Consideration
144In my view, and as I consider is revealed by the analysis which follows, the words used by these parties in their specific instruments have the meaning for which Sumiseki contends.
145Sumiseki prayed in aid of its construction what was said by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, which concerned a formulation materially indistinguishable from the words in the present case.
146Mr Prenn sold to Dr Simmonds shares in R.T.T. Clause 1 of their written agreement provided, amongst others, for a payment by Mr Prenn to Dr Simmonds and for the sale to Dr Simmonds of shares in R.T.T. Clause 2 provided, relevantly, that the provisions of cl 1 would not take effect unless any one of a number of conditions had been satisfied, including that "[t]he aggregate profits of R.T.T. earned during the four years ending August 19, 1963 and available for dividend on the ordinary stock units for the time being issued whether declared or not shall have amounted to ₤300,000" after tax. At 1389 his Lordship said:
The reference (in paragraph (b)) to profits "available for dividend on the ordinary stock units," so far from pointing toward the limited construction, points, for me, the other way. For both commercially and on the established accounting practice, all profits of the group are available for these dividends. It is true that a large part of the profits was ploughed back into the business of the subsidiaries, and that both parties must have contemplated that this would be done, but this is not to the point. To say so, is to confuse the earning of profits with their appropriation: all profits earned are available for dividend; what is done with them is a matter of choice which rests with those who control the company. Even if they decided to "plough them back" they still remain "available for dividend," so long as they remain in the balance sheet as "balance on profit and loss account."
147It seems that Lord Wilberforce had in mind the meaning given to the word "available" in the Macquarie Concise Dictionary 4th ed, which is "suitable or ready for use; at hand; of use or service". On this approach, profits are available if they are capable of being used to pay dividends.
148PAML and Wambo relied on what was said by Barrett J (as his Honour then was) in Heesh v Baker [2008] NSWSC 711; (2008) 67 ACSR 192, which they submitted is to different effect and supports the construction for which they contend.
149Barrett J was called on to consider whether certain shareholders were creditors of a company ("York") for the purposes of Part 5.3A of the Corporations Act 2001 (Cth) ("the Act"), solely by reason of their rights against York under its constitution and the terms of issue of redeemable preference shares held by them. They claimed to be future creditors on the basis that there would be a debt or claim in respect of dividends or redemption monies in the future, or that they were contingent creditors, York having an existing obligation to make payment out of which a payment liability would arise on a future event.
150Having regard to the terms of issue of the shares and the constitution of York, his Honour held that the shareholders were neither future nor contingent creditors in respect of any dividends, absent there being a declaration of those dividends. In the context of a company's ability to declare dividends out of profits, at 203, [42]-[45], under the heading "[o]bservations on the availability of profits", his Honour said:
[42] The constitution of York contains provisions about ascertaining profits and the distributable quantum. Article 18.4 says that the directors, "may, before declaring any dividend, set aside out of the profits of the company such sums as they think proper as reserves, to be applied, at the discretion of the directors, for any purpose for which the profits of the company may properly be applied". Article 19.1 permits the capitalisation of profits. Under both these provisions, profits that might otherwise have been used to pay dividends may be applied in other ways. Only such residue of profits as remains after any such applications is properly available for dividend.
[43] Circumstances may be such that it is either necessary or prudent to carry profits to a reserve rather than treating them as available for dividends. An unrealised capital gain arising by reason of revaluation and disclosed in the accounts may be the source of a dividend. As the High Court observed in Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 ; 222 ALR 286 ; 80 ALJR 202 ; [2005] HCA 70 at [49], "the concept of profits in the context of company law is sufficiently broad to encompass unrealised capital profits". But good practice or adherence to accounting standards may not only impose constraints upon revaluation (so that, for example, classes of assets rather than individual assets are considered) but also require that the unrealised surplus be carried to a revaluation reserve.
[44] At an even earlier stage, directors will be called upon to exercise judgment and prudence in relation to contingencies. To the extent that debts owing to the company may be judged unlikely to be recovered, it will be appropriate to recognise a provision for doubtful debts which reflects in the determination of profits as such.
[45] These and similar matters are of significance because they show not only that principles of prudence are to be applied in determining profits but also that profits, once ascertained, may be in part devoted to other purposes before being considered a proper source of dividends. This is sometimes said to represent the difference between distributable profits and profits available for dividend - the latter being, in the words of Maugham J in Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 at 202, those profits "available for dividend after making any reserve or other similar application which the directors, in good faith, acting on behalf of the company, think it is their duty to make in the interests of the company".
151At [24] his Honour set out Arts 18.1 and 18.2 of York's constitution. They were in the following terms:
18.1 Subject to the rights of persons (if any) entitled of shares with special rights to dividend, the Directors may declare a final dividend out of profits as they see fit but in accordance with the Corporations Act and may authorise the payment or crediting by the Company to the Members of such a dividend.
18.2 The Directors may authorise the payment or crediting by the Company to the Members of such interim dividends as appear to the Directors to be justified by the profits of the Company as they see fit but in accordance with the Corporations Act.
152At [28] his Honour observed:
As I have said, the articles place the matter of release of dividends in the hands of the directors who must, however, recognise special rights to dividends carried by any shares.
153PAML and Wambo submitted that the meaning attributed to the formulation by his Honour is a generally understood one in the field of corporations. They also relied on a statement by Campbell JA in Phoenix v City of Canada Bay Council at [174] to the following effect:
If the document in question is drawn by a lawyer, is manifestly intended to effect a legal transaction, and uses an expression that is not an expression in common use but that has a meaning in an area of legal discourse that is relevant to the document in question, that in itself provides a basis for the reasonable reader concluding that that expression is used in its special legal sense, unless there are other factors present that show it is not used in that special legal sense. So understood, the presumption is consistent with the current approach to construction.
154Sumiseki says that profits are available under Art 2.1B to pay the B Class dividend if that dividend could lawfully be declared out of them. PAML and Wambo's position is that profits are available for the purpose of paying the B Class dividend only after the directors have considered whether any part of them which might otherwise have been used for that purpose should be devoted to some other purpose.
155On the approach taken by Lord Wilberforce in Prenn v Simmonds, profits are available for dividend purposes even if the directors have the discretion to appropriate them, or some of them, to uses in priority to the payment of dividends. They are available because they can be used for either.
156The construction contended for by PAML and Wambo and the approach of Barrett J in Heesh v Baker posit the existence of a discretion in the directors to devote profits which might otherwise be used to pay the B Class dividend to some other purpose in priority to the payment of the B Class dividend.
157In Heesh v Baker, Arts 18.1 and 18.2 of the constitution of York gave the directors wide power to devote profits to purposes other than the declaration and payment of dividends.
158In Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196, cited by Barrett J, Maugham J referred to and relied upon Fisher v Black and White Publishing Company [1901] 1 Ch 174, in which one of the clauses in the articles under consideration gave directors power to set aside out of the profits of the company a reserve fund.
159If York had been obliged to pay a dividend calculated by direct reference to a profit figure yielded by the accounts, and the directors had been given no discretion to devote any of it to other purposes, all of it would have been available for dividend purposes.
160This demonstrates, unsurprisingly, that the meaning of the formulation depends on the specific context in which it is used. For this reason, other decisions which have considered similar phrases are of limited assistance: see for example Bagot Pneumatic Tyre Company v Clipper Pneumatic Tyre Company [1902] 1 Ch 146; Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101; In re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384; Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590.
161The true inquiry distils into whether, viewed objectively and having regard to the entire instrument under consideration, the parties intended the directors to have the power to determine whether part of a profit disclosed by the accounts and otherwise lawfully available to be distributed as the B Class dividend could be devoted to other purposes.
162The discretion of the directors to deal with profits derives exclusively from the Constitution and is conferred by Arts 9.1(a), 9.4(a) and 9.5.
163Did the parties by the words they chose in the Restructure Agreement and the Resolution intend to exclude, in so far as they might otherwise have applied to the B Class shares, the powers given to the directors in Arts 9.1(a), 9.4(a) and 9.5 of the Constitution? In my view, the question is to be answered in the affirmative.
164First, the words in Art 2.1B "[d]espite any provision in this Constitution to the contrary" displace the operation of Arts 9.1(a), 9.4(a) and 9.5 in so far as they might otherwise have applied to the true and fair value of the profit of Wambo as shown in the accounts.
165To meet this, PAML and Wambo put that the commencing words of Art 2.1B might displace the operation of Arts 9.1(a), 9.4(a) and 9.5, but that the words in Art 2.1(d) and (e) "profit of the Company available for dividend purposes" themselves independently conferred discretion on the directors to utilise profits for other purposes. This submission is unsustainable. It would mean attributing to the parties an intention to give back by implication what had expressly been taken away. In my view, Arts 9.1(a), 9.4(a) and 9.5 are the sole repositories of the discretion anyway.
166Secondly, in contrast to Art 2.1A, which gives the holder of ordinary shares the right to receive dividends "as determined from time to time", Art 2.1B contains no formulation requiring the directors (or giving them a discretion) to determine the amount of the dividends.
167Thirdly, Art 2.1B contains machinery which enables the ascertainment, objectively, of an amount capable of being distributed as a dividend. If the directors had a plenary discretion to devote all or some of the profit figure disclosed by the working of that machinery, it would render the structure otiose.
168Fourthly, Art 2.1B(f) provides for the payment of a final dividend at the end of Wambo's winding up. The dividend then payable would not be one determined by the directors in their discretion, given that the directors would have been relieved of the power to do so. The article uses the same formulation, indicating that Sumiseki's construction should be preferred.
169Fifthly, the Deed of Variation to the Free Cash Flow Escrow Agreement inserted a definition of "B Class Dividend Entitlements". The effect of the variation was to give priority to the payment to Sumiseki of the B Class dividend out of what otherwise would have been part of Free Cash Flow. However, whatever was not paid in respect of the B Class dividend would still be required to be paid to Sumiseki as part of Free Cash Flow. Wambo was required to estimate the profit available to pay the B Class dividend on a six monthly basis. If the directors of Wambo had the discretion to devote part of the profit to other purposes before the B Class dividend was to be calculated, the balance would simply be paid over as Free Cash Flow. The discretion would have no financial effect. This is an indication that none was intended. Additionally, Wambo was required to estimate the profit available for the B Class dividends on a six monthly basis with supporting details. It seems unlikely that the notification would have to take into account possible exercises of discretions, the occasion for which may not yet have arisen.
170The recitals to the Restructure Agreement recorded that Sumiseki and Hunter entered into the Profit Interest Agreement on 10 January 2001 and that the parties had agreed to restructure the arrangements including the termination of the Profit Interest Agreement on the terms and conditions set out in this agreement. The Profit Interest Agreement refers to the Subscription Agreement, which in turn refers to the Share Sale Deed.
171The recitals to the Profit Interest Agreement recorded that Hunter was indebted to Sumiseki for $50M pursuant to the Debenture Stock and that the parties had agreed that part of the indebtedness may be forgiven by Sumiseki in exchange for being granted a Profit Interest on the terms set out in that instrument. The Debenture Stock bore a fixed interest rate and was to be repaid out of Free Cash Flow as earlier discussed. Sumiseki's rights to be paid on the Debenture Stock were not a matter of discretion in the hands of the Wambo directors. At the same time as the Profit Interest Agreement was entered into, Wambo came under the control of Hunter.
172Sumiseki received the Profit Interest in return for a fixed right to receive repayment of its loan and interest on the Debenture Stock. In my view, it more accords with the objects these transactions were intended to secure that Sumiseki would get, in return, a dividend objectively determinable on the basis of profits earned, rather than a Profit Interest the value of which depended on discretions of the directors of Wambo (and for that matter, Hunter) being exercised in its favour.
173PAML and Wambo put a submission that cl 5 of the Restructure Agreement favoured their construction on the footing that it showed that the parties valued the B Class shares on the same basis as ordinary shares, the latter not having any fixed dividend rights. Even if the parties did, for the purpose of the specific circumstances in which cl 5 operates, attribute equal value to each class of shares, it does not follow that their dividend entitlements were equated. Each class had widely differing rights. The B Class shares had no voting rights but fixed dividend rights. The ordinary shares did not have fixed dividend rights but gave control of Wambo. The equating of value more favours Sumiseki's construction than undermines it.