have to bring these matters to account in the current financial period when the final accounts were prepared.

415 Mr Kearney also discussed the Mr Lavery spreadsheets with Mr Erana of San Miguel. The substance of their discussions concerned the adjustments which were considered likely to be made in the finalised accounts.

Further 2005 Consideration of Accounting Adjustments

416 In early December, Mr Read also discussed with Mr Erana possible adjustments that needed to be considered in respect of the Berri accounts. Mr Read told Mr Erana that given the trading results and the number of adjustments that had been identified, there may not be enough profits to even consider further dividends for the year.

417 Mr Erana gave evidence that neither he nor Mr Read had seen the relevant agreements at this time in early December 2005. Mr Read was subsequently sent some extracts of the Shareholders Agreement by Mr Erana, on 7 December 2005. At some stage in the last quarter of 2005, Mr Kearney also saw extracts of the Shareholders Agreement, but he was not familiar with the provisions of it.

418 On about 7 or 8 December 2005, Mr Read made notes on an email which he received from Mr Erana. The email alerted Mr Read as to the implications of the dividend payment and matters that required investigation.

419 Mr Read gave evidence that, at around this time, there were a number of outstanding items, and until a concluded position had been arrived at on each of those items, it would not be known what the profit of the Berri business was.

420 In about early to mid-December 2005, Berri prepared the "Berri Australian Operations Review Profit Report November 2005". Mr Kearney saw it in about the second week of December. At the time Mr Kearney received it, he was of the view that there were a considerable number of adjustments to be made to the Berri accounts, in spite of the report showing only $4 million of "abnormals".

421 In about the second week of December 2005, Mr Read also saw the Berri November profit report. That document showed the operating results of Berri. It included transactions that had involved Berri, but it did not include a number of the items recorded in Mr Lavery's spreadsheets that Mr Read was aware of.

422 On or about 13 December 2005, Mr Lavery prepared an updated version of the spreadsheet regarding possible provisions to be made in Berri's 2005 accounts. The total estimated pre-tax impact on Berri's 2005 financial performance of the items referred to in the 13 December spreadsheet was to reduce the profit by almost $12 million (or more than $8.3 million after tax).

423 Mr Read received the 13 December spreadsheet, reviewed it, and noted actions to be taken.

424 At about this time, Mr Read was aware of the proposed settlement with ACI. He was aware of the proposal to acquire the ACI Riverland plant, and of the component parts of the proposed settlement sum.

425 Completion of the Put Option did not occur by 16 December 2005.

426 Mr Erana accepted that, as at 16 December 2005, San Miguel had not taken any steps to convene a Board meeting of Berri to consider the payment of a dividend to ICM, and had not taken any step to cause a dividend to be paid on 16 December 2005.

427 It was Mr Kearney's view at this time that there was too much uncertainty about the Berri accounts to pay a dividend to ICM. He had discussions with Mr Read and Mr Erana about the matter and they formed the view that it was inappropriate for Berri to pay a dividend. Their discussions primarily related to the accounting adjustments that had not then been finalised.

428 In late 2005, Mr Read prepared a draft dividend recommendation for submission to the Board of Berri.

429 Mr Read's draft dividend recommendation was derived from a spreadsheet produced by Mr Lavery on 13 December 2005, and was produced by Mr Reid within a short time thereafter, but prior to 20 December.

430 Although it was never presented to the board, it nevertheless evidences the perception of a senior Berri executive at the time as to the capacity of the company to declare a second interim dividend at the end of 2005. It also represents the tenor of Mr Read's likely advice to the Berri Board, had he been asked to give advice to it on the question of the declaration and payment of the Second Interim Dividend.

431 Mr Read's draft dividend recommendation contained the following elements of relevance:

Directors Duties

Pursuant to the Corporations Act, a Directors duty in respect to the declaration of a dividend is to ensure the company will be prevented from insolvent trading on payment of dividends.

Comments:

(i) The available funds from Berri Limited banking facilities will adequately fund the payment of the proposed minimum dividend.

(ii) The company does not have adequate retained earnings to declare and distribute to shareholders a minimum dividend

(iii) The estimated full year result for Berri is an NPAT $8.7 million.

(iv) Management is not aware of any other matters that would materially impact on this estimated result, other than:

• continued losses to be suffered from the legally exposed position resulting from the ACI/Brickwood settlement and related costs;
• determination on whether erroneous contacts are required to be recognised.

Results of the group are subject also to audit.

...........................

Franking Credits

The balance of franking credits is $4 million and therefore will support a fully franked dividend.

Appropriation

A cash dividend declared and paid based on the minimum payment formula, under the shareholder agreement will appropriate $7m of retained earnings.

It is forecast that available retained earnings are estimated to be in a deficit, and that the estimated loss carried forward will be $ 5.5 million. This is based on management estimates still subject to audit. A reconciliation is tabled Appendix A.

Recommendation

The recommendation of management to the Board is that there is adequate retained earnings to support a recommendation to enable a minimum dividend declaration to be made.

[Emphasis added.]

Appendix B

Statutory Profit Forecast

December 2005

* Subject to audit to based on work performed September\October

432 Mr Read's recommendation estimates a full year profit result for Berri of $8.7 million. This is arrived at in the Appendix B calculation set out above. The calculation of a net profit of $8.7 million commences with the acceptance of a forecast set out in the "Berri Australian Operations Review Profit Report November 2005". This monthly management report carried forward an operating profit for the year to the date of the report of $16 million. It then proceeded to forecast a full year profit of $19.1 million. This forecast included an expense of $6.3 million in respect of actual and projected costs arising from the ACI/Brickwood disputes (being the payments of $476,000 per month plus legal expenses).

433 However, Mr Read's Appendix B calculation then proceeded to subtract two items:

(a) the sum of $8.4 million in respect of an item described as "adjusted due diligence matters"; and

434 The items noted as "adjusted due diligence matters" were derived from an earlier spreadsheet prepared by Mr Lavery of Berri under headings "Possible provisions (prior to tax effect unless otherwise stated)" (the "Lavery spreadsheet"). The Lavery spreadsheet included a little over $8.388 million as possible provisions proposed by Lavery to be allowed by Berri for the 2005 year. Included in the Lavery spreadsheet as Item 24 was an item described as "ACI/Brickwoods legal dispute", with the an accompanying notation as follows: "Take worst case scenario of damages payments to Brickwoods of $476,000 per month for term of contract plus legal fees less an estimate of recoveries from Warrantors". The amount allowed for this provision for the 2005 year was $6,049,090. I accept that this was calculated by multiplying $476,000 by 12 and adding a provision for legal costs.

435 As also noted above, the $19.1 million figure, which had been earlier calculated by Mr Lavery in his spreadsheet, already included actual and estimated outlays in respect of a liability to Brickwood of $476,000 per month plus legal costs. This component was therefore double counted in the $8.4 million figure found in Mr Read's Appendix B calculation.

436 Mr Kearney acknowledged under cross-examination that this was a clear error. Mr Read said it may be an error, but he would need further information before attributing any such error to Mr Lavery.

437 As to the "Eureka costs - estimate" of $2 million allowed for by Mr Read in his Appendix B calculation, I find there was some justification for making this allowance. It was referenced by the Berri auditors KPMG in the final Berri accounts produced in April 2006. These accounts allowed and expense of $1.5 million for the item.

438 Nevertheless, Mr Read's draft dividend recommendation must be regarded as inaccurate. The total deductions of $10.4 million were overstated by at least $6,049,090, and should have been no more than $4,350,910, resulting in a net profit forecast for the 2005 year of not less than $14,749,090. This is an increase of some $6,049,090 on Mr Read's $8.7 million profit estimate for the year as reflected in his draft dividend recommendation.

439 If Mr Read's draft dividend recommendation was corrected to this extent, it would have revealed a net profit included in his Appendix A "Appropriation Account" calculation of not less than $14,749,090, resulting in an "Accumulated Profit" (not "Loss") at the end of the period of merely $553,090. On this basis, given that Mr Read had calculated that a "cash dividend declared and paid based on the minimum payment formula under the shareholder agreement" would be approximately "$7m of retained earnings", more than likely it would have resulted in the same recommendation from management to the Berri Board in late 2005. That is, a recommendation that there were "inadequate retained earnings to support a recommendation to enable a minimum dividend declaration to be made".

440 I am satisfied that a director of Berri in late 2005, properly advised and knowing all of the relevant facts, would not be likely to have been in a position to have formed an opinion different to that expressed by Mr Read in his draft dividend recommendation. This is so even if the draft dividend recommendation had been corrected as I have found it ought to have been to reflect the correct position.

441 Assuming this to be the case, it is not likely that a director at the time, would have formed a genuine opinion that the state of the final accounts, when they were eventually produced in the following year, would have revealed sufficient distributable profits to justify the declaration and payment of a second interim dividend on or before either 16 or 28 December 2005 calculated in accordance with the formula in clause 10 of the Shareholders Agreement.

442 Berri's financial statements for the 12 month period ending 31 December 2005, which were subsequently prepared and audited by Berri's accountants KPMG and adopted by the Berri board on 26 April 2006, recorded, amongst other things:

(a) net profits for those 12 months of $1.717 million;

(b) an asset realisation reserve of $1.831 million;

(d) available franking credits of $6.789 million; and

443 As will become apparent, these results were capable of differing interpretations in relation to what they revealed on the question of distributable profits out of which Berri could have paid the Second Interim Dividend in late 2005.

Adjustments to Final Accounts Foreshadowed in 2005

444 In the second half of 2005, as earlier discussed, a number of adjustments and provisions which might have been required to be made in Berri's final accounts for the 2005 financial year, being the year ended 31 December 2005, were under active investigation and consideration within the company.

445 As I have found, the adjustments, or some of them, were referred to in Berri's internal papers, memoranda, correspondence, and management accounts, and were the subject of discussions between the senior managers of the company and other officers associated with Berri, and its parent to be, San Miguel. They were also referred to in Berri's final accounts for the 2005 financial year.

446 If the Berri Board had been convened to consider the declaration of a Second Interim Dividend on or prior to 16 or 28 December 2005, the board would have been required to take the adjustments into consideration in forming the relevant opinion at that time. The relevant opinion was an opinion as to whether, when the final accounts were produced some months later, profits would be disclosed and actually exist from which the Second Interim Dividend could be paid as at 16 or 28 December 2005.

447 The most significant adjustments included those summarised below.

448 In his draft dividend recommendation of 20 December 2005, Mr Read makes an allowance of $2.0 million for "Eureka costs". It will be recalled that Project Eureka was San Miguel's project to integrate the business of National Foods and Berri when they became wholly owned subsidiaries. This project was managed by National Foods.

449 Mr Read's allowance appears to be an estimate of costs incurred by National Foods in integrating the businesses of Berri and National Foods for which National Foods would seek reimbursement from Berri.

450 Integration costs in respect of redundancies and other matters were already recognised in the Berri Operations Reports as "Rationalisation Costs & Abnormal Items".

451 However, there is no evidence that in December 2005 the Berri Board had agreed to reimburse any of National Foods' costs in respect of the integration. Rather, the position was that there was no agreement between Berri and National Foods that Berri would assume liability for any portion of the costs incurred by the latter in implementing Project Eureka.

452 ICM submitted that, in any event, the directors of Berri could not have legitimately incurred such costs consistently with their duties to the company as directors. Directors cannot give away the company's assets by assuming another company's debts, whether it is a subsidiary or not. It said, this consideration applied while ICM remained a minority shareholder in Berri until at least 28 December 2005, and thereafter.

453 Mr Read said in his evidence that the costs he proposed to attribute to Berri under the adjustment would essentially cover the cost of consultants who were engaged by National Foods. He said the attribution to Berri was an arbitrary allocation by him based on his own personal view that it was not unreasonable that Berri should be responsible for some of these costs of National Foods.

454 However, on the evidence, Berri and National Foods never made an agreement under which Berri agreed to assume liability for National Foods' costs, or any part of them, whether in respect of consultants or otherwise. No such agreement was made in 2005 and the issue of the costs of Project Eureka was never brought to the attention of the Berri Board during that period. Thereafter, no agreement was identified to KPMG in January 2006, and there is no evidence of any such agreement arising later.

455 Accordingly, it was submitted by ICM that there was no factual basis for including this adjustment in Mr Read's draft dividend recommendation. Further, there was no factual basis upon which the directors of Berri could regard it as an appropriate adjustment in December 2005 if they were considering the declaration and payment of the Second Interim Dividend to ICM.

456 Nevertheless, Berri's auditors KPMG provided for an adjustment reflected in Berri's final accounts, for a final amount of $8.11 million. This amount was identified as a separate line item "Costs associated with merger with parent entity" under Note 3, "Expenses". This amount was noted in the accounts as "includes redundancies of $6.6 mill and Berri's share of Project Eureka costs of $1.5 mill". This was not far from Mr Read's estimate provided in his draft dividend recommendation of 20 December 2005 of $2 million.

457 The adjustment of $1.5 million was allowed by KPMG apparently in respect of Berri's share of the Project Eureka integration costs. It appears to have been based on the Review of Year-End Accounting Issues paper tabled at Berri's Audit, Risk and Compliance Committee meeting on 21 April 2006. The Review included entries of $6.6m for redundancies and $1.5m for a share in the Project Eureka costs.

458 There is no doubt that as at the end of August 2005, the integration of the business operations of Berri and its proposed parent company National Foods had been approved by Berri and was underway. There is also little doubt that the Project Eureka integration program would have incurred costs.

459 Mr Read gave evidence that the $6.6 million for redundancies related to redundancy payments either made or committed to be made in relation to people who had been advised that they were to leave Berri, or who had left the company, and was on the basis of the accounting standards at the time.

460 However, there was no direct evidence adduced at the trial which justified the adjustment of $1.5 million allowed by KPMG in respect of Berri's share of the Project Eureka integration costs. Mr Read could only surmise that:

... clearly Berri were actively participating in the Eureka program, they were receiving the benefits of activities such as procurement so they were already benefitting their result from the work of that project, so it was not unreasonable that they should, having received the benefits, also received some of the costs.

461 Nevertheless, Project Eureka was a formal integration plan that was jointly executed and enjoyed by National Foods and Berri and was operational before 31 December 2005.

462 Further, and in any event, KPMG as the company auditors in 2006 would have to have satisfied themselves of this fact before approving the audited accounts which included provision for an expense of $1.5m for Project Eureka costs. I make no finding as to whether or not this allowance made by KPMG was in fact correct.

463 However, the issue exposes one matter which I find to be of some importance to the central question under consideration. Project Eureka was well underway in the second half of 2005, as reflected in the example of a $1.5 million allowance made by KPMG and $2 million estimated by Mr Read. The integration program contemplated by Project Eureka involved considerable accounting complexity. This complexity would have added to the difficulty the Berri Board would have faced had it convened in late 2005 to consider whether or not to declare and pay a second interim dividend for the year. The accounting complexity would have clouded the board's ability to foreshadow precisely what the Berri accounts would disclose in terms of available distributable profits from which a second interim dividend could be paid as at 16 or 28 December 2005, or shortly prior thereto.

464 The issue would have given rise to uncertainty in late December 2005 in the minds of the Berri directors, if they had been called upon to consider declaring and paying the Second Interim Dividend.

465 In 2004, Berri had serious disputes with two of its suppliers of beverage bottles and tops, ACI Operations Pty Ltd ("ACI") and Brickwood Holdings Ltd ("Brickwood"). These disputes blossomed into two main pieces of litigation, which commenced in 2004 and produced two judgments of this Court, namely ACI Operations Pty Ltd v Berri Ltd[93] decided by Habersberger J (handed down on 25 June 2004), followed by ACI Operations Pty Ltd v Berri Ltd[94] decided by Dodds-Streeton J (handed down on 9 June 2005).

466 The litigation was not finally resolved until entry into a written settlement agreement on 29 December 2005, the day after settlement of the Put Option transaction which conferred the last parcel of ICM shares on San Miguel.

467 A useful summary of the dispute between Berri and its suppliers appears in the judgment of Dodds-Streeton J in ACI Operations Pty Ltd v Berri Ltd.[95] The following summary of facts appears in the headnote to the case:

An agreement for the supply of beverage bottles and tops gave the manufacturer-supplier ("ACI") an exclusive right to supply its customer ("Berri") with defined products, and products "substantially the same as or substitutable for" any such products for an initial five-year term expiring in May 2006. ACI's exclusive right was subject to Berri's right to accept a third party's "bona fide arm's length" offer to supply the defined products (cl 5.5) or the substantially same products (cl 4.8) if ACI did not match the third party's offer. In December 2003, Berri received two offers from a third party ("Brickwood") and, notwithstanding ACI's denial that either offer was a qualifying offer under its supply contract with Berri and ACI's issue of proceedings against it in the court, Berri accepted the Brickwood offers, under the first of which Brickwood was to commence supplying Berri in late January 2005. In June 2004, Habersberger J upheld ACI's challenge to the validity of Brickwood's offer: [2004] VSC 219. In late 2004, by which time Berri had resubmitted one of the Brickwood offers to ACI under cl 4.8 of the supply agreement and ACI had commenced a second proceeding challenging the validity of the resubmitted offer, Berri terminated the Brickwood contract and solicited from Brickwood an offer for a replacement contract so that Brickwood could endeavour to mitigate its loss. Following lengthy negotiations between them in December 2004, Brickwood supplied Berri with an offer requiring acceptance by 21 December 2004 which Brickwood later extended to 30 June 2005 after Berri offered to pay $476,000 per month towards Brickwood's estimated damages. ACI applied for declaratory and injunctive relief, including an order restraining Berri from accepting, acting on, or purchasing bottles pursuant to Brickwood's offer. ACI alleged, inter alia, that 10 of the bottles in the Brickwood offer did not fall within cl 4.8 because they had the same volume, material type and weight as the corresponding ACI products.[96]

468 Dodds-Streeton J held on 9 June 2005 that Brickwood's then most recent offer to Berri was not a valid offer which Berri could accept.

469 Berri filed a notice of appeal in respect of Dodds-Streeton J's decision (No. 2088 of 2004) but the appeal was ultimately not pursued.

(a) In mid-2001, Berri entered into a bottle/packaging supply contract with ACI, under which ACI had: (i) during the contract term (up to 29 May 2006), the right of last refusal to match any bona fide, third party offer received by Berri; and (ii) after the expiration of the initial contract term, the right to match any bona fide, third party offer received by Berri;

(b) In January 2004, notwithstanding its contract with ACI, Berri had accepted an offer from Brickwood for supply from 27 January 2004 to 29 May 2006, with the result that Berri was then bound to two bottle/packaging supply contracts, with two different suppliers;

(c) Berri had entered into the supply contract with Brickwood because the cost to purchase supply was cheaper than continuing to purchase from ACI; and

(d) Throughout 2004 and 2005, Berri was the subject of two principal proceedings commenced by ACI (both of which were decided in favour of ACI). Meanwhile, Berri continued to take supply from ACI under its supply contract and make compensation payments to Brickwood in the sum of $476,000 per month to hold over an arrangement with Brickwood until June 2005. The payments to Brickwood continued until June 2005.

471 By June 2005, I accept that it was clear to Berri that: the Brickwood offers were invalid; it was impossible for Berri lawfully to comply with the terms of both contracts; and out of necessity it needed to resolve the position with both Brickwood and ACI. As at June 2005, Berri therefore faced a significant exposure to both ACI and Brickwood.

472 Berri initially commenced settlement discussions, however they broke down. San Miguel, which was by then Berri's majority shareholder, took over the negotiations.

473 From about September 2005, San Miguel investigated potential settlement options for the Berri disputes. It undertook due diligence and valuations in September through to November and had a lead role in liaising and negotiating with ACI. Various options for settlement were considered by San Miguel, National Foods and Berri.

474 Brickwood made a further offer to Berri dated 29 August 2005 which was given to ACI on 2 September 2005. On 23 September 2005 ACI commenced proceedings for a declaration that the latest Brickwood offer was invalid.

475 On 28 September 2005, representatives of San Miguel and representatives of ACI met in Singapore to discuss resolving the disputes between ACI and Berri and agreeing upon contractual variations to the ACI supply agreement that would allow Berri to move to Brickwood as a supplier, which was its preferred commercial objective.

476 On 10 October 2005, Mr Shears of ICM gave a clearance to San Miguel to "continue pursuing a compromise on the ACI/Brickwoods case".

477 By November 2005, negotiations were reasonably well advanced. It was determined that the most cost effective solution for Berri was to settle with ACI; for Berri to purchase and operate ACI's Riverland plant for supply of glass bottles in South Australia and Western Australia; and for Berri to commence a new supply contract with Brickwood for the Australian east coast.

478 The ACI Riverland plant proposed to be acquired from ACI by Berri was a bottling plant which Berri considered suitable to meet some of its needs. It was referred to as the "ACI Roxy business" in some of the documentary evidence.

479 The negotiations with ACI were conducted by San Miguel, with some assistance from National Foods. San Miguel, however, considered it important to maintain the "posture" that it was San Miguel negotiating with ACI. No Berri employees were involved in the negotiations and the Berri Board was not apprised of the negotiations or even the offers of settlement purportedly made by Berri to ACI.

480 On 22 November 2005, a settlement proposal was formulated and put to ACI in a letter. While the letter purported to be from Berri, it was signed by two San Miguel employees, who were on the Berri Board. The offer was sent without authorisation from the Berri Board. The proposal involved:

(a) Berri acquiring ACI's Riverland plant for $10 million; and

(b) a variation to the contract provisions under which ACI supplied bottles to Berri for use in its NSW and Queensland operations. This was designed to facilitate supply from Brickwood to commence soon thereafter.

The proposal was subject to conditions, including Board approvals from both San Miguel and Berri and settlement of all outstanding contractual disputes and proceedings between Berri and ACI.

481 ACI responded to the proposal on 25 November 2005. The response was addressed to San Miguel.

482 A further letter of offer was then sent to ACI on 6 December 2005. Again the offer purported to be from Berri, although it had not been approved or authorised by the Berri Board. An acquisition of the kind contemplated in the offer, involving the purchase of ACI's Riverland plant, required the unanimous approval of the Berri board under Schedule 3 to the Shareholders Agreement.

483 The offer contemplated that settlement would occur on 21 December 2005, shortly after the then expected completion date of 16 December 2005 for the acquisition of the remainder of ICM's shares in Berri by San Miguel.

484 Ultimately, a "Sale of Business and Assets Agreement" (the "the Sale Agreement") between ACI and Berri was entered into and executed on 29 December 2005, the day after completion of the transfer of ICM's shares in Berri to San Miguel. The Berri Board was not apprised of the Sale Agreement, either before 28 December or even, it seems, on 29 December. Unusually, completion of the sale took place on the same day that the sale agreement was executed. This step permitted Berri subsequently to report the associated expenses in the 2005 financial year, prior to 31 December 2005.

485 The monetary consideration payable under the Sale Agreement was $10 million which was expressed as the "Completion Payment". This was subject to defined Adjustment Amounts. The Sale Agreement was also expressed to be just that. Pursuant to clause 2 the Sale Agreement said: "Vendor [ACI] sells ... and the Purchaser [Berri] purchases .... The Business and the Assets for the Purchase Price". The Business was the bottling plant conducted by ACI in South Australia. Clause 3.1 of the Sale Agreement apportioned the Purchase Price, allocating $2,702,000 to Plant and Equipment, an amount to Stock at valuation, nominal amounts to various other items, and the balance to Goodwill. No part of the Purchase Price was stated to be allocated to settlement of any disputes between ACI and Berri.

486 However, provision was made for entry into a "Settlement Deed". This was defined in the Sale Agreement to mean "the deed dated on or about the date of this Agreement between the Vendor and the Purchaser in relation to proceedings between the parties regarding the Heads of Agreement". The "Heads of Agreement" was in turn defined to mean the agreement of that name dated 30 May 2001 between the Vendor (as supplier) and the Purchaser (as customer). Pursuant to clause 6.2(a) completion of the Sale Agreement was conditional upon the Purchaser (Berri) delivering to the Vendor (ACI) an executed counterpart of the Settlement Deed. This condition was called the "Completion Condition". Pursuant to clause 6.2(e), if the Completion Condition was not fully satisfied (or waived) by 3 February 2006, the Sale Agreement could be terminated by either party. Under clause 6.2(g) it was noted that the Completion Condition was for the benefit of "both the Vendor and the Purchaser", and could "only be waived by notice in writing".

487 The "Heads of Agreement" was the supply agreement entered into between ACI and Berri dated 30 May 2001 under which Berri was obliged to purchase all of its requirements for defined beverage bottles and bottle tops and products "substantially the same as or substitutable for" any such products. The supply agreement operated for an initial five year term expiring on 30 May 2006, subject to Berri's right to accept a third party's "bona fide arm's length" offer to supply the products if ACI did not match the third party offer. This supply agreement was the subject of the litigation which was first determined by Habersberger J in June 2004 and then by Dodds-Streeton J in June 2005.[97]

488 Further, one of the obligations of ACI under clause 6.3(f) of the Sale Agreement was to deliver to Berri a counterpart of the Deed of Amendment executed by ACI. The form of Deed of Amendment was annexed to the Sale Agreement.

489 The Deed of Amendment amended the Heads of Agreement between ACI and Berri dated 30 May 2001 under which ACI supplied bottling and other services to Berri. The effect of the amendments to the Heads of Agreement, as set out in clause 3 of the Deed of Amendment, was to allow Berri to enter into a contract with Brickwood for future supply of bottles to meet Berri's needs in South Australia, Queensland and NSW, which was its preferred commercial outcome. In other respects, ACI retained its rights as supplier until 29 May 2006, with certain supply rights being assigned by ACI to Visy with the consent of Berri.

Uncertainties in Relation to the Proposed Settlement as at 16 and 28 December 2005

490 Progress towards a settlement was well advanced by December 2005 and had crystallised into the formal letter of offer of 6 December. Further, it is likely that at least San Miguel and ACI anticipated that the central elements of the proposed settlement would be accepted and would result in a concluded bargain.

491 Nevertheless, a number of uncertainties arose and remained present in relation to the proposed settlement as at 16 and 28 December 2005.

492 The first uncertainty related to the settlement date. It will be recalled that the offer in the letter of 6 December contemplated that settlement would occur on 21 December 2005.

493 However, there was a delay. Settlement did not occur until 29 December 2005. This took further negotiation to achieve.

Terms and Conditions Remained to be Satisfied

494 There was also uncertainty surrounding completion of some major elements of the terms and conditions of settlement. It will also be recalled that the Sale Agreement imposed obligations on both Berri and ACI to do the following things after the settlement, which I construe to be conditions:

(a) Berri was to deliver to ACI an executed counterpart of the Settlement Deed, and if this was not satisfied by 3 February 2006, the Sale Agreement could be terminated by either party;

(b) ACI was to deliver to Berri a counterpart of the Deed of Amendment to the original supply agreement executed by ACI.

495 As at both 16 and 28 December 2005, these things had not been done, and remained to be done to complete the settlement.

496 Further, the Berri Board needed to convene to approve the following things:

(c) approval of the Deed of Amendment to the original supply agreement with ACI.

497 As at both 16 and 28 December 2005, no meeting of the directors of Berri had been convened to consider these matters.

Accounting Issues in Relation to the Settlement

498 Further, accounting issues arose from the settlement which were likely to impact on the final financial statements of Berri when they were finally produced, and were likely to give rise to adjustments in the accounts.

499 As at 16 and 28 December 2005, if the Berri Board had considered these accounting issues in the context of considering whether to pay a second interim dividend for the year, given the complexity of the issues, it is unlikely that the directors would have been in a position to anticipate how they would be treated in the final audited accounts.

Accounting Treatment of "Goodwill" in the Settlement

500 The first accounting issue arising from the settlement concerns the treatment of the goodwill purchased by Berri from ACI in the Sale Agreement.

501 The 2005 Berri Accounts produced in April 2006 show an expense charge of $13.351m for "costs associated with a legal dispute with certain suppliers". This is further explained in the Review of Year-End Accounting Issues paper tabled at Berri's Audit, Risk and Compliance Committee Meeting of 21 April 2006. There, the expense charge is described as "costs associated with the Brickwood/ACI legal dispute ... includes the write-off of the $6.9 mill previously classified as goodwill on the purchase of the ACI Roxy business".

502 This determination to write off the sum of $6.9 million in the final audited accounts for the company in respect of the year ended 31 December 2005 was made by the Berri auditors KPMG some time in April 2006. The $6.9 million sum had been previously allocated to goodwill in respect of the purchase of the ACI Riverland plant.

(i) the whole of the purchase price of the Riverland plant (or at least the $6.9 million designated as "goodwill" in the sale agreement) could not be treated as costs associated with the ACI dispute; and

(ii) if such costs were settlement costs, unanimous approval of the Berri Board was required in accordance with the Shareholders Agreement and such approval was not obtained.

504 San Miguel, on the other hand, submitted that the adjustment was appropriate on the basis that it was a cost associated with the ACI dispute. It points to a body of written evidence showing that at all relevant times, it was evident that the offer of $10 million made to ACI comprised an amount with respect to the settlement of the ACI/Berri dispute and an amount with respect to the purchase of ACI's bottling plant in Riverland. For example, the letter of offer dated 6 December 2005 stated that Berri's offer of AU$10 million was "for the settlement of all contractual disputes and legal proceedings between ACI Operations Pty Ltd (ACI) and Berri" and "includes the purchase price for the ACI blow moulding operation ... (ACI Riverland Operation) from ACI and the consideration for the early termination of arrangements to supply packaging materials by ACI to Berri". The covering letter of the same date states that "a proportion of the purchase price to be attributed to settlement of the litigation between ACI and Berri".

505 In January 2006 Berri management undertook a discounted cashflow analysis to measure the value in use of the business it had acquired. That cashflow analysis determined that the goodwill was impaired only to the extent of $1.85 million. The assessment carried out by Berri was in accordance with the accounting standard AASB 136.

506 KPMG, the Berri auditors who audited the April 2006 accounts, noted in a summary review memorandum of 24 January 2006 that:

Berri have treated the $6.9 million excess over the fair value of assets acquired as goodwill on acquisition. Management have advised that a discounted cash flow analysis was performed in relation to the ACI plant which determined that approximately $1.85 million of the goodwill was impaired. This amount has been written off to profit and loss at year end.

507 This entry records the fact that only $1.85 million was in fact written off by Berri in its accounts produced in January 2006.

508 KPMG's accounting analysis in its 24 January 2006 report also supported this view.

509 However, KPMG did not ultimately agree, and it took a different approach. In the Berri final audited accounts for 2005, prepared in April 2006, KPMG wrote off the entire amount of $6.9 million. There was no evidence as to why this was done.

510 On the other hand, Ernst & Young accountants took a different view of the value of the goodwill acquired by Berri when it acquired ACI's Riverland plant on 29 December 2005. Ernst & Young audited the accounts of National Foods for the year ended 31 December 2005. In its report dated 17 February 2006, Ernst & Young recorded that "impairment" of the goodwill on the acquisition was calculated at $1.85 million and was written off in the 2005 financial year in the books of Berri. Ernst & Young accepted that this impairment figure of $1.85 million should be carried into the books of National Foods.

511 This approach was supported by Mr Morris, the accounting expert called by ICM who concluded that the Berri Board would have been in a position as at 16 December or 28 December to recognise or take into account an adjustment that reduced the value of goodwill in Berri's books by no more than $1.85 million. Other evidence supported this conclusion, including KPMG's accounting analysis in its 24 January 2006 report, and the audit report on National Foods' final accounts for the year ended 31 December 2005 produced by Ernst & Young, dated 17 February 2006. Further, $1.85 million, and nothing greater, was expensed through the profits/loss accounts prepared for National Foods in the period ended 31 December 2005.

512 A third opinion was also open as to the accounting treatment of goodwill following the acquisition of the Riverland plant by Berri. Berri submitted that if Berri was the only customer of ACI's Riverland plant when it was acquired by it, then there could be no goodwill following the acquisition. The argument was advanced that goodwill in the business of the plant would cease to exist because it would be subsumed into Berri's consolidated accounts.

513 The discounted cash flow analysis performed by management was submitted by ICM to be evidence of an assessment that the directors of Berri could or would have made on 16 or 28 December 2005, had the directors known of the terms of the Sale Agreement between ACI and Berri. Further, ICM contends that there is no evidence which justifies the complete write off of the value of the business acquired from ACI (i.e. $6.9 million goodwill) because Berri was continuing to operate the business.

514 I do not have to resolve the issue as to which accounting treatment of the goodwill was the most appropriate, as things stood in late 2005. It is sufficient for present purposes to identify the issue as a matter which is likely to have given rise to uncertainty in the minds of the directors of Berri as at 16 and 28 December 2005. It was uncertain how the goodwill component of the settlement would be treated in the final audited accounts, and how it would affect the "bottom line" expressed in those accounts. Had the Berri Board or those advising it turned their minds to the issue at that time, they would have encountered this uncertainty.

515 I am satisfied that a director of Berri in late 2005, properly advised and knowing all of the relevant facts, was not in a position to have formed a genuine opinion on the difficult question as to the correct and appropriate accounting treatment for the settlement of the ACI disputes and the purchase of the Riverland plant, prior to the final accounts of Berri being prepared.

516 It follows, in my opinion, that the Berri Board would not have been in a position as at 16 or 28 December to take into account an adjustment that reduced the value of goodwill in Berri's books by only $1.85 million (or less). This would have to have awaited the production of the audited financial reports of the company for the year in question.

Accounting Treatment of the Brickwood Payments

517 The second accounting issue arising from the settlement of the legal dispute concerns the treatment of the payments made to Brickwood.

518 Pursuant to the agreement reached between Berri and Brickwood in December 2004, Berri had paid $476,000 per month to Brickwood between February and June 2005. This was done in order for Brickwood to keep its supply offer to Berri open and as a contribution towards Brickwood's estimated damages by reason of Berri's breach of its earlier contract with Brickwood. These payments were included in Berri's monthly operations reports in 2005, and were expensed through Berri's accounts during 2005.

519 San Miguel produced bank records and other documents evidencing that Berri had in fact made the agreed payments of $476,000 in each month from February to June 2005. However, San Miguel produced no documents evidencing any payments made after June 2005. Nor did San Miguel produce any documents evidencing any agreement made by Berri with Brickwood after 2 September 2005.

520 No witness gave evidence that Berri made any payments to Brickwood between 30 June 2005 and 31 December 2005 or that any agreement had been entered into between Berri and Brickwood after 2 September 2005. Mr Kearney's evidence was that he was not aware of any agreement with Brickwood to make payments after 30 June 2005; there were discussions but never any agreement.

521 I am satisfied that Berri did not make any further payments to Brickwood after June 2005, and that Berri had in fact incurred no liability to Brickwood to make such payments beyond 30 June 2005. Further, Brickwood never commenced proceedings against Berri nor did it obtain any judgment. Berri never paid any amount to Brickwood on account of damages.

522 In these circumstances, if there was a potential liability in Berri to make compensation payments to Brickwood between July 2005 and 31 December 2005, that would only have been a contingent liability, at most.

523 However, Berri continued to record an estimated expense of $476,000 per month and an estimate of legal expenses in its monthly reports, including its September and November 2005 reports. This was recorded in spite of the fact that no actual payments were made to Brickwood for these periods. In relation to Brickwood, the Berri September Management Report showed year to date expenses of $4.5 million and estimated full year expenses of $6.1 million. Further, the Berri November Management Report was prepared on the same basis as the September report and showed year to date expenses in relation to Brickwood of $5.7 million and estimated expenses for the full year of $6.3 million.

524 However, there is no evidence before the Court to enable it to infer that by early 2006 there was even a contingent liability in respect of any further exposure of Berri to Brickwood.

525 Accordingly, it was submitted by ICM that there was no proper basis for the adjustment of $3.056 million recorded in the November Operating Accounts in respect of Brickwood. This adjustment, it was said, should be reversed, and the available profits should be increased by that amount.

526 It was further submitted by ICM that even if there had been a contingent liability, this did not need to be expensed through Berri's profit and loss account for the year ended 31 December 2005.

527 Nevertheless, I am not satisfied that a director of Berri, in considering the monthly reports of September and November 2005, would or should have taken the step of requesting further accounting advice on the treatment of Brickwood payments shown in the monthly management reports covering those periods.

528 I am satisfied that a director of Berri in late 2005 was not in a position to have formed an opinion different to that expressed in the monthly management accounts for September and November 2005 as to the inclusion of Berri's contingent liability to Brickwood. Alternatively, had a query been raised by a director in relation to those matters, I am not satisfied that this would have produced anything different in relation to what was reported in the monthly management reports.

529 Indeed, I am satisfied that a director of Berri in late 2005, properly advised and knowing all of the relevant facts, if asked to consider a resolution to declare a second interim dividend for the year on either 16 or 28 December 2005, would in all likelihood have arrived at a conclusion that the Berri financial statements, when finally produced, would be likely to include a contingent liability to Brickwood as reflected in the Berri monthly management accounts prepared for September and November 2005.

530 At the very least, had the matter been placed before the directors for decision in late 2005, they would have been uncertain as to how the Brickwood amounts would be treated in the final audited accounts. This uncertainty would have affected the directors determination of whether to declare and pay the Second Interim Dividend on or shortly before 16 or 28 December 2005.

531 During the 2005 accounting period, commencing on 1 January 2005, new accounting standards known as the Australian International Financial Reporting Standards ("AIFRS") were introduced and became applicable to the Berri accounts for the year.

532 In late 2005, the Australian Securities and Investment Commission ("ASIC") issued ASIC Release IR 05-57. This was a public release on the reporting implications of the new accounting standard. IR 05-57 was not published until 5 October 2005. It included a reference to the payment of dividends and accounting standards under AIFRS to be observed for this purpose. The ASIC Release relevantly stated in this respect:

Under s254T of the Corporations Act 2001 (the Act), a company can only pay dividends out of profits. The retained profits shown in the last financial report of a company are relevant for this purpose.

Upon the adoption of AIFRS, the retained profits of some companies will change and in a number of instances, there will be material adjustments.

ASIC believes that retained profits previously reported on a pre-AIFRS basis cease to have relevance for paying dividends after the first half-year financial report of a disclosing entity, or full year financial report of a non-disclosing entity prepared under the Act using AIFRS, is completed. Only retained profits and current year profits recorded under AIFRS will be relevant from that time going forward.

533 In my opinion, the status and application of the ASIC Release IR 05-57 was not clear, and was capable of differing interpretations.

534 On one view, the ASIC Release merely indicated a policy position to the effect that ASIC would not pursue inadvertent infringements of the newly introduced AIFRS accounting standards in respect of dividends declared and paid during a transition phase. Mr Westworth, the accounting expert called by San Miguel, appeared to adopt this approach. Mr Westworth explained that the ASIC Release was intended to provide a transitional policy to facilitate the adoption of the new accounting standards, and did not create a right to act contrary to those new standards. In his second report he indicated that the ASIC Release was no more than a statement of intent on ASIC's part not to take action where a company inadvertently paid dividends which were in excess of distributable profits by reason of AIFRS adjustments.

535 On the other hand, Mr Morris, the accounting expert called by ICM, explained his understanding of IR 05-57 under cross examination in less definitive terms:

... if one looks to the relevant Australian accounting standards, they were published, from memory, in June or thereabouts of 2004. They provided that they were to apply in the preparation of the first financial statements for a full year that commenced on or after 1 January 2005. They don't say that they apply on 1 January 2005, nor do they say that they apply on the first day of the accounting period. What they say is they apply when you prepare the accounts for the 2005 year and they also require a restatement of the prior year's accounts on the same basis. Hence, one, reading carefully the application provisions of any of the relevant standards, will see the reasoning that appears to have been applied by ASIC in preparing IR 05-57. It's saying that when you strike the accounts and apply AIFRS, that's when or until that time, they seem to be saying that the profits reported in the prior year accounts under Australian GAAP continue to be the relevant profits, they are not overtaken until you prepare your first set of accounts under the new rules. I think that's what the document says. I don't think it changes the law. I don't think it changes any accounting standards and if it would be of assistance to Your Honour, I'm more than happy to point you to further documents that might clarify that for your benefit.

536 It is to be noted that IR 05-57 was not published until 5 October 2005. Accordingly, Berri was not in a position to have relied on it in declaring the first interim dividend in July 2005, whatever interpretation was placed upon it. Conversely, Berri was technically in a position to have taken into account the ASIC Release on and before 16 or 28 December 2005, if the Berri Board had convened to consider the payment of a second interim dividend at that time.

537 I accept that ASIC Release IR 05-57 was intended to provide authoritative guidance which was intended to reflect the correct legal position. I also accept that on one view the Release conveyed an indication that the requirements of AIFRS concerned the presentation of accounts subsequent to the 2005 year, and did not affect the availability of retained profits from previous years during 2005. However, in my opinion, the ASIC Release IR 05-57 was not entirely clear, either as to its intended operation or as to the consequences of a failure to adhere to its guidelines.

538 The ASIC Release IR 05-57 was of potential relevance to the accounting position of Berri. The company derived profits from land and buildings that formed part of a reserve known as the asset revaluation reserve. The balance of the asset revaluation reserve was stated in Berri's 31 December 2004 accounts to be $44.490 million. However, in order to comply with AIFRS, this figure was required to be restated on 1 January 2005 to remove profits relating to the revaluation of brand names and trademarks. This restatement removed $39.959 million of the reserve but left $4.530 million available for distribution as capital profits. By 31 December 2005, the Berri Board had not made any decision to transfer these capital profits and to apply them against accumulated losses. Nor did the Board make any such decision after 31 December 2005. As a result, ICM submitted that these capital profits of $4.530 million remained available for distribution by way of dividend on 16 and 28 December.

539 According to Note 24 to the April 2006 financial statements prepared for Berri, "Explanation of Transition to AIFRS", the $4.53 million recorded in the accounts represented "the balance of the revaluation reserve at 1 July 2004 in respect of assets that are measured on the basis of deemed cost under AIFRS". This balance remaining in the reserve was attributable to the revaluations of land and buildings.

540 Nevertheless, on ICM's case, the effect of applying IR 05-57 was that the $39.959 million "adjustment to other reserves" in respect of the "de-recognition of internally-generated brand names" recorded in Note 24 to Berri's April 2006 financial statements, did not in fact have to be taken into account in determining available profits in December 2005. If this were to be accepted, on ICM's case, it would add a further $39.959 million of distributable profit to the total available reserves and profits available to Berri in December 2005.

541 It was on this basis that Mr Morris concluded that the amount available to the Berri Board for distribution as dividends on 31 December 2005 was well over $40 million.

542 However, I am not satisfied that a Berri director, if asked to consider the matter in late 2005 in the context of determining whether a second interim dividend ought to be declared for the 2005 year, would have formed a genuine opinion that the finalised financial statements in respect of the year, when they were subsequently prepared, would give rise to this result.

543 Rather, it is more likely that a director considering the matter in late 2005, in the context of determining whether or not to declare and pay a second interim dividend for the year, would not have been in a position to foresee how the final audited financial statements, when they were produced, would treat the issue. In other words, it would not be likely that a director at the time would have been in a position to form a genuine opinion on the matter, one way or the other.

544 Throughout 2005, and indeed until September 2008, Berri was using in its business an "enterprise resource planning" ("ERP") information system. This was made by J D Edwards and the system was known internally within Berri as "JDE". Berri had in fact also used the system for a significant period of time prior to 2005. The system operated satisfactorily.

545 National Foods also used an ERP system known as "MFG Pro". The JDE and MFG Pro systems were not compatible.

546 San Miguel used a third ERP system known as "SAP". Neither the JDE nor MFG Pro systems were compatible with SAP.

547 No effective decision had been taken to move Berri to a new ERP platform in 2005.

548 However, on May 8 2006, San Miguel launched a project to move both Berri and National Foods to the SAP system.

549 The project was extensive. It involved some 48 people from National Foods, as well as external consultants from Deloitte. The project budget was in the order of $50 million. The project involved numerous complex steps including mapping the way Berri and National Foods performed their existing activities; considering what improvements might be made; cleansing existing data; and product coding.

550 As at May 2006, the project was expected to be completed in June 2008. In fact it was completed in September 2008. The juice division, which was Berri's business operated on JDE, was not scheduled to transition to SAP until October or November 2007. Until this time, Berri planned to and did continue to use its JDE information system.

551 The 2005 end of year Berri Accounts show an impairment charge of $7.743 million for property, plant and equipment. This is further explained in the Review of Year-End Accounting Issues paper tabled at Berri's Audit, Risk and Compliance Committee Meeting of 21 April 2006. The paper included "write-downs of IS-related assets of $5.4 million".

552 ICM takes issue with this adjustment on the basis that Berri's IS assets (consisting of the JDE enterprise resource planning system) were still in use throughout 2006, until the implementation of the SAP project across Berri and National Foods.

553 ICM submitted that it was not contemplated in December 2005 that Berri would transition to the new SAP system before July 2007.

554 Mr Morris' opinion was that: "the carrying value of the IS assets should have been depreciated over the period to 30 June 2007 at a rate that would reduce its carrying value at that date to the realisable value (if any) of those assets"; and the directors of Berri were "in a position to recognise or take into account an adjustment of no more than $284,000 for the year ended 31 December 2005".

555 The question for present purposes is: what were the accounting implications arising from the Berri information system in late 2005, as things stood at that time, in the context of the directors of Berri considering the declaration and payment of a second interim dividend payment for the year?

556 Although in 2005, no formal decision had been made by Berri to abandon the JDE system, and no decision had been made by National Foods to abandon its MFG Pro system, the evidence demonstrates that the cessation of use of the JDE system within Berri was planned to occur earlier than 2006.

557 IT-related synergies were the subject of discussions between Mr Kop of Berri, Ms Joy Linton of National Foods and Ms de Ocampo of San Miguel on or around 21 June 2005. This is further reflected in an email sent by Mr Kop to Mr Erana and Mr Read on 30 August 2005, where he identified Berri IS assets as a potential acquisition adjustment.

558 San Miguel and Berri referred to a body of evidence which demonstrated, as from approximately December 2004, a plan had been adopted within Berri to retire its information system assets and thereby satisfy the test of impairment under the accounting standard AASB 136.

559 Documentary evidence included a spreadsheet of adjustments dated 5 December 2005 which said the Berri IS asset adjustment is "[b]eing reviewed by Michael Read". Other references were made to this in Mr Lavery's 13 December 2005 spreadsheet, which noted "... write-off the majority of Berri's IS assets (except the phone system) as acquisition adjustment due to doubt over the future use given push for a single operating environment in the combined business ..." A 24 January 2006 Summary Review Memorandum and a 17 February 2006 Summary Review Memorandum pointed in the same direction. These documents together suggest that a plan to abandon Berri's existing information technology system and introduce a new one was adopted and accepted in the latter part of 2005. Indeed, consistently with that timing, the 17 February 2006 Summary Review Memorandum referred to the proposed installation of a common platform for National Foods and Berri in 2006.

560 Mr Kop gave evidence that "there were discussions about the implementation of a new system prior to National Foods coming along because San Miguel from memory used SAP and they had a view, from memory, that Berri should move to a new system in time". He said further that in mid-2005 "there was a hold on all IT development because there needed to be an assessment as to what would be the best system in future for all of the activities".

561 Mr Mercer gave evidence that the IT systems at each of Berri, San Miguel and National Foods were not compatible with each other and that "somewhere around about the end of the year" there were indications that National Foods, presumably supported by San Miguel, was anticipating a change of its computer systems.

562 I find that, by late December 2005 there was an intention within the senior management of Berri for the IT systems of Berri and National Foods to be integrated, notwithstanding that there had been no board decision or approval of this step at the time.

563 The accounting standard on impairments (AASB 136) requires companies to take into account objective evidence, which may include plans, in determining whether or not to impair an asset.

564 Although the accounting expert called by ICM, Mr Morris, did not treat Berri's IS assets as an impairment issue, in the year end accounts produced in April 2006, Berri did treat the information system assets as such. The Berri auditors KPMG agreed that this adjustment needed to be reflected in Berri's final accounts in the sum of $5.4 million. This amount formed part of the $7,545,000 for the line item "Impairment of property, plant and equipment" under Note 3, "Expenses".

565 In my opinion, if the directors of Berri had been called upon to consider the matter at either 16 or 28 December 2005 in relation to Berri's IS system, it would have been open for them to conclude that an impairment adjustment may well be made in the final accounts, when they were prepared. At least there would have been sufficient doubt about the matter in late 2005 to preclude a confident assessment being made that the audited financial statements, when they were eventually prepared, would treat Berri's IS system as other than an impairment issue to be taken into account.

566 The background to this issue is as follows: most orange juice produced in Australia for human consumption is derived from the Valencia variety of fruit. Berri had developed a new variety of citrus plant which would allow growers to harvest oranges during the period of the year when Valencia trees were not in fruit. Berri made long term loans to farmers to allow them to purchase the new rootstock from Berri and pay off the loan out of the proceeds of sale of the fruit. Those loans were, or were to be, secured by real property mortgages.

567 However, the project suffered set-backs. Mr Read gave evidence that when he investigated the project in November or December 2005, he found that there were no legal agreements and that there were trees of a new variety planted in the middle of a drought that would not produce a commercial crop for at least seven years.

568 There were indications in August 2005 that the farmers involved in the project were in financial difficulty and, by December 2005, there was evidence that it was unlikely that Berri would recover any rootstock receivable.

569 This placed the repayment of the loans advanced to the farmers at some risk, and called for an adjustment to be made in respect of the issue. This was reflected in the Berri accounts produced in late 2005. An adjustment in respect of the rootstock loan was also one of the matters referred to in Mr Lavery's 13 December 2005 spreadsheet which was relied upon by Mr Read in his draft dividend recommendation. The November Operations Report included a $100,000 write down in respect of the rootstock loan. That write down was included in the full year profit forecast of $19.1 million.

570 Further, the 2005 Berri final accounts produced in April 2006 showed a provision charge of $762,000 for "provision against long term receivable", being rootstock on-sold at cost (by way of a loan) to certain farmers.

571 ICM takes issue with this adjustment. It says that the loans were subject to a commercial interest rate, had a medium payment term, were entered into (or about to be entered into) in late 2005 and were secured by real property mortgages over the land on which the trees were planted.

572 ICM submitted further that the factual position that would have presented itself to the directors of Berri in December 2005, if they were considering the payment of a second interim dividend to ICM, was that an adjustment was not required in respect of the rootstock loan. The ICM accounting expert Mr Morris concluded that Berri was not in a position to recognise or take into account an adjustment, and was not required or obliged to take into account an adjustment, in respect of the rootstock loan.

573 However, I am satisfied that the evidence demonstrates that this was an appropriate adjustment for the directors of Berri to consider in December 2005 if they were determining the state of the final accounts to be later produced, for the purpose of making a decision as to whether to declare and pay a second interim dividend for the 2005 year.

574 PT Berri Indosari was an Indonesian subsidiary owned 80% by Berri.

575 Berri's investment in Indosari had been written down from time to time "to bring the investment into line with net assets [of Indosari] at the time". Mr Kop confirmed that Berri had consistently taken this approach in valuing its investment, both equity and debt, in Indosari.

576 Accordingly, ICM submitted that there was no reason for Berri to depart from this approach in December 2005. It pointed to Indosari's cash flow position being the same as in previous years, about break even, and to documentary evidence that its net assets continued to support the recoverability of the loan. ICM also referred to the fact that in past periods, the auditors of Berri had approved the approach which had been taken in relation to Berri's loan to Indosari. That approach was to assess the carrying value of the loan by reference to the underlying net asset position of Indosari.

577 Berri's auditors, KPMG stated in their 24 January 2006 memorandum that "the carrying value of the loan at 31 December 2005 is still supported by the underlying net asset position of Indosari".

578 ICM's accounting expert Mr Morris concluded that in December 2005 Berri was not in a position to recognise or take into account an adjustment, and was not required to take into account an adjustment, in respect of the loan to Indosari.

579 The issue arises because the 2005 Berri final audited accounts prepared in April 2006 by KPMG show a provision charge of $1.231 million for "provision against intercompany loan", which relates to the Indosari loan. ICM takes issue with this adjustment.

581 In the latter part of 2005, doubts were raised regarding the recoverability of the long-term loan made by Berri to the Indosari company, particularly because the related entity had negligible positive cash flows.

582 Mr Read gave evidence that there were some indications that the Indosari business was not performing well. Further, there were indications that Indosari was not in a sufficiently stable financial position to repay the loan or to be able to absorb the losses that would result if it were to apply normal foreign currency arrangements.

583 On 30 August 2005, Mr Kop raised with Mr Erana and Mr Read "revised Indosari valuations" as a potential acquisition adjustment. Later that day, Mr Kop presented a paper entitled "Audit Committee Paper - August 2005 Year-End Accounting Review" to Berri's Audit, Risk & Compliance Committee. That paper stated:

It should be noted that the investments has been written down by the holding company by $2.9m in prior years, including $1.0m at 30/6/04 and $0.6m at 31/12/04, so as to bring the investment into line with the underlying net assets at that time. If necessary, it is anticipated that the investment will be revalued again at 31/12/05 to ensure that the investment does not exceed the underlying net assets of Indosari.

584 Mr Lavery's spreadsheet of adjustments dated 5 December 2005 identifies "NFL International management to advise plans to enable this provision [on Indosari business] to be estimated". On a subsequent version of that spreadsheet dated 13 December 2005, it was noted that "Due to doubts over recoverability of long term loan as may not be supported by cash flows, the full balance to be written off. NBV at 10/04 was $3,767,699. The increase in the loan from then to 12/05 will be written off in 12/05". This was corroborated by Mr Kop's evidence that Indosari "was break even to small loss, small profit". Further, the financial accounts of Indosari show that the majority of its assets were non-realisable assets.

585 Mr Read's evidence was that, in the course of looking at the accounting for a number of matters within Berri, he found "there was some indications that [Indosari] was not performing well". Further, he found "numbers that indicated that, and that the loan that had been put in place between Berri and Indosari had been amended particularly in relation to the foreign currency arrangement which did indicate an inability also of the Indosari company not to be in a sufficient stable financial position to repay the loan or to be able to absorb the losses that would result if it were to apply normal foreign currency arrangements".

586 In the end, KPMG agreed that this adjustment needed to be reflected in Berri's final audited accounts, for an amount of $1.231 million. This sum was identified as its own line item "Provision against intercompany loan" under Note 3, "Expenses".

587 In my opinion, if a director of Berri had been called upon to consider the matter at either 16 or 28 December 2005 in relation to the Indosari loan, it would have been open for that director to conclude that an adjustment for the risk was likely to be made in the final accounts, when they were prepared. It was likely to have been a matter considered by each of the directors, had the Berri Board convened to consider the declaration and payment of a second interim dividend for the 2005 year. The adjustment, or potential adjustment, would have introduced yet another element of uncertainty as to what the final audited accounts would reveal as to available distributable profits, when they were later produced.

588 Berri had leasehold assets located at Carlton and Lytton.

589 Prior to 2005, Berri's leasehold improvements had been depreciated over the full duration of the lease including any optional term. As part of the integration with National Foods, it was decided that leasehold improvements should be depreciated over the duration of the lease, excluding any optional term.

590 KPMG determined that this adjustment needed to be reflected in Berri's final accounts produced in April 2006, in the sum of $1.4 million. This amount formed part of the $7,545,000 for the line item "Impairment of property, plant and equipment" under Note 3, "Expenses".

591 ICM takes issue with this adjustment. It says that the adjustment being based upon Berri's decision to change its accounting policy, was contrary to the Shareholders Agreement which provided that Berri's accounting standards and principles could only be altered with the unanimous approval of the Berri Board, which did not occur.

592 Further, it says that there is no evidence that this adjustment was supportable in December 2005. Its appropriateness would depend on a future control transaction pursuant to which National Foods acquired 100% of Berri. No such transaction was proposed until 2006.

593 Further, and in any event, the change was not an impairment adjustment within accounting standard AASB 136. It did not amount to a change in the use of an asset, but merely the proposed adoption by Berri of a new accounting policy to mirror the accounting policy followed by National Foods if and when it acquired 100% of Berri.

594 Mr Kearney agreed that there was no basis for changing Berri's accounting policy in this regard in 2005. Mr Westworth said that the potential adoption of National Foods' accounting policies in 2006 did not provide a basis for this adjustment in 2005.

595 In my opinion, the treatment of this issue by KPMG in Berri's final accounts may well have been open to challenge.

596 Nevertheless, the integration of Berri with National Foods, which was well underway in the second half of 2005, would have presented the directors of Berri a range of imponderables in late 2005. Had it arisen for specific consideration, the Berri/National Foods integration would have been a source of uncertainty.

597 In these circumstances, I am satisfied that the evidence demonstrates that this particular adjustment could not be dismissed in late 2005 as an inappropriate adjustment. It could well have been within the reasonable contemplation of the directors of Berri in December 2005, had they considered the matter when determining the state of the final accounts to be later produced, in the context of making a decision as to whether to declare and pay the Second Interim Dividend. On the information that was likely to have been available to the directors in late 2005 on the matter, in my view, it is doubtful that they could have confidently arrived at an opinion as to how the issue would be ultimately dealt with in the final accounts.

598 A proposal to close a Berri operation at Balcatta, Western Australia, gave rise to another issue relating to accounting adjustments. The closure was part of a program to rationalise the business operations of Berri with that of National Foods by, amongst other things, relocating some Berri plants to the premises of National Foods. The Balcatta proposal was part of that strategic plan.

599 In the final Berri accounts, KPMG included the sum of $800,000 in respect of a proposal to close down the Berri Balcatta plant. This was included in the final accounts (which formed part of the $7,545,000 for the line item "Impairment of property, plant and equipment" under Note 3, "Expenses").

600 ICM claims through its expert accountant Mr Morris that adjustments relating to the possible future impairment of other assets which would have values impacted by any relocation in 2006 of Berri's premises to premises belonging to National Foods, should not have been taken into consideration in finalising the Berri 2005 final accounts. The Review of Year-End Accounting Issues paper tabled at Berri's Audit, Risk and Compliance Committee meeting on 21 April 2006 records an amount of $0.8m for "Balcatta P&E". Mr Morris said the adjustment should not be allowed.

601 In January 2006, KPMG recorded the decision of Berri to close the Balcatta plant, stating that it agreed with Berri's analysis of the fixed asset write-downs for closure of the Balcatta plant. Those write-downs were for $778,000 at year end, and an additional $695,000 for redundancies.

602 The write-downs relating to these premises were considered at various times from late 2004 through to early 2006. As early as 9 December 2004, the information provided by Mr Kop to Ms de Ocampo contemplated synergies which included Balcatta as part of the manufacturing supply chain opportunities. This adjustment was still in issue on 30 August 2005.

603 As at 5 December 2005, the item (noted as Item 17 under "Possible provisions"), was recorded as "NFL management has advised that the Balcatta plant will be closed. Asset write-downs and closure costs to be provided". This was accompanied by a handwritten notation by Mr Read recording "fully provide for the site". The entries on Mr Lavery's spreadsheets show actions by management to evaluate these adjustments in 2005.

604 Further, on 14 December 2005, Mr Read sent an email to Mr Mercer setting out estimates relating to the closure costs at Balcatta to be taken up at year end.[98] This included the breakdown of redundancy costs (estimated at over $900,000), make good costs (estimated at $460,000), and asset write-downs (estimated at $778,000) that should be processed in December. The profit and loss forecast for Berri at 14 December 2005 did not take these adjustments into consideration (referring to the November operating profit report).[99] Mr Mercer, in his oral evidence, stated that these particular items would be put to one side to be dealt with in the year end accounts[100] and that this amount would be included in the December monthly management accounts.[101]

605 I find that planning and decisions were being made relating to the impairment of future assets during the second half of 2005 and such issues were being discussed with the auditors at an early state. In my opinion, the directors of Berri, had they met in late 2005 to determine whether to declare and pay the Second Interim Dividend, could not have confidently dismissed potential adjustments relating to the Carlton and Balcatta assets, and were not likely to have dismissed the potential adjustments.

606 An adjustment was also made by KPMG in the final Berri accounts in relation to what was known as the Wade dispute.

607 This adjustment concerned a provision for the settlement of a claim made against Berri by its Philippines distributor (Water and Drinks Enterprises, WADE). Berri had been instructed to terminate this relationship after San Miguel first acquired an interest in Berri.

608 KPMG took the view that this adjustment needed to be reflected in Berri's final accounts, for a final amount of $1.5 million. This amount was identified as a separate line item "Provision for legal settlement" under Note 3, "Expenses".

609 ICM adduced no lay evidence to challenge this adjustment.

610 Reference was made to this item in the Lavery spreadsheets (Item 10 - "Termination of Berri Philippines Distributor") where a provision of $500,000 was made.

611 This was an adjustment that was reasonable, and is likely to have been taken into account by the Berri directors had they considered the financial capacity of the company to declare and pay a second interim dividend in late 2005, had they been called upon to consider the matter.

612 In the final accounts prepared for the year ended 31 December 2005, KPMG also included an expensed amount of $500,000 relating to a supply contract with Summit Water. This was included as a separate line item "Provision relating to onerous supply contract" under Note 3, "Expenses".

613 Although this adjustment was not challenged by ICM, it is indicative of the range of issues and the scale of adjustments that ultimately appeared on the Berri accounts when they were finalised and adopted in April 2006.

614 This particular item was not recorded in the December 2005 Lavery spreadsheets. This points to the provisional nature of those documents as an indicator at that time as to how Berri's accounts would look, when they were ultimately produced.

CONCLUSION ON APPLICATION OF THE MARRA TEST

615 Consideration of the chain of causation between the breaches of contract found and the loss and damage claimed must proceed from the application of the "Marra Test", based on the approach of the New South Wales Court of Appeal in Marra Developments.[102]

616 The Berri Board was required to act in accordance with the law when declaring interim dividends. Satisfying the "Marra Test described in these reasons was a necessary prerequisite to a valid declaration and payment of any second interim dividend for the 2005 year.

617 This involves determining whether or not, on or shortly prior to 16 or 28 December 2005, the directors of Berri would have formed a genuine opinion that:

a) the profits out of which a second interim dividend could be paid would actually be disclosed in the final accounts for the year ended 31 December 2005, when they were eventually produced; and

b) the final accounts, when produced, would reveal a sufficient profit to pay to ICM an interim dividend of up to $3,472,198 (plus associated franking credits) or some lesser sum, as at those dates.

618 Berri's financial report for the year ended 31 December 2005 was approved by its board of directors on 21 April 2006.

619 Neither this document, nor any draft of the document, was available to the Berri directors in December 2005.

620 Further, had the facts as stated above been considered by a Berri director at the time, in the context of determining whether or not Berri actually had sufficient distributable profits as at 16 or 28 December 2005 from which to declare and pay a second interim dividend, the director would more than likely have achieved an inconclusive outcome.

621 Had the Berri directors convened a meeting in late 2005 to consider the declaration and payment of a second interim dividend for the 2005 year, the directors more than likely would have had available to them, either directly or indirectly, the following materials:

(a) the Lavery spreadsheets of 5 and 13 December 2005;

(b) the Berri November monthly management report; and

(c) a report from Mr Read, which it must be assumed would have been corrected at least in respect of the double counting error identified in these reasons.

622 It is those materials that would have informed the Berri directors' decision as to what the Berri financial statements would be likely to disclose as to distributable profits when they were eventually produced.

623 In addition, the directors would then be expected to apply their own judgement to this material and their knowledge of any distributable profits which were then available. The directors would also, no doubt, have brought to the table their own assessment of the progress of the Berri business during the course of December 2005, which on one view of the material, was well ahead of expectations in terms of trading profits. All such knowledge and opinion might inform as to what the final accounts were likely to disclose when they were prepared.

624 In forming the necessary opinion to satisfy the "Marra Test" in late 2005, the Berri Board members may also have taken into account the availability of profit reserves as a possible source of funds for the payment of a second interim dividend to ICM, and the further fact that in past years Berri had declared and paid dividends without first recouping the losses of previous years, as it was technically entitled to do.

625 However, the directors were also obliged to consider all of the other factors which were relevant to the decision and which had uniquely converged in late 2005, including two principal factors of note.

626 The first factor was the declaration of the July Interim Dividend in favour of Berri members in July 2005, followed by payment of that interim dividend, which was fully franked, on 27 October 2005 in the total sum of $7,658,392. ICM benefitted from this dividend payment as it then remained a 49% shareholder. This was a sizeable portion of distributable profits which had already been parted with by late October in the year. Expending a further sum on a near equivalent scale ($7,086,118), or even 49% of that sum to pay out ICM's claim ($3,472,198) or some lesser sum by 16 or 28 December in the same year, called for circumspection.

627 The second factor was the number and nature of unusual accounting adjustments facing Berri at this particular time in its history, which had all aligned and were well recognized within Berri in the second half of 2005. It will be recalled that these issues included: the Project Eureka costs arising from integration with the business of National Foods; the ACI/Brickwood litigation and outstanding matters relating to finalisation of its settlement; the introduction of the new AIFRS accounting standard on 1 January 2005; the ASIC Release IR 05-57 issued on 5 October 2005; and various accounting questions arising from: Berri's information system assets; the rootstock loan; the Indosari loan; internal changes to accounting policies arising from integration with National Foods; the Balcatta plant closure; the Wade dispute; and the Summit Water supply contract. The accounting treatment of each gave rise to a unique spectrum of issues and uncertainties that bristled with controversy in the course of this trial.

628 To my mind, as at late 2005, given the range of complex adjustments foreshadowed by Berri senior management to be considered in the preparation of the end of year accounts, it would not have been possible for the directors of Berri to have arrived at a genuine opinion that the final audited accounts of the company, when they were eventually produced, would disclose sufficient distributable profits earned between 1 July and 16 or 28 December 2005, from which any second interim dividend for the year could be paid. Further, the directors of Berri would not have formed such genuine opinion, had they convened to consider the matter.

629 In making the necessary decision the directors could have, and probably ought to have, sought independent expert opinion to assist them. Had they done so, they could have been provided with advice to the effect of that provided by Mr Westworth, that the availability of company reserves would also have to be considered in the process of offsetting the accumulated losses carried forward after the period of heavy losses ending in 2000. Had this been done, there would have been no distributable profits for 2005, and the Berri Board would have been so advised. A cautious approach, as illustrated by the opinions of Mr Westworth, may well have been recommended in all the circumstances which then existed for Berri in late 2005, in spite of the prior custom of Berri to declare and pay dividends without first recouping the losses of previous years.

630 It is also conceivable that the directors of Berri, in late 2005, could have obtained a different accounting opinion, for example to the effect of Mr Morris' opinion. Had they done so, the Berri Board would have been in a state of uncertainty as to which path to follow.

631 In these circumstances, if a meeting of the Berri Board had been convened on or shortly prior to either 16 or 28 December 2005 to consider the declaration and payment of any second interim dividend for the year, in all probability each director would have either:

(a) refused to declare such a dividend, on the basis that each could not form a genuine opinion that the final accounts, when prepared, would disclose sufficient distributable profits from which such a dividend could be paid in late 2005;

(b) refused to declare such a dividend, on the basis that more time was needed to seek information on which to form the necessary opinion and make the necessary determination; or

(c) refused to declare any second interim dividend, and instead awaited the finalisation of Berri's accounts.

632 These findings are supported by the evidence given by witnesses called at the trial.

633 Mr Kearney, a director of Berri, stated that he wanted to get to the end of the year to consider the position because there were "a considerable number of adjustments to be made". Mr Kearney said further, in discussions he had with Mr Read and KPMG in early December 2005, "there were the potential for quite a number of adjustments to be" made and "there was the likelihood we would have to bring them to account in that financial period". He said in his examination in chief:

Do you actually recall any discussions with Mr Read about this document in particular?---I can't say - I recall the subjects of this document during December, the matters, I recall discussing those. Can you recall the substance of the discussions you had with Mr Read about the matters that are recorded in the document?---Yes, the accounts were - there were the potential for quite a number of adjustments to be, accounts of the business.

634 Mr Kop said that the adjustments would have had to be considered after the close of the financial year. He made the point in his cross-examination that this was standard procedure, in the following passages:

Then you had to get to the end of the year and sit down with the benefit of the ruling off of the accounts and look at these matters to make sure what you had done was appropriate, whether any other adjustments had to be made, correct? ---

Yes, that applies to anything in the accounts, that's correct, yes.

So there's a variety of things that you set out which are not otherwise reported in this document which are prepaid computer maintenance costs, insurance and advertising, plus interest? --- That's correct, yes, any other asset would have to be considered.

To be considered at year end, i.e. after 31 December 2005? --- Correct, yes, whenever the accounts are drawn up we reassess all of these items.

635 Similarly, Mr Read gave evidence that, in early December 2005, there were a number of outstanding items and until a conclusion had been reached in relation to those items, they would not actually know what the profit of the Berri business was. He said in his examination in chief:

Why was that?---Because there was a number of outstanding items, largely on the, not only operationally but also on that list that we talked about earlier - page 1416 - and that until we'd concluded our position on each of those items, we wouldn't actually know what the profit of the business was.

636 Mr Morris, ICM's accounting expert, said that if he were to have advised the directors of Berri as at 15 December 2005 whether they could anticipate what profits would be disclosed in the final accounts, he would advise them to wait and see and discuss the adjustments to see how they play out. He said in cross-examination:

About would you be in a position to recognise certain adjustments as at 15 December, correct? --- Yes. I want to ask you - I would like to try and consider this question: if you were to advise the directors of Berri as at 15 December whether they could anticipate at that stage what the profits were that would be disclosed in the final accounts, would you be able to confidently do it at that given date, 15 December, or would you say to them, "You need to wait and see and discuss these matters and see how they play out"?

Without any more, I would probably say yes to that but when I say without any more, that ignores whether or not there was an imperative upon those directors to make a decision about distributable profits at the time.

637 Mr Westworth expressed the following opinion, which I accept:

In my view, an accountant determining whether profits were available at any of those dates [16,28 or 31 December 2005] would have sought to have financial statements prepared to deal with the several complex adjustments that needed to be considered, not limited to the AIFRS adjustments...

638 Mr Westworth was also of the view that it would not have been appropriate to have made a distribution of dividends at either 16 or 28 December 2005.

639 It follows that ICM has not proved it has suffered loss and damage caused by the breaches of contract I have found, and that its claims against both defendants must be dismissed.

Staff Assistant to the General Manager in the Dairy Business of San Miguel (1988-2004).

Assistant Vice President in the Corporate Planning of San Miguel (2004).

Vice President in the Corporate Planning of San Miguel (2004).

Vice President and Chief Financial Officer at San Miguel Pure Foods (July 2002 - May 2005).

Director of the First Defendant Berri Ltd October 2005 - April 2007.

General Manager of International Food and Service at National Foods (October 1997 - January 1999).

Executive Business Development Manager (January 1999 - December 2002).

Group Executive Marketing and Innovation Manager (December 2002 - June 2005).

Chief Financial Officer of First Defendant, Berri Ltd (4 February 2003 - 28 October 2005).

National Management Accountant of Berri Ltd (1998 - 2005).

Managing Partner and Chairman of Partners at Edwards Marshal.

Fellow of the CPA and Institute of Chartered Accountants in Australia.

Member of the Australian Institute of Company Directors.

Technical Partner at Ernst & Young Sydney (1988 - 2006).

Audit Partner and Oceania Professional Practice Partner for Ernst & Young Oceania (June 2006 - 2010).

Director Capital Management and Projects (2010 - February 2012).

Chairman of the Plaintiff, ICM Investments Pty Ltd ("ICM") and its associated companies comprising the Shears Group of companies.

1. [1] San Miguel's Corporate Head Office is located in Mandaluyong City. Mandaluyong City is one of the cities and municipalities that comprise Metro Manila, Philippines.

[2] [2013] VSCA 217.

[4] [1985] AC 191, 201.

[5] [1992] VicRp 99; (1992) 2 VR 732, 740 (Marks J, with whom Hedigan J agreed).

[6] [2008] HCA 3; (2008) 234 CLR 151 at [8] (citations omitted).

[7] [2001] HCA 70; (2001) 210 CLR 181, 198 [43] (citations omitted).

[9] [1973] HCA 36; (1973) 129 CLR 99, 109.

[10] (1994) 36 NSWLR 290; cited with approval by the Court of Appeal in Plenary Research Pty Ltd v Biosciences Research Centre Pty Ltd [2013] VSCA 217, [43].

[11] Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290, 298-300 (citations omitted).

[12] Clause 10(c)(ii) of the Shareholders Agreement was not materially relevant to any issue in the proceeding.

[13] In 2010, the requirement in s 254T of the Corporations Act 2001 (Cth) (that dividends could be paid only out of profits) was replaced by a test that allows a company to pay dividends if all of three specified requirements are met. Those requirements are that the company's assets exceed its liabilities and the excess would be enough to fund the dividend, payment of the dividend would be fair and reasonable to the shareholders, and payment would not materially prejudice the company's ability to pay its creditors.

[14] [2002] NSWSC 17, [63]-[71].

[15] See Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [63]-[71].

[16] Comprised in the Articles of Association of Berrivale Orchards Limited.

[17] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567, 581 (Jacobs J).

[19] [1983] 2 Lloyd's Rep 210. Cited with approval by the High Court in Wallaby Grip Ltd v QBE Insurance 240 CLR 444, 459.

[21] 240 CLR 444, 459.

[22] "DSS" I find was a reference to Shears, whose full name was Douglas Stephen Shears. Shears was the Chairman of ICM (See Schedule of natural Persons attached).

[23] See, eg. Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567; Federal Commissioner of Taxation v Slater Holdings [1984] HCA 78; (1984) 56 ALR 306; Leeds Estate Building and Investment Company v Shepherd (1887) 36 Ch 787.

[24] Re Spanish Prospecting Co Ltd [1911] 1 Ch 92, 98-9; [1908-10] All ER Rep 573 (Fletcher Moulton LJ). See also Federal Commissioner of Taxation v Slater Holdings Ltd [1984] HCA 78; (1984) 156 CLR 447, 466 (Gibbs CJ); Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488; [2005] HCA 70, [61] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ); QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270, 286 (Lockhart J).

[25] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567.

[26] Ibid 576 (Mason J) (citations omitted).

[27] [1911] 1 Ch 92, 98. See too: Federal Commissioner of Taxation v Slater Holdings Ltd [1984] HCA 78; (1984) 156 CLR 447, 460; [1984] HCA 78; 56 ALR 306, 314. Gibbs CJ said that Fletcher Moulton LJ's words were a "guide" rather than a "dictum ... of universal application".

[28] RP Austin and IM Ramsay (eds), Ford's Principles of Corporations Law (LexisNexis, 15th Edition, 2013) [18.130]-[18.140].

[29] Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266, 283 (Swinfen Eady J); Marra Developments [1977] 2 NSWLR 616, 622 (Hutley JA). [1977] 2 NSWLR 616, 630 (Mahoney JA); Spassked Pty Ltd v Cmr of Taxation (2003) 136 FCR 441; [2003] FCAFC 282, [16].

[30] [1963] HCA 36; (1963) 109 CLR 199, 207-8.

[31] [1971] 2 NSWLR 616, 637-8.

[32] [1904] 2 Ch 208, 213-4 (Romer LJ) and Vaughan Williams LJ at 216.

[33] [1932] NI 35.

[34] [1958] HCA 51; (1958) 101 CLR 119.

[36] [1963] HCA 36; (1963) 109 CLR 199, 207 (citations omitted).

[38] [1977] 2 NSWLR 616, 629B to E.

[39] (1992) 38 FCR 270, 286.

[40] Glenville Pastoral [1963] HCA 36; (1963) 109 CLR 199, 207. See also Marra Developments [1977] 2 NSWLR 616, 632-8. In this case, Article 24.3 of Berri's Constitution permitted undistributed profits to be held in a reserve account.

[41] See, for example, Glenville Pastoral [1963] HCA 36; (1963) 109 CLR 199, 207-8; Marra Developments [1977] 2 NSWLR 616, 630-1 (Mahoney JA).

[42] [1958] HCA 51; (1958) 101 CLR 119.

[43] [1977] 2 NSWLR 616, 629E to G; and QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270, 287.

[44] [1961] 1 All ER 769, 780.

[45] [1977] HCA 59; (1977) 137 CLR 567, 580.

[46] Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266, 283 (Swinfen Eady J); Marra Developments [1977] 2 NSWLR 616, 630 (Mahoney JA); Spassked Pty Ltd v Cmr of Taxation (2003) 136 FCR 441; [2003] FCAFC 282, [16].

[47] [1963] HCA 36; (1963) 109 CLR 199, 207-208.

[48] [1977] 2 NSWLR 616, 630 and 637-638.

[49] [1904] 2 Ch 208, 213-4 (Romer LJ) and Vaughan Williams LJ at 216.

[50] [1932] NI 35.

1. [51] RP Austin and IM Ramsay (eds), Ford's Principles of Corporations Law (LexisNexis, 15th Edition, 2013) [18.060.3].

[52] Marra Developments [1977] 2 NSWLR 616, 642-3 (Mahoney JA); Heesh v Baker (2008) 67 ACSR 192; [2008] NSWSC 711, [41] (Barrett J). cf. After the change of law in June 2010, a dividend can only be paid if the company's assets exceed its liabilities by at least the amount of the dividend, and additional tests relating to material prejudice to creditors and fairness to shareholders are satisfied.

[53] Bluebottle UK Ltd v DCT (2007) 240 ALR 597; 64 ACSR 273; [2007] HCA 54, [19] (Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ).

[54] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567, 572 (Mason J); Bluebottle UK Ltd v DCT[2007] HCA 54; , (2007) 240 ALR 597, [20].

[55] (1901) 85 LT 22.

[57] [1977] 2 NSWLR 616, 622; (1977) 3 ACLR 185.

[58] [1981] HCA 28; (1981) 147 CLR 441; 35 ALR 293.

[59] Marra Developments [1977] 2 NSWLR 616, 622 (Hutley JA).

[64] [1902] 1 Ch 353.

[67] (1887) 36 Ch D 787, 800.

[68] Darvall v North Sydney Brick and Tile Co Ltd (No. 4) (1988) 14 ACLR 474; 6 ACLC 1095 affirmed in North Sydney Brick and Tile Co Ltd v Darvall (1989) 17 NSWLR 327; 15 ACLR 706.

[69] RP Austin and IM Ramsay (eds), Ford's Principles of Corporations Law (LexisNexis, 15th Edition, 2013) [18.100].

[70] (1886) 35 Ch D 502.

[71] [1925] Ch 407.

[72] [1891] VicLawRp 105; (1891) 17 VLR 493.

[73] RP Austin and IM Ramsay (eds), Ford's Principles of Corporations Law (LexisNexis, 15th Edition, 2013) [18.100].

[76] (1991) 5 ACSR 115.

[78] [2011] FCA 717; (2011) 196 FCR 291.

[79] (1992) 7 ACSR 759.

[81] (1995) 37 NSWLR 438.

[83] 432 A 2d 814 (NJ, 1981).

[85] [2003] NSWCA 91; (2003) 57 NSWLR 113. See also ASIC v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291, [30]; ASIC v Rich (2009) 236 FCR 1.

[86] [2003] NSWCA 91; (2003) 57 NSWLR 113, [108]-[109].

[87] [2011] FCA 717; (2011) 196 FCR 291, [17].

[88] Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616, 622 (Hutley JA).

[90] 240 CLR 444, 459.

[91] [2009] NSWSC 1229; (2009) 75 ACSR 1.

[93] [2004] VSC 219.

[94] (2005) 15 VR 312; [2005] VSC 201.

[97] ACI Operations Pty Ltd v Berri Ltd. [2004] VSC 219 (handed down by Habersberger J on 25 June 2004) and ACI Operations Pty Ltd v Berri Limited [2005] VSC 201; (2005) 15 VR 312 (handed down by Dodds-Streeton Jon 9 June 2005).

[102] (1977) 2 NSWLR 616, (Hutley JA, 622).