Plaintiff v First Defendant

CONTRACT - Guarantee Arrangement - Whether an agreement to raise capital to fund redemption of redeemable preference shares constitutes a guarantee - Guarantor not indemnified by principal debtor - Construction of contract strictissimi juris - Whether conditions precedent to guarantee enlivened - Liability of guarantor - Ankar Pty Ltd v National Westminster Finance (Aust) Ltd [1987] HCA 15; (1987) 162 CLR 549; Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370; Andar Transport Pty Ltd v Brambles Ltd (2004) HCA 28; (2004) 217 CLR 424; Tricontinental Corporation Ltd v HDFI Ltd (2009) 21 NSWLR 689 considered.

CONTRACT - Principles of construction of commercial contracts - Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2020] VSC 126; Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280; (2016) 343 ALR 112; Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633; Zhang v ROC Services (NSW) Pty Ltd [2016] NSWCA 370; (2016) 93 NSWLR 561; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 328 ALR 564 considered.

INSOLVENCY - Meaning of 'due' and 'due and payable' - Determination of appropriate date for assessment of solvency - Whether commercial reality can be considered in assessing whether a debt is due for purposes of assessing solvency - Section 95A of the Corporations Act 2001 (Cth) - Mack v Commissioner of Stamp Duties [1920] HCA 76; (1920) 28 CLR 373; Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1; Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187; Griffin Energy Group Pty Ltd v ICICI Bank Ltd [2015] NSWCA 29; (2015) 317 ALR 395; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 188 ALR 114 considered.

ESTOPPEL - Silence as a representation - Whether detrimental reliance occurred - Australasia Development (M) Pty Ltd v Glenwood Estate (Vic) Pty Ltd [2012] VSC 758; Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26; (2016) 260 CLR 1.

1 This proceeding originates in the sale of the Pacific Reef Fisheries Group, which owned an aquaculture business and associated facility in Ayr, North Queensland. Pacreef Investments Pty Ltd ('Pacreef'), a company controlled by the Mitris family, owned the business through a subsidiary. In August 2017, Pacreef sold its shares in the subsidiary to Pacific Biotechnologies Limited ('Pac Bio'),[1] an unlisted public company. A major shareholder in Pac Bio is GTW Investments (Aust) Pty Ltd ('GTW'), a company associated with prominent businessman and philanthropist, Mr Graeme Wood ('Mr Wood'). Through GTW, Mr Wood was a director and key stakeholder[2] in Pac Bio. Mr Wood is a founder of the online travel site Wotif, and has more recently concentrated on commercial investments and philanthropy; the latter conducted through the Graeme Wood Foundation ('the Foundation'), the trustee of which is Grannette Pty Ltd ('Grannette').

2 As part of the consideration for the August 2017 sale, Pacreef received 15 million fully paid A Class Shares ('the A Class Shares') in Pac Bio.[3] The A Class Shares do not pay dividends or carry voting rights and are redeemable by Pac Bio on notice from Pacreef at a price of $1 per share. The A Class Shares were issued pursuant to an agreement between Pacreef and Pac Bio titled 'Subscription Agreement' ('the Subscription Agreement'), which outlines the redemption process. The obligation of Pac Bio to redeem the A Class shares was supported by a further agreement between Pacreef, Pac Bio, and GTW titled 'Guarantee Arrangement' ('the Guarantee Arrangement'). Though the exact nature of the Guarantee Arrangement is in dispute, in essence it requires GTW to subscribe for capital in Pac Bio to fund the redemption of the A Class Shares if certain conditions are met.

3 On 7 January 2019, Pacreef served Pac Bio with a redemption notice in respect of the A Class Shares ('the 7 January 2019 Redemption Notice'). It is not in dispute that Pac Bio has not redeemed the A Class shares.

4 On 11 February 2020, Pacreef commenced this proceeding against Pac Bio and GTW to enforce the 7 January 2019 Redemption Notice and the Guarantee Arrangement.

5 Pac Bio was placed into voluntary administration on 12 March 2020. Subsequently, the creditors of Pac Bio resolved to enter into a deed of company arrangement ('DOCA'). The claim against Pac Bio has been stayed by operation of s 471B of the Corporations Act 2001 (Cth) ('the Corporations Act').

6 The remaining claim by Pacreef alleges that, Pac Bio not having redeemed the A Class Shares, the Guarantee Arrangement is thereby enlivened and GTW is in breach.

7 In its defence, GTW makes four allegations that form the central issues in the case:

(a) the A Class Shares are not preference shares and so cannot be lawfully redeemed by Pac Bio, such that GTW has no liability under the Guarantee Arrangement ('the Preference Shares Issue');

(b) the conditions precedent to GTW's liability under the Guarantee Arrangement had not been satisfied in the following respects, such that GTW's obligations do not arise ('the Conditions Precedent Issue'):

(i) Pac Bio was required to conduct a capital raising for the purposes of satisfying the 7 January 2019 Redemption Notice and did not do so ('the Capital Raise Issue');

(ii) the board of Pac Bio was required to pass a resolution that no Insolvency Event[4] had arisen and did not do so ('the Insolvency Declaration Issue'); and

(iii) in any event, an Insolvency Event subsisted as at the relevant date such that GTW's obligations under the Guarantee Arrangement did not arise ('the Insolvency Event Issue').

The relevant date against which the subsistence of an Insolvency Event is to be assessed is also in issue: the parties dispute whether it was 4 February 2019 or 7 April 2019 ('the Solvency Dates'; the issue to determined, 'the Solvency Date Issue');

(c) Pacreef is estopped from relying on the 7 January 2019 Redemption Notice ('the Estoppel Issue'); and

(d) Whether the fact that Pac Bio is subject to a DOCA and that proceedings against it are consequently stayed disentitles Pacreef from the relief that it seeks against GTW ('the Relief Issue').

8 With the exception of the Estoppel Issue, the remaining issues in the proceeding are not fact intensive. They largely depend upon the proper interpretation of the Guarantee Arrangement or on questions of law that do not require detailed factual analysis.

9 In contrast, the Estoppel Issue demands a fact-laden enquiry. Matters relevant to its resolution occupied the bulk of the trial.

(a) Mr Nick Mitris ('Mr Mitris'), the head of the Mitris family, who attended board meetings of Pac Bio from time to time;

(b) Ms Maria Mitris-Honos ('Ms Mitris-Honos'), Mr Mitris' daughter, who was a director of Pac Bio from 12 October 2017 to 17 February 2020 effectively as a nominee of Pacreef;

(c) Mr John Patton ('Mr Patton'), a chartered accountant who has acted as an advisor to the Mitris family for many years and who assisted the Mitris family with their negotiations in respect to the sale of the aquaculture business to Pac Bio; and

(d) Mr Stewart McCallum ('Mr McCallum'), a chartered accountant, who gave evidence as an independent expert in respect of the solvency of Pac Bio on the two Solvency Dates.

11 Pacreef also tendered without objection a witness outline from Pac Bio's former company secretary, Mr Andrew Metcalfe ('Mr Metcalfe'). By consent, the parties agreed that Mr Metcalfe's witness outline would stand as evidence. All witnesses aside from Mr Metcalfe were cross examined.

(a) Mr Wood;

(b) Mr Chris Collett ('Mr Collett'), an investment banker from Greenhill & Co Corporate Advisory ('Greenhill'), a firm which provided advice on recapitalisation to Pac Bio from late 2018 onwards; and

(c) Mr Greg Meredith ('Mr Meredith'), a chartered accountant, who also gave evidence as an independent expert in respect of the solvency of Pac Bio on the Solvency Dates.

13 Each of the witnesses was cross-examined, with Mr Wood cross-examined for approximately two days.

14 The need for solvency evidence from Mr McCallum and Mr Meredith arose insofar as GTW asserted that its obligations under the Guarantee Arrangement were not enlivened as an Insolvency Event had subsisted with respect to Pac Bio as at both 4 February 2019 and 7 April 2019 (that is, the Solvency Dates).

15 As is common in modern commercial disputes, a significant body of contemporaneous documentation, including a proliferation of emails, was produced. This established a reliable and near comprehensive account of the events necessary to resolve the dispute. In the fact-finding exercise which I have been required to undertake, I have found the contemporaneous documents of far greater assistance than the oral evidence, which was given by witnesses some years after the event.

16 It is necessary to set out the facts in greater detail below.

17 On 28 July 2017, Pacreef entered into three agreements:

(a) an agreement titled 'Share Sale Agreement' pursuant to which Pacreef, among others, sold shares in entities owning the Pacific Reef Fisheries Group to Pac Bio ('the Share Sale Agreement');

(b) the Subscription Agreement, by which Pacreef agreed to subscribe for and Pac Bio agreed to, among other things, issue the A Class Shares to Pacreef; and

(c) the Guarantee Arrangement, to which each of Pacreef, Pac Bio and GTW were parties and by which GTW agreed to subscribe for capital in Pac Bio to fund the redemption of the A Class Shares if certain conditions were met.

The Share Sale Agreement and issue of the A Class Shares

18 Under the terms of the Share Sale Agreement, Pacreef sold the shares to Pac Bio in consideration for:

(a) receipt of a deposit of $6.5 million

(b) three tranches of shares, namely:

(i) 15 million fully paid A Class Shares in Pac Bio at an issue price of $1 per share;

(ii) 8 million fully paid B Class Shares in Pac Bio at an issue price of $1 per share ('the B Class Shares');

(iii) 5 million fully paid ordinary shares in Pac Bio at the issue price of $1 per share (referred to as 'the Uplift Shares'); and

(c) a completion payment of $35.5 million, together with further amounts for existing inventory as well as an 'upfront profit' amount of $3 million.[5]

19 Effectively, the consideration received by Pacreef under the Share Sale Agreement comprised:

(a) cash payments totalling $45 million;

(b) 5 million ordinary shares in Pac Bio;

(c) 15 million A Class Shares in Pac Bio; and

(d) 8 million B Class Shares in Pac Bio.

20 Pac Bio funded the purchase price under the Share Sale Agreement largely through a combination of:

(a) $22 million in cash (sourced via an equity raising in July 2017);

(b) $25 million in long term borrowings from the Commonwealth Bank of Australia ('CBA'); and

(c) through the issue of $28 million in equity (that is, the A Class Shares, the B Class Shares, and the Uplift Shares) to Pacreef.

21 Pac Bio funded a small portion of the purchase price by way of a vendor finance loan, reflected in a deed of indebtedness between Pacreef and Pac Bio for $3 million. Similarly, Pac Bio funded an adjustment payment due to Pacreef by a further deed of indebtedness in relevantly identical terms for $2,893,817 (collectively, the 'Vendor Finance Deeds'). The precise terms of the Vendor Finance Deeds are important to the Insolvency Event Issue, and will be considered in greater detail below.

22 Pac Bio's issue of the A Class Shares and the B Class Shares under the Share Sale Agreement was facilitated by the Subscription Agreement between Pacreef and Pac Bio, entered into on the same date. The Subscription Agreement provided, among other things, that:

(a) Pacreef would subscribe for the A Class Shares and B Class Shares in Pac Bio;

(b) Pac Bio would issue the A Class Shares and B Class Shares to Pacreef; and

(c) upon their issue the A Class Shares and the B Class Shares would be governed by the terms of issue set out in Schedule 3 to the Subscription Agreement ('the Terms of Issue').

23 The Terms of Issue in turn provided, among other things, that:

(a) the A Class Shares and B Class Shares had no rights to dividends or distributions from the company;

(b) the A Class Shares and B Class Shares did not confer any voting rights on their holders;

(c) the A Class Shares and the B Class Shares were not transferable; and

(d) the A Class Shares and B Class Shares carried conversion rights, namely that:

(i) the A Class shareholder may convert each A Class Share into an ordinary share by serving a conversion notice on Pac Bio at any time up to and including 3 July 2018;

(ii) the B Class shareholder may convert each B Class Share into an ordinary share by serving a conversion notice on Pac Bio at any time up to and including 3 July 2019; and

(iii) in the event that no conversion notice was served before either of the relevant dates, the conversion rights would cease.

24 Importantly, a redemption procedure was set out in Clause 8 of the Terms of Issue.

25 Clauses 8.1 provided for the redemption of the A Class Shares as follows:

(a) If either:

[certain preconditions are met]

the A Class Shareholder may require the Company to redeem all or any of the A Class Shares by serving a Redemption Notice on the Company.

(b) Subject to clause 8.3, within 28 days of receipt of a Redemption Notice, the Company must pay the A Class Shareholder, the amount of $1 for each A Class Share held and redeemed in cleared funds into a bank account nominated in advance by the Subscriber.

(c) Within 5 Business Days of receipt of the Redemption Notice, the Company must deliver a notice to the Subscriber setting out the amount paid-up on the A Class Shares immediately before the redemption of the A Class Shares and confirming that the funds used to pay the redemption amount will be debited to the Company's share capital account.

(d) The Company must only pay the redemption amount out of the proceeds of a new issue of shares made for the purpose of the redemption.

26 Clause 8.2, which provided for the redemption of the B Class Shares, was in relevantly identical terms.

8.3 Instalments

(a) The Company must raise capital through a fresh issue of Ordinary Shares to satisfy a redemption request under this clause 8. The parties acknowledge that the issue of Ordinary Shares in the Company to certain shareholders of the Company may result in a breach of the takeover provisions in the Act. In order to comply with one of the exemptions to the takeover provisions in the Act, the A Class Shareholder and the B Class Shareholder agree, and make no objection to, the Company paying the redemption amount in instalments provided the redemption amount is fully paid as soon as possible and in any event on the earlier to occur of:

(i) the earliest date on which the Company may issue Ordinary Shares in compliance with the exemptions to the takeover provisions in the Act in order to satisfy the redemption request; and

(ii) the date nine months after the receipt of the Redemption Notice.

(b) The Company can pay the redemption amounts in this manner for each of the A Class Shares and the B Class Shares so redeemed.

28 On 10 August 2017, a general meeting of shareholders of Pac Bio passed a special resolution which, among other things, authorised the issue of the A Class Shares and the B Class Shares.

29 The material provided to shareholders in advance of the general meeting included an explanatory memorandum dated 20 July 2017 ('the Explanatory Memorandum'). The Explanatory Memorandum informed shareholders that under s 254A(2) of the Corporations Act, a company can only issue preference shares (including redeemable preference shares) if certain rights attaching to those preference shares are set out in the company's constitution or have been otherwise approved by a special resolution. The Explanatory Memorandum further informed shareholders that the board was seeking shareholder approval by special resolution for the issue of the A Class Shares and B Class Shares to Pacreef on terms outlined in the Explanatory Memorandum.

30 The share issue special resolution, as proposed in the notice of general meeting, read:

That for the purposes of section 254A(2) of the Corporations Act 2001 (Cth) and for all other purposes, approval is given for the issue of 15,000,000 A Class Shares and 8,000,000 B Class Shares to Pacreef Investments Pty Ltd (as trustee for Pacreef Discretionary Trust) on the terms described in the explanatory memorandum accompanying this notice of meeting.

31 Ultimately, on 10 August 2017 the shareholders of Pac Bio by an overwhelming majority[6] passed a special resolution to approve the issue of the A Class Shares and B Class Shares to Pacreef. The shareholders who voted in favour of the resolution included GTW. Pacreef was not a shareholder at the time.

32 On 22 August 2017, following the passage of the special resolution, Pac Bio's directors resolved that on completion of the Share Sale Agreement, and subject to receipt by Pac Bio of a duly executed application for shares from Pacreef, Pac Bio would issue the A Class Shares, the B Class Shares, and the Uplift Shares to Pacreef.

33 The board also resolved, subject to completion of the sale, that Ms Mitris-Honos be appointed as a director of Pac Bio.

34 The documents executed on 28 July 2017 also included the Guarantee Arrangement between Pac Bio, Pacreef and GTW. The terms of the Guarantee Arrangement are critical and relevantly include the following:[7]

1 MBD, MBD Energy (Pacific Reef) Ltd (MBD Energy), ENEM Holdings Pty Ltd (ENEM) and Pacreef propose to enter into a

share sale agreement (SPA) pursuant to which MBD Energy

will acquire shares from Pacreef and ENEM on the terms and

conditions of that agreement (the Transaction). As part of the Transaction, Pacreef will be issued 15 million A Class Shares in

MBD which may be redeemed in accordance with the Subscription Agreement.

2 GTW has agreed to guarantee any capital raising by MBD to

satisfy any redemption of the A Class shares by Pacreef on the

terms and conditions of this deed.

3 In consideration of GTW entering into this deed, MDB has

agreed to grant the Initial Option and the Subsequent Option to

GTW to purchase the Initial Option Shares and the Subsequent Option Shares on the terms and conditions of this deed.

...

1.1 Definitions

Term Meaning

...

A Class Shares 15 million fully paid A Class Shares in MDB

...

Conditions the conditions set out in clause 2.1.

...

Exercise Notice a notice in the form set out in Schedule 3.

Exercise Price 1 in respect of the Initial Option Shares, $0.50 ...

...

Initial Option the option granted to GTW pursuant to clause 5.1.

...

Initial Option Shares 2,000,000 ordinary shares in MBD.

Insolvency Event in relation to an entity:

1 the entity is unable to pay its debts as and when they fall due;

2 the entity goes into liquidation;

3 the entity [sic]

4 receives a deregistration

notice under section 601AB of the Corporations Act; an order is made for the winding up (otherwise than for the purposes of reconstruction or amalgamation) of the entity;

5 a receiver, receiver and manager, judicial manager, liquidator, administrator or like official is appointed over

the whole or a substantial

part of the undertaking of

the property of the entity;

6 a writ of execution issued

against the entity or a majority proportion of the

entity's assets;

7 the entity is declared or taken under the applicable law to be insolvent.

Maximum Subscription Shares 15 million fully paid ordinary shares in MDB at an issue price of $1.00 each.

...

Subscription Agreement the subscription agreement between MDB and Pacreef dated

on or about the date of this deed.

...

Subsequent Option the option granted to GTW pursuant to clause 6.1.

...

Subsequent Option Shares the number of ordinary shares in MBD which, when multiplied by the Exercise Price in respect of the Subsequent Option, would result in:

1 the aggregate amount paid by GTW to MDB in

respect of the Subscription

Shares, Initial Option Shares and Subsequent Option Shares; divided by

2 the total number of Subscription Shares, Initial Option Shares and

Subsequent Option Shares

being equal to $0.83.

...

2.1 Conditions precedent to obligations under this deed

The obligations of GTW under clause 3 of this deed are conditional only on:

(a) Pacreef giving notice to MBD to redeem the A Class shares in, or substantially in, accordance with the Subscription Agreement (Redemption Request);

(b) MBD does not raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary shares in MBD carried out for the purpose of satisfying the Redemption Request within three months after the date of the Redemption Request; and

(c) no Insolvency Event exists in respect of MBD as at the date the A Class shares are to be redeemed in accordance with the Subscription Agreement.

Each party must take all steps within its own capacity to ensure that each Condition is fulfilled.

The Conditions are for the benefit of all parties and may only be waived by written agreement between the parties.

2.4 Notice of satisfaction of Conditions

(a) Each party must provide written notice to each other party of the satisfaction or waiver of each of the Conditions promptly upon satisfaction or waiver occurring.

(b) Each party must promptly notify the other party in writing if it becomes aware that any Condition that becomes incapable of being satisfied.

2.5 Termination of deed

If:

(a) the SPA is terminated before Completion (as defined in the SPA), this deed will automatically terminate; or

(b) the Conditions are not satisfied or waived prior to 31 December 2018, then Pacreef or, subject to GTW and MBD complying with their obligations under this deed, GTW or MBD may terminate this deed by five business days prior notice to each other party.

...

(a) If the Conditions have been satisfied or waived in accordance with clause 2.2, subject to clauses 3.1(b) and 4:

(i) (subscription): GTW must subscribe for and accept the issue by MBD of, such number of fully paid ordinary shares in MBD at $1 each (Subscription Price) as is required to fully satisfy the Redemption Request (Subscription Shares) by means of an application substantially in the form in Schedule 2; and

(ii) (Subscription Price): GTW must, subject to clause 3.1(c), pay to MBD the Subscription Price in Immediately Available Funds without counter-claim or set-off;

(b) MBD and GTW must procure the Subscription Shares that GTW must subscribe for and accept the issue by MBD of under clause 3.1(a) must not exceed the Maximum Subscription Shares.

(c) MBD must hold the Subscription Price on trust for the benefit of Pacreef for the sole purpose of redeeming the A Class shares in accordance with the Subscription Agreement. Contemporaneously with the receipt of the Subscription Price, MBD must redeem the A Class shares and pay the Subscription Price to Pacreef in Immediately Available Funds without counter-claim or set-off, and without limiting the foregoing, MBD hereby directs GTW to pay, and GTW must pay, the Subscription Price directly to Pacreef at each Subscription Completion, in Immediately Available Funds without counterclaim or setoff.

(d) The liability of GTW under clause 3.1(a) is not affected by anything that might operate to release or exonerate GTW in whole or in part from its obligations under this deed including any of the following, whether with or without the consent of GTW:

(i) the grant to GTW or any other person of any time, waiver or other indulgence, or the discharge or release of GTW or any other person from any liability or obligation;

(ii) any transaction or arrangement that may take place between the parties or any other person;

(iii) the failure or omission or any delay by Pacreef or MBD to give notice to GTW or any default by MBD, Pacreef or any other person under this deed; and

(iv) any legal limitation, disability, incapacity or other circumstance related to GTW or any other person.

(e) Completion of the issue of the Subscription Shares, and the redemption of the corresponding number of A Class shares, pursuant to this clause 3 must take place at the office of MBD at 456 Victoria Parade, East Melbourne Vic 3002 at 11.00am on the Subscription Shares Completion Date or such other place, time and date as the parties agree.

3.2 Obligations of MBD

(a) On or before Subscription Completion, MBD must procure that a meeting of directors of MBD is convened and approves:

(i) the redemption of the A Class Shares the subject of the Redemption Request and the payment of the redemption moneys to Pacreef;

(ii) the issue of the Subscription Shares to GTW; and

(iii) the issue of a new certificate for the Subscription Shares in the name of GTW;

(b) on the date of Subscription Completion, MBD must:

(i) (share issue): issue the Subscription Shares to GTW free from any Encumbrance;

(ii) (redemption): produce the redemption of the A Class shares the subject of the Redemption Request, and the payment of redemption moneys to Pacreef;

(iii) (share certificates): issue a share certificate under the name of GTW for all the Subscription Shares; and

(iv) (register of members): give to GTW a certified copy of the register of members of Pac Bio showing GTW as the registered holder of the Subscription Shares.

4 Instalments

(a) If MBD issues the Subscription Shares pursuant to clause 3.1(a), GTW and MBD must, within their respective power and control, procure that the Subscription Shares are issued to GTW in compliance with the exemptions to section 606 of the Corporations Act, including, but not limited to, the exemption under item 9 of section 611 of the Corporations Act.

(b) The parties agree that the Subscription Shares may be issued to GTW in instalments for the purposes of satisfying the requirements of clause 4(a) only, provided that all of the Subscription Shares are issued to GTW within 9 months of the date of the Redemption Request. The parties agree that the maximum number of Subscription Shares must be issued to GTW (and the maximum number of A Class Shares held by Pacreef must be so redeemed and paid for) in each instalment in order to comply with the exemptions to section 606 of the Corporations Act.

(c) The obligations on each party and the terms of this deed apply to each instalment of Subscription Shares issued to GTW.

5.1 Grant of Initial Option

Subject to completion occurring under the SPA, MBD grants to GTW an option buy from MBD the initial option shares for the Exercise Price and the terms of this clause 5.

...

6.1 Grant of Subsequent Option

Subject to completion of the issue of the Subscription Shares pursuant to clause 3, MBD grants to GTW an option to buy the Subsequent Option Shares for the Exercise Price on the terms of this clause 6.

...

Subject to clause 8.2, between the date of this deed and the earlier of:

(i) the date of the issue of all the Subscription Shares and the redemption of the A Class Shares the subject of the Redemption Request under clause 3.1(a); and

MBD must not pay any dividends or make any other distributions of its profits.

...

13.3 Invalidity and enforceability

(a) If any provision of this deed is invalid under the law of any jurisdiction the provision is enforceable in that jurisdiction to the extent that it is not invalid, where there is in severable terms or not;

(b) Clause 13.3(a) does not apply where enforcement of the provision of this deed in accordance with clause 13.3(a) would materially affect the nature or effect of the parties' obligations under this deed.

13.4 Waiver

No party to this deed may rely on the words or conduct of the other party as a waiver of any right unless the waiver is in writing and signed by the party granting the waiver.

The meanings of the terms used in this clause 13.4 are set out below.

...

waiver includes an election between rights and remedies and conduct that might otherwise give rise to an estoppel.

A variation of any term in this deed must be in writing and signed by the parties.

...

This deed states all the express terms of the agreement between the parties in respect of its subject matter. This deed supersedes all prior discussions, negotiations, understandings, arrangements and agreements, express or implied in respect of its subject matter.

35 On 26 July 2017, in anticipation of completion,[8] Mr Wood executed and returned to Pac Bio's then-chief executive officer the exercise notice for the Initial Option Shares and the Subsequent Option Shares in Schedule 3 to the Guarantee Arrangement. Mr Wood also executed and returned the application for Subscription Shares in Schedule 2 to the Guarantee Arrangement.

Development of the Proposed Recapitalisation and service of the 2018 Redemption Notice

36 By early to mid-2018, the board of Pac Bio had turned its mind to implementing a recapitalisation strategy for the company ('the Proposed Recapitalisation').

37 At a meeting of the board held on 18 April 2018, the board minutes record that the company would work to implement a recapitalisation through an equity raising in the second half of 2018. The minutes noted that the primary strategy for the Proposed Recapitalisation would be a rights issue, though alternatives such as a share placement would also be considered. The aim of the Proposed Recapitalisation was:

(a) to raise sufficient equity to repay the convertible notes then on issue;

(b) to repay an anticipated short term debt facility to be provided by GTW for $6 million[9] to, among other things, provide liquidity and working capital until a planned debt raising from strategic investors;

(c) to fund the anticipated redemption of the A Class Shares and B Class Shares; and

(d) to provide equity for an expansion of an existing aquaculture farm in Guthalungra.

38 The board minutes noted the necessity of entering into an implementation deed arranging the rights of its creditors and contributories to facilitate the Proposed Recapitalisation ('the Implementation Deed'). By the minutes, GTW, the Mitris family,[10] and the various convertible noteholders were to be the parties to the Implementation Deed.

39 On 18 July 2018, Pac Bio's new chief executive officer, Sam Bastounas ('Mr Bastounas'), had emailed Mr Wood updating him as to the steps required to enter into the Implementation Deed and to facilitate the Proposed Recapitalisation. Under points 5 and 6 of the email Mr Bastounas wrote:

5 Mitris - Wood agree to a deferral till March to allow Arne and I to book build. We haven't started this as yet when we do we will know what the uptake will look like - if we do this right will bring this home nicely.

6 GTW guarantee stays in place as this was your commitment to Nick that if the rights issue doesn't generate enough cash to buy out the prefs that you would step up and buy the balance. Now we wouldn't undertake a rights issue without being confident that (1) we have enough interest (2) we are underwritten (3) we have pre courted new investors - so the GTW shouldn't need to be called upon but it gives the Mitris family the security that they need knowing that if something goes wrong you're there. It was your commitment to him. The reality is that uptake on the rights issue is purely a function of price. If it's well priced it will go beautifully. If it's too expensive we adjust to market. I don't expect that the GTW guarantee would be called upon as we have an option to reshape MBD aggressively to make it attractive to avoid this.

The people exposed in all of this are yourself and the Mitris family along with all the other ordinary shareholders who just get crunched.

...

40 The same day, Mr Bastounas forwarded this email to Ms Mitris-Honos.

41 On 19 July 2018, the Mitris family's advisor, John Patton ('Mr Patton'), emailed Mr Bastounas, addressing the terms of the proposed Implementation Deed that had been forwarded for the Mitris family's consideration.

42 Among other things, Mr Patton noted that the Implementation Deed was premised on the Proposed Recapitalisation being (in part) applied to pay or redeem each of the A Class Shares, the B Class Shares, the convertible notes, and the Vendor Finance Deeds. Mr Patton noted that the Mitris family wished for the A Class Shares and B Class Shares to be paid in priority to the convertible noteholders. Mr Patton also requested that Mr Bastounas advise what would occur if the rights issue did not raise sufficient funds to redeem these liabilities.

43 Mr Patton concluded his email by informing Mr Bastounas that:

... the Mitris family have instructed me to advise you that they intend to exercise the GTW Guarantee on Friday this week. While that process runs its course, the Mitris family are happy to progress the Implementation Deed in parallel if this is something you believe can be finalised by the end of this month.

44 By a reply email later that day, Mr Bastounas asked that Mr Patton counsel the Mitris family to refrain from issuing a redemption notice. He told Mr Patton that Pac Bio was attempting to 'move the discussion forward', including by recirculating the Implementation Deed and continuing negotiations with all parties. Mr Bastounas advised Mr Patton that the issue of a redemption notice was likely to 'shift the relevant parties' mindset away from constructive dialogue and make it difficult for MBD to obtain further financial support'.

45 Mr Bastounas forwarded the email exchange with Mr Patton to Mr Wood. The same day, Mr Wood responded:

Dear All,

It seems nothing has changed from our meeting four (?) [sic] months ago where I expressed my belief in the MBD vision and at the same time expressed my personal business view that I would prefer to see a VA[11] with known losses to me rather than continue to engage with counter parties that neither shared the MBD vision or had other agendas unknown to me.

John, thanks for your [sic] last paragraph.

Hello VA :)

46 In oral evidence, Mr Patton accepted that if a redemption notice were to be served then there was a risk that Mr Wood would have put the company into voluntary administration. However, he said that the Mitris family had weighed up that risk against the fact that Mr Wood had a large shareholding, and that they believed that Mr Wood would not follow through on the threat. Mr Patton's (and both Ms Mitris-Honos' and Mr Mitris') evidence made it clear that, unlike Mr Wood, the Mitris family were not interested in the so-called 'Pac Bio vision'. To them, their entitlement to redemption of the A Class Shares was nothing more than part of the balance of the purchase price due to them under the Share Sale Agreement.

47 On 20 July 2018, as foreshadowed in the email exchange, Pacreef served a redemption notice for the A Class Shares on Pac Bio ('the 2018 Redemption Notice'), receipt of which was acknowledged by email on 27 July 2018.

48 Notwithstanding the service of the 2018 Redemption Notice and the terms of Mr Wood's email of 19 July 2018, the relevant stakeholders continued their negotiations with a view to finalising the Implementation Deed.

49 In about August 2018, Pac Bio retained the corporate advisory firm Greenhill to assist with the Proposed Recapitalisation.[12]

50 At a meeting of the board on 5 September 2018, the board resolved to adopt a valuation of the group which had been prepared by PKF. The valuation was based on forecasts prepared by the Company's chief financial officer, Arne Dimpfel ('Mr Dimpfel'), and gave an enterprise value of $102 - $116.5 million and an equity valuation range (that is, enterprise value after deducting capitalised corporate costs and debt) of between $14.7 - $31.8 million. This equated to a value per share of between $0.08 per share and $0.173 per share, with a midpoint of $0.127 per share.

51 On 27 September 2018, Pac Bio, GTW, and Pacreef, along with various other stakeholders,[13] entered into the Implementation Deed pursuant to which, among other things, Pacreef withdrew the 2018 Redemption Notice.

52 The Implementation Deed is important. Its recitals refer to Pac Bio proposing to enter into 'the New Debt Facilities', as well as entering into 'the Proposed Strategic Investment' and conducting the 'Proposed Recapitalisation'.

53 'Proposed Recapitalisation' was defined to mean 'one or more issue(s) of securities in [Pac Bio]' proposed to be undertaken prior to the End Date of 31 March 2019, as contemplated in clauses 3.3 ('Obligation to give effect to the terms of this document'), 3.4 ('Amount to be raised under the Proposed Recapitalisation') and 3.5 ('Notification regarding completion of the Proposed Recapitalisation'). The terms of the Proposed Recapitalisation were to be determined by Pac Bio.

54 'Proposed Strategic Investment' was defined to mean an investment, whether by way of equity or debt, in an amount up to approximately $10 million.

... use its best endeavours to ensure that the Proposed Recapitalisation is conducted such that upon completion of the Proposed Recapitalisation, the amounts raised are sufficient to, at a minimum:

(a) redeem in full the A Class shares and the B Class shares;

(b) repay in full all amounts outstanding under:

(i) each Existing Secured Convertible Loan Deed;

(ii) the Vendor Finance Deeds of Indebtedness;

(iii) the Existing Batterham Convertible Note Agreement; and

(iv) the GTW Facility Agreement.

56 Clause 5.6, headed 'Undertaking in respect of Relevant Documents', read:

(a) During the Standstill Period,[14] each of:

[Pac Bio's other creditors]

...

(v) GTW; and

(vi) Pacreef;

undertakes to Pac Bio that, despite any other provision of a Relevant Document, they will not take, and will not instruct or permit any other party to take, any action under a Relevant Document in respect of any default, potential default or review event (or similar event, however described) arising before the End Date.

(b) During the Standstill Period, GTW undertakes to continue to make all of the facilities available to Pac Bio under the GTW facility agreement, and any default, potential default or review event (or similar event, however described) under the Relevant Documents will be disregarded for the purposes of determining if the conditions precedent to a drawdown under the GTW facility agreement have been met.

57 The definition of 'Relevant Documents' set out a list of debt and equity instruments including, among other things, the Guarantee Arrangement; the Share Subscription Agreement; the Vendor Finance Deeds; and the existing general security agreement between Pac Bio and GTW.

58 Also included was a definition of 'New Facility Documentation', defined to include, among other things, the GTW Facility Agreement. The GTW Facility Agreement was in turn defined as a facility agreement to be entered into between Pac Bio and GTW in the form set out in Annexure A to the Implementation Deed. That annexure contemplated the provision of further finance facilities by GTW to Pac Bio up to a facility limit of $6 million. The repayment date under the GTW Facility Agreement was '31 March 2019 or such other date as agreed between the company and the lender in writing'.

59 By clause 6.1, Pacreef and Pac Bio agreed to replace the definition of 'Repayment Date' in the Vendor Finance Deeds with the following:

Repayment Date means the first to occur of:

(i) completion of the Proposed Recapitalisation (as defined in, and as contemplated by, the Implementation Deed); or

(ii) 5:00pm on 31 March 2019.

60 By clause 8.1, Pacreef agreed and irrevocably and unconditionally undertook to Pac Bio and to GTW that it would not issue a further redemption notice in respect of the A Class Shares until the earlier of:

(a) the completion of the Proposed Recapitalisation; or

(b) 5:00pm on 31 December 2018.

Further, Pacreef agreed that any purported redemption notice given prior to that date would be of no force and effect.[15]

61 By clause 8.2, Pac Bio agreed that, in consideration of the agreement and undertaking given by Pacreef in respect of the redemption notice, it would pay Pacreef an amount representing interest at a rate of 15% per annum in respect of an amount representing the value of the A Class Shares on redemption (that is, $15 million or any lesser amount that may be paid up from time to time), with effect on and from 4 July 2018 and until the redemption notice date.

62 Clause 9 is headed 'Underwriting of the Proposed Recapitalisation and amendments to GTW Guarantee Agreement'[16]. Sub-clause 9.1 read:

9.1 Underwriting of the Proposed Recapitalisation

(a) GTW agrees that, if the Proposed Recapitalisation is to be implemented as a rights issue ('Rights Issue'), GTW will underwrite the Rights Issue:

(i) up to an aggregate amount of $15 million;

(ii) at a price equal to the price at which ordinary shares are issued under the Rights Issue (as determined by MBD Industries by reference to the valuation of MDB Industries at the time of the Rights Issue); and

(iii) otherwise on terms customary for underwritten rights offers of a similar nature.

63 Clause 9.2 contained an acknowledgement that clause 9.1 did not create any obligation on Pac Bio to conduct a rights issue.

9.3 Amendments to the GTW Guarantee Agreement

In respect of the GTW Guarantee Agreement, each of MDB Industries, Pacreef and GTW agree, consent to and approve, that on and from the Effective Time, the date of '31 December 2018' in clause 2.5(b) of the GTW Guarantee Agreement is deleted and replaced with '30 June 2019 or such other date as agreed in writing between MBD, Pacreef and GTW".

Other than as amended pursuant to clause 9.3 ("Amendments to the GTW Guarantee Agreement"), the provisions of the GTW Guarantee Agreement remain in full force and effect.

9.5 Proposed Recapitalisation is a new issue of shares

The parties each acknowledge and agree that the Proposed Recapitalisation is to be treated as a new issue of fully paid ordinary shares in MBD Industries carried out for the purpose of satisfying a redemption request for the purposes of clause 2.1 of the GTW Guarantee Agreement, such that, if the Proposed Recapitalisation results in the issue of new ordinary shares sufficient to redeem all of the A Class Shares, the condition set out at clause 2.1(b) of the GTW Guarantee Agreement will not be satisfied (such that the obligations under clause 3 of the GTW Guarantee Agreement will have no effect).

65 In essence, under the terms of the Implementation Deed:

(a) Pacreef withdrew the 2018 Redemption Notice and agreed not to issue any further redemption notice until the completion of the Proposed Recapitalisation or 31 December 2018;

(b) Pacreef agreed to extend the repayment date under the Vendor Finance Deeds to the earlier of the completion of the Proposed Recapitalisation or 31 March 2019; and

(c) GTW agreed:

(i) to extend the period of operation of the GTW Guarantee Arrangement until 30 June 2019, or such other date as agreed in writing between Pac Bio, Pacreef and GTW; and

(ii) to make available further finance in the form of the GTW Facility Agreement so as to, among other things, allow the Proposed Recapitalisation to occur.

Service of the 7 January 2019 Redemption Notice

66 Ultimately, on 31 December 2018 the Proposed Recapitalisation had not been completed.

67 On 7 January 2019, Pacreef served the 7 January 2019 Redemption Notice on Pac Bio.

68 On 8 January 2019, shortly after midnight, the notice was forwarded on by Mr Bastounas to Mr Wood. Mr Bastounas' covering email advised that the Mitris family had put in their redemption notice again, and that 'we' (presumably the board of Pac Bio) had anticipated this 'as a negotiating tactic'. Mr Bastounas otherwise reported on positive meetings that he had held with the Clean Energy Finance Corporation ('CEFC') and Tsing Capital ('Tsing'), who were potential investors in the Proposed Recapitalisation. Mr Bastounas concluded his email by noting 'all moving in the right direction'.

The Proposed Recapitalisation - 'Project Poseidon'

69 In anticipation of a board meeting scheduled for 22 January 2019, Pac Bio's company secretary, Mr Metcalfe, provided board members[17] with a paper titled 'Recapitalisation and Strategy Update (Project Poseidon)'. The enclosed paper had been prepared by Greenhill and set out options for Pac Bio's Proposed Recapitalisation. The paper set out the respective advantages and disadvantages in connection with private and public fundraising options. In respect of the private fundraising option, Greenhill advised of a strategy involving fundraising from new sophisticated investors via a share placement, and from existing investors via a rights issue. The private fundraising option was estimated by Greenhill as requiring a minimum four months to complete.[18] Ultimately, the private fundraising option became the favoured procedure.

70 Greenhill set out its current thinking in respect of the recapitalisation strategy in the following terms:

• The Mark II strategic plan currently being developed is designed to:

- Reduce execution risk (acquisition of existing business + brownfield expansion + slower greenfield expansion);

- Reduce the amount of capital which needs to be raised up front (APF vs. Gutha).

• To recapitalise Pacific Bio and fund the Mark II strategic plan, around $75-80m of capital is required (including APF acquisition/expansion).

- A future capital raising/IPO would be required to fund Gutha and Ayr expansion.

• If $50m can be secured from two or three strategic investors (eg, Tsing, Tiverton, CEFC), this leaves ~$25-30m to be raised via rights issue.

- The equity investors are likely to require certainty that the recapitalisation can be completed before they will invest;

- GTW has already committed to underwrite $15m of the rights issue. Therefore an underwriting commitment of $5-10m from the remaining CN holders and Pacreef would be required to deliver a fully underwritten transaction and provide certainty to all parties;

- Implication is that up to $5-10m of the Hub & Spokes, Galexer CNs and Class B shares could be 'converted' into equity via a underwriting if there is a shortfall in the rights issue.

• Therefore, to deliver a 'complete solution' with a high degree of certainty of completion, we need to negotiate and document:

• Firm investment commitments from strategic investors;

- Underwriting agreements with GTW, Hub & Spokes, Galexer and Pacreef.

• If all of the above can be secured by March, it should be possible to draw down the equity commitments and meet the obligations to repay Friday/Blenheim, redeem A Class Shares within the timeframe under the Implementation Deed, and a rights issue could follow later in April/May. However, it may be necessary to seek extension of the Implementation Deed timeframe.

71 At the board meeting the next day, the board discussed the Project Poseidon board paper. The minutes record, among other things, the following:

(i) The Board received a detailed presentation from Greenhill. Titled Recapitalisation Update 'Poseidon Project' dated 19 January 2019.

(i) Greenhill proposed both public and private funding options as well as a multi-prong strategy which could provide the opportunity for Pacific Bio Technologies Ltd to proceed to IPO in 6-12 months.

(ii) Noted that potential new investors identified by PBL are seeking a long-term investment timeframe, supporting an IPO event only when timing is appropriate based upon performance of business.

(iii) Tsing Capital (identified by PBL as a potential cornerstone investor) are considering a $25M investment for up to 35% shareholding in PBL, subject to completion of due diligence and completion of the recapitalisation strategy approved by board and are not concerned about PBL introducing a co-investor if the co-investor is aligned with their investment strategy.

(iv) CEFC (also identified by PBL as a second potential cornerstone investor) and are aligned with a long-term investment strategy.

(v) Tiverton, associated with HY and Nigel Sharpe, remain interested in being a third co-investor.

(vi) Greenhill reported that they have identified other potential investors.

(vii) Greenhill reported that the proposed recapitalisation model requires $75M to $80M equity, excluding Guthalungra stage one and Ayr expansion projects.

(viii) GW confirmed that he is committed to underwrite $15M of the proposed $30M rights issue.

(ix) Plan A Investment strategy includes acquisition of Australian prawn farms (APF) which provides a stronger business strategy and investment plan for PBL; however, Plan B (no APF acquisition) investment strategy is also being developed and any funds raised from potential co-investors and valuation/price paid per share will be different from Plan A.

ACTION: Greenhill, in association with Arne Dimpfel, to finalise the debt/equity model and investment strategy before finalising a Term Sheet for each potential co-investor, with a view to circulate the draft debt/equity model and investment strategy to the board.

72 Under the subheading 'Finance', the board noted the receipt of a cash flow projections report dated 23 January 2019. In discussing the report, the minutes note a future potential cash shortfall in late February 2019 (excluding the proposed strategic investor finance); and a future projected cash shortfall of $1.4 million at end of March 2019 and $3 million at end of April 2019. It was noted that these projected shortfalls aligned with previously tabled cash flow and shortfall projections.

73 On 19 February 2019, Greenhill provided a further update on the Project Poseidon recapitalisation strategy in advance of the 20 February 2019 board meeting. The paper attached a sheet to be provided to new investors entitled 'Recapitalisation Structure and Key Terms', which stated that the Proposed Recapitalisation was designed to raise sufficient capital to replace or refinance existing short term debt, as well as to fund key strategic initiatives, including the possible acquisition of Australian Prawn Farms Pty Ltd ('APF'). The sheet also contained a table headed 'Illustrative Sources and Uses of Funds', which anticipated a need for:

(a) an amount described as 'expansion capital' of $25.9 million; comprising:

(i) $17.9 million towards the acquisition of APF;

(ii) $5 million towards working capital; and

(iii) $3 million towards transaction costs.

(b) an amount described as 'debt refinancing' of $53.3 million; comprising:

(iv) $3.5 million towards repayment of vendor finance;

(v) $5.5 million towards repayment of convertible notes held by Friday Investments Pty Ltd ('Friday Investments') and Blenheim Investments Pty Ltd ('Blenheim');

(vi) $16.2[19] million towards redemption of the A Class shares;

(vii) $8.6 million towards; redemption of B Class shares; and

(viii) $6 million towards repayment of the GTW Facility Agreement;

(ix) $7.9 million towards repayment of convertible notes held by GTW;

(x) $5.6 million towards repayment of convertible notes held by Hub & Spokes Investments Pty Ltd ('Hub & Spokes') and Galexer Pty Ltd ('Galexer').

74 The table identified the proposed sources of funds as totalling $79.2 million, comprising:

(a) $50 million from two separate cornerstone equity investors, who proposed to contribute $25 million each;

(b) $17.5 million from a strategic debt investor; and

(c) a rights issue to raise between $11.7 to $29.2 million.

75 Under the subheading 'Potential Sources of Underwriting' (that is, in connection with the rights issue), the table listed:

(a) GTW's underwriting commitment against a rights issue of $15 million, as set out in the Implementation Deed;

(b) Hub & Spokes and Galexer convertible notes of $5.6 million; and

(c) an underwriting commitment from Pacreef of $8.6 million.

76 The minutes of the board meeting held 20 February 2019 confirm discussion of the Project Poseidon paper, noting that the strategy involved the raising of between $80-85 million in new equity followed by a future capital raising to fund expansion of facilities at Ayr and Guthalungra. The board resolved the membership of a due diligence committee to comprise, among others, the existing Chair, Dan Fitzgerald ('Mr Fitzgerald'); the CEO, Mr Bastounas; and Mr Wood. Under the heading 'Finance,' the minutes record that the company was seeking a $1.5 million increase in the 'short term debt facility' (as events later made clear, this referred to the existing GTW Facility Agreement).

77 On 1 March 2019, Mr Bastounas emailed Mr Wood, Ms Mitris-Honos and Mr Fitzgerald, referring to discussions at the last board meeting and noting:

we will need some additional funding to help us get through the pre-rights recapitalisation period and to prepare for the rights issue. A syndicate has been put together that is prepared to provide the funding needed and the easiest way to do this is to increase the limit of the short term debt facility by up to $2m and work within the construct of the implementation deed.

78 Mr Bastounas attached, among other things, a letter amending the GTW Facility Agreement which was to be signed by Pac Bio and GTW, and which Mr Bastounas noted was to 'serve to document the increase and also secure the increased amount under the existing GTW security arrangements'.

79 The minutes of the board meeting held 20 March 2019 confirm further discussion of Greenhill's Project Poseidon presentation. Relevantly, the minutes recorded in a section headed 'Cashflow Projections and Funding Position':

(a) under the subheading 'Funding Position', that a $454,000 payment had been made to James Cook University ('JCU'); however, further payments were subject to funding and Pac Bio was seeking approval from JCU to defer outstanding payments.

(b) under the subheading 'Projected Cashflow', the minutes note that:

(i) there was a forecasted deficit of $2 million at the end of April 2019 after an anticipated payment to JCU on the current payment terms

(ii) JCU had rejected a proposal to convert its debt to equity in Pac Bio;

(iii) JCU and Pac Bio were reviewing personnel costs in the rollover of current projects; and

(iv) discussions were continuing towards a new agreement between JCU and Pac Bio from 1 July 2019.

(c) in respect of discussions with the proposed cornerstone investors, the minutes note that it was anticipated that negotiations would be completed by the end of March 2019 with funding to be received by the end of April 2019.

(d) in respect of strategic board interim funding, this was to be agreed and finalised by mid-April 2019, with agreement on the Implementation Deed by existing noteholders to be secured by end of March 2019.

80 In a section headed 'Legal' the minutes referred in to a dispute between the company and Stewart Corporate Advisory Pty Ltd ('Stewart Advisory'). The minutes record that an email had been tabled at the meeting, and that given the lack of a response from Stewart Advisory the matter was assumed to be finalised without liability to Pac Bio.

Negotiations for extension of the Implementation Deed and withdrawal of 7 January 2019 Redemption Notice

81 On 21 March 2019, another member of the Pac Bio board, Benjamin Krasnostein ('Mr Krasnostein') emailed Mr Bastounas requesting an introduction to Tsing, one of the proposed cornerstone investors. Mr Bastounas forwarded the email on to Mr Wood. Mr Wood expressed concern about Mr Krasnostein's focus, apparently on the basis that Mr Krasnostein was seeking to excite investment interests from Tsing in a project unrelated to Pac Bio. More relevantly, Mr Bastounas responded to Mr Wood declaring his intention to speak to 'all the debtholders [of Pac Bio]' that week to discuss an extension of the Implementation Deed and to ascertain if the existing convertible noteholders 'will convert or want their money out'. Mr Bastounas also wrote to Mr Wood:

I've said to Greenhill that we need to go far and wide with investors to generate interest. I get the sense that if Mitris gets his $15M he's likely to leave his $8M[20] in which would be a good outcome.

(footnote added)

82 On 28 March 2019, Mr Bastounas emailed Mr Wood with the subject line 'Implementation Deed Extension Request'. The attachments to the email included a document headed 'Pacific Bio - Pacreef - Redemption Notice Withdrawal', as well as documents headed 'Pacific Bio - Implementation Deed - End Date' and 'Poseidon - Investor List'. The email, among other things, stated the following:

In relation to the recapitalisation, we are well progressed with several large, motivated cornerstone investors who have concluded their due diligence and are telling us that they're ready to engage on transaction terms. We also have a second group of new investors who have a keen interest in our story, but will need more time to complete due diligence. Attached is the list of investors that Greenhill is targeting. It is our plan to generate the underlying interest so that anything that is not taken up via the rights issue will be taken up by new investors who aren't jaded by the history of this business and see the future.

Although we've achieved a lot since the Implementation Deed was signed 6 months ago, my team and I need more time to complete the work with new investors and implement the rights issue so we can get the best outcome we can for all investors. Pacific Bio is therefore seeking an extension of the timeframes set out in the Implementation Deed. Specifically, we are looking to:

1 Extend the 'End Date' in the Implementation Deed from 31 March to 30 July 2019 (ie by 4 months). This will give us time to complete the process with cornerstone investors next month so that we can start repaying debts as contemplated by the Implementation Deed, and then finish our prospectus in May followed by the rights issue in June.

2 Extend the due date for the remaining balance of the vendor finance by 4 months.

3 Extend the guarantee arrangement with GTW Investments by 4 months to 31 October.

4 Extend the timeframe for Pacreef to issue a redemption notice by 4 months to 30 April and in return, extend the capitalised interest on both the A and B shares by 4 months.

KWM[21] have prepared the attached documents giving effect to these amendments and seeking the same from the Mitris family. Please take your time to review the attached documents. We would welcome your continued support to complete the transformation we've started and deliver on our commitments to both lenders and shareholders.

83 Also on 28 March 2019, GTW executed the amendment to the GTW Facility Agreement foreshadowed in and attached to Mr Bastounas' email of 1 March 2019 ('the GTW Facility Amendment'). The document was headed 'GTW Facility Agreement - $6 million Facility Agreement - Facility Limit Amendment Letter'. By the terms of the document, the definition of 'facility limit' in the GTW Facility Agreement, previously $6 million, was deleted and replaced with $8 million. An additional $2 million was provided to Pac Bio pursuant to this amended facility limit in April and June 2019.[22]

84 On 30 March 2019, Mr Bastounas provided the directors of Pac Bio with a draft of the company's consolidated financial report for the half year ended 31 December 2018. In section 6 of the report, under the heading 'Recapitalisation Update', it was noted that:

Pacific Bio is in the process of raising capital to support its strategic plan and reduce leverage by conducting an equity placement to cornerstone investors, followed by a rights issue which will give all shareholders the opportunity to participate.

The report also noted that significant progress had been made with implementing the Proposed Recapitalisation since the November 2018 AGM. Further, the report noted that the company was:

able to secure a $2m increase in the existing short term debt facility which will provide further working capital to fund the business while the capital raising is completed.

Our current expectation is that the placement to cornerstone investors will be completed in April and that the rights issue will be completed in June. Pacific Bio has therefore approached the counterparties to the Implementation Deed to seek an extension of the timeframe for the capital raising process.

85 A set of notes to the report under the subheading 'Going Concern' record, among other things, that:

Pacific Bio's current liabilities exceed its current assets by $72,639,709 as at 31 December 2018.

...

Pending completion of the recapitalisation, there remains a material uncertainty related to events or conditions which may cast significant doubt on PBL's ability to continue as a going concern, and Pacific Bio might therefore be unable to realise its assets and discharge its liabilities in the normal course of business. The ongoing viability of Pacific Bio and its ability to continue as a going concern, meet its debt obligations and commitments as they fall due and execute its existing and future commercialisation plans is dependent upon continued support from financiers and successful implementation of the recapitalisation strategy. This includes:

• Continuing support from Commonwealth Bank of Australia ...

• Support from GTW Investments ... which provided a $6 million short term debt facility during the period which was subsequently increased by an additional $2 million;

• Continuing support from parties to the Implementation Deed ... who have recently been approached by Pacific Bio seeking extension of the timeframe for completion of the proposed recapitalisation from 31 March 2019 as contained in the Implementation Deed, to 31 July 2019;

• Raising additional equity from new and existing shareholders and/or convertible note holders as contemplated by the Implementation Deed, within this revised timeline. These funds will be used to reduce high cost short term debt by:

  (a) Repayment of the balance of vendor finance provided by Pacreef Investments Pty Ltd (Pacreef);

  (b) Repayment (or conversion into ordinary shares) of convertible notes held by the convertible note holders; being GTW ($7 million), Friday Investments Pty Ltd ($3 million), Blenheim Investments Pty Ltd ($2 million), Galexer Pty Ltd ($2.5 million) and Hub and Spokes Pty Ltd ($2.5 million); and

  (c) Redemption of the Class A shares ($15 million plus accrued interest) and the Class B shares ($8 million plus accrued interest) which are redeemable at the election of the holder (Pacreef).

86 By 31 March 2019, being the End Date of the Implementation Deed, Pac Bio had not raised the funds necessary to redeem the A Class Shares.

87 On 3 April 2019, Mr Bastounas wrote to Mr Bartlett and others from Friday Investments, blind carbon copying Pac Bio's then-solicitor, Matthew Coull ('Mr Coull') of King & Wood Mallesons, as well as Mr Wood. The cover email requested the support of Mr Bartlett and the other Friday Investments investors to extend the timelines in the Implementation Deed 'to give us the runway needed to complete negotiations with our 3 early stage strategic investors and allow the equity to flow into Pacific Bio'. The email expressed Mr Bastounas' expectation that the negotiations would be finalised within the month (that is, April 2019), with funds available thereafter. The email also noted that the company was 'well progressed' with the rights issue.

88 On 5 April 2019, the company's chair, Mr Fitzgerald, signed the directors' report accompanying the consolidated financial report for the half year ended 31 December 2018. The financial report was in substantially the same terms as the earlier draft on 20 March 2019, but additionally and relevantly included the following statement in the notes under the heading 'Going Concern':

The directors believe that Pacific Bio will be successful in meeting all of its financial obligations for at least 12 months from the date of this report. Accordingly this Consolidated Financial Report is prepared on a going concern basis.

Also included under the heading 'Subsequent Events' was the following subheading:

Proposed Revisions to Implementation Deed

The Implementation Deed between Pacific Bio and Pacreef and the Convertible Noteholders (the Parties), as currently drafted, contemplates the proposed recapitalisation being completed by 31 March 2019. Despite positive progress having been made, this timeframe has not been met. Accordingly, Pacific Bio has approached the Parties seeking an extension of this timeframe. Although the Directors are confident that the proposed changes to the Implementation Deed will be adopted by the Parties, this has not occurred as at the date of these consolidated general purpose financial statements.

Increase in GTW short term debt facility

Pacific Bio and the other parties to the Implementation Deed have executed an amendment dated 28 March 2019 which allows the limit of the GTW short-term debt facility to be increased by $2 million, to $8 million.

Pacific Bio and GTW have executed an amendment dated 28 March 2019 which increases the limit of the GTW short term debt facility by $2 million, to $8 million.

The directors' report concluded with the following:

Directors' Declaration

In the Directors' opinions:

(a) the financial statements and notes set out on pages 13 to 24 are in accordance with the Corporations Act 2001 including:

(i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

(ii) giving a true and fair view of Pacific Bio's financial position as at 31 December 2018 and of its performance, as represented by the results of the operations, changes in equity and the cash flows, for the financial period ended on that date; and

(b) there are reasonable grounds to believe that Pacific Bio will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Directors;

The directors' declaration was signed by the company chairman on 5 April 2019.

89 On 6 April 2019,[23] Mr Bastounas emailed Mr Wood. The email read:

Graeme,

My biggest single headache at present is the GTW Guarantee and the Mitris redemption notice. The extension expires on 7 April 2019 (Sunday). If Mitris doesn't withdraw then on the terms of the Guarantee Agreement, GTW we need to issue you shares at $1.00 per share [sic]. It's just a crazy agreement.

Nick has been agitating every day wanting his money and saying he can't wait because he has a $5m tax bill to pay. I've gone over the same old ground saying that we've made significant progress and we're about 100 days from closing out the rights issue and the recap and closing out this part of the company's history. I've said that it's unfair and stupid that we ask you to pay $1.00 a share and that we pit Pacific Bio against its largest and most supportive shareholder who could have allowed the business to go into receivership and it's totally counterproductive to go into a huge legal battle between us all at this juncture. Friday & Blenheim are also being difficult but I've just been working them over to keep the peace. Frankly they don't really have a leg to stand on as their CN isn't due to (sic) August and we're not in default. The reality is that they, like all of the other CN holders and Mitris have all accrued good rates of interest and will do very well out of their time with us.

I'm seeing Mitris this morning and will share details on the Tsing and Tiverton position. Reality is given our circumstances, Tsing can be opportunistic and Pacific Bio doesn't have a whole lot of leverage. We are in marketing overdrive with Greenhill and will be doing a piece in the AFR over coming weeks. If Mitris wants to start a war then this is problematic.

(underline added)

90 Mr Wood gave evidence acknowledging that he had received the email, but that he could not recall precisely when he did so. He said he was in France at the time and preparing to go sailing for the weekend, suggesting that he received it at some time on the Friday. He agreed that he did not respond to the email, but said that he was not worried about its content as he believed the 7 January 2019 Redemption Notice was like the 2018 Redemption Notice and could be withdrawn. He also gave evidence that at the time, he did not believe that the conditions precedent in the Guarantee Arrangement had arisen.

91 Also on 6 April 2019, after Mr Bastounas had sent the email to Mr Wood and as foreshadowed in that email, Mr Bastounas met with Ms Mitris-Honos and Mr Mitris in Oakleigh. Ms Mitris-Honos gave evidence that at the meeting Mr Bastounas showed them a copy of an unexecuted term sheet between Pac Bio and Tsing dated 11 April 2019. The term sheet referred to an investment by Tsing of $25 million in the form of the acquisition of 138,890,000 ordinary shares at a share price of $0.18 per share, with the funds to be used in connection with the acquisition of APF and for working capital. The conditions precedent to investment included, among other things, execution of a $25 million co-investment in Pac Bio ordinary shares by an approved secondary investor, at equivalent terms to those set out in the term sheet. Ms Mitris-Honos said that she told Mr Bastounas that the redemption notice was due on 7 April 2019, to which Mr Bastounas replied that 'this is what he was working on'. She said that Mr Bastounas requested that Pacreef withdraw the 7 January 2019 Redemption Notice. Ms Mitris-Honos refused to do so. Ms Mitris-Honos also took a photo of the term sheet.

92 After the meeting, Mr Bastounas sent an email to Ms Mitris-Honos and Mr Mitris. The email referenced their discussions earlier in the day and noted that Mr Bastounas was sharing with Ms Mitris-Honos by way of attachment 'a term sheet for $50 million that's aimed to pay you out, provide working capital and allowing us to acquire APF'. Mr Bastounas expressed the view that he considered that the deal in its current form (that is, the term sheet) was 'opportunistic' as it would deliver Tsing and Tiverton 'a bargain', although he acknowledged that the deal would enable Pacreef to be paid out. The email continued:

We have done a heap of work with Greenhill and are talking to investors that can cut $10m - $20m cheques including Legend Group ... we will need 3 months to get the prospectus finalised as there is a heap of work in this and to complete the rights issue. Graeme Wood as you know has ~18% of the company now and has committed to convert his funds into equity and put in his additional $15M as an underwrite to keep him at 18% (post rights money) and this would mean that his $15M on top of everything else is there to guarantee your payout. He has never stepped away from paying the $15m but if we try and enforce the GTW guarantee and issue shares to Graeme for $15m at $1.00 when we all believe value sits somewhere closer to $0.20 - 0.30 I am sure he will put up a legal challenge that would take months and if we win he can still only buy up ~2% every 3 months given takeover provision anyway so it will take you till well post rights to get your money. If we all start another legal battle here it just detracts in what we're trying to do and we are so close to closing all of this out.

If you don't withdraw the redemption notice (by 7th April) I must issue a request to GW for $15m at $1.00 on Monday. If you withdraw and reissue immediately we get 3 months to close out all of my negotiations and rights issues. 3 months window is the way the legal documents work in this deal as I understand it from KWM. As I mentioned I see the Tsing and Tiverton offer as an opportunistic, very clever play at taking control of the company. If I am not supported and can't get enough runway to do what I need to do I have no option but to recommend to the board to accept their deal to pay you out, pay out Friday and Blenheim and buy APF.

The email concluded by requesting that Ms Mitris-Honos and Mr Mitris let Mr Bastounas know their thoughts on the extension of the Implementation Deed and the withdrawal of the 7 January 2019 Redemption Notice by Monday (that is, 8 April 2019).

93 On 8 April 2019, Mr Patton emailed Mr Bastounas, copying in Ms Mitris-Honos and Mr Mitris. Mr Patton wrote that:

... the Mitris family ... are agreeable to extending the redemption date to 31 July 2019 on the basis that:

1. The Redemption Notice stays in place (so is not withdrawn) with the Redemption deadline being moved to 31 July 2019;

2. The GTW Guarantee is to be extended accordingly ...;

3. Interest is reinstated from the date that the notice was lodged until the date when the redemptions are actually made ...;

4. The Completion Loan[24] is repaid in full ...;

5. The B Class shares are fully redeemed ... prior to Pacific Bio, or any of its associated entities, entering into any binding agreement/commitment involving capital expenditure in excess of $1 million.

Finally, in the event that Pacific Bio, or any of its associated entities receive a capital injection (outside of the Graeme Wood injections), then these funds will be applied to redeem the B Class shares.

94 There is no evidence of any response from Mr Bastounas, and in any event, on 15 April 2019 Mr Patton forwarded a copy of the email to Pac Bio's chair, Mr Fitzgerald. Mr Fitzgerald responded on the same day, thanking the Mitris family for their patience and advising that he considered that they were very close to being in a position to 'fulfil the obligations of Pacific Bio to the Mitris family'.

95 Despite Mr Bastounas' requests on 6 April 2019, the 7 January 2019 Redemption Notice was not withdrawn. It is also clear that the offer made by Mr Patton on behalf of Pacreef in his email to Mr Bastounas of 8 April 2019 was not accepted.

96 Additionally, between 1 April and 11 April 2019, Pacific Bio had:

(a) received $200,000[25] pursuant to the GTW Facility Agreement (as amended by the GTW Facility Amendment on 28 March 2019);

(b) by 3 April 2019 entered into a non-binding indicative term sheet to purchase APF; and

(c) on 5 April 2019 published its half year statutory accounts in which the directors' resolved that Pac Bio could pay its debts as and when they become due and payable.

(d) On or around 11 April 2019 received the unexecuted terms sheets with Tsing and Tiverton.

97 The board next met on 17 April 2019. There is some controversy as to what took place at the meeting, at least in respect of the discussions concerning the 7 January 2019 Redemption Notice.

98 Pacreef's chief financial officer, Mr Dimpfel, took handwritten notes of the meeting. Those notes record that Ms Mitris-Honos spoke to the following:

- redemption notice issued

• extension terms not agreed by Pacreef

• document doesn't reflect discussions

• need to complete obligations under PRF acquisition before buying APF

99 Ms Mitris-Honos gave evidence that in response Mr Fitzgerald told her Pac Bio was attempting to meet its obligations to Pacreef.

100 Mr Wood was not present at the 17 April 2019 meeting, but his alternate, Mr Youngman, was. Mr Youngman gave Mr Wood no report of the meeting. Mr Youngman was not called to give evidence.

101 The first draft of the minutes of the meeting were prepared on 19 April 2019 by the company secretary Mr Metcalfe ('the Draft April Minutes') and sent to Mr Fitzgerald that same day. The Draft April Minutes relevantly record the following:

Maria Mitris reported the redemption notice had been issued by Pacreef Pty Ltd to PBL for $5m[26] currently outstanding and PBL are currently in default of the redemption notice.

Board discussion held on the status of the recapitalisation process and commitments of PBL. Greenhill reported to Board that the recapitalisation process aims at repaying outstanding debt and raising capital to develop the Guthalungra project and expand current operations including proposed acquisition of APF as a second prawn farm operation.

Under the subheading 'Cornerstone Investors/Debt Providers', it was noted that:

(a) CEFC was a proposed debt providers for between $15 million - $25 million to 'expire' existing debt;

(b) Tsing and Tiverton were proposed equity providers of up to $50 million; and

(c) Mr Wood continued to fund Pac Bio's working capital.

It was noted that the rights issue strategy was proposed to be withdrawn as the company was not in a secure financial position to complete a rights issue and therefore uncertainty of rights being accepted by existing shareholders. Hence a recapitalisation strategy via debt and cornerstone investor capital was considered a preferred and optimal strategy.

102 The Draft April Minutes then record the board's resolution to put a hold on a prospectus for a rights issue, though the board agreed to communicate with shareholders as to their ability and willingness to take up rights under a rights issue and to advise of Pac Bio's intention to raise capital.

103 The Draft April Minutes were subsequently distributed to attendees for their comment.

104 The version of the minutes subsequently signed by Mr Fitzgerald as chair of the board on about 3 June 2019 ('the Signed April Minutes') record Ms Mitris-Honos as saying the following:

Maria Mitris reported that a redemption notice had been issued by Pacreef Pty Ltd to PBL for $15m that remains outstanding and PBL are yet to fulfil the obligations set out in the PRF Purchase Agreement and Implementation Deed. Pacreef advised that they are not taking action on this at present, pending outcome of the recapitalisation strategy.

105 The difference between the Draft April Minutes and the Signed April Minutes was a matter of some controversy in the trial. I deal with it in greater detail below in considering the Estoppel Issue. For present purposes, it is sufficient to note that Ms Mitris-Honos denies that she had said that Pacreef was 'not taking action at present pending outcome of the recapitalisation strategy', and her denial is supported by Mr Metcalfe, whose signed witness outline was tendered by consent to stand as his evidence in chief, and is also corroborated by Mr Dimpfel's handwritten notes.[27]

106 In any event such a statement by Ms Mitris-Honos is arguably at odds with an email of Mr Patton, sent on behalf of Pacreef on 29 April 2019 to Mr Fitzgerald, and which copied in the solicitor Mr Coull, in which Mr Patton noted that he 'had been expecting to receive something regarding the Redemption Notice (given that MBD is now technically in default), however nothing has been forthcoming'.

107 In an email of Mr Bastounas to Mr Coull on 29 April 2019 which copied in, among others, Mr Dimpfel, he referred to conversations with Ms Mitris-Honos on that day and with Mr Mitris the previous Friday (that is, 26 April 2019). Mr Bastounas said that Ms Mitris-Honos and Mr Mitris had 'made the point that they feel that [Pac Bio] have been tardy and have let the process slip'. Mr Bastounas' email concludes 'bottom line is they want to work with us and see the redemption notice as a big stick'.

108 Similarly, on 1 May 2019, Mr Fitzgerald wrote to Mr Patton, Ms Mitris-Honos and Mr Mitris (copying in, among others, Mr Bastounas) acknowledging that the redemption notice had not yet been 'remedied', but advising that Pac Bio was 'working tirelessly to resolve this'. He informed Mr Patton that the company anticipated that by the end of the week they would have:

(a) 'an agreement amongst debt holders with regard to the waterfall of funds from cornerstone investors and an acknowledgement'; and

(b) 'a document to remedy the redemption notice along the lines discussed' which was to be 'a withdrawal and reissuance with a longer timeframe to allow the cornerstone investment to be closed and for funds to be paid'; in fact, no such document was prepared or circulated.

109 On 16 May 2019, Mr Fitzgerald again emailed Mr Patton, copying in Ms Mitris-Honos, Mr Mitris and Mr Bastounas, attaching a 'Redemption Notice Withdrawal Form' for execution. The covering email noted that, if the 7 January 2019 Redemption Notice was withdrawn pursuant to the attached form, Pacreef would remain entitled to issue a further redemption notice and that Pac Bio agreed to continue to pay interest on the paid up amount in respect of the A Class Shares and the B Class Shares at a rate of 15% per annum, with effect from 1 January 2019.

110 On 18 May 2019, Mr Metcalfe emailed the board members, including Mr Wood, the board pack for the board meeting on 22 May 2019, which included the Draft April Minutes.

111 On 24 May 2019, Mr Fitzgerald sent an email to Mr Patton, Ms Mitris-Honos and Mr Mitris, and copied to Mr Bastounas, in which he acknowledged 'the Mitris family position' and proposed an order for the repayment of creditors using incoming funds. Relevantly, Mr Fitzgerald proposed that:

(a) first, the Vendor Finance Deeds be paid;

(b) second, the Friday Investments & Blenheim convertible notes be paid;

(c) third, the A Class Shares be redeemed;

(d) fourth, the short term debt be repaid (presumably including the GTW Facility Agreement);

(e) fifth, the B Class Shares be redeemed;

(f) sixth, any remaining convertible notes be paid (presumably including the GTW Convertible Notes).

112 On 28 May 2019, Mr Patton emailed Mr Fitzgerald (once again copying in Ms Mitris-Honos, Mr Mitris and Mr Bastounas) noting that the Mitris family would be prepared to withdraw the 7 January 2019 Redemption Notice on terms that:

(a) legal advice be provided from Pac Bio's solicitors confirming that the proposed amendments would not prejudice the interests of the Mitris family; and

(b) that interest on the A Class Shares and B Class Shares be reinstated from 1 January 2019 and apply until such time as the A Class Shares and B Class Shares were redeemed (that is, as opposed to ceasing when a redemption notice was lodged).

113 On 5 June 2019, Mr Fitzgerald responded advising that the company could accept the extension of interest to the date of redemption, and noting that:

... we have an agreement from GTW to extend the guarantee to 30th Sep as we discussed. This advice was provided directly to the company. All else being equal, we are merely extending the timeline and all terms stay the same.

114 On 19 June 2019, Mr Fitzgerald forwarded Mr Patton an earlier exchange between Mr Fitzgerald and Mr Wood. Relevantly, on 16 May 2019 Mr Fitzgerald had emailed Mr Wood requesting that GTW extend the termination date referred to in the Guarantee Arrangement to 31 October 2019 or a later date to be agreed between the Pac Bio, Pacreef and GTW 'in order to facilitate Pacreef agreeing to withdraw its redemption notice dated 7 January 2019'. Mr Wood had replied on 13 June 2019 confirming GTW agreed to the request.

115 On 2 July 2019, Mr Fitzgerald again emailed Mr Patton. The email was in the following terms:

Hi John,

Upon reflection, and given the passage of time, it may be more appropriate to 'amend' the current redemption notice, rather than withdraw it. I have attached an updated version of the original (from April) amendment notice. It extends it until 21 July.

KWM cannot provide advice directly to Pacreef, given that they are acting for the company in this matter. As a director I am happy to share any advice from KWM with Maria if this is suitable and alleviates any concerns. Hope that makes sense.

116 On 3 July 2019, Mr Fitzgerald emailed Mr Patton requesting Pacreef's consideration of, among other things, an extension of the current redemption notice through until 21 July 2019, on the basis that the Guarantee Arrangement was to remain in place until the earlier of the full repayment of the A Class Shares or 31 October 2021. On 8 July 2019, Mr Fitzgerald followed up Mr Patton urgently seeking Pacreef's consent to the proposed extension of the redemption notice.

117 On 16 July 2021, Mr Patton emailed Mr Fitzgerald (copied to, among others, Mr Bastounas) stating, among other things, the following:

- you mention that there is only likely to be a partial repayment of the A Class shares. As you know, the Mitris family have had their redemption request in for quite some time now and as such would like to draw upon the GTW guarantee to receive full repayment of the A Class shares;

- this should leave sufficient capacity for the B Class shares to then be redeemed in full out of the $40 million capital injection, along with the repayment of the Vendor loan.

The Mitris family are simply look [sic] for certainty regarding the repayment of their Vendor loan, A Class and B Class shares.

118 On 14 August 2019, Mr Patton forwarded a copy of a redemption notice in respect of the B Class shares ('the B Class Shares Redemption Notice') to Mr Fitzgerald, Mr Bastounas and Mr Dimpfel.

The failure of the Proposed Recapitalisation and breakdown of negotiations

119 Earlier, on 12 August 2019 the board of Pac Bio had met and a draft of the meeting minutes recorded, under the heading 'Recapitalisation', that the company was in possession of signed binding agreements from both Tsing and Tiverton for a $25 million investment and a $15 million investment respectively. Nevertheless, the board appeared to be concerned as to Tsing's capacity to deliver on its promised $25 million investment: the minutes also record that the board agreed 'to chase Tsing for default in funding Pacific Bio of $25 million if situation arose' under the binding agreement.

120 On 28 August 2019, the risk attending the proposed Tsing investment was the subject of a special board meeting, at which the board agreed to allow Tsing an additional 24 hours to confirm the funding position. Another meeting of the board was held on 30 August 2019, where the board again received updates in relation to both the proposed Tsing investment and the Tiverton investment. The difficulties persisted: at a board meeting held on 18 September 2019, the minutes record ongoing issues with Tsing completing its funding, which resulted in Pac Bio cancelling its planned acquisition of APF.

121 On 8 October 2019, Mr Bastounas sent a text message to Mr Wood to tell him that Mr Bastounas wanted 'to have a chat' with Mr Wood and Mr Mitris. Mr Bastounas' text stated that Mr Mitris was 'really supportive if he knows the GW [sic] Guarantee is still there if all goes bad with the capital raise'. Mr Bastounas also wrote that he had told Mr Mitris that Pac Bio would secure the Tiverton funding and raise sufficient capital for the APF acquisition. Mr Wood responded by saying that whatever is in writing in relation to the guarantee is already known, and that he didn't know what else he could add. Mr Bastounas then responded by saying that what Mr Mitris wanted to know was 'whether you would be willing to extend the timeline from the guarantee in case we don't get the money we need from the cap raise'.

122 The next board meeting was held on 23 October 2019. The draft minutes record the continued failure of Tsing to meet its funding commitment and note that this had caused 'significant financial and operational damage to PBL'. Further, the minutes note that the Tsing term sheet was due to expire on 31 October 2019. The minutes record that Greenhill then provided an update, to the effect that Tsing and Tiverton were the principal frontrunners to fund the company and that if funding was not achieved and the company was put into voluntary administration, there would be little or no value returned to shareholders or debtholders. Moreover, Greenhill noted that in that scenario the CBA would likely enforce its security against Pac Bio and recover its secured debt from a sale of assets.

123 On 26 November 2019, Mr Bastounas emailed Mr Patton, copying in Mr Wood and Mr Bastounas. Mr Bastounas advised that he had received a request from Mr Patton that the Guarantee Arrangement be extended to 6 April 2020. Mr Bastounas further noted that the promised funding for Tsing had still not eventuated and provided a colourful account of Tsing's inability to contribute. In short, Tsing's founding partner had been found guilty in China of misappropriation of some $200 million and had been imprisoned for 15 years. Mr Bastounas advised that Pac Bio was now continuing to work exclusively with Tiverton on a revised funding deal to bring in up to $15 million.

124 By 27 November 2019, notwithstanding Mr Patton's request for return of an extension of the Guarantee Arrangement, no response had been received. Mr Patton emailed Mr Bastounas, noting that he and the Mitris family were still awaiting an executed copy of an extension to the Guarantee Arrangement. The email emphasised that Pac Bio was in default of its obligations pursuant to the 7 January 2019 Redemption Notice, which remained on foot.

125 On 27 November 2019, Mr Patton emailed Mr Fitzgerald and Mr Bastounas. Mr Patton noted that:

(a) Pac Bio was in default of its obligations pursuant to the 7 January 2019 Redemption Notice as well the B Class Shares Redemption Notice;

(b) that Pacreef demanded immediate payment of $23 million in redemption of the A Class Shares and B Class Shares.

126 On 29 November 2019, after some further correspondence with Mr Bastounas, Mr Patton formally advised that the Pac Bio was in default under the 7 January 2019 Redemption Notice and the B Class Share Redemption Notice, and sought immediate payment of the combined redemption sum of $23 million. Mr Patton also noted that Pac Bio was able to call on the GTW Guarantee in respect of the A Class Shares

127 On 17 December 2019, the solicitors for Pacreef, Fitzpatrick Legal, sent a letter of demand to Pac Bio, copying in Mr Bastounas and Mr Wood. The letter referred to the 7 January 2019 Redemption Notice and requested that payment of the $15 million in respect of redemption of the A Class Shares be made by 23 December 2019.

128 On the same day, Pac Bio sent a letter to Pacreef, copied to Mr Wood. The letter set out a settlement proposal between Pac Bio, GTW, and Pacreef. The letter recited that in August 2017 Pac Bio had acquired Pacific Reef Fisheries[28] for $80.8 million, in respect of which Pacreef had been paid $50.5 million in cash (comprising $44.4 million paid up front, $4.9 million in retained stock, and $1.2 million paid under a consultancy agreement) and $5 million in ordinary equity. It noted that Pacreef had received $5.7 million in interest payments paid in respect of the A Class Shares and B Class Shares. It further noted that Pacreef had been paid $2.4 million in principal and $1.2 million in interest in relation to the Vendor Finance Deeds, leaving an amount outstanding of $3.5 million.

129 The letter went on to note that GTW had previously agreed under the Guarantee Arrangement to subscribe for shares in Pac Bio under certain circumstances and subject to certain conditions so as to enable the redemption of the A Class Shares. The letter noted that Guarantee Arrangement had been extended a number of times in Pacreef's favour. The letter advised that the Tiverton proposed to invest $15 million in Pac Bio at $0.10 per share, but that the proposed investment was subject to certain conditions, including a condition that all short term debt (ie, all debt excluding debt owed to CBA), the A Class Shares, and the B Class Shares be extinguished beforehand.

130 Accordingly, the letter proposed to settle all outstanding amounts to Pacreef on terms, among others, that Pacreef:

(a) forego all accrued interest on the A Class Shares and the B Class Shares; and

(b) convert the principal amount of the A Class Shares and B Class Shares to ordinary shares in Pac Bio at 0.10 per share.

In consideration for this, the letter noted that GTW offered to enter into an arrangement that 'gave certainty for Pacreef to receive $15 million cash for the converted Class A shares on 30 June 2020 through legally binding put and call options'.

131 The letter of offer was not accepted by Pacreef, which commenced this proceeding against Pac Bio and GTW on 11 February 2020.

132 On 4 March 2020, the solicitors for GTW, Gilbert + Tobin, wrote to Pac Bio noting that GTW was party to a facility agreement dated 20 July 2018 with a facility limit of $8 million (that is, the GTW Facility Agreement) and had advanced $5,940,000[29] to Pac Bio under that agreement. The letter advised that GTW presently intended to call on 12 March 2020 for repayment of all amounts owing by Pac Bio to GTW, and that payment would be required within seven days. The letter advised that GTW would not call for payment if Pacreef (which was not an addressee of the letter) waived all its rights pursuant to the Guarantee Arrangement, executed an enclosed termination agreement, and discontinued this proceeding.

133 On 12 March 2020, GTW's solicitors sent a letter of demand on its behalf requesting payment of the amount of $5,940,000 outstanding under the GTW Facility Agreement by 19 March 2020. The letter noted that GTW understood an additional facility had been obtained by Pac Bio from the CBA, and that GTW advised Pac Bio that it should not draw down on that facility. It requested further that Pac Bio advise CBA of GTW's demand.

134 On 12 March 2020, the directors of Pac Bio resolved that it was their opinion that Pac Bio was likely to become insolvent at some future time, and accordingly appointed Messrs Albarran, Gladman, and Ross from Hall Chadwick as administrators under s 436A of the Corporations Act. The discussion which preceded the resolution noted that a letter of demand had been issued by GTW's solicitors, and recorded the directors' view that if the company was not already insolvent it was likely to become insolvent at some future time.

135 On 19 May 2020, the administrators and Pac Bio entered into a DOCA with Galexer, Hub & Spokes, and GTW.

136 GTW submits that the A Class Shares are not preference shares. Consequently, GTW submits it is not liable under clause 3.1 of the Guarantee Arrangement, as a redemption of ordinary shares would involve a contravention of the Corporations Act.

137 GTW rely on, among other things, s 254A(3) of the Corporations Act, which provides:

(3) Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable:

(a) at a fixed time or on the happening of a particular event; or

(b) at the company's option; or

(c) at the shareholder's option.

138 Relevantly, there is no specific provision in the Corporations Act for the issue of redeemable ordinary shares or any other form of redeemable share. Accordingly, on GTW's submission, where a share is not a preference share there is no mechanism by which it can be redeemed, in the strict sense of the word; rather, a capital reduction or share buy-back would need to be transacted in accordance with the requirements set out in the Corporations Act. Rightly, GTW submits that this is a discrete legal issue. GTW submits that it turns on two questions:

(a) whether the A Class Shares are preference shares; that is whether the A Class Shares carried any preference or priority over Pac Bio's ordinary shares;

(b) if the A Class shares are not preference shares, whether it follows that the inability at law to redeem them negates any liability which GTW would otherwise have pursuant to clause 3.1 of the Guarantee Arrangement.

139 In my view, there are in fact three questions that need to be determined:

(a) first, whether the A Class Shares are preference shares, carrying any preference or priority over Pac Bio's ordinary shares;

(b) secondly, if the A Class Shares are not preference shares, what effect that has on Pacreef's rights against Pac Bio under the Subscription Agreement; and

(c) thirdly, if the consequence of the A Class Shares not being preference shares is that Pacreef is not entitled to oblige Pac Bio to redeem the A Class shares, whether this excuses GTW from any liability it might bear under the Guarantee Arrangement.

140 GTW openly concedes that this submission is unattractive as it is clear that Pac Bio issued the A Class Shares and B Class Shares to Pacreef as part of the consideration payable to it under the Share Sale Agreement. On 10 August 2017, the board of Pac Bio, which included Mr Wood, convened a general meeting of the shareholders of Pac Bio for the purposes of considering and passing a special resolution approving of the issue of 15 million A Class Shares and 8 million B Class Shares to Pacreef, which carried with 94.56% of shareholders (including GTW) voting in favour. Moreover, Pac Bio's directors, including Mr Wood, unanimously recommended that the shareholders vote in favour of the share issue resolution. The Explanatory Memorandum made it clear that Pac Bio, in putting the resolution before the shareholders, had specifically considered the relevant Corporations Act provisions and no doubt believed that the A Class Shares and B Class Shares constituted preference shares.

141 Indeed, the special resolution, as proposed in the notice of general meeting, read as follows:

That for the purposes of section 254A(2) of the Corporations Act 2001 (Cth) and for all other purposes, approval is given for the issue of 15,000,000 A Class shares and 8,000,000 B Class shares to Pacreef Investments Pty Ltd (as trustee for Pacreef Discretionary Trust) on the terms described in the explanatory memorandum accompanying this notice of meeting.

142 Section 254A(2) of the Corporations Act provides:

A company can issue preference shares only if the rights attaching to the preference shares with respect to the following matters are set out in the company's constitution (if any) or have been otherwise approved by special resolution of the company:

(a) repayment of capital;

(b) participation in surplus assets and profits;

(c) cumulative and non-cumulative dividends;

(d) voting;

(e) priority of payment of capital and dividends in relation to other shares or classes of preference shares.

143 Further, GTW accepts that the resolution, extending as it did to the 'terms described in the explanatory memorandum accompanying this notice of meeting', set out the rights to be attached to the A Class Shares and the B Class Shares in respect of the matters set out in s 254A(2)(a) to (e).

144 GTW's submission is that the A Class Shares were not preference shares because, far from conferring any preference or priority over Pac Bio's ordinary shares, the rights conferred upon Pacreef as the holder of the A Class Shares and B Class Shares were in fact inferior to or at best equivalent[30] with the rights of ordinary shareholders. This is notwithstanding that all the relevant actors believed that the A Class Shares and B Class Shares were lawfully issued as preference shares in accordance with s 254A(2) and that all intended that those shares would be redeemable by the company on notice by Pacreef.

145 The foundation for GTW's submission is that the A Class Shares do not, according to GTW, have any preferential right. Curiously, if the A Class Shares did have such a preferential right, this would necessarily be to the advantage of the preference shareholders and to the corresponding disadvantage of the ordinary shareholders. Thus, on GTW's case, the fact that the A Class shareholders are worse off while the ordinary shareholders are better off, would have the effect that the A Class Shares are not redeemable. At first blush, this would be a strange outcome - the ordinary shareholders who passed the special resolution could consent to a greater diminishment of the value of their interest, but not to a lesser diminishment. If GTW's submission is accepted, then in effect Pac Bio, as issuer of the shares, can resile from its obligation to redeem on the basis that the A Class Shares were less attractive to their holder than was anticipated by Pac Bio and Pacreef.

Are the A Class Shares preference shares? - Relevant considerations

146 The rights that attach to the A Class Shares (and B Class Shares)[31] are set out in the annexure to the Explanatory Memorandum. Relevantly, the rights, obligations, and restrictions provided in the Explanatory Memorandum were that:

(a) each A Class Share would be issued at a price of $1 (clause 2);

(b) the A Class Shares would have no rights to dividends or distributions from the company (clause 3);

(c) the A Class Shares carried no rights to attend or vote at meetings of members of the company (clause 4);

(d) the A Class Shares could not be transferred (clause 5);

(e) at any time up to and including 3 July 2018, the A Class Shares could be converted into ordinary shares by service of a conversion notice on the company (clause 6.1(a));[32]

(f) if the company proposed to list on any prescribed financial market, then immediately prior to listing each A Class Share still in issue would convert into an ordinary share at a value deemed to be the same as the price proposed for all ordinary shares on their quotation at the company's listing (clause 7);

(g) provided the company had not listed and provided the conversion of the A Class Shares had not occurred, then upon the occurrence of a Redemption Event,[33] the A Class shareholder may require the company to redeem the A Class Shares by service of a redemption notice on the company;

(h) the A Class Shares had no preference or priority to return of capital in the event of a winding up of the company (clause 10);

(i) the A Class Shares would have equal rights to participate with ordinary shares in the event of any surplus assets or profits of the company being available for distribution to members (clause 11).

147 In essence, the Terms of Issue of the A Class Shares (and the B Class Shares) provided that those shares had rights equal to those attaching to ordinary shares in certain respects (eg, in relation to return of capital in the event of winding up and the distribution of surplus assets or profits), but otherwise enjoyed inferior rights with respect to voting, transfer and dividends.

148 Accordingly, GTW contends that the A Class Shares enjoy no preference or priority at all over the ordinary shares in Pac Bio.

149 Pacreef argues that the A Class Shares carried rights in preference or priority to Pac Bio's ordinary shares (or, where relevant, the B Class shares), as the A Class Shares carried:

(a) the right to convert to an ordinary share at the price of $1 per share, which right could benefit the holder to enable it to take the benefit of any favourable movement in the price of the ordinary shares;

(b) the right to repayment of capital on redemption, at a fixed price of $1 per share (which right could benefit the holder);

(c) in relation to the A Class Shares, the right to repayment of capital on redemption from 3 July 2018 (being a date one year prior to the date that the B Class Shares could be redeemed to receive repayment of capital, namely 3 July 2019);

(d) a right not to have those rights attaching to the A Class Shares varied, abrogated, amended, or substituted without the prior written consent of the A Class shareholder, unlike the rights of ordinary shareholders whose rights could be varied by the passing of a special resolution.[34]

150 Some of these so-called preference rights can be put to one side at the outset.

151 First, the conversion right was not a right to convert into an ordinary share at a price of $1 per share. Rather, the Terms of Issue provided for no more than the conversion of the A Class Shares into ordinary shares. Thus, upon the service of a conversion notice, the 15 million A Class Shares would become 15 million ordinary shares and enjoy the same rights as ordinary shares. Nor could it amount to any preference or priority over the B Class shares, which are convertible on the same basis.

152 Second, whether the fact that the conversion period of the B Class shares is later than the A Class shares (ie, 3 July 2019 and not 3 July 2018) in some way means that the A Class shares enjoy a form of preference over the B Class shares is more conveniently considered below, in the context of the more general discussion as to whether any preferential rights of the A Class Shares over the B Class Shares is sufficient to render the A Class Shares preference shares.

153 Third, I do not accept that the terms of issue of the A Class Shares were such that the A Class Shares could only be varied, abrogated, amended or substituted with the prior written consent of the A Class Shareholders, such that this distinguished them from the ordinary shares.

154 The special resolution of members of Pac Bio passed on 10 August 2017 records the passage of the first resolution as 'approve share issue'. The notice of general meeting and Explanatory Memorandum issued in advance of the meeting confirmed the substance of the resolution in the following terms:

That for the purpose of section 254A(2) of the Corporations Act 2001 (Cth) and for all other purposes, approval is given for the issue of 15 million A Class shares and 8 million B Class shares to Pacreef Investments Pty Ltd (as trustee for Pacreef Discretionary Trust) on the terms described in the explanatory memorandum accompanying this notice of meeting.

The Explanatory Memorandum provided for the terms of issue of the A Class Shares to be to the effect set out in full in the annexure. The annexed terms of issue did not provide that the rights attaching to the A Class Shares could not be varied, abrogated, amended or substituted without the prior written consent of the A Class shareholder. Rather, that restriction first appeared in the Terms of Issue[35] which were annexed to the Subscription Agreement and which also differed in other immaterial respects from those that had been approved at the general meeting. Thus the terms of issue approved at the meeting by special resolution did not include this restriction.

155 As mentioned above, s 254A(2) of the Corporations Act provides that a company can issue preference shares only if the relevant rights attaching to the preference shares are set out in the company's constitution or have been otherwise approved by special resolution of the company. Further, s 254B of the Corporations Act provides that a company may determine the terms on which the shares are issued and the rights and restrictions attaching to the shares.

156 The rights, restrictions, and obligations which attach to the A Class Shares are those set out in the special resolution passed at the general meeting of shareholders. It is these terms which were approved by the company in general meeting and were thus approved by the shareholders as a whole in accordance with s 254A(2) of the Corporations Act. The additional term to the effect that the rights that attached to the A Class Shares could only be varied with Pacreef's consent was not incorporated in this resolution.

157 I do not therefore accept that the rights attaching to the A Class Shares included the requirement that those shares could only be amended with the consent of the A Class shareholder. It is clear from the terms of issue that a special resolution of shareholders could effect an amendment to those rights.[36]

158 In the result, whether the A Class Shares constitute preference shares must come down to:

(a) whether the A Class shareholder's ability to at its option compel the company to redeem the A Class Shares at a price of $1 per share ('the Redemption Right') is sufficient to characterise the A Class Shares as preference shares; or

(b) whether the differences between the A Class Shares and the B Class Shares as to the dates upon which the Redemption Right and conversion rights can be exercised is sufficient to characterise the A Class Shares as preference shares.

Are the A Class Shares preference shares? - Authorities

159 In Re Capel Finance Ltd ('Re Capel'),[37] a company sought an order under s 411(1) of the Corporations Act for the convening of a meeting of members to seek approval for a selective reduction of capital. Barrett J of the Supreme Court of New South Wales refused the application.

160 The company was dormant and had been delisted from the ASX, but held cash on hand of $1.5 million. The scheme proposed by the company involved the cancellation of all existing shares other than those held by two nominated shareholders. The shares to be cancelled were referred to as 'scheme shares'. The capital liberated by the reduction was to be applied to entitle holders of scheme shares to either receive a payment in cash; obtain an issue of new shares in the company (on the basis of one new share for each cancelled scheme share); or a combination of the two.

161 The new shares to be made available in substitution for the scheme shares were described as 'redeemable preference shares'. The proposed terms of issue entitled the holders of the redeemable preference shares to redeem their shareholdings by notice in writing to the company. However, the terms of issue otherwise provided that holders of the redeemable preference shares were not entitled to any priority as against holders of existing or future classes of shares to repayment of capital during a winding up of the company, were not entitled to participate in the profits of the company, and were not entitled to vote at, attend or address general meetings of the company.

162 His Honour refused to approve the general meeting for various reasons. In the context of the issues relevant to this case, his Honour noted the definition of 'redeemable preference shares' in s 9 of the Corporations Act, which reads:

'redeemable preference share' means a preference share in a body corporate that is, or at the body's option is to be, liable to be redeemed.

By contrast, the phrase 'preference share' is not defined in the Corporations Act.

163 His Honour also referred to ss 254A(2) and (3) of the Corporations Act, which deal respectively with preference shares and redeemable preference shares. Those sections read:

(2) Preference shares

A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company's constitution (if any) or have been otherwise approved by special resolution of the company:

(a) repayment of capital;

(b) participation in surplus assets and profits;

(c) cumulative and non-cumulative dividends;

(d) voting;

(e) priority or payment of capital and dividends in relation to other shares or classes of preference shares;

(3) Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable:

(a) at a fixed time or on the happening of a particular event; or

(b) at the company's option; or

(c) at the shareholder's option.

164 After setting out those provisions,[38] Barrett J said that shares issued on the terms proposed would not be 'redeemable preference shares' at all, insofar as that though they were redeemable, they were not preference shares.[39]

165 His Honour noted that there was no definition of 'preference share' in the Corporations Act, but opined that the concept was 'well entrenched in company law', to the effect that 'preference shares can only exist by way of juxtaposition with other shares.[40] His Honour quoted the observations of Roxburgh J in Re Powell-Cotton's Settlement[41] that 'preferred stock' is stock which has some preference or priority over ordinary or common stock, and noted that in logical analysis, there is no difference in that context between the words 'preferred' and 'preference'. Barrett J went on to say that:[42]

It is not possible for "preference shares" to exist except as a result of a process of differentiation from shares which are not "preference shares" which sees the "preference shares" entitled to some comparative advantage, commonly with respect to one or more of the matters referred to in s 254A(2) ...

166 His Honour rejected the suggestion 'faintly suggested' on behalf of the company that the right of the holder to require redemption by the company of itself made the shares preference shares.[43] His Honour considered that this feature made the shares redeemable shares, which represented only one of the two characteristics contemplated by the s 9 definition of 'redeemable preference shares', stating that:[44]

The characteristics that make a share a "preference share" are distinct from those that make it redeemable.

167 In that event, his Honour observed:[45]

The consequence of the shares not being redeemable preference shares is, of course, that they cannot be redeemed, except by future and separate compliance with either the capital reduction provisions or the share buy-back provisions. Either course would require separate decisions on each occasion of proposed redemption and the necessary corporate decisions might or might not be forthcoming on any particular occasion.

168 In the context of Barrett J's remarks, it should be noted that in the earlier case of TNT Australia Pty Ltd v Normandy Resources NL[46] ('TNT Australia'), O'Loughlin J, sitting in the Full Court of the Supreme Court of South Australia, explicitly described the redemption rights in that case as involving a repayment of capital for the purposes of the predecessor provision of s254A(2)(a):[47]

It is sufficient then to point first, to the provisions of art 7(i)(iii) which state that each holder of preference shares shall "rank for payment of the redemption amount equally with the holders of the other preference shares" and next to art 7(i)(iv) which states that each holder of preference shares shall have the right in a winding up of the company to payment, in priority to all holders of other classes of shares, of the redemption amount but shall not participate in any further distribution of profits or assets. Then art 7(k) provides that the company shall pay to the holder, on the agreed date of redemption, the redemption amount or assets of Normandy ... in lieu of money.

Those then are the rights of the redeemable preference shareholders "with respect to" the repayment of capital: a right to payment equally with the holders of other similar shares, a right in priority on a winding up - but only in respect of the redemption amount - and finally a right to payment in cash or in kind as may be agreed between the company and the individual holder.

169 In Re Capel, Barrett J indirectly referred to TNT Australia, but not in this respect.[48] Moreover, it seems clear that no submission was made in Re Capel to the effect that the right to repayment of capital afforded by the proposed scheme was a right preferential to the rights of ordinary shareholders, such that the new shares would be 'preference shares'. No doubt part of the explanation for this was that what was to be paid by the company on receipt of a redemption notice in Re Capel was not the capital subscribed by the shareholders, but a fixed amount of A$0.084 for each new share held (defined as 'the Redemption Amount').

170 Moreover, in Re Capel the company constitution by clause 2 provided:

2.1 Capel Finance Preference shares will not be entitled to receive any priority ... in relation to the:

(a) repayment of capital by Capel Finance; and

(b) during the winding up of Capel Finance.

2.2 A Capel Finance Preference Share does not confer on its holder any rights to participate in the profits of Capel Finance.

171 The presence of this clause was foundational to Barrett J's conclusion in Re Capel. As his Honour made clear:[49]

Shares issued upon the terms in Sch 1, set out above, will, on this basis, not be "preference shares". Clause 2.1 says in explicit terms that the so-called redeemable preference shares "will not be entitled to receive any priority as against the holders of any existing or future classes of shares" in relation to repayment of capital or during a winding up. Clause 2.2 says that no right to participate in profits attaches to the shares in question, while cl 3.1 confers a right to a fixed sum of 8.4c per share upon a winding up, which right is not expressed to exist in priority to the rights and claims of holders of other shares. Clause 4.1 denies voting rights and the right to attend and speak at general meetings. The so-called redeemable preference shares do not attract any preference or priority, compared with other shares.

Section 254A(2) requires, as a condition of the ability to issue preference shares, that the rights attached to the preference shares with respect to certain matters be set out in the constitution or be approved by special resolution. Section 254A(2) is as follows:

A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company's constitution (if any) or have been otherwise approved by special resolution of the company:

(e) priority of payment of capital and dividends in relation to other shares or classes of preference shares.

Shares issued on the terms in Sch 1 would carry no priority in respect of any of these (or any other) matters and it is for that reason that they would not properly be regarded as "preference shares" and so could not be issued as redeemable preference shares.

172 Thus, his Honour's comments in Re Capel that the right to require redemption could not make the new shares preference shares needs to be kept in its proper context. The right to redeem the shares and receive a particular amount, which importantly did not involve the repayment of the capital subscribed by the shareholder, did not make those shares redeemable preference shares. This was all the more so when the constitution specifically provided that the holders of the new shares had no priority in respect of the repayment of capital.

173 In Beck v Weinstock,[50] Hamilton AJ of the Supreme Court of New South Wales considered an application for declaratory relief to the effect that certain shares ('the C Class shares') were not redeemable preference shares within the meaning of the Act, and accordingly could not be redeemed by the company. The applicant also sought declarations to the effect that a purported redemption of the C Class Shares was void and of no effect. The application was made after the company had, in accordance with its constitution and at its own option, purported to redeem the C Class shares for par value. If the C Class shares remained on issue, they would carry priority rights in respect of the return of capital over ordinary shares in a winding up. In the circumstances, the priority rights to return of capital were worth significantly more than the par value at which the shares were purportedly redeemed. Beyond the priority right to return of capital, the shares ranked equally with the ordinary shares for the distribution of dividends. The controversy in the case was that no ordinary shares in the company had ever been issued. Thus, the applicant argued that the C Class Shares could not be preference shares where there were no ordinary shares on issue.

174 His Honour concluded that the C Class Shares were not validly issued as redeemable preference shares, as there were no ordinary shares on issue over which the preference shares would carry a preference.[51]

175 On appeal in Weinstock v Beck,[52] the Court of Appeal of New South Wales by majority held that redeemable preference shares may be validly issued notwithstanding that the rights attaching to them are only potentially preferential, with respect to the rights of an as yet unissued class of ordinary shares. In other words, the rights conferred on the holder of the C Class shares carried a preference, even though the preference would only arise if and when ordinary shares were issued.

176 Young JA in dissent considered that the proper analysis required the Court to first see whether the C Class shares could properly be described as preference shares, and then to determine whether they were properly classed as redeemable preference shares.[53] Young JA then traced the relevant authorities in an effort to ascertain the inherent qualities of a preference share, and in so doing discussed the history of the relevant provisions in the Companies Act 1961 (NSW) ('the 1961 Act'), which governed the C Class shares.[54]

177 Interestingly, in the context of the issues in this case, Young JA noted:[55]

In the commentary on the corresponding section of the Singapore Companies Act (Cap 50 1994 ed), Walter Woon on Company Law (Revised 3rd ed, Sweet & Maxwell, 2009) says at 11.70 that an issue of preference shares contrary to the section is still valid and the holders of the various classes of shares are remitted to the former system of having the court construe the constitution of the company to determine the rights.

(citations in original; underline added)

178 Young JA also noted that in Australia this principle not apply as s 63 of the 1961 Act (now s 254E of the Corporations Act) gave the Court a power to validate the terms of an irregular issue of shares.[56]

179 In the result, after carefully reviewing the authorities on the subject, Young JA concluded that a preference share was one which had preferred rights over another class of share, such that if there was no other class of shares on issue there could not be any preference shares.[57]

180 Handley AJA (with whom Giles JA agreed) allowed the appeal. Handley AJA distinguished Hamilton AJ's reliance upon Re Capel, noting that Barrett J's decision in Capel did not pertain to a position such as the present, where the constitution did in fact confer appropriate preferential rights on the relevant share though those rights lacked effective content as there were no ordinary shares on issue.[58] In the result, Handley AJA held that the fact that the terms of issue of the C Class shares conferred priority on the holder of those shares over ordinary shareholders was sufficient to permit them to be characterised as preference shares, notwithstanding that at the time of the issue there were no issued ordinary shares over which they had priority.[59]

181 An appeal to the High Court was unanimously dismissed in Beck v Weinstock.[60] Each of the members of the High Court undertook an analysis of the history of the concept of a preference share and the associated statutory framework.

182 French CJ noted that the preference share had emerged in the United Kingdom in the 18th and 19th centuries out of the need for private corporations to raise additional capital: in order to attract additional investors, shares were issued which attracted preferential dividend rights.[61] Later, the Chief Justice observed that preference shares as a device began to confer priorities not only in relation to dividends, but also capital and voting rights in different combinations. His Honour emphasised that the variety of the uses of preference shares and the priority rights attaching to them made a narrow legal definition elusive.[62] The Chief Justice referred to the observations of Lord Simons in Scottish Insurance Corporation Ltd v Wilsons and Clyde Coal Co Ltd ('Wilsons and Clyde Coal')[63] to the following effect:

... subject to any relevant provision of the general law, the rights inter se of preference and ordinary shareholders must depend on the terms of the instrument which contains the bargain that they have made with the company and each other.

183 To similar effect, Hayne, Crennan and Kiefel JJ observed that there was nothing in the 1961 Act which provided any textual footing for the submission that a share was not a 'preference share' unless the rights attaching to it gave some preference or priority over some other issued share.[64] The majority then continued:[65]

What was a "preference share" for the purposes of the 1961 Act was to be determined by reference to the relevant company's memorandum and articles of association, not by reference to the state of the issued capital of that company at any time. That is, whether a share was a "preference share" did not depend upon what shares the company had issued. If a company's memorandum and articles of association provided that shares of an identified class carried some right with respect to repayment of capital, participation in surplus assets or profits, cumulative or non-cumulative dividends, voting, or priority of payment of capital or dividend which preferred the holder of a share of that class over the holder of some other class of share for which the memorandum and articles of association provided, those shares were preference shares.

(underline added)

184 Ultimately, the plurality concluded that the disputed shares had rights which preferred the holder of those shares over the holder of any ordinary share in the company, and the fact that no ordinary shares were on issue did not preclude that the disputed shares were preference shares.[66]

185 Gageler J reached a similar conclusion, considering that the preference share regime in the Corporations Act neither required nor assumed that a share could not be a preference share or a redeemable preference share unless or until an ordinary share was on issue.[67] His Honour stated that it was inherent in the concept of a preference share that the rights attaching to it are differentiated from the rights attaching to an ordinary share.[68] His Honour also noted that the rights attaching to preference shares issued under the company's Constitution take effect in contract between the company and the holders of those preference shares immediately on issue, whereas the rights as between the holders of the preference shares and the holders of ordinary shares take effect in contract if and when ordinary shares are issued.[69]

186 Beyond these helpful discussions of the history and definition of preference shares in Australian company law, the decisions in Beck v Weinstock are of no direct relevance to the issues in this case. It was clear that the C Class shares under consideration in Beck v Weinstock expressly enjoyed priority over ordinary shares on the return of capital on a winding up, which is one of the matters set out in s 254A(2) of the Corporations Act. Rather, the issue in controversy was whether the fact that there were no ordinary shares on issue precluded the C Class shares from being considered as preference shares, and thus invalidated the redemption effected by the company. Relevantly, no issue arose as to whether the shareholder's option to require redemption of the shares, and thereby obtain the repayment of that shareholder's capital, meant that the shares were preference shares.

Are the A Class Shares preference shares? - Analysis and conclusion

187 In the present case, the A Class Shares were issued to Pacreef as fully paid shares at a price of $1 per share. The 15 million A Class Shares, issued to Pacreef as fully paid $1 shares, thus represented a $15 million capital contribution by Pacreef. The terms of issue as approved by the special resolution provide for the Company to redeem the A Class Shares at a price of $1 per share on notice from Pacreef. This redemption price of $1 per share equated to the $1 of capital per share capital contributed by Pacreef. This is a right which is not enjoyed by the ordinary shareholders.

188 As sub-ss 254A(2)(a), (b) and (e) make clear, rights to the repayment of capital; rights to participation in surplus assets and profits; and the right to priority of payment[70] of capital (and dividends) are all separate features. Provided those features are set out in either the company's constitution or have been approved by special resolution, and those rights confer advantage over the rights of the holders of ordinary shares, the shares can be regarded as 'preference shares.'

189 In my view the holders of the A Class Shares have a right to repayment of capital (that is, the capital provided by their holder, Pacreef of $1 per share) which is not enjoyed by the holders of ordinary shares. I agree with the reasoning of the Full Court in TNT Australia. Barrett J's observations in Re Capel are distinguishable in the present case. In Re Capel the shares carried no preferential right to repayment of capital; in fact, the constitution expressly provided to the contrary.

190 It should be emphasised that this conclusion is not at odds with the statement of Barrett J in Re Capel that:[71]

the characteristics that make a share a "preference share" are distinct from those that make it redeemable.

191 As Barrett J rightly observed, the language of the Corporations Act draws a distinction between the characteristics of redeemability and preference. However, this does not, and I do not take his Honour to imply that it does, prevent the redeemability of the preference shares at the shareholder's option for an amount equivalent to the fully paid up amount of those shares from constituting a preferential right to the repayment of capital. There are several reasons why the characteristics of redeemability and preference are distinguished in the Corporations Act; none of them demand that redeemability cannot in appropriate circumstances amount to a preferential right.

192 First, not all redemption mechanisms represent an advantage to the shareholder. In addition to redemption at the option of the shareholder, s 245(3) of the Corporations Act provides for redemption at a fixed time, or redemption at the company's option. A redemption at the option of the company often represents a significant disadvantage to the relevant shareholder. It was a redemption at the option of the company that was contested by the preference shareholder in Beck v Weinstock; in that case, redemption at par represented a loss of value to the preference shareholder, who would otherwise have profited from the rights of the preference shares to participate in the winding up.

193 Indeed, an examination of the history of redemption of preference shares reveals that the redemption mechanism has by and large represented a disadvantage to the holder of the redeemable preference shares: prior to the introduction of s 254A in 1998, preference shares were only redeemable at the option of the company.[72] Until recently, then, redeemability and preference were necessarily distinct concepts: there were few, if no, mechanisms by which redeemability could amount to a preferential right. This in part accounts for the distinction between the notions of redeemability and preference in the text of the statute.

194 Second, the language of 'redeemable preference shares' reflects the historical development of statutory redemption mechanisms, rather than any deliberate intent on the part of the legislature to keep the characteristics of redeemability and preference strictly separate.

195 Previous redeemable preference share legislation was enacted at a time when preference shares were, at general law, by that very fact redeemable at the company's option. Though resources on the history of redemption mechanisms appear scant,[73] the authors of the eighth edition of Gower and Davies' Principles of Modern Company Law note that:[74]

... prior to the [Companies Act 1981 (UK)], only preference shares could be issued as redeemable.

Continuing in a footnote:

Perhaps because they were already capable of being squeezed out through the reduction procedure ... and the redemption mechanism allowed the parties to contract about the handling of this process.

196 That preference shareholders could be 'squeezed out' is discussed by the authors later:[75]

In particular, companies have often wanted to cancel the shares issued to preference shareholders, whose entitlement to a fixed preference dividend has moved out of line with interest rates in the market, so that the contribution of those shareholders can be refinanced more cheaply. The courts have held that the mere cancellation of preference shares does not infringe their rights, provided the preference shareholders are treated in accordance with the rights they would have on a winding up of the company.

197 And in a footnote to that section:[76]

The proposition that the preference shareholders are treated in breach of their rights by cancellation of their shares and deprivation of a favourable dividend entitlement was decisively rejected by the Court of Appeal in Re Chatterly-Whitfield Collieries Ltd [1948] 2 All ER 593, so that the issue has become whether the terms of the reduction are in accordance with the rights which they would have on a winding up. The effect of the decision was to make preference shares in effect redeemable by the company, even if not formally issued as redeemable, provided the company could satisfy the requirements of the reduction procedure.

(underline added)

198 In Re Chatterly-Whitfield Colleries Ltd,[77] Lord Greene MR set out the basis of this doctrine. Speaking of a submission that it would be unfair to oust a preference shareholder from a company by a capital reduction undertaken without their consent, he said:

Apart from the fact that no such principle has ever been recognised by the court, it is, in my opinion, unsound for the reason that it ignores the facts (1) that the risk of a reduction of capital taking place is as much an element in the bargain as the right to a preferential dividend, and (2) that the well-known practice of the courts involves what (as I have endeavoured to point out) is really in accordance with sound business practice, and, moreover, is based on the recognised analogy of priorities as to capital in a winding-up, viz., that, at any rate where preference shares are not entitled to participate in surplus assets, they are to be paid off first on a reduction, and references to the reasonable expectations of preference shareholders which are intended to suggest that there is something inequitable in this form of treatment, have, in my judgment, no support either in practice or principle, and are unsound.

199 Similarly, in Wilsons and Clyde Coal,[78] Viscount Maugham held that the right to the capital assets of the company were, subject to the payment to preference shareholders of capital and of any accumulated preferential dividends, to be 'appropriated to the ordinary shareholders and in that sense belong to them to the exclusion of the preference shareholders.'[79] In that case, Viscount Maugham made reference to In re Bridgewater Navigation Co,[80] in which holders of preference shares bearing preferential dividends (and no other right to profits) were held to be, on a winding up, entitled to no more than their capital and accumulated dividend entitlements, with any surplus assets to be distributed solely to the ordinary shareholders.

200 Relevantly, the phrase 'redeemable preference shares' first features in the Companies Act 1928 (UK), from which it has been carried through to the present.[81] With this in mind, the language of 'redeemable preference shares' first arose at a time when preference shares were arguably already redeemable at general law at the option of the company, inasmuch as they were assimilated to debt capital and thereby precluded from participating in surplus assets or profits beyond their preferential dividends. Under the state of the law at that time, it was thought that preference shareholders, having no right to participate in profits or surplus, would suffer little prejudice on redemption at the company's option in comparison to ordinary shareholders.

201 If anything, it is precisely because preference shares were (at least historically) analogous to debentures that they were redeemable: the characteristics that made them preference shares (ie, that they paid fixed dividends and did not have rights to surplus capital in a winding up) were those very characteristics that made them liable to redemption.[82] With this in mind, there can be no implication in the phrase 'redeemable preference share' that 'redeemability' and 'preference' are strictly separate characteristics.

202 Moreover, insofar as the A Class Shares are deferred to ordinary shares with respect to many of the ordinary rights of a share to participate in the profits or assets, they are closer to a debenture than the ordinary share. In light of the historical rationale for redeemable preference shares, it would be strange to disqualify the A Class Shares from redemption on the basis that they carry less rights than ordinary shares to participate in the profits or assets of the company.[83] These are the very characteristics that made such shares amenable to redemption in the first place.

203 There is little reason now, if there ever was, to read in a strict distinction between the characteristics of redeemability and preference. While redeemability will not in all cases amount to a preference, redeemability at the option of the shareholder may do so, at least in circumstances such as the present where the redemption amounts to a repayment of capital.

204 In my opinion the A Class Shares are preference shares, and having regard to their terms of issue are 'redeemable preference shares' within the meaning of the Corporations Act.

205 For completeness, I will also briefly consider Pacreef's alternative submission that the fact that the A Class Shares are preference shares insofar as they could be redeemed earlier than the B Class Shares and as such enjoy a preference or priority over the B Class Shares.

206 The argument finds some support in the High Court's decision in Beck v Weinstock, and in particular in the reasons of the plurality where Hayne, Crennan and Kiefel JJ refer to preference shares as having some right or advantage over 'the holder of some other class of shares'.[84]

207 However, that passage needs to be considered in context; the issue at hand was whether the shares could be classified as preference shares in circumstances where the ordinary shares had not been issued but which were provided for in the company's Articles. There was no question in the case that the relevant comparison was between the asserted preference shares and ordinary shares. Those aspects of the plurality's reasons need to be considered in that context, and additionally in light of the plurality's conclusion that:

the disputed shares had rights which preferenced the holder of those shares over the holder of any ordinary share in the company. That no ordinary shares were ever issued does not deny that the designated shares were preference shares.[85]

208 Gageler J's reasons are consistent too with the relevant comparison being between the putative preference shares and ordinary shares,[86] which in turn is consistent with the historical rationale for the development of such shares, as discussed above.[87]

209 In my view therefore, the fact that the A Class Shares had preferred rights over the B Class Shares in the sense that the holder of the former could call for repayment of capital earlier than the holder of the latter, does not mean that A Class Shares are preference shares.

210 In case I am wrong that the A Class Shares are preference shares, I will also consider GTWs submission that if the the A Class Shares are not preference shares then they cannot be redeemed by Pac Bio.

If the A Class Shares are not preference shares, are they redeemable?

211 Section 254K of the Corporations Act provides that:

A company may only redeem redeemable preference shares:

(a) if the shares are fully paid up; and

(b) out of profits or the proceeds of a new issue of shares made for the purpose of the redemption.

212 The requirement in s 254K derives from the principle demanding the maintenance of a company's capital, The effect of s 254K is to permit the redemption of preference shares only in circumstances where the capital of the company would not be improperly reduced.

213 If GTW's submission is accepted, then s 254K has no application as the A Class Shares are not preference shares. Lacking an alternative statutory mechanism for redemption, on GTW's argument the A Class shareholder could at most seek a reduction of capital under the procedure set out in ss 256B and 256C of the Corporations Act, or a share buyback under the procedure set out under s 257A of the Corporations Act. However, these mechanisms arguably fall outside of the scope of the Guarantee Arrangement, expressed as it is to apply to a redemption.

214 The difficulty with this submission is that it puts entirely to one side the terms of the contract between Pacreef and Pac Bio, as reflected in the Subscription Agreement and the Terms of Issue attached to that agreement. Those Terms of Issue make it clear that the redemption of the A Class Shares could only be effected 'out of the proceeds of a new issue of shares made for the purpose of the redemption'. The Subscription Agreement was entered into at the same time as the Guarantee Arrangement between Pac Bio, Pacreef and GTW; the substance of the Guarantee Arrangement being that in certain circumstances GTW would subscribe for and accept the issue by Pacreef of such number of fully paid ordinary shares in Pac Bio as is required to satisfy Pacreef's redemption request.

215 Clearly, as a matter of contract Pac Bio was to effect the redemption out of a new issue of shares made for the purpose of the redemption, and that if necessary (and subject to the satisfaction of the conditions precedent in the Guarantee Arrangement) GTW would subscribe for those new shares in order to ensure the fulfilment of the contractual arrangements between Pacreef and Pac Bio. The effect of these arrangements is that in such circumstances Pac Bio's capital would be maintained; by contrast, the effect of the procedures in ss 256B, 256C or 257A of the Corporations Act would be a reduction of capital.

216 Thus, the submission that Pacreef must seek recourse to those provisions in the Corporations Act providing for a reduction of capital is disconsonant with the contract between Pacreef and Pac Bio.

217 Accordingly, I cannot see how the reduction of capital procedure set out in ss 256B and 256C of the Corporations Act, or for that matter the buyback procedure under s 257A of the Corporations Act, has any application to the contract between Pacreef and Pac Bio.

218 The relevant question is whether Pacreef, under the terms of the abovementioned agreements, is entitled to relief compelling Pac Bio to redeem the A Class Shares out of a fresh issue of shares made for the purpose of facilitating the redemption. GTW argues that Pacreef is not, simply because the redeemable preference shares provisions in the Corporations Act do not apply. However, that submission overlooks the effect of the contract between Pacreef and Pac Bio.

219 In my view, and provided the redemption is facilitated by the means of a new issue of shares for the purpose of effecting the redemption of the A Class Shares, Pacreef would be entitled to relief compelling a redemption pursuant to the contract.

220 GTW's submission infers an inability on Pacreef's part to enforce the contract between it and Pac Bio from the disconformity between the contract and the Corporations Act. In effect, GTW alleges that it would be unlawful to effect a redemption of the A Class Shares otherwise than in accordance with the Corporations Act, and that accordingly Pacreef is left with no redress in contract (at least as against Pac Bio). In my opinion, that submission lacks merit.

221 In Nelson v Nelson ('Nelson'),[88] the High Court considered whether equity would disentitle a party who acts contrary to law from legal or equitable relief, a doctrine often referred to as the principle of illegality. The case concerned a property which the appellant contended was held on trust for her by her daughter. The appellant had taken out a loan under a legislative scheme for which only persons who do not presently own a property were eligible. In applying for the loan, the appellant falsely declared that she did not have a beneficial ownership in the property. Her daughter claimed the appellant was disentitled from proving her beneficial ownership of the property at equity by reason of her declaration. The High Court held that there is no general proposition that equity will not let a loss lie where it falls in a case of illegality consisting of contravention of policy or statute.[89]

222 McHugh J accepted a submission to the effect that denying the appellant's rights as a beneficiary would be unwarranted in the circumstances. His Honour stated:[90]

The courts, including courts exercising equitable jurisdiction, will not enforce an unlawful agreement or trust and, frequently will not enforce an agreement or trust that has been entered into for an unlawful purpose. But these propositions do not lead to the conclusion that a person who participated in the making or execution of such an agreement or trust never has a curial remedy. A court that finds that an agreement is unlawful or has an unlawful purpose has merely set the stage for a further enquiry: are the circumstances surrounding the agreement such that the court should deny a relevant remedy to the party seeking the assistance of the court?

One of the most significant reasons for adopting a less rigid approach to illegality ... is that statutory illegality can arise in a number of different ways. First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is carried out. It would be surprising if sound legal policy required each of these forms of illegality to be treated in the same way. There is, for example, a vast difference between the performance of a contract for carriage of goods by ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited.

(citations omitted)

The existence of criminal sanctions strengthens this analysis because the existence of a range of sanctions together with the omission of a provision that makes unenforceable any agreement made in breach of or to evade the Act is a powerful indication that no other sanctions are needed. Evidently, the federal Parliament saw the legislative sanctions and remedies as being sufficient to deal with unlawful conduct similar to that which has occurred in the present case. That being so, I can see no justification for the courts imposing a further sanction by refusing to enforce the legal or equitable rights of applicants under the Act, particularly when such a refusal may often result, as it does in this case, in a penalty out of all proportion to the seriousness of an applicant's conduct.

223 Applying those principles to the present case, it is clear that Pac Bio was fully cognisant of the Corporations Act when it entered into the contract with Pacreef, constituted by the Subscription Agreement which included the Terms of Issue of the A Class Shares. It was for this reason that the Terms of Issue specifically precluded redemption of redeemable preference shares otherwise than out of the proceeds of a new issue of shares made for the purpose of the redemption. There is no ground to construe the Corporations Act as prohibiting the redemption of shares (even if they are not preference shares), provided the redemption does not result in a reduction of the company's capital. Even where a reduction of capital is involved, the buyback by the company may be still permitted where the provisions of the Corporations Act have been observed.

224 Moreover, s 254L of the Corporations Act, which is contained in Pt 2H.2, specifically provides that a contravention of s 254K does not affect the validity of the redemption or of any contract or transaction associated with it, and that the company is not thereby guilty of an offence.[93] In other words, there is no indication in s 245L that a redemption of redeemable preference shares (or of shares generally) which involved a breach of the requirements of s 254K would invalidate either the redemption, if it occurred, or the contract connected with and providing for the redemption.

225 Therefore, it would be an extraordinary result if a contract which was expressly consistent with s 254K and which expressly sought to avoid the vice addressed in that section, would be unenforceable by reason of that section, particularly in circumstances where the company had, by its board of directors, unanimously recommended that the issue of the A Class Shares should be approved and did so against the background of, and for the purposes of, facilitating performance of the Subscription Agreement (including the Terms of Issue). There is nothing in the scheme of the Corporations Act which would suggest that a redemption could not be effected so as to give effect to the contractual arrangements entered into between the parties; all indicators are to the contrary, particularly where the redemption was to be facilitated by a new issue of shares made for the purpose of facilitating the redemption in a manner consistent with the Corporations Act.

226 Accordingly, I do not accept GTW's submission that the A Class Shares, assuming that they are not preference shares (which is not my view), could not be redeemed by Pac Bio. Nor do I accept the corollary that the burden of this illegality (whatever it may be) must rest with Pacreef as the holder of the A Class Shares, as opposed to Pac Bio which issued the shares.

227 It may well be that one answer is to be found in s 254E of the Corporations Act which entitles the company, a shareholder, a creditor, or any other person whose interests have been or may be affected, to obtain an order from the Court validating or confirming the terms of a purported issue of shares if the issue is or may be invalid for any reason or the terms of issue are inconsistent with or not authorised by the Act.

228 Noting that s 254B of the Corporations Act provides for the company to determine the terms on which its shares are issued and the rights and restrictions attaching to the shares, and that in the present case both the Constitution and the special resolution passed by the company recognised that the A Class Shares were to be redeemable, it may well be that the incongruity arising from GTW's submission is properly dealt with by s 254E of the Corporations Act. It is an acknowledged rationale for the making of such an order that it may be necessary to validate a proprietary interest apparently represented by shares which have been issued or allocated irregularly.[94]

If the A Class Shares are not redeemable, does GTW's liability under the Guarantee Arrangement not arise?

229 In case I am wrong in my conclusions that firstly, the A Class Shares are preference shares; and secondly, that even if they were not, that would not mean that the shares were not redeemable by Pac Bio, I will next consider whether the A Class Shares not being redeemable would mean that the obligations imposed on GTW under the Guarantee Arrangement are not enlivened, insofar as GTW's obligation was contingent on the A Class Shares being redeemed.

230 At first blush, this too would be a somewhat surprising outcome. If GTW's submission is correct, then the consequences of A Class Shares not being redeemable preference shares would be adverse to Pacreef. It would be odd if this adverse outcome had the further consequence of disentitling Pacreef from enforcing a Guarantee Arrangement which would have otherwise applied.

231 It is of course not uncommon for a guarantor's obligations under a guarantee to be discharged owing to some accommodation or non-contemplated benefit being given by a creditor to the principal. Here the claimed guarantor, GTW,[95] makes a like argument in the case of a detriment (not a benefit) not contemplated by the contract arising against the entity standing in the position analogous to that of the creditor, Pacreef.

232 Pacreef, relies on, among other things, clauses 2.1 and 3.1(d) terms of the Guarantee Arrangement, and in particular clauses 2.1 and 3.1(d).

233 Clause 2.1 provides that the obligations of GTW under clause 3 are conditional only on the three events set out therein. The proper construction of that provision is dealt with below, but for present purposes it is sufficient to record that Pacreef submits that the effect of clause 2.1 is to preclude the obligations of GTW under clause 3 being made conditional on a further matter, namely that the A Class Shares are lawfully redeemable by Pac Bio.

234 Further, Pacreef points to clause 3.1(d) of the Guarantee Arrangement which reads:

The liability of GTW under clause 3.1(a) is not affected by anything that might operate to release or exonerate GTW in whole or in part from its obligations under this deed including any of the following, whether with or without the consent of GTW:

(i) the grant to GTW or any other person of any time, waiver or other indulgence, or the discharge or release of GTW or any other person from any liability or obligation;

(ii) any transaction or arrangement that may take place between the parties or any other person;

(iii) the failure or omission or any delay by Pacreef or MBD to give notice to GTW or any default by MBD, Pacreef or any other person under this deed; and

(iv) any legal limitation, disability, incapacity or other circumstances related to GTW or any other person.

235 Pacreef submits that if the A Class Shares are not lawfully redeemable by Pac Bio, such inability would fall within clause 3.1(d)(iv), being a legal limitation, disability, incapacity or other circumstance relating to another person (that is, Pac Bio) and that in such circumstances, the parties had agreed this would not discharge GTW's liability.

236 Clauses of this nature are commonly found in guarantees to prevent the discharge of the guarantor's liability under the guarantee as a result of conduct as between the creditor and the principal affecting the principal's liability (and thus, the guarantor's secondary liability) and over which the guarantor has no means of foreseeing or protecting itself. [96] Thus, absent such a clause, the creditor's conduct towards a principal can discharge a surety where:

(a) there is a material variation of the principal contract to which the surety has not consented;

(b) time for performance has been extended without the consent of the surety; or

(c) the creditor made advance payments of the contract price without the consent of the surety.[97]

237 The relevant principle is an equitable one.[98] The principle operates to absolutely discharge a guarantor's liability if there is a variation of the relevant contract which could prejudice the guarantor, whether or not the variation has in fact resulted in prejudice is likely to do so. Even the mere possibility of detriment arising from the variation is enough to justify the discharge of the surety.[99] However, the guarantor will remain liable where the alteration to the principal contract is 'obviously and without inquiry unsubstantial'[100] such that no possible prejudice to the guarantor results, or where the alteration is clearly for the guarantor's benefit.

238 In order to avoid the principle, the creditor must show that the nature of the alteration can only be beneficial to the guarantor, or that by its nature it cannot in any circumstance increase the guarantor's risk; for example, where there is a reduction in the principal debt or in the interest rate payable by the guarantor.[101] A change or variation to the principal contract that is not prima facie prejudicial to the guarantor will not discharge them from liability.[102] Even though the non-prejudicial effect of the alteration must be apparent without a detailed enquiry as to its effects, some evaluative judgment is necessary to determine whether a variation that is 'obviously and without inquiry unsubstantial' is necessarily required.

239 In Corumo Holdings Pty Ltd v C Itoh Ltd,[103] Meagher JA held that a variation increasing the amount of the principal's potential liability could prejudice the guarantor, despite the fact that the principal's liability prior to the variation was already in excess of the guarantor's maximum limit of liability under the guarantee.[104] The additional indebtedness increased the likelihood that a demand would be made upon a guarantor and that the value of the guarantor's right of indemnity against the principal would be depreciated.[105] However, Kirby P was of the view that, in the context of the commercial setting and the particular provisions of the guarantee in that case, that the variation, which prevented the guarantee being called on at an earlier stage, might even be regarded as being for the benefit of the guarantor.[106]

240 Here, GTW seeks to rely upon the operation of this general principle in circumstances where the creditor has not acted to confer advantage upon the debtor, nor where the liability of GTW could possibly be compromised by reason of Pacreef's inability to redeem the A Class shares. Rather, here Pacreef has suffered a detriment unintended by Pac Bio and its directors, which included Mr Wood, and unintended by GTW itself as a party to the Guarantee Arrangement.

241 Under the terms of the Guarantee Arrangement, GTW remains entitled to the benefit of those parts of the Guarantee Arrangement which confer advantage on it: first, as consideration for its provision of the guarantee, GTW received the option to buy the initial option shares; secondly, upon performance of the obligations imposed upon it under clause 3.1(a) of the Guarantee Arrangement, GTW would still receive the issue of fully paid ordinary shares in Pac Bio at the subscription price (that is, $1 each) as was required to satisfy the redemption request; thirdly, and subject to completion of the issue of the subscription shares to GTW, Pac Bio granted a further option to GTW to buy the subsequent option shares for the exercise price.

242 Thus, even if it were the case that Pacreef was not able to compel Pac Bio to redeem the A Class Shares, that inability does not prejudice GTW, which continued to enjoy the benefit obtained by the initial option and could have enjoyed the benefit of the issuance of the subscription shares and obtained the option to buy the subsequent option shares, were it so minded.

243 Accordingly, and to the extent which it is necessary to decide, in my view GTW's liability under clause 3.1(a) is unaffected by any inability on the part of Pacreef to enforce the redemption as against Pac Bio.

244 There is nothing in the Guarantee Arrangement that expressly contemplates such an outcome. In fact, such an outcome would be inconsistent with the chapeau to clause 2.1 of the Guarantee Arrangement, which makes it clear that GTW's obligations under clause 3 were conditional only on:

(a) Pacreef giving notice to Pac Bio to redeem the A Class Shares;

(b) Pac Bio not raising all of the capital required to satisfy the redemption request from a new issue of fully paid ordinary shares in Pac Bio carried out for the purpose of satisfying the redemption request within three months after the date of the redemption request; and

(c) no insolvency event subsisting in respect of Pac Bio as at the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement.

245 In short, GTW's submission finds no support in equitable principle, is inconsistent with clause 2.1 of the Guarantee Arrangement and in any event is precluded by clauses 3.1(d)(i) to (iv). Accordingly, in my view, GTW's submission that its obligations under the Guarantee Arrangement are not enlivened if the A Class Shares issued by Pac Bio are not redeemable preference shares should be rejected. In my opinion, the A Class Shares are redeemable preference shares; if they are not redeemable preference shares for the purposes of the Corporations Act, they are still redeemable under the contract; if they are not redeemable under the contract, then this does not permit GTW to evade its liability under the guarantee.

246 The next issue for consideration is the satisfaction or otherwise of the conditions precedent to GTW's liability under the Guarantee Arrangement.

247 This issue calls for a proper construction of the Guarantee Arrangement. Accordingly, it is appropriate to first to set out the relevant principles of construction of guarantees, as well as commercial contracts more generally.

Principles of construction of commercial contracts

248 There was no substantial difference between the parties' submissions as to the appropriate principles applying in the construction of commercial contracts. Both parties referred me to the recent and convenient summary of the principle of construction provided by Riordan J of this Court in Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd ('Siemens').[107] I am grateful for his Honour's summary, which I set out verbatim below:[108]

To construe the terms of a commercial contract, the Court asks 'what a reasonable businessperson would have understood those terms to mean'. To answer that question, 'the reasonable businessperson [is] placed in the position of the parties',and the Court applies the following principles:

(a) The terms are construed objectively and the subjective intentions of the parties are irrelevant.

(b) The objective approach requires reference to the text and its ordinary meaning, together with:

(i) the context, being the entire text of the contract including matters referred to in the text; and

(ii) the purpose.

These matters will ordinarily be identified by reference to the contract alone, but evidence of mutually known objective background circumstances relevant to the purpose is admissible 'no matter how clear the "ordinary meaning" of the words'. Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.

(c) Unless a contrary intention appears in the contract, the court is entitled to approach the task of interpretation on the assumption that the parties intended to produce a commercial result, and should construe it so as to avoid a commercial nonsense. However, the court does not weigh the commerciality of the agreement, and business common sense is a topic on which reasonable minds may differ.

(d) If, after completion of this process, the language used in the contract 'is ambiguous or susceptible of more than one meaning', then evidence of surrounding circumstances external to the contract ('surrounding circumstances') is admissible to assist with interpretation of the contract ('the ambiguity requirement').

events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating.

(f) However, 'evidence of the parties' statements and actions reflecting their actual intentions and expectations' is inadmissible. Although evidence of prior negotiations is admissible to establish objective background facts known to both parties and the subject matter of the contract, evidence of negotiations reflective of actual intentions and expectations is not receivable.

(g) Post contractual conduct is inadmissible to construe the terms of the contract.

Despite the above rules, evidence of surrounding circumstances may be admissible to establish that:

(a) an expression has a particular meaning in business custom or usage;

(b) a particular interpretation was either rejected or accepted by the parties; or

(c) the contract should be rectified.

Further, at common law, a court may supply, omit or correct words to avoid absurdity or inconsistency.

(citations omitted)

249 In written submissions, GTW expressly referred to the above passage of Riordan J's reasons in Siemens, which at [87(d)] reaffirmed the ambiguity requirement (sometimes referred to as the 'gateway requirement') and thereafter expanded on his Honour's reasons for accepting that requirement; including by reference to the judgment of her Honour Tate JA in the Court of Appeal of this Court in Apple and Pear Australia Ltd v Pink Lady America LLC ('Apple and Pear'),[109] in which her Honour cast doubt on aspects of the reasoning of Leeming JA in Mainteck Services Pty Ltd v Stein Heurtey SA ('Mainteck').[110] However, in oral submissions counsel for GTW expressed a preference for the approach followed by Leeming JA in Mainteck.

250 In that context it is necessary to refer briefly to Leeming JA's judgment in Mainteck alongside Tate JA's consideration of those reasons in Apple and Pear. In Mainteck, Leeming JA summarised what his Honour regarded as the proper approach as follows:[111]

First, in principle, every legal text requires legal interpretation, in order to ascertain its legal meaning, although there is no real scope for dispute about the interpretation of many legal texts. Professor Wigmore long ago wrote that "the process of interpretation, then, though it is commonly simple and often unobserved, is always present, being inherently indispensable" ... Lord Steyn said, in the first John Lehane Memorial Lecture, that "it is a universal truth that words can only be understood in relation to the circumstances in which they are used" .... I do not think there is any understatement in that statement. McHugh JA made substantially the same point in Manufacturers' Mutual Insurance Ltd v Withers ...

"Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means."

Lord Hoffmann, in a passage adopted by the joint judgment in Marley v Rawlings ..., had said in Kirin-Amgen Inc v Hoechst Marion Roussel Ltd ... that:

"No one has ever made an acontextual statement. There is always some context to any utterance, however meagre."

Secondly, very often, language when considered in its context will have a single, clear meaning. Very often, there is no dispute as to the ordinary grammatical or literal meaning of a sentence, and no dispute that that is the legal meaning. Very often, nothing in the context will come close to displacing the ordinary grammatical meaning of the legal text. "But not always"...

The legal meaning may diverge from its literal or grammatical meaning, especially in the (self-selectingly contestable) cases that reach courts. Words do not have a "natural" meaning that can be determined in isolation. As Lord Hoffmann said in Charter Reinsurance Co Ltd v Fagan ..., approved in Campbell v R ... and Dale v The Queen ...:

"[I]n some cases the notion of words having a natural meaning is not a very helpful one. Because the meaning of words is so sensitive to syntax and context, the natural meaning of words in one sentence may be quite unnatural in another. Thus a statement that words have a particular natural meaning may mean no more than that in many contexts they will have that meaning. In other contexts, their meaning will be different but no less natural."

What is the legal meaning of a promise to sell "my Dürer drawing", if the vendor's wife owns a Dürer drawing which is on display in their home, and the vendor keeps another secretly in his study? What is the meaning of a gift "to my niece Eliza Woodhouse during her life" in a will, if the testator had no such niece, but a grandniece of that name, and another grandniece, who was illegitimate, who lived with him ...? What is the meaning of cl 7 of the Wild Dog Destruction Regulation 1999, which provided "The Wild Dog Destruction Regulation 1994 is repealed"? Contracts, wills and statutes are very different legal texts, to the process of ascertaining whose legal meaning different rules apply, yet all are based on language, and language is unavoidably contextual. If I may repeat what I wrote of the uncertain meaning of the Wild Dog Destruction Regulation in Resolving Conflicts of Laws ... "The meaning of even the seemingly clearest legal text can be unclear, hence the importance of attending to context in the first instance."

For those reasons, to say that a legal text is "clear" reflects the outcome of that process of interpretation. It means that there is nothing in the context which detracts from the ordinary literal meaning. It cannot mean that context can be put to one side; otherwise the three legal texts mentioned in the previous paragraph would be "clear".

Thirdly, I would not regard anything in the foregoing as inconsistent with the passage in Mason J's reasons in Codelfa Construction Pty Ltd v State Rail Authority (NSW) ... (which was the focus of Jireh):

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning."

There is no inconsistency because whether contractual language has a "plain meaning" is (a) a conclusion and (b) a conclusion which cannot be reached until one has had regard to the context. That accords with what was said by Allsop P in Franklins Pty Ltd v Metcash Trading Ltd ...:

"the phrase used by Mason J in Codelfa Construction (at 352) 'if the language is ambiguous or susceptible of more than one meaning' does not mean that the susceptibility of the language to more than one meaning must be assessed without reference to the surrounding circumstances ..."

Mason J was indicating that there are very real limits to the extent to which grammatical meaning can be displaced by contextual considerations. However, in order to determine whether more than one meaning is available, it may be necessary first to turn to the context.

Fourthly, what I have called "context" was formerly described as the "surrounding circumstances", and then, influenced by Lord Wilberforce in decisions such as Prenn v Simmonds ... and Reardon Smith Line Ltd v Yngvar Hansen-Tangen ..., as the "matrix of facts"...

Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society ... referred to a "fundamental change" in the approach espoused by Lord Wilberforce, the "modern" contextual approach had nineteenth century precursors, at least in relation to commercial contracts. Without seeking to be exhaustive, the Earl of Selborne had deprecated and rejected the "extreme literalism" in the mercantile contract construed in McCowan v Baine ... (contrast the (dissenting) speech of Lord Bramwell, who had required "necessity, or [something] approaching to it" in order to displace the "primary and natural meaning of the words"...). To the same effect was Lord Herschell's rejection of a process of construction by reference to dictionary meaning, and insistence that contractual language must be "construed in a business fashion" and "interpreted in the way in which business men would interpret" in Southland Frozen Meat and Produce Export Company Ltd v Nelson Brothers Ltd .... The approach adopted by Lords Selborne and Herschell anticipated what was popularised by Lord Wilberforce in the following century. Professor Carter has examined the evolutionary process at pp 17-20 of his book referred to in the previous paragraph.

Fifthly, the approach endorsed in Woodside avoids the difficulty of identifying what is meant by "ambiguity", itself an ambiguous term, whose perception "differs from one judicial eye to the other"...

Sixthly, the approach to construction of written commercial contracts reflected in Woodside at [35] accords with what had been said in familiar passages in Pacific Carriers Ltd v BNP Paribas ... (construction "requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction"); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd ...] ("The meaning of the terms ... normally requires consideration not only of the text but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction"); and the endorsement in Wilkie v Gordian Runoff Ltd ... of the proposition that "Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure". It means also that the Australian approach mirrors that adopted in England, New Zealand, Singapore and Hong Kong: ...

Seventhly, although evidence of context and purpose expands the scope of the litigation, none of the foregoing should be seen as opening the door to lengthy litigation in commercial causes. As will be seen below, the evidence of "surrounding circumstances" sought to be relied on by Mainteck was lengthy, contested, vague, and divorced - by many months in time, and a markedly different commercial position - from the execution of the Second Consortial Agreement. This makes it quite distinct from evidence which is apt to assist the process of construction. ...

(citations omitted)

251 In Apple and Pear, Tate JA undertook a detailed consideration of the authorities as to the applicability of the ambiguity requirement, declining to follow what her Honour perceived as the conclusion of Leeming JA in Mainteck that evidence of surrounding circumstances was admissible to identify ambiguity.[112] Her Honour said:[113]

With great respect to Leeming JA, the premise upon which his Honour in Mainteck arrived at the view that, following Woodside, evidence of surrounding circumstances, external to the contract, was admissible in the construction of commercial contracts, and in particular, was admissible to raise, and not only to resolve, an ambiguity, is not to be accepted as a prevailing principle given that it was not confirmed by Mount Bruce.

252 Her Honour rejected the assertion that Mount Bruce was authority for the proposition that 'the universal contextual dependence of the meaning of contractual terms ... requires reference to events or circumstances beyond the contract'.[114] Her Honour said:[115]

In my view, it follows from what was said in Mount Bruce that it would be wrong to conclude that the High Court has endorsed an approach to the construction of commercial contracts, whereby the surrounding circumstances, including, relevantly, pre-contractual negotiations, can invariably be relied upon to assist construction. ...

It is not in dispute that this Court must follow the precepts of the High Court. While this Court may, as a matter of judicial comity, extend deference to the observations made by other intermediate appellate courts with respect to their understanding of principles enunciated by the High Court, it is 'bound directly' by what the High Court has said and 'is not bound indirectly by another court's interpretation of what the High Court said'.

(citations omitted)

253 Ferguson and McLeish JJA agreed with Tate JA and stated that the Court was bound to apply the ambiguity gateway requirement, as articulated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW ('Codelfa'),[116] until the High Court said otherwise.[117] However, their Honours did not consider it necessary to address the question of whether surrounding evidence was admissible to identify ambiguity because the issue was not raised on the appeal.[118]

254 Later, in Zhang v ROC Services (NSW) Pty Ltd ('Zhang'),[119] Leeming JA said that there was 'little to be gained from analysing the [reasoning of Tate JA in Apple and Pear]' in any detail because no reference was made in her Honour's reasons to Victoria v Tatts Group Ltd ('Tatts Group').[120] In his Honour's opinion, the High Court in Tatts Group clarified that the true rule did not include an ambiguity requirement.[121]

255 Riordan J in Siemens was not persuaded that Tatts Group impacted the reasoning of Tate JA in Apple and Pear,[122] and concluded therefore that the gateway of ambiguity remains as a precondition to the acceptance of evidence of surrounding circumstances.

256 In circumstances where the Court of Appeal has reaffirmed that position, I am bound to follow such an approach. Moreover, the question of whether there is a need to reconcile receipt of evidence of surrounding circumstances for the purposes of identifying the genesis of the transaction and the background, the context and the market on the one hand, and the restriction on the receipt of evidence of surrounding circumstances absent ambiguity is not a matter that I need concern myself with in this case.

257 GTW did not articulate how the application of the reasoning in Mainteck, as opposed to Apple and Pear, impacted on the outcome of the interpretative process in the instant case.

Is the Guarantee Arrangement a contract of suretyship?

258 What is more controversial between the parties is whether this general approach to interpretation as summarised in Siemens, is subject to an additional requirement that any ambiguous provisions be construed in favour of GTW. Such an interpretative approach is urged by GTW in its submission that the Guarantee Arrangement is, as the name suggests, an arrangement in which GTW is a guarantor and which attracts the operation of the interpretive principle of strictissimi juris.

259 GTW relies on the well-established principles referred to by the High Court in Ankar,[123] and later Andar Transport Pty Ltd v Brambles Ltd ('Andar'),[124] that the liability of a guarantor is strictissimi juris and that contractual provisions which are ambiguous must be construed in favour of the guarantor. As the High Court stated in Ankar:[125]

At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety and so the provision should be interpreted as a condition, or perhaps as an innominate term, instead of a mere warranty. If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety's obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach.

260 This passage was later endorsed by the High Court in Andar.[126] In that case the High Court held that the principles in Ankar also applied to the construction of indemnity clauses which carried the necessary features of suretyship.

261 Later, in Bofinger v Kingsway Group Ltd,[127] the High Court said at [53]:[128]

The settled principle in Australia governing the interpretation of contracts of guarantee and indemnity has been stated by this Court in authorities the most recent of which is found in the joint reasons in Andar Transport Pty Ltd v Brambles Ltd. The principle is that a doubt as to the construction of a provision in such a contract should be resolved in favour of the surety or indemnifier. It is implicit in this that the doubt may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application.

262 Specifically, GTW draws attention to the decision of the Court of Appeal in New South Wales in Tricontinental Corporation Ltd v HDFI Ltd ('Tricontinental').[129] In that case, the Court considered conditions precedent to a guarantee and the majority found that strict compliance with such conditions was necessary. As there had not been strict compliance with certain notice provisions, the obligations on the guarantor in that case did not arise.

263 As Kirby P sitting in the Court of Appeal in New South Wales stated in Tricontinental:[130]

Most legal systems have regarded the surety as a favoured debtor ... The common law has traditionally demonstrated a solicitude to the surety because the surety typically accepts a dangerous obligation depending on the defaults of others, and usually assumes the obligations gratuitously. Originally the surety was typically a friend or relative of the principal, lending the surety's credit to the principal without compensation for doing so. This is often the case still. A variety of defences were developed by the law to an action on the contract or bond of suretyship designed to protect the surety. Equity would assure the surety relief by enjoining an action at law where a principal had deviated in the subsisting obligation without the surety's assent .... It was the very precariousness of the position of the typical surety which led courts of equity to seek ways to free the surety from liability considered unjust. Such solicitude produced the doctrine of strictissimi juris by which the surety could escape liability if some provision in the contract had not been strictly complied with.

264 GTW also referred to the reasons of Waddell AJA:[131]

The clear commercial purpose of the provisions is to provide a mechanism whereby the liability on the part of HDFI can be established in a way which is unambiguous and certain. It is essential in commercial dealings that provisions of this kind should be applied strictly so that parties know exactly where they stand. HDFI was obviously in the business of providing financial support of various kinds and could not carry on its business effectively if it did not know from day to day what were its liabilities.

265 Pacreef did not in terms take issue with the proposition that the strictissimi juris principle applied when interpreting a contract which involved a relationship of suretyship. Rather, its primary submission is that that upon its proper analysis the Guarantee Arrangement is, despite its name, not a relationship of suretyship in the traditional sense. Rather, Pacreef submits that the Guarantee Arrangement has a twofold character, namely:

(a) first, it is a contract for the subscription by GTW for the Subscription Shares at the Subscription Price (that is, $15 million for 15 million ordinary shares in Pac Bio) conditional upon, amongst other things, the issuing of a redemption notice by Pacreef;

(b) secondly, as an agreement to provide options to GTW to purchase the initial option shares and the subsequent option shares.

266 Pacreef submits that the Guarantee Arrangement obliged GTW, in the events set out in clause 2.1(a) to (c), to pay the Subscription Price to Pac Bio. It submits that this creates a relationship of debtor and creditor between GTW and Pac Bio, which is to be contrasted to the separate obligation that Pac Bio has to Pacreef under the Subscription Agreement to pay $1 for each of the 15 million A Class Shares it holds. Pacreef further argued that, in contrast to the usual suretyship relationship, GTW does not discharge a liability of Pac Bio under the Guarantee Arrangement. Nor, so Pacreef submits, would GTW be entitled to an indemnity from Pac Bio as the principal debtor upon GTW's performance of the obligation imposed upon it under clause 3.1(a)(ii) of the Guarantee Arrangement.

267 GTW's submission that the process of construction should proceed strictissimi juris rests on the proposition that the Guarantee Arrangement is a contract of suretyship and exhibits the necessary features of such a contract. GTW points to recital 2 of the Guarantee Arrangement which states 'GTW has agreed to guarantee any capital raising by Pacific Bio to satisfy any redemption of the A Class shares by Pacreef on the terms and conditions of the deed', and further points to clause 2.1(b) of the Guarantee Arrangement, which conditions GTW's obligations on the failure of Pac Bio to raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary shares in Pac Bio, carried out for the purpose of satisfying the Redemption Request within three days after the date of the Redemption Request.

268 In order to assess the validity of this submission, it is necessary to have regard to the essential features of suretyship. As Phillips, O'Donovan and Courtney state in The Modern Contract of Guarantee:[132]

A consistent thread of principle linking the threefold classification of Lord Selborne in Duncan Fox & Co v North and South Wales Bank (1880) LR 6 App Cas 1 and other authorities defining the nature of a guarantee is that surety exists where there is a primary and second liability for the same debt, with the party who is secondarily liable having a right of reimbursement from the primary obligor.

(underline added).

269 Thus, in order for the Guarantee Arrangement to be a contract of suretyship, GTW and Pac Bio must be liable for the same debt (with GTW's liability being secondary) and it must be so that if GTW satisfies that debt, GTW will have a right of reimbursement from Pac Bio.

270 It is at this point that GTW's argument confronts difficulty. Whilst it is true that the Guarantee Arrangement provides for the direct payment by GTW to Pacreef of an amount equal to the amount payable by Pac Bio to Pacreef on redemption of the A Class Shares, it is quite clear that this payment by GTW is not a payment in discharge of the debt owed by Pac Bio to Pacreef, but rather is a payment by GTW of the Subscription Price for the Subscription Shares. So much follows from clauses 3.1(a) and (b) of the Guarantee Arrangement. That payment creates both a source of funds enabling Pac Bio to effect the payment to Pacreef of the amount due to it and facilitates the redemption occurring in accordance with the Terms of Issue of the A Class Shares, which in turn reflect s 254K of the Corporations Act.

271 In other words, the payment by GTW of the Subscription Price is not a payment to Pacreef which extinguishes Pac Bio's obligation to pay a specific debt to Pacreef. Rather, it is payment by GTW to Pac Bio by way of subscription for shares which facilitates the lawful redemption by Pac Bio of the A Class Shares. The facilitation of direct payment in clause 3(c) of the Guarantee Arrangement is simply a mechanical provision, imposed in the circumstances for the convenience of the parties.

272 Moreover, and in any event, the second key feature of the suretyship arrangement, the right of reimbursement that the guarantor has against the principal, also does not arise. The making of the payment by GTW of the Subscription Price, though it facilitates the redemption by Pac Bio of the A Class Shares, does not confer any right of reimbursement on GTW from Pac Bio. Indeed, GTW receives ordinary shares in consideration for its payment to Pac Bio.

273 The relationship set out in the Guarantee Arrangement is in the nature of a conditional subscription agreement; that is to say, under the conditions set out in clause 2.1, GTW is required to subscribe for shares in Pac Bio and pay the Subscription Price accordingly. Upon the receipt of this amount and the simultaneous issue of the Subscription Shares, Pacreef is then able to redeem the A Class Shares as contemplated by the Terms of Issue and in compliance with s 254K of the Corporations Act. The obligations of Pac Bio under the Subscription Agreement and those of GTW under the Guarantee Arrangement are related, but they do not constitute a primary and secondary liability for payment of the same debt. Accordingly, the relationship is not a suretyship.

274 Against this, GTW understandably points to the designation of the agreement as a 'Guarantee Arrangement', but this is far from decisive; in many cases courts have held contracts described by the parties as guarantees to be indemnities.[133] In Phoenix Assurance Co Ltd v Wren,[134] the contract was held to be one of insurance, although it was expressed to be a bond for the payment of an entertainment tax. In other cases, contracts described as guarantees have been held to be warranties.[135] It is a question of fact in each case whether the relevant contract is a guarantee,[136] and the Court examines the substance of the arrangement, not its form.[137] In the result, the substance of the Guarantee Arrangement is not that of a guarantee in law. Accordingly the strictissimi juris principle has no application to the proper interpretation of the Guarantee Arrangement.

275 Having determined the applicable interpretative principles, I turn now to the construction and application to the facts of the individual conditions precedent.

276 Clause 2.1 of the Guarantee Arrangement, headed 'Conditions Precedent to Obligations under this Deed', reads:

The obligations of GTW under clause 3 of this deed are conditional only on:

(a) Pacreef giving notice to MBD to redeem the A Class shares in or substantially in accordance with the Subscription Agreement (redemption request);

(b) MBD does not raise all of the capital required to satisfy the redemption request from a new issue of fully paid ordinary shares in MBD carried out for the purposes of satisfying the redemption request within three months of the date of the redemption request; and

(c) no Insolvency Event subsists in respect of MBD as at the date the A Class shares are to be redeemed in accordance with the Subscription Agreement.

277 As mentioned above, GTW submits that it was only required to subscribe for and accept the issue of up to 15 million shares[138] if:

(a) a capital raise had in fact been undertaken or attempted by Pac Bio for the purpose of satisfying the redemption of the A Class Shares, pursuant to clause 2.1(b) (that is, the Capital Raise Issue);

(b) the board had resolved that no Insolvency Event subsisted as at the relevant Solvency Date (that is, the Insolvency Declaration Issue) and

(c) there was in fact no Insolvency Event as at the Solvency Date (that is, the Insolvency Event Issue).

278 Pacreef submits that clause 2.1 of the Guarantee Arrangement is clear and unambiguous. Similarly, Pacreef submits in respect of the Insolvency Declaration Issue that there is no condition precedent set out in the Guarantee Arrangement which requires the passage of a resolution by Pac Bio's board that no Insolvency Event subsisted as at any Solvency Date.

279 Relevantly, Pacreef also argues that, assuming GTW's obligations only arose if a capital raise was in fact undertaken or attempted by Pac Bio for the purposes of satisfying the redemption of the A Class Shares, then GTW, Pac Bio and Pacreef had agreed in clause 9.5 of the Implementation Deed that the Proposed Recapitalisation would be treated as a new issue of fully paid ordinary shares in Pac Bio carried out for the purposes of satisfying any redemption request for the purpose of clause 2.1 of the Guarantee Arrangement. Accordingly, even if the recapitalisation following the Implementation Deed did not result in the issue of new ordinary shares sufficient to redeem all of the A Class Shares, the conditions set out clause 2.1(b) of the Guarantee Arrangement would be nonetheless satisfied.

280 In what follows, I turn first to the Capital Raise Issue - that is, whether, as a matter of the proper construction of the Guarantee Arrangement, clause 2.1(b) in fact required a capital raise to be undertaken or attempted by Pac Bio for the purposes of satisfying the redemption of the A Class shares; and if so, whether a capital raise to that effect was in fact undertaken or attempted by Pac Bio. I then consider the Insolvency Declaration Issue - whether it is a necessary precondition for GTW's liability under clause 3.1 that the board of Pacreef to resolve that no Insolvency Event subsisted as at the Solvency Date. Lastly, I will consider the Insolvency Event Issue, identifying the applicable Solvency Date and then determining whether an Insolvency Event in fact subsisted at that date.

281 GTW relies upon the recitals to the Guarantee Arrangement in support of its submission that a capital raise must have been undertaken by Pac Bio to satisfy the redemption of the A Class Shares in order for GTW's liability to arise. Recital 2 to the Guarantee Arrangement reads:

GTW has agreed to guarantee any capital raising by MBD to satisfy any redemption of the A Class Shares by Pacreef on the terms and conditions of this deed.

282 Recitals may be prayed in aid of interpretation only if the recital is capable of being read consistently with the operative part of the contract.[139] Where the words in the operative part of the contract are clear and unambiguous, they cannot be controlled by the recitals.[140]

283 The position was succinctly stated by Lord Esher MR in Ex p Dawes; Re Moon:[141]

Now there are three rules applicable to the construction of such an instrument. If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous, and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred.

284 The principal problem which confronts GTW's submission is the use of the word 'only' in the chapeau to clause 2.1 of the Guarantee Arrangement: relevantly, GTW's obligations are expressed to be conditional only on the conditions precedent in that clause, including condition (b), that:

MDB does not raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary shares in MBD carried out for the purpose of satisfying the Redemption Request within 3 months after the date of the Redemption Request ...

285 Thus, the objective fact that Pac Bio did not raise the requisite capital is a condition of GTW's liability under the Guarantee Arrangement. On a proper construction of clause 2.1, it does not matter how it arose that the requisite capital was not raised.

286 In my view, the wording of clause 2.1(b) is clear and unambiguous. GTW's submission would require the addition of a new event, namely that Pac Bio actively undertake a capital raise for the purposes of satisfying the redemption request. There is no support in the text of clause 2.1 to construe that clause as requiring this additional event to take place. This is particularly so where the chapeau to that clause exhaustively defines the conditions upon which GTW's liability was to arise.

287 Moreover, in arguing that the proper construction of clause 2.1(b) only enlivens GTW's obligation if a capital raise was actively undertaken by Pac Bio, what GTW is in fact attempting to do is not to urge a construction of that clause, but rather to imply a further term into the contract.

288 Whilst the processes of construction and implication of terms are closely linked, as a matter of legal analysis they must be kept separate.[142] In an Australian context, in Gordon & Gotch Australia Pty Ltd v Horwitz Publications Pty Ltd,[143] Allsop P and Sackville AJA in the Court of Appeal of New South Wales said:[144]

That interpretation can shade into implication and, indeed, that both may perhaps be seen as part of the one process of the construction of words in a document to identify linguistic and legal meaning can be accepted. However, the distinction between interpretation and implication of terms is recognised (even if the limits of each are not capable of clear definition).

289 If the relevant question is regarded as one of the implication of a further term, and not merely as a question of the interpretation of the words in the Guarantee Arrangement, then GTW's submission must confront the test set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings ('BP Refinery'):[145]

For a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

290 In my view, the chapeau to clause 2.1 precludes the submission that a term should be implied to the effect that the obligation on GTW only arose if a capital raise was actively undertaken or attempted by Pac Bio for the purpose of satisfying the redemption of the A Class Shares. As mentioned above, the chapeau expressly specified that GTW's obligations would be conditional only on the three events there set out. It has the effect of making clause 2.1 an exhaustive list of the conditions precedent to GTW's obligations. Moreover, the proposed additional requirement would not satisfy the second element in the BP Refinery test: that is, it is not necessary to imply that term in order to give business efficacy to the contract.[146] The contract is effective without the further term.

291 Accordingly, I do not accept that the Guarantee Arrangement, either on the proper construction of clause 2.1(b) or by necessary implication, required Pac Bio to undertake a capital raising for the purpose of satisfying the redemption of the A Class Shares.

292 If I am wrong in that conclusion, and in any event because the matter was fully argued, I will consider the question of whether a capital raising was in fact undertaken or attempted by Pac Bio for the purposes of satisfying the Redemption Request.

293 Given that on Pacreef's case GTW's obligations arose on 7 April 2019, I will confine my examination of the activities of Pac Bio to the period from 7 January 2019 to 7 April 2019. However, in order to understand the activities carried out during that period in their proper context, it is convenient to have regard to matters which occurred from about December 2018 onwards.

294 On 7 December 2019, Mr Bastounas sent an email to board members which advised of the need to convene a board meeting for the purposes of, among other things, introducing the board members to Mr Collett from Greenhill. Subsequently, on 18 December 2018 the members of the board received a document entitled 'Strategic Plan Update'. The strategic plan update referred to the Proposed Recapitalisation and a related opportunity to acquire APF, as well as to expand the Ayr facility. The update noted Pac Bio's previous intention to raise approximately $91 million of capital under the strategic plan 'Mark I', which would comprise some $77 million in new capital, both equity and debt, and $13.5 million of convertible notes being converted to ordinary shares.

295 The Mark I strategy anticipated the following allocation of the $91.3 million:

(i) repay the $5 million owed to Pacreef under the Vendor Finance Deeds;

(ii) repay $5.4 million in convertible notes owed to Friday Investments and Blenheim; and

(iii) to fund $7.1 million in initial capital expenditure on expansion of the Guthalungra facility;

(b) to use $60.2 million in new equity capital to:

(iv) to fund $25.1 million for the redemption of both the A Class Shares and the B Class Shares;

(v) to fund $28.8 million in capital expenditure on the expansion of the Guthalungra facility; and

(vi) to repay $6.4 million under the GTW Facility Arrangement;

(c) to convert $13.5 million in convertible notes to ordinary shares at the rights issue price; that is:

(vii) $2.8 million in convertible notes held by Hub & Spokes;

(viii) $2.8 million in convertible notes held by Galexer; and

(ix) $7.9 million in convertible notes held by GTW.

296 Within the equity capital proposed to be raised, the Mark I strategy contemplated that the redemption of the A Class Shares and B Class Shares would take place by way of a proposed placement to cornerstone investors; while the Guthalungra capital expenditure and the repayment of the GTW Facility Agreement was to occur by way of the proposed rights issue.

297 On the next page of the strategic plan update, the new strategy, 'Mark II', was set out. The Mark II strategy involved a growth plan for the business which required significantly less upfront capital. Greenhill considered that this would significantly 'derisk' the recapitalisation. The Mark II strategy anticipated the raising of two pools of capital, totalling some $78.7 million.

298 The first pool of $46.3 million was to be raised from the following sources:

(a) $15 million be raised from a strategic investor by way of a debt facility;

(b) $25 million be raised by a cornerstone investor as equity; and

(c) $6.3 million be raised under what was described as an 'APF project-level debt facility'.

(d) $8.5 million to repay the Friday and Blenheim convertible notes;

(e) $21 million be used for the APF purchase price and 'Stage 1 Expansion';

(f) $15 million be used for the redemption of the A Class Shares; and

(g) $1.8 million be used to repay interest owed on the A Class Shares and the convertible notes.

299 The second pool of $32.4 million was to be raised from the following sources:

(a) $1.4 million, again to be raised under a 'APF project-level debt facility';

(b) $13.5 million to be raised by way of the conversion of the convertible notes to ordinary shares; and

(c) $17.6 million to be raised by way of a rights issue, in respect of which it was noted that GTW had committed to underwrite $15 million.

This $32.4 million component was earmarked as follows:

(d) $4.5 million for stage 2 of the APF expansion;

(e) $13.5 to repay the remaining convertible notes (presumably, the 'raising' of $13.5 million through conversion of the convertible notes and the 'repayment' of $13.5 million of convertible notes where two ways of referring to the same process);

(f) $6.4 million to repay the GTW Facility Agreement; and

(g) $8 million to be used to redeem the B Class Shares (as to $8 million).

300 Prior to the board meeting on 21 December 2018, the board members received a document prepared by Greenhill headed 'Project Poseidon - Discussion Materials'. Greenhill identified a set of preliminary recommendations in relation to the structure of the Proposed Recapitalisation, including testing multiple sources of funding, seeking early investors, and pursuing a rights issue to the extent possible alongside a broader equity raising to be conducted in parallel. This iteration of the Project Poseidon strategy contained no express reference to the redemption of the A Class Shares or B Class Shares, which were presumably treated as part of the non-CBA debt.

301 The minutes of the board meeting held 21 December 2018 note, under the heading 'Equity and recapitalisation project', that a presentation was made by Greenhill which referred to, among other things, a desire to seek an extension of the Implementation Deed. The meeting culminated in the board resolving:

to continue working with Greenhill on the recapitalisation plan based upon board approval of the strategic plan and financial modelling.

302 On 17 January 2019, Pac Bio's management prepared a document entitled 'Pacific Bio Technologies - Recapitalisation Update'. This document set out the current focus of the Mark II Strategy, which again included reference to the APF acquisition opportunity and the Ayr expansion. The Recapitalisation Update outlined a two step Proposed Recapitalisation process in terms not dissimilar to that which appeared in the version dated 14 December 2018.

303 Step 1, the 'Strategic Investor Process' (the investors Tiverton and CEFC were identified) outlined an intention to raise $48.8 million in the form of:

(a) $25 million from a cornerstone equity investor;

(b) $17.5 million from a 'Strategic Debt Investor' by way of convertible notes or debt instruments; and

(c) $6.3 million which would be raised in an 'APF project-level debt facility'.

304 That $48.8 million was then earmarked as follows:

(a) $3.5 million to repay the Vendor Finance Deeds;

(b) $5.5 million to repay the Friday Investments and Blenheim convertible notes;

(c) $21 million for the APF purchase price and the 'Stage 1 Expansion';

(d) $16.2 million towards the redemption of the A Class Shares; and

(e) $2.7 million for working capital and transaction costs.

305 Step 2, the 'Rights Issue Process (or Potential IPO)' outlined an intention to raise $32.7 million in the form of:

(a) $25.7 million from a rights issue, in respect of which GTW had agreed to underwrite $15 million;

(b) $5.6 million from conversion of convertible notes; and

(c) $1.4 million to be raised in an 'APF project- level debt facility'.

(a) $4.5 million for the 'APF Expansion Stage 2';

(b) $8.6 million for redemption of the B Class Shares;

(c) $6 million for repayment of the GTW Facility Agreement;

(d) $7.9 million for repayment of the GTW Convertible Notes; and

(e) $5.6 million in repayment (that is, in conversion) of the remaining convertible notes.

307 Prior to the board meeting to be held on 22 January 2019, the board members received a document titled 'Recapitalisation Strategy - Update', apparently prepared by Greenhill. The document set out two key options for raising capital:

(a) a private option, which would raise funds from new investors via a share placement and from existing investors through a rights issue using a prospectus, and which option was anticipated to take four months; and

(b) a public option, which would raise funds from a listing of Pac Bio on the ASX and a new share issue, and which option was anticipated to take four to six months.

308 A section of the paper headed 'Strategy and Progress Update' went on to set out management's current thinking in relation to the strategy for the Proposed Recapitalisation, again not dissimilar to the earlier versions. It contemplated the raising of a total of $78.1 million in the form of:

(a) $50 million from two cornerstone equity investors; and

(b) $28.1 million by way of the conversion of the B Class Shares, the GTW Convertible Notes and the Hub & Spokes and Galexer convertible notes.

309 This $78.1 million would then be deployed as follows:

(a) $24.8 million for expansion, including the acquisition of APF;

(b) $3.5 million for the repayment of the Vendor Finance Deeds;

(c) $5.5 million for the repayment of the Friday Investments and Blenheim convertible notes;

(d) $16.2 million for the redemption of the A Class Shares; and

(e) $28.1 million for the repayment of the GTW Convertible Notes, and the Hub & Spokes and Galexer convertible notes (that is, 'repayment' by their conversion to ordinary shares).

310 At the meeting of the board held on 22 January 2019, the board minutes record a detailed presentation from Greenhill of a proposal for a 'multi-prong' strategy involving both public and private funding options, which would provide the opportunity for Pac Bio to proceed to an IPO in six to 12 months' time. The minutes further record the identification of Tsing as a potential cornerstone investor, and record that Tsing was considering a $25 million investment in consideration for up to a 35% shareholding in Pac Bio.

Greenhill, in association with Arne Dimpfel, to finalise the debt/equity model and investment strategy before finalising a Term Sheet for each potential co-investor...

The minutes also record that Mr Wood confirmed he was committed to underwrite $15 million of a proposed $30 million rights issue.

312 On 14 February 2019, Greenhill prepared a document headed 'Recapitalisation Structure and Key Terms'. The key proposed elements of the Proposed Recapitalisation strategy included a new equity investment by a cornerstone investor, the replacement of some short term debt with longer term debt, a rights issue and the proposed acquisition of APF. Again, in a similar manner to that outlined previously, the document contemplated the deployment of the capital raised in this way for the redemption of the A Class Shares; the redemption of the B Class Shares; the repayment of the Vendor Finance Deeds; the repayment of the GTW Facility Agreement; and the repayment of the remaining convertible notes, including the GTW Convertible Notes.

313 On 19 February 2019, the board members received a document titled 'Poseidon Strategy Update FINAL', ahead of the board meeting scheduled to take place on 20 February 2019. The paper encompassed both a document headed 'Recapitalisation Strategy - Update', apparently prepared by Pac Bio itself, as well as a document prepared by Greenhill titled 'Recapitalisation Structure and Key Terms'. The Recapitalisation Strategy prepared by Pac Bio, among other things:

(a) contemplated the establishment of a due diligence committee which would ensure the accuracy and completeness of a proposed prospectus;

(b) modelled the projected earnings of Pac Bio before interest, tax, depreciation and amortisation ('EBITDA') over an eight year period associated with the implementation of that strategic plan; Relevantly, the strategic plan projected:

(i) an EBITDA of $1.6 million for the financial year ending 2019;

(ii) an EBITDA of $4.1 million for the financial year ending2020;

(iii) a substantially increased EBITDA of $21.3 million for the financial year 2022.

(c) noted a need to raise $80-$85 million of new capital, which would be deployed as to:

(iv) $19 million to finance the acquisition of APF;

(v) $53 million to redeem the A Class Shares and B Class Shares and to repay the GTW Facility Agreement and all convertible notes; and

(vi) a further $8 million for working capital and transaction costs.

314 The Greenhill Recapitalisation Structure summarised the key terms for each element of the Proposed Recapitalisation, described as designed to satisfy the need to replace or refinance existing short term debt and to fund key strategic initiatives. The Greenhill paper outlined the proposed elements of the recapitalisation as including a new equity investment by cornerstone investors, the replacement of some short term debt with longer term debt, and a rights issue. Again, the document set out the size and elements of the proposed capital expansion and the use of the funds so raised, which relevantly included, as before, the redemption of the A Class Shares and B Class Shares, the repayment of the GTW Facility Agreement, and the repayment of the convertible notes. GTW's underwriting commitment in respect of the rights issue was described as a potential source of underwriting along with Pacreef as a potential source of underwriting as to $8.6 million.

315 Similarly, in advance of the March 2019 board meeting, the directors received a document entitled 'Project Poseidon - Board Materials', a document which set out a timeline scheduled to commence in about mid-March 2019 and to conclude at the end of June 2019. The prospective cornerstone investors were identified as including Tiverton, Tsing, the CEFC and a third unidentified strategic investor. The respective target investments from those cornerstone investors was:

(a) Tiverton as to $25 million;

(b) Tsing as to $15 million;

(c) CEFC as to $17.5 million; and

(d) the third strategic investor as to $10-25 million.

316 Again, the recapitalisation strategy contemplated the redemption of the A Class Shares, the B Class Shares, the repayment of the GTW Facility Agreement, and the repayment of the remaining convertible notes.

317 At the board meeting held on 20 March 2019, the minutes record the making of a presentation by Greenhill and note as action items that the board was to agree the composition of the due diligence committee, and for Greenhill to schedule its first meeting in the last week of March 2019. The minutes record that the Proposed Recapitalisation process had been focused on retiring debt created by the previous board and management, and that this had been an issue for investors that required careful management. The minutes further record that the cornerstone investors required confirmation that the debt retirement and funding would be completed, resulting in the need to reset the company's balance sheet. Under the subheading 'Rights issue planning', the minutes record the establishment of the due diligence committee and identified the relevant members noting, among other things, the need to establish the intentions of existing debtholders given the Implementation Deed was to expire on 31 March 2019. In relation to section 8 of the minutes headed 'Cashflow Projections and Funding Position', the notes record the anticipated completion of negotiations with the cornerstone investors by the end of March, with funding to be received by the end of April 2019.

318 The above reveals a concerted effort by Pac Bio in the period from at least 7 January 2019 to 7 April 2019 to design and then implement a capital fundraising strategy, the successful implementation of which would, among other things, effect the redemption of the A Class Shares. Whilst it is true that the strategy did not in terms earmark that those who would provide the necessary capital to redeem the A Class Shares would themselves receive a new issue of shares, it defies credulity to suggest that the members of the board did not intend that those who provided the new capital would receive shares to facilitate the redemption of the A Class Shares in a manner which maintained the company's capital. Each of board members owed fiduciary and statutory obligations to the company and must be taken to have been aware of the fact that the redemption could occur only out of the issuance of new shares.

319 GTW's submission therefore must rest upon the proposition that compliance with clause 2.1(b) could only be achieved if the clause required a singular capital raise, to be undertaken solely for the purpose of satisfying the redemption of the A Class Shares and which was not part of a broader capital raise.

320 In my view, there is nothing in the Guarantee Arrangement which would require a singular and sole purpose capital raising to be undertaken by Pac Bio for GTW's obligations under the Guarantee Arrangement to arise. To the extent to which that argument finds any support in the Guarantee Arrangement (which it does not), then in my view clause 3.1(d) would preserve GTW's liability in any event.

321 It should be noted that Mr Wood was a director of Pac Bio at all relevant times, including at the time in which the directors unanimously appeared to endorse the Proposed Recapitalisation strategy. Moreover, GTW was to benefit from such a strategy, including because its successful implementation (which was anticipated to occur by the end of April 2019) would mean that GTW would not have to subscribe for the subscription shares at a price of $1 per share under the Guarantee Arrangement, but could instead participate in the mooted rights issue at an anticipated lower price.[147] The entire strategy was aimed at restructuring Pac Bio's balance sheet by retiring a large amount of its debt, converting other debt to equity, and growing its business with the aim of enhancing the value of the shares then held by its shareholders, including GTW. Further, under the Proposed Recapitalisation the GTW Convertible Notes were to be either paid out or converted to equity, and the GTW Facility Agreement was also to be repaid.

322 In my view, GTW's submission that Pac Bio did not, for the purposes of 3.1(b), attempt a capital raise sufficient to satisfy the redemption request from a new issue of fully paid ordinary shares carried out for the purpose of satisfying the redemption request is without substance.

323 In that event, it is not strictly necessary for me to consider the further argument advanced by Pacreef as to clause 9.5 of the Implementation Deed. Again, because the matter was fully argued and in case I am wrong with respect to my earlier conclusions, I will consider it briefly.

Was a capital raise deemed to have occurred by agreement between the parties?

324 Pacreef argues that by the terms of clause 9.5 of the Implementation Deed the parties to that deed (which relevantly included Pac Bio, GTW and Pacreef) agreed that the Proposed Recapitalisation[148] (as opposed to the actual issuance of shares) would be treated as a new issue of fully paid ordinary shares in Pac Bio carried out for the purposes of satisfying the redemption request for the purpose of clause 2.1 of the GTW Guarantee Arrangement.

9.5 Proposed recapitalisation is a new issue of shares

The parties each acknowledge and agree that the Proposed Recapitalisation is to be treated as a new issue of fully paid ordinary shares in MBD Industries carried out for the purpose of satisfying a redemption request for the purposes of clause 2.1 of the GTW Guarantee Agreement, such that, if the Proposed Recapitalisation results in the issue of new ordinary shares sufficient to redeem all of the A Class Shares, the condition set out at clause 2.1(b) of the GTW Guarantee Agreement will not be satisfied (such that the obligations under clause 3 of the GTW Guarantee Agreement will have no effect)

326 The Implementation Deed defines 'Proposed Recapitalisation' to mean:

one or more issue(s) of securities in MBD proposed to be undertaken prior to the End Date, as contemplated in clauses 3.3(c), 3.4 ('Amount to be raised under the Proposed Recapitalisation'), and 3.5 ('Notification regarding completion of the Proposed Recapitalisation') the terms of which are to be determined by MBD Industries.

(underline added)

The End Date under the Implementation Deed was 5:00pm on 31 March 2019, or such later date as might be agreed in writing by all parties.

327 The Implementation Deed also contemplated that the 7 July 2018 Redemption Notice would be of no force and effect.[149] The Implementation Deed did however plainly contemplate that a further redemption notice could be given after 5:00pm on 31 December 2018, which was evidently before the completion of the Proposed Recapitalisation and necessarily before the earliest End Date of 5:00pm on 31 March 2019.

328 Clause 12 is headed 'Consequences if Proposed Recapitalisation has not occurred by the End Date'. Subclause 12.2 provides that:

if completion of the Proposed Recapitalisation has not occurred by the End Date, the remaining provisions of the document remain in full force and effect.

Clause 12.3 provides that that if the Proposed Recapitalisation has not occurred by the End Date, all rights under any 'Relevant Document' (defined to include the Guarantee Arrangement) would be unaffected.

329 It is not in dispute that the condition in clause 2.1(b) of the Guarantee Arrangement would not have been satisfied had the Proposed Recapitalisation resulted in the issue of new ordinary shares and an associated raising of funds sufficient to facilitate the redemption of the A Class Shares. Pacreef argues that the converse is also true; that is, that the parties must be taken to have agreed that the condition would also be satisfied if the Proposed Recapitalisation did not result in the issue of new ordinary shares sufficient to redeem all of the A Class Shares. Pacreef submits that clause 9.5 can therefore be read as follows:

The parties each acknowledge and agree that the Proposed Recapitalisation is to be treated as a new issue of fully paid ordinary shares in MBD Industries carried out for the purpose of satisfying a redemption request for the purposes of clause 2.1 of the GTW Guarantee Agreement, such that, if the Proposed Recapitalisation does not result in the issue of new ordinary shares sufficient to redeem all of the A Class Shares, the condition set out at clause 2.1(b) of the GTW Guarantee Agreement will not be satisfied (such that the obligations under clause 3 of the GTW Guarantee Agreement will have no effect).

(additions in underline; deletions in strikethrough)

330 GTW argues that it is not possible to divorce the first part of clause 9.5 from the latter part; that is, the portion which reads:

such that, if the proposed recapitalisation results in the issue of new ordinary shares sufficient to redeem all of the A Class shares, the conditions set out at clause 2.1(b) of the GTW Guarantee Agreement will not be satisfied (such that the obligations under clause 3 of the GTW Guarantee Agreement will have no effect).

That is, on GTW's submission clause 9.5 cannot be treated as an unqualified acknowledgment that the Proposed Recapitalisation is to be treated as satisfying the condition in clause 2.1(b). Rather, it is a restricted acknowledgement that the Proposed Capitalisation, if and only if it is successful, is to be treated as satisfying the condition in clause 2.1(b).

331 Accordingly, GTW argues that clause 9.5 only has operative effect if there is an issue of new ordinary shares sufficient to redeem all of the A Class Shares. Importantly, it argues that it does not apply or have effect in the converse circumstance where the proposed recapitalisation does not result in an issue of new ordinary shares sufficient to redeem all of the A Class Shares.

332 I was initially sceptical of Pacreef's submission in reply, but on further reflection it has some merit. Pacreef notes that the Implementation Deed allows for the service of a further redemption notice after 31 December 2018, and that the reference in clause 9.5 to the redemption request to be satisfied could not have referred to the 2018 Redemption Notice (as that notice had been agreed to be of no force and effect). Pacreef therefore submits that the reference to redemption notice in clause 9.5 must be taken to refer to a redemption notice to be served after 31 December 2018, and further that the Proposed Recapitalisation may or may not have been completed prior to the End Date. It therefore argues that the parties must be taken to have agreed that in the event that Pacreef served a further redemption notice after 31 December 2018, the Proposed Recapitalisation would constitute Pac Bio's attempt to raise capital within the meaning of clause 2.1(b).

333 Although I have not found this a particularly easy question to resolve, on balance, I accept GTW's submission. Clause 9.5 does not enable the words commencing 'such that' to be ignored or that the clause may be read to address a different circumstance.

334 It appears to me that the purpose of clause 9.5 is twofold:

(a) first, assuming that the Proposed Recapitalisation resulted in sufficient shares to redeem the A Class Shares, then the A Class Shares would be able to be redeemed without the service of a further redemption notice; and

(b) secondly, that GTW's obligations under the Guarantee Arrangement would not be enlivened if Pac Bio raised sufficient ordinary shares as part of the Proposed Recapitalisation, but for whatever reason did not utilise the money raised from the issue of such new ordinary shares to redeem Pacreef's A Class Shares.

335 Notwithstanding that I accept GTW's submission in that respect, for the reasons set out above I otherwise consider that GTW's submission that the condition set out in clause 2.1(b) of the Guarantee Arrangement was not satisfied lacks merit and is rejected.

336 That leaves for consideration the Insolvency Declaration Issue and the Insolvency Event Issue.

337 For the same reasons and on the same principles of construction outlined at [280]-[291] above, I do not accept GTW's submission that clause 2.1(c) required the board of Pac Bio to pass a resolution that no Insolvency Event subsisted as at the solvency date. On its proper construction clause 2.1(c) does not require such a resolution; nor is a term requiring such a resolution to be implied. In short, GTW's submission requires the addition of a fourth condition which does not appear in, and is contrary to, clause 2.1.

The Insolvency Event Issue and the Solvency Date Issue

338 GTW argues that its obligations under the Guarantee Arrangement were not enlivened, as:

(a) firstly, the 'date the A Class Shares are to be redeemed in accordance with the Subscription Agreement', as referred to in clause 2.1(c) of the Guarantee Arrangement, is 7 April 2019 and thus the date on which the solvency of Pac Bio is to be assessed;

(b) secondly, as at 7 April 2019 an Insolvency Event subsisted with respect to Pac Bio;

(c) thirdly, if Pacreef is correct and the Solvency Date is 4 February 2019 and not 7 April 2019, an Insolvency Event subsisted as at 4 February 2019.

(a) firstly, the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement is 4 February 2019, not 7 April 2019, and that no Insolvency Event subsisted at that date; and

(b) secondly, that in any event there was no Insolvency Event as at 7 April 2019.

340 The resolution of this issue requires consideration of:

(a) firstly, what the applicable date is for the purposes of clause 2.1(c) of the Guarantee Arrangement (that is, what is the relevant Solvency Date); and

(b) secondly, whether there was an Insolvency Event on either of the candidate Solvency Dates.

341 Insolvency Event is defined in the Guarantee Arrangement as follows:

Insolvency Event in relation to an entity:

1 the entity is unable to pay its debts as and when they fall due;

2 the entity goes into liquidation;

3 the entity [sic]

4 receives a deregistration

notice under section 601AB of the Corporations Act; an order is made for the winding up (otherwise than for the purposes of reconstruction or amalgamation) of the entity;

5 a receiver, receiver and manager, judicial manager, liquidator, administrator or like official is appointed over

the whole or a substantial

part of the undertaking of

the property of the entity;

6 a writ of execution issued

against the entity or a majority proportion of the

entity's assets;

7 the entity is declared or taken under applicable law to be insolvent.

342 Two components of the definition are relevant in the present case:

(a) Item 1, that is, was Pac Bio unable to pay its debts as and when they fell due ('the Item 1 Definition'); and

(b) Item 7, that is, was Pac Bio declared or taken under any applicable law to be insolvent ('the Item 7 Definition').

GTW submits that the Item 1 Definition compels an enquiry into the factual question as to whether Pac Bio was as at the relevant Solvency Date (on GTW's argument, 7 April 2019) able to pay its debts as they fell due. Relatedly, it submits that the Item 7 Definition picks up the broader concept of insolvency in the Corporations Act, which is defined in s 95A of that act and at common law.

343 I will turn first to the applicable Solvency Date for the purposes of clause 2.1(c), before determining what enquiry is required to establish whether an Insolvency Event subsisted (ie, the Item 1 Definition or Item 7 Definition), and finally determining whether an Insolvency Event did so subsist.

The Solvency Date Issue - Relevant considerations

The obligations of GTW under clause 3 of this deed are conditional only on:

...

(c) no Insolvency Event subsists in respect of Pac Bio as at the date the A Class shares are to be redeemed in accordance with the Subscription Agreement'.

(underline added)

345 Thus, clause 2.1(c) specifically directs attention to the terms of the Subscription Agreement.

346 Before turning to the Subscription Agreement, it is also necessary to have regard to clause 2.1(b), which GTW relies upon in support of its submission that the relevant date is 7 April 2019. It will be recalled that clause 2.1(b) provides:

The obligations of GTW under clause 3 of this deed are conditional only on:

...

MBD does not raise all of the capital required to satisfy the Redemption Request[150] from a new issue of fully paid ordinary shares in MBD carried out for the purpose of satisfying the Redemption Request within three months after the date of the Redemption Request ...

(underline added)

347 It is common ground that the date which is three months after the date of the Redemption Request is 7 April 2019.

348 Pacreef submits that the proper construction of the Subscription Agreement is clear: clause 8.1(b) of the Terms of Issue provide that:

Subject to clause 8.3, within 28 days of receipt of a Redemption Notice, the Company must pay the A Class shareholder the amount of $1 for each A Class Share held and redeemed in cleared funds into a bank account nominated in advance by the Subscriber.

349 Pacreef therefore argues that by the terms of clause 8.1(b), Pac Bio was required to redeem the shares within 28 days of receipt of a redemption notice subject to or unless the circumstances fell within clause 8.3.

8.3 Instalments

(a) The Company must raise capital through a fresh issue of Ordinary Shares to satisfy a redemption request under this clause 8. The parties acknowledge that the issue of Ordinary Shares in the Company to certain shareholders of the Company may result in a breach of the takeover provisions in the Act. In order to comply with one of the exemptions to the takeover provisions in the Act, the A Class Shareholder and the B Class Shareholder agree, and make no objection to, the Company paying the redemption amount in instalments provided the redemption amount is fully paid as soon as possible and in any event on the earlier to occur of:

(i) the earliest date on which the Company may issue Ordinary Shares in compliance with the exemptions to the takeover provisions in the Act in order to satisfy the redemption request; and

(ii) the date nine months after the receipt of the redemption notice.

351 Pacreef argues therefore that the circumstance contemplated by clause 8.3(a) (that is, that the issue of ordinary shares in the company to certain existing shareholders resulting in a breach of the takeover provisions of the Act) did not arise, and as such clause 8.3 has no application and can be put to one side. Accordingly, it argues that the relevant date is 28 days from receipt of the January 2019 Redemption Notice, which is 4 February 2019.

352 GTW submits that Pacreef's construction is overly simplistic, arguing that Pacreef's submission ignores:

(a) first, clause 8.1(d), which provides that Pac Bio must only pay the redemption amount out of the proceeds of a new issue of shares made for the purpose of the redemption;

(b) second, the introductory words of clause 8.1(b) which read 'subject to clause 8.3'; and

(c) third, the first sentence of clause 8.3(a), which specifically refers to the fact that the Company must raise capital through a fresh issue of ordinary shares to satisfy the redemption request.

353 As discussed above, the requirement to only pay the redemption amount out of the proceeds of a new issue of shares made for the purposes of the redemption is consistent with s 254K of the Corporations Act.

354 GTW therefore argues that, when clauses 8.1(b), 8.1(d) and 8.3 are read together and considered against the background to s 254K of the Corporations Act, the proper construction of the Subscription Agreement is that:

(a) Pac Bio must pay the redemption amount out of the proceeds of a new issue of shares made for the purposes of the redemption; and

(b) if Pac Bio can complete such new issue of shares within 28 days of service of a redemption notice, then by the 28th day Pac Bio must make payment and effect the redemption of the A Class Shares;

(c) however, if Pac Bio does not complete a new issue of shares by that time, or at all, then it cannot pay Pacreef until it does so (whether pursuant to the Guarantee Arrangement or otherwise).

355 Indeed, GTW argues further that on one view the date in clause 2.1(c) on which the shares 'are to be redeemed' has not yet arrived, because Pacreef has not procured a meeting of the directors of Pac Bio to approve:

(a) the redemption of the A Class Shares the subject of the redemption request and the payment of redemption moneys to Pacreef;

(b) the issue of the subscription shares to GTW; and

(c) the issue of a new share certificate for the subscription shares in GTW's name.

356 GTW's argument is resonant of that considered by the Full Court of the Federal Court of Australia in Federal Commissioner of Taxation v Coppleson ('Coppleson').[151] In Coppleson, W Limited was incorporated in the Australian Capital Territory with a share capital of $40,000, and $39,991 redeemable preference shares were allotted to CS Pty Ltd. CS Pty Ltd sold the shares to Coppleson for $39,900. Coppleson then transferred the shares to a hospital which accepted them as a gift. Coppleson claimed the value of the gifted shares as a tax deductible loss. One of the issues in the case was the value of the shares gifted to the hospital. Section 61(3) of the Companies Ordinance 1962 (ACT) ('the Companies Ordinance') required the redemption of preference shares to be made from profits otherwise available for dividend or out of the proceeds of a fresh issue of shares made for the purpose. It was accepted that a hypothetical purchaser of the preference shares could not reasonably envisage the existence of either profits or the proceeds of a fresh issue of shares, and that accordingly W Limited would not be able to redeem a hypothetical purchaser's shares should that person give notice requiring redemption within six months of allotment. The taxpayer argued that the value of the gift should be determined by reference to the right to repayment out of the assets of the company that the holder of the shares would be entitled to in the event of a liquidation, on the premise that the holder of the shares could force a liquidation of the company in the event that the shares were not redeemed.

357 The Court noted that the rights of the preference shareholder were as set out in the company's articles of association, which entitled the holder of the preference shares to give notice to the company requiring redemption and further provided that:

subject to the provisions of the Companies Ordinance [1962 (ACT)], the company shall be bound to redeem redeemable shares in respect of which notice has been given.

358 Coppleson argued unsuccessfully that the reference to the Companies Ordinance was merely a reminder to the reader that there were sections of the Companies Ordinance relevant to redeemable preference shares, but that those provisions governed only the permissible modes of redemption, but not the obligation to redeem itself.[152] The Full Court considered that the reference to the ordinance in clause 1C(3)(i) added nothing, because any relevant provisions of the Companies Ordinance would apply even if their application was not expressly stated.[153] Nonetheless, given that the parties were taken to contract on the basis of the existing law, the Full Court held that the parties could not be presumed to have assumed obligations which it would be unlawful for one of the parties to fulfil.[154]

359 Thus, the Full Court held that W Limited and CS Pty Ltd had contracted on the basis that s 61 of the Companies Ordinance regulated the matter and that therefore, failing the availability of one or both of the funds specified in s 61(3), W Limited would not be in default under its contract with the holders of the redeemable preference shares if it failed to redeem after receipt of the requisite notice.[155] Thus, the Court was not required to consider what remedy the holder of the preference shares would have if the company's failure to redeem gave rise to a breach of contract.

360 Next, the Full Court considered whether the holder of the shares could force a liquidation of the company on the just and equitable ground and concluded that it could not, because W Limited and CS Pty Ltd had contracted on the basis of the law as set out in the Companies Ordinance. In the circumstances of that case, that led to the consequence that the value of the shares gifted was much less than the taxpayer had claimed in his income tax deduction for the relevant tax year.

361 Consistent with that reasoning, GTW argues that the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement is the date on which the shares can be redeemed out of the proceeds of a new share issue. Assuming for the sake of argument that this is correct, the necessary extension of this submission is that the date has not yet arisen because there has been no new share issue to GTW, rather than that the date is 7 April 2019.

362 In Coppleson the Full Court referred to two other cases which are relevant in this context. The first, Re Holders Investment Trust Ltd,[156] was a decision of Megarry J sitting in the Chancery Division. In that case, his Honour considered an application for approval of a capital reduction which involved cancelling certain cumulative redeemable preference shares. A majority group of preference shareholders voted in favour of and passed a special resolution approving the cancellation of the shares. However, that group also held a separate, larger holding of ordinary shares. The remaining preference shareholders, who voted against the capital reduction, alleged that the majority group did not vote in the interest of the preference shareholders as a class, and had rather voted to benefit the totality of their shareholding.

363 The resolution approving issue of the preference shares provided that they should be issued on terms which anticipated their redemption out of profits by the company on a date in the future. In the course of argument, Megarry J expressed doubt as to a submission advanced by the majority group to the effect that because no profits were available to redeem the preference shares, there would be no default under the terms of issue in effecting the capital reduction, notwithstanding that the terms of issue provided the preference shares were to be redeemed out of profits (that is, rather than cancelled in a capital reduction).[157] Ultimately, his Honour refused to sanction the capital reduction on the grounds that it was unfair to the preference shareholders.[158]

364 The Full Court in Coppleson also referred to the judgment of Waddell J of the Supreme Court of New South Wales in Re Marra Developments Ltd ('Re Marra').[159] In Re Marra, Waddell J sitting in the Equity Division heard an application for an interlocutory injunction pending the hearing of a petition to wind up a company. The petitioners were the ordinary shareholders of the company who complained that the directors were managing the company in the interests of redeemable preference shareholders and in a manner oppressive to the ordinary shareholders. The application for the interlocutory injunction was dismissed and orders were made for an expedited hearing of the petition.

365 The preference shares were required to be redeemed on 31 December 1983. The directors argued that company policy must be guided by the obligation to ensure profits were available to redeem the preference shares and pay accrued dividends by the redemption date. His Honour considered s 61 of the 1961 Act, which provided that preference shares should not be redeemed except out of profits or out of the proceeds of a fresh issue. His Honour accepted that, in the absence of profits or a fresh issue of shares to meet the redemption, the company would be in breach of its obligations under the articles to redeem and the preference shareholders would in such circumstances be entitled to have the company wound up.[160] In respect of the alternative argument, ie, that in such circumstances it was simply to be accepted the law would provide no remedy to enable the preference shareholders to enforce their contractual right of redemption, his Honour stated that 'this could not be right'.[161]

366 Similarly, in TNT Australia,[162] the Full Court of the Supreme Court of South Australia dismissed an appeal against various declarations to the effect that a Part A takeover offer was invalid. O'Loughlin J (which whom King CJ agreed) stated that if a company issues redeemable preference shares on terms that enable the holders to demand redemption, then it is incumbent on that company to organise its affairs so as to ensure that it will have appropriate profits out of which to meet its obligations to redeem, or to so organise its capital structure that it will, as and when required, be able to make a fresh issue of shares for the purposes of the redemption.[163] O'Loughlin J considered that in the event that the company was unable to meet its contractual commitments because of its inability to do so in accordance with the relevant provisions of the Companies Code, the company faced the prospect of being wound up under the just and equitable rule at the suit of the disgruntled shareholders.[164] In other words, the Full Court considered that a default arose on the failure to redeem in accordance with the notice given by the shareholder, and that the inability to redeem in accordance with the Companies Code only affected the remedy available to the redeemable preference shareholders in the event of default, rather than the existence of the right to redeem itself.

367 To similar effect, the New Zealand Court of Appeal in Mutual Life and Citizens Assurance Co Ltd v Mosgiel Ltd ('Mutual Life')[165] considered that where a company undertook to redeem on a particular event, it would be for the company to organise its affairs so as to ensure that it will have appropriate profits out of which to meet its obligations, and that if it became apparent that it would not be able to meet its contractual commitments on redemption, then the company face the prospect of being wound up.[166]

368 In Mutual Life, the company resolved to issue certain redeemable preference shares on terms that they were redeemable on 31 October 1987. Dividends were paid on the preference shares up to 31 October 1979. On 11 March 1980, the directors resolved to pay a dividend on the preference shares due on 30 April 1980; however, the company went into receivership on the same day. The receivers continued to trade through one of the company's subsidiaries to take advantage of substantial tax losses within the group, and concluded an agreement pursuant to which a third party made substantial advances to that subsidiary. A term of that agreement was that the third party stipulated that no dividend was to be paid by the subsidiary to the holding company without the third party's approval.

369 The subsidiary traded and made profits from 30 June 1984 to 30 June 1989; through that period the holding company remained insolvent and in receivership. In 1989, one year after the preference shares were to be redeemed, a dividend was paid from the subsidiary to the company which allowed for the discharge of all of the company's unsecured creditors and made some $3.4 million of profits available for the company's shareholders. Had there been available profits on the redemption date, the preference shareholders would have been entitled to a substantial accumulated dividend. The Court was required to determine whether the preference shareholders had any subsisting entitlement to arrears in dividends, in circumstances where the subsidiary had had profits available at the redemption date and through the earning period of the preference shares, but those profits had not been available to the holding company.

370 The New Zealand companies legislation was in relevantly identical terms to s 254K of the Corporations Act. The Court noted that it was common ground that the case turned on the interpretation of the resolutions governing the issue of the shares.[167] The Court held that the terms of issue required the shares to be redeemed on a particular date, and that the existence of this obligation on the company's part may exist 'even though there are restrictions governing the mode of performance'.[168] Further, the Court of Appeal noted that if the company was in breach, the remedies available in connection with that breach must not be inconsistent with the legislative constraints on the sources of redemption of funds.[169]

371 Accordingly, the Court of Appeal considered that in contracting with the shareholder on the terms of the resolutions, the company had undertaken that it would it would honour that obligation and ensure that it would have profits available or have made a fresh issue of shares.[170] It was not necessary in order to satisfy that requirement that the holding company itself have earned those profits.[171] Accordingly, the preference shareholders were entitled to claim arrears of dividends.

The Solvency Date Issue - Analysis and conclusion

372 There is a tension between, on the one hand, Coppleson, insofar as the Full Court in that case considered that a company failing to redeem in accordance with a redemption notice given by a preference shareholder would not be in breach of its contract with the shareholder; and on the other, the decision in Re Holders Investment Trust Limited, Re Marra, as well as two decisions decided after Coppleson, TNT Australia and Mutual Life.[172]

373 The critical question in Coppleson was the value of the shares, which hinged on the taxpayer's contention that it could compel a winding up of the company on the just and equitable ground as a consequence of its failure to redeem the preference shares in response to the service of the redemption notice. The ratio decidendi was that the inability to redeem in accordance with the company's code did not constitute a circumstance allowing the shareholder to invoke the quasi-equitable basis to wind up the company on the just and equitable ground. The Full Court's earlier reference to the company's failure to redeem as not giving rise to a default under its contract with the holder of the shares is obiter. Moreover and in any event, in my view and with respect, such analysis conflates the lawful performance of an obligation which has ripened with the existence of the obligation itself. An approach which recognises the existence of the obligation and which looks at the question of breach as affecting the remedy is the approach taken in the various cases cited above, and accords with a construction of the Subscription Agreement consistent with business common sense and which produces a commercial result.

374 Drawing these threads together and returning to the provisions of the Subscription Agreement, and putting aside for present purposes the event contemplated by clause 8.3, in my view Pac Bio assumed an obligation to pay Pacreef the amount of $1 for each A Class Share held and redeemed within 28 days of receipt of a redemption notice. The reference in clause 8.1(d) to Pac Bio only paying the redemption amount out of the proceeds of a new issue of shares made for the purposes of the redemption, and the obligation cast in 8.3(a) that the company must raise capital to draw a fresh issue of ordinary shares to satisfy a redemption request under clause 8, confirm that the obligation must be performed in accordance with the law (specifically, in accordance with the requirements in s 254K of the Corporations Act). It was therefore incumbent on Pac Bio to manage its affairs so as to ensure that it was in a position to lawfully comply with its obligation within 28 days of receipt of any redemption notice.

375 In the event that Pac Bio was unable to pay the redemption amount out of the proceeds of a new issue of shares made for the purposes of the redemption, then the prohibition in s 254K would only affect the remedy open to Pacreef. It would also mean that the A Class Shares could not in fact be redeemed unless and until the payment occurred in the mode set out in clause 8.1(d) and s 254K of the Corporations Act. But the fact that redemption cannot in fact occur is a separate question from determining the date on which the A Class Shares were required to be redeemed under the Subscription Agreement.

376 GTW's submission in my view conflates the fact of redemption with the entitlement to redemption; or, to put it another way, the performance of the obligation with the existence of the obligation.

377 This is reinforced by the fact that the relevant question is the meaning of the phrase 'the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement'. GTW's construction of that phrase proceeds as if the words 'to be' are not present. Further, it leaves little work for the reference to '28 days' in clause 8.1(b) of the Subscription Agreement. If it is accepted that the reference to 28 days is unnecessary then this would mean the shares are to be redeemed when there are funds available from a fresh issue of shares, regardless of how many days had elapsed from the date of service of the redemption notice.

378 In my view, the date that the shares are to be redeemed in accordance with the Subscription Agreement (as opposed to redeemed in general) is within 28 days of receipt of the 7 January 2019 Redemption Notice, save to the extent to which the events in clause 8.3 have application. Given that the clause 8.3 events had no application, that clause can be put to one side. The A Class Shares were therefore required to be redeemed on 4 February 2019. The fact that the A Class Shares were not able to be redeemed at that date out of the proceeds of a fresh share issue is a separate question which bears on the rights of Pacreef as against Pac Bio.

379 There is another answer to GTW's submission. The Subscription Agreement and the Guarantee Arrangement were entered into contemporaneously, and the Guarantee Arrangement makes express reference to the Subscription Agreement.[173] It is an appropriate exercise in interpretation of those agreements to have regard to the text of both, and to interpret them in the manner in which a reasonable businessperson would have interpreted them, as well as in a manner which enables both agreements to operate in conformity with one another.[174]

380 In that context, the Subscription Agreement contains provisions for the redemption of the A Class Shares; thus, under the Subscription Agreement the shares are redeemed upon receipt of cleared funds into the bank account nominated in advance by Pacreef, whereupon s 254J of the Corporations Act operates so as to cancel the A Class Shares.

381 By contrast, the Guarantee Arrangement instead sets out a separate regime for the redemption of the A Class Shares. Under the mechanism in the Guarantee Arrangement, clause 3.1(a)(i) requires GTW to subscribe for the Subscription Shares by paying the Subscription Price, while clause 3.1(c) provides for the redemption by Pac Bio of the A Class Shares by way of payment of the Subscription Price to Pacreef in immediately available funds.

382 In other words, the regime for redemption of the A Class shares that is set out in clause 3.1 and that is to take place through GTW subscribing for the Subscription Shares is not necessarily the same regime as that specified in the Subscription Agreement. Rather, the redemption contemplated by clause 3.1 occurs pursuant to the mechanisms in the Guarantee Arrangement, or, to put it another way, 'in accordance with the Guarantee Arrangement', not the Subscription Agreement. This is notwithstanding that the Guarantee Arrangement is in conformity with the Subscription Agreement.

383 By choosing to refer in clause 2.1(c) of the Guarantee Arrangement to 'the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement', as opposed to the date the A Class Shares are to be redeemed in accordance with the Guarantee Arrangement, the parties can be taken to have contemplated a different reference point and a different regime by which to determine the relevant date to assess the subsistence or otherwise of any Insolvency Event.

384 This characterisation is supported by, but not dependent upon, the fact that in an earlier draft of the Guarantee Arrangement the parties specifically rejected the very wording that GTW submits is the proper interpretation. Although not necessary, it is permissible to receive evidence of a previous draft which was rejected by the party if evidence of that draft would negative an inference as to meaning sought to be drawn from the surrounding circumstances, where the previous draft shows that the meaning was positively rejected by the parties.[175]

385 There is a further reason why I reject GTW's submission that the relevant date is 7 April 2019. Clause 2.1 of the Guarantee Arrangement contemplates that the performance of GTW's obligations under clause 3 were to follow the satisfaction (or waiver) of the events set out in clause 2.1, including clause 2.1(c). In other words, performance by GTW under clause 3 was only to take place after the events set out in clause 2.1 had been satisfied. So much is clear by the fact that clause 3.1(a) specifically contemplates that the conditions could be waived by written agreement between the parties. GTW's submission would have the effect that the clause 3 obligations would never be enlivened. If the A Class Shares were redeemed by Pac Bio following a share issue otherwise than to GTW pursuant to the Guarantee Arrangement, clearly the Guarantee Arrangement would have no application. Conversely, if the A Class Shares were redeemed by such a process then on GTW's submission, the A Class Shares could not be redeemed as there would have been no share issue: in such circumstances, GTW submits that the time for redemption under the Subscription Agreement would not have arrived, ergo the conditions precedent to GTW's obligations under the Guarantee Arrangement would not have arisen. This is not a construction which produces a commercial result.

386 Finally, the parties to the Guarantee Arrangement determined that the relevant time for satisfaction of the condition in clause 2.1(b) was three months after the date of the redemption request. This wording differs from that in clause 2.1(c). It should be inferred that they chose different wording for good reason. A consequence of accepting GTW's submission is that the time for the satisfaction of the condition in clause 2.1(c) would be the same as that set out in clause 2.1(b). If that was intended, the parties would be expected to have chosen the same wording in 2.1(c) as occurred in the immediately preceding subclause.

387 Clause 2.1(b) has different work to do than clause 2.1(c). For the purposes of the conditions contained in the Guarantee Arrangement, Pac Bio had three months to attempt to raise the capital required before the obligations of GTW under the Guarantee Arrangement were enlivened. This did not happen in the allotted time. But that does not mean that Pac Bio did not have the obligation pursuant to clause 8.1(b) of the Terms of Issue (which formed part of the Subscription Agreement) to pay within 28 days of receipt of the 7 January 2019 Redemption Notice. Pac Bio's obligation arose then. However, GTW's obligation under the Guarantee Arrangement arose at a different and later point, as contemplated by clause 2.1(b) of the Guarantee Arrangement, three months hence.

388 Accordingly, in my opinion, on a proper construction of clause 2.1(c) the 'date the A Class shares are to be redeemed in accordance with the Subscription Agreement' is 4 February 2019, not 7 April 2019.

389 Nonetheless, in case I am wrong, in what follows I will assess the solvency status of Pac Bio at both Solvency Dates.

The Insolvency Event Issue - Relevant considerations

390 Clause 2.1(c) provided that the obligations of GTW under clause 3 of the Guarantee Arrangement were conditional on no Insolvency Event subsist[ing] in respect of MBD as at the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement'.

391 The clause calls for consideration of each of the Solvency Dates in light of the definitions of Insolvency Event in the Guarantee Arrangement, as set out at [341] above. In particular, two of those definitions were alleged by GTW to be relevant on the facts as at the Solvency Dates:

(a) the Item 1 Definition - as at 4 February 2019 (or if I am wrong as to the Solvency Date, then as at 7 April 2019,) was Pac Bio unable to pay its debts as and when they fell due ?

(b) the Item 7 Definition - as at 4 February 2019 (or as at 7 April 2019) was Pac Bio declared or taken under applicable law to be insolvent?

392 Before undertaking this enquiry, it is convenient to review some of the more pertinent facts going to whether an Insolvency Event subsisted in respect of Pac Bio as at the Solvency Dates.

393 As noted above, part of the purchase consideration provided by Pac Bio on settlement of the Share Sale Agreement was funded by Pacreef by way of vendor finance, evidenced in the Vendor Finance Deeds, pursuant to which Pac Bio was indebted to Pacreef in the respective sums of $3,000,000 and $2,893,817.

394 The Vendor Finance Deeds are in relevantly identical form. The August 2017 Deed of Indebtedness, under the subheading 'Agreed Terms' records an 'Acknowledgement of Indebtedness by the Debtor' providing:

In satisfaction of the purchaser's obligations to pay AUD3,000,000 of the Purchase Price (Partial Amount) to the Creditor at Completion, the Debtor undertakes on the date of this deed to pay the Creditor and the Debtor acknowledges its indebtedness to the Creditor for an amount equal to the Partial Amount on the terms applicable to the Indebtedness set out in this deed.

395 The Vendor Finance Deeds also contain a definition of 'Payment':

Payment

The Debtor must pay the Indebtedness and all other Money Owing to the Creditor on or before the Repayment Date'.

396 Further, a definition of 'Interest Rate' is provided which reads:

Interest Rate

The Indebtednss [sic] will accrue daily interest at 10% per annum or such other rate agreed between the Debtor and the Creditor in writing from time to time.

If the Indebtedness or any other Money Owing has not been repaid by the Debtor to the Creditor by 31 January 2018, the relevant unpaid amounts will accrue daily interest at 15% per annum for the period from 31 January 2018 until the date of payment in full by the Debtor of all Money Owing.

397 Against the definition of 'Interest Payment', the Vendor Finance Deeds record that:

Interest Payment

The Debtor must pay to the Creditor all accrued but unpaid interest on the outstanding amount of the Indebtedness. Interest is payable in arrears on the last day of each month.

...

398 The Vendor Finance Deeds further provides that 'Default' has the meaning that:

Default

If a Default subsists, the Creditor may by Notice to the Debtor declare that the Money Owing is immediately due and payable in which case the Debtor must immediately pay to the Creditor the Money Owing.

399 'Default' is then defined as including any one or more of the following, including among others:

(a) (Business) if the Debtor without the Creditor's prior written consent ceases or threatens to cease to carry on its businesses;

(b) (non-payment) the Debtor fails to pay any of the Money Owing payable by it, in the way and when due.

(c) (other obligations not complied with) the Debtor fails to comply with any of its obligations under this deed (other than an obligation referred to in paragraph (a)) and, if in the Creditor's opinion the failure is capable of a remedy, it continues unremedied for 5 Business Days after the earlier of receipt by the Debtor of a notice from the Creditor identifying the failure to comply or the Debtor becoming aware of the failure to comply.

... the indebtedness of the Debtor to pay the Creditor an amount equal to the Partial Amount on the terms of this deed.

... on any day the aggregate of all amounts, in AUD, actually owing or remaining unpaid by the Debtor to the Creditor under this deed, including any interest.

(a) 31 January 2018; and

(b) any earlier date on which the Money Owing becomes due and payable under this deed including on Default.

403 As noted above, on 27 September 2018 Pac Bio, GTW and Pacreef among others entered into the Implementation Deed, which relevantly replaced the definition of 'Repayment Date' in the Vendor Finance Deeds with the first to occur of:

(a) completion of the Proposed Recapitalisation (as defined in and as contemplated by the Implementation Deed); or

(b) 5pm on 31 March 2019.

404 Further, the Implementation Deed, among other things, contained in clause 5.6(a) undertakings by Pacreef that during the Standstill Period (the end date of which was 31 March 2019), it would not take any action in respect of any default arising before the end date of 31 March 2019.

405 Under clause 5.6(b) of the Implementation Deed, GTW undertook to continue to make all of the facilities available to Pac Bio under the GTW Facility Agreement and provided a like undertaking not to take any action in respect of any default, potential default or review event arising before 31 March 2019.

406 The GTW Facility Agreement was in fact first set out as Annexure A to the Implementation Deed. It will be recalled that in broad terms the GTW Facility Agreement provided for the provision of a loan facilities up to $6 million by GTW to Pac Bio, with a specified repayment date of 31 March 2019.

407 As noted above, on 1 March 2019 Mr Bastounas sent an email to, among others, Mr Wood, attaching a document titled 'GTW Facility Agreement Amendment Letter.' The covering email referenced the establishment of a syndicate to provide additional funding of up to $2 million and stated that the easiest way to do this was to increase the limit of the GTW Facility Agreement by $2 million. The enclosed letter of amendment provided for an amendment to the GTW Facility Agreement so as to provide that it would be amended to replace the definition of 'Facility Limit' in that document with $8 million. Mr Wood executed the amendment letter on behalf of GTW on 28 March 2019. Subsequently, additional funds of $2 million were provided to Pac Bio pursuant to the facility through drawdowns in April and June 2019.

408 The GTW Facility Agreement amendment letter did not however amend the definition of 'Repayment Date' in the GTW Facility Agreement, which continued to read:

31 March 2019 or such other date as agreed between [Pac Bio] and [GTW] in writing.

409 The GTW Facility Agreement otherwise contained relevantly similar provisions in respect of repayment as those which were contained in the Vendor Finance Deeds. Clause 6.1 provided:

Repayment

[Pac Bio] must repay the Amount Outstanding that remains outstanding to [GTW] in full on the Repayment Date or otherwise as required under this agreement[176]

... at any time the sum of the following amounts:

(a) such amount of the Facility Limit as has been advanced by [GTW] to [Pac Bio] as at that time; and

(b) all interest owing by [Pac Bio] to [GTW] under this agreement, including capitalised interest.

Rights on occurrence of Default

If a Default occurs:

(a) [GTW] may by notice to [Pac Bio]:

(i) declare that the Amount Outstanding is immediately due and repayable; and

(ii) take any actions or proceedings necessary or desirable in order to exercise or enforce any right conferred on [GTW] under this agreement or any Security Interest granted in favour of it by [Pac Bio]; and

(b) on receipt of any such notice [Pac Bio] must immediately pay the Amount Outstanding to [GTW].

412 Clause 10.2 provided, among other things, that:

Defaults

A Default[177] will be taken to have occurred under this agreement if:

(a) (non-payment) [Pac Bio] fails to pay on the due date any amount payable by it under this agreement at the place and in the currency in which it is expressed to be payable, and such failure continues for 3 business days after [Pac Bio] received notice from the lender requiring a failure to be remedied;

(b) (other breach) [Pac Bio] fails to perform any obligation it has under this agreement (other than a failure referred to elsewhere in this clause) and that failure is incapable of remedy or, if capable of remedy, continues for 10 business days after [Pac Bio] receives notice from [GTW] requiring the failure to be remedied.

413 At the meeting of the board on 20 March 2019, attended by, among others, Mr Wood and Ms Mitris-Honos, the minutes record the board's consideration of its funding position under the heading 'Cashflow Projections and Funding Position'. Relevantly, the board identified a projected cash flow deficit of $2 million at the end of April after payment of a debt owing to JCU. For present purposes, it is clear that the cash flow projections considered by the board at this meeting did not contemplate the repayment of the amounts owing under the Vendor Finance Deeds or the amounts advanced pursuant to the GTW Facility Agreement. In contrast, the cashflow projections treated the undrawn amount under the GTW Facility Agreement as a source of funds.

414 On 5 April 2019, the directors approved Pac Bio's half yearly financial statements for the half year ending 31 December 2018. The half yearly financial statements include the directors' declaration, signed by the chairman Mr Fitzgerald. The declaration, made in accordance with the resolution of the directors, records the directors' opinion that the financial statements and notes in the report were:

(a) in accordance with the Corporations Act,

(b) complied with the relevant Accounting Standards, the Corporations Regulations 2001, and other mandatory professional reporting requirements; and

(c) give a true and fair view of Pac Bio's financial position as at 31 December 2018.

415 Additionally, the declaration provides that the directors' opinion was that there were reasonable grounds to believe that Pac Bio will be able to pay its debts as and when they became due and payable.

416 The report also records under the heading 'Note 8: Subsequent Events':

Increase in GTW short-term debt facility

...

Pacific Bio and GTW have executed an amendment dated 28 March 2019 which increases the limit of the GTW short-term debt facility by $2 million, to $8 million.

417 Both Pacreef and GTW called expert evidence in relation to the solvency of Pac Bio as at the Solvency Dates. The expert evidence was of some assistance in narrowing the points of controversy as to the existence or otherwise of an Insolvency Event as at the Solvency Dates.

(a) Pacreef called Mr McCallum, a chartered accountant from Ernst & Young, who provided an independent expert report in which he concluded that an Insolvency Event did not arise either as at 4 February 2019 or 7 April 2019; and

(b) GTW called Mr Meredith, a chartered accountant from KPMG, who provided an independent expert report in which he concluded that an Insolvency Event did not arise as at 4 February 2019, but did arise as at 7 April 2019.

Accordingly, Mr McCallum and Mr Meredith did not agree as to the solvency of Pac Bio as at 7 April 2019. I note that, if I am correct in holding 4 February 2019 to be the correct Solvency Date, then the expert evidence is consistent that no Insolvency Event subsisted as at that date.

419 Mr McCallum and Mr Meredith's reports focussed on four key items:

(a) a debt owing to Pacreef by way of the Vendor Finance Deeds of $3.5 million ('the Vendor Finance Debt'), which

(i) Mr McCallum treats as not due and payable on either date;

(ii) Mr Meredith treats as not due and payable on 4 February 2019, but was due and payable on 7 April 2019

(b) a debt of $5,500,000[178] as at 4 February 2019 and $6,850,000 as at 7 April 2019 representing amounts drawn down under the GTW Facility Agreement, which

(iii) Mr McCallum treats as not due and payable on those dates;

(iv) Mr Meredith treats as not due and payable on those dates;

(c) a debt owed to JCU of $910,000 on 4 February 2019 and $583,350 on 7 April 2019 ('the JCU Debt'), which amounts:

(v) Mr McCallum treats as not due and payable on those dates; and

(vi) Mr Meredith treats as due and payable on those dates.

(d) a debt owed to Stewart Advisory of $220,000 ('the Stewart Advisory Debt') (though at times this debt was treated in combination with the JCU Debt[179]), which:

(vii) Mr McCallum treats as due and payable on both dates; and

(viii) Mr Meredith treats as due and payable on both dates.

420 Accordingly, Mr McCallum and Mr Meredith differ primarily on the status the Vendor Finance Debt and the JCU Debt.

421 Mr McCallum undertook his analysis by considering whether Pac Bio was insolvent within the meaning of s 95A(1) of the Act. That section provides:

Solvency and insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is in insolvent.

422 Accordingly, Mr McCallum undertook an analysis as to the solvency question by reference to the common indicia of insolvency set out in ASIC v Plymin.[180] In reaching his opinion that Pac Bio was solvent on 4 February 2019 and 7 April 2019, Mr McCallum, consistent with the authorities pertaining to the determination of solvency for the purposes of s 95A of the Corporations Act, took into account the circumstances and commercial realities which faced Pac Bio at those dates. On that basis, Mr McCallum in essence put to one side the Vendor Finance Debt, the GTW Facility Debt, and the JCU Debt.

423 In relation to the Vendor Finance Deeds, Mr McCallum notes that it was his instruction that, notwithstanding that the repayment date of the Vendor Finance Deeds (as amended by the Implementation Deed) was 31 March 2019, Pacreef had no intention of enforcing and did not enforce payment of the Vendor Finance Debt owing under those deeds and accordingly did not make any demand for repayment. Accordingly, Mr McCallum did not treat the Vendor Finance Debt as due and payable as at 7 April 2019. Ms Mitris-Honos gave evidence substantially to the same effect as Mr McCallum's instructions.

424 In respect of the GTW Facility Debt, Mr McCallum maintained that the GTW Facility Agreement was fully drawn to $6 million in the week ending 15 February 2019, though noted with reference to Mr Wood's witness outline[181] that GTW had not called for payment on 31 March 2019; instead, as mentioned above, on 28 March 2019 GTW has amended the GTW Facility Agreement which increased the facility limit by $2 million to $8 million.[182] Accordingly, Mr McCallum did not treat the GTW Facility Debt as due and payable as at 7 April 2019. Consistent with this, he relied on the increase in the facility limit in the GTW Facility Agreement as an additional source of funds, rather than as a debt due for repayment.

425 Further, in relation to the JCU Debt, Mr McCallum records in some detail a history of accommodation between JCU and Pac Bio, whereby JCU had continued to accept payment outside of the original trading terms during financial year 2018 and financial year 2019. Accordingly, Mr McCallum did not treat the JCU Debt as due and payable as at 4 February 2019 or 7 April 2019. As Mr McCallum explains it, the accommodating stance taken by JCU is consistent with the fact that JCU had a commitment to a long-term partnership with Pac Bio; in particular, Mr McCallum notes that JCU and Pac Bio jointly owned all intellectual property produced by the funded research undertaken by JCU. Further, Mr McCallum notes that an entity known as NQCC as trustee for the JCU Asset Trust held 5 million ordinary shares in Pac Bio; and that Grannette as the trustee of the Foundation was a substantial benefactor of JCU.

426 In relation to the Stewart Advisory Debt, Mr McCallum ultimately considered that this debt was due and payable on both 4 February 2019 and 7 April 2019.

427 For the purposes of his report, Mr Meredith was instructed to take into account both the relevant definitions of 'Insolvency Event' as set out in the Guarantee Arrangement, and the definition of insolvency in s 95A of the Corporations Act.

428 As mentioned above, Mr Meredith considered that no Insolvency Event has arisen at 4 February 2019, but had arisen at 7 April 2019. Mr Meredith primarily differs from Mr McCallum in that he:

(a) assessed the Vendor Finance Debt as due and payable as at 7 April 2019; and

(b) assessed the JCU Debt (to the amounts of $909,919 and $583,350, respectively) as due and payable on 4 February 2019 and 7 April 2019.

429 Importantly, Mr Meredith's approach to the GTW Facility Debt does not differ in any major respect from Mr McCallum's. Mr Meredith also treats the undrawn amounts under the GTW Facility Agreement as a source of funds; and does not treat the drawn amounts as funds due and payable as at 4 February 2019 and 7 April 2019. Mr Meredith also treats the Stewart Advisory Debt as due and payable on both 4 February 2019 and 7 April 2019.[183]

430 Ultimately, the differences between Mr McCallum and Mr Meredith in respect of the treatment of the JCU Debt are not significant in the context of the matters at issue. Whilst Mr McCallum essentially puts the JCU Debt to one side, Mr Meredith's inclusion of that debt as a debt due and payable in the amount of $910,000 as at 4 February 2019 and $583,350 as at 7 April 2019 is of no great moment given the scale of the amounts involved. Even if Mr Meredith's approach is accepted and the JCU Debt is treated as being due and payable on both dates, it would still not result in an Insolvency Event as at 4 February 2019 or 7 April 2019, provided that the Vendor Finance Debt and the GTW Facility Debt as that date are not treated as debts due (and provided the GTW Facility Agreement is treated as an additional source of funds).

431 So much is apparent from Mr Meredith's table 7 in his expert report which is set out below:

432 Accordingly, the difference of opinion between Mr McCallum and Mr Meredith in respect of the existence of an Insolvency Event as at 7 April 2019 ultimately rests on Mr Meredith's treatment of the Vendor Finance Debt. To put it another way, if Mr Meredith is correct with respect to his treatment of the Vendor Finance Debt, then an Insolvency Event has arisen regardless of what approach is taken with respect to the JCU Debt. As a corollary, if Mr McCallum's approach is accepted with respect to the treatment of the Vendor Finance Debt then no Insolvency Event has arisen even if the JCU Debt is treated in the manner contended for by Mr Meredith.

The Insolvency Event Issue - Controversies to be determined

433 From the above comparison of Mr McCallum's and Mr Meredith's reports, the key controversy that emerges is whether the Vendor Finance Debt was due (or, to the extent that there is a material difference, due and payable) as at 7 April 2019, such that an Insolvency Event in respect of Pac Bio subsisted on that date.

434 However, in addition GTW (but not Mr Meredith) submitted that the amount of $6,850,000 drawn down under the GTW Facility Agreement as at 7 April 2019 ('the GTW Facility Debt') was due as at that date for the purposes of assessing whether an Insolvency Event obtained. As noted above at [407]-[408], although the GTW Facility Agreement was amended on 28 March 2019 to increase the facility limit to $8 million, the repayment date of 31 March 2019 was not amended; accordingly, GTW argue that the GTW Facility Debt was due from 31 March 2019 and so is relevant to the subsistence or otherwise of an Insolvency Event.

435 To that end, GTW submit that even if the Vendor Finance Debt and the GTW Facility Debt are not 'due and payable' as at 4 February 2019 and 7 April 2019, they are nonetheless 'due'. This alternative submission relies on a narrow reading of the phrase 'unable to pay its debts as and when they fall due' in the Item 1 Definition. The gist of the submission is that whilst the Vendor Finance Debt and the GTW Facility Debt may not be 'payable' as at 4 February 2019, they were nevertheless dates at which those debts were 'due' and at which Pac Bio was unable to pay. Presumably, such an argument implies that the analysis conducted by Mr McCallum and Mr Meredith was only an application of the Item 7 Definition: in considering the solvency of Pac Bio within the meaning of s 95A of the Corporations Act, Mr McCallum and Mr Meredith were considering whether Pac Bio was taken to be insolvent in accordance with the applicable law, but not whether it was unable to pay its debts as and when they fell due within the meaning of the Item 1 Definition.

436 The points in dispute can be helpfully reduced to the following issues:

(a) is Mr Meredith correct in treating the Vendor Finance Debt as 'due and payable', or is the Vendor Finance Debt otherwise due within the sense relevant to the Item 1 Definition as at 7 April 2019?

(b) is GTW correct in submitting that the GTW Facility Debt was due within the sense relevant to the Item 1 Definition as at 7 April 2019?

(c) is GTW correct in submitting that the Item 1 Definition compels a different and more stringent inquiry than that provided for by s 95A of the Corporations Act; namely, whether those debts were 'due' as at the Solvency Dates and unable to be paid?

The Insolvency Event Issue - Meaning of 'due' and 'due and payable'

437 Crucial to the resolution of these issues is the proper construction of the Item 1 Definition and the Item 7 Definition. This calls for an analysis of the meaning of 'due' and 'due and payable', particularly in relation to the Item 1 Definition (as 'due' appears in the text of the definition itself) and the Item 7 Definition (as 'due and payable' appearing in the text of s 95A of the Corporations Act).

438 In urging their construction of the Item 1 Definition and the asserted difference between a debt 'due' and a debt 'due and payable', GTW referred in particular to Mack v Commissioner of Stamp Duties ('Mack'),[184] Clyne v Deputy Commissioner of Taxation ('Clyne'),[185] Melbase Corporation Pty Ltd v Segenhoe Ltd ('Melbase Corporation'),[186] and Griffin Energy Group Pty Ltd v ICICI Bank Ltd ('Griffin).[187]

439 In Mack, the High Court considered the effect of ss 49 and 53 of the Stamp Duties Act 1898 (NSW) ('the Stamp Duties Act'). Section 49(2) provided for the levying and payment of duty from out of all personal estate gifted by a donor under a will. Section 53 provided for 'all debts actually due and owing' by the deceased to be deducted from the estate. A testator had executed in favour of each of his six daughters a deed whereby he covenanted and agreed that on demand he would pay to that daughter a certain sum of money, and that in the meantime and until such demand was made, he would pay her interest on so much of the sum that remain unpaid. At the time of the testator's death none of the sums had been paid, nor had any demand for their payment been made by any of the daughters, though the testator had paid interest as agreed. It fell to be determined whether the several sums were gifts made by the testator, and so taxable under s 49(2), or where debts that were to be deducted from the value of the estate under s 53.

440 The High Court held unanimously that the several sums were debts actually 'due and owing' within the meaning of s 53 and so should be deducted from the value of the assets comprised in the deceased's estate.[188]

441 Knox CJ considered that there was nothing in s 53 which required the phrase 'debts actually due and owing' to be read as meaning 'debts actually due and payable'. Moreover, the Chief Justice noted that a construction requiring all debts to be 'due and payable' would preclude deduction of any debts payable at a date after the death of the testator.[189] In reaching that conclusion, the Chief Justice had regard to the general object of the Stamp Duties Act provisions, which was to render liable to taxation on the death of a person property which, but for some disposition made by him during his lifetime, would have passed from him on his death.[190] The Chief Justice considered that s 53 dealt with the 'liabilities' side of the deceased's personal account, while s 49 dealt with the 'assets' side: the 'two sides of the account' were to be compiled independently of one another.[191] The Chief Justice held that the deed did not amount to a gift of anything tangible; rather, it created a liability without disposing of any assets. Accordingly, as the assets were not affected by the execution of the deeds, s 49 had no application and the sums were debts to be deducted from the estate.

442 Isaacs J considered that the obligation to pay the sum was owed absolutely and not contingently; the liability for the payment of that sum was not dependent in any way upon the non-performance of some other obligation, but was presently existing, fixed and independent of any other stipulation.[192] His Honour considered that the provision for a demand to be made by the creditor was stipulated not in order to create a pecuniary obligation at the time the demand was made, but simply to fix the time of performance so that no litigation for breach was possible until the demand was made.[193]

The debt existed. It was, at the date of the testator's death a debt "actually due and owing", that is, truly and really due and owing; for "due" here only means "debitum", and "owing" only means that which is "owed". "Due" is sometimes used in the sense of "payable"; that, however is where the context requires it.

444 In making that observation, Isaacs J referred with approval to the judgment of Mellish LJ in Ex parte Kemp; re Fastnedge.[195] In that case, the Lord Justice gave a classic statement of the meaning of 'due':[196]

Now, the words "debts due to him" are certainly words which are capable of a wide or a narrow construction. I think that prima facie, and if there be nothing in the context to give them a different construction, they would include all sums certain which any person is legally liable to pay, whether such sums had become actually payable or not. On the other hand, there can be no doubt that the word "due" is constantly used in the sense of "payable," and if it is used in that sense, then no debts which had not actually become payable when the act of bankruptcy was committed would be included. Lastly, the expression "debts due" is sometimes used in bankruptcy proceedings to include all demands which can be proved against a bankrupt's estate, although some of them may not be strictly debts at all.

445 Relatedly, in the later case of Main Camp Tea Tree Oil Ltd v Australian Rural Group Ltd,[197] Barrett J said:[198]

A statement that one person "owes" a particular sum to another and "is indebted" in that sum asserts no more than the existence of a debt, that is, an obligation to pay the sum concerned. It says nothing about the time at which the obligation must be performed. It therefore says nothing about whether the sum concerned is "due" or "payable". It is, of course, axiomatic that a debt, in the form of a payment obligation, may be presently owing but not yet either "due" or "payable". It may likewise be "owing" and "due" but not yet "payable", although it is not possible for a debt "owing" to be "payable" but not "due" .... A statement that a sum is "due and payable" thus connotes not only that it is "owed" (so that the debtor is "indebted") but also that the time for payment has arrived and the obligation to pay is an unqualified and unfettered obligation requiring immediate performance.

(citations omitted)

446 In Clyne, the High Court considered s 218(1)(a)(i) of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act'). Broadly, that section empowered the Commissioner of Taxation to serve a notice upon any person by whom any money was due to a taxpayer, requiring that person to instead pay the money due to the Commissioner. In particular, the section stated:

(1) The Commissioner may at any time, or from time to time, by notice in writing ... require -

(a) any person by whom any money is due or accruing or may become due to a taxpayer;

...

to pay to the Commissioner, either forthwith upon the money becoming due or being held, or at or within a time specified in the notice (not being a time before the money becomes due or is held) [sufficient moneys to discharge the taxpayer's tax liability]

Sub-section (2) made a person who failed to comply with any such notice guilty of an offence.

447 On 9 July 1979, the Commissioner served a notice of assessment on a taxpayer for $236,922.31. The notice stated that the amount assessed was due and payable on 8 August 1979. On 10 July 1979 the Commissioner served on a bank two notices, identical in substance, requiring it to pay to the Commissioner any amount due or accruing or which might become due by the bank to the taxpayer up to $118,486.31. On that date, the taxpayer had three interest bearing deposits with the bank of a sum of $70,000, which were repayable to the taxpayer on, respectively, 21 September 1979, 9 April 1980 and 20 April 1980. On 4 September 1979, the taxpayer by deed assigned those deposits to a third party as security for further advances to be made by the assignee to the taxpayer. The taxpayer gave notice of assignment to the bank. The assignee applied to the Court for declarations to the effect that she entitled to the benefit of the deposits. The taxpayer, argued that by virtue of s 204 of the 1936 Act, the tax was due but not payable before 8 August. He then argued that the word 'due' in s 218(1)(i) must mean 'due and payable'; as such a notice could not be given under s 218 in respect of a taxpayer such as the appellant, whose tax was at the relevant time due but not payable.

448 The primary judge declared that the notices issued by the Commissioner did not constitute a valid requirement under s 218 of the 1936 Act for either the bank or the taxpayer to pay the proceeds of the deposits to the Commissioner. An appeal was allowed, and the assignee and taxpayer together appealed to the High Court.

449 Gibbs CJ observed that the word 'due' is ambiguous: it could mean either owing, although not payable until some future date; or alternatively it could mean presently payable.[199] Accordingly, his Honour considered that the meaning of the word must be determined by the context.[200] His Honour had no doubt that the word 'due' when it appeared in s 218(1)(a) in the words 'forthwith upon the money becoming due' and 'not being a time before the money becomes due' meant presently payable. Accordingly, his Honour accepted the argument that the reference to 'due' in s 218(1)(a), in that context meant 'due and payable'.[201] However, his Honour rejected that submission in respect of subparagraph (i), finding rather that 'due' there simply meant owing.[202]

450 Mason J similarly held that the meaning of 'due' in the relevant section was 'very much the product of the special context in which it is there found'.[203] Aickin, Wilson, and Brennan J agreed with Mason J in his analysis of the phrase as it appeared in the act.

451 Whilst Mack and Clyne are cases of interest, each makes it clear the proper construction of 'due' depends critically on the relevant context. In both those cases, the particular statutory provisions under consideration were determinative of whether 'due' meant 'due and payable' or simply 'owing'.

452 Next, and perhaps of more relevance to the present case, in Melbase Corporation a minority shareholder, Melbase, applied to have a company, Segenhoe, wound up under s 459P of the Corporations Law. Melbase was a contributory and relied on the grounds referred to in ss 461(e), (f) and (k) and 459A, arguing that Segenhoe was insolvent within the meaning of s 95A of the Corporations Law. As Melbase was a contributory of Segenhoe, it was required to make an application pursuant to s 459P(2) for special leave to make the application that the company be wound up on the insolvency ground. In order to be granted leave, Melbase had to establish a prima facie case that Segenhoe was not able to pay all its debts as and when they become due and payable.

453 Lindgren J noted that in determining whether a person was insolvent, s 95A of the Corporations Law called for a 'cash flow test', rather than a 'balance sheet test'.[204] His Honour also considered that it was relevant to take into consideration the relationship between the creditor and the debtor, any agreement between them, and their course of conduct.[205]

454 In Segenhoe's half yearly accounts for the year ending 31 December 1994, it had disclosed an operating loss before abnormal items and tax of some $1,214,000, and showed a deficiency of assets over liabilities of in excess of $20 million.[206] The current liabilities were largely owed to its majority shareholder and parent, Akron. The notes to the financial statements of Segenhoe for the year ending 30 June 1994 advised that those financial statements had been prepared on a going concern basis, further noting that Akron had advised that in the ordinary course of business it would not at present be seeking repayment of any moneys due to it by Segenhoe.

455 By contrast, the language of Akron's financial statements for the year ended 30 June 1994 was less comforting, referring to the existence of the debt owing by Segenhoe and stating that no assurance has been provided that Akron would not take action to recover the amounts due to it.[207] Segenhoe's directors' statement dated 28 October 1994, which formed part of its annual report for 1994, contained an opinion that Segenhoe relied upon the continued financial support of Akron, and that because Akron had indicated its ongoing financial support was qualified, Segenhoe could not be said to be able to pay its debts as and when they fell due. Nonetheless, the annual report further opined that in the absence of any firm decision by Akron as at that date to seek repayment of its debt during the next 12 months, Segenhoe's directors had decided to prepare its accounts on the basis that it was a going concern.

456 On the hearing of the application, an affidavit was made by one Michael Sissian, who was the chair of both Segenhoe and Akron, in which he deposed that the board of Akron had not contemplated calling for payment of the debt owed by Segenhoe and would not be reviewing the question of demanding payment in the financial year ended 30 June 1995.

457 Accordingly, Lindgren J proceeded upon the basis that Segenhoe's indebtedness to Akron was in excess of $32 million as both 30 June 1994 and 31 October 1994, that Akron had reserved the right to require payment at any time after 23 March 1995, but that the chairman of both had said it has in fact not contemplated doing so and Akron would not be reviewing the question until after 30 June 1995.

458 His Honour then considered whether Melbase had established a prima facie case that Segenhoe was not 'able to pay all its debts as and when they become due and payable', as set out by s 95A. His Honour observed that the words 'as and when they become due and payable' in s 95A make it clear that although the issue of prima facie insolvency must be determined at a particular time, that determination calls for a degree of 'forward looking'.[208] His Honour further agreed that although different descriptions have been given from time to time as to the meaning of the expression 'become due' (as opposed to become due and payable), his Honour agreed[209] with the statement in Re New World Alliance Pty Ltd (Receiver and Manager apptd); Sycotex Pty Ltd v Baseler ('Sycotex')[210] by Gummow J that:[211]

Any conflict between the authorities may be more illusory than real and factual rather than legal.

459 In holding that Melbase had established a prima facie case, his Honour found that on the evidence the existing debt would be due and payable following 30 June 1995. It was appropriate to 'look forward' at least as far as 30 June 1995, at which date there was a prima facie case that the company would be unable to pay its debts.[212]

460 In my view, Melbase Corporation is of no real assistance to GTW. In that case the relevant enquiry was whether there was a prima facie case that the company under consideration was insolvent within the meaning of s 95A. The conclusion was that there was a prima facie case that the company would become insolvent on a later date (30 June 1995); however, that conclusion was reached in the particular circumstances of that case, where his Honour had determined that it was appropriate to undertake the forward-looking enquiry.[213]

461 In CPB Contractors Pty Ltd v JKC Australia Lng Pty Ltd ('CPB Contractors'),[214] the Court of Appeal in Western Australia considered the meaning of the words 'payable' and 'due and payable' as they appeared in a contract. The Court dismissed an appeal against a refusal to grant injunctive relief restraining recourse to a performance bond, provided by way of security for the obligations of a subcontractor under a construction contract. The Court of Appeal held that on the proper construction of the contract, the contractor had a right of recourse to the performance bonds where it had a bona fide claim to immediate payment under the subcontract.[215]

462 The Court of Appeal construed the phrase 'due and payable' in the contract to denote an obligation presently payable, as opposed to an obligation due but not yet payable.[216] The Court rejected the subcontractor's submission that the phrase 'due and payable' should be construed as meaning 'payable' in the sense of objectively or authoritatively established by arbitral or curial determination or by admission.[217]

In ordinary parlance, the meaning of the word 'due' includes 'immediately payable' or 'owing, irrespective of whether the time for payment has arrived'. The word 'due' in a legal context is sometimes used in the sense of 'payable', but prima facie means any sum that a person is legally liable to pay, irrespective of whether the time for payment has arrived, ie, irrespective of whether it is then 'payable'. A debt may be said to be 'payable' if it is not only due (in the sense of owing), but is presently payable in the sense that the time for payment has arrived, and an action could be maintained in respect of it. In the expression 'due and payable', the word 'payable' often means required to be immediately or presently paid. Thus, the words 'due and payable' may often be tautological in the sense that an amount which is 'payable' will at least generally first be owing in the sense of due. In other words to say that an amount is 'due and payable' will often not add anything to a statement that the amount is 'payable'. In ordinary parlance, a debt may be said to be 'payable' prior to any admission that it is payable, or any legal adjudication in respect of it.

(citations omitted)

The Court construed the contract with these principles in mind, and noted that the starting point in the process of construction is to strive to give meaning to each and all of the words used, including having regard to the nature and the terms of the contract.[219]

464 In Griffin, the Court of Appeal in New South Wales considered the meaning of the expression 'due and payable' in a letter of credit. The letter of credit expired on Sunday 1 March 2015, and secure the interest of a vendor in the payment of deferred consideration by a purchaser. Under the terms of the sale agreement the date for payment of the deferred consideration was either Saturday 28 February 2015 or Sunday 1 March 2015, neither of which was a business day. The effect of the sale agreement was that the final instalment had to be paid on 3 March 2015. Recourse to the letter of credit was only permitted in the event that the beneficiary declared that the amount was due and payable.

465 The Court of Appeal noted that both the sale agreement and the letters of credit had to be construed by reference to what a reasonable businessperson would have understood the terms to mean, and that this required consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract.[220] The Court further noted that the language and surrounding circumstances for the commercial purpose or objects of the sale agreement were different to those of the letters of credit.[221] The Court of Appeal considered that the expression 'due and payable' in the letter of credit should be given its ordinary meaning, noting Gibbs CJ's observation in Clyne, referred to above, that the word 'due' is ambiguous and could mean either owing though not payable until some future date, or could mean presently payable.[222] The Court of Appeal noted that the phrase under consideration in the present case was the compound phrase 'due and payable'. The Court of Appeal then noted:[223]

As Gibbs CJ's observation in Clyne implies, a debt may be due without being payable: ... A debt is payable if the time for payment has arrived and an action to recover it can be maintained by the creditor .... This means that an amount is payable if the creditor has a legal entitlement to maintain an action for recovery.

(citations omitted)

466 Whilst the above cases relied upon by GTW are not without interest, they are of no direct assistance to the question of the proper construction to be given to the Item 1 Definition of 'Insolvency Event'. The authorities make it clear that the word 'due' is ambiguous, meaning 'owing' or alternatively 'owing and presently payable'. If it is the former meaning, then, as was the case in Mack, all present obligations to pay a fixed or ascertainable sum at any point in the future would constitute due debts. Thus, due debts would include all sums payable in the future in respect of which a present unconditional obligation arose; even long term liabilities could be regarded as debts due.

467 The authorities establish that the particular meaning to be given to the word 'due' is a matter which must be determined by reference to the context in which the word is deployed. Thus, the fact that the High Court considered 'due' to have a particular meaning in the context of the Stamp Duties Act is of no real assistance in the present case. Here, the relevant enquiry is as to whether the word 'due', in the particular context of the Item 1 Definition of 'Insolvency Event', extends to all amounts in respect of which Pac Bio had a present liability notwithstanding that the time for payment of that liability had not arrived, or whether it extended only to those amounts which were presently payable.

468 In Southern Cross Interiors Pty Ltd & Anor v Deputy Commissioner of Taxation & Ors ('Southern Cross Interiors'),[224] Palmer J of the Supreme Court in New South Wales gave judgment in an unfair preference action. The defendant argued that the liquidator had failed to prove that the company was insolvent within the meaning of s 95A of the Act. The defendant contended that, although there were a number of creditors whose debts had been outstanding for more than 30 days (30 days being the accepted time for payment of the relevant invoice), the absence of evidence of any demands made by the creditors for payment meant the debts may have been due but were not payable. The defendant's submission was that debts were payable only when the creditors issued statutory notices of demand under the Corporations Act. With reference to the judgment of Ormiston J in Re Elgar Heights Pty Ltd (No 1),[225] his Honour noted:[226]

Many of the cases which have considered which of the two meanings of "due" is applicable in the context of the companies legislation have been reviewed by Ormiston J. in a scholarly and illuminating judgment in Re Elgar Heights Pty Ltd (No 1) ... That review shows two things. The first is that in the United Kingdom and Australia "due" has been uniformly construed as meaning "payable" in those sections of the companies legislation which are concerned with ascertaining a company's ability to pay its debts. The second is that the question whether "due" means "payable" or merely "owing" is a frequently litigated one.

Doubtless, it was in the hope of reducing the scope for argument as to the test of a company's insolvency and in order to emphasise that the test was concerned only with a company's ability to pay its debts when they became payable that the drafter of CA s.95A(1) indulged in what might be described as a surfeit of pleonasms. The words "as and when" place emphasis upon the time at which the character of debts is to be ascertained, although "as" and "when" are synonymous in this context. Likewise, the words "become due and payable" place emphasis on the character of the debts which is to be ascertained although, again, the words "due" and "payable" are clearly synonymous in this context.

Unfortunately, the use of the two words "due" and "payable" when one would have sufficed has made room for the argument that if two separate words are used in the definition of insolvency then each word must have different work to do. Thus, Mr Aitkin has had a respectable, if tenuous, toehold for his submission that, on the true construction of CA s.95A(1), the time at which a debt "becomes due" may be different from the time at which it "becomes payable". The submission has some encouragement from at least one academic writer ...

The sooner this incipient heresy is scotched, the better. In a claim for recovery of an unfair preference, the test of insolvency prescribed by CA s.95A(1) is no different in substance from that prescribed by its predecessors, s.95 of the Bankruptcy Act, 1924 (Cth) and s.122(1) of the Bankruptcy Act, 1966. That test is simply whether the company is able to pay its debts as they become payable ...

(citations omitted)

469 Palmer J then went on to state an oft cited summary of the principles of insolvency for the purposes of s 95A:[227]

In my opinion, the following propositions may now be drawn from the authorities:

1. whether or not a company is insolvent for the purposes of CA ss.95A, 459B, 588FC or 588G(1)(b) is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter (1966) 115 CLR 666 at 670; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer;

2. in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable ...

3. in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency ...

4. the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand ...

5. in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court's satisfaction, that:

   • there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or
   • there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or
   • there has been a well-established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand ...

6. it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence ...

(citations omitted)

470 The cases cited by Palmer J included the oft cited Sandell v Porter,[228] a judgment of the High Court, regularly cited in cases considering the application of s 95A. In Sandell v Porter, Barwick CJ (with whom McTiernan and Windeyer JJ agreed) observed that:[229]

Insolvency is expressed in [Bankruptcy Act 1924] s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.

471 Relevantly, the statute in Sandell v Porter in fact used the phrase 'by any person unable to pay his debts as they become due from his own money'.

The Insolvency Event Issue - Proper construction of the Item 1 and Item 7 definitions

472 Thus, in the context of the consideration of s 95A of the Corporations Act and its predecessor provisions, (and the Bankruptcy Act 1966 and its predecessor provisions) there has been no relevantly difference in approach to interpretation between 'due' on the one hand and 'due and payable' on the other.

473 In light of the above, if 'due and payable' in s 95A of the Corporations Act is construed as equivalent to, in broad terms, payment of debts when 'due' as that phrase appears in earlier iterations of that provision and in provisions with a similar sphere of operations, then GTW's submission that the reference to 'due and payable' in s 95A (and thus, on GTW's argument, in the Item 7 Definition) must be different to the meaning of 'due' in the Item 1 Definition loses much of its force. Moreover, the above authorities suggest that 'due' as it appears in the Item 1 Definition is unlikely to bear a different meaning to 'due and payable' as that phrase appears in s 95A of the Corporations Act.

474 Moreover, GTW's submission assumes that the Item 7 Definition is in effect an indirect reference to s 95A of the Corporations Act. The Item 7 Definition of 'Insolvency Event' does not in terms refer to s 95A of the Corporations Act, and nor in terms is the operation of the Item 7 Definition limited to that section. Another available construction of the Item 7 Definition is that it is intended to refer to an Insolvency Event not occasioned by reason of Pac Bio's inability to pay its debts as and when they become due (or due and payable), which would be picked up by the Item 1 Definition. Rather, it may be intended to pick up instances where a court has made a declaration of insolvency or instances where under the force of 'an applicable law' the entity is taken to be or deemed to be insolvent.

475 There are provisions in the Corporations Act that could provide for an entity to be taken to be or deemed to be insolvent: for example, s 588E(4) of the Corporations Act provides that, subject to ss 5-7, a company that has failed to keep financial records as required by sub-s 286(1) will be presumed to have been insolvent throughout the relevant period in respect of which it failed to keep such records. In other words, the Item 7 Definition might apply so as to avoid the necessity of establishing as an objective fact whether the elements of the Item 1 Definition are satisfied, where there exists proof of either the making of a relevant declaration or of some other fact that under the terms of an applicable law would cause the company to be taken to be insolvent.

476 In accordance with this, the text of the Item 1 Definition refers to an inability 'to pay debts as and when they fall due', and clause 2.1(c) of the Guarantee Arrangement requires that this question be assessed at a particular date, namely the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement. The text therefore provides a strong indication that the assessment to be undertaken on the relevant date is one which requires consideration of Pac Bio's capacity to pay those debts which are payable on that day. This is further supported by the use of the phrase 'unable to pay' in the Item 1 Definition.

477 Further, it can be presumed that the parties intended that the question of the satisfaction or otherwise of the condition in clause 2.1(c) would be a matter which could be ascertained with objective clarity. Certainly, Items 2 to 6 of the definition of Insolvency Event are all matters that can be clearly and definitely ascertained. There is little room for debate as to whether a company is in liquidation (Item 2), or whether it has received a deregistration notice (Item 4). If the Item 7 Definition is construed in the manner set out in paragraphs [475]-[476] above, the establishment of those matters could occur with either objective clarity (eg, if a declaration of insolvency has been made) or at least where there are legal standards in place affording a greater degree of objective clarity (eg, where the company has failed to keep proper books and records).

478 Thus, the Item 7 Definition is properly construed as asking both whether any relevant declaration of insolvency had been made in respect of Pac Bio, and whether any relevant legislation deemed to Pac Bio insolvent by operation of law.

479 Moreover, an interpretation of the Item 1 Definition which treats the phrase as extending to those debts which are actually required to be paid on the relevant date, and which are either able to be paid or not (as the case may be) is supported by the fact that it was known by the parties to the Guarantee Arrangement that two of the parties affected by the condition, GTW and Pacreef, would have seats at the board table of Pac Bio via nominee directors, and that the third, Pac Bio, was the company itself the subject of the Insolvency Event. The nominee directors could be expected to be aware of the risks of the company trading whilst insolvent within the meaning of the Corporations Act, and additionally could be expected to be familiar with Pac Bio's financial position. The nominee directors could also be expected to be aware of the company's obligations to prepare financial reports, and the obligation of the directors to approve those reports and to make appropriate accompanying directors' resolutions.[230]

480 In that context, I do not consider that reasonable business people in the position of GTW and Pacreef would consider that the Item 1 Definition of Insolvency Event would have a different meaning to the meaning given to insolvent under s 95A of the Corporations Act, which section (despite using only the word 'due') calls for consideration of a company's capacity to pay its debts as and when they are due and payable with regard to commercial realities. If that were not the case, a strange position could result where Mr Wood and Ms Mitris-Honos, wearing their hats as directors of Pac Bio, could in accordance with their obligations resolve that Pac Bio was solvent, there being reasonable grounds for a belief that Pac Bio is able to pay its debts as and when they become due and payable within the meaning of s 95A; and yet in another setting argue on the same day that Pac Bio is insolvent, unable to pay its debts as and when they fall due within the meaning of the Item 1 Definition. An interpretation of the Insolvency Event definitions that leaves open such a result cannot be presumed to have been intended by the parties.

481 Indeed, that is the position here, where Mr Wood had joined with the other directors of Pac Bio on 5 April 2019 in giving the directors' declaration, but now, in a different setting and through GTW, a corporate entity which he controls, submits that an Insolvency Event within the meaning of the Item 1 Definition arose at both 7 April 2019 and 4 February 2019; viz. that Pac Bio was unable to pay its debts as and when they fell due.[231]

482 Thus, I consider that the Item 1 Definition is properly construed as asking whether Pac Bio was, on the relevant date, able to pay those debts which were due on that date and of which payment was required; that is, those debts which were due and payable. As the assessment called for by the Item 1 Definition was to be carried out by Pacreef and GTW, and each had nominees on the board of Pac Bio, a reasonable business person would have understood that this assessment would take account of the commercial realities as they affected Pac Bio at the relevant date; including the commercial reality of whether a creditor required payment of the debt at that time. Such an analysis is to substantially the same effect as that which is carried out in determining the question of insolvency under s 95A of the Corporations Act.

483 Having arrived at proper construction of the Item 1 Definition and Item 7 Definition, I will now consider whether an Insolvency Event under either definition arose as at the Solvency Dates.

484 As mentioned above, Mr McCallum and Mr Meredith were in agreement that no Insolvency Event arose at 4 February 2019.

485 Applying the Item 1 Definition arrived at above, it is clear that the date of repayment had not arrived for either the Vendor Finance Debt nor the GTW Facility Debt. Further, the definition of 'repayment date' in the Vendor Finance Deeds had been extended to the first to occur of completion of the Proposed Recapitalisation or 5pm on 31 March 2019. In addition, by the amended terms of the GTW Facility Agreement, the repayment date of the amounts drawn down was 31 March 2019. This accords with the expert evidence of Mr McCallum and Mr Meredith, both of whom, for the reasons just mentioned, did not assess the Vendor Finance Deed or the GTW Facility Agreement as 'due and payable' as at 4 February 2019.

486 Nor was there any evidence or submissions to the effect that Pac Bio had in accordance with the Item 7 Definition been declared insolvent or deemed insolvent by operation of law.

487 In sum, reasonable businesspeople in the position of GTW and Pacreef would not have considered that on 4 February 2019 Pac Bio was unable to pay its debts as and when they fell due, by reason of the inability Pac Bio to pay the Vendor Finance Debt of the GTW Facility Debt on that date. Neither of the two relevant debts owing by Pac Bio was in fact due for payment until 31 March 2019. Moreover, both were owed to existing shareholders of the company in circumstances where Pac Bio was in the midst of a planned fundraising that had at that stage significant prospects of attracting a $25 million investor and under which a proposed 30 million rights issue was underwritten up to some $15 million.[232] Even if payment of the Vendor Finance Debt or the GTW Facility Debt could have been called for, neither Pacreef nor GTW was likely to do so.

488 As mentioned above, Mr Meredith, in contrast to Mr McCallum, maintained that an Insolvency Event subsisted as at 7 April 2019. Mr Meredith maintained that the Vendor Finance Debt were due and payable as that date. Again, both Mr Meredith and Mr McCallum maintained that the GTW Facility Debt was not due as at 7 April 2019, treating the undrawn amounts under the GTW Facility Agreement as a source of funds for Pac Bio.

489 In my opinion, neither the Vendor Finance Debt nor the GTW Facility Debt were due and payable as at that date. It is clear that, though the option to call for payment may have been available to either of them from 31 March 2019, neither GTW nor Pacreef required repayment of either the Vendor Finance Debt and GTW Facility Debt as at 7 April 2019.

490 In the case of GTW, on 28 March 2019, it had agreed to the variation to the GTW Facility Agreement so as to increase the facility limit from $6 million to $8 million. Moreover, funds were subsequently advanced under the amended facility limit on 29 March 2019, 1 April 2019, 15 April 2019, 23 April 2019 and 11 June 2019.[233]

491 In the case of Pacreef, Ms Mitris-Honos gave evidence that she did not intend to call for payment of the Vendor Finance Debt. Indeed, it would make little sense for Pacreef to call for payment of the Vendor Finance Debt in light of the Mitris family's clearly expressed desire to redeem the A Class Shares; which redemption required Pac Bio to be solvent as at the Solvency Date.

492 Moreover, it is at least an arguable, and indeed it is in my view the better construction of the Vendor Finance Deeds, that Pacreef was not able to enforce the repayment obligation which arose on Pac Bio under the Deeds unless Pacreef first gave written notice to Pac Bio declaring that the Money Owing was immediately due and payable. So much follows from the definition of 'Default' in that deed. Thus, whilst the Vendor Finance Deeds stipulated a repayment date of 31 March 2019, it was not open to Pacreef to bring an action the very next day against Pac Bio for payment of the full amount of the indebtedness. Pacreef could only do this if it had at first served a notice of default.

493 Thus, under the terms of the Vendor Finance Deeds, the non-payment of the $3.5 million by Pac Bio on 31 March 2019 effectively conferred an option on Pacreef to either serve a notice requiring repayment of the Money Owing, or receive default interest payable under the Vendor Finance Deed on the outstanding sum in the amount of 15% per annum. Plainly, in this case Pacreef was content to receive the default interest payments at 15% per annum. That was reflected in the figures for the cash flow projections as considered by the board of Pac Bio, which included Ms Mitris-Honos as Pacreef's representative.

494 Further, both Ms Mitris-Honos and Mr Wood also sat on the Pac Bio board. In that capacity they received reports on cash flows prior to the 27 March 2019 board meeting, and against the background of those cash flows participated in the passing of a directors' resolution on 5 April 2019 that Pac Bio was able to pay its debts as and when they fell due.[234]

495 Whilst it is not uncommon for directors of a company to mistakenly believe that a company is able to pay its debts as and when they fall due where it is in fact unable to do so; here the position is somewhat different. The GTW Facility Debt and the Vendor Finance Debt were owed to entities associated with Mr Mitris and Mr Wood. Plainly, neither of them believed that the respective payments said to be due under the Vendor Finance Deeds and the GTW Facility Agreement had to be paid by Pac Bio; hence their participation in the passage of the directors' resolution on 5 April 2019.

496 A reasonable businessperson in the position of GTW and Pacreef would not have considered that on 7 April 2019 that Pac Bio was unable to pay its debts as and when they fell due. The two crucial debts were owed by Pac Bio to existing shareholders of the company, in circumstances where neither creditor considered that the debt was due for repayment: one creditor, Pacreef, had elected to choose the option, provided under the Vendor Finance Deed, of receiving interest at the rate of 15% per annum as contemplated under the Vendor Finance Deeds and the other creditor, GTW, had agreed to increase the facility limit by $2 million and had in fact advanced further moneys to Pac Bio. The respective approaches taken by each creditor was no doubt influenced by the Proposed Recapitalisation adopted by the board, which was understood by Pacreef and GTW to be likely benefit their shareholder interests by, inter alia, in Pacreef's case facilitating the repayment of the A Class Shares, and in GTW's case leading to the recapitalising of the company's balance sheet.

497 Consistently with the above analysis, I accept Mr McCallum and Mr Meredith's evidence that it is appropriate to treat the GTW Facility Agreement as a source of additional funds of $1,150,000 as 7 April 2019. I do not accept Mr Meredith's evidence that the Vendor Finance Debt of $3.5 million should be treated as a debt which gave rise to an Insolvency Event as at 7 April 2019.

498 Accordingly, in my opinion, no Insolvency Event subsisted as at 4 February 2019 or 7 April 2019. As a result, I reject GTW's submission that GTW did not become liable under the Guarantee Arrangement because an Insolvency Event arose as at 4 February 2019 or 7 April 2019 and that accordingly the condition under clause 2.1(c) was not satisfied.

499 In my view, the condition set out in clause 2.1(c) was satisfied because no Insolvency Event subsisted in respect of Pac Bio as at the date the A Class Shares were to be redeemed in accordance with the Subscription Agreement, which date was 4 February 2019. That conclusion also follows even if I am wrong and the relevant date was in fact 7 April 2019.

500 GTW alleges that Pacreef is estopped from enforcing any obligations arising under clause 3 of the Guarantee Arrangement against GTW. Specifically, Pacreef alleges that:

(a) at all times since 7 January 2019 until 17 December 2019, Pacreef induced GTW to assume that Pacreef would not require:

(i) Pac Bio to raise capital for the purpose of redeeming its A Class Shares; or

(ii) GTW to perform any obligations required of it pursuant to clause 3 of the Guarantee Arrangement;

(together, 'the Assumptions')

(b) relying on the assumptions, GTW acted to its detriment; and

(c) by reason of those matters, it would be unconscionable to permit Pacreef to act contrary to the Assumption, and accordingly Pacreef is estopped from enforcing against GTW any obligation that has arisen under clause 3 of the Guarantee Arrangement.

501 The various categories of estoppel all operate to serve the 'fundamental purpose', namely 'protection against the detriment which would flow from a party's change of position if the assumption (or expectation) that led to it were deserted'.[235]

502 In Grundt v Great Boulder Pty Goldmines Ltd ('Grundt'),[236] Dixon J explained the principle upon which estoppel in pais is founded[237] as follows:[238]

The law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations ... [providing] that other ... [has] so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption.

503 Whilst Grundt concerned an estoppel at common law, Dixon J's analysis has been held by the High Court to be applicable to promissory estoppel[239] and equitable estoppel.[240]

504 In Walsh v Walsh,[241] Meagher JA, in the Court of Appeal in New South Wales, also held that the analysis extended to equitable claims for promissory and proprietary estoppel, stating:[242]

The action or abstaining from action in reliance upon the assumption or expectation encouraged is what invites the intervention of equity ... and the detriment that makes the estoppel enforceable is that which "would flow from the change of position if the assumption were deserted that led to it".

(citations omitted)

505 In Australasia Development (M) Pty Ltd v Glenwood Estate (Vic) Pty Ltd,[243] Riordan J conveniently set out the necessary elements of estoppel as follows:[244]

(a) Did [the defendant] assume or expect that a state of affairs or a particular legal relationship existed, or would exist?

(b) Did [the plaintiff] play a part in the adoption of the assumption or expectation?

(c) Has [the defendant] changed [its] position to [its] detriment on the basis of the assumption or expectation;

(d) Is [the plaintiff's] departure from the assumption or expectation unconscientious in all the circumstances, including:

(i) The part played by [the plaintiff] in the adoption of the assumption or expectation;

(ii) The nature and extent of the detriment;

(iii) How the detriment can be cured;

The proportionality of such cure to the terms and character of the part played by [the plaintiff] in the adoption of the assumption or expectation;

The conformity with good conscience of keeping a party to the relevant assumption or expectation.

(citations omitted)

506 Importantly in the context of the present case, for GTW to maintain that Pacreef induced or played a part in its adoption of an assumption or expectation, it is necessary for GTW to establish that:

(a) the representation, promise or assurance was clear; and

(b) the language used was precise and unambiguous.

507 In respect of the need for clarity and precision with respect to Pacreef's representation, conduct, or assurance, the High Court's decision in Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd ('Crown Melbourne')[245] is relevant. In that case, the High Court was required to consider an estoppel alleged to arise by a statement, made by a landlord to a tenant, that the tenant would be 'looked after at renewal time'. The lease had no contractual option for renewal. The tenant alleged that the landlord was estopped from not offering a further term under the lease. The plurality said:[246]

It has long been recognised that for a representation to found an estoppel it must be clear [citations omitted]. In Low v Bouverie, it was said [citations omitted] that the language used must be precise and unambiguous. This does not mean that the words used may not be open to different constructions, but rather that they must be able to be understood in a particular sense by the person to whom the words are addressed. The sense in which they may be understood provides the basis for the assumption or expectation upon which the person to whom they are addressed acts. The words must be capable of misleading a reasonable person in the way that the person relying on the estoppel claims he or she has been misled [citations omitted]. The statement that the tenants would be "looked after at renewal time" is not capable of conveying to a reasonable person that the tenants would be offered a further lease.

(citations omitted; underline added)

Analysis of the facts - 7 January 2019 to 7 April 2019

508 In its defence, GTW pleaded that the conduct of Pacreef which allegedly induced the Assumptions in GTW and the associated detrimental reliance occurred in the period 'from 7 January 2019 until 17 December 2019'.

509 It will be recalled that Pacreef's case is founded upon its service of the 7 January 2019 Redemption Notice. In the events which followed, on Pacreef's case, GTW then became liable three months later, on 7 April 2019.

510 If that is so, the period in which Pacreef's conduct is relevant in the sense that it induced GTW to make the Assumptions and the period in respect of which GTW acted to its detriment is confined to 7 January 2019 to 7 April 2019. That conclusion considerably reduces the evidentiary terrain to be reviewed in considering the estoppel issue.

511 Pacreef's conduct alleged to have given rise to the Assumptions comprises the silence of Pacreef's representatives, Ms Mitris-Honos and Nick Mitris, at various board meetings of Pac Bio in the period from 7 January 2019 to 7 April 2019.

512 The silence is said to be in respect of a number of matters; namely that:

(a) they never suggested that Pac Bio's efforts should be limited to raising the capital required to satisfy the 7 January 2019 Redemption Notice;

(b) they never suggested that such a limited capital raising should take priority to any broader capital raising;

(c) they never raised any concern that Pac Bio had not sought to enforce its rights under the Guarantee Arrangement;

(d) they never informed the Pac Bio board or GTW that Pacreef intended to pursue GTW for any shortfall payment on the redemption of the A Class Shares; and

(e) they never said to Mr Wood that Pacreef required or expected GTW to perform any of the obligations required of it pursuant to clause 3 of the Guarantee Arrangement.

513 Shortly after midnight, on 8 January 2019, a copy of the 7 January 2019 Redemption Notice was sent by Mr Bastounas to Mr Wood. The notice was in the form prescribed by the Subscription Agreement. Mr Bastounas' covering email described the 7 January 2019 Redemption Notice as a negotiating tactic.

514 In Mr Bastounas' email sent on 7 January 2019 to Pac Bio's corporate adviser Greenhill and to its solicitors KWM, as well as to the chairman Mr Fitzgerald and the company secretary Mr Dimpfel (though not to Mr Wood), Mr Bastounas records the receipt of the redemption notice as 'expected' and notes that it 'does crystallise a timeline within which we need to act'.

515 Thus, Pac Bio was under no illusion following the receipt of the January 2019 Redemption Notice that its service crystallised a timeline within which Pac Bio needed to take certain steps. The characterisation of the notice in that sense by Mr Bastounas, though not directly relevant to Mr Wood's understanding, is nevertheless of evidentiary force insofar as it illustrates the reaction of a reasonable person to the notice so served. A reasonable person would or certainly could have picked up the Redemption Notice and identified that it crystallised a timeline for Pac Bio and GTW's obligations under the Subscription Agreement and the Guarantee Arrangement.

516 In any event, there is nothing in the service of the January 2019 Redemption Notice on 7 January 2019 which could in any way support either of the Assumptions which are alleged to have arisen as and from that date.

517 Pac Bio board meetings were held on 23 January 2019, 20 February 2019 and 20 March 2019. It is true that at each of those board meetings there is no reference in terms to Pacreef, by service of the 7 January 2019 Redemption Notice, requiring Pac Bio to raise capital for the purpose of redeeming the A Class Shares or requiring GTW to perform any obligations required of it pursuant to clause 3 of the Guarantee Arrangement.

518 However, Pacreef's silence at those board meetings cannot possibly give rise to a clear and unambiguous representation that Pacreef would not require Pac Bio to raise capital for the purpose of redeeming its A Class Shares, or in the event that the Guarantee Arrangement was to be called upon, that GTW would not be required to perform any obligations required of it pursuant to the Guarantee Arrangement. Pacreef's silence alone could not have conveyed those matters to a reasonable person.

519 Further, Pacreef's silence also needs to be considered in context. At each of the three board meetings during that relevant period, the board members discussed various iterations of the Project Poseidon recapitalisation strategy which, among other things, aimed to raise sufficient moneys such as to enable the redemption of Pacreef's A Class Shares.

520 In other words, it is clear that during the relevant period Pac Bio was preparing to undertake a fundraising strategy which would enable the redemption of the A Class Shares. In that context, it is hardly surprising that Pacreef, aware that attempts were being undertaken to raise moneys to facilitate the redemption of the A Class Shares, did not see the need to reiterate that the 7 January 2019 Redemption notice was on foot; which fact was already clear from its service on 7 January 2019

521 Further, it is also clear that Mr Wood could not have been under any illusion during that period that Pacreef had abandoned or was otherwise not relying upon the service of the 7 January 2019 Redemption Notice and the rights accruing thereby.

522 By way of example, on 28 March 2019, Mr Bastounas emailed Mr Wood attaching a document headed 'Pacreef - Redemption Notice Withdrawal', which as its title suggests would if executed withdraw the 7 January 2019 Redemption, and a document headed 'Pacific Bio - Implementation Deed - End Date', which would if executed extend the end date under the Implementation Deed (which remained 31 March 2019). Mr Bastounas' email advised that Pac Bio was seeking agreement to both of these documents from the Mitris family. It necessarily follows that it was understood by Mr Bastounas, and would have been understood by a reasonable person in Mr Wood's position as a recipient of that email, that as at 28 March 2019, Pacreef was relying upon the January 2019 Redemption Notice and the rights accruing to it thereunder, and would continue to rely on same unless and until the notice was withdrawn and the end date of the Implementation Deed extended. Indeed, that was the reason why Mr Bastounas wanted the Mitris family to withdraw the notice and extend the date of the Implementation Deed by execution of the attached documents (which, of course, did not occur).

523 To similar effect, on 6 April 2019 Mr Bastounas emailed Mr Wood advising, among other things, that:

My biggest single headache at present is the GTW Guarantee and the Mitris redemption notice. The extension expires on 7 April 2019 (Sunday). If Mitris doesn't withdraw then on the terms of the Guarantee Agreement GTW we need to issue you shares at $1.00 per share. Its just a crazy agreement.

Nick has been agitating every day wanting his money and saying he can't wait ...