Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL

SIMON ROBERT PARSONS (and others named in the Schedule) Third Defendant

JUDGE: WHITE J DATE OF ORDER: 29 SEPTEMBER 2016

1. The Defendants' interlocutory application dated 18 May 2016 be dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 This is a decision on the defendants' application pursuant to r 16.21(1)(e) of the Federal Court Rules 2011 (Cth) (the FCR) for the striking out of specified paragraphs in the plaintiff's Amended Statement of Claim on the basis that they do not disclose a reasonable cause of action.

Background 2 In this section of the reasons, I set out relevant aspects of the allegations in the Statement of Claim. Some of those matters were common ground but some are contentious. In the interests of brevity, I have not used repeatedly the term "the Statement of Claim alleges" or an equivalent as a preface to the matter recited. It is to be understood, however, that at this stage the matters recited are allegations only and do not constitute findings of fact. 3 Commencing in December 2010, the plaintiff, Termite Resources NL (Termite), operated a magnetite-copper-gold mine (the Cairn Hill Mine) near Coober Pedy in South Australia. Termite is a wholly owned subsidiary of Outback Iron Pty Ltd (Outback). Termite operated the mine as an incorporated joint venture (the Cairn Hill Joint Venture) between IMX Resources Ltd (IMX) and Taifeng Yuanchuang International Development Co Ltd (Taifeng), a company incorporated in Hong Kong. IMX owned 51% of the issued share capital in Outback and Taifeng owned 49%. Taifeng held 13.06% of the shares in IMX as at 30 June 2013 and 10.22% as at 30 June 2014. 4 On 18 June 2014, the directors of Termite resolved that administrators should be appointed to it. Subsequently, on 15 September 2014, Termite's creditors resolved that it be wound up. 5 Termite's claims concern conduct between mid-2012 and March 2014 in relation to the Cairn Hill Joint Venture. 6 There are six defendants to the proceedings. Each of the first four defendants (Messrs Meadows, Nitschke, Parsons and Hoskins) was, at the times material to Termite's claims, one of its directors. Mr Meadows ceased to be a director on 15 October 2013 and Mr Hoskins commenced as a director of Termite on 5 November 2013. The fourth defendant (Mr Hoskins) was also, successively, IMX's Chief Financial Officer, Chief Executive Officer and Managing Director. The fifth and sixth defendants (Mr Sun and Mr Pang) were at material times directors of Outback. Mr Pang commenced as a director of Outback on 9 January 2012. 7 The defendants Meadows, Nitschke and Sun were directors and officers of IMX in the relevant period, although Mr Meadows ceased being a director and chairman of IMX on 15 October 2013 and Mr Sun occupied the position of alternative director between 15 March 2012 and 23 May 2013 and thereafter occupied the position of director. Mr Meadows, Mr Nitschke and Mr Hoskins were also directors of Outback at relevant times, although Mr Meadows ceased to hold that office on 15 October 2013. Mr Parsons was not a director of either IMX or Outback. He was employed by Termite as the General Manager of the Cairn Hill Mine at relevant times. 8 Mr Sun and Mr Pang were de facto directors of Termite in accordance with the definition of "director" in s 9(b)(i) of the Corporations Act 2001 (Cth) or, in the alternative, were shadow directors in accordance with s 9(b)(ii). Those assertions are contested. 9 Termite seeks to recover substantial damages from the defendants on the basis of breaches by them of duties which they owed to it in their capacity as directors. 10 The arrangements between IMX and Taifeng in relation to the Cairn Hill Joint Venture were contained in a heads of agreement made between those entities on 29 December 2009. The arrangement was as follows: IMX and Taifeng agreed, subject to approval by the Foreign Investment Review Board, that Taifeng would provide funding to Outback which would be invested in the development of the Cairn Hill Mine by Termite; Taifeng was to match the amount already invested by IMX; after that had occurred, IMX and Taifeng would then provide further funding on a proportionate basis; in return, Taifeng was to have 50% of the shares in Outback and equal representation on its Board; IMX and Taifeng were to act unanimously in relation to all issues relating to the operations of Termite; and the implementation and operation of the projects undertaken by Termite were to be overseen by the directors of Outback, but with management responsibility for the daily operations delegated to Termite. 11 Subsequently, Taifeng became a 49% owner of Outback (on 31 October 2010). However, no shareholder agreement had been entered into between those entities as at 30 June 2012. 12 By mid-2012, IMX and Taifeng had advanced nearly $49 million to Outback for the purposes of the Cairn Hill Joint Venture (the JV Loans) and Outback had advanced that money by loan to Termite (the Outback Loan). In addition, Termite had a credit facility with a financier, LinQ, which was drawn down by $9 million. The effect was that Termite had debts of approximately $58 million. However, by the end of 2012, Termite had repaid the LinQ facility and did not have a separate banking facility after that time. 13 Termite's allegations as to the terms of the JV Loans and the Outback Loan are particularly relevant to its claim. Termite alleges that the JV Loans and the Outback Loan were: (a) interest free; (b) for a term expiring on 1 March 2018 by which time all operations at the Cairn Hill Mine were forecast to have been completed; (c) were unable to be demanded by the respective lenders prior to expiration of the term; and (d) would be forgiven if and to the extent that they remained unpaid after completion of operations at the Cairn Hill Mine (including the payment of all other creditors) and the payment of final distributions by Termite. These features led Termite to characterise the Outback Loan and the JV Loans as subordinated debts of Termite and Outback respectively, in that they were repayable only when the other creditors of Termite and Outback respectively had been paid in full. 14 In the course of its operation of the Cairn Hill Mine, Termite entered into a number of "life of mine" contracts with logistical services providers. It pleaded five such contracts which it says imposed early termination penalties or "take or pay" obligations if terminated prior to the full term, corresponding to the services projected to be required through to the completion of Phase 1 of the mining activities (Tail Liabilities). One of the effects of these contracts was that, if Termite ceased mining operations earlier than the full life of the Cairn Hill Mine contemplated by Phase 1, it would crystallise the Tail Liabilities at a cost of many millions of dollars. 15 At the heart of Termite's claim is a joint venture distribution policy approved by the Boards of Directors of each of IMX, Outback and Termite on 12 March 2013 which was also approved by Taifeng (the Distribution Policy). 16 Before it approved the Distribution Policy, Termite had, in the period between 11 January 2013 and 12 March 2013, advanced $5 million to IMX by way of an interest free unsecured loan (the Termite-IMX Loan). The $5 million was advanced by nine separate instalments in the period between 11 January and 12 March 2013. 17 Pursuant to the Distribution Policy, the management of Termite was authorised and directed, and without the need for any further instruction, to distribute to Outback on a month by month basis and in repayment of the Outback Loan, the highest amount to the nearest $100,000 which left Termite with a cash reserve of $3 million. The Distribution Policy also contemplated that such amounts as were paid by Termite to Outback would then be on-paid by Outback to IMX and Taifeng in repayment of the JV Loans. 18 The Distribution Policy was implemented in the period between 12 March 2013 and 31 March 2014. Termite made 13 distribution payments totalling $46,053,095.08 to Outback or directly to IMX and Taifeng. They were treated as repayments of the Outback Loan and, insofar as they were paid directly to IMX and Taifeng, as repayments of the JV Loans. Taifeng received $22,566,016.59 and IMX $23,487,078.49. 19 Termite alleges that the arrangements contemplated by the Distribution Policy were, in effect, the repayment of the $46 million advanced by way of capital by the joint venturers to establish the Cairn Hill Mine, with only a modest cash reserve of $3 million being retained by it beyond its budgeted expenditure. The repayment had occurred even though all parties knew that Termite was fully reliant on its own cash resources to meet its future liabilities. That was so because Termite had no ability to make any cash call on Outback, IMX or Taifeng and it did not have any credit banking facility beyond its normal operating account. 20 By June 2014, Termite had become insolvent. As previously noted, on 18 June 2014, the directors of Termite resolved that administrators should be appointed to it and it ceased mining. The cessation of operations at the Cairn Hill Mine meant that the Tail Liabilities were crystallised. The liquidators of Termite have admitted claims by unsecured creditors (many of which are logistical services providers) totalling over $67 million.

Termite's claim 21 The essence of Termite's claim is that: (1) the defendants knew, or ought have known, that, if Termite was constrained to the limited cash buffer contemplated by the Distribution Policy, it would be susceptible to business shocks which would affect its capacity to trade on an ongoing basis and, in turn, to crystallisation of the Tail Liabilities and to a winding up in insolvency; (2) the defendants failed to consider properly the risks of insolvency to which Termite would be exposed if it adopted the Distribution Policy, given that Termite would be left with only a limited cash buffer; and (3) the defendants failed to consider properly that implementation of the Distribution Policy involved the repayment of subordinated debt, which was liable to be forgiven if not capable of being repaid.

The basis for the strike out application 22 The defendants allege that Termite's Amended Statement of Claim fails to disclose any cause of action for three reasons: (1) Directors are not subject to any general duty requiring them not to prefer one creditor over another. The only circumstances in which such a duty arises is when a director positively and dishonestly chooses to prefer one creditor over others, in order to cause a detriment to the other creditors, but Termite makes no positive and particularised claim of dishonesty in this case (the No Duty Ground); (2) Termite does not allege facts upon which it could be concluded that it suffered any damage which may be the subject of an award of damages or statutory compensation under s 1317H of the Corporations Act or the basis of an order under s 598 of the Corporations Act. On the facts Termite alleges, any damage has been suffered by its individual creditors, and not by Termite itself (the No Damage Ground); (3) Termite has not alleged a matter essential to establishing that the defendants, acting as its directors, had a duty to consider the interests of Termite's creditors when making the payments or taking the steps which are impugned, because Termite has not alleged that it was insolvent or in a position of doubtful insolvency at a relevant time (the no allegation of insolvency ground). 23 Since the submissions were made on the strike out application, Termite has exercised its entitlement under r 16.51 of the FCR to file an Amended Statement of Claim. The amendments to the Statement of Claim do not affect the basis upon which the defendants make the strike out application. I have considered the defendants' application by reference to the terms of the Statement of Claim as originally filed.

Strike out principles 24 The principles on which the Court acts on applications pursuant to r 16.21(1)(e) are well-established and need not be outlined in detail. The discretionary power is to be exercised only in clear cases. On such applications the Court does not engage in an evaluation of an applicant's prospects of success. If the question raised by a pleading is fairly arguable, the Court will decline to strike out the pleading and allow the matter to proceed to trial. The defendants recognised the onus which they bore on the present application.

The "No duty" ground 25 The defendants' first submission was made on the basis that, from the point of view of Termite's directors when adopting and implementing the Distribution Policy, there was no reason (in terms of duty) for them to differentiate between IMX and Outback as creditors, on the one hand, and Termite's other creditors such as the logistical service providers, on the other. Their duty as directors (assuming for present purposes that all were directors of Termite) was to act in the interests of Termite as a whole and, to the extent that they had to consider the interests of creditors, it was the interests of creditors as a class which were pertinent and not the interests of individual creditors. This was so because of the principle that directors owe duties to their company as a whole. Although there have been criticisms in some contexts of the appropriateness of the formulation of the duty of in those terms (Mills v Mills (1938) 60 CLR 150 at 164; Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 512; Gambotto v W.C.P. Ltd (1995) 182 CLR 432 at 444), the formulation is appropriate in relation to creditors, at least until a company nears insolvency. Generally, in the period before a company reaches such a state, directors do not owe a direct duty to particular creditors. 26 This had the consequence, so the defendants contended, that they as directors of Termite did not, before Termite became insolvent or neared insolvency, owe duties to individual creditors and, in particular, did not owe any duty not to act in a way which preferred one class of creditor over another. 27 The defendants acknowledged that there have been cases in which courts have intervened on the basis that directors have acted contrary to the interest of creditors (for example, Nicholson v Permakraft (NZ) Ltd (in liq) (1985) 1 NZLR 242; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580), but submitted that the circumstances of those cases are distinguishable from the present. 28 The defendants also acknowledged that it is "commercially unacceptable" for directors intentionally to prefer one creditor so as to cause detriment to another, and that directors cannot positively and dishonestly choose to advantage one creditor at the expense of another. Subject to those limitations, their submission was that courts recognise that directors have latitude to exercise legitimate business judgments in choosing to pay off creditors in order to keep afloat a business experiencing difficulties. 29 The defendants then referred to cases concerning the Court setting aside of dispositions of property made with an intention to defraud creditors. 30 The defendants placed considerable reliance on Gevena Finance Pty Ltd v Resource & Industry Ltd [2002] WASC 121; (2002) 169 FLR 152. In that case, Geneva Finance sought to recover from a former director (Hawkins) and his company (Hawkins Court Ltd) the loss it had suffered by reason of an alleged breach of duty by Hawkins. The breach was said to arise from Hawkins' conduct in causing Geneva Finance to pay out $300,000 to discharge its liability to Hawkins Court so that it (Hawkins Court) could advance the funds to a debtor of Geneva Finance (Oehlers) in order that he could discharge his indebtedness to Geneva Finance. 31 On those facts, Heenan J considered, at [14], that prima facie Geneva Finance had not suffered any loss. The liability of Oehlers to it had been discharged and, although its funds had been reduced by the payment out of the $300,000, its liability to Hawkins Court had been reduced by a corresponding amount. Geneva Finance's claim rested, however, on the basis that, at the time of the two transactions, it had been either actually insolvent or close to inevitable insolvency. This had the effect, so it contended, that the effect of the payment of the $300,000 had been to grant Hawkins Court a preference, thereby reducing the pool of funds available for distribution to other creditors. In this context, Heenan J considered the director's duties and concluded: [34] … I consider that for liability to be established against Hawkins or Hawkins Court Ltd, it is necessary for the plaintiff to prove that decisions taken by the company … were not made in the best interests of the company as a whole or, what would amount to the same thing, the dominant purpose of those undertaking those transactions was to secure a benefit for Hawkins Court Ltd at the expense of other creditors of the same degree. … [35] In practical terms, this means that the plaintiff must establish something more than a mere de facto preference and must show unconscientious behaviour by the fiduciary in order to succeed. This has implications for the plaintiff's alternative argument that, in the absence of actual knowledge of impending solvency [sic] for Geneva Finance by Hawkins, he is nevertheless in breach of his fiduciary duty and accountable for the benefit improperly derived by Hawkins Court Ltd by reason of his neglect to exercise sufficient care and attention to inquire into the true financial circumstances of Geneva Finance as one of its directors. There may well be instances where the lack of reasonable diligence by a director in performing the duties of his office is so gross that the director cannot be heard to say that no improper intent or purpose should be attributed to him for a transaction which advantaged a third person because he simply did not know or understand the true position. However, for that to occur, I consider that the neglect by the director of his duties would need to be gross before it was sufficient to attribute to him an improper purpose for a transaction in which he was involved and in which he had believed himself to be acting honestly. 32 The defendants in the present case emphasised the conclusion of Heenan J that the payment of a preference by directors would constitute a breach of their duties to act for a proper purpose and in the interests of a company if the dominant purpose of those undertaking the transaction was to secure a benefit for the other party to the transaction at the expense of other creditors of the same degree. This meant that a plaintiff company must establish something more than a mere de facto preference, that is, it must establish a form of unconscientious behaviour by the director. 33 On this basis, the defendants submitted that the absence of any plea of improper purpose, bad faith, unconscientious behaviour or the like had the consequence that Termite's Statement of Claim did not disclose a reasonable cause of action. 34 In my opinion, Termite's response to these contentions is sound, and should be upheld. The defendants' submissions are based on a mischaracterisation of Termite's claim. The gravamen of Termite's case is not the payment of the unsecured liability of one creditor in priority to that of another but, instead, the directors' decision to repay the subordinated loans when they were not due, in circumstances which exposed Termite to a risk of insolvency and to the crystallisation of contingent liabilities. Termite's complaint is that the directors breached duties to it by taking action which worsened its own position. It is not the claim of an individual creditor or creditors as the defendants suppose but, instead, its own claim. 35 Geneva Finance, properly understood, does not stand for any contrary position. It shows only that directors do not breach any duty owed to a company by a decision to discharge the debt of one creditor when the debt was due and payable, the discharge was lawful and the decision to pay was not dishonest, undertaken for an improper purpose or undertaken with any consciousness that the transaction would result in a de facto preference - see the reasons of Heenan J at [98]. 36 In my opinion, it should not be concluded at this stage that Termite's claim does not disclose a reasonable cause of action on this basis by reason of failing to plead facts which could give rise to the breach of duty it alleges.

The no damage ground 37 The defendants' second contention was that Termite is suing to recover a loss which it has not suffered. That was said to be so because any loss suffered by reason of the payments pursuant to the Distribution Policy was sustained by Termite's other creditors, and not by it. If a company pays one creditor in preference to another, the company itself suffers no damage because the company's liabilities are reduced by an amount equal to that of the payment. Again, the defendants referred to the reasoning of Heenan J in Geneva Finance to which I referred earlier. 38 In response, Termite contended that, unlike the position in Geneva Finance, its position was affected by the decision of the defendants to make payments to IMX and Taifeng, that is to say, that the identity of the creditors to whom the payments were made was significant. Termite contended that that is so on the following basis. Had Termite not implemented the Distribution Policy and retained the cash, it could and would have traded until the expiration of the life of the Cairn Hill Mine. In that event, the liabilities to the logistical system providers would never have crystallised and its liability to repay the Outback Loan (and Outback's liability to repay the JV Loans) would have been forgiven in accordance with the terms of those loans. Accordingly, Termite alleges that it would have been better off to the extent of the $46 million in distributions which were made and by the amount of its unsecured liabilities. The chain of causal links alleged by the plaintiff is set out in some detail in [46] of its Statement of Claim. 39 Plainly, there will be some issues at trial regarding some of the causal links pleaded by Termite. There may also be issues as to whether the amounts pleaded by Termite are the proper measure of the loss it alleges. It is, however, unnecessary to explore those issues on a strike out application. It is sufficient to conclude that the way in which Termite alleges that it has suffered loss is at least reasonably arguable so that it should not be precluded, in a summary way, from advancing this claim at trial.

No allegation of insolvency ground 40 By this ground, the defendants submitted that the duty of directors to consider the interests of creditors arises only when a company is insolvent or is approaching insolvency and that Termite had not alleged that it was in, or near, such a state when the Distribution Policy was approved and implemented. Counsel relied in this respect on Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425. Gummow J said at 444-5: It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company. The restriction is similar to that found in cases involving fraud on the minority. Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statue, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors. … [T]he result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator. (Emphasis added) This passage was quoted with approval by the plurality in Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603 at [94]. 41 The defendants also referred to the discussion by Owen J in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1 at [4436]-[4450]. 42 There are numerous illustrations in the authorities of actual or prospective insolvency being held to enliven a duty by directors to consider the interests of creditors as an aspect of the duty to act in the best interests of the company. See, for example, Nicholson v Permakraft (NZ) Ltd (in liq) (1985) 1 NZLR 242 at 249 ("doubtful solvency"); Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 732 ("an insolvency context"); Linton v Telnet Pty Ltd (1999) 30 ACSR 465 at 471, 478 ("should have been concerned for [solvency]" and "financial instability"); Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 at 444 ("insolvent or nearing insolvency"); and Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, (2008) 39 WAR 1 at [4440] ("prejudicial to creditors"). 43 For its part, Termite contested the proposition that the duty of directors to their company, insofar as it involves an obligation to take into account the interests of creditors, is enlivened only when the company is insolvent, or is nearing insolvency. Termite's starting point was the oft-quoted statement passage of Mason J (with whom Barwick CJ agreed) in Walker v Wimborne (1976) 137 CLR 1 at 6-7: [T]he emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a "group" of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent. (Emphasis added) 44 Although the company whose payment was being considered in Walker v Wimborne was insolvent, Mason J did not confine this statement of the duties of directors to companies which were insolvent or nearing insolvency. 45 Then, Termite referred to Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 733 in which Street CJ (with whom Hope and McHugh JJA agreed) said: I hesitate to attempt to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors. For present purposes, it is not necessary to draw upon Nicholson v Permakraft as authority for any more than the proposition that the duty arises when a company is insolvent inasmuch as it is the creditors' money which is at risk, in contrast to the shareholders' proprietary interests. It needs to be borne in mind that to some extent the degree of financial instability and the degree of risk to the creditors are inter-related. Courts have traditionally and properly been cautious indeed in entering boardrooms and pronouncing upon the commercial justification of particular executive decisions. … Moreover, the plainer it is that it is the creditors' money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all the shareholders, can justifiably expose the company. 46 As can be seen, Street CJ was disinclined to formulate a general test of the degree of the "financial instability" necessary to give rise to a duty by directors of a company to consider the interests of its creditors, and noted the diverse range of circumstances in which the question may have to be considered. Termite's submission, as I understand it, was that such circumstances could include the making of decisions which put the company's continued solvency in jeopardy. 47 Next, Termite referred to Ring v Sutton (1980) 5 ACLR 546 in which Hope JA (with whom Moffitt P and Glass JA agreed) found that the liquidator of a company could recover from a director the balance of a loan from the company to the director on unduly favourable terms even though there was no suggestion that the loan had been made at a time when the company was at, or nearing, insolvency. 48 Fourthly, Termite referred to Grove v Flavel (1986) 43 SASR 410 at 417 at which Jacobs J said that there was nothing in the statement of Mason J in Walker v Wimborne quoted above which suggested that it is insolvency which gives rise to the duty by directors to take account of the interests of creditors. Other aspects of Grove v Flavel have been disapproved by the High Court, but I do not understand the expressions of disapproval to have extended to this passage. 49 Finally, I note that, after his review of the authorities in Bell Group Ltd (in liq) v Westpac, Owen J said: [4445] In my view these statements all suggest that a financial state short of actual solvency could be sufficient to trigger the obligation to take into account the interests of creditors. Again, in my view, this approach accords with principle. The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore. (Emphasis added) 50 This statement of principle is similar to, but not identical with, that stated by Giles J in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191, (2007) 63 ACSR 557 at [162]: It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question. 51 In reliance on these authorities, Termite contended that it is not the fact that a company is "insolvent or near insolvency" which enlivens the duty of directors to consider the interests of creditors but, instead, when the director knows, or should realise, that the creditors' interests may be adversely affected by the proposed conduct. It also referred in this respect to Geneva Finance at [28]; Jeffree v National Companies and Securities Commission [1990] WAR 183 at 187-188; Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512 at 1516; and to Re New World Alliance at 445 ("there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator"). 52 It is pertinent that in Nicholson v Permakraft (NZ) Ltd (in liq) at 249, Cooke J regarded the fact of actual or approaching insolvency as being but one instance of a circumstance in which directors may be required to consider the interests of creditors. Cooke J went on to say that directors may be under a duty to consider the interests of creditors "if a contemplated payment or other course of action would jeopardise its solvency" (Emphasis added). 53 In the application of the principles discussed in these authorities, much may depend on the particular facts of any given case: Linton v Telnet at 473. 54 A strike out application is not really an appropriate occasion upon which to determine in a conclusive way the circumstances in which directors will owe a duty to consider the interests of creditors when determining upon conduct which may impact upon a company's insolvency. In any case, Termite's allegations in the present case relate to the duty of directors to consider the company's own interests. Further, as already indicated, much may turn on the circumstances of a given case. In this context, Termite's allegation that the Outback Loan and the JV Loans were subordinated debts of Termite and Outback respectively, that is to say, repayable only after the other creditors of Termite and Outback respectively had been paid in full (Statement of Claim [20], [44] and [45]) is particularly pertinent. So also may be the circumstance that the directors were not deciding on a course of investment of Termite's funds which, if successful, would be productive of profits for Termite. Generally, courts may be more willing to recognise greater latitude by directors with respect to decisions of this kind. 55 In considering the implications of these features of the arrangement (assuming for present purposes that it is established), account may have to be taken of the interest of IMX and Taifeng as investors in obtaining a return on their investment. Nevertheless, I consider that Termite's submission that these features of the arrangement have the effect of making at least arguable the claim against the defendants should be upheld. 56 For this reason, there is no deficiency in the statement of claim and it is appropriate that the matter be allowed to proceed to trial.

Summary 57 For the reasons given above, the defendants have not succeeded in showing that the Statement of Claim does not disclose a reasonable cause of action. Their application must be dismissed. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.

SCHEDULE OF PARTIES SAD 99 of 2016 Defendants Fourth Defendant: PHILIP ROSS HOSKINS Fifth Defendant: WEI SUN Sixth Defendant: KEE CHAU PANG