Sigiriya Capital Pty Ltd v Scanlon

Court of Appeal (NSW)|2013-10-23|Before: Meagher JA, Leeming JA, Young AJ

te Transactions, 3rd ed (2011) Sweet & Maxwell P Wood, Set-off and Netting, Derivatives, Clearing Systems, 2nd ed (2007) Sweet & Maxwell Category: Principal judgment Parties: Sigiriya Capital Pty Ltd (appellant) Alexander Witrak Scanlon (respondent) Representation: Counsel: D Fagan SC; V Bedrossian (appellant) P Kite SC; G Boyce (respondent) Solicitors: Hunt & Hunt Lawyers (appellant) Kardos Scanlan Lawyers (respondent) File Number(s): 2013/121735 Decision under appeal Jurisdiction: 9111 Citation: [2013] NSWSC 227 Date of Decision: 2013-03-26 00:00:00 Before: Young AJ File Number(s): 2012/47100

Judgment 1MEAGHER JA: In November 2010 the appellant (Sigiriya) advanced $47,500 to the respondent (Mr Scanlon) to enable him to subscribe for shares in a company, York Potash Ltd, which he could be required to exchange for shares in Sirius Minerals Plc (Sirius). That arrangement was made in the context of Mr Scanlon's employment by Sigiriya and was subject to the terms of a Loan Agreement dated 8 November 2010. 2The Loan Agreement provided for repayment of the advance and interest on 8 November 2013 unless, relevantly, one of two events occurred. The first was an event of Early Termination, which in substance described a non-consensual discharge of Mr Scanlon's employment. The second was the happening of an Event of Default under the Loan Agreement. In the latter case Sigiriya could, under cl 11.2, "declare" the loan immediately due and payable and require that it be satisfied by delivery or transfer of the Shares (which were defined to include shares in York Potash Ltd or Sirius). As events transpired Mr Scanlon became entitled to and received 7,499,850 shares in Sirius. 3In the proceedings before the primary judge (Young AJ) Sigiriya argued that an Early Termination event had occurred at the end of February 2011 when, by agreement, Mr Scanlon's employment with Sigiriya was terminated and he was employed by Sirius. Sigiriya also argued that Events of Default occurred in early 2011 which entitled it to give a notice under cl 11.2 of the Loan Agreement. 4Sigiriya alleged that between January and March 2011 Mr Scanlon had transferred the shares in Sirius to Chase Nominees Ltd in the context of his securities dealings with JP Morgan. That transfer was said to constitute a breach of cl 10.2(c) and cl 14.1 of the Loan Agreement; the former giving rise to an Event of Default under cl 11.1(c) and the latter to an Event of Default under cl 11.1(k) or cl 11.1(c). Sigiriya further alleged that by letter dated 5 February 2013 it gave a notice to Mr Scanlon under cl 11.2 declaring the loan owing and requiring that it be satisfied by delivery or transfer of the shares. 5In his judgment delivered on 26 March 2013 (Scanlon v Sigiriya Capital Pty Ltd [2013] NSWSC 227) the primary judge rejected Sigiriya's argument that in February 2011 there had been an Early Termination, by reason of Mr Scanlon having terminated the employment contract, to which cl 5.2 of the Loan Agreement applied: [39], [50]. Although he considered (at [70], [71]) that there may have been a breach by Mr Scanlon of cl 10.2(c) by pledging the shares to JP Morgan and that there may have been an Event of Default under cl 11.1(k) (at [86]), the primary judge did not address Sigiriya's argument that there was a transfer or pledge of the Sirius shares which constituted an Event of Default entitling it to give the notice under cl 11.2. Sigiriya appeals from the primary judge's conclusion that there was no Early Termination and in relation to his failure to deal with its argument based on the happening of an Event or Events of Default. 6I have had the benefit of reading in draft the judgment of Leeming JA. I agree with his Honour's reasons for concluding that there was no Early Termination and that Sigiriya was entitled to give a notice under cl 11.2 requiring that the loan amount be satisfied by transfer of the shares to it. I also agree with his Honour's reasons for disposing of the other arguments made on behalf of Mr Scanlon. The orders proposed by Leeming JA should be made. 7LEEMING JA: This appeal turns on the construction of a loan agreement between the parties, not inaptly described as a "golden handcuff". The appellant (Sigiriya) formerly employed the respondent Mr Alexander Scanlon, and lent him $47,500 on favourable terms which was drawn down to acquire a parcel of shares. The terms of the loan required, in certain circumstances, the return of the shares. The ultimate issue is whether Sigiriya validly exercised a right to require Mr Scanlon to transfer the shares, which are now worth many times their cost.

Factual background 8Sigiriya was founded in 2009 by Mr Christopher Fraser, its Managing Director. Mr Scanlon described it as "a boutique advisory and principal investments group focused on natural resources" and it employed him as an "Investment Banking Executive" from September 2009. After May 2010, Mr Scanlon was Sigiriya's sole professional employee. 9The Loan Agreement between Sigiriya and Mr Scanlon was dated 8 November 2010. On the same date Mr Scanlon entered into a Subscription Deed with York Potash Ltd, a company registered in the United Kingdom most of whose shares were owned by the trustee of The Fraser Family Trust. York Potash promised to issue 2,500 shares to Mr Scanlon at a price of £28,835; he promised not to "Dispose, transfer or enter into any economically equivalent arrangement relating to the Shares ... without the prior written approval of [York Potash], such approval not to be unreasonably withheld". The Subscription Deed recognised that the York Potash shares were subject to an option pursuant to which Sirius Minerals Plc (Sirius), a public company incorporated in the United Kingdom, could acquire them in exchange for shares in Sirius; Mr Scanlon agreed to be bound by the option. 10The consideration for the York Potash shares was funded from the $47,500 provided pursuant to the Loan Agreement. I will return to the detail of its terms, which are central to this appeal, below, but it was repayable after three years, interest was capitalised, and the loan could not be repaid early without written consent. If however there was an event of default or the "Early Termination" clauses were triggered in the first year, then the loan was thereupon repayable by the transfer of the shares. The Loan Agreement contemplated the option being exercised: if Sirius exercised the option, such that Mr Scanlon's York Potash shares were replaced by Sirius shares, and there was subsequently an event of default or "Early Termination", then it was the Sirius shares which Mr Scanlon could be required to transfer to Sigiriya. 11It was common ground that Mr Scanlon drew down the loan facility and acquired the York Potash shares; it is not clear whether the shares were in fact issued to him but nothing turns on that. Sirius exercised its option and acquired all the shares in York Potash, including Mr Scanlon's, on 17 January 2011. Mr Scanlon was issued with a share certificate for 7,499,850 Sirius shares (Shares) dated 21 January 2011. Mr Fraser, whose family trust had become entitled to 12.8% of the issued shares in Sirius, was appointed its Managing Director and Chief Executive Officer. 12The parties agreed in their pleadings that Mr Scanlon ceased working for Sigiriya on or about 28 February 2011, or in early March 2011, by agreement. Mr Scanlon thereafter entered into a written contract of employment with Sirius, where he worked until, at the end of 2011, there was the falling out which has led to this litigation.

Mr Scanlon's dealings with JP Morgan 13On the same day as his Sirius share certificate issued, Mr Scanlon spoke with and sent an email to Ms Ashley Miller, who was based in San Francisco and worked in Private Wealth Management with JP Morgan. (Previously, in October 2009, he had opened an account with JP Morgan Clearing Corporation, and had dealt with Ms Miller.) It is clear from his email that he wished to borrow money from JP Morgan, and for the Sirius shares to be (to use his language) "held" by the bank: "In terms of having flexibility for my discussion regarding the purchase of options, it would be great to know the upper limit that I could be lent under two scenarios: 1) Unsecured, but in recognition of the shares to be held in account with JPM (this is by far the preferred route); and 2) Secured by some portion of the Sirius Minerals shares (in case I can get my boss to agree to permit this, but much harder). ... I should very much be in a position to cover interest on quite a significant loan purely on the basis of my current income as I have very low outgoing expenses." 14Mr Scanlon completed an application form dated 29 January 2011 in order to open a brokerage and a margin account with JP Morgan. Mr Scanlon also signed a blank "IRREVOCABLE STOCK OR BOND POWER FOR VALUE RECEIVED", being a standard form for the transfer of shares or bonds. He emailed a scanned copy and sent the original to Ms Miller. 15Mr Scanlon's emails at this time record some measure of urgency and a sense of frustration. On 28 January 2011 he had said "I just want to have everything done and ready to go because I want to be ready to move the moment I have my shares registered in the account". On 31 January 2011 he wrote "I am still waiting on my share certificate - you can imagine that I am frustrated". On 2 February 2011, Mr Scanlon sent scanned copies of the certificate to Ms Miller, with the original in express registered airmail. 16Thereafter, it seems that Mr Scanlon was keen to obtain a margin facility. On 3 February he asked, "Any luck on the current enquiries regarding leverage?" to which Ms Miller replied "I got another no today on the margin front. I am inquiring about perhaps setting up an exception from the securities based line of credit group." On 5 February Mr Scanlon wrote: "I am getting concerned about the margin issue. I understand that I am on the private side of JPM but I am only seeking a small amount of margin ...". 17Eventually, the share certificate was received by Ms Miller in San Francisco, and Mr Scanlon was told on 19 February that the "stock certificate has been deposited into your Brokerage Account". He was also requested to complete another share transfer, which he did on 24 February, emailing a scanned copy and sending the original to Ms Miller. 18This second transfer was described as a "CREST TRANSFER", and said, immediately above Mr Scanlon's signature, "I/We hereby transfer the above security out of the name(s) aforesaid into the name(s) of the system member set out below and request that the necessary entries by made in the undertaking' own register of members." The transferee was left blank; ultimately it was stamped Chase Nominees Limited no later than 22 March 2011. The parties proceeded on the basis that thereafter, until judgment at first instance was handed down, Chase Nominees was the registered owner of the Shares. 19Sirius was listed on the Alternative Investment Market Exchange (AIM), a subsidiary exchange of the London Stock Exchange. There was uncontradicted evidence that shares in companies listed on AIM could be held in certificated or uncertificated form, and that if uncertificated, then they were transferred using CREST (a settlement system operated by Euroclear UK & Ireland Limited). CREST was described as the "central securities depository for securities issued in the United Kingdom and some other jurisdictions." Where the securities are uncertificated, title is determined through the electronic registers maintained by CREST, as opposed to the register of members maintained by the company. The description of the system in the evidence resembled what may be seen in standard English texts (for example, Gore-Browne on Companies, 45th ed, vol 2 (at Update 88, November 2010) at 23[23]-[28] under the heading "Uncertificated Shares" and M Stamp (ed), Practical Company Law and Corporate Transactions, 3rd ed (2011) Sweet & Maxwell at 122-128 (section 4.4)). CREST resembles the CHESS system operating in Australia (both of which differ from the securities depositories operating elsewhere in the world: see P Wood, Set-off and Netting, Derivatives, Clearing Systems, 2nd ed (2007) Sweet & Maxwell at 18-002 and 18-073-075). But for present purposes, all that matters is what was agreed by the parties: that, as a practical matter, natural persons resident outside the European Economic Area, such as Mr Scanlon, could not themselves have legal title to an uncertificated security; instead they would contract with a nominee member of CREST which would become the legal owner of the securities.

The way JP Morgan "held" the Shares 20Although the legal owner of the Shares was Chase Nominees, its name did not appear on Mr Scanlon's JP Morgan portfolio statement, which stated: "Your Asset Account consists of a bank account that custodies assets linked to a brokerage account through which securities transactions are executed. As a result, the Asset Account statement(s) reflect brokerage transactions executed through JPMS but (except for exchange listed options) held in custody at JPMCB. Securities purchased or sold through JPMS in US markets (other than mutual funds) are cleared through an affiliate of JPMS, in non-US markets securities are cleared through JPMS. Positions in exchange-listed options are held by JPMCC. For your convenience, however, positions in exchange-listed options are presented in Asset Account statement(s) together with other assets held in such account(s). All pertinent information about your settled and pending purchases and sales effected through your JPMS account during the period covered by these statement(s), is summarized in the 'Trade Activity' portion of the statement(s)." 21Not all of Mr Scanlon's JP Morgan portfolio statements were in evidence. Those that were showed that the bank had established a "Margin Account" whose last three digits were 027. The statements recorded no activity in that account. JP Morgan also established an "Asset Account", whose last three digits were 009. The latter had provision for a cash balance, but those in evidence recorded no cash or cash transactions. However, the latter did record the Sirius shares as "Securities Transferred In" on 24 February 2011, and the portfolio statements gave a market value of the account by reference to the share price. For example, in March 2011, Mr Scanlon's 009 account had a market value of $1,349,973 reflecting a value of 0.18c per share. Similarly, on 4 March 2011, JP Morgan wrote "To Whom It May Concern" in these terms: "Please be advised that on 2/24/2011 Alexander Witrak Scanlon deposited 7,499,850.00 shares of Sirius Minerals PLC Ordinary Stock, CUSIP 82967PXX6 into his JP Morgan Account Number xxxxxxx009. The last bid on the OTC Bulletin Board today for symbol SRUXF was .24 cents for a total closing position of approximately $1,837,463.25." By November 2011, Mr Scanlon's portfolio statement recorded the market value of the 7,499,850 Sirius shares in the JP Morgan account as $3,361,785.26 because they were valued at 45c per share.

The terms of the Loan Agreement 22Pursuant to the Loan Agreement, Sigiriya lent Mr Scanlon $47,500 for the sole purpose of funding his acquisition of 2,500 York Potash shares. The interest rate was 7% and interest was capitalised. Mr Scanlon was not permitted to prepay the Loan without the written consent of Sigiriya. He was required to repay the loan plus accrued interest three years later, unless there was an "Early Termination". "Early Termination" was defined to mean that "prior to the Final Repayment Date, the Borrower terminates its employment contract with the Lender, or its contract is terminated by the Lender due to a breach of that employment contract by the Borrower". If that took place in the first year, repayment of the loan could only be effected by transferring the Shares to Sigiriya (if the clauses were triggered in the second or third years, a diminishing proportion of the Shares were to be transferred). 23At the end of 2011 there was a falling out between Mr Scanlon and Sirius' Managing Director and CEO, who wrote by letter dated 23 December 2011 advising that his employment was terminated. The same letter advised that the early termination provisions of the Loan Agreement had become operative. 24The primary judge focussed on the "Early Termination" provisions of the Loan Agreement, and started with an analysis of how Mr Scanlon's employment came to an end. With respect, that approach left unresolved the most direct means by which Sigiriya could bring Mr Scanlon's indebtedness to an end, and require the return of the Shares - namely, through exercise of its contractual right following an event of default. The primary judge did consider the operation of the events of default to an extent, but only in order to answer the question (negatively) whether Mr Scanlon's employment was terminated by reason of his breach of the Loan Agreement. The primary judge concluded his analysis upholding Mr Scanlon's claim with the statement that Sigiriya "needs to show that the employment was terminated due to specific causes" (at [90]). That is not so; the circumstances and timing of the termination of Mr Scanlon's employment are a distraction from the ultimate question: was Sigiriya entitled to have the Shares transferred to it by reason of Mr Scanlon's default under the Loan Agreement, in accordance with its demand? For by letter dated 5 February 2013, three weeks before trial, it wrote to Mr Scanlon in these terms: "At least one 'Event of Default' (as defined in clause 11.1 of the Loan Agreement) has occurred under the Loan Agreement. In particular, the following Events of Default have occurred: a) As defined by clause 11.1(k) of the Loan Agreement, an Event of Default occurred by reason of your breach of the undertaking(s) given by you by your agreement to clause 10.2(c) of the Loan Agreement. You breached clause 10.2(c) by causing legal title to 'the Shares' (as defined in the Loan Agreement) to be assigned or transferred (or by you taking an economically similar action) on or shortly after 22 March 2011. You achieved that assignment, transfer or economically similar action by the execution and delivery to the relevant body or authority of a CREST Transfer Form dated 22 March 2011. b) As defined by clause 11.1(c) and/or clause 11.1(l) of the Loan Agreement, an Event of Default occurred by reason of your breach of the obligation(s) imposed upon you by your agreement to clause 14.1 of the Loan Agreement. You breached clause 14.1 by causing legal title to the Shares to be assigned, transferred, subjected to a trust or other interest, or otherwise dealt with without the prior written consent of [Sigiriya] ('the Lender'). In this regard, you were aware of the default, or ought reasonably to have become aware of the default, as early as 22 March 2011 and by no later than 23 December 2011, yet, to this date, you have not remedied that default. By reason of the above Events of Default, each operating independently as a basis for this Notice, the Lender hereby gives you notice pursuant to clause 11.2(c) of the Loan Agreement, that the 'Amount Owing' (as defined in the Loan Agreement) is immediately due and payable by you without further demand and that the Amount Owing is to be satisfied only by delivery of the Shares." 25The critical provisions of the Loan Agreement for the purposes of this appeal are as follows: "9 Representations and warranties 9.1 The Borrower represents and warrants to the Lender in respect of itself that: ... (l) title: it will be the sole beneficial owner of the Shares purported to be charged or mortgaged by it free of any Security Interest or other third party right or interest other than the Permitted Security Interests; ..."

"10 Undertakings Positive undertakings 10.1 ... Negative undertakings 10.2 Unless the Lender or an Authorised Officer of the Lender otherwise agrees in writing, the Borrower must not: (a) Security Interests: create or permit to exist a Security Interest over all or any part of its assets, revenues or business, other than a Permitted Security Interest; (b) Insolvency Event: do anything which would cause an Insolvency Event to occur in respect of itself; or (c) Disposal: sell, pledge, encumber, assign, transfer, or take any economically similar action, or make any such offer, in relation to the Shares, nor permit the sale, encumbrance, assignment, transfer or economically similar action of the Shares in any manner, including such actions as writing covered options or other economically similar undertaking."

"11 Events of Default 11.1 It is an event of default if: (a) non-payment of principal or interest: the Borrower fails to repay the Loan in accordance with this Agreement; (b) non-payment of other money: the Borrower fails to pay any fees, costs, charges, expenses or other money (other than the amounts referred to in clause 11.1(a)) payable under a Transaction Document; (c) other default: the Borrower fails to perform or observe any other obligation under a Transaction Document and: (i) the Lender considers that the failure or default cannot be remedied; or (ii) the Lender considers that the failure or default can be remedied but it is not remedied to the Lender's satisfaction within 3 Business Days (or any longer period the Lender or an Authorised Officer of the Lender approves) from the earlier of: (A) the date the Borrower became aware of the default or ought reasonably to have become aware of the default; and (B) receipt by the Borrower of a notice from the Lender requiring it to remedy the default; (d) representations: a representation or warranty made or deemed to be made by the Borrower in, or in connection with, a Transaction Document is untrue or misleading (by omission or in any other way) when made or repeated; (e) Authorisations: an Authorisation described in clause 10.1(d) is not granted or ceases to be in full force and effect for any reason or is varied in a manner which may have a Material Adverse Effect on the Borrower or the ability of the Lender to exercise or enforce its rights under any Transaction Document; (f) Insolvency Event: an Insolvency Event occurs in respect of the Borrower; (g) execution: distress, attachment, execution or other court process or any judgment in an amount exceeding $50,000 is issued, levied or enforced on or against the Borrower or any assets, revenues or business of the Borrower; (h) expropriation: a Government Agency expropriates all or a substantial part of the assets or business of the Borrower or proposes to do so; (i) vitiation of documents: (i) a Transaction Document or a provision of a Transaction Document ceases for any reason to be of full force and effect or becomes void, voidable or unenforceable; (ii) a law suspends, varies, terminates or excuses performance by the Borrower of any of its obligations under a Transaction Document or purports to do so; (iii) it becomes impossible or unlawful for the Borrower to perform an obligation under a Transaction Document or for the Lender to exercise all or any of its rights, powers and remedies under a Transaction Document; (iv) any undertaking of the Borrower under a Transaction Document is not enforceable in accordance with its terms and the Borrower fails to do, or fails to refrain from doing, the act which it purported to undertake to do or not to do, as the case requires; or (v) the Borrower alleges that a Transaction Document has been affected as described in paragraphs (i) to (iv) inclusive of this sub-clause; (j) material adverse change: an event or circumstance occurs which does or may have a Material Adverse Effect on the Borrower; (k) undertakings: an undertaking given to the Lender or an agent or adviser of the Lender by or on behalf of the Borrower or an agent or adviser of the Borrower is not honoured strictly in accordance with its terms; (l) other event of default: an event of default (however described in the relevant Transaction Document) occurs under any other Transaction Document. 11.2 If an Event of Default occurs the Lender may by notice to the Borrower: (a) declare the Amount Owing to be either: (i) payable on demand; or (ii) immediately due and payable without further demand, notice or other legal formality of any kind; or (b) declare the Facility cancelled; or (c) declare the Amount Owing to be immediately due and payable without further demand, the Amount Owing to be satisfied only by delivery of the Shares. or make any or all of these declarations. 11.3 A notice given under clause 11.2 is effective on receipt."

"14 Assignment Assignment by the Borrower 14.1 The Borrower must not assign or otherwise transfer, create any charge, trust or other interest in or otherwise deal with a Transaction Document or a right, remedy, power, duty or obligation under a Transaction Document without the prior written consent of the Lender or an Authorised Officer of the Lender. Assignment by the Lender 14.2 The Lender must not assign or otherwise transfer, create a charge, trust or other interest in or otherwise deal with a right, remedy, power, duty or obligation under a Transaction Document or grant a participation or sub-participation in a Transaction Document without the prior written consent of the Borrower."

Sigiriya's submissions 26Sigiriya advanced three submissions based on those clauses. It said that the transfer of the Shares to Chase Nominees, and the pledge in favour of JP Morgan, were a breach of the negative undertakings in cl 10.2 giving rise to an event of default by reason of cl 11.1(k). Secondly, it said that the same conduct was a breach of cl 14.1, which was an "other default" under cl 11.1(c) which had not been remedied in accordance with that paragraph. Thirdly, it said that if the breach of the negative undertakings did not directly engage cl 11.1(k), it engaged cl 11.1(c), which default once again had not been remedied in accordance with that paragraph. I address each submission in turn.

Breach of an undertaking under cl 11.1(k)? 27The first way in which Sigiriya justified its right to call for the Shares was that there had been a breach of one of the negative undertakings in cl 10.2(a) or (c). Clause 10.2(a) was neither pleaded nor relied on in the 5 February 2013 letter, and, on the view that I take, does not in any respect add to the appellant's arguments (for any grant of a Security Interest within the meaning of cl 10.2(a) must necessarily be an action falling within cl 10.2(c) (Disposal)). It follows that it is unnecessary to resolve whether the fact that paragraph (a) applied to all the Borrower's "assets, revenues or business", unlike paragraph (c) which was confined to the Shares and imposed different obligations, should result in a construction whereby the more general provisions of paragraph (a) do not extend to the specific circumstances addressed by paragraph (c). 28There were two ways in which Sigiriya said that cl 10.2(c) was engaged: first by the mere assignment to Chase Nominees, and secondly by the pledging or encumbering of the Shares as discussed further below. The appellant said that the negative undertakings in cl 10.2(c) engaged cl 11.1(k), such that Mr Scanlon's failure to honour them strictly in accordance with their terms was of itself an event of default, immediately entitling the appellant to exercise the powers in cl 11.2. The reason for this being Sigiriya's primary submission was that, if correct, it enlivened the power to call for the Shares under cl 11.2 without the need to comply with the provisions of cl 11.(1)(c)(i) or (ii). 29Sigiriya's construction is not readily reconciled with the text and structure of cl 11.1. On Sigiriya's construction, the Disposal is an event of default because the negative undertaking was not honoured strictly in accordance with its terms. But then either cl 11.1(c) applies to the Disposal or it does not. If it does, then the very same Disposal engages the provisions of cl 11.1(c)(i) and (ii), both of which require an additional element of the Lender considering the Disposal before there is an event of default, and one of which permits the Borrower to remedy the position, in which case there is no event of default. But that regime, which is favourable to the Borrower, is side-stepped if cl 11.1(k) applies. On the other hand, if cl 11.1(c) does not apply to the Disposal, then the words "any other obligation" in it do not bear their ordinary meaning. The force of that consideration is strengthened by the fact that paragraphs (a) and (b) each address pecuniary breaches (which are apt to be of fundamental importance in what after all is a loan agreement) before paragraph (c) deals with a failure to perform "any other obligation under a Transaction Document", and the following paragraphs then deal with matters which, on the whole, arise outside the Loan Agreement. In particular, cl 11.1(k) deals expressly with undertakings given to or by either party's agent or adviser, which squarely points to something outside the Loan Agreement. Neither of those possibilities is attractive; the question is whether a legal meaning is available which more closely adheres to the language of the clause as a whole. 30Clause 11.1 (which is, after all, a single very long sentence) must be considered as a whole, just as must the Loan Agreement itself. In Fitzgerald v Masters (1956) 95 CLR 420 at 437, McTiernan, Webb and Taylor JJ said: "It is trite law that an instrument must be construed as a whole. Indeed it is the only method by which inconsistencies of expression may be reconciled ..." Gibbs J made the same point in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 when saying that the meaning of any one part of the contract may be revealed by other parts, and "the words of every clause must if possible be construed so as to render them all harmonious one with another." In Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [16] the joint judgment spoke of preferring a construction "supplying a congruent operation to the various components of the whole". In Chapmans Ltd v Australian Stock Exchange Ltd [1996] FCA 474; (1996) 67 FCR 402 at 411, in a passage applied in Perpetual Custodians Ltd as custodian for Tamoran Pty Ltd as trustee for Michael Crivelli v IOOF Investment Management Ltd [2013] NSWCA 231 at [81], Lockhart and Hill JJ said: "It is an elementary proposition that a contract will be read as a whole giving weight to all clauses of it, where possible, in an endeavour to give effect to the intention of the parties as reflected in the language which they have used. A court will strain against interpreting a contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning can be given to it consonant with other provisions in a contract. Likewise where there are general provisions in a contract and specific provisions, both will be given effect, the specific provisions being applicable to the circumstances which fall within them." Those uncontroversial statements of principle reflect the fact that ordinarily considerations of internal coherence are a sound guide to a contract's legal meaning, as Professor Carter has observed: The Construction of Commercial Contracts (2013) Hart Publishing at 440-441. Here the immediate question turns on the internal coherence of clause 11.1. 31Reading cl 11.1 as a whole, and giving weight to all of its clauses, notably the words "any other obligation" in cl 11.1(c), the additional steps to be taken by the Lender under cl 11.1(c)(i) or (ii), and the broader language in cl 11.1(k) which includes agents and advisers of the parties, leads me to reject Sigiriya's construction. Although Sigiriya's construction accords with the literal meaning of cl 11.1(k) if read in isolation, it sits ill with the language of "any other obligation" in cl 11.1(c), and with the structure of cl 11.1 as a whole. There is an alternative construction readily available which does no violence to cl 11.1(c) and which makes commercial sense. The alternative construction excludes from cl 11.1(k) breaches of cl 10.2 negative undertakings and confines cl 11.1(k) to undertakings dehors the contract. It follows that cl 11.1(k) is not available to Sigiriya. 32Against this, Sigiriya said that the negative undertaking in cl 10.2(c) in this "golden handcuff" agreement made his holding the shares for the term of the loan "absolutely the essence of this contract". The submission is not without force, but fails to address satisfactorily the textual matters pointed to above, and the consideration that something which is essential to the bargain can, without detracting from that essentiality, be made subject to the procedure contained in cl 11.1(c) before an event of default can be said to occur.

Clause 14.1 is not available to Sigiriya 33Sigiriya's second submission may be addressed concisely. It was put that both the transfer to Chase Nominees, and the pledging of the parcel of Shares in favour of JP Morgan, contravened cl 14.1, on the basis that the Shares were a "right" under a Transaction Document. Three things stand in the way of that submission. The first is that cl 14.2 imposes a symmetrical, and similarly worded, obligation upon the Lender. That symmetry reveals a very different purpose for these clauses: in essence that for this particular (and rather unusual) contract the parties have agreed to deal with each other, and not with the other's assignee. Secondly, even recognizing that the term "right" can be used very broadly and indiscriminately, it strains language to regard the parcel of Shares (which is, after all, a defined term in, and the raison d'etre of, the Loan Agreement) as falling within the word "right" in cl 14.1. Thirdly, if the submission is correct, how to explain the duplication in cl 14.1 and cl 10.2(c) of the specific covenant not to assign or transfer the Shares? 34For those reasons, I do not regard cl 14.1 as speaking to a dealing with the Shares. However, even if I were wrong about that, I cannot see that anything turns upon it, for I struggle to see how the appellant can fail in respect of a breach of cl 10.2(c) yet succeed by relying on a breach of cl 14.1. Even if Sigiriya were correct and the Shares were a cl 14.1 "right", Sigiriya would still have to show that the Shares were dealt with and would still have to show that cl 11.1(c) had been satisfied.

Clause 11.1(c) 35Thirdly, Sigiriya submitted that there was a breach of cl 10.2(c) which engaged cl 11.1(c), and that its letter dated 5 February 2013 was sufficient to satisfy that clause. It conceded that it had never given a notice requiring Mr Scanlon to remedy the default, but said that that was not necessary through reliance on cl 11.1(c)(ii)(A). Mr Scanlon denied both steps of Sigiriya's submission, and further said that reliance by Sigiriya on a right to acquire the Shares was in breach of an implied term to act reasonably or in good faith. I deal with each element in turn.

(a) There was a contravention of cl 10.2(c) 36I consider that cl 10.2(c) means what it says, and was breached by the transfer of legal title in the Shares from Mr Scanlon to Chase Nominees. Mr Scanlon contended that it was not contravened where there was no transfer of the beneficial interest in the Shares, and he pointed to the fact that representation 9.1(l) was that he would be the "sole beneficial owner of the Shares" and that the undertaking in 10.2(c) included not taking "any economically similar action". The fact that a contractual representation is narrower than a negative undertaking is of relatively slight weight. I see little force in a submission that seeks to read down the fourth and fifth verbs "assign" and "transfer" by reference to the later words in the clause "or take any economically similar action" which are prima facie intended to be expansive of the forbidden "Disposals". 37Mine might seem at first blush to reflect an unduly and potentially unfairly technical approach, if all Mr Scanlon were doing was, for the purposes of convenience, obtaining an uncertificated holding of foreign listed shares. But the force of the ordinary literal meaning of "assign" and "transfer" is strengthened, in my opinion, once it is borne in mind that the point of this "Golden Handcuff" was that the Shares not trade. The self-evident commerciality of the Loan Agreement and in particular of cl 5.2 was that Mr Scanlon was being issued shares at no upfront cost at what was hoped to be a very substantial discount. If there was Early Termination in the first year, the Shares were to be returned. If there were Early Termination in the second or third year, a declining fractional amount of the loan and proportion of the Shares was to be repaid and returned. After three years, Mr Scanlon was required to repay the loan, and he was free to deal with the Shares. That is to my mind a powerful consideration supporting giving the covenant against assignment or transfer its ordinary meaning. 38Moreover, any unfairness is superficial. For it was sufficient for Mr Scanlon to disclose his dealings with JP Morgan to Sigiriya and obtain written consent. (There was an issue on the pleadings as to whether there had been disclosure, but Mr Scanlon did not suggest that Sigiriya had given written consent to the transfer of title.) 39Further, it was not the case that Mr Scanlon merely had the Shares registered in the name of a nominee member of CREST. He sought to utilise them to obtain a margin facility from JP Morgan and he pledged them in favour of JP Morgan. There is nothing technical about this. Mr Scanlon knew that he was not able to use the Shares as security, but proceeded on the basis that JP Morgan might lend him money on the strength of its holding the Shares ("Unsecured, but in recognition of the shares to be held in account with JPM"). In his correspondence with Ms Miller in seeking a loan, he sought "leverage" (which is hard to reconcile with an absence of security) and was at pains to point out that Sirius was liquid ("there are 878 million shares on issue, the vast majority of which are small shareholders, so there is tons of free float and liquidity"). And he opened a margin account. Although the evidence does not disclose any transactions in that account, any transactions were apt to give rise to obligations owed by him to JP Morgan. 40The first page of the 29 January 2011 JP Morgan application form which Mr Scanlon signed stated: "Each account I open, and each subaccount opened under such account from time to time, are subject to the security interest provisions in the Agreement (as defined below in 'D. Agreement') and are pledged as Collateral for all my Obligations." 41Extensive submissions were made by Mr Scanlon on the meaning of the "Security interest provisions" and in support of a textual argument pursuant to which, so it was said, those provisions did not apply to him. It is not necessary to address those submissions because, taking them at their highest, they are no answer to the ordinary meaning of the last eight words, which plainly create a pledge upon his providing the share certificate to JP Morgan.

(b) Clause 11.1(c) was satisfied 42Although Mr Scanlon breached cl 10.2(c), there is no event of default until there is also compliance with 11.1(c)(i) or (ii), each of which turns upon the state of Sigiriya's mind. Either Sigiriya must form the view that the breach cannot be remedied, or else it has not been promptly remedied. The latter matters here (for plainly the Shares could be re-transferred to Mr Scanlon). 43The letter dated 5 February 2013 complained, in paragraph (a), that the transfer of the Shares breached cl 10.2(c), but asserted that the breach engaged cl 11.1(k). In my opinion, as stated above, cl 11.1(k) was not available. However, the letter went on, in paragraph (b), to complain that the same transfer of title to the Shares engaged cl 11.1(c), and said that Mr Scanlon had been aware of that default for many months and had not remedied it. The allegations in paragraph (b) were well-founded. In my view, cl 11.1(c)(ii)(A) was satisfied, so that there was an "event of default" and Sigiriya was entitled to invoke cl 11.2, which it did. It is not necessary, on the view that I take, to determine whether the 5 February 2013 letter would suffice to satisfy cl 11.1(c) in respect of the breach caused by the pledge over the Shares granted by Mr Scanlon contrary to cl 10.2(c). 44At trial, Mr Scanlon denied that there was any breach by him in "depositing" the shares with JP Morgan. It may seem to some a little implausible, but Mr Scanlon maintained that notwithstanding many years of experience in equity markets, "I believed that the CREST Transfer Form would simply leave the shares in my name". The primary judge did not disbelieve him, and there was no finding by the primary judge that Mr Scanlon was aware that executing the CREST Transfer Form constituted a breach of cl 10.2(c). However, in my view, Mr Scanlon ought reasonably to have become aware that there was a breach at the time that he sent to JP Morgan (a) the "IRREVOCABLE STOCK OR BOND POWER" signed and made out in blank, (b) the signed document described as a "CREST TRANSFER" and (c) the original share certificate. Mr Scanlon's portfolio statements do not alter the position; although they do not mention Chase Nominees, and their language is loose ("held in custody" and "Securities Transferred In"), they do not displace what ought to have been self-evident upon the signing of the transfer forms and the provision of the share certificate. 45Clause 11.1(c)(ii) needs to accommodate cases where there is a deliberate breach by the Borrower, or where the Borrower is recklessly indifferent to breach. In either of those cases, the Lender might not learn of the breach for some weeks or months. Clause 11.1(c)(ii)(A) therefore is engaged not by the Lender's knowledge of the breach, but by the Borrower's actual or constructive awareness of the breach. In those circumstances, the three day period may have expired long before the Lender learns of the breach. That makes the position different from many "show cause" provisions. However, it is to be remembered that this Loan Agreement was very different from most. There was no obligation upon Mr Scanlon to do anything except retain ownership of the Shares, which had been issued to him at a deep discount and financed on very favourable terms. 46No later than 5 February 2013, Sigiriya had formed the view that the transfer of the Shares was contrary to the Loan Agreement and therefore that cl 11.1(c) applied and had not been remedied. Sigiriya relied upon some clauses in the Loan Agreement which, on the construction I favour, were inapplicable. But that did not prevent its letter from complying with cl 11.1(c). It follows that there was an event of default, and Sigiriya was prima facie entitled to exercise the powers under cl 11.2, which it did by the same letter.

(c) Sigiriya's exercise of powers not unreasonable or contrary to good faith 47Against this result, Mr Scanlon submitted that Sigiriya was prevented from exercising those powers to require the return of the Shares because it would be contrary to an implied term requiring Sigiriya to exercise powers given to it "fairly and in good faith" and reasonably. The submission was advanced purely on the basis of implication, as opposed to construction (for example, it was not put that cl 11.2(c) was to be construed as meaning only that so many of the Shares needed to be transferred as would have been sufficient to permit the repayment of the Amount Owing). It follows that arguments of construction based on the disparity between the "Amount Owing" and the market value of the Shares and the fact that what had originally been an illiquid parcel of shares in a private company had become readily disposable may be put to one side (and it is unnecessary to consider whether this is a (relatively rare) case where the approach favoured by Elisabeth Peden based on construction rather than implication may have been available: E Peden, Good Faith in the Performance of Contracts (2003) LexisNexis Butterworths, chapters 5 and 6; cf Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [204]-[206] (Giles JA, Sheller and Ipp JJA agreeing)). 48Accepting that cl 11.2(c) bears its literal meaning, there are two answers to Mr Scanlon's submissions based on an implied term. The first is that the implied term for which he contends term cannot be inconsistent with the express terms of a contract: Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [146]. The second deals with the submission more substantively. Let it be assumed, favourably to Mr Scanlon, that Sigiriya was obliged to act reasonably and in good faith. The Loan Agreement was not some onerous or valuable contract whose termination was to be regulated by reference to what was necessary for the protection of a party's legitimate interests (to use the language of Sheller JA in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 368). Mr Scanlon was the beneficiary of what amounted in substance to a gift of shares. He contributed nothing up-front to the purchase price, and all interest was capitalised. He was not obliged to perform any positive obligations throughout the entirety of the term, and his obligation to repay the loan, as it turned out, was a tiny fraction of the market value of the Shares. Had only he done nothing, he would not be in breach. However, as set out above, he set about actively breaching his obligations by transferring and pledging the Shares as soon as it became possible for him to do so. 49There was no contravention of any obligation to act reasonably or in good faith, where Mr Scanlon had invested nothing in York Potash or Sirius, but had breached the very favourable (to him) terms of the Loan Agreement at its outset, in the Lender acting in accordance with the agreement's self-evident purpose and having transferred to it the Shares which it had paid for. Any other conclusion would subvert the purpose of the Loan Agreement.

Remaining issues 50Sigiriya in the further alternative said that the consensual termination of Mr Scanlon's employment with it, to be replaced by his employment with Sirius, amounted to an "Early Termination". I disagree. That clause was directed to two more specific circumstances: Sigiriya terminating the contract of employment due to breach by Mr Scanlon, or Mr Scanlon terminating his contract of employment (for any reason). Consensual termination by both parties does not fall within the definition for two reasons. The first is that the language of "termination" reflects a unilateral right (such as may be conferred by contract, or by accepting a repudiation), not a consensual discharge. The second is that there was no need for the clause to address the circumstance where the parties were of the same mind to vary the employment contract, because the parties to the employment contract were the same as the parties to the Loan Agreement. 51Finally, Mr Scanlon sought to adduce fresh evidence on the hearing of the appeal going to two issues. The first was that it was open to him to direct JP Morgan to cause legal title to the Shares to be retransferred to him. So much I would readily infer and indeed, this aspect was not pressed. The second was to the effect that there were no funds deposited or transactions executed in relation to the JP Morgan account said to have been provisionally opened in October 2009. It will be seen from the foregoing that it plays no part in my reasons for allowing the appeal; it is not necessary in the circumstances to say anything further about the discretion to receive such evidence and whether it could have been obtained through reasonable diligence; cf Harding v Anton's Wire Products Pty Ltd [2013] NSWCA 258 at [14] (Meagher JA).

Orders 52For those reasons, I propose that the appeal be allowed, orders 3, 4 and 5 made on 30 April 2013 be set aside, and in lieu thereof make the following orders in the terms sought by Sigiriya (as to whose form Mr Scanlon advanced no contrary submission): (1)Declare that the notice from Sigiriya to Mr Scanlon dated 5 February 2013 constituted a valid and effective exercise by Sigiriya of its powers under cl 11.2 of the Loan Agreement and thereby required Mr Scanlon to deliver the entirety of the 7,499,850 ordinary shares in Sirius Minerals Plc to Sigiriya. (2)Order that Mr Scanlon immediately take such steps as are necessary so as to cause the entirety of the 7,499,850 ordinary shares in Sirius Minerals Plc, which had been acquired by Mr Scanlon pursuant to the terms of the Loan Agreement, to be transferred and/or delivered to Sigiriya (or to such other person or entity as nominated in writing by Sigiriya) and that such delivery and/or transfer be completed within seven days. (3)Order that Mr Scanlon pay Sigiriya's costs both in the Court below and of this appeal. 53Mr Scanlon filed a notice of cross-appeal, although there are no orders adverse to him which could be challenged. The parties agreed to treat it as a notice of contention, and the arguments contained in it have been addressed above. Formally, the notice of cross-appeal should be dismissed. 54SACKVILLE AJA: I agree with the orders proposed by Leeming JA and with his Honour's reasons. 55I wish to make only one observation. It may be that an argument could be mounted that cl 10.2(c) of the Loan Agreement would not be breached if all that happened was that Mr Scanlon executed a CREST Transfer in order to obtain uncertificated registration of the shareholding for the purposes of better managing his shareholding. The evidence established that there were very good practical reasons why a non-resident of the European Economic Area ("EEA") would wish to obtain uncertificated registration of his or her shareholding. These included facilitating the payment of dividends and ensuring timely notification of corporate announcements. 56The evidence also showed that the only way a non-EEA resident could obtain uncertificated registration of a shareholding in a United Kingdom company listed on the Alternative Investment Market Exchange was through a nominee account operated by a bank or stockbroker. For someone in Mr Scanlon's position, it was necessary to execute a CREST Transfer of his shareholdings in order to place the shares in the name of a nominee. 57However, as Leeming JA has pointed out (at [39]), Mr Scanlon did much more than have his shareholding registered in the name of a nominee in order to better manage the holding as a non-resident. The transfer of the shares was part of a strategy to use the shares as collateral for investment loans. This is not a case of a standard transfer designed simply to allow a non-resident shareholder to gain the benefits available as of course to resident shareholders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 November 2013

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