ICM Investments Pty Ltd v San Miguel Corporation and Berri Ltd [2014] VSCA 246

CORPORATIONS - Directors' duties - Dividends - Interim dividend - Whether contractual obligation of first respondent to procure payment of interim dividend by second respondent dependent on ability of directors of second respondent to form genuine opinion as to sufficiency of company profits from which to pay dividend - Profits - Whether reserves able to be treated as profits available for payment of dividends - Distinction between reserves comprised of capital profits and reserves comprised of profits on revenue account - Whether necessary to set off reserves against accumulated losses before payment of dividends - Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616, followed; Glenville Pastoral Co Pty Ltd (in liq) v Federal Commissioner of Taxation [1963] HCA 36; (1963) 109 CLR 199, applied; Trevor v Whitworth (1887) 12 App Cas 409; Australian Vic Exploration Ltd v Lachberg [1958] HCA 51; (1958) 101 CLR 119, referred to; Foster v New Trinidad Lake Asphalt Co Ltd [1901] Ch 208, explained - Corporations Act 2001 (Cth), s 245T.

ILLEGALITY - Whether incumbent on first respondent to prove not open to directors of second respondent honestly and reasonably to conclude sufficiency of profits from which to pay dividend - Holidaywise Koala Pty Ltd v Queenslodge Pty Ltd [1977] VicRp 20; [1977] VR 164, applied; Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd [2006] FCAFC 188, referred to.

1 Berri Ltd ('Berri') is a company that carries on the business of manufacturing and marketing fruit juices and other beverages. San Miguel Corporation ('San Miguel') is a large and well established publicly listed food, beverage and packaging company. ICM Investments Pty Ltd ('ICM') is a company in the Shears Group of companies, a privately owned agribusiness group with interests in food and beverage manufacturing and processing. In 2004, the majority of Berri's shares were owned by companies associated with ICM. The balance were owned by institutional investors.

2 On 5 August 2004, ICM and San Miguel entered into certain transaction documents whereby San Miguel acquired the institutional investors' shares in Berri, and ICM (and its related parties) agreed to sell all of their shares in Berri in tranches. As at 5 November 2004, San Miguel held 51 per cent of the shares in Berri. On 28 December 2005, following the exercise of a put option, San Miguel acquired through its wholly owned subsidiary National Foods Ltd ('NFL') the remaining 49 per cent of Berri from ICM.

3 In the proceeding below, ICM claimed damages from San Miguel and Berri in the amount of $4,960,282.91. ICM contended that Berri was required to declare and pay, and San Miguel was required to procure the declaration and payment of, a fully franked dividend to ICM of $3,472,198.04, immediately prior to completion of the transfer of ICM's shares to San Miguel on 28 December 2005. The amount of $4,960,282.91 was comprised of the dividend and the sum of $1,488,084.87 in respect of the associated franking credits.

4 On 7 October 2013, following a nine day trial, a judge of the Trial Division found that San Miguel and Berri breached certain obligations under the transaction documents, but ultimately concluded that ICM had not proved it had suffered any loss and damage.[1] On 19 November 2013, after hearing further argument, the judge ordered San Miguel and Berri to pay ICM nominal damages in the sum of $10, and ICM to pay the costs of San Miguel and Berri on a standard (party/party) basis.[2]

5 Following the making of the judge's orders, ICM filed a notice of appeal and San Miguel and Berri filed notices of cross-appeal. Additionally, San Miguel and Berri have filed notices of contention in ICM's appeal. ICM's appeal and San Miguel's and Berri's cross-appeals were heard together.

(a) ICM, San Miguel and others entered into a Share Sale Agreement regarding shares in Berri ('the Share Sale Agreement'), referred to in some of the documents as 'the SSA';

(b) ICM, San Miguel and others entered into a Put and Call Option Deed regarding shares in Berri ('the Option Deed'); and

(c) ICM, San Miguel, Berri and others entered into a Shareholders Agreement ('the Shareholders Agreement').

7 On 5 November 2004, San Miguel exercised the first of two call options provided for in the Option Deed, and acquired a further one per cent of the shares of Berri.

8 In April 2005, Berri declared and paid a dividend of $259,473 'out of the year-to-date 2005 financial year earnings'. In July 2005, Berri declared a dividend of $7,658,393 'out of the year-to-date 2005 financial year earnings'. Berri paid this second dividend in October 2005.

9 On 11 November 2005, ICM forwarded to San Miguel a Put Option notice in relation to ICM's shares in Berri. On 28 December 2005:

(a) ICM, San Miguel, Berri and others entered into a deed ('the 28 December Deed') regarding completion of the acquisition by San Miguel of ICM's shares in Berri; and

(b) San Miguel completed the acquisition of ICM's shares in Berri.

10 Berri did not pay a dividend to San Miguel immediately prior to the completion of the transfer of ICM's shares to San Miguel or at any time thereafter. Neither ICM nor San Miguel or any other parties to the Option Deed procured Berri:

(a) To pay a dividend to ICM immediately prior to the completion of the transfer of ICM's shares to San Miguel; or

(b) To convene a meeting of the Board of Berri to consider whether the alleged dividend entitlement could be or would be paid. That said, there was in fact a meeting of the Board of Berri on 28 December 2005.

The relevant provisions of the transaction documents

11 Clause 21.8 of the Shareholders Agreement provided that the Shareholders Agreement, together with the other transaction documents (defined to mean the Shareholders Agreement, Berri's Constitution, the Share Sale Agreement, the Option Deed and any other agreement or document that the parties agree is a transaction document), constitutes the entire agreement between the parties. To the extent of any inconsistency between any transaction document, cl 21.8 provided that such inconsistency would be resolved in the following priority: first, cl 21.8 of the Shareholders Agreement; secondly, the Share Sale Agreement; thirdly, the Option Deed; fourthly, the Shareholders Agreement other than cl 21.8; and fifthly, Berri's Constitution. Additionally, cl 21.9 of the Shareholders Agreement provided that each party to the Shareholders Agreement 'must do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to [the Shareholders Agreement] and transactions contemplated by it'.

12 Central to the resolution of ICM's claim is cl 7.7 of the Option Deed. Clause 7.7 of the Option Deed provided:

(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.

13 Clause 10 of the Shareholders Agreement provided:

(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.

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

the Company is not required to pay that dividend.

14 At trial, ICM contended (and San Miguel and Berri denied) that:

(a) On their proper construction, the transaction documents gave rise to an entitlement on the part of ICM to a dividend in respect of the period from the last dividend declared and paid prior to the exercise of the Put Option until completion of the acquisition of ICM's shares by San Miguel on 28 December 2005;

(b) On the proper construction of the transaction documents, San Miguel and Berri were contractually obliged to procure the declaration and payment of the required dividend; and

(c) Berri had sufficient profits or anticipated profits on or shortly prior to 28 December 2005 from which to pay the required dividend.

15 The parties agreed that, if Berri were required to declare and pay a dividend for the period from 1 July 2005 to 28 December 2005 as contended by ICM, the correct calculation of the amount of the dividend payable to ICM (as the owner of 49 per cent of the shares in Berri immediately before completion), being the product of the 'Rate' and the 'Purchase Price' referred to in cl 10(a) of the Shareholders Agreement and then pro-rated for that period, was $3,472,198.04 (not including any amount referable to franking credits, if any) - subject of course to the parties' contentions as to whether a lesser amount, or any dividend at all, was in fact payable.

16 At trial, San Miguel and Berri contended (and ICM denied) that:

(a) On their proper construction, the transaction documents only gave rise to an entitlement to be paid all dividends (if any) declared pursuant to cl 10 of the Shareholders Agreement during the period from the last dividend declared and paid prior to the exercise of the Put Option until completion of that acquisition;

(b) The declaration and payment of the alleged dividend entitlement pursuant to cl 7.7 of the Option Deed was not a 'transaction contemplated by' the Shareholders Agreement within the meaning of cl 21.9 of the Shareholders Agreement;

(c) Any rights which ICM had in relation to the alleged dividend entitlement were extinguished on 28 December 2005, pursuant to the 28 December Deed; and

(d) Berri did not have sufficient profits or anticipated profits to pay the claimed dividend or any dividend.

(a) The transaction documents created a dividend entitlement for ICM in respect of the period from the last declared and paid dividend until completion of the acquisition, subject to the Board of Berri being in a position legitimately to declare and pay such a dividend;[3]

(b) ICM and San Miguel were contractually bound to procure Berri to pay the dividend to ICM;[4]

(c) The payment of a dividend under cl 7.7 of the Option Deed was a transaction contemplated by cl 21.9 of the Shareholders Agreement;[5]

(d) San Miguel and Berri were contractually bound to do everything reasonably necessary to declare and pay the required dividend to ICM;[6]

(e) San Miguel and Berri would be in breach of cl 21.9 of the Shareholders Agreement if they failed to take the required positive steps to ensure that the potential benefits conferred on ICM by cl 7.7 of the Option Deed flowed to ICM;[7]

(f) The 28 December Deed did not vary or replace any substantive duty or obligation which arose under the transaction documents; and did not constitute an abandonment of rights secured under the transaction documents through an agreement by way of settlement;[8]

(g) San Miguel and Berri breached cl 21.9 of the Shareholders Agreement by failing to convene a board meeting to consider the declaration and payment of the dividend;[9]

(h) Given that the breach of the agreement arose from the failure to call a directors' meeting, any loss and damage caused was to be judged by assessing what in all likelihood would have been determined had such a meeting been convened on the issue;[10]

(i) Berri's profit reserves were available to fund an interim dividend in December 2005;[11]

(j) There must be reasonable grounds, whether derived from authorative preliminary accounts or from other reasonably reliable sources, that enable the directors to form a genuine opinion that the profits out of which the interim dividend are to be paid will actually exist when the final accounts for the period are produced and put before the Board;[12] and

(k) ICM had failed to prove that it had suffered loss and damage caused by a breach by San Miguel and Berri because:

[A]s 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 ... 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.[13]

18 In its notice of appeal, ICM makes complaint about the judge's treatment of damages issues. Broadly speaking, it says that the judge erred by holding that the loss and damage it suffered by reason of San Miguel's and Berri's breach of contract was to be judged by assessing what would have been determined by the directors of Berri if a meeting of the directors of Berri had been convened to consider the payment of a dividend on 28 December 2005. ICM contends that San Miguel and Berri were contractually obliged to procure the declaration and payment of the required dividend if Berri had sufficient distributable profits to pay that dividend lawfully.

19 Further, ICM submits that the judge erred in a number of respects to the extent that his Honour found either that Berri did not have sufficient distributable profits in December 2005 to pay the required dividend, or that the directors of Berri would not have been in a position to determine whether or not Berri had sufficient distributable profits at that time.

20 By their separate notices of contention, San Miguel and Berri seek to support the judge's conclusion that ICM failed to establish any loss and damage. In its notice of contention, Berri contends: first, that cl 10(a) of the Shareholders Agreement was confined to the declaration of dividends out of current trading profits and not from reserves; secondly, that there were, in any event, no reserves available to Berri from which to pay dividends in December 2005; and thirdly, that Berri did not have sufficient distributable profits from which to pay an interim dividend - and therefore the exception provided for in sub-cl 10(c)(i) of the Shareholders Agreement applied. In its notice of contention, Berri also makes complaint about the judge's conclusion that profit reserves were available for Berri to fund an interim dividend in December 2005. Further, Berri contends that there were additional findings the judge ought to have made, but did not make, that supported the judge's ultimate conclusion on the question of damages.

21 In their cross-appeals, San Miguel and Berri say in summary that the judge erred in his construction of the transaction documents in:

(a) holding that cl 7.7 of the Option Deed entitled ICM to a further dividend in addition to those declared pursuant to cl 10 of the Shareholders Agreement;

(b) treating the transaction documents as comprising one entire agreement;

(c) holding that the payment of any dividend which was payable under cl 7.7 of the Option Deed was a transaction contemplated by cl 21.9 of the Shareholders Agreement; and

(d) finding that Berri was required to declare and pay, and San Miguel was required to procure the declaration and payment of, the dividend claimed by ICM.

22 San Miguel and Berri also contend that the judge erred in holding that they breached their obligations under the transaction documents, and also that he erred in respect of his conclusions in relation to the 28 December Deed.

23 Finally, San Miguel and Berri make complaint about the judge's conclusion that ICM's rejection of a Calderbank offer of $250,000 from each of them ($500,000 in total) was not unreasonable. San Miguel and Berri contend that the judge thereby erred in not ordering ICM to pay their costs on an indemnity basis from the time of the Calderbank offer (29 September 2012). The judge found that it was not unreasonable for ICM to reject the Calderbank offer, in substance, because ICM succeeded on all of the issues that San Miguel and Berri said in the Calderbank offer would cause it to be unsuccessful in the litigation, and only failed to establish loss and damage on an issue not addressed in the letter containing the Calderbank offer. It should at this stage be noted that, if the appeal and cross-appeals are otherwise unsuccessful, San Miguel and Berri require the leave of the Court to appeal against the judge's costs order.

ICM's Appeal, Ground 1: The construction of the transaction documents

(i) The proper construction of clause 7.7 of the Option Deed

24 The transaction documents, like any other commercial contracts, fall to be construed according to what a reasonable person in the position of the parties would have understood their terms to mean, having regard to the surrounding circumstances known to the parties and the purpose and object of the relevant transaction. Additionally, in construing each transaction document, the Court should have regard to all of the words used in the document so as to render them all harmonious with one another, and to ensure the congruent operation of the various components of the document as a whole.[14]

25 In the course of his analysis, the judge made a finding 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'.[15] Having made this finding, the judge then turned to the text of cl 7.7 of the Option Deed. San Miguel and Berri submit that, in failing to start with the text of cl 7.7 and in starting with a declaration of what his Honour found to be the commercial object of the dividend provisions, the judge erred. Additionally, they contend that the judge was wrong in any event in his finding as to the commercial object and purpose of the dividend provisions in the transaction documents.

26 The construction of cl 7.7 of the Option Deed is not without difficulty. In substance, the competing positions are whether the clause is merely a mechanical provision designed to ensure that any dividend already declared by Berri be paid to the party that was the holder of the relevant Berri shares at time the dividend was declared, or whether the clause gives an entitlement to an extra dividend to be paid to the holder of the relevant shares during the period those shares were held up to the completion of their transfer.

27 With great respect to the judge, we do not think that there was a sufficient basis for concluding that the commercial object or purpose of the dividend provisions (or more particularly cl 7.7 of the Option Deed) was to provide interest for the deferred payment of the purchase price of the shares covered by the put and call options. A sounder footing on which to approach the construction of cl 7.7 is to start and end with the language of the clause. To reason from a concluded purpose to an eventual construction, in the context of transaction documents which were not without their complexities, was unsound. Further, and in any event, we take leave to doubt the correctness of the judge's conclusion that cl 7.7 provided interest for a deferred payment of the purchase price. First, such provision as was made for any deferred consideration was to be found in cl 5 of the Option Deed. Secondly, cl 7.7 does not provide for any payment by the transferee of relevant shares, but rather for procuring payment by a third party to the Option Deed (Berri).

28 Clause 7.7 provides that the member of the Shears Group holding the relevant shares 'will be entitled to all dividends in the period ..., the amount of such dividend to be determined in accordance with cl 10 of the Shareholders Agreement'. Berri submitted that it was wrong to read the words 'such dividend to be determined' as if they contained the word 'is' after the word 'dividend'. So much may be accepted. It is plain, however, that the words to which we have just referred speak as to a future event. That is, whatever the dividend entitlement may be, there is an entitlement to a dividend, the amount of which, not having been determined, will be determined at some point in the future. While the drafting of cl 7.7 might have been more felicitous if the word 'is' had been inserted after the words 'such dividend', we do not think that the omission of 'is' assists in the construction of cl 7.7.

29 San Miguel and Berri submitted that the construction for which they contend is supported by the use of the words 'all dividends'. The argument runs that if cl 7.7 were meant to provide for an additional dividend entitlement above and beyond those provided for in cl 10 of the Shareholders Agreement then, instead of the words 'all dividends' being used in cl 7.7 of the Option Deed, the Option Deed would have provided for an entitlement to or of 'a dividend'. We agree that if cl 7.7 had used the words 'a dividend' it would have been easier to accept the construction contended for by ICM. But we think the answer to this submission made by San Miguel and Berri is that the use of the words 'all dividends' could encompass the payment of an additional dividend entitlement together with any dividend already declared (but not yet paid) under cl 10 of the Shareholders Agreement.

30 On its face, cl 7.7 provides that the dividend entitlement referred to in the clause will be determined in accordance with cl 10 of the Shareholders Agreement. The words 'to be determined in accordance with cl 10 of the Shareholders Agreement' would have no work to do if the construction for which San Miguel and Berri contend were accepted. San Miguel and Berri answer this argument by submitting that these words are no more than a 'clumsy reference back to cl 10'. We do not accept that submission. We think it clear enough that the words 'to be determined in accordance with cl 10 of the Shareholders Agreement' posit a situation where a dividend entitlement arises over and above those dividends which may have already been declared (but not paid) under cl 10 of the Shareholders Agreement.

31 The second sentence of cl 7.7(a) requires the parties to 'procure that [Berri] pays this dividend entitlement to the holder of the Shares immediately prior to their transfer to [San Miguel] as a dividend determined in accordance with cl 10 of the Shareholders Agreement'. The parties agree that the words 'the holder of the Shares immediately prior to their transfer to [San Miguel]' provide for the timing of the payment rather than the identification of the entity to whom the dividend entitlement must be paid. We think that in this respect the parties are correct and, as that is the way the parties chose to conduct this proceeding, we are content to accept that construction.

32 San Miguel and Berri submit that the requirement that the parties must procure that Berri 'pays this dividend entitlement' supports their construction. They contend that if cl 7.7 had meant to provide an entitlement to an additional dividend the clause would have been expressed in a way that required the parties to procure that Berri declare and pay the dividend entitlement. San Miguel and Berri say that the use of only the words 'pays this dividend entitlement' rather than 'declares and pays this dividend entitlement' supports their construction that cl 7.7 of the Option Deed is directed to dividends that have already been declared pursuant to cl 10 of the Shareholders Agreement but not yet paid. In our view, there is little in this point. Plainly, the requirement to procure the payment of a dividend can encompass a requirement to procure any necessary anterior step such as declaring the relevant dividend.

33 In his analysis of the construction issues thrown up by the transaction documents, the judge referred to authority that permits a court, in an appropriate case, to modify or insert words into a contract in order to avoid absurdity or inconsistency or so as to give effect to the intention of the parties. Thus the judge said that to the extent that particular words in the transaction documents appeared to be at odds with the intent of the documents as he found them to be, 'words may be supplied, omitted or corrected in the relevant instrument'.[16]

34 In their submissions before this Court, San Miguel and Berri were critical of the judge's approach. In our view, their criticisms have force. Reading all of the transaction documents in their context, we see no basis for any modification, correction, omission or insertion of words into the relevant clauses of the transaction documents.

35 Notwithstanding their criticisms, however, San Miguel and Berri both submitted to this Court that the construction for which they contend is supported by reference to possible fact scenarios that were said to give rise to absurdity if ICM's construction were preferred. Specifically, they noted the requirement in cl 7.7 that the so-called dividend entitlement is expressed to be payable immediately prior to the transfer of the relevant shares. San Miguel and Berri contended that this would impose a very difficult burden on the directors of Berri (if not an impossibility) because the directors of Berri would need time to conduct a proper analysis to ascertain whether a dividend could lawfully be paid out of the profits of Berri, and any such analysis or inquiry could not be done within the very short timeframe contemplated by cl 7.7 of the Option Deed.

36 We reject this submission. First, it is to be remembered that cl 7.7 imposes a contractual obligation on the parties to the Option Deed (not Berri) to procure the relevant dividend entitlement. That a party might take on a contractual obligation to procure the performance of an act by a third party (in this case Berri), which act such a third party might find onerous or difficult to perform, is no basis for adopting a construction of the relevant contractual provision contrary to its text.[17] Secondly, we think the arguments of San Miguel and Berri on this aspect of the construction of cl 7.7 are thin having regard to the matters to which we have already referred.

37 The same may be said of San Miguel's and Berri's submissions concerning s 254W of the Corporations Act 2001 (Cth) ('the Corporations Act'). Section 254W(1) relevantly provides:

(1) Each share in a class of shares in a public company has the same dividend rights unless:

(a) the company has a constitution and it provides for the shares to have different dividend rights; or

(b) different dividend rights are provided for by special resolution of the company.

38 We do not see s 254W as any impediment to parties entering into contractual arrangements which oblige them to procure a company, in which they both hold shares, to procure the payment of a dividend to one of them upon the transfer of a particular parcel of those shares. The contractual obligation to procure the payment of a dividend in such circumstances may or may not require the party upon whom the obligation is imposed to procure the payment of a dividend in respect of all of the shares of the same class as those being transferred.

39 San Miguel and Berri submit that ICM's construction of the cl 7.7 of the Option Deed involves a selective application of the elements of cl 10 of the Shareholders Agreement. That is, ICM's construction involves an application of cl 10 of the Shareholders Agreement but ignores the timing elements of it. So much may be accepted. By its very terms, cl 7.7 is clear that it does not require the application of every element of cl 10 of the Shareholders Agreement. Clause 7.7 provides that it is the amount of the dividend provided for in that clause that is to be determined in accordance with cl 10 of the Shareholders Agreement. The parties must then procure the payment of the dividend 'as a dividend determined in accordance with cl 10'. Nothing in cl 7.7 of the Option Deed requires compliance with the time elements in cl 10 of the Shareholders Agreement. In our view, there is no difficulty in the so-called 'selective' application of some of the elements of cl 10 of the Shareholders Agreement in accordance with the text of cl 7.7 of the Option Deed.

40 San Miguel and Berri contend that another ground for preferring their construction is the ability of the relevant member of the Shears Group (in this case ICM) to exercise the put option on two different occasions. The ability of the transferor to exercise the put option on two different occasions is specifically recognised in the first line of cl 7.7(a). Clause 3(j) of the Option Deed provides:

Notwithstanding any provision of this Deed to the contrary, the Shears Group may exercise the Put Option on two occasions, in which case the preceding provisions of clause 3 will be amended as follows:

(i) the first exercise will be for one half of the total shares held by the Shears Group (rounded up in the case of a fraction), which will constitute the 'Entire Parcel' in respect of that exercise for the purposes of clause 3(a); and

(ii) the second and final exercise will be for all remaining Shares held by the Shears Group (rounded up in the case of a fraction), which will constitute the 'Entire Parcel' in respect of that exercise for the purposes of clause 3(a).[18]

41 San Miguel and Berri submit that, because the put option can be exercised on two occasions, there may be circumstances where shareholders would be entitled to two dividends in respect of a particular period, each calculated in accordance with the formula in cl 10 of the Shareholders Agreement. There are two answers to that submission. First, if that be the effect of the Option Deed, it is what the parties to the Option Deed have contracted for. Secondly, the submission is in any event to be doubted because cl 10 or the Shareholders Agreement requires a minimum dividend to be paid in accordance with the formula set out in it for each relevant period. Nothing in cl 7.7 of the Option Deed or cl 10 of the Shareholders Agreement requires the declaration and payment of dividends for particular periods in amounts greater than the minimum provided for in cl 10 of the Shareholders Agreement.

42 Although, as we have observed, the construction of cl 7.7 of the Option Deed is not free of difficulty, we think the construction posited by ICM is correct. It gives meaning to all of the words contained in it. It does not 'flout business common sense',[19] and it accords with 'commercial reality'.[20] As was said by Gleeson CJ, Gummow and Hayne JJA in Maggbury Pty Ltd v Hafele Australia Pty Ltd:[21]

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.[22]

43 Finally, we note that, if the parties had intended cl 7.7 of the Option Deed to provide only a mechanism for the payment of dividends that had previously been declared, one might have expected cl 7.7 to provide, as some agreements in other cases do, that the relevant party was 'entitled to all dividends declared'.[23]

(ii) The proper construction of clause 21.9 of the Shareholders Agreement

44 Although cl 7.7 of the Option Deed imposes an obligation on the parties (ICM and San Miguel) to procure the dividend to which it refers, it imposes no obligation on Berri - Berri not being a party to it. The judge concluded, however, that the transaction documents imposed a contractual obligation on Berri in respect of the cl 7.7 dividend. His Honour reached that conclusion by an application of cl 21.9 of the Shareholders Agreement. In support of the judge's construction of cl 21.9, ICM made reference to cl 21.8 of the Shareholders Agreement.

45 Clauses 21.8 and 21.9 of the Shareholders Agreement provided:

21.8 Entire agreement and inconsistency

(a) This agreement, together with the other Transaction Documents,[24] 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;

(iii) the Option Deed;

(iv) this agreement other than clause 21.8;

(v) the Constitution.

21.9 Further action

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.

46 At one point in its submissions, ICM appeared to contend that cl 21.8 of the Shareholders Agreement had the effect of creating a single agreement between ICM, San Miguel and Berri comprised of the transaction documents. To the extent that this was San Miguel's submission, it must be rejected. Clause 21.8 does not purport to merge the various transaction documents into one agreement. It merely provides that there is no agreement between the parties outside those contained in the terms of the transaction documents. Indeed, as we have seen,[25] the clause then goes on to provide for the resolution of any inconsistency between terms in the various documents in the priority set out in cl 21.8(b).

47 ICM submitted that the expression 'this agreement' in cl 21.9 encompassed the agreement constituted by the transaction documents. That submission must also be rejected. An examination of the terms of the Shareholders Agreement shows that the clauses in the Shareholders Agreement differentiate between 'this agreement' and the transaction documents (see, for example, cls 21.1 and 21.4). In our view, it is plain that the expression 'this agreement' in cl 21.9 means the Shareholders Agreement.

48 Further, we note that cl 11.9 of the Option Deed provides (in identical terms to cl 21.9 of the Shareholders Agreement) that each party was required to do everything reasonably necessary 'to give full effect to this Deed and any transactions contemplated by it'.[26] If ICM's construction of cl 21.9 were accepted, it is difficult to see what, if any, work would be left for cl 11.9 of the Option Deed. In our opinion, the better view is that each of these clauses (together with the relevantly identical cl 14.11 of the Share Sale Agreement) was designed to operate so as to require the parties to the agreements constituted by each separate transaction document to do everything reasonably necessary to give full effect to transactions contemplated by that agreement (that is, the agreement constituted by the relevant transaction document).

49 Next, ICM submitted that the dividend entitlement provided for in cl 7.7 of the Option Deed was a transaction contemplated by the Shareholders Agreement. While the payment of dividends pursuant to cl 10 of the Shareholders Agreement is clearly a transaction contemplated by the Shareholders Agreement, the short answer to the present issue is that the payment of the dividend entitlement created by cl 7.7 of the Option Deed is not a transaction contemplated by the Shareholders Agreement. There is nothing in the Shareholders Agreement that refers to or contemplates the existence of the obligation on the parties to the Option Deed to procure the payment of a dividend upon a put or call option being exercised - even if that dividend is to be calculated in accordance with cl 10 of the Shareholders Agreement.

50 It follows that the judge was wrong to conclude that cl 21.9 of the Shareholders Agreement imposed a contractual obligation on Berri in respect of the payment of the cl 7.7 Option Deed dividend entitlement. There being no other basis upon which it could be asserted that Berri had any contractual obligation in respect of the cl 7.7 dividend entitlement, the claim against Berri should have been dismissed.

51 During the course of argument, San Miguel submitted that, if Berri were not bound by cl 21.9 of the Shareholders Agreement to do everything reasonably necessary to give full effect to the procuring (by San Miguel) or the paying (by Berri) of an additional dividend under cl 7.7 of the Option Deed then, not only must Berri succeed in the appeal but San Miguel must also succeed. No reason was advanced for that submission. With respect, we are unable to see how the fact that there was no relevant contractual obligation imposed upon Berri could assist San Miguel on the question of whether any relevant contractual obligation was imposed on it (or in relation to any question of breach, causation or other relevant issue). San Miguel's submission in this regard must be rejected.

San Miguel Cross-Appeal, Ground 3; Berri Cross-Appeal, Grounds 9 and 10: The 28 December 2005 Deed

52 On 19 December 2005, Francis Jardeleza of San Miguel emailed to Trevor Mackey of ICM as follows:

We confirm that the settlement of the purchase of the final 49% interest in Berri will be on December 30, 2005. We hope 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 of the Berri dividend.

53 That was followed by an exchange of emails as to the precise date of settlement - at first it was suggested that it should take place on 16 December 2005, and then it was arranged that it would be on 28 December 2005 - but otherwise it appeared that settlement, including payment of the cl 7.7 dividend, would proceed.

54 Then, on 22 December 2005, Mr Read of NFL sent the following email to Mr Mackey stating that there would be no dividend:

I have attached a revised settlement calculation that takes into account the following matters, which are an update to the advice below:

• I have advised SMC that Berri Limited is forecast not to have any distributable earnings as at this balance date, and therefore the minimum dividend payment contemplated in the shareholder agreement is not able to be declared under Corporations Law. As the deficit position is expected to be reasonably large, even a small dividend could not be considered, in addition to consideration of the substantial exposure relating to the ACI matter.
• The applicable bbsy interest rate has been increased to 5.7241%, to bring the rate to 28\12 - using the current rate as an indication of the remaining period....

55 The next day, Mr Mackey responded by email to Mr Jardeleza as follows:

Our lawyers, Minter Ellison, have been provided with a completion checklist by Freehills. It refers to a 'Berri Implementation Deed' which we have not seen or heard of before. This is not the position that we agreed by exchange of emails recently.

Our position is that we will not be signing any new documentation, not the least because it has been raised at the last minute and even now we have not been provided with a draft of it.

...

The other issue of concern is recent advice we have received by email from Michael Read to the effect that Berri does not have available profits to pay the dividend required to be paid immediately before Completion. No detail has been provided in respect of this advice so we are unable to determine whether or not it is correct. As you are aware we have not received any Berri reports since mid-year at which time the accounts forecast indicated a comfortable ability to pay the dividend required.

We therefore propose that completion of the transfer of Berri shares occurs on 28 December 2005 and that the Botanical Loan set off arrangement take place, such that we will be paid the net amount of these two amounts plus interest.

We reserve our rights under the Shareholders Agreement and the Put and Call Option Deed in respect of the dividend. I suggest that this matter can best be dealt with by NFD [NFL] providing information to support its contention that it does not have available profits. If we accept this, that will be the end of the matter. If not, we will consider what steps are required to be taken to enforce our rights.

For completeness, we will be ready to complete the transfer of Berri shares on Wednesday, 28 December 2005 on the basis set out above.

56 On 28 December 2005, the parties executed a 'Settlement Deed' (the 28 December Deed) providing, inter alia, as follows:

1. The signatories acknowledge, for the avoidance of doubt, that subject to paragraphs 2 and 3 above, the provisions of the Deed [the Put and Call Option Deed] (including, without limitation, clauses 13 and 15 of the Deed) remain in force in accordance with their terms, despite this deed.
2. The Company [Berri], SMC, ICM, Agrifood Investments Pty Ltd, Agribusiness Investment Management Pty Ltd and Douglas Stephen Shears agree that if Completion occurs on 28 December 2005 the Shareholders Agreement is terminated with effect from such completion ...
3. Paragraph 5 above in no way limits the obligations (if any) under clause 7.7 of the Deed 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 in 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 discussion between them.

57 At 3.30 pm the same day, there was a meeting of the directors of Berri chaired by Mr Shears. It was noted that Completion would occur that day and would involve Berri entering into a set-off deed. It was resolved that the deed be executed; the share transfers to give effect to Completion be registered; and Mr Shears would resign as a director with effect from the time nominated in the registration to be signed by him as part of Completion.

58 The judge held that the 28 December Deed preserved the rights of ICM to claim payment of the cl 7.7 dividend:

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.

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.

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

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.

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.[27]

59 San Miguel contends that the judge should have held that the 28 December Deed constituted an abandonment of rights secured under the transaction documents and thus that any rights which ICM may have had against San Miguel and Berri in relation to the cl 7.7 dividend were extinguished.

60 Similarly, Berri contends that the judge erred in holding that the 28 December Deed preserved any rights against Berri in relation to the dividend under cl 21.9 of the Shareholders Agreement.

61 It is sufficient to dispose of this ground of appeal to say that, for the reasons already given, we do not consider that ICM had any rights against Berri under cl 21.9 of the Shareholders Agreement in relation to the cl 7.7 dividend. Otherwise, however, in view of cl 6 of the Deed of 28 December 2005, and the context in which it was executed, we think that any suggestion that ICM thereby gave up its rights as against San Miguel in relation to the cl 7.7 dividend is untenable.

San Miguel Cross-Appeal Ground 2; Berri Cross-Appeal, Grounds 6 to 8; ICM's Appeal, Ground 1: Breach

62 The judge held that, because a meeting of the Berri Board was not convened to consider payment of the cl 7.7 dividend, and San Miguel and Berri did not take steps to convene such a meeting, they each breached the obligation imposed on them by cl 21.9 of the Shareholders Agreement to do what was reasonably necessary to procure payment of the cl 7.7 dividend.[28]

63 San Miguel contends that, because a meeting of the Berri Board was held on 28 December 2005, at which the 28 December Deed was approved, San Miguel did all that it reasonably could to procure payment of the cl 7.7 dividend and that the judge erred in holding to the contrary.

64 Berri contends that, because the meeting of 28 December 2005 was convened, and the judge found that San Miguel had not taken steps to procure payment of the cl 7.7 dividend, the judge erred in holding that Berri breached its obligations under cl 21.9 of the Shareholder Agreement. As counsel for Berri submitted, if the directors of Berri would not resolve to pay the dividend, what could Berri do about it?

65 We accept Berri's submissions in part. As previously stated,[29] we do not accept that Berri was under an obligation under cl 21.9 of the Shareholders Agreement to procure payment of the cl 7.7 dividend. Accordingly, we think that the judge erred in holding that Berri breached cl 21.9 by failing to take steps to procure payment of the dividend. Equally, for reasons already stated, we do not accept that cl 21.9 of the Shareholders Agreement imposed any obligation on San Miguel in respect of the cl 7.7 dividend. Accordingly, in our view, the judge was wrong to hold that San Miguel breached cl 21.9 of the Shareholders' Agreement by reason of its failure to procure a meeting of directors of Berri to consider payment of the dividend at or before Completion.

66 At the same time, however, ICM's pleaded case[30] and its case at trial[31] was not just that San Miguel breached cl 21.9 of the Shareholders Agreement by failing to procure payment of the dividend but also, and more importantly, that it breached cl 7.7 of the Option Deed by failing to procure its payment. The judge rejected the latter contention because he was not satisfied San Miguel's failure to procure a meeting of the Berri board to consider payment of the dividend was motivated by self-interest. In his Honour's view, Mr Read honestly believed that Berri would not have sufficient profits out of which to pay the dividend.[32] In our view, the judge erred in approaching the question in that way.

67 As has been explained, cl 7.7 of the Option Deed subjected San Miguel to an obligation to procure payment of the cl 7.7 dividend, except to the extent that there were insufficient distributable profits out of which to pay it. Consequently, whether or not San Miguel was motivated by self-interest (which we assume it was) and whatever Mr Read's true opinion might have been as to the state of available profits (which we take leave to doubt was quite as the judge found it to be), was essentially irrelevant. San Miguel was bound by cl 7.7 of the Option Deed to procure payment of the dividend for which that clause provided except to the extent that there were insufficient distributable profits from which to pay it.

68 As will be explained in what follows, in our view there were sufficient profits from which to pay the dividend. Subject to only one qualification which remains to be mentioned, it follows that San Miguel was in breach of cl 7.7.

69 As part of their submissions on the issue of breach, the respondents submitted that because the Judge only made a limited finding as to breach (failing to call a directors' meeting[33]) the appellant must now fail because, in fact, a directors' meeting was called and held on 28 December 2005. These submissions must be rejected. Plainly, the Judge's finding as to breach were wider than that contended for by the respondents. A fair reading of the judge's reasons discloses that the judge did not confine consideration to a failure to call a directors' meeting;[34] and in any event, as this is a rehearing,[35] this Court is not limited to dealing with the question of breach by the findings of breach which were made by the judge and which were sufficient for the purposes of disposing of the proceeding at first instance.

ICM's Appeal, Grounds 2 to 6: Assessment of damages

70 When the judge turned to the assessment of damages, he found that none had been proved because he was not satisfied it would have been possible for the directors of Berri acting honestly and reasonably as at the end of December 2005 to have arrived at a genuine opinion that the final audited accounts of the company when eventually produced would disclose sufficient distributable profits earned in the second half of 2005 to fund the dividend for which cl 7.7 of the Option Deed provided. His Honour reasoned as follows:[36]

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.[37]

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.[38]

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.

...

Applying the test in Marra Developments[39] 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?[40]

... 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.

...

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.

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.

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.[41]

Test for the application of Marra Developments

71 ICM attacks this part of the judge's reasoning at a number of levels. First, although it accepts, as it must, that the principle in Marra Developments[42] would have applied to any decision of directors to pay a dividend in December 2005, it contends that the proper test for the application of the principle in this context was not the opinion which the directors of Berri might have formed if they had considered the matter in December 2005 but whether Berri and San Miguel established on the balance of probabilities that it would not have been open to the directors of Berri acting honestly and reasonably to come to the view in December 2005 that there were sufficient profits out of which to pay the dividend.

72 We agree. The Shareholders Agreement and the Option Deed affected the dividend policy of Berri between the time of the making of the Shareholders Agreement and the completion of the acquisition contemplated by cl 7.7 of the Deed.

73 During the currency of the Shareholders Agreement, that policy was directly regulated: all shareholders were entitled to be paid a dividend at the stipulated rate by the stipulated dates. Under the Option Deed, the policy was indirectly regulated: the parties to the Deed (which included San Miguel) were to procure that Berri declare and pay a dividend to the relevant member of the Shears Group at the stipulated rate 'in the period from the last declared and paid dividend until completion of that acquisition'.

74 The Shareholders Agreement had the effect of supplanting the provisions in the constitution of Berri which would normally have regulated the payment of dividends. Under article 25 of the constitution, the power of Berri to declare a dividend was delegated to the board; the power was not subject to authorisation or ratification by the general meeting. But the distribution by a constitution of the powers of a company between the board and the general meeting is always subject to the doctrine of unanimous assent.[43] The Shareholders Agreement is the evidence of that form of assent.

75 Under the Option Deed, the obligation cast upon San Miguel was unconditional; it was not subject to best or reasonable endeavours. Subject to the provisions of cl 10 of the Agreement and to considerations of lawfulness, if Berri failed to pay the dividend, San Miguel was in breach of its covenant to procure Berri to declare and pay the dividend.

76 The obligation of Berri to declare the dividend could be vetoed, for example, by 'the Board by Unanimous Approval'; it was subject to there being 'sufficient distributable profits from which to pay a dividend required to be paid under cl 10(a)'; and it was necessarily subject to its being lawful.

77 In contrast, however, the obligation of San Miguel to procure the payment of the dividend provided for in cl 7.7 of the Deed was unconditional and, therefore was subject only to the requirement that payment of the dividend be not unlawful. The payment would have been unlawful if, for example, there had been no 'profits of the company' within s 254T of the Corporations Act.[44] It would also have been unlawful if, for example, the declaration or payment involved the directors contravening their duty to prevent insolvent trading.[45]

78 In the circumstances, San Miguel had the onus of showing that the declaration and payment of a dividend by Berri was unlawful. In Holidaywise Koala Pty Ltd v Queenslodge Pty Ltd,[46] the legality of a lease granted for use of some premises as a motel where there was no development permit was held not to be on its face illegal. In discussing the onus of proof of illegality, Gillard J said:

As Lord Abinger, CB pointed out in Lewis v Davison ... 'when the act which is the subject of the contract may, according to the circumstances, be lawful or unlawful, it will not be presumed that the contract was to do the unlawful act, the contrary is the proper inference'.[47]

79 Consistently with the principles applied by Gillard J, if San Miguel wished to establish that the payment of a dividend was unlawful, it was incumbent on it to show that there was no way in which the directors of Berri could lawfully have paid a cl 7.7 dividend as at end of December 2005; and, therefore, incumbent on San Miguel to show, not just that it would have been open to the directors to take the view that there were not sufficient profits out of which to pay the dividend (as the judge said) but also, critically, that it would have been impossible for the directors acting honestly and reasonably as at the end of December 2005 to have concluded that there were sufficient profits out of which to pay the dividend.

80 ICM's case at trial was in part that, as at 28 December 2005, Berri had the following profit reserves available for distribution as dividends:

Reserves

General reserve $5.313 million

Asset realisation reserve $1.831 million

Other Accumulated Profits from past years

Capital profits from land and buildings that

formed part of the Asset revaluation reserve $4.530 million

Further capital profits attributable to

Intangibles that formed part of the Asset

Revaluation reserve $39.959 million

81 The judge held that the general reserve and the capital profit attributable to land and buildings were available for distribution as dividends but that the capital profits attributable to intangibles were not. ICM contends that the judge should have held that all of the identified reserves, including the profits attributable to intangibles, were available for distribution as dividends. San Miguel and Berri contend that the judge should have held that none of the reserves was available for distribution as dividends.

82 For the reasons which follow, we agree with the judge that the general reserve was available for distribution as dividends but, in our view, the capital profits attributable to land and buildings and intangibles were not.

83 Mr Morris, the expert accounting witness called by ICM gave evidence that, in his opinion, both the general reserve and the asset revaluation reserves were available to be distributed as dividends in December 2005:

Reserves available for distribution

I have been asked what reserves were available to be distributed as dividends on 16, 28 and 31 December 2005, assuming the directors and company in general meeting had passed the necessary resolutions to permit their distribution.

2.19 My answer has required me to make the assumptions of law set out at paragraph 4.3 below.

2.20 I have concluded that:

2.20.1 As Berri had a surplus of capital at the dates at which it recognised the capital profits that were set aside in the asset realisation reserve, that reserve was available to be distributed as dividends;

2.20.2 As Berri's general reserve arose out of operating profits that had been derived prior to 30 June 1985 and set aside to the general reserve and amortisation reserve at the time they were derived, that reserve was available for distribution.[48]

...

4.3 I have assumed as a matter of law that:

4.3.1 The Corporations Act 2001(Cth) prescribed, at the relevant time, that a dividend could not be paid otherwise than out of profits.

4.3.2 The Constitution of Berri provided that no dividend was to be paid otherwise than out of profits.

4.3.3 The profits of Berri were the only profits that may be distributed. Profits of the group comprising Berri and its controlled entities were not relevant. No regard was to be given to reported consolidated profits of the group or the profits of the individual subsidiaries of Berri when assessing the profits that were available for distribution by Berri to its shareholders.

4.3.4 Profits available for distribution included profits of the current accounting period and accumulated profits of prior accounting periods that had not been distribute to shareholders or otherwise appropriated for another purpose in a manner that rendered them unavailable for distribution.

4.3.5 Profits available for distribution included profits appropriated or transferred to reserve accounts, which could be distributed from such accounts or transferred to the profits and loss account.

4.3.6 Unrealised profits could be distributed provided that such profits were of a permanent character and arose out of a bona fide valuation of assets by a competent valuer.

4.3.7 Where a company had incurred losses, profits derived in subsequent period were available for distribution. It was not necessary to recoup past losses before making a distribution out of subsequent profits.

4.3.8 A capital profit was available for distribution providing that there was a surplus on capital account at the time the capital profit was derived; in other words, at that time the aggregate of share capital and reserves had to exceed the company's issued capital.[49]

84 Mr Westworth, the expert accounting witness called by Berri, gave evidence to the contrary that neither the general reserve nor the asset revaluation reserve was available as a source out of which to pay dividends. In his opinion, good accounting practice necessitated that both reserves be set off against accumulated losses thus eliminating the reserves:

The legal requirements for the creation of specific reserves (such as the share premium account and capital redemption reserves) in Australia have disappeared with the reforms to the Corporations Act which removed the concept of the par value of share capital. Those reserves, which could not generally be distributed, formed, together with par value shares, a legal articulation of what accountants refer to as the concept of capital maintenance. Notwithstanding these changes, this concept of capital maintenance was nevertheless relevant to the understanding of the concept of profit in the 2005 accounting literature. The Framework considers two concepts of capital, a physical concept and a financial concept and states:

102. A financial concept of capital is adopted by most entities in preparing their financial report. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.

...

In other words, under the Framework, both unrealised and realised items can be considered as 'profits', and profit exists as long as there has been an increase in net assets over the period. In the absence of any legal requirements to the contrary, the accumulated profits and losses , both realised and unrealised are conceptually the same and can be view as one pool.

...

In my opinion, therefore, a reasonably competent accountant in 2005 would treat undistributed profits from prior periods as being comprised within a general pool of retained earnings/accumulated losses rather than retaining their identity as profits or losses from a specific period.

...

In my opinion, in 2005 it was consistent with good accounting practice to apply undistributed profits of past years towards payment of a dividend only to the extent that they exceed cumulative losses. Such a policy was commercially prudent.

...

... in order to ascertain the accumulated profits, which include reserves brought forward, available for distribution at 31 December 2005, I must first consider the situation at 30 June 2000, when Berri's accumulated losses were $26.795 million, to see which reserves are still available for distribution in 2005. Reserves as at 30 June 2000 were as follows:

From the above table, it can be seen that the general reserve and asset realisation reserve were both absorbed by the accumulated losses for the purposes of distributability and were no longer available in 2005.[50]

85 Berri and San Miguel contended below, and again before this Court, that the general reserve was not available for distribution as dividends because, if it had been applied in that fashion, it would have reduced the value of Berri shares being sold by ICM and acquired by San Miguel. Counsel for Berri and San Miguel also relied on the fact that the reserves had originally been created by Berri Fruit Juice Cooperative Limited before the cooperative's activities were transferred to Berri as at 4 July 1985.

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

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.

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.

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.

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

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.[51]

87 With respect, we agree with that aspect of his Honour's reasoning.

88 Counsel for San Miguel submitted in oral argument that it was not open to the judge to find that the general reserve had been created out of operating profits because Mr Morris had conceded in cross-examination that he merely assumed rather than established that the general reserve taken into the books of Berri in 1985 was created by the appropriation of profits. In counsel's submission, mere assumption was not a sufficient basis for a finding that the reserve was created by the appropriation of profits.

89 We do not accept that submission. The judge's finding is amply supported by the following sections of Mr Morris' first report:

3.5 The accumulated reserves of Berri Co-operative at 4 July 1985 became accumulated profits of Berri at that date and retained their original characteristics after that date as accumulated reserves of Berri. The reserves that were in existence at 4 July 1985 were:

3.5.1 An asset revaluation reserve of $759,032 that arose from the revaluation of buildings and freehold land as at 30 June 1979.

3.5.2 An amortisation reserve of $6,107,693 and a general reserve of $2,995,152 that had been created by the appropriation of the profits each year.

3.6. These reserves were reported as reserves of Berri in its 1986 financial report.

3.7. The amortisation reserve was transferred to the general reserve with effect from 4 July 1985, resulting in a general reserve of $9,102, 845.

3.8. The general reserve was reduced from $9.103 million at 4 July 1985, by:

3.8.1 The capitalisation of profits of $2,781,516 for the issue of 1,390,758 ordinary shares of $2 each, during the 1986 financial year; and

3.8.2 The appropriation of $1.008 million for the payment of a dividend for the 1998 financial year.

90 The passage of cross-examination on which counsel for San Miguel relied was as follows:

COUNSEL: If you look at page 256 you will see that the amortisation reserve is $6.1 million at the top there? ---Yes.

COUNSEL: So the amortisation reserve was $5.5 million prior to the adjustment or the transfer that you've referred to? --- Yes.

COUNSEL: You don't know what the other $5.5 comprises because we don't have the records of Berri going back any earlier do we? --- No.

COUNSEL: So you just assume, without knowing, that it's profits? --- I have assume that it was created in the same way as the $1.3 million that was transferred in 1984 and 1985.

91 We are not persuaded that evidence undermines the judge's conclusion that the general reserve was constituted out of profits. The fact that the reserve was created in the same way as the $1.3 million which was transferred in 1984 and 1985, and treated in the accounts as if it were constituted out of profits, strongly implied that it was created out of profits; and, in the absence of contrary evidence (which San Miguel did not adduce), that was a sufficient basis for the judge to find on the balance of probabilities that the reserve had been set aside out of accumulated profits.[52]

The need to deduct accumulated losses from the general reserve

92 Berri and San Miguel contended below, and again before this Court, that the general reserve was not available for the payment of dividends because it was required to be set off against accumulated losses in accordance with what Mr Westworth had opined was 'good accounting practice'. The judge rejected that argument, too:

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.

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.[53] 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');[54] Marra Developments;[55] and Re Hoare & Co[56] (cf. Re John Fulton & Co Ltd[57]).

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.

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'.

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.[58]

93 With respect, we agree with the judge that it was permissible to pay dividends out of current and past year operating profits despite the existence unrecouped past year losses. The law was changed in England with the passage of the Companies Act 1980 (UK)[59] and, as the judge noted, it was changed in this country with respect to dividends declared after 28 June 2010. But, at relevant times, the only requirement was the common law imperative embodied in s 245T of the Corporations Act, as it was then, that dividends be paid out of profits.[60]

94 Berri and San Miguel contended below, and again before this Court, that a dividend could not be paid out of reserves created from capital profits, and so could not be paid out of the asset realisation reserve of $1.831 million, unless the company's equity (excluding reserves) were greater than its paid up capital at the time of declaration of dividend. The judge rejected that contention, as follows:

... this submission is not supported by the authorities.

Australasian Oil Exploration Ltd v Lachberg[61] 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;[62] Verner v General & Commercial Investment Trust;[63] Foster v New Trinidad Lake Asphalt Co Ltd;[64] and Cross v Imperial Continental Gas Association.[65]

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.

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.

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.[66]

95 With respect, we disagree with that section of his Honour's reasoning. At relevant times, there was a prohibition on the payment of dividends out of capital. The prohibition was a vestigial remnant of the 19th century doctrine of the maintenance of capital whereby shareholders were entitled to assume that no part of the capital would be paid out by the company except in the legitimate course of business.[67] Despite changes made by the Corporations Law Review Act 1998 (which included the abolition of par value and the facilitation of a reduction in share capital without court approval), transactions which affected a company's share capital remained closely regulated. Section 245T retained the common law proscription of the payment of dividends otherwise than out of profits and, although companies were thenceforth permitted to reduce capital without court approval, they could only do so in conformity with the procedures laid down in Chapter 2J.

96 Under the doctrine of maintenance of capital, a company had no capital profits available for dividend purposes unless upon a balance of capital account it appeared that there had been an accretion to paid up capital; and, for that purpose, capital meant the money subscribed for shares. Accretions to that amount might be realized and turned into money which might then be divided among shareholders as dividends. But any increase in the value of one or more of the capital assets of the company could not be distributed as dividends unless or to a greater extent than there had been an appreciation in the total value of capital assets.[68] Any other distribution to shareholders out of an accretion to the value of one or more of the capital assets would have represented a return of capital to shareholders and thus an unauthorised reduction in capital.[69]

97 Of course, it was open to a company to effect a reduction of capital in order to reflect past year losses, in accordance with s 256C of the Corporations Act, and then to treat the profit subsequently emerging on capital assets as an accretion to the reduced total value of paid up capital. But that was not the case here. Neither cl 10 of the Shareholders' Agreement nor cl 7.7 of the Option Deed provided for that to be done. Clause 10(c)(i) of the Shareholders' Agreement referred to 'distributable profits' and, in our opinion, that expression was employed advisedly, consistently with s 245T of the Corporations Act, in the sense of operating profits and any capital profits to the extent that they resulted in an accretion to the total value of paid up capital after bringing to account outstanding capital losses.

98 It appears that the judge considered it was enough to recognise a capital profit as a fund out of which dividends might be paid that there had been an increase in the value of capital over the current accounting period. Possibly, his Honour based that conclusion on the observation of Byrne J in Foster v New Trinidad Lake Asphalt Co Ltd,[70] that:

I must not, however, be understood as determining that this sum or portion of it [the increase in the value of one of the capital assets of a company]may not properly be brought into profit-and-loss account or be taken into account in ascertaining the amount available for dividend. That appears to me to depend upon the result of the whole accounts for the years'.

99 If so, however, we think that his Honour misconstrued what Byrne J stated. His Lordship's reference to the whole of the year was made in the context of a requirement that account be taken of the movement in the value of capital after bringing losses as well as gains to account across the whole range of capital assets. It was an injunction against singling out one capital asset and claiming an increase in the value of that asset as a capital profit without also bringing to account any diminution in the value in other capital assets. That Byrne J intended no departure from the established doctrine that dividends could not be paid out of capital profits (except to the extent that they represented an increase in the value of paid up capital) emerges from his Lordship's further observation that:

It is clear, I think, that an appreciation in total value of capital assets, if duly realised by sale or getting in of some portion of such assets, may in a proper case be treated as available for purposes of dividend. This, I think, is involved in the decision in the case of Lubbock v British Bank of South America,[71] cited with approval by Lord Lindley in Verner v General and Commercial Investment Trust.[72]

100 As was earlier noted, the judge reasoned that to hold that dividends could not be paid out of an increase in the value of capital assets (except or to the extent of any increase in the value of paid up capital) would be:

at odds with the principle, supported by the authorities earlier cited, that profits including profits carried to a reserve, may be distributed even although previously incurred loss of paid up capital has not been made good.[73]

101 In our view, however, there was no inconsistency. The authorities which his Honour had earlier cited were concerned with the distribution of operating profits; not capital profit. The distinction between operating profits (which were available for distribution as dividends despite previous year losses) and capital profit (which was not available for distribution except to the extent that it reflected an increase in value of paid up capital) was based on the view sanctioned in Ammonia Soda Co Ltd v Chamberlain[74] and applied in Marra Developments[75] that a company's profit and loss account was an account from year to year. In contrast, a company's capital account was a continuous account. That distinction was subsequently much criticised and was modified in England by the Companies Act 1980 (UK). But, at relevant times, it remained the law in this country.

102 The point made in the authorities about carrying operating profits to a reserve was that, until and unless such a reserve was applied in reduction of losses incurred on capital account, the profits comprising the reserve remained available for distribution as dividends.[76] That point was emphasised by the High Court in Glenville Pastoral Company Pty Ltd (in liq) v Commissioner of Taxation, as follows: [77]

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. But provided there is nothing to the contrary in the articles of association or otherwise binding upon the company, the directors (or the general meeting, whichever is the appropriate body under the articles) may, by a positive and final decision, apply distributable profits to make good lost share capital. The amount of the profits is then carried to a capital account, and loses its identity as a detachable fund of profit. Thereafter the company cannot utilize the amount for the payment of dividends, any more than it can utilize for that purpose other moneys representing share capital.

103 In contrast, here we are concerned with capital profits which have been carried to an asset realization reserve, in a context where past years losses on capital account totalled at least $16.574 million[78] and, therefore, far exceeded the amount of the asset realization reserve. Consequently, we do not consider that any of the asset realization reserve of $1.831 million was available as a fund for the distribution of dividends.

104 Lastly, on this aspect of the matter, we note that, although the judge held that capital profits were distributable as dividends without first recouping accumulated losses - with which we disagree - much later in the judgment, his Honour concluded on the basis of expert evidence that none of the $1.831 million asset realization reserve was available to pay a dividend, because:

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.

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.[79]

As will be apparent, we agree with that latter aspect of his Honour's judgment.

(iii) Other capital Profits arising from realisation of land and buildings

105 Similar considerations apply to the $4.53 million of capital profits arising from the realization of land and buildings. In view of the accumulated previous year losses, those capital profits were not available as a fund for the distribution of dividends.

106 Additionally, as the judge found later in his judgment, the $4.53 million was applied on or about 31 December 2004 in setting off accumulated losses and thus, in any event, was not available for distribution as dividends:

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.

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.

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.[80]

(iv) Asset revaluation reserve (brand name goodwill)

107 As was earlier noted, Berri's accounts for the period ended 31 December 2004 contained an asset revaluation reserve of $44.49 million[81] comprised of $4.53 million in respect of land and buildings[82] and $39.959 million relating to brand name goodwill. The judge dealt with the $39.959 million brand name goodwill reserve, thus:

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.

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 s 254T 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.[83]

108 ICM contended below and again before this Court that the reduction of $39.959 million did not have to be taken into account in determining the amount of available profits from which to pay a dividend in December 2005. It relied on Mr Morris's expert opinion evidence that, until the final accounts were prepared for the year ended 30 June 2005 (which was not until April 2006), the profits reported in the prior year's accounts under the Australian GAAP continued to be the relevant profits.

109 The judge rejected that contention. He found that, although the meaning of ASIC Release IR 05-57 was not entirely clear in every respect and there was a question as to what would have been the legal consequences of failing to comply with its requirements, it was intended to provide authoritative guidance on the legal requirements applicable to the determination of profits under AIFRS which it was expected would be obeyed. It followed, his Honour said, he was not satisfied that, if the directors of Berri had been asked to consider the matter in December 2005, they would have formed a genuine opinion that the finalised financial statements in respect of the year when prepared would require that the reserve be reduced to $4.35 million. It was more likely that they would not have been in a position to form a genuine opinion on the matter.

110 ICM criticises that conclusion. It contends that the judge was bound to determine whether the asset realization reserve of $39.959 million was legally available as part of Berri's distributable profits in the financial year ended 31 December 2005 and it submits that it was not a sufficient response to the problem merely to determine what the directors would be likely to have done. Needless to say, Berri and San Miguel support the judge's conclusion.

111 We do not think ICM's submissions on this point to be persuasive. The weight of evidence implied that there was a binding legal obligation to implement AIFRS with effect from 1 January 2005. But, even if that were not so, it remains that there was competing expert opinion evidence as to what the standard demanded and, in those circumstances, it would not have availed the resolution of the case to have made a binding determination as to how the conflict should be resolved. For the reasons earlier stated, the question was whether the directors of Berri, if asked in late December 2005, could honestly and reasonably have determined that there were sufficient profits from which to pay the dividend. In this context, that meant whether they could honestly and reasonably have taken the view that the $39.959 million reserve was available as profits out of which to pay the dividend. As we read his Honour's finding, the directors could not honestly and reasonably have concluded that the $39.959 million was available for distribution because it was likely, if not certain, that AIFRS required it to be reduced to zero. With respect, we agree with his Honour.

112 In our view, ASIC Release IR 05-57 was clear in its interpretation of the inception of AIFRS[84] and, even on the basis of the expert evidence most favourable to ICM, it was not disputed that under AIFRS the $39.959 million had to be annihilated in the end of year accounts. It followed that, by December 2005, the directors of Berri could, and in all probability would, have foreseen that the reserves available for distribution would be less by $39.959 million than had previously been reported. In those circumstances, for the directors to close their eyes to the inevitability of the final result, and proceed as if the $39.959 million reduction were still available, would not have been honest or reasonable.

113 In our view, the judge was correct to treat the $39.959 million reserve as unavailable for the distribution of dividends.

114 Having thus dealt with reserves, the judge turned next to whether there were sufficient other profits out of which to pay the dividend. He noted that there was conflicting expert evidence on that issue, too:

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.[85]

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.

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.[86]

116 Based on the difference in expert opinion, the judge concluded (although he did not expressly say why) that he was not satisfied that there were inadequate current year profits out of which to pay the dividend:

Berri bore the onus of establishing that it fell within the exception provided for in subclause 10(c)(i). See: The Torenia;[87] Wallaby Grip Ltd v QBE Insurance.[88]

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.

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

It follows that Berri cannot avail itself of the exception provided under the subclause.[89]

117 Nonetheless, the judge then went on to hold that, because the directors of Berri might have wished to apply those profits in satisfaction of past year losses, it was open to them to conclude that there were not sufficient profits from which to pay the cl 7.7 dividend.

118 ICM attacks that part of the judge's reasoning as misplaced. For the reasons which follow, we agree that it was erroneous.

119 The evidence showed that, as at November 2005, budgeted net profits for the year ending 31 December 2005 were $19.1 million. At that time, Mr Read of NFL proposed that there should be deducted from the $19.1 million $6.279 million accumulated losses; $8.4 million in respect of what he described as 'adjusted due diligence matters'; and a further $2 million for an item which he described as 'Eurka costs - estimate'. That would have left $8.7 million ($19.1 million - $8.4 million - $2.0 million) and thus, after bringing to account the dividend of $7.658 already paid in respect of the half year to 30 June 2005, there would have been a net deficiency for the year of $5.496 million.

120 The difficulty with that, however, was that it ignored the principles applicable to accumulated losses. As we have explained, at relevant times the law did not require that accumulated losses be set off against profits before payment of a dividend. To same effect, Mr Morris stated in his evidence, and Mr Westworth accepted in cross-examination, that there was no accounting standard which required accumulated losses from past years to be set off against profits before paying a dividend. It was also acknowledged that it had been Berri's practice in past years and in the first half of 2005 to pay dividends out of current profits despite the existence of accumulated losses. That practice was approved by Berri's auditors.

121 Despite that evidence, the judge reasoned that:

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.[90]

122 With respect, we disagree. As we have said, the test was not what the directors would have been entitled to take into account but what they would have been bound to conclude if acting honestly and reasonably. On the evidence, there was no basis to hold that the directors of Berri would have been bound to conclude that accumulated losses should be deducted from profits before determining whether there were sufficient profits to pay the cl 7.7 dividend. To the contrary, if properly advised, the directors would have known it was lawful and consistent with the long standing practice of Berri, and sanctioned by the company's auditors, to pay a dividend out of profits without recouping accumulated losses. The fact that Mr Read of San Miguel or anyone else might have wished the directors to change that practice for the benefit of San Miguel was irrelevant.

ICM's Appeal, Grounds 11 and 12: The dividend recommendation

123 The judge found that, if the directors had considered paying a dividend at the end of December 2005, they would have had available to them spreadsheets prepared by Mr Lavery of Berri, the Berri November Operations Report and a report by Mr Read of Berri's proposed holding company, NFL, on the basis of Mr Lavery's spread sheets.

124 ICM contends that Mr Read's report contained significant factual and accounting errors and that, if corrected or, more precisely, if a recommendation had been based on the facts as they were as opposed to Mr Read's errors, it would have been apparent to the board of Berri that there were ample profits out of which to pay the dividend.

125 Mr Read's report estimated a net profit for Berri for the year ended December 2005 of $8.7 million, and accumulated losses of $5.496 million. The profit of $8.7 million was derived from a full year estimated profit of $19.1 million calculated by Mr Lavery in his spreadsheet, from which Mr Read had then subtracted the two items totalling $10.4 million already referred to, namely: $8.4 million for what were described as 'adjusted due diligence matters' and $2 million in respect of what were denominated as 'Eureka costs'. The accumulated losses of $5.496 million were then derived by setting off against the net profit of $8.7 million the dividend of $7.658 million already declared in 2005 and accumulated losses at commencement of 2005 of $6.279 million (ie. $8.7 million - $7.658 million - $6.279 million = $5.237). Thus:

Appendix B

Statutory Profit Forecast

December 2005

Subject to audit based on work performance September\October.

126 ICM complains of the following significant errors in that calculation which it says the judge ignored:

1. First, as was earlier noted, there was no necessity to set off the accumulated losses of $6.279 million in reduction of current year profits before determining whether there were sufficient profits from which to declare a dividend.

2. Secondly, the deduction of $8.4 million for 'Adjusted due diligence matters' came from an earlier spreadsheet prepared by Mr Lavery wherein it was bundled as one of a number of year end 'Possible provisions (prior to tax effect unless otherwise stated)'. One of the year end provisions so proposed was an allowance of a little more than $8.388 million constituted as to $6,049,090 of an allowance in respect of the ACI/Brickwoods legal dispute. That figure of $6,049,090 was accompanied by a notation: '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'.[91] As the judge found, the $6.3 million of costs of the ACI/Brickwoods legal dispute had already been included in the calculation of the full year profit of $19.1 million, with the result that the proposed provision of $6,049,090 was double counting. In his Honour's words:

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 years 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.[92]

Notwithstanding that finding, the judge appears to have decided the case as if the allowance of $6.3 million for ACI/Brickwoods legal dispute were properly made.

1. Thirdly, ICM argues that none of 'the range of complex adjustments foreshadowed by Berri senior management' was warranted let alone of a kind which the directors of Berri would have been bound to take into account.

127 The judge dealt individually with the 'Adjusted due diligence matters' and 'the range of complex adjustments foreshadowed by Berri senior management' and therefore so shall we.

128 The judge found that 'Project Eureka' was San Miguel's project to integrate the businesses of NFL and Berri when they became wholly owned subsidiaries of San Miguel. The project was managed by NFL.

129 His Honour also found that the $2.0 million adjustment for 'Eureka costs' was an estimate of costs incurred or to be incurred by NFL (not Berri) in integrating its business with Berri. As emerged from Mr Read's evidence, the attribution of those costs to Berri was an arbitrary allocation based on Mr Read's personal view that it was not unreasonable that Berri should be responsible for some part of those costs incurred by NFL. Hence, as the judge said:

there [was] 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.[93]

...

... 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.[94]

130 Even so, the judge concluded that, because Berri's auditors later allowed an adjustment in Berri's final accounts for 2005 (which were prepared in April 2006) of $1.5 million in respect of Berri's share of the integration costs, the $2.0 million for 'Eureka costs' was something which the directors would have been entitled to take into account in determining whether to declare a dividend as at December 2005. His Honour said that:

the issue exposes one matter which I find to be of some importance to the central question under consideration. Project Eureka [a project for the integration of the business operations of Berri and its propose parent company National Foods] 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 programme 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.

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.[95]

131 With respect, we disagree. The test was not what the directors of Berri would have been entitled to take into account but whether they would have been bound to assume that a cost of $2 million or some other amount for costs incurred by NFL would be imputed to Berri at the instance of San Miguel. Logically, and at law, there was no basis to hold that the directors of Berri would have been bound in December 2005 (at a time when Berri's business had not been combined with NFL) to bring to account as a liability incurred by Berri during the year ending 30 December 2005 a charge of $1.5 million which Berri had not then incurred and was not legally obligated to pay but might perhaps be requested to assume in 2006 (if and after Berri's business was combined with NFL).

132 In any event, San Miguel was bound by cl 7.7 of the Option Deed to procure Berri to pay the dividend and, to that end, there would have been nothing to prevent San Miguel assuring the directors of Berri as at December 2005 that no such charge would be levied in relation to the 2005 year and that no attempt would be made to impute it to that year. Having failed to do what could reasonably be done to procure that a dividend was paid lawfully, San Miguel cannot now be heard to claim as a defence of its failure to do so that, because it did not do so, a dividend could not have been paid lawfully.

ICM's Appeal, Ground 16: ACI Brickwood dispute - Payments

133 The judge found that Berri had serious disputes with two of its suppliers of beverage bottles and tops, ACI Operations Pty Ltd ('ACI') and Brickwood Holdings Pty Ltd ('Brickwood').

134 As part of a settlement with Brickwood in December 2004, between February 2005 and June 2005 Berri paid $476,000 per month to Brickwood for Brickwood to keep open its supply offer to Berri and as a contribution towards Brickwoods' estimated damages by reason of Berri's breach of its earlier contract with Brickwood.[96] Those payments were included in Berri's monthly operations reports in 2005 and expensed through Berri's accounts during 2005. San Miguel also produced bank records at trial which showed that the payments had been made in each of those months. But there was no suggestion still less evidence that any further payments were made after June 2005. Nor was there any evidence of an agreement to make further payments, although it was said that there was evidence of some 'discussions'. Berri simply continued to record an estimated expense of $476,000 per month in its monthly reports following June 2005, and thus the November 2005 management report showed year to date expenses in relation to Brickwood of $5.7 million and estimated expenses for the full year of $6.3 million. That resulted in an adjustment of $3.056 million in respect of those payments in the November Operating Accounts.

135 ICM contended below that there was no evidence from which to infer that Berri was liable to make payments to Brickwood after June 2005 and that, even if there were a prospective liability, it was at most a contingent liability and consequently did not need to be expensed through Berri's profits and loss account for the year ended December 2005.

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.[97]

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.[98]

137 With respect, we disagree. In our view, the evidence did not establish that Berri was under a liability to make any payments to Brickwoods after June 200. If there were a liability, however, it was no more than a contingent liability and, therefore, prima facie there was no requirement to expense it through the profit and loss account. The proper method of bringing it to account would have been below the line as a note to the balance sheet.

138 We accept of course that, if there were a contingent liability, the directors would need to have had regard to it in determining whether there were sufficient profits out of which to pay an interim dividend as at December 2005. But, in that event, the directors if acting honestly and reasonably would have been bound to make an estimate of the contingency and to value it according to an honest and reasonable assessment of relevant vicissitudes. In the scheme of things, and in the absence of relevant evidence to the contrary (which it was incumbent on San Miguel to adduce), it is inherently unlikely that a valuation so undertaken would have resulted in an estimate of value anything like as great as the face value of the maximum possible exposure. Given the range of conceivable vicissitudes, and the time value of money, the proper value of such a contingent liability might well have been de minimis. But, even if it had some value, in the absence of relevant evidence it is impossible to say that the directors of Berri acting honestly and reasonably as at December 2005 would have been bound to regard it as material.

139 Accordingly, in our view, the judge should have concluded that it was not shown that the directors of Berri acting honestly and reasonably as at December 2005 would have been bound to make any allowance against profits for payments to Brickwood after June 2005 or to bring such an allowance to account in deciding whether to pay a dividend.

140 Berri's 2005 year end accounts (prepared in April 2006) included $6.9 million as costs of a write-off of what had previously classified in Berri's accounts as goodwill on the purchase of the ACI Riverland plant (as part of the settlement of a dispute with ACI). The judge found that the determination to write off that sum was made by the Berri's auditors, KPMG, sometime in April 2006. In contrast, NFL's auditors, Ernst & Young, using a discounted cash flow analysis, calculated that the 'impairment' of the goodwill on the acquisition was only $1.85 million and they directed that that figure of $1.85 million rather than $6.9 million be carried into the books of account of NFL.

141 As the judge observed, Ernst & Young's approach was supported by Mr Morris who said that the directors of Berri as at December 2005 would not have been justified in allowing for a write-off in reduction of goodwill of any more than a $1.85 million at that time; and by KPMG's accounting analysis in its 24 January 2006 report. It was further supported by the fact that only $1.85 million was expensed through the profit and loss account prepared by NFL for the period ended 31 December 2005. In contrast, there was nothing to commend KPMG's approach and they were not called to defend it. The judge, however, held as follows:

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.

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.

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.[99]

142 With respect, we disagree. As the evidence showed, Berri management were able to undertake a discounted cashflow analysis in respect of the ACI Riverland Plant in January 2006 only weeks after the date for payment of dividend and on that basis to conclude that goodwill was impaired to an extent of only $1.85 million. As at January 2006, KPMG supported that calculation. There was no suggestion in January 2006 by any of Berri management or San Miguel and NFLs' auditors that the extent of the impairment was any more than $1.85 million. There was no evidence that any more than $1.85 million was incurred as an expense in settling the dispute with ACI. In those circumstances, if the directors of Berri had approached the question of dividend as at December 2005, they would almost certainly have concluded that goodwill was to be reduced by no more than $1.85 million if as much as that. And, even if there were a basis for a greater write-down than $1.85 million, there was no evidence that the directors were bound to adopt it.

ICM's Appeal, Grounds 17 and 18: Information system assets

143 Beginning some years before 2005 until September 2008, Berri used an enterprise resource planning information system ('ERP'). It was made by J D Edwards and known within Berri as 'JDE'. The JDE operated satisfactorily. NFL used a different ERP system known as MFG Pro, and JDE and MFG Pro were not compatible. In turn, San Miguel used a third, different, ERP system, known as SAP. SAP was not compatible with either JDE or MFG Pro.

144 On 8 May 2006, after San Miguel acquired total control of Berri, it launched a programme to transfer Berri and NFL to the SAP system. The judge found that, until then, there had been no decision to do so. The programme was an extensive project involving numerous complex steps and was not expected to be finished before September 2008. Berri's business was not scheduled to be 'transitioned' to SAP until October or November 2007 and it was planned that, until then, Berri should continue to use JDE. Despite those facts, Berri's final accounts for 2005 (prepared in April 2006) incorporated an impairment charge of $7.743 million for property, plant and equipment which included 'write-downs in IS-related assets of $5.4 million'.

145 Before the judge, ICM contended that the adjustment of $5.4 million for IS-related assets was inappropriate given that Berri was not planned to move to SAP until July 2007 at the earliest. Mr Morris gave expert evidence in support of ICM's position that, according to proper accounting principles, the IS assets should have been depreciated over the period to 30 June 2007 at a rate which would reduce their carrying value to the realizable value at the date of transition, and that the directors of Berri were thus in a position as December 2005 to recognise or take into account an adjustment of no more than $284,000.

146 The judge did not accept the argument. He referred to evidence that 'somewhere around about the end of the year [of 2005] there were indications that NFL, presumably supported by San Miguel was anticipating a change of its computer system'. His Honour also found that, by late December 2005 there was an intention within senior management of Berri for the IT systems of Berri and NFL to be integrated even though at that stage there had been no Berri board decision or approval to that effect.[100] The judge noted that Accounting Standard AASB 136 required companies to take into account objective evidence, which may include plans, in determining whether or not to impair an asset. His Honour also considered it to be of some significance that in April 2006 Berri's auditors approved the inclusion of the impairment charge of $5.4 million for the IS system in the year end accounts for 2005. Based on those considerations, he concluded that:

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.[101]

147 With respect, we disagree. In our view, the following considerations pointed ineluctably in favour of the conclusion that the only impairment charge which could properly have been taken into account in assessing distributable profits as at 28 December 2005 was the sum of $284,000:

• First, San Miguel's auditors, Ernst & Young, stated in their audit report of 17 February 2006 that they had audited 'the Consolidation Package of San Miguel Food Australia Holdings Pty Ltd' (SMFAH) and 'undertaken the audit of both SMFAH and National Foods Limited' group. They noted in that report that the value of the IS assets would be affected 'once a common platform for NFL and Berri is installed in 2006'. [102]
• Secondly, evidence given by Mr Westworth, the expert accounting witness called by San Miguel, was based on assumptions that Berri had made a decision before 31 December 2005 to discontinue use of its IS assets. As the judge found, those assumptions were unfounded.
• Thirdly, the only relevant possibility under contemplation in December 2005 was that a common IS platform would not be introduced until after Berri had become a 100 per cent subsidiary of NFL and it was not planned that should occur until 2006.
• Even then, as we have said, the proposal was that Berri and NFL would continue to use their existing assets until 2007 at the earliest.

148 In view of the facts, we do not consider that there was any demonstrated justification for an impairment charge or provision in 2005 of more than the $284,000 calculated by Mr Morris. Based on ordinary accounting principles that the value of an income producing asset should be depreciated to residual value over the duration of projected use,[103] and given the stance taken by Ernst & Young in relation to the San Miguel consolidated accounts, the charge of $5.4 million appears to have been grossly inflated and therefore unjustified. Further, even if it were possible to justify a charge of something more than the $284,000 calculated by Mr Morris, the evidence fell far short of establishing on the balance of probabilities that the directors of Berri acting honestly and reasonably in December 2005 would have been bound to consider that they should make any greater provision than the $284,000.

149 We observe once again, too, that San Miguel was bound by cl 7.7 of the Option Deed to procure the payment of the dividend for which that clause provided. Thus, it was incumbent on San Miguel to do what it reasonably could to ensure that there were sufficient profits in Berri out of which to pay the dividend. In our view, doing what could reasonably have been done to procure the payment of the dividend would have extended to assuring the Berri board as at December 2005 that there would be no need for an ACI provision of more than the $284,000 identified by Ernst & Young.

150 PT Berri Indosari ('Indosari') was an 80 per cent owned Indonesian subsidiary of Berri and, as a matter of long standing practice, Berri's investment in Indosari was written down from time to time to bring the investment into line with Indosari's net assets. Consistently with that practice, in a report dated 30 August 2005 from Mr Kop of Berri to Mr Erana and Mr Read of San Miguel, Mr Kop proposed that the value of the investment should be written down further as at December 2005 so as not to exceed the underlying net asset value of Indosari at the time. The same proposal was reflected in Mr Lavery's spreadsheet of adjustments dated 5 December 2005. But, in a subsequent version of the spreadsheets dated 13 December 2005, it was noted for the first time 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 2w $3,767,699. The increase in the loan from then to 12/05 will be written off in 12/05.[104]

151 Mr Morris gave evidence that Berri was not in a position as at December 2005 to recognize or take into account any adjustment, and was not required to take into account any adjustment, in relation to the loan to Indsoari.

152 The judge, however, preferred the alternative view. His Honour said that:

[The propriety of writing off the investment] 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.

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'.

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'.

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.[105]

153 With respect, we disagree. To start with, the test was not whether it was open to directors to take something into account but whether they were bound to conclude that there were insufficient profits to fund a dividend. Specifically, therefore, the test was not whether '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', but whether the evidence established on the balance of probabilities that the directors, if acting honestly and reasonably, would have been bound to conclude that the investment had to be written off.

154 Secondly, whatever weight might justifiably be attributed to Mr Read's evidence of his thoughts about the recoverability of the investment, the evidence as a whole fell well short of establishing that the action of writing off the whole of the value of Berri's investment in in 2005 reflected a true and fair view of the investment. To the contrary the evidence showed that:

• Indosari's cash flow position was the same as in previous years - about breakeven - in which Berri had consistently followed the practice of writing down the value of its investment in Indosari to the net value of Indosari assets.
• In past periods, Berri's auditors had approved the approach of writing down the investment to the net value of Indosari assets and Mr Westworth agreed that the net asset position of Indosari was relevant to assessing the carrying value of the loan, as was the ongoing trading relationship between Berri and Indosari.
• There was no evidence that the auditors of Indosari ever requested a letter of comfort or support from Berri to the effect that Berri was satisfied with the ability of Indosari to repay the loan or have regard to its net asset position.
• KPMG stated in their 24 January 2006 memorandum that 'the carrying value of the loan at 31 December 2005 is still support by the underlying net asset position of Indosari'.
• There was no evidence of any suggestion as at December 2005 that the previous practice would be changed or that, if Directors had considered the matter at that point, the advice which management might have given them would have been anything other than to maintain the status quo ante.
• On the evidence, it is much more likely than not that Mr Read of San Miguel was keen that Berri should write off as much of the value of its assets as KPMG could be made to accept and, to that end, in the period between January 2006 and April 2006, Mr Read managed to persuade KPMG, contrary to their opinion of January 2006, that a write off far in excess dictated by previous practice was permissible.

155 Thirdly, at best from San Miguel's point of view, the evidence demonstrated that there was more than one view reasonably open as to the propriety of writing off the whole of the value of the investment in Indosari (although we do not consider that the evidence went that far). If so, the directors of Berri would still have been lawfully entitled to assume there should be no change to the previous practice.

156 In order to assist with the development of a new species of orange capable of being grown during the Valencia orange off-season, Berri made loans to a number of orange farmers repayable out of the proceeds of sale of fruit ('Rootstock loans').

157 At trial, Mr Read gave evidence that, when he investigated the Rootstock loan project in November or December 2005, he found that there were no legal agreements and that new trees had been planted in the middle of a drought which would not produce a commercial crop for at least seven years. He also claimed there were indications in August 2005 that the farmers involved in the project were in financial difficulty and that, by December 2005, there was evidence that it was unlikely Berri would recover any Rootstock receivables.

158 In his spreadsheet of December 2005, Mr Lavery included a $100,000 write-down of Rootstock receivables to reflect those vicissitudes. But, in the final end of year accounts for 2005 (prepared in April 2006) the provision was increased to $762,000.

159 At trial, ICM took issue with that adjustment on the basis 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 in which the trees were planted. Mr Morris also gave evidence that, if the directors of Berri had been considering the matter as at December 2005, they would not have been in a position to take any such adjustment into account and certainly would not have been required to take it into account.

160 Even so, the judge rejected ICM's position for the following limited reasons:

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.[106]

161 Counsel for ICM contended that the following considerations demonstrated that the judge was in error:

• As has been noted, the November Operations Report included a $100,000 write down in respect of the Rootstock loans and that was also included in the full year profit forecast of $19.1 million assembled in December 2005. As an aside, the inclusion of the same $100,000 in the $8.4 million adjustment made by Mr Read to Mr Lavery's spreadsheet and in Mr Read's draft dividend report was double counting.
• Mr Morris' opinion that the directors were not in a position to and were not bound to make any greater provision in respect of the Rootstock receivables was supported by KPMG's assessment as reported in January 2006, that provisioning for the Rootstock loans appeared to be 'overly conservative' as at 31 December 2005.
• In cross-examination, Mr Westworth agreed that the Rootstock loans should have been included at fair value and that 'due to the loans being immaterial in the context of the overall accounts', they 'might not have been treated absolutely precisely as they should be'.

162 On balance we are inclined to agree. It is, however, sufficient to say of this aspect of the matter that, assuming without deciding it was open to conclude that the $762,000 adjustment 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' (although, we doubt the evidence went that far), it is clear that the evidence did not establish that the directors acting honestly and reasonably in December 2005 would have been bound to make any more allowance for the irrecoverableness of Rootstock receivables than the $100,000 included in the spreadsheet and accounts in December 2005 and, as such, endorsed by KPMG in January 2006.

ICM's Appeal, Ground 22: Change of accounting policies

163 Finally, until December 2005, Berri's leasehold improvements were depreciated in its accounts over the full life of each lease including any optional terms. Contrary to that practice, in his December 2005 spreadsheet Mr Lavery included an adjustment of $193,000 (pre-tax) to conform Berri's accounting policies to the accounting practices of San Miguel and NFL. Then, in Berri's final end of year accounts (prepared in April 2006), the adjustment was further increased to $1.4 million (forming part of the $7.545 million line item for 'Impairment of property, plant and equipment' under Note 3, 'Expenses').

164 ICM contended below that the adjustment was wholly unwarranted for a number of reasons:

• First and perhaps foremost, the change to 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,[107] and there was no such approval.
• Secondly, there was no evidence in support of the adjustment. Its appropriateness was dependent upon NFL acquiring 100 per cent of Berri and, until 2006, there was no commitment for NFL to acquire 100 per cent of Berri.
• Thirdly, the change was not an impairment adjustment within the accounting standard AASB 136. There was no 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 NFL, when and if NFL acquired 100 per cent of Berri.
• Fourthly, Mr Kearney of San Miguel agreed there was no basis for changing Berri's accounting policy in that respect in 2005 and Mr Westworth agreed that the potential adoption of NFLs' accounting policies in 2006 did not provide a basis for an adjustment in 2005.

165 The judge found that, in view of those considerations 'the treatment of this issue by KPMG in Berri's final accounts may well have been open to challenge'.[108] Nonetheless, his Honour said that, because the integration of Berri with NFL 'was well underway in the second half of 2005', it would have presented the directors of Berri 'with a range of imponderables in 2005' and thus, if it had 'arisen for specific consideration, the Berri/NFL integration would have been a source of uncertainty'. It followed, his Honour concluded, that:

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.[109]

166 With respect, we disagree. The evidence showed that there was no basis in 2005 for changing Berri's accounting policy in relation to leasehold improvements in 2005. The fact that Berri's accounting policies might change in future on adoption of NFL's accounting policies in 2006 was not a warrant still less a requirement to change them in relation to 2005. There was, therefore, nothing to preclude the directors of Berri honestly and reasonably taking the view as at December 2005 that there should be no change in relation to the 2005. More specifically, there was nothing to preclude the directors of Berri as at December 2005 honestly and reasonably taking the view that the only allowance for leasehold depreciation which should be taken into account in the calculation of profits in December 2005 was an adjustment calculated in accordance with the process of calculation which had been used to that point.

ICM's Appeal, Grounds 23 to 26: no excuse for non-payment of the dividend

167 If follows from the foregoing that, in deciding whether it was open to pay a dividend in December 2005, the position which the directors if acting honestly and reasonably would have been faced with was as follows:

• Profits available for distribution $19.53 million

168 Accordingly, even if the directors had wished to pay off all of the accumulated losses of $6.279 million (which we have concluded they were not bound to do), and had chosen not to use the general reserve of $5.313 million for the payment of dividends (which we have concluded was available to them for the payment of dividends), it has not been shown that they could not honestly and reasonably have taken the view, as at December 2005, that there were adequate profits from which to pay the minimum cash dividend, calculated in accordance with cl 10 of the Shareholders' Agreement, as required by cl 7.7 of the Option Deed. Hence, in our view, there was no excuse for the non-payment of that dividend.

169 For these reasons, we conclude that the appeal should be allowed, the judgment below should be set aside and, in lieu thereof, it should be ordered that there be judgment for ICM against San Miguel for damages for breach of cl 7.7 of the Put and Call Option Deed in the amount of the dividend of $3,472,198.04 together with the amount of the franking credits of $1,488,084.87, making a total of $4,960,282.91, plus interest pursuant to Statute. Berri's cross-appeal will be allowed and San Miguel's cross appeal will be dismissed.

[1] ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 2) [2013] VSC 528 ('First Reasons').

[2] ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 3) [2013] VSC 621 ('Second Reasons').

[3] First Reasons [119], [137], [155], [245].

[14] See Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461-2 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522; Western Exports Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1, 3 [5]; Retirement Services Australia v 3143 Victoria Street Doncaster Pty Ltd [2012] VSCA 134 [5]; and Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 88 ALJR 447, 454 [35].

[17] Foster v Wheeler (1888) 38 Ch D 130,134 (Bowen LJ); Kim Lewison and David Hughes, The Interpretation of Contracts in Australia (Thomson Reuters (Professional) Australia, 2012) [7.18].

[18] We interpolate here that having rounded up in the case of a fraction when determining the number of shares on the first exercising of the put option, it is difficult to see how there can be any remaining rounding to be done in respect of the remaining shares for the second occasion upon which the put option might be exercised. The words 'rounded up in the case of a fraction' in cl 3(j)(ii) appear to be otiose.

[19] Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201.

[20] Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; (1992) 2 VR 732, 740.

[21] [2001] HCA 70; (2001) 210 CLR 181.

[22] Ibid 198 [43] (citations omitted).

[23] See for example Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267, 270.

[24] The expression 'Transaction Documents' is defined in clause 1.1 of the Shareholders Agreement to mean:

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

[25] See [11] above.

[26] The only difference in text is that clause 11.9 of the Option Deed referred to 'this Deed', whereas clause 21.9 of the Shareholders Agreement referred to 'this Agreement'.

[29] See [50] above.

[30] Further Amended Statement of Claim, paragraphs [22(b)] and [28].

[31] ICM's final submissions at trial, paragraph [275].

[34] First reasons [38], [177], [224] and [639].

[35] Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531; Fox v Percy (2003) 124 CLR 118.

[36] First Reasons [283]-[285] (emphasis added).

[37] Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616, 622 E-F (Hutley JA) ('Marra Developments').

[39] Marra Developments [1977] 2 NSWLR 616.

[42] [1977] 2 NSWLR 616.

[43] In re Duomatic [1969] 2 Ch 365, 372; see, generally, Robert P Austin and Ian M Ramsay, Ford's Principles of Corporations Law, (LexisNexis Butterworths, 13th ed 2007) [7.590]-[7.595].

[44] It would also have been in direct contravention of s 10(c).

[45] Corporations Act s 588G.

[46] [1977] VicRp 20; [1977] VR 164. See also Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd [2006] FCAFC 188(French and Kiefel JJ).

[48] Report of Brian Morris dated 25 November 2011, [2.16]-[2.17] (AB Vol 1, Tab E01,page 0084).

[50] Report of Chris Waterworth dated 2 February 2012, (AB Vol 2, Tab F01, pages 0147-0155)

[53] Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266, 283 (Swinten Eady J); Marra Developments [1977] 2 NSWLR 616, 622 (Hutley JA), 630 (Mahoney JA); Spassked Pty Ltd v Commissioner of Taxation [2003] FCAFC 282; (2003) 136 FCR 441.

[54] [1963] HCA 36; (1963) 109 CLR 199, 207-8.

[55] [1977] 2 NSWLR 616, 637-8.

[56] [1904] 2 Ch 208, 213-4 (Romer LJ), 216 (Vaughan Williams LJ).

[57] [1932] NI 35.

[58] First Reasons [257]-[261] (emphasis added).

[59] Companies Act 1980 (UK) s 39 and see now Companies Act 2006 (UK) ss 830; Robert P Austin and Ian M Ramsay, Ford's Principles of Corporations Law, (LexisNexis Butterworths, 13th ed 2007) [18.190].

[61] [1958] HCA 51; (1958) 101 CLR 119.

[62] [1892] 2 Ch 198, 201.

[63] [1894] 2 Ch 239, 265, 266.

[64] [1901] 1 Ch 208,212, 213

[65] [1923] 2 Ch 553, 565

[66] First Reasons [263]-[267] (emphasis added).

[67] Trevor v Whitworth (1887) 12 App Cas 409, 423-4; Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) [1958] HCA 22; (1958) 100 CLR 392, 413; Australasian Vic Exploration Ltd v Lachberg [1958] HCA 51; (1958) 101 CLR 119, 132; Robert P Austin and Ian M Ramsay, Ford's Principles of Corporations Law, (LexisNexis Butterworths, 13th ed 2007) [20.270].

[68] Cross v Imperial Continental Gas Association [1923] 2 Ch 553, 565-6.

[69] Ammonia Soda Company v Chamberlain [1918] 1 Ch 266, 273 (Peterson J).

[70] [1901] Ch 208, 212, repeated by Romer J in Cross v Imperial Continental Gas Assn [1923] 2 Ch 553, 565.

[71] [1892] 2 Ch 198.

[72] [1894] 2 Ch 239, 265.

[74] [1918] 1 Ch 266, 296 (Scrutton LJ).

[75] [1977] 2 NSWR 616, 630 (Mahoney JA)

[76] Glenville Pastoral Company Pty Ltd (in liq) v Federal Commissioner of Taxation [1963] HCA 36; (1963) 109 CLR 199, 207-8.

[78] Accounts as December 2004, AB 4, page 1908.

[79] First Reasons [348]-[349] (emphasis added).

[84] It expressly provided that: 'AIFRS apply for reporting periods commencing on or after 1 January 2005. For companies that are disclosing entities (including listed companies) with a 30 June 2005 balance date, this will be their financial report for the half-year ended 31 December 2005'.

[86] First Reasons [353]-[354] (emphasis added).

[88] (2010) 240 CLR 444, 459.

[89] First Reasons [361]-[364]. (We take his Honour to have meant that he was not satisfied that 'the write-downs and adjustments on the adoption of the AIFRS accounting standard as from 1 January 2005' were warranted.)

[102] It was accepted that the reference to '2006' was erroneous. It was intended to be a reference to 2007, when it was planned that the change of system would be installed.

[105] First Reasons [584]-[587] (emphasis added).

[107] Shareholders' Agreement, cl 5.1 and Sch 3, [9].