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

Factual overview 6 Termite was the vehicle by which a mining joint venture was conducted by IMX Resources Ltd (IMX) and Taifeng Yuanchuang International Development Co Ltd (Taifeng), a company incorporated in Hong Kong. The Joint Venture had commenced in December 2009 with the execution of a heads of agreement. Termite was wholly owned by Outback Iron Pty Ltd (Outback), a company in which IMX and Taifeng held, respectively, 51% and 49% of the shares. Outback had no other business and functioned solely as the holding company of Termite. 7 Taifeng was a significant shareholder in IMX, holding 13.06% of its shares as at 30 June 2013 and 10.22% of its shares as at 30 June 2014. 8 Each of IMX and Taifeng had provided funding for the conduct of Termite's mining operations. They did so by advances to Outback which Outback then on-lent to Termite (unsecured and interest free) (the Outback-Termite Loan). By 30 June 2012, Outback had advanced $48.905 million to Termite. Of this amount, $21,309,673.50 had been advanced by IMX and $20.474 million by Taifeng. These advances were characterised as unsecured interest free loans from IMX and Taifeng to Outback (the JV Loans). The balance of the total amount of $48.905 million advanced by Outback to Termite ($7,121,326.50) was said to be equity advanced by IMX and Taifeng to Outback. 9 The precise status of the JV Loans and of the Outback-Termite Loan (together, the Shareholder Loans) was an issue in the trial as Termite claims that they were a form of subordinated debt. Before March 2013, there had been no repayment by Termite of the Outback-Termite Loan at all and Termite claims that, at the time of the adoption of the Distributions Policy, it had not been under any obligation to make a repayment on that loan. 10 The principal elements of the Distributions Policy were that, provided that there were no "unfavourable developments" in the current or forecast iron ore price, copper price, or the AUD-USD exchange rate which would warrant additional cash being held by Termite, its management was each month to distribute to Outback all of its cash, after payment of operating expenses, which exceeded $3 million. That sum was to be kept as a reserve (referred to as the "Termite Cash Reserve"). Outback in turn was to distribute all the cash it received from Termite to its shareholders, apart from a reserve of "a nominal amount of $5,000 plus an amount covering any potential Termite liabilities". Despite the terms of the Distributions Policy, in practice Termite paid the distributions directly to IMX and Taifeng. 11 In early 2014, there was a sudden and unanticipated decline in the iron ore spot price. It fell from about US$130 per tonne CFR in January 2014 to about US$100 per tonne CFR by May 2014, and continued to decline thereafter. In September 2014, when the creditors of Termite resolved that it be wound up, the spot price was about US$80 per tonne. Some of the experts referred to the decline in price in early 2014 as a "sharp correction" and others referred to it as a "step change". 12 It was common ground in the trial that movements in the price of copper at material times had not impacted significantly on the price at which Termite sold its ore. It was also common ground that movements in the foreign exchange rate in 2014 had not affected in a significant way the amount received. It was the reduction in the iron ore spot price in the context of Termite not having accumulated sufficient reserves of cash which was the principal cause of Termite's insolvency. 13 Termite also alleges that, during the period of Termite's implementation of the Distributions Policy, it had become apparent that the amount available to be mined had been significantly over-estimated. 14 The defendants are persons who were, or are claimed by Termite to have been, its directors and officers at relevant times so as to have owed duties to it under ss 180 and 181 of the Act and under the common law. Each was at one time an appointed director of either IMX, Outback or Termite. In the case of those who were not an appointed director of Termite, it alleges that they exercised control over its activities, so as to be deemed directors. 15 Termite claims that, by causing it to enter into and perform the Distributions Policy producing the effect just described and by failing to cause it to review, revoke or vary the Policy, the defendants breached their common law duties to act with care, skill, diligence and in good faith for its benefit as a whole. In addition, Termite alleges that the defendants breached the statutory duties imposed by ss 180 and 181 of the Act. Its principal claim is that the figure of $3 million as the Termite Cash Reserve was inadequate. However, Termite also pleaded that a reserve of $10 million was required to provide for a short term downturn in the iron ore price and a reserve of $50 million for a long term downturn. That has a significance for the fate of Termite's claim to which I will return. 16 Termite's Third Statement of Claim also alleges breaches of duty by the defendants in respect of the interest free unsecured loan of $5 million which it made to IMX between 11 January and 12 March 2013 (the IMX Loan). It alleges that the defendants breached the same statutory and common law duties to it in respect of the making of that loan. However, Termite acknowledged that its claim in respect of the $5 million loan was "subsumed" within its principal claim so that it would be necessary for the Court to consider it only if that claim failed. As the loan was repaid in September 2013, the defendants' conduct could not in any event have been causative of loss. 17 Termite claims damages from the defendants pursuant to s 1317H of the Act or at common law. It quantifies its loss on three alternate bases: the whole of the deficiency in the liquidation ($78,487,539.37); the difference between that figure and the position on the hypothesis that the Outback-Termite Loan had a different character from that for which Termite contended ($64,634,444.37); and the amount of the distributions themselves ($46,053,095.08). Again, this method of formulating its claim has a significance for the outcome of Termite's claim. 18 In my opinion, Termite's claims succeed only in part, and it is entitled to judgment for $7 million and, subject to the parties' submissions, interest. That is because Termite has not established that, on a proper discharge of their duties, the defendants would have caused it to maintain a cash reserve of more than $10 million at material times. My reasons follow.

The defendants 19 The six defendants, and the positions held by them at material times, are as follows: • Neil Eugene Meadows (first defendant) Chair of Board of Directors of Termite 17/01/2012-15/10/2013 Chair of Board of Directors of Outback 09/01/2012-15/10/2013 IMX Managing Director 28/11/2011-15/10/2013 • John Stephen Nitschke (second defendant) Termite Director 27/02/2012-01/05/2014 Chair of Board of Directors of Termite 00/03/2013-01/05/2014 Outback Director 09/01/2012-01/05/2014 Chair of Board of Directors of Outback 09/01/2012-01/05/2014 IMX Director 23/12/2009-31/01/2014 Acting IMX Managing Director 00/10/2013-00/04/2014 Chair of IMX Board of Directors 00/02/2012-00/09/2013 • Simon Robert Parsons (third defendant) Termite Director From 10/05/2010 General Manager of Cairn Hill Mine • Philip Ross Hoskins (fourth defendant) Termite Director 05/11/2013-01/05/2014 Outback Director 05/11/2013-01/05/2014 IMX Chief Financial Officer 00/01/2012-00/09/2014 IMX Chief Executive Officer 00/09/2014-00/10/2015 IMX Managing Director Since 00/10/2015 • Wei "Robert" Sun (fifth defendant) Outback Director Since 26/04/2012 IMX "Alternate" Director 15/03/2012 & 23/05/2013 IMX Director Since 23/05/2013 • Kee "Jack" Chau Pang (sixth defendant) Outback Director Since 09/01/2012

20 In summary, during the period commencing in March 2013 and concluding in March 2014 in which Termite adopted and implemented the Distributions Policy, Mr Nitschke and Mr Parsons were appointed directors for the whole period, Mr Meadows was an appointed director between March 2013 and 15 October 2013, and Mr Hoskins an appointed director from November 2013. During the same period, Mr Sun and Mr Pang were appointed directors of Outback. 21 Both Mr Sun and Mr Pang were employees of TFA International Pty Ltd, a wholly owned subsidiary of Taifeng. The sole director of Taifeng was Yuan Gang Song (Mr Song). Mr Song was a director of Outback between 10 December 2010 and 2 April 2012, but this was before the events on which Termite relies for its claim. Mr Sun and Mr Pang were on Outback's Board as representatives of Taifeng. 22 Mr Meadows and Mr Nitschke (who was later replaced by Mr Hoskins) were on Outback's Board as representatives of IMX. 23 In addition, Termite alleges that, having regard to subpara (b) of the definition of "director of a corporation" in s 9 of the Act, each of Messrs Hoskins, Sun and Pang was a de facto director of it for such period as they were members of the Board of Directors of Outback. This was because the nominated directors of Termite were "accustomed to act in accordance with [their] instructions or wishes" within the meaning of subpara (b) of the definition of "director of a corporation". 24 Each of Messrs Meadows, Nitschke, Parsons and Hoskins was, by virtue of his de jure directorship and the definition of "officer of a corporation" in s 9 of the Act, also an officer of Termite during the period of the respective appointments. 25 Termite alleges in addition that each of Messrs Hoskins, Sun and Pang was a deemed officer because each was a person who, within the meaning of subpara (c)(i) of the definition of "officer" in s 9 of the Act, made, or participated in making, decisions which affected the whole, or a substantial part, of its business. 26 Finally, Termite alleges that, if Messrs Hoskins, Sun or Pang are not liable as a principal, they were persons "involved in" the contraventions of ss 180 and 181 of the Act by Messrs Meadows, Nitschke and Parsons. However, in its final submissions, Termite acknowledged that only s 181(2) provides for this form of liability.

The evidence in the trial 27 The evidence in chief of all the non-expert witnesses in the trial was in affidavit form. All but one were required to attend for cross-examination.

Termite's evidence 28 Termite led evidence from only four non-expert witnesses. This was because a large amount of its case was documentary. Mr Lewis, who is a Chartered Accountant, an experienced liquidator and one of Termite's joint and several liquidators, gave evidence concerning factual matters. He deferred, appropriately, to some of the expert evidence concerning the claims of the Services Contractors. I regarded his evidence as honest and reliable, and accept it. 29 The remaining non-expert witnesses from whom Termite led evidence were from three of the Services Contractors: Mr Thwaites, Mr Fetini, and Mr Thorn. I considered that the evidence of each of these witnesses was honest and generally reliable. Except when otherwise indicated, I have accepted it. 30 Termite led expert opinion evidence from two witnesses. The first was Mr Dominic Tisdell whose formal qualifications are a Bachelor of Engineering (Mining) obtained at the University of New South Wales in 1997 and a Master of Business Administration obtained at the University of Melbourne in 2005. At the time he gave evidence, Mr Tisdell was the head of the metals and mining consulting team in the Asia-Pacific division at Wood Mackenzie, a global energy, metals and mining research and consultancy group. In that role, Mr Tisdell (and the team of which he is part) provide advice as to the markets and market dynamics relating to minerals to major banks, hedge funds, investors, mining companies and others. 31 I am satisfied that Mr Tisdell has considerable experience in the engineering, mining and consultancy fields. Early in his career, he was employed by gold, coal and iron ore mining companies, including Hargraves Resources, BHP Steel and Rio Tinto. Between February 2002 and December 2003, Mr Tisdell was the mine planning team leader for the Hamersley Iron business of Rio Tinto which, at the time, had seven medium to large scale iron ore mines in Western Australia. 32 Mr Tisdell has also held senior positions with Mitsubishi Corporation, Accenture Australia Ltd, Rio Tinto, Hamersley Iron Pty Ltd and Robe River Mining Company Pty Ltd. At Accenture, Mr Tisdell was a member of its business strategy consulting team managing projects for clients which included Rio Tinto and BHP Billiton. 33 Between 2013 and 2015, Mr Tisdell was the Chief Executive Officer of Apollo Minerals Ltd and between 2011 and 2013 its Chief Operating Officer. Apollo Minerals is a publicly listed mineral exploration and development company involved in the exploration for, and development of, iron ore, base and precious metal minerals around the world. During Mr Tisdell's time at Apollo Minerals, it was engaged in defining and assessing the viability of iron ore resources in South Australia and in Gabon. 34 The principal topic which Mr Tisdell addressed in his reports was the adequacy of the $3 million Cash Reserve having regard to several matters affecting the market for iron ore and the financial outlook in March 2013, movements in the exchange rate, and hedging. This involved Mr Tisdell giving evidence of the matters bearing on the risks in conducting mining operations (both operational and marketing), and the manner in which the risks are appropriately identified, forecast and managed. 35 Mr Tisdell also addressed the counter factual position, namely, what Termite's position would have been had it retained the profits until concluding mining operations. He considered that in that event, Termite would not have become insolvent. 36 The defendants mounted a major challenge to Mr Tisdell's expertise and objectivity. That challenge was made good in several respects. Mr Tisdell had made a "probability analysis" based on the forecasts of iron ore prices. On the basis of that analysis, he said that Termite would require a reserve of approximately AU$50 million if it was to reduce its risk of becoming insolvent to 10%, which he regarded as an acceptable level, at [1.58]. Under cross-examination, and faced with the critique of Professor Everett who was called by the defendants, Mr Tisdell acknowledged that his analysis was neither theoretically nor statistically sound. It was apparent that Mr Tisdell had exceeded the bounds of his expertise in making the analysis. Ultimately, Termite did not rely on Mr Tisdell's evidence based on his probability analysis. 37 By itself, this caused me to have doubts about the value of Mr Tisdell's evidence more generally. In addition, there were several respects in which I considered Mr Tisdell's evidence to lack clarity and his opinions to lack a clearly articulated basis. 38 I also considered that Mr Tisdell displayed at times an over willingness to advance Termite's cause in his opinions and, when shortcomings in his reasoning were exposed, a tendency to rationalise and defend doggedly and inappropriately those opinions. Some of Mr Tisdell's opinions were inconsistent with the forecasts made by his own firm, Wood Mackenzie. They were also inconsistent with the contemporaneous forecasts of other reputable analysts. 39 The effect is that, while I accept some matters about which Mr Tisdell gave evidence, I am not willing to proceed on the basis that his evidence and opinions were generally reliable or useful. 40 The second expert from whom Termite led evidence was Mr Peter Holmes, a forensic accountant. His evidence concerned the liabilities of Termite to the Services Contractors. The defendants challenged Mr Holmes' independence as an expert witness, given that he, like the joint and several liquidators of Termite, is a member of the firm Ferrier Hodgson. Counsel made it plain, however, that the defendants did not suggest any conscious bias by Mr Holmes or that he had not attempted to fulfil his duties to the Court as an independent witness. They submitted, nevertheless, that he may unconsciously have wished to promote the interests of Ferrier Hodgson or at least have found it difficult to be critical of decisions made by his partners. 41 I considered that Mr Holmes revealed in his evidence a well-developed understanding of the obligations of independence of an expert witness under this Court's Rules and Practice Notes and that he conformed to the standards they require. He showed an appreciation of the limitations of his expertise and of the limits of the matters on which he was asked to advise. 42 Further, and in any event, the defendants did not identify any of Mr Holmes' evidence which was affected by the unconscious bias which they sought to attribute to him. I consider it appropriate to accept his evidence. 43 Termite's documentary evidence included the signed transcripts of the examination of the defendants conducted by its liquidators pursuant to s 597 of the Act. Mr Sun's examination took place in June 2015 and Mr Pang's in February 2016. The remaining examinations took place in March 2015, with those of Messrs Nitschke and Meadows being completed in June 2016.

The defendants' evidence 44 The defendants led evidence from 10 witnesses, six of whom were the defendants themselves. One of the defendants' witnesses, Mr O'Sullivan, was not required to attend for cross-examination. 45 Mr Nitschke was the first defendant to give evidence. He is well-qualified, having an Honours Degree in Mining Engineering from Melbourne University, and a Master's Degree and a Diploma in Mineral Production Management of the Imperial College Royal School of Mines at the University of London. Mr Nitschke has over 40 years of experience in the resource industry and is a Fellow of the Australian Institute of Mining and Metallurgy, a Chartered Professional in Mine Management at the Australian Institute of Mining and Metallurgy, and a Graduate of the Australian Institute of Company Directors. Mr Nitschke also has considerable experience as a director of listed resource companies and their subsidiaries. 46 During the course of his evidence, Mr Nitschke impressed as being intelligent, capable and experienced and as having a wide range of knowledge of matters affecting the mining and marketing of minerals. 47 I was concerned about the extended duration of Mr Nitschke's cross-examination and have taken into account the potential for fatigue to have affected his evidence as the cross-examination unfolded. I also considered it unsurprising that, at times, Mr Nitschke displayed some impatience and exasperation while giving his evidence. 48 Nevertheless, even taking these matters into account, I consider that care is required before acting on some aspects of Mr Nitschke's evidence, especially that evidence which was marked by defensiveness and argumentativeness. It was apparent that Mr Nitschke was at times engaged in reconstruction or attempting retrospectively to rationalise or justify his conduct. I thought that Mr Nitschke had a good appreciation of where his interests, and those of the defendants, lay in the litigation and that at times this affected his answers. The result is that, while there is much of Mr Nitschke's evidence which I accept, there is some which I do not. This is particularly so in relation to his evidence which is inconsistent with the contemporaneous documents, the inferences arising naturally from those documents or the admissions which he made in his s 597 examination. 49 Several of the other defendants had a tendency to be argumentative and self-justificatory in their cross-examination and to give evidence of a rehearsed kind. To an extent, that is unremarkable as serious claims are made against them and it is common for witnesses whose conduct and decision-making is impugned to wish to justify themselves. I considered that the evidence of Messrs Hoskins, Meadows and Parsons was affected, to an extent, by a retrospective rationalisation or justification for their conduct. 50 In the case of Mr Sun, I have taken into account that English is not his first language and that he may not be familiar with the manner in which court proceedings are conducted. Nevertheless, I considered that he was not an impressive witness. Mr Sun was very self-justificatory in his cross-examination. I had the strong impression that he had a very quick understanding of the questions put to him and their potential significance in the litigation. I considered that he allowed this to affect the answers which he gave in the cross-examination. 51 Termite accepted that Mr Pang was a witness of truth. 52 Several of the defendants sought to qualify, resile from, or withdraw, admissions which they had made during their s 597 examinations. Some attributed this to having reflected in more detail on the issues and the events which had occurred, as part of their preparation to give evidence. Some referred to the assistance they had derived from recourse to contemporaneous documents. At a general level, I accept that the fact that they are defendants to serious claims is likely to have sharpened their focus on relevant events. I also accept that they may have thought about events more deeply than they had at the time of the s 597 examinations. Nevertheless, I thought that these factors could not explain many of the variances in the respective cross-examinations from the s 597 answers. I have maintained that view on re-reading the transcript. I consider that several of the defendants realised the damaging nature of answers in the s 597 examinations and sought to modify them. This explains the rehearsed character of some of their evidence. When this occurred, I have thought, generally that the s 597 examination answers are more likely to be accurate. 53 The three experts called by the defendants were Professor Everett, Professor Trench and Mr Morris. Before his retirement in 2006, Professor Everett was the Professor of Information Management at the University of Western Australia. He has expertise in the application of statistical techniques in the mining and petroleum industries. He has also consulted to a number of entities in the mining industry. I considered that his evidence was more reliable than that of Mr Tisdell and accept it whenever it was in conflict with his evidence. 54 Professor Trench obtained a PhD in Geophysics from the University of Glasgow in 1989 and has tertiary level qualifications in science, mineral, economics and business. He has a part-time profession position in the Business School at the University of Western Australia as well as an Adjunct Professorship in the Centre for Exploration Targeting at the same University. I regarded his evidence as generally reliable. 55 Professor Trench has significant experience in the mining industry and, since 2008, has been engaged as an Associate Consultant by CRU Consulting, a well-respected provider of specialised independent market research, commodity market forecasting and business advisory services to the metal and mining industries. 56 Mr Morris is an experienced forensic accountant. I indicate later some respects in which I do not accept his evidence.

Factual setting 57 In this section of the reasons, I will make findings of fact providing the context in which the issues for the Court's determination arise. For the most part, the matters I now record were not contentious. 58 IMX was a publicly listed mining and resources company. In the years 2011 to 2014, its principal activities were mineral exploration and mining. The IMX group of companies held (wholly or as part owner) mineral tenements in South Australia (Cairn Hill and Mt Woods), Tasmania, Tanzania and Mozambique, and held a 26.63% interest in Uranex NL (a uranium exploration and development company). Of these tenements, mining in 2012 and 2013 was carried out only at Cairn Hill. Exploration activities were conducted on the remaining tenements. This meant that IMX was dependent for its income on capital raisings, the sales of assets and the distributions from Termite. 59 Before Taifeng's involvement in the Cairn Hill Mine, IMX had owned all of the issued share capital in Outback and had fully funded its operations. 60 Termite was incorporated on 1 December 2004 and, at all material times, has been a wholly owned subsidiary of Outback. On 14 May 2008, it was issued Mineral Lease No. 6303 (ML 6303) for an area of about 80 square km which encompasses the Cairn Hill Mine. Trial mining operations commenced shortly afterwards and full scale mining commenced in May 2010. 61 ML 6303 is within the Woomera Protection Area established pursuant to the Defence Act 1903 (Cth) and regulations made pursuant to that Act. The effect of reg 35 of the Defence Forces Regulations was that, despite the grant of any mining tenement, the permission of the Commonwealth was required for entry into the prohibited area. The Commonwealth had by a Deed dated 13 May 2008 (the Woomera Access Deed) (amended by a Deed of Variation dated 12 July 2010) granted Termite such permission but it was a condition of the grant that the Commonwealth could, in effect, preclude any foreign investment in Termite having regard to the geographic proximity of the Cairn Hill Mine to the Woomera Defence Zone. 62 It was common ground at the trial that, by reason of this restriction, Taifeng had made its investment into Outback and not Termite. The evidence also indicated that the Outback Board made the strategic, and many of the operational, decisions concerning Termite. I will return to this topic shortly. 63 Outback contemplated that Termite would carry out mining in successive phases: Phase 1 and Phase 2. A Phase 3 had also been contemplated but the area of the proposed Phase 3 was some 30-40 km away from the area of Phase 1 and Phase 2. It later became known as the Mount Woods Project. The areas of Phase 1 and the proposed Phase 2 of the Cairn Hill Mine were adjacent. Phase 1 was a magnetite-copper mine, whereas Phase 2 was to be a magnetite mine only, involving lower grade ore than Phase 1. 64 Outback and Termite contemplated that Phase 1 of the Cairn Hill Mine would have a life of 4.5 to 5 years and would involve the excavation of two pits: Pit 1 and Pit 2. An estimate adopted by IMX in November 2009 was that some 7.3 million tonnes of ore could be mined from Pits 1 and 2. The finite life of the Mine, together with the fact that the Services Contracts were for terms which corresponded closely with that life, is an important aspect of Termite's case. 65 Termite did proceed with Pit 1. Nearly all the ore it mined came from that Pit. The question of whether to proceed with Pit 2 and, if so, its form was the subject of active consideration by Outback after October 2012. Eventually, at its meeting on 29 June 2013, the Outback Board resolved to proceed with a modified (shallower) Pit 2 known as "Design 10a". Some mining in Pit 2 had occurred before Termite went into administration. 66 At its meeting on 26 March 2014, the Outback Board resolved, conditionally, to extend the mining operations to include Phase 2 (which would comprise Pits 3 and 4). The condition to which the resolution was subject was resolved by 1 April 2014. However, in the events which happened and, in particular, Termite's administration, it did not ever proceed with Phase 2. 67 The Cairn Hill Mine is located about 55 km southeast of Coober Pedy. It is approximately 12-15 km east of the Stuart Highway and about 60 km east of the Darwin-Adelaide railway line. Termite established a siding (the Rankin Dam siding) on the railway line and constructed an unsealed road between the Cairn Hill Mine and the siding. 68 Termite sold the product of the mine on a CFR basis to Chinese buyers, initially to Jilin Tonghua Iron and Steel (Group) Mining Co Ltd (Tonghua) but from January 2011 to Taifeng and others. This meant that Termite incurred the shipping costs. It did not have difficulty in locating purchasers of the mined ore. 69 The sequence of steps in delivering the ore to the Chinese buyers was as follows. Termite mined the ore comprising magnetite and copper and crushed it on site so that it was "40 mm topsize". The ore was then taken by truck to the Rankin Dam siding where it was loaded into specially designed containers. It then travelled by rail to Port Adelaide where it was loaded onto the ships which took it to China. Termite aimed to have 150,000 tonnes of ore on ships every month (two ships each with 75,000 tonnes). In order to avoid interruptions in the delivery chain, Termite maintained stockpiles of ore at the mine (both crushed and uncrushed), at Rankin Dam and at Port Adelaide. It attempted to maintain a stockpile of 30,000 tonnes in Port Adelaide in addition to the amount of 75,000 tonnes needed for a full ship load. 70 Termite did not carry out the work in this series of steps by its own employees. Instead, it engaged the Services Contractors as follows: (a) Exactmix Mining Pty Ltd (which later changed its name to Exact Mining Services Pty Ltd) (Exact) conducted the mining and crushing operations at the Cairn Hill Mine and hauled the ore to Rankin Dam. It did so pursuant to two separate contracts: a mining services contract and a haulage contract; (b) Termite leased from Gemco Rail Pty Ltd (Gemco) the rail wagons used to carry the ore to Port Adelaide; (c) Termite leased from Cronos Containers Limited (Cronos) the containers used on the rail wagons and to store the product at Port Adelaide before it was loaded onto ships; (d) Specialised Bulk Rail Pty Ltd (SBR) provided the rail haulage services, including the locomotives and drivers, to transport the ore from Rankin Dam to Port Adelaide; and (e) Flinders Ports Pty Ltd (Flinders Ports) provided the loading, storage and port services at Port Adelaide. 71 The terms of the Services Contracts were, in different ways, aligned with the expected duration of Phase 1. Termite had contracted with the Services Contractors only for Phase 1. 72 The liabilities to the Services Contractors which Termite undertook pursuant to the respective contracts underpin its present claims against the defendants. I will make detailed findings about those liabilities when considering the quantum of damages claimed by Termite. Termite alleges that the contracts contained "take or pay" provisions, giving rise to the ETPs or "Tail Liabilities" in the event that it ceased mining earlier than the termination dates in the respective contracts. The earlier the cessation of mining before the end of the contracts, the greater would be the Tail Liabilities. 73 Commencing in May 2014, the USD price for 62% iron ore fines dropped below $100 per tonne. The parties disagreed as to the break-even price for Termite (Termite alleged it was about AU$106 per tonne whereas the defendants said it was in the range of AU$90-$94 per tonne) but it was common ground that the Cairn Hill Mine was not viable at the prices prevailing after May 2014. That led to the appointment of administrators and in turn to the liquidation of Termite.

The Heads of Agreement 74 The arrangements between IMX and Taifeng were governed by a "Co-operation Heads of Agreement" (HoA) executed on 29 December 2009. The principal terms of the HoA were that, subject to Taifeng's completion of a due diligence assessment: (a) Taifeng was to subscribe for, and IMX was to issue, shares in IMX; (b) Taifeng could nominate one non-executive director to the Board of IMX; (c) Taifeng would match IMX's past expenditure on the Cairn Hill Mine (Matching Expenditure) and all the money invested by Taifeng would be used in the development of the Cairn Hill Mine; (d) following Foreign Investment Review Board (FIRB) approval, Outback would register Taifeng as an equal shareholder with IMX, the existing Board of Directors of Outback would resign and, simultaneously, IMX and Taifeng would nominate two directors to the Outback Board, with IMX nominating the Chairperson of the Board; (e) management control of the project was to comply with the Woomera Access Deed; (f) after the Matching Expenditure had been spent, all capital contributions to Outback by IMX and Taifeng would be funded pro-rata according to their respective shareholdings in Outback; (g) any decisions concerning the issue of new shares, assets disposals, budgets, investments, new contracts and distribution of profits were to be the subject of unanimous Outback Board decisions; (h) the implementation and operation of all projects within ML 6303 were to be overseen by the Board of Outback with responsibility for the day-to-day operations within the framework approved by the Board to be delegated to management; (i) IMX and Taifeng would negotiate a detailed shareholder agreement concerning their shareholding in Outback. The parties contemplated that the shareholder agreement would be finalised within three months and would provide for major decisions concerning the issue of new shares, asset disposals, budgets, investments, new contracts and distribution of profits to be the subject of unanimous decisions; (j) Taifeng expressed willingness to assist IMX in financing the development of Phase 2; and (k) Taifeng would have first rights to purchase 100% of the ore production at the prevailing market price from Phase 2 onwards and first right to take over Termite's existing offtake contract for Phase 1. 75 IMX also executed a Supplementary Heads of Agreement on 8 April 2010 (the Supplementary HoA) by which it confirmed that, upon the issue to Taifeng of a share certificate representing 50% of the shares on issue in Outback, Taifeng would have 50% ownership of Cairn Hill ML 6303. 76 Although negotiations for the contemplated shareholders' agreement continued until about September 2012 with the exchange of several drafts, a shareholders' agreement was never finalised nor executed. Accordingly, the arrangements between IMX and Taifeng were governed only by the HoA and the Supplementary HoA. 77 Taifeng completed its payment of the Matching Expenditure in January 2011. It had been issued with 490 of the 1,000 ordinary shares issued by Outback. IMX had the remaining 51% interest. The evidence did not disclose the reason for the departure from the 50:50 arrangement contemplated by the Supplementary HoA (although it may have been related to the restrictions concerning the Woomera Protection Area or to conditions imposed by the FIRB). IMX and Taifeng later advanced further amounts to Outback (which were on-lent to Termite) with the consequence that, by 30 June 2012, the total of the Outback-Termite Loan was $48,905,000. 78 The IMX Annual Report for the 2011-12 year records that Taifeng had advanced $16.352 million and $20.474 million by the end of the 2011 and 2012 financial years respectively. 79 There were, however, occasions when Taifeng did not meet its commitment under the HoA to provide, pro-rata, additional funds to meet Termite's operating requirements. On 14 November 2011, IMX called on Taifeng to pay AU$4,121,601 but it refused to do so. Subsequently, Taifeng relented and paid the claimed amount. However, Taifeng did not meet the next cash call of $3.675 million which was required by 31 December 2011. Its failure to do was addressed at the meetings of the Outback Board held on 12 January 2012 and 7 February 2012. The Minutes of the Meeting held on 12 January 2012 include the following: Mr Meadows requested Mr Song to confirm if Sichuan Taifeng would be making their share of the cash calls that had been requested by Termite. Mr Song did not answer this question and noted that he must have time to review his investment decision. Mr Meadows again noted that the cash call is not an investment, but an obligation. Mr Song noted that he recognises his obligations and commitments, but also requested that the Board recognise that he had not approved some past decisions and that he believes they must first be cleaned up. … Mr Meadows again asked Mr Song to confirm if the cash calls would be made by Sichuan Taifeng and Mr Song noted that the cash calls were not fair and that he must be given more time to assess his decision. 80 The Minutes of the Meeting held on 7 February 2012 indicate that the discussion on this topic concluded with: Mr Song responded that Taifeng would not invest further into the project until management was changed because he believed current management was not effective. 81 The consequence of Taifeng's refusal to pay its pro-rata contribution was that IMX had to fund Termite's operations itself. On 20 January 2012, IMX entered into an agreement with Termite whereby IMX agreed to advance monies to Termite. A copy of this agreement was not in evidence but it can be inferred from other evidence that the amount of the advance provided by IMX was $9 million.

The LinQ Capital facility 82 On 30 May 2012, Termite and Outback entered into a financing facility with LinQ Capital Limited. It is evident that Termite entered into the LinQ facility in order to obtain funds with which to repay the amount advanced by IMX and to obtain access to funds for its operations. It also had the effect that Taifeng would have to meet its pro rata share of financing Termite's operations. 83 The essential terms of the LinQ facility were: (a) the amount of the facility was $15 million; (b) Termite was to use the funds advanced pursuant to the facility for defined purposes only, which included using an amount not exceeding $11 million to repay the IMX loan, and paying the working capital requirements and development costs in respect of the Cairn Hill Project (cl 3.2); (c) Termite was to pay LinQ a "signing fee" of $50,000 (cl 1.1); (d) Termite was to pay LinQ a "success fee" of $850,000 on the execution of the facility agreement (cl 13.1); (e) Termite was to pay a "commitment fee" each quarter, being 6.5% of the undrawn amount of the facility (cl 13.1); (f) Termite was to pay interest on the portions of the facility which it drew down at the rate of 13% per annum (cl 5.3(a) and the definition of funding rate); (g) Termite was to pay interest at the rate of 15% per annum on any amounts due to LinQ but unpaid (cl 14 and the definitions of funding rate and overdue margin); (h) Termite was to repay any outstanding principal at the end of each quarter and at the expiration of the facility (cl 5.2); (i) if Termite had made the repayment each quarter, it could withdraw the repaid amount (subject to compliance with certain conditions, one of which was that its actual cash flow had not varied (adversely) by more than 20% from the initial cash flow forecast) (cll 2.2, 5.4); (j) Termite was at all times during which it had drawn down on the facility to maintain a cash reserve of at least $3 million and, if there was no money drawn down, a cash reserve of $1 million (cl 8.26); (k) LinQ's security included IMX's shares in Uranex Ltd, the shares in Termite and ML 6303 itself; (l) Outback guaranteed the performance of Termite's obligations (cl 11.1); and (m) Termite and Outback were not to sell, transfer or dispose of any assets except in the ordinary course of business or in the expenditure of cash (cl 8.12). This clause precluded Termite and Outback respectively from making any repayment of the Outback-Termite Loan or of the JV Loans, at least without the consent of LinQ. 84 Termite drew down $9 million on the LinQ facility shortly after it was put in place and used these funds to repay the advance from IMX. There were also some suggestions that the amount drawn was $11 million. In any event, Termite had borrowings from LinQ (including redraws) until December 2012 and terminated the facility altogether on 12 March 2013. 85 I am satisfied that the primary reason for the termination of the LinQ facility was to clear the way for Termite to lend money to IMX and/or to make distributions. Nevertheless, the decision to terminate the facility had another rationale. Even though Termite had repaid the amount which it had drawn down on the LinQ facility, it remained obliged to pay LinQ a substantial "commitment fee" (potentially $975,000 per annum) in respect of the undrawn amount of the facility. By terminating the facility, it removed that liability. 86 As the LinQ facility was the only source of credit available to Termite, it then became reliant on the earnings from its own mining activities for its capital.

The locus of decision-making for Termite 87 The Boards of IMX and Outback met regularly and usually every month. The Board of Termite met only infrequently and usually only if a particular authorisation or resolution was required. In 2012, the Termite Board met only on 27 January, 31 August, 10 September and 24 September. In 2013 it met only on 12 March and in 2014, it met only on 13, 17 and 18 June. The three meetings in June 2014 were prompted by Termite's deteriorating cash flow position and culminated in the decision that administrators should be appointed. The meetings on 27 January 2012 and the three meetings in August and September 2012 were also associated with concerns at those times about Termite's solvency. As is apparent, the Termite Board did not meet at all between 24 September 2012 and 12 March 2013, or between 12 March 2013 and 13 June 2014. 88 There is a considerable body of evidence indicating (and I so find) that it was the Outback Board which exercised the functions of a Board of Directors determining matters of strategy, management and oversight of the operations of Termite. 89 A principal reason for this was that the Woomera Variation Deed provided that a foreign national could not, without the consent of the Commonwealth, be appointed as a director of Termite. This precluded Taifeng having its preferred representatives on Termite's Board. In particular, Mr Sun and Mr Pang could not sit on the Termite Board (although Mr Sun became an Australian citizen in 2013). 90 The potential difficulties created by the Woomera Access Deed and the Variation Deed were avoided by Taifeng making its investment into Outback and by the appointment of its representatives to that Board, and it then making the decisions for Termite. 91 As already seen, the HoA contemplated that decision-making concerning Termite would be made at the Outback Board level. Further, Finlaysons, a firm of lawyers in Adelaide had informed the FIRB on 12 October 2011 when seeking its approval for the investment by Taifeng that "all activities and projects at the Cairn Hill Project will continue to be overseen and implemented by the Outback Board". 92 A number of witnesses gave evidence that effect was given to this agreement and commitment. The evidence of each of Messrs Nitschke, Hoskins and Meadows was to the effect that it was the Outback Board which provided the oversight, supervision and direction for Termite's operations, with Termite management involved only at the day-to-day operational level. In general, the Termite Board met only when it was necessary to deal with more formal issues. Mr Parsons said "Outback effectively controlled the major decision-making which affected Termite". Mr Hoskins agreed that it was the Outback Board which provided the oversight of management and the provision of strategic direction for Termite's management and that this was a consequence of the Joint Venture arrangements struck between IMX and Taifeng. Mr Pang said that, while the Outback Board did not make "day-to-day operation decisions" relating to Termite, it did make "the major decisions which related to the Joint Venture". Mr Sun said that Termite dealt with the operational issues involved in running the Cairn Hill Mine, but that important issues regarding the Joint Venture and strategic issues, such as decisions on hedging, Pit 2 design adoption and Phase 2, were dealt with at the Outback Board level. 93 It was the practice for the directors of IMX and Outback to be provided in advance of each meeting with a "Board Pack". In addition to the agenda, minutes of the previous meeting and the like, it was common for the Board Packs to include a detailed report concerning Termite's operations, a cash flow forecast, a report on commodity prices and other papers prepared by the management of Termite concerning the matters for discussion and decision. 94 It is apparent (and I so find) that the directors of Termite were not provided with Board Packs with corresponding content for their meetings. 95 At its meeting on 22 May 2013, the Outback Board adopted an "Approvals Framework" to define "the limits of authority designated to nominated positions of responsibility within the Outback Iron Pty Ltd joint venture including [Termite] (the JV or the Company)" and to establish "the type and maximum amount of obligations that may be approved by individuals". The Approvals Framework also provided: All IMX and JV employees should be aware that conduct that violates this Approvals Framework is always considered outside the scope of their employment. Violation of this Approvals Framework could significantly damage the JV and expose it to unintended legal and commercial liability. In addition, individuals who violate these policies are subject to appropriate disciplinary action by the Company, including possible termination of employment. … The management and control of the business and affairs of the JV rests with the Outback Board of Directors (the Board). The Board has reserved some matters to itself for decision and, save for those matters, has delegated authority for other matters to the Executive Team. (Emphasis added) The Executive Team was identified as comprising three persons from IMX being its Managing Director (Mr Meadows and later Mr Nitschke), its Chief Financial Officer (Mr Hoskins) and its Company Secretary (Mr McKenzie) and three from within Termite, including Mr Parsons and Mr Hassard, an accountant employed by Termite as its Commercial Manager. 96 One of the matters which the Outback Board reserved for its own decision was "approval of strategy and annual budgets". 97 As decisions concerning the strategies and overview of Termite's operations were made by the Outback Board, it was not necessary for there to be meetings of the Termite Board of the kind which one would otherwise expect of an operating mining company. That explains why it was the Outback Board, and not the Termite Board, which met monthly to make decisions concerning the business and operations of Termite. 98 The following email exchange between Mr Parsons and Mr Hoskins on 10 December 2013 made plain where the locus of decision-making lay: Parsons: As a philosophical question why do we have a TR Board? Hoskins: I guess Termite is the operating entity that takes direction from Outback being the entity at which the JV is conducted. I think that technically, if Termite is entering large contracts, it should be approving them there however it's probably dealt with in the Outback approvals framework. Parsons: I suppose I just don't want to [get] caught out somehow as a TR Director if a decision is made at IMX level without ever going to the TR Board. Maybe I should ask John if I can get of[f] the TR Board. 99 I did not understand the defendants ultimately to dispute the proposition that the Outback Board functioned, in practice, as the Board of Directors for Termite. To the extent that they may have disputed it, I am satisfied that it is unsound. The evidence points overwhelmingly to the Outback Board having been the decision-making Board for Termite's operations.

Termite's cash flow forecasting 100 Termite's management prepared for each Outback Board meeting a reasonably detailed cash flow report. Each of the reports included as an appendix a Life of Mine (LoM) cash flow forecast (the LoM CFF) which was updated from month to month. Initially, the appendices contained, in spreadsheet form, forecast details for each of the next 12 months and the whole of a financial year thereafter. This changed over time. The LoM CFF presented to the Outback Board at its meeting on 20 February 2013 (the last before the adoption of the Distribution Policy) showed details for each month to June 2014. Thereafter, the LoM CFFs were generally to March or April 2015. 101 The LoM CFFs contained estimates of the ore which would be mined each month, the forecast prices (based on both iron and copper), and the forecasts of the revenue to be received, the costs to be incurred, and the pre and post-tax net cash flows. The resultant figure was then added to the previous end of month cash at bank, indicating the cash forecast to be available. In addition, the appendices contained details of any debt funding and the forecast cash at bank. Until March 2014, the modelling was with respect to Phase 1 only. 102 The estimates of the ore to be mined were updated each month as the details of the amounts actually mined became known. Generally, the cost inputs were reasonably constant, by reason of the nature of Termite's contracts with the Services Contractors. 103 It is evident, and I accept, that Termite gave considerable attention to attempts at forecasting future iron ore prices. From July 2012, Termite's management used for its revenue forecasts the Energy & Metals Consensus Forecasts (EMCFs) published every two months by the firm Consensus Economics. Before July 2012, it had used data in forecasts by the Commonwealth Bank of Australia. 104 The EMCFs contained (relevantly) a compilation of the quarterly forecast prices for iron and copper made by a number of reputable analysts (13 in the case of iron ore and 25 in the case of copper). The forecast figures were for the last month of each quarter, for the next nine quarters. Typically, there was a wide range in the forecasts of the analysts. The EMCFs contained a calculation of the mean of the forecasts for each quarter, the standard deviation for the spread of the mean estimates and identified the highest and lowest of the forecasts. The standard deviations were typically less than +/- US$10 per tonne. Termite used the EMCF mean figure in its LoM CFFs. 105 Following the adoption of the Distributions Policy on 12 March 2013, Mr Hoskins and Mr Parsons used the monthly forecasts in determining the amount to be available for distribution. 106 Mr Hassard also prepared a daily cash flow model which he provided to Mr Parsons, Mr Hoskins and other IMX finance staff on a weekly basis. This model was called the "daily cash flow" because it projected cash receipts and payments on a daily basis, not because it was updated on a daily basis. 107 In addition, Termite management prepared "daily dashboards" which were circulated to the directors of Outback and Termite and to Mr Hoskins every Monday. The daily dashboards contained details of Termite's immediate future cash position, spot margin, margin using 30 day averages, a summary of shipments, and summary of any hedges. 108 Termite did not contend that the defendants had not undertaken appropriate and diligent cash flow forecasting, although it did contend that there was a "structural flaw" in the LoM CFFs with respect to the implementation of the Distributions Policy. I will return to that later.

The adoption of the Distributions Policy 109 In this section of the reasons, I make findings about the adoption of the Distributions Policy by the Boards of IMX, Outback and Termite, and concerning the distributions made pursuant to it. 110 Two considerations were particularly important in the adoption of the Distributions Policy by each of IMX, Outback and Termite on 12 March 2013. The first was the illiquidity of IMX and its reliance on cash from Termite, and the second was the view of KPMG, IMX's new auditors.

The illiquidity of IMX and the loan from Termite 111 IMX's illiquidity arose from the circumstance that, while it and its subsidiaries had a number of active exploration projects, only the Cairn Hill Mine was producing income. Further, with the exception of the $5 million loan from Termite to be mentioned shortly, it had not before 12 March 2013, received any return on its investment in the Joint Venture. IMX's liquidity issues were acknowledged by Mr Nitschke in his evidence and they are in any event apparent in the documentary evidence. 112 A comparison of the financial statements of the IMX Group with those of Termite for the financial year ending on 30 June 2013 indicates that, independently of Termite: (a) IMX's revenue had been approximately $116,000 whereas its expenditure had been approximately $24.6 million; and (b) IMX held only $2.9 million in cash or equivalent. 113 As at 31 March 2013, and after receipt of the $5 million loan from Termite, IMX's cash at bank was only $2 million. I accept Termite's submission that, without a capital raising, IMX was, throughout 2013, dependent on the cash from Termite's operations to remain solvent. 114 In late 2012 and early 2013, IMX had taken steps in relation to its own capital position. On 21 November 2012, it obtained $3.7 million from a capital raising ($0.11 per share). It considered undertaking a further capital raising but this had not occurred by March 2013 (and, in the events which happened, did not occur at all). 115 In November 2012, IMX agreed to sell its interest in the Mt Woods copper and gold joint venture to Oz Minerals Ltd. This was to realize $8.7 million in cash. 116 I am satisfied that IMX agreed to this sale in an endeavour to raise cash. Amongst other things, it is evidenced by an email to Mr Sun on 9 January 2013 in which Mr Hoskins said that one of the reasons for the transaction with Oz Minerals was that "it solved our cash flow requirements through until March/April when we could embark on a raising to fund the 2013 Tanzanian exploration program". Mr Hoskins also told Mr Sun that IMX expected that it would require $1 million before the end of January. 117 However, on 12 February 2013, Oz Minerals informed IMX that it would not proceed with the transaction and IMX announced this to the market on 18 February. 118 Given its illiquidity, IMX sought the approval of Taifeng for it to borrow money from Termite, as a temporary measure. It appreciated that Taifeng's agreement was needed having regard to the HoA and to the terms of the confirmation by Taifeng through Mr Pang on 25 September 2012 concerning the signing off on the accounts of IMX, to which I will refer later. 119 The possibility of Termite making a loan to IMX was raised by Mr Hoskins on 31 December 2012. In an email addressed to Messrs Parsons, Meadows and Nitschke, he noted that IMX needed cash in the first two weeks of January in order to pay bills as they fell due. He said that IMX's short term cash flow had been dependent on payment by Oz Minerals of a $3 million deposit, and noted that negotiations with Oz Minerals were continuing. Mr Hoskins identified six options by which IMX could raise funds, of which two were either a loan from, or a distribution by, Termite. 120 The email exchanges during January 2013 reveal the following: (a) the consciousness within IMX that its short term cash flow was "extremely tight"; (b) discussion of the alternatives of a loan from, or a distribution by, Termite; (c) Taifeng's approval on 9 January of a loan of $1 million from Termite to IMX (communicated to Mr Hoskins by Mr Sun); (d) IMX managing the payment of its creditors, with some accounts being overdue to the extent of one or two months; (e) as January proceeded, the discussion of the prospect of further loans by Termite to IMX; and (f) Taifeng's approval by 29 January 2013 of a loan from Termite totalling $5 million (on this occasion communicated by Mr Sun to Mr Meadows). 121 Mr Hoskins made apparent IMX's difficulties in an email of 31 December 2012 to Messrs Hassard, Parsons, Dunstan (an accountant within IMX), Meadows and Nitschke: IMX's short term cash flow has been dependent on receiving the $3m deposit from Oz Minerals and then the $2m remainder a month later. Negotiations with Oz continue and will continue into January. But IMX needs cash in the first week or two of January to pay bills as they fall due. 122 When Mr Parsons raised a query later that same day, apparently in the interest of Termite, Mr Hoskins responded: IMX's cash position is a lot tighter than Termite's. IMX has less than $0.5m. It has salaries and bonuses by 15 Jan and various other things that cannot be deferred. We will not pay any creditor that is discretionary however. 123 It is also apparent that Mr Hoskins contemplated that Termite should advance monies to IMX, even though that would leave Termite with insufficient cash to pay its own creditors. In his email of 29 January 2013 to Mr Parsons and Mr Hassard (Termite's Management Accountant/Commercial Manager), Mr Hoskins said: I know the 15 Feb date is tight for you guys depending on when that ship money comes in but can we either back ourselves or hold off on EMS's [Exact's] 2nd payment if we haven't got it in? IMX has some payments to make this week that are urgent. 124 Mr Nitschke also made apparent IMX's funding difficulties in an email to IMX Board members on 6 March 2013 in which he said: I met with Neil [Meadows] last week. He confirmed that he and Phil [Hoskins] had been unable to come up with an acceptable loan arrangement with Taifeng. This means that we have an immediate (before 30th June) requirement to raise $5M. We may actually need to raise closer to $10M to provide a buffer against the uncertainty in the iron ore price as the work plan proposed by management at the strategy session would leave us with $4M at the end of the calendar year assuming that we raise $10M. 125 The loan from Termite to IMX (the Termite-IMX Loan) was formalised in a "Working Capital Loan Agreement" executed on 14 March 2013. It provided for an interest free loan of $5 million repayable on or before 30 June 2013. 126 The Termite-IMX Loan was made by the following advances: Date Amount loaned 11 January 2013 $500,000 15 January 2013 $300,000 25 January 2013 $200,000 30 January 2013 $500,000 6 February 2013 $500,000 13 February 2013 $1,000,000 21 February 2013 $1,000,000 6 March 2013 $500,000 12 March 2013 $500,000 Total $5,000,000

127 As is apparent, all of these advances were made before the execution of the Loan Agreement. 128 It is convenient to record here my satisfaction that IMX continued after March 2013 to be financially dependent on payments from Termite. In his evidence, Mr Nitschke claimed to have been confident that IMX could have obtained funds from a capital raising, and there is some evidence that it had explored that possibility. I consider that, even had IMX been able to raise some funds by a capital raising, the amount involved would have been relatively modest, and may not have relieved altogether IMX's reliance on payments from Termite.

The advice from KPMG 129 KPMG was the auditor of IMX and Termite for the financial year ending 30 June 2013. It replaced BDO Audit (WA) Pty Ltd which had been the auditor of the two companies in (at least) the two previous financial years. 130 By 1 March 2013, KPMG was raising issues with IMX about the "going concern" note to appear in IMX's half year accounts. KPMG was concerned that the consolidated accounts for IMX would have to show the Taifeng loan to Outback as current, which would mean that IMX's liabilities would exceed its assets by a significant margin. 131 In an email of 1 March 2013 to Mr Hoskins, Mr Cowell from KPMG said: From our perspective the loan agreement with Termite and the distribution agreement with Taifeng are important to the company's going concern position, as we're sure they are from the directors' point of view. Can you keep me informed if you envisage any difficulty in getting these finalised next week? (Emphasis added) Mr Cowell elaborated this in an email of 5 March 2013 to Mr Dunstan at IMX (and copied to Mr Hoskins): The main [query] being the fact that with a distribution policy being formalised, part of the Taifeng loan will now become current and this may lead to a working capital deficiency in the consolidated accounts, hence the need for a going concern note and for the Taifeng loan and distribution policy to be finalised before the accounts are signed. (Emphasis added) 132 This led to the following email exchanges: 5 March 2013 at 2.01 pm - Mr Hoskins to Mr Cowell The shareholder loan from Taifeng is never due and can't be called. It will only be repaid out of cash flows from Cairn Hill. If Cairn Hill was shut tomorrow, that entire loan would be forgiven. It is not a debt. Let's discuss but I'm unwilling to add much more to the going concern disclosure in the year end accounts. 5 March 2013 at 2.33 pm - Mr Hoskins to Messrs Sun, Pang and Meadows Please find attached the draft distributions policy. Please provide me with comments as soon as possible because IMX's auditors have said that they need to see the Distributions Policy agreed by the Outback Board prior to signing off on the IMX half year accounts. 6 March 2013 at 9.26 am - Mr Cowell to Mr Hoskins [W]e have considered if there [is] an alternative to having to classify part of the Taifeng loan as current based on forecast distributions. Unless Taifeng were to formally convert their debt to equity, the balance remains as a loan and therefore will need to have a portion reclassified to current. In this regard, can you have the forecast distributions to Taifeng calculated and adjust the balance sheet in the accounts? As discussed, we can assist with the disclosure that will help explain this once we see what the numbers come out with. (Emphasis added) 133 On 12 March 2013, KPMG provided a draft of its report to the IMX Audit and Risk Management Committee (ARMC). KPMG raised as a significant matter the "going concern" statement. Having noted the assumptions on which IMX was proceeding in the event that a capital raising did not occur, the draft report continued: This assumption however is heavily dependent on ongoing provision of a loan from Outback and the commencement of distributions to IMX. The company reached verbal agreement with Outback in January 2013 for a loan of up to $5 million (currently drawn to $4 million) to be provided to IMX to assist its short-term cash requirements. The draft loan agreement indicates a repayment date of 30 June 2013. Repayment of the loan is dependent upon the commencement of distributions by Outback to IMX and Taifeng. The cash flow forecast assumes these distributions commence in March 2013, with IMX's share through to 31 December 2013 totalling $20 million. Given the relative informality of these arrangements and assumptions (and yet their importance to IMX), we have emphasised to management the need to have such arrangements appropriately documented before the half year financial statements are signed. (Emphasis added) 134 Ms McComish and Mr Cowell from KPMG attended a meeting of the ARMC at 7.35 am on 12 March 2013. The attendees at that meeting included Messrs Nitschke, Meadows and Hoskins. The minutes of the meeting record that Ms McComish and Mr Cowell stepped the meeting through the draft report and confirmed that: [I]n order to deliver an unmodified opinion on the financial statements for the half year ended 31 December 2012, [KPMG] requires a copy of an appropriately documented loan agreement between [Termite] and IMX and an approved distributions policy of Termite, due to the reliance on these items in the Company's cash flow. (Emphasis added) 135 There was no suggestion that these minutes were inaccurate. To the contrary, Mr Hoskins deposed that KPMG had advised IMX management, including himself, that it would place "an emphasis of matter" in the audited IMX accounts as to whether IMX could continue as a going concern unless the distributions IMX had forecast to be received from Termite, were documented under a distribution policy setting out the parameters under which distributions would be made. 136 I am satisfied that KPMG's insistence on a distribution policy being appropriately documented was a factor in the approval of the Distributions Policy later on 12 March 2013.

The development of the Distributions Policy 137 As already noted, it was Mr Hoskins who, on 31 December 2012, had raised the prospect of Termite making distributions of some of its profits. Before that date, the prospect of distributions had been contemplated in a general way, for example, in cash flow forecasts in June, October and November 2012 and in IMX's announcement to the ASX on 10 December 2012 concerning payment of the amount advanced under the LinQ facility. However, while the LinQ facility itself remained in place, it was not open to Termite to make any distribution of profits. 138 The making of distributions and the development of the Distributions Policy was given impetus by a suggestion of Mr Nitschke at the time IMX was arranging the loan from Termite. Having confirmed with Mr Hoskins that the JV Loans were to Outback, he asked Mr Hoskins in an email of 8 February 2013: So why can't we just do a distribution to Outback and decide to preferentially repay our loan? 139 The following email exchange then occurred on 8 February 2013: (Hoskins email to Nitschke) We could do that but I'm assuming this would also require Taifeng's approval. I'm not sure why this is a big issue John? Can you bring me to into the loop as to why with the questions? A loan agreement is supported by Taifeng and no interest is supported by Robert [Sun]. (Nitschke email to Hoskins) … A loan from Termite is repayable to Termite. A distribution to Outback is not. Could be significant depending on our strategy going forward. 140 The concept of distributions by Termite followed by a loan from Taifeng to IMX was pursued in discussions between Mr Meadows and Mr Sun, as the following email exchange between Mr Sun and Mr Meadows (copied to Mr Nitschke and Mr Hoskins) on 17 February 2013 indicates: (Meadows email to Sun) What we are hoping to achieve this afternoon is as follows in line with our discussions since Friday: The current idea that money is provided from Termite to IMX ($3m at the moment) would be eliminated and replaced by a system whereby: • Distributions from Termite to Outback would be formalised; • The 51% from Termite to IMX would go straight through to IMX via Outback; • The 49% to Taifeng would initially accumulate at Outback level and a loan of up to $6m would be provided from Taifeng's funds at Outback level to IMX; • The debt would be paid back at a date to be agreed as cash and partial conversion to equity at an agreed price or would be paid back fully as cash. The stated preference of Taifeng would be to get back to close to 20% IMX shareholding at the same share price as at the last placement. The details of all of this to be worked through with you [in] the week commencing 25th February after the strategy for IMX for 2013 has been agreed this week. I hope this is an accurate transcription of the current discussions. (Sun email to Meadows) Yes, these are what we have talked about except we have not touched [on] how Taifeng's share of [the] distribution [is] to be provide[d] to IMX as a loan. Phil [Hoskins] told me about your distribution model on the whole on Friday. My understanding was that Termite physically distributed cash surplus pro rata to IMX and Taifeng at the same time and then Taifeng lent its money to IMX whenever IMX needed. It was very similar to a bank facility. We did not mention accumulation process of Taifeng's share in Termite. Do you mean that IMX takes its share of distribution away and Taifeng leaves its share in Termite to let Termite use it before IMX borrows it? (Meadows email to Sun) Accumulation at Outback (not Termite) level is suggested as a means to conduct the loan as the banking facilities are in place and that way we would minimise bank charges that would be caused by movements of funds across IMX and Taifeng accounts but it is not a mechanism that anyone is fixed on, just suggested as being the most cost effective system to work within. (Sun email to Meadows) Thank you for the explanation, Neil. We can look into any mechanism that serves us best. To keep the distribution as what it is, I would like the distribution to be a separated matter from the loan. 141 Further discussions then occurred in which Mr Sun, on behalf of Taifeng, proposed that any drawdown by IMX from Taifeng's funds would be for a maximum term of six months. This was not acceptable to Mr Meadows. He proposed instead that the existing loan arrangement be documented in a loan agreement and at the same time a distributions policy from Termite to Outback should be developed. 142 By 28 February 2013, the attitude of Taifeng had changed. Mr Meadows reported on that day that Taifeng's position was that now that Termite was "finally achieving returns from the mine, they need to repatriate them to China to satisfy the State and their financiers who at the very least want them to show that they got the loan back by mine life end". Mr Pang also proposed that the loan from Termite to IMX be for three months, and that, on its repayment, the $5 million should be distributed to IMX and Taifeng. 143 Drafting of the terms of the Distributions Policy commenced after 26 February 2013 and Mr Hoskins completed the first draft on 1 March 2013. He circulated the draft to Messrs Sun, Pang and Meadows on 5 March 2013. 144 Some revision of the terms of the draft Distributions Policy occurred over the ensuing days. The Distributions Policy was approved by the Boards of IMX, Outback and Termite on 12 March 2013.

The Board meetings approving the Distributions Policy 145 The IMX Board meeting (in which Messrs Nitschke, Meadows and Sun participated as directors) occurred first, at 9.50 am. The Board noted, amongst other things, that KPMG required an approved distributions policy by Termite. Read literally, the minutes of the IMX Board meeting of 12 March 2013 do not record the approval of the Distributions Policy, but it was common ground that the IMX Board had approved the Policy at that meeting. 146 The meeting of the Outback Board (in which Messrs Meadows, Nitschke, Pang and Sun participated as directors) commenced at 10.50 am and, with one amendment to the draft, approved the Distributions Policy. 147 The Board of Termite (in which Messrs Meadows, Nitschke and Parsons participated as directors) met at 1.30 pm and resolved to approve the Distributions Policy. 148 Mr Hoskins attended each of the Board meetings in his capacity as CFO.

The terms of the Distributions Policy 149 The Distributions Policy approved by the three Boards was in the following terms: CAIRN HILL JOINT VENTURE DISTRIBUTIONS POLICY The Cairn Hill Joint Venture ("JV") Distributions Policy outlines the JV's policy on equitably distributing excess cash and profits to its shareholders. POLICY Termite Resources NL ("Termite") The Distributions Policy dictates that as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate that would warrant additional cash being held by Termite, Management of Termite will distribute 100% of excess cash (after deducting operating expenses and the required Termite Cash Reserve) to Outback Iron Pty Ltd ("Outback"). The Termite Cash Reserve is $3m and Termite Management should ensure that the short term cash flow at all times shows a minimum cash balance above this figure. Outback Outback will distribute 100% of excess cash after deducting the Outback Cash Reserve. The Outback Cash Reserve = a nominal amount of $5,000 plus an amount covering any potential Termite liabilities. Given the shareholders of Outback would currently prefer distributions from Outback in preference to holding cash at Outback level, the Outback Cash Reserve will become a standing agenda item at Outback Board meetings and Management will provide the amount of any potential Termite liabilities to each meeting. The Outback Board will continue to monitor the Outback Cash Reserve. PROCEDURE Termite Management will produce a weekly short term cash flow from which they will monitor the forecast cash position of Termite over the upcoming 6 months. On a monthly basis, and as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate, Termite Management will distribute the highest amount to the nearest $100,000 that leaves Termite with at least the Termite Cash Reserve. Cash returned by Termite to Outback will represent a repayment of the shareholder loan from Outback to Termite until that loan is fully repaid. When the loan is fully repaid, payment of dividends will commence. All shareholder loans between IMX, Taifeng and Outback and between Outback and Termite are interest free and are for a term of 5 years from 1 March 2013. Repayment of these shareholder loans is unable to be demanded by either Outback (of Termite) and IMX or Taifeng (of Outback). Upon completion of operations and payment of final distributions by Termite, if these shareholder loans remain unpaid, the loans will be forgiven. Closer to the time of the shareholder loans being repaid, Management will consider whether it needs to amend this Distributions Policy to outline how dividends will be approved and paid. APPROVALS No Termite or Outback Board approval will be required for monthly distributions. This policy will be reviewed by the Outback Board on a six monthly basis to determine its ongoing applicability to the JV however it can be amended at any time if approved by the Outback Board. As per the Heads of Agreement, loans and distributions are subject to unanimous Outback Board approval. Distributions will be formally reported to the Board of Outback and IMX. DATE OF LAST REVIEW This policy was last reviewed on 12 March 2013 150 The effect of the Distributions Policy was that, in the absence of unfavourable developments in the iron ore price, the copper price or in the foreign currency exchange rates, Termite's management would distribute all of its excess cash to Outback, after deducting its operating expenses and "the required Termite Cash Reserve" of $3 million. The amount of the distribution was to be calculated by Termite management so that its cash balance would not drop below $3 million at any time. That is to say, the requirement was not just for there to be a minimum reserve of $3 million at the time of the distribution, but at any time during the period of the short term cash flow forecast. This meant that, depending on the timing of the receipts and of the payments to creditors, the amount held by Termite could well exceed $3 million from time to time.

The binding effect of clauses in the Distributions Policy 151 Because of its significance to an issue to be considered later, it is convenient to address at this point the parties' submissions concerning the binding effect of the Distributions Policy. 152 In its opening submissions, Termite submitted that the adoption of the Distributions Policy by the respective Boards of Termite, Outback and IMX had contractual effect by which the Joint Venturers had agreed that the Shareholder Loans were to be subordinated, that is, repayable only to the extent that the remaining creditors of Termite and Outback respectively had been repaid fully. In its closing submission, Termite's contention was more confined. It contended that one paragraph in the Distributions Policy had binding effect, being: All shareholder loans between IMX, Taifeng and Outback and between Outback and Termite are interest free and are for a term of 5 years from 1 March 2013. Repayment of these shareholder loans is unable to be demanded by either Outback (of Termite) and IMX or Taifeng (of Outback). Upon completion of operations and payment of final distributions by Termite, if these shareholder loans remain unpaid, the loans will be forgiven. 153 The contractual status of this clause is to be determined objectively: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165 at [40]; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 at [59], [98]-[100]. Accordingly, the evidence of the defendants as to their understanding of the effect is inadmissible. Instead, regard should be had the subject matter of the Distributions Policy, the status of the parties, their relationship to one another and to the surrounding circumstances: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at [24]-[25]. 154 It is pertinent that the term in question appears in a document which is described as a "Policy". That tends to point against any part of the document having binding effect. Further, some parts of the document are expressed in terms which do not appear apt as the language of contract. In particular, the condition "as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate that would warrant additional cash being held by Termite" does not appear to be contractual in nature. Further, as the defendants submitted, it would be unusual for one clause in a document to be characterised as having binding effect when the balance does not. 155 The defendants submitted that other matters also point against there being an intention, objectively considered, that the Distributions Policy should have binding effect: there was no evidence of an intention that the Distributions Policy should impose new repayment terms upon Termite; no evidence that it was intended to confer any legally enforceable benefit upon third party creditors; and a company is entitled to pay dividends to its shareholders even if the company is not indebted to them, or if the shareholders have no right to demand any payment from the company. 156 One may accept each of the matters mentioned in the previous paragraph but I do not regard any of them as being of great moment. It was not necessary for the Distributions Policy to impose new repayment terms on Termite in order for it to have legal effect; the absence of conferral of a legally enforceable benefit upon third party creditors is not material; and, while it is obvious that a company may pay dividends to its shareholders even when not indebted to them and in circumstances in which they have no entitlement to demand payment, that does not preclude participants in a joint venture from agreeing, in a binding way, on the duration of the advances which fund the joint venture. 157 The clause in question is in some respects declaratory of the position previously agreed by the Joint Venturers. The provision that the Shareholder Loans were for terms of five years from 1 March 2013 was new. However, in context, to the extent to which this introduced a finite term, it was one expiring well after the expected conclusion of mining operations at Cairn Hill. 158 Despite the matters to which the defendants referred, I consider that the clause on which Termite relies should be regarded as having contractual effect. It appears in a section of the Policy headed "Procedure", thereby distinguishing it from the section headed "Policy". The paragraph which precedes that relied upon by Termite contains the parties' agreement as to the character of the distributions. Both the subject matter and the manner of expression are apt to indicate a binding agreement. The Policy specified that Termite's payments "will" represent a repayment of the Shareholder Loans until that loan is fully repaid. When that occurred, the parties agreed that payment of dividends "will" commence. These were matters about which it is understandable that companies would wish to agree in a binding way. 159 The clause on which Termite relies is expressed in declaratory terms, and in a manner which is apt to record the parties' ongoing agreement with respect to the Shareholder Loans. In a context in which there had previously been difficulties in obtaining the unanimity of views about the loans, and in which KPMG was pressing for the position to be documented in a formal way, it is understandable, objectively considered, that the Companies wished to bind themselves in this way. 160 There was no suggestion of a lack of consideration. 161 The Distributions Policy had been adopted by resolutions by the Boards of each of IMX, Outback and Termite, so that there is no difficulty in accepting that those Companies were accepting for themselves the terms of the loans for which it provided. Taifeng can also be taken to have agreed to those terms, given that it had instructed Mr Sun and Mr Pang to agree to the terms of the Distributions Policy and to supports its adoption. 162 Accordingly, I reject the defendants' submission on this topic. I conclude that the two clauses in the Distributions Policy concerning the agreed character of the contemplated payments and of the Shareholder Loans were intended, objectively considered, to have contractual effect, and that they did have that effect. 163 As already indicated, it is not necessary to refer in any detail to the evidence of the defendants concerning their own understanding of this clause in the Distributions Policy. I note however that, with the exception of Mr Hoskins, each gave evidence which was broadly consistent with the understanding of the clause for which Termite contended.

The making of the distributions 164 Termite made distributions as follows: Date Taifeng IMX 22/3/13 2,842,000.00 2,958,000.00 22/4/13 3,332,000.00 3,468,000.00 21/6/13 1,513,689.87 1,575,473.13 13/7/13 1,176,008.55 1,224,008.90 21/8/13 1,282,121.17 1,334,452.65 13/9/13 1,000,000.00 23/9/13 2,500,000.00 2,602,040.82 25/09/13 1,009,000.00 2,091,000.00 28/10/13 2,353,137.69 2,449,184.13 27/11/13 1,713,211.84 1,783,138.85 30/12/13 1,740,724.04 1,811,773.99 14/1/14 1,415,229.01 1,472,993.46 31/3/14 688,894.42 717,012.56 Total $22,566,016.59 $23,487,078.49

165 Generally, Termite paid the distributions directly to IMX and Taifeng (in proportion to their respective interests of 51% and 49%). The payments between 23 March 2013 and 30 December 2013 constituted a full repayment of the JV Loans. It seemed to be common ground that the payments made on 14 January and 31 March 2014 were appropriately characterised as a return of capital of Outback to IMX and Taifeng. 166 Mr Meadows said that the amounts of the monthly distributions were discussed each month at one of the weekly Termite management meetings. The participants in those meetings were usually Messrs Meadows, Hoskins, Parsons, Hassard and Dunstan (an accountant with IMX). He said that the amount of the payment was determined in the meetings by consent although it was for him, as a director of Termite, to agree with Mr Parsons on the amount of the payment. 167 Mr Hassard conferred with Mr Parsons about the distributions before the management meetings. Mr Parsons said that he approved the distributions on the basis of Mr Hassard's advice because of his confidence in him and his confidence in the forecasting model and assumptions used for costs and revenue purposes. He said that in some months he decided that no distributions should be made or that the distribution should be less than had been requested by Mr Hoskins or Mr Dunstan. He made these decisions having regard to the amount available for distribution under the terms of the Distributions Policy. I note, however, that there were only two months in which distributions were not made, being May 2013 and February 2014. 168 I accept the evidence of Mr Meadows and Mr Parsons as being broadly correct although it is apparent that IMX's need for cash was a dominant consideration in the decisions which were made. 169 At one stage in his evidence, Mr Hoskins denied having any "input" as to whether a payment was to be made by Termite. I regarded that evidence as untruthful. Later, when challenged, Mr Hoskins conceded his involvement: Q: There was not a single distribution that was made without your concurrence being sought as to whether it should be made; do you agree with that? A: Maybe with my concurrence. I wasn't - yes. That's probably right. I was the ultimate financial officer of the entire group. Moving money around within it should - should be run by me before its finalised. … Q: And I suggest that prior to the making of distributions you would say to Mr Meadows words to the effect of "This is what we" - that is you and Hassard and Parsons - "were thinking about the relevant distribution"? A: Yes. I might not be walking into his office, but might have forwarded an email where the three of us have conversed about it. … Q: Do you agree that Termite management, that is, Mr Hassard and Mr Parsons, weren't making any decision regarding distributions without the concurrence of you and Mr Meadows? A: The concurrence is that - that we concurred with that being - yes, well, Neil was the managing director of the group and I was the CFO of the group, and so it would need our - our sign off. 170 I am satisfied that, as CFO, Mr Hoskins had a very real interest in the amount, and timing, of the payments by Termite. That was because IMX was reliant, at material times, on the distributions from Termite for its operating cash. Mr Hoskins participated in the decision-making concerning each distribution.

Directors' duties - overview 171 Termite alleges that each of Messrs Meadows, Nitschke and Parsons, while its directors and officers, owed it the duty pursuant to s 180 of the Act to act with the degree of care and diligence which a reasonable person in a like position would exercise in Termite's circumstances, and the duty, pursuant to s 181 of the Act, to act in good faith in its best interests and for a proper purpose. Termite also alleges that Messrs Meadows, Nitschke and Parsons owed it the common law duties of directors, namely, the duty to act with care, skill and diligence and the duty to act in good faith for the benefit of the company as a whole. 172 Termite alleges that, in the period from January 2012 to 5 November 2013, Mr Hoskins, as a de facto director and as one of its officers, owed it duties pursuant to ss 180 and 181 of the Act. In respect of the period commencing on 5 November 2013 when Mr Hoskins became one of its appointed directors, Termite alleges that, as a de jure director and one of its officers, he owed the same duties as did Messrs Meadows, Nitschke and Parsons. 173 In respect of Mr Sun and Mr Pang, Termite alleges that from 26 April 2012 they were its de facto directors and, as directors and officers, owed it the statutory duties pursuant to ss 180 and 181 of the Act. It does not allege that either Mr Sun or Mr Pang owed it the duties imposed by the common law as directors. 174 Termite alleges that each of the defendants breached the duties he owed. 175 Each of Messrs Meadows, Nitschke and Parsons admits that he owed the duties alleged by Termite, but only in respect of the period in which he held office as a director of Termite (to 15 October 2013, 1 May 2014 and 23 July 2014 respectively). The ASIC Extract for Termite indicates that Mr Parsons continued as a director after 23 July 2014, but nothing turns on that presently. 176 Mr Hoskins admits only that he owed duties to Termite as one of its directors in the period from 5 November 2013 to 1 May 2014. Both Mr Sun and Mr Pang deny that they were deemed directors of Termite and deny that they owed duties to Termite as alleged by it. 177 All of the defendants deny Termite's allegations of breach of duty. In relation to the alleged breach of s 180(1), the defendants invoke the business judgment "defence" contained in s 180(2) of the Act. The defendants also pleaded that if any breach of duties by them is established, they ought fairly be excused pursuant to s 1317S(2) or s 1318 of the Act from any liability. However, they did not make any submission to that effect in their closing submissions and, in particular, did not resist Termite's submission that they ought not be afforded relief from liability under ss 1317S and 1318 of the Act. I have taken that part of the filed Defence to have been tacitly abandoned and will not mention it further. 178 It was common ground that the statutory and common law duties of directors are owed to the company: Daniels v Anderson (1995) 37 NSWLR 438 at 505, although there may be a public aspect to a breach of the statutory duties: Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023, (2016) 336 ALR 209 (ASIC v Cassimatis (No 8)) at [455]-[478].

Section 180 179 Section 180(1) imposes an obligation on a company's directors and officers to act with care and diligence, as follows: Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Note: This subsection is a civil penalty provision (see section 1317E). Section 180(2) concerns the business judgment rule invoked by the defendants. 180 The principles developed by the Courts concerning the duty imposed by s 180(1) were not in issue. It is convenient to adopt the summary which Brereton J gave in Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373: [99] The statutory duty imposed by s 180(1) reflects, and to some extent refines, that which obtains at general law. As Santow J (as his Honour then was) explained in ASIC v Adler … both the common law and equity imposes on directors a duty of care and skill … the content of which is essentially the same as the statutory duty … . Similarly, the statutory duties imposed by s 181 and s 182 reflect, and to some extent refine, corresponding obligations of directors under the general law. [100] In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the director's position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case … . [101] Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances … And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company … they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance … . [102] The constitution of the corporation, and concomitantly the identity of those to whom the duty is owed, is of importance because the duties referred to in ss 180, 181 and 182 are not duties owed in the abstract, but duties owed to the corporation. As Clarke and Sheller JJA observed in Daniels v Anderson (at NSWLR 504), the duties imposed by former s 232 (the predecessor of s 180) reflected the concept of negligence at general law, in that a director owes to the company a duty to take reasonable care in the performance of the office. In Vrisakis v ASC (1993) 9 WAR 395, 449-50; 11 ACSR 162, 211-13; Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ) held that although the statutory duty of care and diligence would be contravened if a director had not exercised a reasonable degree of care and diligence in the exercise of his powers or the discharge of his duties, even if there was no actual damage, that could only be so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company - and, moreover, that in determining whether the relevant duty had been breached, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct [see also ASIC v Doyle (2001) 38 ACSR 606, 641]. As His Honour explained: Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise. Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question. 181 The standard of care required by s 180(1) is objective but account must be taken of the circumstances of the company and of the particular director or officer involved. The Court enquires as to what an ordinary person, with the knowledge and experience of the director or officer, could be expected to have done in the circumstances if he or she was acting on their own behalf: Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [372]. The "corporation's circumstances" include the type of company, the size and nature of its business, the provisions of its constitution, the composition of the Board and the distribution of the work between the Board and other officers: Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 (ASIC v Rich) at [7201]. In Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589; (2015) 241 FCR 502, Beach J elaborated the position: [440] It is not in doubt that the circumstances of the particular company concerned inform the content of the duty. These include the size and type of the company, the size and nature of the business it carries on, the terms of its Constitution, and the composition of the board of directors. [441] It is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director's position and responsibilities, the director's experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company's business has been distributed between the directors and the company's employees, the informational flows and systems in place and the reporting systems and requirements within the company. [442] Further, one then looks at the relevant acts, omissions and circumstances in the given case. 182 In ASIC v Cassimatis (No 8), Edelman J reviewed the historical basis and nature of the common law, equitable and statutory bases for the duty of directors and officers to act with due care and diligence. His Honour's conclusions included the following: (a) the dominant position is that directors owe a single general law duty, recognised by both common law and equity, to take reasonable care, at [427]; and (b) the duty is concerned with negligence and not gross negligence, at [428]. 183 Edelman J also concluded that the foreseeable risk of harm to be considered in relation to an alleged breach of s 180(1) is not confined to financial harm but includes harm to all of the interests of the company, including its reputation; that the question of whether a director has exercised reasonable care and diligence is to be answered by balancing the foreseeable risk of harm against the potential benefits which could be expected to accrue to the company from the conduct in question; that the balancing of the risk against potential benefits should be carried out in a way which is similar to the negligence calculus discussed by Mason J Wyong Shire Council v Shirt [1980] HCA 12, (1980) 146 CLR 40 at 47-8; and that the exercise is "forward looking" to what a reasonable person would have done, not "backward looking" at what would have avoided the injury: ASIC v Cassimatis (No 8) at [483]-[487]. See also Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 (ASIC v Drake (No 2)) at [395]-[401]. 184 The duty imposed by s 180(1) requires directors and officers to be familiar with the fundamentals of the company's business, to keep themselves informed about the company's activities, to monitor generally the company's affairs, to maintain familiarity with its financial status and, in most cases, to have a reasonably informed opinion of the company's financial capacity: ASIC v Rich at [7203]. Questions of whether a director or officer has failed to meet the required standard of care and diligence are to be assessed with regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment kept firmly in mind: ibid at [7242]. Section 180(1) is not directed to mere mistakes or errors of judgment. The position was stated by Robson J in Australian Securities and Investments Commission v Lindberg [2012] VSC 332 at [72]: … Making mistakes does not by itself demonstrate lack of due care and diligence. The business judgment rule in s 180(2) also recognises that business judgments made in good faith and on a proper basis do not fall within s 180(1). Directors and officers of corporations are expected to take calculated commercial risks. A company run on the basis that no risks were ever taken would be unlikely to be successful. The proper taking of risk in making business decisions is entirely consistent with exercising care and diligence. The proper assessment of the risks and potential rewards is a matter that demands the exercise of care and diligence. The two concepts complement each other in the management of corporations. 185 Hence, the question is what a reasonable person in each of the defendants' positions would have done in response to the foreseeable risk: ASIC v Drake (No 2) at [398]-[400]. 186 Ordinarily, the circumstances of each individual director and officer should be considered, at [491]. However, the parties did not in the final submissions suggest that the individual positions of the defendants could warrant different conclusions. Instead their submissions proceeded on the basis that it was not necessary to distinguish between the respective defendants. It is also convenient to note in this respect the concession by the defendants' counsel that the distinction sometimes drawn between the position of executive and non-executive directors has less significance in the present case.

Section 180(2) - the business judgment rule 187 Section 180(2) of the Act provides: Business judgment rule A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) - it does not operate in relation to duties under any other provision of this Act or under any other laws. 188 In s 180(3) "business judgment" is defined to mean "any decision to take or not take action in respect of a matter relevant to the business operations of the corporation". 189 The four elements in s 180(2) are cumulative. 190 It is a person who invokes the business judgment rule who has the onus of proving that he or she falls within its terms: ASIC v Rich at [7269]; Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364 at [197]. The business judgment rule applies only to business decisions. A failure by directors to turn their mind to a particular issue does not attract the defence: ASIC v Rich at [7271]-[7284]. 191 The circumstances to which the business judgment defence rule relate will ordinarily be encompassed by the obligation of care and diligence to which s 180(1) refers. However, as explained by Austin J in ASIC v Rich, s 180(2) may still have some work to do, at [7242], [7254]-[7255].

Section 181 192 Section 181 of the Act provides: 181 Good faith - civil obligations Good faith - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. Note 1: This subsection is a civil penalty provision (see section 1317E). Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 1: Section 79 defines involved. Note 2: This subsection is a civil penalty provision (see section 1317E). 193 Despite the decision in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 (WBC v Bell Group (No 3)) at [923], [1988], [2027], [2772] and [2795], the authorities favour the view that the question of whether or not directors or officers have exercised their powers and discharged their duties in the manner required by s 181 is to be determined objectively: ASIC v Drake (No 2) at [494]; FAL Healthy Beverages Pty Ltd v Xenos [2017] NSWSC 476 at [59]; Australian Securities and Investments Commission v Flugge [2016] VSC 779, (2017) 342 ALR 1 (ASIC v Flugge) at [1965]-[1990]; Re Colorado Products Pty Ltd [2014] NSWCA 789 at [419]-[421]. 194 Nevertheless, an allegation of breach involves both subjective and objective elements: subjective in the enquiry as to the directors' subjective purpose, and objective in the assessment of whether that purpose was improper: ASIC v Flugge at [1976]. 195 In considering whether the s 181(1) duty has been breached, the Court seeks to balance "the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question": Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450; ASIC v Cassimatis (No 8) at [465], [479]. That is because the mere fact that a director participates in conduct which carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that the director has failed to exercise a reasonable degree of care and diligence in the discharge of his or her duties. The management and direction of companies involves the making of decisions and embarking upon actions which involve risk: Vrisakis at 449. 196 The common law duties and the statutory duties are of a similar character: Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451 at [142].

The interests of creditors 197 The duty of directors to act in the best interests of a company may require them to take account of the interests of its creditors, as well as the interests of its shareholders. In Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1 at 7, Mason J (with whom Barwick CJ agreed) said: [I]t should be emphasized that the directors of a company in discharging their duty to the company must take account of the interests 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. 198 Termite did not allege that the defendants owed any duty directly to its creditors, in particular the Services Contractors, which might support an action by them against the directors. This was appropriate, given the position explained by Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 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 statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... the 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) 199 This passage was referred to with approval by the plurality in Spies v R [2000] HCA 43; (2000) 201 CLR 603 at [94]. 200 In Geneva Finance Ltd v Resource & Industry Ltd [2002] WASC 121; (2002) 169 FLR 152, Heenan J summarised the principle as follows: [26] [I] consider that the orthodox articulation of the duty is that a director of a company, especially if the company is approaching insolvency, is obliged to consider the interests of creditors as part of the discharge of his duty to the company itself, but that he does not have any direct duty to the creditors and certainly not one enforceable by the creditors themselves, except in "special responsibility" cases or under statutory provisions now prevailing in a liquidation. 201 As this passage makes apparent, the obligation of directors to consider the interests of creditors is enlivened particularly when a company is insolvent or nearing insolvency. The Courts have avoided formulating any general test of the degree of financial instability necessary to give rise to a duty by directors of a company to consider the interests of its creditors. Thus, in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 733, 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 of the shareholders, can justifiably expose the company. 202 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 at 732 ("an insolvency context"); Linton v Telnet Pty Ltd (1999) 30 ACSR 465 at 471, 478 ("financial instability" and "should have been concerned for [solvency]"); 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"); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, (2008) 39 WAR 1 (Bell Group v WBC (No 9)) at [4440] and [4421] ("prejudicial to creditors" and "facing insolvency"); WBC v Bell Group (No 3) at [2046] ("a real risk that the creditors of a company in an insolvency context would suffer significant prejudice"); and Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191, (2007) 63 ACSR 557 at [162] ("a real and not remote risk of insolvency"). 203 In Grove v Flavel (1986) 43 SASR 410 at 421, Jacobs J said that directors should consider the interests of creditors when they are aware of "a real and not a remote risk" of insolvency. In Speis v R, at [95], the plurality doubted the correctness of Grove v Flavel insofar as Jacobs J had suggested that directors owe an independent duty to, and enforceable by, creditors. The plurality, however, did not suggest that Jacobs J had been incorrect in holding that directors may owe a duty to creditors when they are aware of a real and not remote risk of insolvency. 204 In Kalls v Balaglow, Giles JA (with whom Ipp and Basten JJA agreed on this issue) said: [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. 205 In Australian Securities and Investments Commission v Somerville [2009] NSWSC 934; (2009) 77 NSWLR 110 at [37], Windeyer AJ considered it "clear" that, "unless the interests of the creditors are taken into account where objective circumstances require this, … and only the interests of shareholders considered, the directors cannot be acting in good faith" (emphasis added). 206 After his review of the authorities in Bell Group v WBC (No 9), 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) 207 In Nicholson v Permakraft 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. His Honour 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). 208 It is also convenient to refer to the summary by the authors of Ford, Austin and Ramsay's Principles of Corporations Law (16th edition) at [8.100.12]: In summary, what directors must do to satisfy their obligation to consider the interests of creditors will vary according to the context. The steps required to be taken by directors will depend upon a number of factors, and these factors will vary from company to company. The factors will include the financial situation of a company (the closer the company is to insolvency, then the greater the weight that should be given by directors to the interests of creditors); the number of creditors the company has; the types of creditors the company has and the amount owed to each creditor; whether the company is part of a corporate group (the existence of a corporate group in the Bell Group litigation meant the directors faced a more complex task in relation to considering the interests of creditors); and the potential impact of any contemplated transactions being considered by the directors on the creditors. 209 In the application of these principles, it will be necessary to have regard to matters bearing upon the solvency of Termite at the time that the Distributions Policy was adopted, and during its implementation. I indicate now, however, that I do not accept the submission of the defendants to the effect that the directors or officers of a company are required to consider the specific interests of creditors only when their actions are likely, on a balance of probabilities, to lead to the insolvency of the company. That was so, the defendants submitted, because it is only at that point that their decisions are effectively managing assets which belong to the creditors and not to the shareholders. I agree with the defendants that that is one circumstance in which directors and officers of a company will be obliged to consider the interests of the company's creditors, but the authorities reviewed above indicate that it is not the only circumstance.

Duties to Termite as a subsidiary 210 The directors of a company which is a member of a corporate group owe their duties to the particular company, and not to the group as a whole: Walker v Wimborne at 6-7. It is the interests of that particular company alone which are to be considered. In Re McGrath: HIH Insurance Ltd [2010] NSWSC 404; (2010) 266 ALR 642, Barrett J said in [39] of the appendix to the judgment: It is axiomatic that, in the context of a group of companies, the propriety of the exercise of powers by directors (or liquidators) of a particular company is to be judged by reference to the interests of that company rather than some perceived transcending interest of the group. 211 Nevertheless, there are circumstances in which the advance of monies by one member in a corporate group to another may be regarded as being in the interests of the former. Mason J spoke of this in Walker v Wimborne, at 6: The word "group" is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder and company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company. (Emphasis added) 212 The defendants referred to Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 in which Giles JA said at [148]: It was necessary for the directors to consider the interests of Constructions, as a separate legal entity, in deciding whether to participate in the debt restructuring … It has nonetheless been recognised that a transaction benefiting one company in a group may have derivative benefits for another company in the group, even if the companies are not parent and subsidiary. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 Brennan J observed (at 183) that "it may be for the benefit of solvent companies in a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group". In Equiticorp Finance Ltd (In Liquidation) v Bank of New Zealand Clarke and Cripps JJA said … "It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B." 213 In Ford, Austin and Ramsay's Principles of Corporations Law (16th edition), the authors summarised the position by reference to the judgment of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404 as follows: • The powers of directors of a company must be used for the purposes of that company. • This does not preclude the exercise of a power with a view to an advantage to be received by another company if the transaction is one for the benefit of the company entering into it. The benefit need not be direct and immediate; it may arise indirectly. The purpose of obtaining an advantage for a related company does not necessarily result in a breach of duty. There would not be a breach of duty where a benefit is derived from a transaction by two or more companies or if the company entering into the transaction receives some indirect benefit. Considering the interests of the group does not automatically result in a breach of duty. What does result in a breach of duty is lack of regard for the interests of the company entering into the transaction. (Emphasis added)

The actions constituting the alleged breaches 214 Termite alleges that three different kinds of actions by each of the defendants breached the pleaded duties: causing Termite to enter into the Distributions Policy; causing or permitting Termite to perform the Distributions Policy by making each of the payments; and failing to review, revoke or vary the Distributions Policy or to cause Termite to do so. 215 There is considerable overlap in the pleaded particulars of each form of breach, although the respective pleas were not entirely co-extensive. In substance, Termite alleged with respect to each breach that the defendants had failed to take into account the interests of Termite as a whole (including its unsecured creditors), failed to consider the impact on the Services Contractors, failed to undertake any proper analysis of an appropriate cash reserve, failed to consider and take into account the foreseeable risks affecting Termite's future profitability including the size and length of potential downturns in the iron ore price, approved a distributions policy which meant that Termite had back-ended liabilities and potentially limited income with which to meet those liabilities and, accordingly left Termite vulnerable to insolvency, and failed to take account of the emerging evidence that its forecast revenues were based on models which over-estimated the amount of ore available to be mined. 216 In relation to the Termite-IMX Loan, Termite alleges that each of the defendants breached the duties described above by causing it to make the loan and, separately, by causing it to enter into the transactions for its repayment by a round robin of payments sourced in Termite's own funds. 217 Termite alleges that a number of circumstances, together with the defendants' knowledge of those circumstances, indicate the defendants' breaches of duty. It is convenient to list these matters. Later I will make findings concerning them and address the allegations that these matters indicate breaches of the defendants' duties. The circumstances on which Termite relies are: (a) Termite's brushes with insolvency in the recent past; (b) the extent of Termite's liabilities, in particular, the liabilities it would incur in the event of early termination of the contracts with the Services Contractors on an early cessation of mining activities; (c) the foreseeable risks which, if realised, would affect Termite's ability to continue operations and, in the event that that occurred, would crystalise the Tail Liabilities. These included the marginal nature of the Cairn Hill mining operation, the known volatility of iron ore prices, the effects of currency fluctuations and the uncertainty as to the life of the Cairn Hill Mine; (d) the continuing contemplation of the prospect of Termite's insolvency and the taking of steps in 2013 to "ring fence" Termite, so that neither IMX nor Outback would have any liability in the event that the prospect was realised; (e) the absence of proper consideration by the defendants of the adequacy of the $3 million Termite Cash Reserve, as well as the advice to the Outback Board in May 2013 that the Termite Cash Reserve should be increased by an additional $6 million, on which the defendants chose not to act (Mr Tisdell considered that the Cash Reserve should have been at least $10 million); (f) the absence of any ongoing review by the defendants of the adequacy of the $3 million Termite Cash Reserve; (g) the absence of alternate sources of funding making Termite wholly reliant for its capital on the cash it generated from its operations; (h) the modest buffer which the Termite Cash Reserve of $3 million provided against the foreseeable risks in the event that they were realised;. (i) the lack of any obligation on Termite at the time of adoption of the Distributions Policy to make repayments to Outback, given the terms of the Outback-Termite Loan; (j) Termite's modest financial performance before March 2013; (k) inherent but unrecognised risks in the LoM CFFs (to which Termite referred as "structural flaws"); and (l) the known over estimation (by approximately 309,000 tonnes) of the amount of ore available from the Cairn Hill Mine. 218 More generally, Termite alleges that the defendants disregarded the duties which they owed to it, as a separate entity, and preferred instead the interests of IMX and/or Taifeng.

Previous issues concerning the solvency of Termite 219 The prospect of Termite becoming insolvent or having to appoint voluntary administrators had arisen before June 2014.

January 2012 220 A file note by a firm of chartered accountants, WA Insolvency Solutions (WAIS), dated 11 January 2012 records a telephone conversation with a Mr Stewart acting on behalf of IMX: Taifeng aren't paying their way and they are looking at putting a VA into Termite. I am satisfied that the reference to a "VA" was a reference to a voluntary administrator. 221 Email exchanges occurring at the same time involving Messrs Meadows, Parsons, Hoskins and a Mr Steers at IMX indicate that IMX was considering at that time withdrawing further support for Termite, given Taifeng's then refusal to meet the calls for contributions made pursuant to the HoA. I referred to those events earlier. 222 There is no evidence that the question of voluntary administration was pursued at that time. Counsel for the defendants submitted that the consideration of the appointment of a voluntary administrator in January 2012 was not a symptom of endemic insolvency but, instead, a consequence of the dispute between the two Joint Venturers. I accept that submission.

The September 2012 Downturn 223 The possible insolvency of Termite rose again in a more serious way in August and September 2012. The iron ore price had dropped without forewarning from approximately US$123.25 per tonne on 23 July 2012 to approximately US$88.50 per tonne on 6 September 2012 (the parties referred to this as the "September 2012 Downturn" and I will do likewise). This had serious implications for Termite as the Outback Board noted at its meeting on 30 July 2012 that, if commodity prices remained at their current levels for another 30 days (at 30 July 2012, the spot price for iron ore was US$117.50 CFR/tonne) the Joint Venture would incur a cash loss of 62 cents/tonne. At the same meeting, the Board considered three cash flow forecasts, one indicating a profit for the Joint Venturers over the anticipated life of the Cairn Hill Mine, and the other two, significant losses. 224 During August and September 2012, IMX, Outback and/or Termite took a number of steps in relation to the September 2012 Downturn. 225 First, IMX negotiated with some of the Services Contractors for short term reductions in the rates paid under their Service Contracts. Flinders Ports was one of the Services Contractors to agree to such a reduction. The evidence indicates that Termite investigated other cost cutting options but it does not disclose the precise nature of those nor their outcome. In addition, Termite asked the South Australian Government to agree to a deferral of the royalty payment of approximately $620,000 due on 31 July 2012. 226 Secondly, IMX commissioned Finlaysons to provide a review of the Cairn Hill Mine contracts and to identify the liabilities which would be incurred in the event of suspension or cessation of mining. Finlaysons provided their report on 17 August 2012. 227 Thirdly, on 10 August 2012, Mr Hoskins prepared, at the request of the Outback Board, the document entitled "Financial Implications of Placing Termite in Administration on 30 June 2012", to which I will refer later. 228 Fourthly, IMX raised with its Chinese purchasers the introduction of a floor price. However, these purchasers (including Taifeng) had no interest in agreeing such a price. 229 Fifthly, on 30 August 2012, Termite drew down $4,495,000 on the LinQ facility. That this input of funds was much needed is evidenced by Mr Hoskins' contemporaneous statement that confirmation of the receipt of those funds was a "massive relief". 230 Finally, IMX retained WAIS to provide advice in relation to the financial affairs of Termite. Mr Meadows met Mr Strickland of WAIS on 14 August 2012. In a letter of 15 August, Mr Strickland identified the matters on which WAIS had been retained to assist as including the potential for a voluntary administration: • reviewing cash flows and other pertinent data in respect to the operations of Termite; • review/consider any legal advices obtained as to Termite's contractual obligations to others; • review/consider the potential consequences and effects of potential actions/decisions going forward (including any action to suspend operations); • advise of the effect/impact of a Voluntary Administration appointment; and • provide any other specific advice/assistance as agreed. 231 WAIS provided letters of advice (addressed to IMX) dated 28 August, 29 August and 3 September 2012. As each letter was an updated version of the previous letter, it is sufficient to refer only to the letter of 3 September 2012. The advice of WAIS included the following: In our view Termite is not currently cash flow insolvent. From the balance sheet provided and other information obtained by us, we believe Termite was balance sheet solvent at 31 July 2012. Consequently from both a cash flow perspective and balance sheet perspective, we do not believe that Termite is currently insolvent. We do not believe that the Directors are currently exposed to any claim for insolvent trading. However, we recommend that this position be constantly monitored especially with the current declining iron ore price. … With each ship loaded with approximately 75,000 tonnes of iron ore at a spot price of US$99.50/tonne, there is potentially a loss to Termite equivalent to approximately $464,250 per shipload. We note however that for ships already in transit the price to be paid for that ore will be calculated taking into account average prices from August 2012. It should be noted that for each US$1/tonne that the spot price decreases during the period between now and 17 November 2012, there will be approximately $345,000 less funds available to meet creditor claims at 17 November 2012, if that US$1/tonne decrease occurs throughout the period. Consequently if the spot price falls to an average in the period US$91.50 or less, Termite will be unable to pay its debts as and when they fall due, before taking into account the cost of getting the inventories to the customers. … In our opinion it would be best to consider suspending current mining operations on an informal basis for the next few months, while the future of the iron ore price is assessed. … We do not recommend appointing Voluntary Administrators (VAs) at this time. We believe the informal suspension of mining services allows less opportunity for suppliers to terminate contracts and causes less adverse publicity and sentiment towards Termite and IMX. It is also cheaper than having VAs in terms of professional costs. At this point of time we believe that it is in the best interests of Termite and the Directors to immediately consider suspension of mining operations on an informal basis, without the appointment of VAs. We also believe this is in the best interests of IMX as it preserves the value of the investment in Termite, an investment that is currently declining in value. (Underlined emphasis in the original and italicised emphasis added) 232 WAIS also reviewed in some detail the liabilities, including the Tail Liabilities, which Termite would incur to the Services Contractors on a cessation of mining. Its calculation of a loss to Termite of approximately $464,250 per ship load of 75,000 tonnes at the spot price of US$99.50 per tonne indicates that Termite's break-even price at that time was of the order of US$105.70 per tonne. 233 It was not suggested that there was any inaccuracy in the factual matters recounted by WAIS reported in this letter. 234 A copy of the WAIS advice of 29 August 2012 was provided to all the appointed directors of IMX, Outback and Termite. 235 Mr Strickland attended meetings of directors of Termite and IMX held on 31 August 2012 and 4 September 2012 respectively to discuss his letter of advice. Mr Sun said, and I accept, that: [Mr Strickland] told us about insolvent trading in general and about the obligations of directors in respect thereof. I believe he educated us on the law relating to insolvent trading. 236 The key recommendation by WAIS in the letter of 3 September 2012 was that Termite "consider suspending current mining operations on an informal basis for the next few months, while the future of the iron ore price is assessed." WAIS identified for Termite some of the risks involved in doing this, including the possible reallocation of the stock of Gemco and Cronos as well as liabilities under the Services Contracts. 237 Following the WAIS advice, Termite prepared a "Cairn Hill Suspension Plan" dated 10 September 2012 which addressed a possible temporary suspension of mining operations at Cairn Hill. This plan was considered by the Termite Board at its meeting on 10 September 2012 (attended by Messrs Meadows, Nitschke, Parsons and Hoskins). The plan contained the following: (a) a recognition that "reduced commodity pricing" had led to the Cairn Hill operations becoming cash flow negative; (b) a statement that management had considered what might be done to address the commodities pricing downturn; (c) a recommendation that, if the strategies described in the plan had been tried and failed (that is, agreements with suppliers or purchasers or a suspension of mining), the directors would then need to place Termite into voluntary administration. 238 The suspension plan noted that the placement of Termite into administration "would trigger the termination clauses in Termite's contracts resulting in only partial payment of all creditors unless the administrator convinced all contractors that continuing with the operation was the preferred alternative." 239 Termite did not implement the suspension of mining operations recommended by WAIS. On 10 September 2012, a meeting of its Board of Directors resolved to defer implementation of that aspect of the WAIS advice and to monitor the situation. The minutes record that this was because of "positive indications with respect to the negotiation of floor pricing and the apparent stabilisation of the iron ore benchmark prices". 240 An analysis carried out by Termite's management in April 2013 revealed that a fortuitous happenstance had accounted for Termite not being affected as severely by the September 2012 Downturn as would otherwise have been the case. That was that the Downturn had coincided with the change in the pricing mechanism in Termite's sales contracts. Termite had made three shipments during the period of the Downturn, but only one of these was subject to the new pricing arrangement (which I will describe shortly). If the change in the pricing mechanism in the contracts had occurred two or three months earlier, Termite would have had to reimburse customers in respect of all three shipments, whereas it had been required to make a reimbursement in respect of only one. Management noted, however, that the iron ore price had been below the then break-even price of US$107/tonne for 44 days. 241 Termite submitted that the experience in July, August and September 2012 indicated a number of matters of present relevance: (a) a downturn in iron ore prices could occur suddenly and without anyone having predicted it; (b) a downturn could be quite marked; (c) the duration of a downturn could be uncertain; (d) the reduction in iron ore prices could make Termite's operations unprofitable; (e) access to the LinQ facility had been of a significant benefit to Termite; (f) in a future downturn, Termite could not expect to have the fortuitous happenstance which had worked in its favour during the September 2012 Downturn to be repeated; and (g) a downturn could lead, relatively quickly, to Termite becoming insolvent and to it having to appoint administrators. 242 Termite also submitted that each of the defendants can be taken to have known these matters at the time. I accept these submissions.

The liabilities to the Services Contractors 243 Termite's liabilities were in three broad categories: its liabilities to the Services Contractors, including the potential ETPs; liabilities to other trade creditors; and liabilities to non-trade creditors. Termite's claims in these proceedings focussed on the first of these, although its damages claim encompassed all three categories. 244 Later in these reasons, in relation to Termite's claim for damages, I make findings as to the liabilities which Termite has to the Services Contractors after being placed into administration and later liquidation in 2014. For the present purposes, it is sufficient to indicate my satisfaction that: (a) Termite had contracted with Cronos to lease 3,050 marine cargo containers for a minimum of 1,825 days, with the earliest day on which it could redeliver being 31 (sic) September 2015. The daily lease rate was US$2.56 (excluding GST) and Termite was also obliged to pay a handling fee of US$25 per container on termination. Termite's contract with Cronos did not contain any provision for early termination by Termite. This meant that Termite's monthly and annual liability to Cronos was US$237,500 and US$2,849,920 respectively, and it would be liable to pay US$76,250 for the handling fee; (b) Termite had contracted with Gemco to lease 194 rail wagons for a term expiring on 1 January 2016, at a price of $1,035 per month per wagon. This meant that Termite's monthly and annual liabilities to Gemco were $200,790 and $2,409,480 respectively. The lease did not contain any provision for early termination by Termite; (c) Termite had two contracts with Exact, one for the provision of Mining Services, and one for the provision of Haulage Services. The former was to continue, in effect, until April 2015 but could be terminated by Termite for convenience on 40 days' notice if continued mining operations would cause "significant ongoing financial losses", and on 120 days' notice for any other reason. The Haulage Agreement could be terminated on five days' notice in the event of cessation of mining operations. The remuneration payable by Termite to Exact varied according to the extent of the mining operations and haulage, but typical monthly payments to Exact were of the order of $5.6 million ($67.2 million per annum); (d) Termite had contracted with SBR to haul the rail wagons between Rankin Dam and Port Adelaide. The contract was to terminate on 1 May 2015. It provided for Termite to pay three kinds of payments, some of which reflected SBR's fixed costs and some its variable costs. Typical monthly payments to SBR were of the order of $3.56 million. Termite could terminate its contract with SBR for convenience on 180 days' notice; and (e) Termite had contracted with Flinders Ports for it to provide port services for the receipt and loading of ore onto ships. The contract was to end on the earlier of a date fixed by a time-based formula or the date on which 7.292 million tonnes had been handled. It required Termite to pay for a minimum of 6.9 million tonnes. Typically, monthly payments to Flinders Ports were of the order of $2 million. Termite did not have an entitlement to terminate its contract with Flinders Ports early. 245 Each of IMX and Outback had, as part of Termite's contract with Flinders Ports, provided guarantees to Flinders Ports in respect of Termite's liability under that contract. Outback was the first guarantor and IMX the second, with the effect that its guarantee could be called on only if Outback failed to honour its guarantee. These guarantees, in particular the guarantee by IMX, had some significance in the defendants' conduct in 2013 to which I will return. There were no guarantees in respect of the liabilities to the other Services Contractors. 246 It is very apparent (and I so find) that the defendants had actual knowledge that Termite could have significant Tail Liabilities to the Services Contractors and, in particular, that IMX or Outback could be called upon under their guarantees to Flinders Ports. The Boards of IMX and Outback had considered these very matters at the time of the September 2012 Downturn. 247 As already noted, on 10 August 2012, Mr Hoskins had prepared, at the request of the Outback Board, a document entitled "Financial Implications of Placing Termite in Administration". Mr Hoskins appreciated that Termite going into administration would involve the immediate termination of the long term Services Contracts whereas, if it was not placed into "a sudden administration", it could manage the termination of these contracts in accordance with contractual notice provisions. Mr Hoskins' analysis shows that, had Termite been placed into administration as at 30 June 2012, its liabilities to creditors (other than to employees and to statutory and secured creditors) would have amounted to $45,883,737. This amount included the following liabilities to the Services Contractors: (a) Flinders Ports - $2,775,363; (b) Flinders Ports' termination fee - $8,500,000; (c) Specialised Bulk Rail Termination Fee - $5,546,560; (d) Cronos - $1,500,000; and (e) Gemco - $1,100,000. 248 Mr Meadows said, and I accept, that he had requested Mr Hoskins to prepare the Financial Implications document. He had done so because he considered it necessary "that the Board of Termite understood exactly where Termite stood from a financial point of view to avoid insolvent trading and [to] fulfil our statutory duties if the downturn should continue for a prolonged period". I am satisfied that the Financial Implications document was viewed at least by the Termite Board and think it probable that it was also seen by the Outback Board members. 249 The review of the liabilities of Termite under nine contracts, including those with the Services Contractors, provided by Finlaysons on 17 August 2012 identified the terms of the respective contracts, the provisions for termination and some strategies open to Termite to mitigate the liabilities it would incur under those contracts, including on termination. 250 Mr Meadows said, and I accept, that he had decided to engage Finlaysons to provide advice to the Boards of Outback and Termite about the extent of the potential Tail Liabilities to the Services Contractors. He also said, and I accept, that the advice from Finlaysons was provided to the Boards of both Termite and Outback. 251 In its letters of advice addressed to IMX dated 28 August, 29 August and 3 September 2012 in relation to the September 2012 Downturn, WAIS reported that Termite may have liabilities to the Services Contractors as follows: (a) Exact - Mining Services Contract - $568,000; (b) Exact Haulage Agreement - $108,000; (c) Cronos - $13.7 million; (d) Gemco - no amount stated; (e) SBR - no amount stated; and (f) Flinders Ports - $8.5 million. Although no amounts were stated in the WAIS advice for Gemco and SBR, the description given by WAIS indicated that Termite's liabilities to them could be substantial. 252 The advice from WAIS was provided to the Boards of each of IMX, Outback and Termite. I am satisfied that the directors of each of those Boards was provided with the advice and can be taken to have the knowledge which it contained. 253 By a letter dated 7 November 2012 to Mr Parsons, Finlaysons advised that IMX could have a liability under its guarantee to Flinders Ports of approximately $2 million if mining ended in December 2014 and a liability of about $16 million if it ended in May 2014. 254 On 5 December 2012, Mr Hassard provided Mr Meadows with an analysis of the "Early Contract Termination Penalties" which estimated the liabilities to the Services Contractors at 30 April 2014 in the event that Termite did not proceed with Pit 2 to be $23.5 million ($5.9 million as at 30 December 2014 if Termite proceeded with a shallow Pit 2). 255 Mr Parsons said, and I accept, that Mr Hoskins had made regular reports at Outback Board meetings of the estimated liabilities to the Services Contractors. 256 Later in these reasons, I will make findings concerning the consideration by the Outback Board of whether Termite should proceed with Pit 2. As will be seen, that consideration provided yet further occasions on which the defendants received information as to Termite's liabilities to the Services Contractors. 257 I accept Termite's submission that each of the defendants knew: (i) by at least March 2013, and throughout the period in which the Distributions Policy was implemented, that significant amounts would be due to the Services Contractors should it cease mining before the planned completion of Phase 1; (ii) that the earlier mining ceased, the greater the ETPs for which Termite would be liable; and (iii) until June 2013, Termite's own LoM CFFs did not make any provision for its liabilities in the event of early cessation of mining and then, only to the extent that the life of mine plan, as modified from time to time, required payment at the conclusion of mining activities. They did not make any provision for the ETPs in the event of a sudden cessation of mining.

The foreseeable risks: Cairn Hill a marginal high cost operation 258 It seemed to be common ground that the Cairn Hill Mine was a marginal high cost mining operation because, over the anticipated life of the mine, the anticipated revenue was likely to exceed the costs by only a relatively small margin, and the prospects of the anticipated revenue being received were attended with a number of risks. The following matters indicate that that was the case and that it was known to the defendants. 259 In his s 597 examination, Mr Meadows described the Cairn Hill Mine as "the most marginal iron ore operation in Australia". However, in his cross-examination in the trial, he said that that had not been his thinking at the beginning of 2013. Mr Meadows accepted, however, that he had thought at that time that "we were a relatively high marginal cost operation" and that Cairn Hill was "a relatively high cost and unique iron ore operation". 260 In an email of 30 July 2012 addressed to Ms Rainsford (IMX's then Company Secretary), Mr Parsons and Mr Pang and copied to Mr Sun, Mr Nitschke had identified the marginal nature of the Cairn Hill Mine by noting: Under the current approved LOM plan and assumed pricing we make an operating surplus of $16M from July 2013 to the end of the Mine Life about 30 months later. In this period we spend $383M and income is $399M. Is this a sound plan in hindsight? 261 In his cross-examination, Mr Nitschke confirmed that he had sent this email in response to the cash flow forecast which formed part of the Board papers for the Outback Board meeting on Monday, 30 July 2012. He also confirmed that he had understood the cash flow forecast to indicate that, after the first year of mining operations to the end of the mining activities, a margin of some $16 million only was expected. He agreed that this indicated a "substantially marginal operation". 262 In the same email, Mr Nitschke asked the question: What are the terms for the major leases in take or pay contracts? Is there a suspension status for these? How long can things stay suspended until the contracts terminate? 263 In cross-examination, Mr Nitschke said that he had asked these questions because of his concern that Cairn Hill was a marginal operation and that, accordingly, IMX should explore the potential for suspension of operations if that could be done properly under the contracts. 264 Mr Sun agreed that the marginal costs of Cairn Hill remained high "relative to most or all other mines in Australia". 265 In his s 597 examination, Mr Sun acknowledged the following matters: when he first started representing the Taifeng group in relation to the Joint Venture he had thought that it was "a stupid project" and he would not have recommended it to Taifeng; the project was marginal and did not make sense; he had thought that, if the iron ore price fell below the very high break even point, the mine would move into losses more quickly than a better project; the fact that the prices for Termite's ore were fixed at the spot price or closely aligned to the spot price, rather than being fixed price contracts, meant that there was a material prospect that the project would be loss making when the iron ore spot price fell; and had it not been for the Services Contracts, he would not have favoured proceeding with Pit 2. 266 In his cross-examination, Mr Sun sought to qualify and explain many of these answers. He said that the market had changed after he started representing Taifeng, so that the project become profitable and his view about it had changed. He also said that he had been speaking in general terms rather than expressing a view at any particular time. I gained the very strong impression that Mr Sun was attempting in these answers to distance himself from the admissions in his s 597 examination which he regarded as damaging. He acknowledged that he had reviewed the transcript of that examination before giving evidence. It was apparent that Mr Sun had a keen appreciation of the significance of those answers in the case which Termite brought against him. This was one of the matters which caused me to doubt the veracity of much of Mr Sun's evidence and to exercise caution before accepting any part of it which was not adverse to his own interests. I find that his statements in the s 597 examination reflected his views about the Cairn Hill Mine at relevant times. 267 Mr Tisdell and Professor Trench agreed that, by reason of the Cairn Hill Mine being a high cost operation, the volatility in commodity prices and foreign currency exchange rates were more relevant to its solvency and cash flow position than would have been the case had it been a lower cost mining operation. 268 The consultancy firm, Noah's Rule, which Termite engaged in late 2013 in relation to hedging against currency fluctuations, described the position in this way: Termite has high operating costs relative to revenues and therefore its net cash flows are highly sensitive to movements in the USD Iron Ore price and the AUDUSD exchange rate.

The foreseeable risks: the iron ore price 269 Termite submitted that, for present purposes, four kinds of risks were particularly pertinent. The three biggest risks were the iron ore price, the foreign exchange rate, and the technical performance of the mine. Mr Tisdell considered (and I accept) that commodity risk and foreign exchange constituted Termite's two biggest risks, as by 2013 the mining operations were reasonably stable. 270 It was common ground that there was a significant correlation between the iron ore price, on the one hand, and Termite's profitability, on the other. It was also evident that Termite was a price taker rather than a price setter.

The determination of the iron ore price 271 The price at which Termite sold the ore was fixed by reference to the Platts Iron Ore Index (Platts Index). The Platts Index is a price series published daily in Singapore which benchmarks (in USD) the spot price of iron ore (62% Fe, 2% Al and 4.5% Si). It is a widely used global price reference for iron ore delivered to the Port of Qingdao in China. The index uses data collected from iron ore producers, traders and steel mills of the prices in market tenders for iron ore (from completed transactions to inquisitive offers). 272 The spot pricing of iron ore sold from Australia to China was introduced in 2010. Before then, a benchmark pricing system had been applied. This meant that during the period of operation of the Cairn Hill Mine, the historical experience of movements in the spot price had been relatively limited. 273 The ore from the Cairn Hill Mine was approximately 53% iron. Accordingly, the calculation of the price for its ore used a proportion of the prevailing Platts Index figure. 274 The London Metal Exchange (LME) price was used to determine the price of the copper content. Copper made up approximately 20-25% of the value of the Cairn Hill ore.

The pricing mechanism in Termite's contracts 275 Before August 2012, the price Termite received for its ore was the price per tonne fixed in the sales contract for each shipment. Termite would receive an initial payment of 80% of its invoice amount with a later payment determined when the final weight and grade of the ore were verified on its discharge in China. 276 From August 2012, Termite's contracts with its purchasers provided for the initial price of the ore to be the 30 day rolling average to the 10 days before the first day of Laycan (the day of notification that the ship was ready for loading at Port Adelaide) and for Termite to be paid that amount at the time of loading. The initial price was later adjusted to reflect the rolling average spot price in the Platts Index and LME for the 30 day period after the date of the bill of loading (the date of loading). This was equivalent approximately to the 30 day period before the discharge of the ore in China. Depending on movements in the Platts Index and LME prices, and variations in the tonnage and grade of the shipped ore, this adjustment could result in Termite receiving more, or in having to refund an amount to the purchaser. This adjustment was referred to as the "True-Up". 277 Mr Hoskins claimed in his evidence that the new payment system created significant certainty regarding Termite's cash flows as the amounts of the provisional payments were known some 30-40 days prior to the ship being loaded. 278 In my view, that evidence cannot be accepted without qualification. Mr Hoskins is correct as to the certainty in times of stability in the iron ore price. It is obvious, however, that in times of volatility, it could not be correct. Further, even if Termite had certainty in relation to the provisional payment, it had the uncertainty in relation to the True-Up. Termite received a benefit when the price rose over the 30 day period after loading, but was disadvantaged if prices declined in the same period. When that occurred, there was the potential for Termite to have to reimburse to its customers portions of their provisional payments. The downturn in the iron ore price in 2014 provides a practical illustration of how this could work to Termite's disadvantage. Termite had three shipments leave Port Adelaide on 16 and 30 March and 14 April 2014 respectively. It was called upon to make reimbursements of over $2 million in respect of each of these shipments. Some portion of these reimbursements was attributable to variations in the weight and grade of the ore but a significant portion ($524,796 in the case of the third shipment) was attributable to the downward movement in the price of the ore. 279 I do not accept Mr Hoskins' evidence that the revised pricing mechanism in Termite's contracts gave the "significant certainty" which he claimed. 280 I am satisfied that the risk of Termite having to make reimbursement on the True-Up was a matter which directors, acting prudently, would have taken into account in March 2013. I am also satisfied that the prospect of Termite having to make payments pursuant to the True-Up was a matter to be taken into account in setting the amount of the Termite Cash Reserve.

Fluctuations in the iron ore price 281 During 2011, 2012 and the first quarter of 2013, there had been significant fluctuations in the iron ore spot price. The variations in the Platts Index for the period between 18 March 2012 to 18 March 2013 are seen in the following graph:

The iron ore price - difficulties in prediction 282 A number of matters affected the Platts Index at any one time. Mr Nitschke referred to some of these in his evidence. These included the "complex interactions between a large number of suppliers and a large number of buyers"; the level of demand by Chinese buyers given that they purchased close to 80% of the "seaborne iron ore" (the iron ore not sold within the country or region of origin but exported to another); the macro-economic position in China; predictions as to the economic position in China; unforeseeable events in China, including any change in stance by the Chinese Government; and some irrational or sentiment-driven market behaviour. 283 IMX had summarised the commodity price risk in its response to Patersons Corporate Finance in relation to a capital raising in late 2012: Revenue derived by the Group is solely through the sale of ore from the Cairn Hill Mining Operation. As a result, the Group is exposed to commodity price risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Group. Such factors include supply and demand fluctuations for minerals, technological advancements, forward selling activities and other macro-economic factors. 284 The same document identified many of the other risks faced by IMX in the operation of the Cairn Hill Mine. 285 Earlier, I referred to Termite's use after July 2012 of the EMCFs published bi-monthly by Consensus Economics, and noted that they listed the prices forecast by a number of analysts, the mean of those forecasts, and the calculated standard deviation in the spread of the estimates. 286 There was no criticism of Termite's use of the EMCFs. Mr Tisdell said of them: These EMCFs published by Consensus Economics are widely regarded as the most comprehensive collection of forecasts made by reputable forecasters, are published quarterly, cheap to access and used by many mining companies for cash flow forecasting and business planning, including Termite and all businesses I have worked for. In my experience junior mining companies in particular commonly use these Consensus (mean) forecasts as the basis of their cash flow projections and business planning. 287 Professor Trench also agreed that Termite's use of the EMCFs for mine planning purposes was appropriate. He said (and I accept), that that there is "no generally accepted methodological 'standard' in either the iron ore or copper industries for deriving a commodity price forecast for budgeting and other uses". 288 Mr Tisdell did consider, however, that Termite had failed to recognise the limitations of the EMCFs and the uncertainties inherent in them. 289 Mr Tisdell and Professor Trench agreed that the standard deviation in the EMCFs could be commonly misconstrued in the industry as providing a standard deviation relating to the possible range of future prices. They also agreed that the mean figure in the EMCFs was not a consensus figure resulting from conferral by analysts, but only the average of the forecasts listed. 290 In addition, Mr Tisdell and Professor Trench agreed that the mean forecasts in the EMCFs were not certain, noting that the standard deviation in the forecast prices "were typically below +/- US$10 per tonne". 291 There was no seasonality in the Platts Index which could inform industry expectations as to price. Professor Trench reported (and I accept) that his review of the literature did not support the hypothesis of predictable seasonal variations which could be used to forecast prices with a high degree of confidence. 292 Termite identified one matter which seemed to affect the price which Chinese purchasers were willing to pay and, in turn, the iron ore spot price as being the level of stockpiles held at Chinese Ports. There was thought to be an inverse relationship between the two. When the stockpiles were large and purchasers could make use of them, it reduced their need to rely on the ore supplied by miners such as Termite and consequently in a reduction of price. It was thought that from time to time the Chinese purchasers would choose to use the iron ore in their stockpiles and wait for a better iron ore price before purchasing more ore. The amount held in the stockpiles was of course finite so that the extent to which use of the stockpiles impacted on the spot price depended upon the size of those stockpiles. From September 2013, Termite management provided data to the Outback Board concerning the known extent of those stockpiles. 293 Despite Mr Tisdell saying that the stockpile levels in Chinese Ports was one matter to which he would have regard in making a forecast of iron ore prices, counsel for Termite disparaged the stockpile-price relationship, pointing out that the defendants had not produced the document containing the analysis said to support it; that Mr Meadows had acknowledged that the relationship was not supported by the expert forecasters; and that it was not supported in the literature. Counsel also submitted that Professor Trench had debunked the relationship between stockpiles and price. In my view, that particular submission was based on a misreading of the evidence, as Professor Trench was referring to an absence of seasonality in the iron ore price, and not to an absence of a relationship between stockpiles and price. I also note that some analysts, including the Australian Bureau of Resources and Energy Economics, referred to the influence of the stockpile levels at Chinese Ports. In the view I take, it is not necessary to express a concluded view concerning the existence of a relationship between the level of the stockpiles and the price of iron ore. It is sufficient to accept that Termite had sought to identify matters influencing the price and had identified, reasonably, the Chinese Ports stockpile levels as one such matter. 294 Termite management also considered that there was a direct correlation between the Platts Index figure and the price of "Asia Hot-Rolled Steel". Termite management provided the following chart to the Outback Board meeting of 21 May 2014 as evidence of the correlation. 295 Several of the defendants acknowledged in their evidence the difficulties in accurate forecasting of the iron ore price. Mr Nitschke was cross-examined extensively about these matters. The admissions which he made included: (a) none of the analysts on whom Consensus Economics reported in the EMCFs had predicted the September 2012 Downturn. In July 2013, Termite's management had provided the Outback Board with a comparison of the forecast iron ore prices by the 12 analysts on whom Consensus Economics reported and the actual prices. It indicated that in their June 2012 forecasts each analyst had over-estimated the September 2012 iron ore price, by margins in the range of 11-31%. The forecasts by 14 analysts in April 2012 of the September 2012 prices had over-estimated the actual price by margins in the range 12-39%. Further, all but four of the analysts had in April 2012 over-estimated the June 2012 price, in one case by as much as 22% The actual figures were of course affected by the September 2012 Downturn. However, the difficulty in accurate forecasting is evidenced by these illustrations; (b) some of the fall and subsequent rebound in the iron ore prices (to which Mr Nitschke referred it as a "perturbation" (a period of temporary divergence from the forecast trend line)) was irrational and sentiment driven; (c) there was no certainty as to how long a "perturbation" may last - it may be a matter of weeks or a matter of months (although Mr Nitschke doubted that they would be as long as three or four months). Relevantly though, Mr Nitschke acknowledged that one could not say with any degree of confidence how long any "perturbation" might last; (d) during the September 2012 Downturn, no one within Termite or Outback had had any confidence as to its likely duration, and the same would be the case in respect of any future "perturbation". In fact, whether the next downturn would "play out in precisely the same way" was really a matter of conjecture; (e) Termite's own forecasting was affected by errors in 2012 and early 2013. In particular, Termite's budgeted profit and loss figures for the 2012 year and the first quarter of the 2013 year were wrong because of errors in its forecast of the iron ore and copper prices as well as the forecast of exchange rates. In the first half of the 2013 financial year, Termite's budget had involved a significant over-estimation of the iron ore price, whereas in the second half it had involved a significant under-estimation of the iron ore price; and (f) he had understood by mid-2012 that movements in commodity prices or a strengthening of the AUD against the USD could very quickly move Termite from a positive cash margin down to a break even position or even worse. 296 Mr Nitschke drew a distinction between short and long term volatility in the iron ore price. He regarded the first ("perturbations") as "largely sentiment driven" and tending to last over a few months. Long term volatility occurred when the long term trend price declined over a longer period. Mr Nitschke said that the Termite Cash Reserve was intended to address the situation of perturbations, and that he had not really been concerned about them because, even if things got "tight", he had thought that Termite could "find a way through". He had thought that it would be a decline in the long term price leading to long term volatility which could result in Termite's administration and the creditors not being paid in full. 297 In other evidence, Mr Nitschke said: [T]he cash provision at Termite level was adequate to sustain the reasonably expected perturbations that might occur in iron ore price [and] exchange rate due to sentimental reasons. But there certainly wasn't a cash reserve at Termite level to protect against a prolonged - a prolonged decrease in iron price or an adverse move in exchange rate. That's a risk of mining. 298 Mr Nitschke elaborated this answer in re-examination: Q: [W]hy did you consider it unnecessary to have a cash reserve to protect against the risk of a prolonged decease in iron ore price or an adverse movement in exchange rate? A: I saw that as a risk of mining and … an inherent risk of the operation. If … the iron ore price rerated, which it did in 2014, the business would become unviable. And that was a risk that we, as venturers, carried and also any contractors engaged by Termite carried to the extent that they … hadn't taken precautions such as Flinders Ports. 299 Mr Hoskins also referred to the distinction between short and long term volatility. 300 Professor Trench also distinguished between short term volatility and long term trend lines which he described as "glide paths". He said that in 2013, analysts' forecasts related to the "glide path" rather than attempting to predict periods of short term volatility. He also said that he had not been able to determine with accuracy what expectation market participants had regarding the duration of short term falls in the price of iron ore below US$110 CFR per tonne, whether for two, four, six or eight weeks. 301 I considered that there was an element of hindsight and retrospective rationalisation by Mr Nitschke and Mr Hoskins in their evidence on this topic. In particular I considered that Mr Nitschke tended to underplay the significance of "perturbations" because it suited his position in the litigation. Mr Nitschke's somewhat benign characterisation of the September 2012 Downturn as a "perturbation" is one which could be made in retrospect. It is very apparent from the contemporaneous documents at the time of the September 2012 Downturn that those involved in it did not have any confidence that they were experiencing merely a short term "perturbation". Mr Nitschke himself described the September 2012 Downturn as a "near death" experience for Termite. Termite survived that Downturn principally because it had access to funds from LinQ and because of the fortuitous happenstance that it coincided with the change in the pricing mechanism in its contracts. 302 But even if the evidence of Mr Nitschke, and to a lesser extent that of Mr Hoskins, on this topic is taken at face value, it has this consequence. As will be apparent in the later findings, the Outback Board, including Mr Nitschke, contemplated during 2013 and the first part of 2014, Termite becoming insolvent and took active steps to protect IMX against that risk. If it be the case that Mr Nitschke had thought that a short term "perturbation" would not result in insolvency, then that must be because he thought that there was a real risk of a long term decline in iron ore prices or a significant adverse movement in the exchange rate. That is to say, if this particular evidence was accepted, the very fact that the defendants contemplated Termite's insolvency suggests therefore that they had contemplated a long term decline in the iron ore price or some other adverse event. There is accordingly an inconsistency in Mr Nitschke's claim that he had not thought, before April 2014, that there was "a high risk" of a long term decrease in the iron ore price or an adverse movement in the exchange rate. 303 In my opinion, Mr Nitschke did not, in 2012-2014, make the clear distinction between short and long term price reductions which he now claims. 304 Several witnesses referred to both a personal and generally prevailing belief that the price of iron ore would not drop below US$110 CFR per tonne (US$100 per tonne FOB) at any time before the end of Phase 1, that is, about mid-2015. These included Messrs Meadows, Nitschke, Hoskins and Parsons. The figure of US$110 CFR per tonne was thought to be the base price at which iron ore could be produced in China. The prevailing belief was that the Chinese Government would not permit the price to fall below the cost of its own production for a sustained period because, if it became cheaper for Chinese iron and steel producers to import ore, the effects on the mining industry in China would be severe. Mr Tisdell and Professor Trench agreed that there had been a commonly held view that the iron ore price would be maintained above US$110 per tonne. Professor Trench also noted, however, that the price had fallen below that level for a total of 32 days during the September 2012 Downturn. 305 Mr Tisdell and Professor Trench also agreed that the concept of a "floor price" for iron ore was a commonly discussed topic between 2012 and mid-2015, but that there had been no unanimity of views about what that term actually meant, in particular as to the extent or duration of a fall below such a price. 306 The defendants submitted that, in the light of this evidence and of the various contemporaneous forecasts, they had been entitled to proceed on the basis that, if there was a long term drop in the iron ore price, it would follow a slowly declining "glide path" to a point around US$110 CFR per tonne into 2015. I accept that that is what the forecasts were predicting, but it does not follow that the defendants acting with the reasonable diligence the law required of them, need not have provided for the contingency that a long term drop in the iron ore price would be much more marked and much more rapid. In particular, I do not accept the defendants' submission that the views about the long term trend price meant that it was not necessary for them to maintain a reserve against a step change in the long term trend price of iron ore.

The defendants' awareness of the iron ore price volatility 307 The evidence contains numerous contemporaneous statements indicating the defendants' awareness of the potential volatility in the iron ore price and the potential for it to decline markedly. 308 In an email to Mr Meadows on 20 October 2012, Mr Nitschke reported that the new shareholders on the IMX Register were concerned "about the exposure to Cairn Hill as we all are. In fact, they all would prefer to see us sell it to eliminate this risk". It was in that same email that Mr Nitschke said: [W]e should in fact not be mining pit two based on our forecast pricing. We lose $13M by mining it. The only reason to keep going would be to try and avoid the costs of terminating the contracts and leases. 309 I referred earlier to Mr Nitschke's email to IMX's Board members of 6 March 2013. In that email Mr Nitschke informed Board members that IMX may need to raise closer to $10 million to provide a buffer against "the uncertainty in the iron ore price". 310 In March 2013, IMX retained Azure Capital to provide advice with respect to a capital raising. In its report to IMX of 8 March 2013, Azure Capital stated: In sizing the raising, in our view IMX should not be overly reliant on cash flows from Termite. Even though base case forecast distributions appear attractive, the iron ore price has been volatile and has the potential to drop materially in a short period of time. (Emphasis added) 311 The minutes of the IMX Board meeting of 28 March 2013 record: Mr Hoskins stepped through the key aspects of the commodities outlook, noting the generally pessimistic view on the iron ore price. (Emphasis added) The minutes then record that the Board requested four actions: a paper from management on the September 2012 Downturn, management's response to those circumstances and the overall impact on IMX; a four quarter retrospective comparing forecast commodity and foreign exchange prices with actual prices be included in the commodities outlook; additional information including the steel price and stock levels in China to be included in the price chart of iron ore; and the Managing Director identify a suitable iron ore industry analyst to address the Board. 312 In an email of 12 May 2013 to Messrs Parsons, Nitschke and Meadows concerning negotiations with Flinders Ports, Mr Hoskins noted: There are 2 scenarios of outcomes with respect to the market/iron price: 1. Iron ore price stays high and we mine through until Feb 2015 (6.8Mt) 2. Iron price drops and stays low causing the decision to stop mining and we don't achieve the 6.8Mt. 313 In an email of 28 May 2013 to Messrs Meadows, Hoskins and Parsons concerning the Flinders Ports' guarantee, Mr Nitschke said: In my mind it is paramount that we limit the exposure of IMX to the downside of Cairn Hill. Once we do this we can aggressively set about trying to extend the life of Cairn Hill Phase 2 etc without being too concerned about the volatility of the Iron Ore price. (Emphasis added) 314 In an email to Mr Meadows on 6 August 2013, Mr Hoskins said: Remember we are still forecasting a crash in the next 4 months or so. 315 Numerous other examples could be given.

Defendants' knowledge of the effects of a decline in the iron ore price 316 The defendants' knowledge of the effect of a decline in the iron ore price is evidenced by the cash flow analysis provided by Termite management to the Outback Board in July 2012. The cash flow forecast modelled three scenarios, the most favourable of which would result in the LinQ debt being repaid in December 2012 and total partner distributions of $63 million over the life of the Cairn Hill Mine. The next two forecasts were based on the forecasts of the analyst SSY. Termite management had found the SSY forecasts to be generally 10% less than the Consensus Economics' mean. Because of this, the second scenario was based on the SSY July 2012 forecast figures adjusted by adding 10%. The third scenario reduced the estimated sales price by 10%. The cash flow analysis on the third scenario indicated that the Shareholder Loans would never be repaid and, indeed, that additional contributions would be required by the Joint Venturers over the life the mine. As Mr Nitschke pointed out, that scenario would never be realised because it would be inconceivable in that circumstance that Termite would continue mining operations. But of course in that event, the Tail Liabilities would be triggered. It is pertinent that this analysis indicated to the defendants that, if iron ore prices fell to a level 10% below the SSY forecast, the Cairn Hill Mine was unprofitable. 317 The forecast based on the SSY forecast figure with an upward adjustment of 10% indicated that the LinQ debt could be repaid in March 2013 but the total partner distributions over the life of the mine would only be $26 million. 318 Apart from this paper, no sensitivity analysis of this (or any other) kind was carried out by the Boards of IMX, Outback or Termite in March 2013 before adopting and implementing the Distributions Policy. Professor Trench confirmed that he had not seen "a standard sensitivity analysis" in the Board papers. 319 I am satisfied that each of the defendants was well aware of the potential for significant deviations in the actual price of iron ore from the forecast price and of the effect on Termite's viability if the potential was realised in an adverse way. Each acknowledged as much in their s 597 examinations. 320 Mr Meadows admitted that he had been aware that it was in the nature of iron ore as a commodity that the forecast prices, however carefully prepared by expert analysts, may be materially wrong. He acknowledged that he had known this at the beginning of 2013. Mr Meadows also acknowledged that he had known that any forecast might turn out to be too bearish or too bullish, that there was plenty of evidence as to the imprecision of forecasts, and that he and IMX's accountant, Mr Dunstan, had been so concerned about the effect of "an adverse shock" on Termite's business that at some time, apparently after September 2012, they had reviewed the history since the Global Financial Crisis in 2008 with a view to seeing if they could identify any feature which might indicate when a problem in the iron ore price may emerge. In his evidence at trial, Mr Meadows corrected this evidence and said that he and Mr Hoskins had requested Mr Dunstan to undertake that task. I accept that that was so. 321 In the case of Mr Nitschke, I have already referred to some of his admissions. In short, Mr Nitschke knew that there could be unforeseen deviations from the forecast prices and that Termite was highly susceptible to fluctuations in the iron ore price. 322 Mr Parsons acknowledged that he had been aware that, depending on the duration of a decline in the iron ore price, Termite may need significant cash in order to be able to continue trading through that period. 323 Mr Sun acknowledged that he was aware that the volatility in the iron ore price meant that mining could be potentially very profitable or potentially loss making, and that the volatility of the price meant that it had to be monitored on month-by-month basis to see whether mining operations could continue. 324 Mr Hoskins acknowledged that the forecast in iron ore prices was, of its nature, a difficult exercise. 325 Mr Pang acknowledged that he had been aware that the cash flow forecast was dependent on the forecast iron ore price.

The foreseeable risks: exchange rate fluctuations 326 The second significant risk to which Termite was susceptible was movement in the Australian dollar (AUD) against the United States dollar (USD). It sold its product in USD but incurred expenses in AUD. The lower the AUD exchange rate against the USD, the better for Termite's profitability. The higher the AUD, the less AUD which Termite would receive upon the conversion of its sales revenue from USD. 327 This susceptibility was recorded in a number of contemporaneous documents. In his Director's Report for IMX for the financial year ending on 30 June 2013, Mr Meadows explained the commodity price risk and the exchange rate risk as follows: During the year, the Group continued mineral production at the Cairn Hill Mine and the revenue it derives through the sale of ore exposes the Group to commodity price and exchange rate risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Group. Such factors include supply and demand fluctuations for minerals, technological advancements, forward selling activities and other macro-economic factors. Furthermore, international prices of various commodities are denominated in the United States dollars, whereas the income and expenditure of the Company are primarily incurred in Australian dollars and are reported by the Group in Australian dollars, exposing the Company to fluctuations and volatility in the rate of exchange between the United States dollar and the Australian dollar, as determined in international markets. The Group currently operates as an unhedged magnetite and copper producer and is therefore currently exposed to both commodity price and exchange rate risk. (Emphasis added) 328 Both Mr Meadows and Mr Nitschke gave evidence that they were aware, at relevant times, that Termite's profitability was highly susceptible to both the iron ore price and AUD/USD exchange rate movements. Each of the other defendants (apart from Mr Pang) admitted in their s 597 examinations that he had been aware of the risks associated with the iron ore price and the foreign exchange rate. Although Mr Pang did not give evidence of a like kind, I am satisfied that he must also have been aware of these risks, and find as a fact that he was. He accepted in his evidence that he had been aware that the cash flow forecast was dependent on the iron ore price, that it could vary from time to time, and that it was difficult to forecast the spot price of iron ore. Mr Pang also said, that he had assumed that management had taken account of exchange rate fluctuations "in coming up with the $3 million Cash Reserve".

The foreseeable risks: ore tonnage and grade 329 Termite was also subject to the reasonably foreseeable risk that it would not be able in fact to mine the predicted tonnage and grades of ore. Mr Nitschke acknowledged that that was so. 330 As it happened, the mining to the first quarter of 2013 had shown that the forecasts of the grade and quantity of the iron ore reserves were reasonably reliable. However, Mr Nitschke said that it was understood that this could be proved wrong at any point in the future. He also acknowledged that another common risk in mining is the occasional occurrence of waste bands (bands of material other than ore) which alter the cost structures in undertaking the mining. Subsequent events proved Mr Nitschke to be correct in both respects. 331 Mr Parsons recognised the risks of mining in an email of 13 May 2013 to Mr Hoskins and Mr Nitschke (copied to Mr Meadows) in relation to the consideration of developing Pit 2: My comment … about not achieving 6.8mt revolves more around the unknowns associated with mining. For example (and not that I am expecting this) what would happen say if we had a wall failure at the bottom of Pit 2 which meant we couldn't mine say the last 10 Vm of ore. When we nominate a specific # it doesn't give us any wriggle room in case for whatever reasons we don't exactly achieve (or better) it. (Emphasis added) 332 Some of these risks were confirmed by Professor Everett. He said that the composition of an ore deposit can only be coarsely sampled before mining, that there are numerous uncertainties inherent in estimating the mineral grade, and that any mine plan is at best tentative and subject to revision in the light of changing knowledge about the ore deposit as it is progressively exposed, as well as changing prices, costs and market demand. 333 These foreseeable risks were realised in the case of the Cairn Hill Mine. Termite's management provided monthly Operation and Financial Reports to the Outback Board. These reported on the extent to which the actual tonnages and grades of ore mined matched the expected ore reserve. From May 2013, the Reports informed the Outback Board of the discovery of a waste band of material. The waste band had two effects: first, it meant that less saleable ore could be recovered over the life of the mine; secondly, the need to remove the waste increased the operating costs. In addition, Termite reported on "hot spots", that is, the presence of geological conditions which were insufficient to support ramps or other infrastructure necessary for the mining. 334 In June 2013, the shortfall of ore against the predicted reserve was estimated at 16,000 tonnes but, over time, the estimate increased: 101,000 tonnes in July 2013, 122,000 tonnes in August 2013, 159,000 tonnes in October 2013, 211,000 tonnes in January 2014 and 249,000 in February 2014. These were significant amounts. At prices of AU$100-$120 per tonne, they represented a loss of approximately $25-$30 million in forecast income (Mr Tisdell's calculation was $29.7 million). 335 An analysis tendered by the defendants indicated that the tonnes withdrawn from the LoM CFF in July 2013 had increased to a cumulative total of 309,000 tonnes in January 2014. 336 On 29 January 2014, the north wall of the bottom of Pit 1 collapsed unexpectedly, resulting in significant ore losses. It is not clear whether these losses were included in the figures mentioned above. I note, however, that the LoM CFF prepared by Mr Parsons in February 2014 "booked" a reduction in the opening estimate of the available ore resource by 192,000 tonnes. 337 In addition to the reduction in the amount of available ore, from December 2013, the Reports of Termite management to the Outback Board reported on the "loadport grades being lower than contract spec grades". The report of 26 March 2014 included the following: Ore mining FYTD is considerabl[y] worse than forecast - this primarily is a result of underperformance of the Pit 1 ore body at depth (impact of internal waste bands etc.) as well as not mining same benches as the forecast. This will be further impacted by the required pit ramp design change which resulted from unexpectedly poor north wall ground conditions. 338 Despite the deteriorating position, it was not until February 2014 that the Outback Board resolved to put distributions on hold temporarily. However, distributions resumed in March 2014. 339 Mr Parsons suggested that it had not been necessary for any allowance to be made for the lost tonnages because of the possibility of recovery of additional ore from "glory cutting". He described a glory cut as "when the pit is finished, you basically dig whatever ore you can out of wherever the hell you can because the pit has finished". I considered that this was a justification on which Mr Parsons has seized only in retrospect. It is inconsistent, amongst other things, with the view expressed by Mr Parsons in the email of 13 May 2013 quoted earlier in these reasons. In 2013 and 2014, Mr Parsons did not think that glory cutting could make up the shortfall. I reject that as a possibility. Likewise with respect to Mr Parsons' claim that the lost tonnages could be made up from Pits 2 and 3. 340 At no stage did the defendants consider the adequacy of the Termite Cash Reserve in the light of the evidence before them of the less than forecast production from the Cairn Hill Mine. 341 The deterioration in the grade of the mined ore and its failure to meet the contract specification meant that Termite became liable to make payments on the True-Up. As noted by Mr Tisdell, at 17 March 2014, Termite was liable to reimburse approximately US$2.4 million for Shipments 65, 66 and 67, principally, in his opinion, because of the lower than expected grades of ore at the bottom of Pit 1. 342 Each of the defendants can be taken to have known of the risks associated with grade and tonnage. 343 The reduction in ore quantities and grade was also a factor contributing to Termite's insolvency in June 2014. This was a matter of which the defendants, acting with reasonable care and diligence should have, but did not, take account. Even after Mr Parsons had had booked the loss of ore of 192,000 tonnes in February 2014 and had predicted a cash shortfall at the end of mining of $3 million, the defendants still allowed Termite to make the distributions in March 2014.

The uncertainty as to proceeding with Pit 2 344 Following the September 2012 Downturn, the Outback Board began to consider whether to proceed with Pit 2. It was obvious to all involved that, if Termite did not proceed with Pit 2, the life of the Cairn Hill Mine would be shorter than planned, as indicated by Termite management in a document entitled "Cairn Hill Update" in October 2012: Options Shipping Completes Current Mine Plan July 2015 Shallow Pit 2 December 2014 No Pit 2 May 2014

345 The document also referred to two other options, one of which involved delaying Pit 2 to July 2013 and the other to a different method of extraction. 346 It was appreciated by all defendants that, in the event of no Pit 2 or a shallow Pit 2, that Termite would incur Tail Liabilities to the Services Contractors. In fact, Mr Nitschke had told Mr Meadows on 20 October 2012 that "[t]he only reason to keep going would be to try and avoid the costs of terminating the contracts and leases". Accordingly, one of the factors bearing on the consideration of whether to proceed with Pit 2 was the extent of those liabilities. 347 Mr Parsons presented a paper entitled "Mine plan excluding Pit 2" at the meetings of the Outback Board on 17 October and 22 November 2012 but, after some discussion, consideration was deferred. 348 In January 2013, Mr Hoskins contacted each of the Services Contractors with a view to identifying their position in the event that Termite did not proceed with Pit 2. He summarised the results of his discussions in an email to Messrs Parsons, Meadows and Hassard of 15 January 2013. Mr Parsons added his comments to Mr Hoskins' summary the same day. 349 In January 2013, Mr Parsons prepared a document entitled "Long Term Mine Plan Analysis" for consideration by the Outback Board. He focussed on the alternatives of proceeding with a shallow Pit 2 and not proceeding with Pit 2 at all, as he had identified that they yielded the highest cash margins. Mr Parsons analysed each alternative, noting that shipping would be complete in May 2014 if there was no Pit 2, and in December 2014 if Termite proceeded with a shallow Pit 2 only. He also noted that if Termite did not proceed with Pit 2, the estimated ETPs to the Services Contractors would be $25.8 million, and, in the event that the shallow Pit 2 option was adopted, these liabilities would be $7 million. The plan contained sensitivity analyses showing forecasts at different levels of iron ore pricing and at different foreign exchange rates. Mr Parsons concluded with a recommendation for proceeding with a shallow Pit 2. 350 The position with respect to the ongoing discussions concerning Pit 2 is apparent from the minutes of the meetings of the Outback Board: 23 January 2013 6. MINING OPTIONS FOR PIT 2 … The Board was informed that a shallow Pit 2 at Cairn Hill was currently the preferred option, though this was highly sensitive to the iron ore price, becoming marginal with a 10% decline in iron ore prices. Further analysis of Pit 2 options is underway and a more definitive position in respect of the different options is expected to be available at the Board meeting to be held on 20 February 2013. 7. REPORT ON CONTRACT NEGOTIATIONS The Board noted that an important factor in any decision on Pit 2 at Cairn Hill was the Company's liability in connection with various logistics and services contracts. … 20 February 2013 6. MINING OPTIONS FOR PIT 2 The CFO stepped through a paper that summarised the financial outcomes under three life of mine scenarios that had emerged from a process of optimised designs for Cairn Hill Pit 2. The CFO explained the 'decision-tree' analysis set out in the paper, which highlighted the key decision points, including decisions in connection with the Flinders Ports Contract and corresponding financial outcomes. ... The Board requested further analysis of the termination of the Flinders Ports Contract and agreed to defer a decision on Cairn Hill Pit 2 until the meeting of the Board to be held in May 2013. ACTION: Management was requested to obtain legal advice on the implications for termination of the Flinders Ports Contract, should the Company immediately sign a Deed of Settlement and Release with Taifeng. 22 May 2013 5. CAIRN HILL PIT 2 … The Board discussed the development of Cairn Hill Pit 2 and acknowledged the predicted positive economic outcome associated with Pit 2 design 10a and confirmed that, given all of the circumstances, extending the life of Cairn Hill operations remained the preferred option. The Chair called for a vote on the modification of the Cairn Hill mine plan to Pit 2 design 10a, with the votes as follows: the Chair [Mr Meadows] voted in favour of Pit 2 design 10a; Mr Nitschke voted in favour of Pit 2 design 10a subject to a satisfactory resolution of IMX's exposure as a guarantor under the Flinders Ports Contract; Mr Sun voted against Pit 2 design 10a; and Mr Pang voted against Pit 2 design 10a. Both Mr Sun and Mr Pang qualified their vote, indicating that they may support Pit 2 design 10a, subject to review of additional sensitivity analysis and a satisfactory resolution of IMX's exposure as a guarantor under the Flinders Ports Contract. The Board requested that management immediately [commence] negotiations with Flinders Ports to address the issues associated with IMX's position as a guarantor under the Flinders Ports Contract. ACTION: Management to negotiate with Flinders Ports to either have IMX removed as guarantor or to have its liability as guarantor capped under the Flinders Ports Contract. 25 June 2013 5. CAIRN HILL PIT 2 … The recommendation, by the Board of Cairn Hill Pit 2 Design 10a, to the board of directors of IMX Resources Limited, is approved. … (Emphasis in the original and emphasis added)

351 The first two recitals to the Board's resolution of 25 June 2013 were: A. Determination of the Cairn Hill mine life is dependent on whether or not mining operations extend to a Pit 2 development; B. Key factors in assessing the economics in any Pit 2 development include iron ore prices, copper prices and costs associated with the early termination of [the Services Contracts]. (Emphasis added) 352 As is apparent, the stark divergence of views at the Board Meeting of 22 May had been resolved by 25 June. The Board minutes refer to discussions with Flinders Ports and to legal advice concerning IMX's liability to Flinders Ports, but do not detail the discussions nor the advice. It seems, however, that by 25 June 2013 Flinders Ports had agreed to cap the liability of Outback and IMX under the guarantee at $3 million. The inference is strong that it was resolution of concerns about the potential liability of IMX to Flinders Ports which was a significant factor in the change of mind. 353 With the exception of the meeting on 25 June 2013 which Mr Pang did not attend, all of the defendants were in attendance at each of these meetings. 354 In his s 597 examination, Mr Sun said that he had been opposed to Pit 2, but had been ultimately persuaded to support it by information from Mr Meadows and Mr Parsons that mining Pit 2 would minimise the liabilities to employees, contractors and suppliers. 355 The minutes of the February, March and June Board meetings indicate a number of matters of present relevance: (a) as at 12 March 2013, no decision had been made about the continuation of mining, whether with a shallow Pit 2 or no Pit 2; (b) as at 12 March 2013, the amount of Termite's liabilities to the Services Contractors was unknown, but it was evident that there were likely to be ETPs of at least $7 million and possibly as much as $25 million; (c) the uncertainty as to whether Termite should proceed with Pit 2 continued until 25 June 2013; and (d) one consequence of the Board deciding on Design 10a for Pit 2, was that it was then inevitable that Termite would have a liability for ETPs which had been estimated to be of the order of $7 million. 356 Accordingly, I am satisfied that, at 12 March 2013, a significant matter concerning the life of the Cairn Hill Mine and the liabilities of Termite to the Services Contractors, and therefore a matter bearing on the adequacy of the Termite Cash Reserve of $3 million, remained unresolved. 357 The significance of the uncertainty about whether Termite would proceed with Pit 2 is indicated by the following passage in Mr Nitschke's cross-examination: Q: At [8 February 2013], Taifeng was expressing concerns about proceeding with Pit 2 wasn't it? A: Yes. Q: If Taifeng's position was to maintain in that way there was nothing you could do about it because of the requirement for unanimity in relation to significant mining decisions? A: Yes. Q: The position was, therefore, that as you understood it at the time, that if Taifeng couldn't be persuaded to proceed with Pit 2 there would be a very significantly truncated mine life in respect of Termite's operations? A: Yes. Q: And that would mean that the Tail Liabilities of 25 plus million dollars would be crystallised? A: Yes. Q: The position in that event was that there would be potentially a need for a voluntary administration within Termite? A: Yes. 358 Later, Mr Nitschke resiled from that admission, but could not explain why he had answered affirmatively that a voluntary administration of Termite was in prospect if Taifeng could not be persuaded to proceed with Pit 2. 359 Moreover, Mr Nitschke acknowledged that it was "a highly material consideration" to the deliberations on the Distributions Policy in March 2013 "to know whether the no Pit 2 was going to be the favoured mine plan or instead a modified Pit 2 … because the modelling of future cash flows … would need to take into account quite a different position regarding the Tail Liabilities, according to which decision was taken".

The uncertainty about proceeding with Phase 2 360 Another matter bearing on the assessment of the defendants' conduct is the uncertainty at material times as to whether Termite would proceed with Phase 2 of the Cairn Hill Mine. It was not until late 2013 that the defendants began to address that issue. 361 On 4 November 2013, Mr Parsons prepared a paper entitled "Cairn Hill Phase 2 Analysis". In the analysis, Mr Parsons noted that Phase 1 was forecast to complete shipping in January 2015 and that preliminary work on Phase 2 indicated "a financially viable project that can extend the Cairn Hill shipping until November 2015". He also noted that the Phase 2 project could use the Phase 1 infrastructure and would produce an iron-only product "via the addition of a dry magnetic separator circuit". Mr Parsons also said that Phase 2 would require "partner financial support of $2.2m" and expressed the assumption that this could be provided by the withholding of "Phase 1 distributions". He concluded with the recommendation that the Board authorise and fund further evaluation of the proposed Phase 2. 362 The Outback Board considered Mr Parsons' analysis at its meeting on the same day. It approved the recommendation for further evaluation. 363 At its meeting on 26 March 2014, the Outback Board considered a document entitled "Cairn Hill Phase 2 Project Evaluation" authored by Mr Parsons and Mr Watkins (who at that time was the General Manager Projects of IMX). The Board resolved to proceed with Phase 2, subject, however, to confirmation from Taifeng of its approval. 364 Taifeng gave its confirmation on 1 April 2014 and Mr Hoskins then commenced negotiations with Exact, Flinders Ports and SBR for amendment of the terms of their respective contracts. 365 Proceeding with Phase 2 had the potential to reduce the potential Tail Liabilities. However, Termite management did not contemplate that proceeding with Phase 2 would eliminate altogether the liability to the Services Contractors for ETPs. The LoM CFF dated 31 March 2014 contemplated mining continuing June 2015 and ETPs of $2,485,630 being payable in September 2015. The LoM CFF at 30 April 2014 also contemplated mining ceasing in May 2015 and ETPs of $2,472,180 being payable in September 2015. It also contemplated a final balancing distribution of $1.508 million being payable in June 2016. As it contemplated that there would be no further distributions under the Distributions Policy after March 2014, this meant that the forecast distribution of $1.508 million provided the only buffer against a fall in the iron ore price or interruptions to mining operations over the 14 month period between March 2014 and the cessation of mining in May 2015. I will refer to the submission which Termite made concerning that "buffer" later in these reasons. 366 For present purposes, I indicate that I accept Termite's submission that it was not known at the time that the Distributions Policy was adopted or at any time during the period when distributions were made whether Termite would be proceeding with Phase 2 and that this meant that there was considerable uncertainty as to the extent of Termite's Tail Liabilities to the Services Contractors.

The continuing contemplation of the prospect of Termite becoming insolvent 367 Termite submitted that the prospect of it having to cease mining operations and/or becoming insolvent was contemplated by the defendants as a real possibility throughout 2013. It submitted that that contemplation lay behind a number of the defendants' decisions including their decision to enter into and implement the Distributions Policy. Part of the purpose of that policy, it submitted, was to obtain for IMX and Taifeng the benefit of the distributions, but at the same time avoiding either entity having a liability to Termite's creditors. 368 I am satisfied that the prospect that the Cairn Hill Mine may become uneconomic, that Termite may have to cease mining activities, and/or that it may become insolvent, was actively contemplated by the defendants during 2013. The consciousness of those prospects prompted a number of actions, including steps to limit the liabilities of IMX, Taifeng and/or Outback in the event of Termite's insolvency but it did not prompt any action to protect the interests of Termite's creditors. A number of matters support that conclusion.

The email exchange of 8 February 2013 369 An early manifestation was the explanation which Mr Nitschke gave to Mr Hoskins in February 2013 for preferring repayment of the Outback-Termite Loan, rather than Termite lending money to IMX, as was then contemplated. Earlier in these reasons, I set out the email exchange between Mr Nitschke and Mr Hoskins of 8 February 2013 in which, in the context of the proposed loan from Termite to IMX, Mr Nitschke asked why Termite could not simply "repay our loan". Mr Hoskins had responded by enquiring why Mr Nitschke would consider repayment of the Outback-Termite Loan when it was supported by the existing agreement with Taifeng (which did not require immediate repayment) and was interest free. 370 Mr Nitschke's response was: A loan from Termite is repayable to Termite. A distribution to Outback is not. Could be significant depending on our strategy going forward. (Emphasis added) 371 The inference which arises naturally from Mr Nitschke's response is that he appreciated that, in the event of Termite going into administration or being wound up, IMX could be called on to repay a loan from Termite whereas a repayment by Termite of the loan to it would not be repayable. Further, Mr Nitschke saw that the difference could be significant, depending on "our strategy going forward". It is natural to understand the strategy to which he referred as being the protection of IMX from detriment in the event that Termite became insolvent. 372 Mr Nitschke's evidence about his email and his thinking at the time he sent it was mixed. At one stage, he accepted that the "strategy going forward" was "making sure … that IMX was protected in an appropriate way from Termite" and that he was referring to the prospect of an administrator or liquidator appointed to Termite demanding repayment of monies lent by it. As just seen, Mr Nitschke also acknowledged that at that time Taifeng was expressing concerns about proceeding with Pit 2 and that he had been aware that, if it could not be persuaded to agree to that course, Termite's mining operations would be truncated, Tail Liabilities of $25 million plus would be crystallised, and that this would give rise to the potential for Termite being placed into voluntary administration. At another stage, Mr Nitschke said that he could not recall the strategy to which he had been referring in the email to Mr Hoskins. I considered the latter evidence to be unconvincing. Later, Mr Nitschke acknowledged that he had had in mind the concept of "ring fencing" IMX from Termite's liabilities. I find that it was Mr Nitschke's appreciation of the prospect of Termite becoming insolvent which made "ring fencing" important. 373 Despite Mr Nitschke's concern to limit IMX's potential liability to Termite, its need for cash was pressing, so it secured Taifeng's agreement to Termite making the loan of $5 million to it.

The avoiding of a paper trail 374 Another indication of Mr Nitschke's awareness that the actions being contemplated in relation to the Distributions Policy might be scrutinised by an administrator or liquidator is seen in a caution which he gave to Mr Hoskins. 375 Mr Hoskins had circulated his draft of the Distributions Policy on 5 March 2013. That draft contained two express references to the liability of Outback to Flinders Ports pursuant to the guarantee in its Service Contract. The first was in the identification of the Outback Cash Reserve. It specified that this would be a nominal amount of $5,000 plus "an amount covering Outback's potential liability under the Logistics Services Contract with Flinders Ports to which Outback is first guarantor". The second was in the statement that management would report to each Outback Board meeting as a standing agenda item "the amount of potential liability under the Flinders Ports' contract". 376 In an email of 8 March 2013, Mr Nitschke counselled Mr Hoskins against mentioning the potential liability to Flinders Ports in the Distributions Policy: I think that we should not specifically acknowledge the Flinders Ports guarantee in the Distribution Policy but rather just refer to any potential liabilities that Management can assess and advise the Board on the extent that they should be provided for at each Board meeting. We should avoid as best we can developing a paper trail where we have specifically deliberated on the potential exposures to Termite. This includes the Board papers and minutes as well. You need to read everything in the perspective that things have gone pear shape[d] and we have our backs to the wall trying to keep the hoards (sic) at bay. It is amazing how different it will read. (Emphasis added) 377 In his cross-examination, Mr Nitschke sought to explain this email by saying that he had thought there should be a reference to the liabilities generically and not just of Flinders Ports. I considered that this was an occasion which Mr Nitschke was adapting his evidence to suit his perceived interests in the litigation. Outback did not have any "generic" liabilities, only a potential liability to Flinders Ports pursuant to the guarantee. The "generic" liabilities were those of Termite and not of Outback. The particular provision which he suggested be altered did not concern the liabilities of Termite but the potential liability of Outback pursuant to the guarantee. Further, had Mr Nitschke been intending only to suggest that liabilities be referred to in a generic way, there would have been no need for him to have mentioned the avoidance of a paper trail or how things would look if matters went "pear shaped". Further still, it would be obvious on a paper trail that the directors had given attention to the "generic" liabilities to the Services Contractors in 2012. The difference in March 2013 was that the defendants were contemplating the removal of cash from Termite. I infer that Mr Nitschke was aware that this could mean that Termite would not be able to meet its liability to Flinders Ports and he was seeking to avoid bringing into existence evidence which would indicate that that prospect had been considered. Counsel for the defendants conceded as much in the final submissions when he said: But you can understand that in the course of litigation Mr Nitschke, being a very experienced executive, may well have come across litigation previously and understand that if there is litigation that admissions of that sort may well end up being decisive. 378 I note that Mr Hoskins, to whom Mr Nitschke's email was addressed, said that he understood at the time that Mr Nitschke was adverting to the prospect of Termite's insolvency and not wishing to have a paper trail at Termite level admitting to the liabilities. 379 I will refer later to an email of Mr Hoskins to Messrs Hassard, Dunstan and Parsons of 22 April 2013 in which he said: The Board didn't make a decision on keeping funds at Outback level for penalties but they did decide not to write it down every month due to creating a paper trail and … admitting that these penalties would be owed. 380 I am satisfied that Mr Hoksins was recording accurately in this email the decision of the Outback Board. On that basis, I am also satisfied that the Outback Board members were conscious of the prospect that their conduct in relation to the ETPs in April 2013 may be scrutinised by an administrator or liquidator in the event of Termite's insolvency. Because of that, they had decided that the minutes should not record aspects of their discussions regarding the potential ETP liabilities because they did not want there to be evidence in the nature of admissions that they had contemplated the prospect of those liabilities not being satisfied. This was so even though, as Mr Nitschke acknowledged, the ETPs were always the subject of consideration by the Outback Board from February 2013. He said that he was well aware that Termite could have a liability for ETPs if the contracts with the Services Contractors came to a premature end.

The inclusion in the Distributions Policy of an Outback reserve 381 Termite submitted that the very fact that the defendants incorporated provision for the Outback Cash Reserve in the Distributions Policy is evidence that they contemplated that the Termite Cash Reserve may be inadequate and that it (Termite) may become insolvent. This was so, it submitted, because Outback did not have any business other than the Termite business and the only potential liability it had with respect to Termite's operations was pursuant to the first guarantee it had provided to Flinders Ports. It was improbable that that guarantee would be called upon while Termite remained solvent and conducted mining operations. The purpose of the Outback Cash Reserve was, as the email exchange between Mr Nitschke and Mr Hoskins indicates, to provide for Outback's liability under the guarantee. Holding money at the Outback level would have the effect of protecting IMX from being called on under its second guarantee to Flinders Ports. 382 In addition to the emails between Mr Hoskins and Mr Nitschke, other evidence supports the conclusion that this was the purpose of the Outback Cash Reserve. In an email on 22 February 2013 to Mr Sun (copied to Mr Hoskins), Mr Meadows explained: The distributions policy would also encompass the holding of funds at Outback level to cover any future default position with respect to the agreement between Termite and Flinders Ports. Mr Sun confirmed that that was his intention also, in an email to Mr Meadows (copied to Mr Hoskins) on 25 February 2013. Mr Hoskins confirmed the position in his email to Mr Pang on 25 February 2013: Robert [Sun] has previously agreed with Neil [Meadows] that at some stage money would be held at Outback level to cover the Flinders Ports guarantee liability before being sent to China. 383 In addition, as already noted, the first draft of the Distributions Policy indicated expressly that the purpose of the Outback Cash Reserve was to cover Outback's potential liability as guarantor to Flinders Ports. 384 Mr Hoskins confirmed that the purpose of the Outback Cash Reserve was to protect IMX against its risk under the Flinders Ports' guarantee in the event of Termite being unable to pay its debts. He gave the following evidence: Q: [Y]ou agree that the Outback Cash Reserve was to protect IMX against its risk under the Flinders Ports guarantee in the event of Termite being unable to pay its debts? A: That's correct. In the event that an ordinary Termite distribution up to Outback had been made, in accordance with the Distribution Policy, then it would be a decision between IMX and Taifeng as to whether to keep it there to protect IMX. Which is what I'm referring to that Taifeng stepping in to basically meet their share. Q: The Outback Cash Reserve was part of the risk mitigation for IMX? A: Yes. Q: And it was risk mitigation against Termite's insolvency? A: Yes. 385 In his evidence, Mr Nitschke said that the purpose of having a cash reserve at the Outback level was to provide a means by which Taifeng would contribute its fair share to meeting the guarantee to Flinders Ports, should a claim under the guarantee be made. I am willing to accept that that may have also been part of the strategy but note, at the same time that the need for Taifeng to contribute its fair share would arise only if Termite defaulted in meeting its primary liability under the Flinders Ports' contract. I also note that, somewhat inconsistently with his first stated rationale, Mr Nitschke said that at the time of the Distributions Policy he had contemplated an Outback Cash Reserve of about $10 million for a "shortened Pit 2" and a reserve of $7 million in the event of no Pit 2. 386 The circumstance that, in the events that happened, an Outback Cash Reserve was not established does not warrant a different conclusion. There was no evidence that a subsequent decision was ever made not to establish that Reserve. My impression is that it was simply overlooked, perhaps because there followed a period of buoyant prices and perhaps because of the interest of both IMX and Taifeng in maximising the distributions to be paid. 387 In my view, Termite's submission on this topic has considerable force, and I accept it.

Ring fencing IMX and Taifeng from Termite's liabilities 388 Another indication of the ongoing contemplation of Termite's insolvency is seen in the consciousness, and in the actions taken to ensure, that, apart from the liability of Outback and IMX to Flinders Ports under the guarantee, IMX and Taifeng would not have any liability to Termite's creditors in the event that Termite could not continue mining. 389 The term "ring fencing" or a cognate was used to describe the protection of IMX and Outback. The first use of the term in the evidence appears to be in a response which IMX provided to Patersons Corporate Finance (signed by Mr Meadows on 16 November 2012) relating to a possible capital raising. One of the responses commenced: If IMX was required to suspend operations at Cairn Hill, the liabilities would be ring fenced within the joint venture except for the termination payment and any other obligations to Flinders Ports which is guaranteed by IMX. This stands at $6m currently. Mr Hoskins acknowledged that he had had a role in preparing the response to Patersons, but could not recall whether he had prepared this particular response. He acknowledged, however, that he had been "familiar with the language of ring fencing before then". 390 The term also appears in the paper prepared by Mr Parsons and Mr Hoskins for the Outback Board meeting of 25 June 2013 concerning the options with respect to Pit 2. After a table identifying the benefit of proceeding with Design 10a, the authors continued: As long as Termite is ring fenced away from IMX and Taifeng, the operation should continue as long as possible, particularly when it results in significant forecast cash inflows. (Emphasis added) 391 Mr Sun used the same term in his email to Mr Meadows (copied to Mr Pang) of 24 June 2013 in relation to the discussions concerning the development of Pit 2. In that email, Mr Sun said (using his exact manner of expression): If we go ahead with design 10a, we need to be sure Termite is ring fenced away from IMX and Taifeng. As I mentioned at the last Board meeting, there are two kinds of liabilities [that] need to be looked into. One kind is related with commercial contracts. We know that except Flinders Port contract there is no contract extending liability to either IMX or Taifeng. And now it seems Flinders Port liability is limited. The other kind is related with corporate structure. My concern is in the event of administration whether administrator and creditors would hold IMX and Taifeng responsible for unpaid credits on the grounds of the Heads of Agreement and the way we distribute cash surplus. The Heads of Agreement states that IMX and Taifeng finance mine operation, which is reflected in our draft shareholder agreement. On the other hand, Termite distributes cash to IMX and Taifeng when there is cash surplus from the operation. Then a reasonable argument from Creditors and administrator would be that IMX and Taifeng take away Termite cash surplus then they should be responsible for cash shortfall - unpaid credits. What is your view of this? Do we need to have a lawyer comments on it? (Emphasis added) 392 I am satisfied that Mr Sun's reference to the "last Board meeting" is a reference to the meeting of the Board of Outback on 22 May 2013 and that his reference to "unpaid credits" is a reference to "unpaid creditors". 393 In his cross-examination, Mr Meadows confirmed that Mr Sun had told the Outback Board meeting of 22 May 2013 that Taifeng would not agree to an increase in the Cash Reserve from $3 million and that there was a necessity to "ring fence" the two Joint Venturers from Termite's liabilities. Mr Meadows also said that he had understood Mr Sun to be saying at the meeting 22 May 2013 that, despite not acting on management's recommendation that the Cash Reserve be increased, there should be no claims against IMX or Taifeng in the event of Termite's insolvency consequent on it having paid out its cash to IMX and Taifeng. 394 Mr Nitschke did not recall Mr Sun speaking of ring fencing Termite's liabilities away from IMX and Taifeng at the 22 May 2013 Board meeting but said that he "would have" said it on another occasion because "it was a discussion that we were always conscious of, … that Termite was ring fenced from IMX". 395 In the final submissions, counsel for the defendants protested that the term "ring fencing" was imprecise and pejorative. However, it is the term which the defendants themselves used. It is evident that they used the term to refer to the means by which Termite's liabilities would be confined to Termite that is, to means by which IMX, Outback and Taifeng could, despite their receipt of the distributions which could expose Termite to insolvency, be insulated from Termite's liabilities. Of course, neither IMX nor Outback could be relieved of the potential liability under their respective guarantees to Flinders Ports but Flinders Ports had agreed, in a process of negotiation, to a cap of $3 million on their liability under the guarantees. 396 The defendants made two further submissions concerning the ring fencing strategy. The first was that there is nothing wrong or sinister in members of a corporate group seeking to maintain a separation of liabilities as between themselves. One may accept that that is so. This is a recognised form of asset protection. The significance in the present case rests in the reasons why IMX and Outback sought to maintain that separation, namely, their appreciation of the prospect of Termite's insolvency. Furthermore, as directors and officers of Termite, the defendants were bound to act in the interests of Termite, and not those of IMX or Outback. They had to consider the preservation of its assets in order to meet the liabilities it had undertaken. As counsel for Termite submitted, directors do not act in the best interests of a company by ring fencing the recipients of payments made by it from liabilities. Acting in the company's interests involves doing what can reasonably be done to enable it to discharge its liabilities and to avoid insolvency. 397 The defendants referred secondly to the fact that, in the events that happened, no Outback Cash Reserve was established. Again, I accept that that is the fact but do not think that it detracts from the force of the submission made by Termite. Further, as I have already indicated, I consider that the reason why the Outback Cash Reserve was not established lay in the fact that, in the second part of 2013 when the reserve should have been established, Termite's operations were profitable with the consequence that the need for the Outback Cash Reserve would not have been so prominent. This, and the desire of IMX and Taifeng to have the distributions, led to the establishment of the Outback Cash Reserve being overlooked. 398 Earlier, I referred to an email from Mr Nitschke to Mr Meadows which was copied to Mr Hoskins and Mr Parsons. The email was written at a time when IMX was actively seeking to limit its potential exposure to Flinders Ports under its guarantee. Mr Nitschke concluded his email by saying: In my mind it is paramount that we limited the exposure of IMX to the downside of Cairn Hill. Once we do this we can aggressively set about trying to extend the life of Cairn Hill, Phase 2 etc without being too concerned about the volatility of the Iron Ore price. I believe that this would be seen positively by the market as well and be in the bests interests of all stakeholders. 399 In his cross-examination, Mr Nitschke conceded that, when writing this email, he had squarely in mind the risk of Termite being rendered insolvent and unable to pay its creditors, including Flinders Ports. From this, it can be inferred (and I do) that the prospect of Termite becoming insolvent was so present in Mr Nitschke's mind at the time that it influenced his decision-making concerning Phase 2. It also indicates Mr Nitschke's concern, in the light of that prospect, to protect IMX. 400 In my view, there is much force in Termite's submission that the defendants had positively contemplated that it may become insolvent, and that their desire to ensure that each of IMX and Taifeng would not have any liability to its creditors in that event explains the references to "ring fencing". The defendants were content for Termite to continue to trade and for distributions to be made, provided that IMX and Taifeng would be protected in the event that the risk of Termite's insolvency was realised. Put slightly differently, once IMX was "ring fenced" from Termite's liabilities, the Outback Board was prepared to proceed with mining at Cairn Hill without increasing the amount of the Termite Cash Reserve, despite being aware of the volatility in the iron ore price and the effect which a downturn in that price could have on Termite.

The repayment of the Termite-IMX loan 401 While the Termite-IMX Loan remained extant, the prospect of IMX being called upon to repay it by an administrator or liquidator of Termite remained real. IMX sought to remove that risk by a process which involved, in effect, Termite funding the repayment of the loan. 402 The Termite-IMX loan was repaid on or about 24 September 2013. As IMX did not have the capacity at that time to make the repayment, Termite, Taifeng and IMX engaged in a series of round robin transactions permitting it to occur. 403 On 2 September 2013, IMX and Taifeng executed a loan agreement. By that agreement, Taifeng agreed to lend IMX $2.5 million interest free and unsecured with repayment to be made on 31 December 2013. On 23 September 2013, Termite paid a distribution of $5,102,040.82. Of this amount, it paid $2,602,040.82 directly to IMX. It also paid the balance of $2.5 million, which was to be Taifeng's share, to IMX. This portion of the payment was documented as the loan by Taifeng to IMX under the loan agreement of 2 September 2013. On the following day, IMX then paid $5 million back to Termite, in full discharge of the Termite-IMX loan. The effect was that the Termite-IMX loan was repaid by use of amounts Termite had distributed from its own profits, and IMX's liability to Termite was extinguished. The amount repaid to Termite could then be distributed to IMX and Taifeng in accordance with the Distributions Policy. IMX repaid the loan from Taifeng later in 2013. 404 Mr Hoskins explained the rationale for the repayment to Mr Pang in an email of 6 June 2013, and Mr Pang confirmed the arrangement in a return email (copied to Mr Sun) on the same day: The issue that Neil and Robert have identified with the current loan is that it is between Termite and IMX. If the iron ore price were to experience a prolonged downturn, an administrator would be able to demand IMX repay the loan to Termite. This situation would not benefit IMX or Taifeng because in administration, those funds would be used by the administrator to pay creditors and no additional funds could be returned to either of the shareholders. Neil and Robert had discussed treating the loan as a preferential repayment of IMX's shareholder loan over Taifeng's. This treatment results in the same problem because in administration, no further distributions would be made by an administrator. So in the end, they both agreed that it would be easier to treat the loan as a $2.5m loan directly between Taifeng and IMX (because it was a $5m loan between Termite and IMX). Will it be possible for Termite to distribute $2.5m to Taifeng and for Taifeng to pay this onto IMX? (Emphasis added) I am satisfied that the references to "Neil" and "Robert" were to Mr Meadows and Mr Sun and that Mr Hoskins was relaying accurately what he had been told by them. 405 Mr Hoskins also explained the arrangement in an email to Mr Parsons and Mr Hassard of 12 September 2013 (copied to Mr Meadows and Mr Dunstan): … I've agreed that we could deal with the loan merry-go-round ourselves. To accomplish this, I think we'll need the following transactions: - Termite pay IMX $2.5m with description that it's a distribution to IMX - Termite pay IMX $2.5m with a description that it's a distribution to Taifeng that has been paid to IMX as the loan proceeds from Taifeng to IMX - IMX to repay Termite $5m to repay loan. 406 Termite submits that the round robin arrangement was put in place by the defendants with the aim of placing assets beyond its reach in the event that it became insolvent. I accept that submission. The arrangement and the emails concerning it evidence the continuing contemplation of the prospect of Termite becoming insolvent. It also evidences the willingness of all defendants (with the possible exception of Mr Parsons) to put the interests of IMX and Taifeng ahead of those of Termite itself.

Other manifestations of the prospect of Termite becoming insolvent 407 There was other evidence indicating the appreciation by the defendants during 2013 of the prospect of Termite being placed into administration on becoming insolvent and of their desire to protect IMX against any liability to Termite or its creditors in that event. 408 In the email to Mr Pang of 6 June 2013 set out earlier, Mr Hoskins referred to the prospect of an administrator appointed to Termite in the event of a prolonged downturn in the iron ore price being able to demand repayment of the $5 million loan. 409 At its meeting on 21 November 2013, the IMX Board (at which Messrs Nitschke, Sun and Hoskins were in attendance) discussed contingency planning for a sudden collapse in the price of iron ore. The Board agreed that hedging was the only available option. Other evidence indicated that hedging was so expensive as to be only a limited protection.

Fixing the Termite Cash Reserve at $3 million 410 As noted earlier, Mr Hoskins prepared the first draft of the Distributions Policy on 1 March 2013. I am satisfied that it needed to be prepared quickly because of the requirement of IMX for cash and the requirement of KPMG in relation to the preparation of the half yearly accounts. Mr Nitschke acknowledged that the Policy was prepared at "relatively short notice" and that it "was done on the run to a certain extent".

The defendants' explanations 411 The defendants advanced different explanations and rationales for the selection of the sum of $3 million as the Termite Cash Reserve. I regarded much of this evidence as unreliable because it constituted the defendants' attempts now to justify the $3 million figure rather than reflecting their thinking at the time. Instead, I am satisfied that they had given relatively little thought to the adequacy of the figure at the time.

Mr Nitschke 412 In his s 597 examination, Mr Nitschke said that he could not recall how the $3 million figure had been selected, or why he had made the judgment that it was appropriate. In his affidavit of 31 October 2016, Mr Nitschke said that, when voting on the Distributions Policy, he had considered the reserve of $3 million sufficient to deal with unforeseen operational or financial issues. This was so because "we had substantial certainty about the costs of our operations, substantial ore in stockpile at any point in time, a demonstrated ability to sell our product and cash certainty from our cash flow modelling based upon predicted ore prices that included provision for the full liability of Termite to all service providers". 413 However, in his cross-examination, Mr Nitschke claimed to have a clear recollection of referring to, and relying on, the fact that the LinQ facility had required a $3 million cash reserve. He said: I have a clear recollection that I understood that the minimum liquidity required under the LinQ debt facility at the point I made this decision was $3 million, and I believed that I could rely on the fact that that liquidity was contained within a debt facility with someone that had lent us money and carried out due diligence … I believe I relied on the fact that … the person that provided the debt facility in setting that $3 million minimum liquidity had considered those - that calculation. 414 This change of position by Mr Nitschke from his evidence in the s 597 examination was all the more remarkable because he had not, in his affidavit of 31 October 2016 containing his evidence in chief on the topic, referred at all to the amount of the reserve required by LinQ as one of the matters which he had taken into account in March 2013 in concluding that $3 million was a sufficient reserve. 415 The first time Mr Nitschke made the claim that he had "had in mind" the LinQ reserve when approving the Distributions Policy was in the affidavit he made on 11 April 2017, the fifth day of the trial, and the same day on which he commenced giving evidence in the trial. 416 I had the very firm impression that the LinQ cash reserve was a rationale on which Mr Nitschke has seized only in retrospect. I have maintained that view on reviewing the evidence. Not only was Mr Nitschke's claim inconsistent with his s 597 examination, it is not supported by any contemporaneous record. I do not accept that it represented his thinking in March 2013. Further, and in any event, Termite's position vis a vis LinQ was not at all comparable with its position when adopting the Distributions Policy and, in my view, a person of Mr Nitschke's intelligence and capacity would have appreciated at the time that that was so. LinQ's requirement for a $3 million cash reserve had not been its only security. It had, in addition, the guarantee by Outback, a mining mortgage over ML 6303, security over IMX's shares in Uranex Ltd, security over the shares in Termite and general security agreements by both Termite and Outback, in addition to the restraint precluding Termite from distributing any of its profits without its consent. In addition, the LinQ facility was a short term facility as it could require Termite to repay any outstanding principal at the end of each quarter. 417 The risk exposure of Termite, on the other hand, was very different. It had no recourse to other securities and in March 2013 it could no longer make use of the LinQ facility. IMX had acknowledged the advantage which access to the LinQ facility provided to Termite in the announcement which it made to the Australian Stock Exchange on 10 December 2012 that the LinQ facility had been fully repaid, saying that it would remain in place "providing the Joint Venture with undrawn head room of $15 million until 30 May 2013". When the LinQ facility was terminated, Termite had no means in place of recourse to an external financier. Mr Nitschke knew that that was so.

Mr Hoskins 418 Mr Hoskins gave diverse explanations. He said that the figure of $3 million was obtained in talking with Mr Meadows about his operating experience and what he considered to be reasonable. He also claimed that Mr Meadows had said "in the hallway" that a reserve of 25-30% of monthly operating costs was reasonable. In his evidence, Mr Meadows said that he "definitely would not have said that". To my mind, this denial of Mr Meadows was plausible. The $3 million figure was significantly less than the monthly amount being paid to only one of Termite's Service Contractors, Exact. Both Mr Meadows and Mr Hoskins knew that. Mr Hoskins said that he had not regarded that as odd adding, by way of justification, that LinQ had required only a $1 million cash reserve at times when its facility was wholly undrawn. He claimed that that had been his thinking in March 2013 but later conceded that this was "less relevant". Mr Hoskins also claimed to have relied on Termite being able to operate previously on other occasions with a similar, and also far lower, cash reserve. 419 At one stage Mr Hoskins claimed that he had thought that, as $3 million or thereabouts had been sufficient at the time of the September 2012 Downturn, it would also be sufficient for the future. However, later he acknowledged that that had not been his thinking at the time. 420 In his s 597 examination, Mr Hoskins had acknowledged that, when considering the suggestion he imputed to Mr Meadows of 25-30% of monthly operating expenses, he had not considered whether that was appropriate for a company which had no right to make cash calls and no credit facilities. 421 I had the strong impression that Mr Hoskins had fixed on 25-30% of operating costs in a process of retrofitting the reserve of $3 million. With monthly expenses of approximately $12 million, 25-30% produced a figure in the range $3 million-$3.6 million. I did not regard any of his evidence as to the way the $3 million figure had been adopted as reliable and do not accept it.

Mr Meadows 422 In his s 597 examination, Mr Meadows said that the $3 million figure had emerged from discussions between himself, a "Taifeng representative" and Mr Hoskins. He had been more inclined to a figure of $5 million than $3 million but, in the interests of good relationships within the Joint Venture, had been willing to bend on that. Mr Meadows said that based on previous experience with other mining companies, he had thought that the figure should be "a month plus". When it was pointed out to him that this would require a reserve of $12-$15 million, Mr Meadows backtracked and said that he had thought that a figure in the range $3-$5 million, with the support of the shareholders would be sufficient. Mr Meadows could not explain how he had derived the figure of $3-$5 million, saying that it was "a relatively simple conversation". 423 The "support of the shareholders" to which Mr Meadows referred was a doubtful value, and Mr Meadows must have known that. IMX did not have the capacity to fund Termite (and in fact was indebted to it) and Taifeng had made very clear that it was not willing to invest further funds. 424 In his cross-examination, Mr Meadows said that one reason he had not been "hung up" on whether the cash reserve was $3, $5 or $6 million was because, in the event of a downturn, it had been open to Termite to stop distributions. The difficulty with that explanation is that, as Mr Meadows well knew, a downturn could occur rapidly and without forewarning, leaving little time for the form of ameliorative action he contemplated. Furthermore, the pricing mechanism in Termite's contracts meant that it could well receive less for its ore than the amount it had anticipated when incurring the expense of mining, hauling and shipping the ore, with no possibility of mitigatory action with respect to those expenses. 425 Mr Meadows acknowledged holding the view that, in the absence of a reasonable assurance of the shareholders' support and taking into account the time required to access that support, the minimum reserve he thought appropriate was equivalent to approximately six weeks of expenditure. He also agreed that he had known that six weeks of expenditure would be equivalent to a figure of approximately $18 million. Mr Meadows said that he had also thought in March 2013, when considering the adequacy of the reserve, that the Joint Venture could return cash to Termite if required. 426 In relation to a reserve of six weeks expenditure, Mr Meadows said that he had been taking into account not just cash but also "near cash equivalent". By this he meant Termite's stockpiles of mined ore. He said that these were approximately 250,000 tonnes and could make up three shipments earning $7-$8 million each. Mr Meadows also claimed to have been influenced by the fact that LinQ had required a $3 million cash reserve as part of its facility. 427 I had the strong impression that Mr Meadows' claim of reliance on the Termite stockpiles comprised a retrospective rationalisation. I do not consider that it formed part of his thinking in March 2013 concerning the adequacy of $3 million Cash Reserve. As in the case of Mr Nitschke, I consider that Mr Meadows' reference to the LinQ facility was also a retrospective rationalisation. I consider it more likely that Mr Meadows relied on "gut feel", to use his own expression, but that that "gut feel" was influenced by IMX's pressing need for cash and his desire to secure Taifeng's agreement. 428 I will address later the evidence relating to the claim that the stockpiles of ore were "near cash equivalent" but indicate now my satisfaction that they could not have been so regarded. 429 Earlier, I referred to Mr Meadows' evidence that he and Mr Hoskins had requested Mr Dunstan to carry out an analysis of previous iron ore price movements with a view to determining whether a pattern could be identified. Mr Meadows was certain that Mr Dunstan had completed his work well before April 2013. However, in answer to Termite's call for production, the defendants produced three documents, none of which referred to an analysis by Mr Dunstan and two of which had in any event been prepared after the adoption of the Distributions Policy. There is no other document evidencing an analysis by Mr Dunstan. In these circumstances, I consider that Mr Meadows' recollection is mistaken and that, if Mr Dunstan did carry out any analysis of the kind described by Mr Meadows, it occurred after 12 March 2013. Accordingly, it could not have been taken account of in the adoption of the Distributions Policy.

Mr Parsons 430 In his s 597 examination, Mr Parsons said that he had "vague recollections" of conversations concerning the adequacy of the $3 million but could not recall their details; that he had thought its adequacy would be "driven by what the length of the dip in the iron ore price was going to be"; but did not recall thinking about "how many shiploads worth of iron ore would be able to go out in loss-making circumstances at various falls in the iron ore price". He also said that he thought it likely that the decision as to the figure of $3 million was made at the Outback Board level. 431 In his cross-examination, Mr Parsons confirmed that he could not recall any discussion involving the sufficiency of $3 million as a reserve. He also volunteered that "maybe it's something that wasn't considered because we were actually seeing good costs, good margins and good production". He described the question of how long a $3 million cash buffer would last as "a very big question". 432 Finally, Mr Parsons confirmed that all the work which was done by way of consideration of the adequacy of the $3 million Cash Reserve took place in April and May 2013, subsequent to the adoption of the Distributions Policy.

Mr Sun 433 In his s 597 examination, Mr Sun said that he had not been involved in the formulation of the figure of $3 million, only in its approval. He had known, however, that Termite's monthly expenditures were "many multiples of $3 million", and that the $3 million Reserve assumed that those expenditures had been "all covered already". He had also known that "if one ship went wrong … the $3 million wouldn't cover the - one ship of - worth". Mr Sun acknowledged that a $3 million buffer would "definitely not" be sufficient if Termite experienced a downturn in the iron ore price "for one month or two months or three months". 434 In his cross-examination, Mr Sun qualified that answer by suggesting that the sufficiency of the $3 million buffer would depend on the extent of the downturn. He also said that he had thought in March 2013 that the "management were forecasting that all the outgoings could be met from sales, that was only as reliable as their assessment of the iron ore price into future". Mr Sun said that he had also taken into account other factors, being the cash reserve in the LinQ facility, market conditions, the cash flow forecasts and the management of the operation at that point. I had the strong impression that Mr Sun had rehearsed this evidence. It had the character of a retrospective rationalisation. I did not regard this evidence as reliable.

Mr Pang 435 Mr Pang's evidence was that he and Mr Sun had discussed the Distributions Policy with a Mr Wu at Taifeng before approving it at the Board meeting of Outback on 12 March 2013. He claimed that it had been Termite which wished to repay the Taifeng loan as soon possible, and that Mr Sun and he had been passive in that respect, just voting "yes or no". He said that he had not had any input into the figure of $3 million and had relied on management's suggestion. Mr Pang also said that he had been told by Mr Hoskins that the $3 million Cash Reserve was based on the cash flow forecast, that that been the extent of his conversation, that he assumed that management had undertaken an analysis of the risks of the fluctuating iron ore price, and that the adequacy of the reserve required a judgment from Termite. Finally, Mr Pang confirmed that there had not been any discussion at the Outback Board meeting concerning the figure of $3 million. 436 I accept that evidence, other than the claim that it was Termite which wished to repay the Taifeng loan as soon as possible. 437 In summary, the evidence of the defendants about the origins of the $3 million figure and consideration of its adequacy was diverse and unsatisfactory. 438 The implausibility of the defendants' evidence concerning the adequacy of $3 million figure is underlined by the fact that it was less than the amount of $5 million which the Joint Venturers themselves had proposed in the drafts of the shareholders' agreement as being a cash reserve sufficient to enable Outback "to pay its operating and capital cost requirements for the next three (3) months … without the need to call on the Parties to make contributions …". Mr Hoskins had reminded Mr Pang of this in an email on 29 December 2011, telling him that a cash reserve of that order "is generally required by a mining operation of this size".

The $3 million figure was adopted without a proper basis 439 In his cross-examination, Mr Nitschke acknowledged a number of matters concerning his approval of the Distributions Policy: that he had not relied on any analysis by management concerning the sufficiency of a reserve of $3 million; that such consideration would have required "a detailed analysis of the company's operations and its finances"; that a proper analysis as to the band of foreseeable changes in iron ore prices and their implications for the company's working capital would have been necessary; that an appreciation of the foreseeable movements in the currency exchange rate and its implications on Termite's working capital would have been necessary; that no specific work had been done at the time the Distributions Policy was approved on the band of foreseeable movements in the exchange rate; that an understanding of the potential outages of mining operations to enable a consideration of the effect of suspension of activities upon working capital requirements would have been required; and that he was not aware of any of these analyses having been carried out. In my view, these were sensible concessions by Mr Nitschke. They point up the shortcomings in the defendants' selection of the figure of $3 million as the Termite Cash Reserve and warrant the conclusion that the $3 million figure was adopted without a proper basis. 440 Earlier in these reasons, I noted the four action items requested by the IMX Board in its meeting on 28 March 2013. Mr Nitschke agreed in his cross-examination that a reasoned decision on how much cash was required to survive a "perturbation" required the completion of the requested analyses. In re-examination, Mr Nitschke maintained that answer and explained: I think what I was trying to say was that in March 2013 we needed a distributions policy to satisfy the auditor. And my recollection is that my impression was that we were going to continue with the $3 million, because that was the cash available, that was the number that was in the LinQ debt facility. I believe that there were some qualitative issues that I could take into account. 441 Apart from the reference to his reliance on the LinQ facility amount (which as indicated I do not accept), this evidence was tantamount to an acknowledgement that the driving considerations had been satisfying KPMG and the availability of the cash for the benefit of IMX and Taifeng. A detailed analysis of the kind outlined by Mr Nitschke as being appropriate had not been undertaken. 442 I think it likely, and so find, that Mr Hoskins simply inserted the $3 million figure into the Distributions Policy without any consideration of its appropriateness, having regard to the contingencies for which it was intended to provide. In proposing $3 million, Mr Hoskins may have been influenced to an extent by the fact that it had also been the required reserve in the LinQ facility, but I am not satisfied that he, or any of the other defendants, based their decision on the LinQ facility 443 Some of the defendants gave no more than superficial consideration to the adequacy of the $3 million figure and some, like Mr Parsons and Mr Pang, gave it no consideration at all. Instead, the factor operating in the minds of several defendants was the desire to maximise the distributions which could be made: in the case of IMX because it was dependent on that cash and in the case of Taifeng, to secure recovery of its investment in a marginal iron ore operation. It was the need of IMX for cash which led Mr Meadows not to insist on a reserve equivalent to about six weeks of expenditure, that is, about $18 million. 444 I am satisfied that each of the defendants knew on 12 March 2013 that Termite did not have access to any credit facility. Further, each knew that Taifeng had previously refused to make any further advances, even when it was called upon to do so under the HoA. There was nothing to indicate any change in attitude by Taifeng. That it had not changed its mind was confirmed by Mr Sun and Mr Pang at the Outback Board meeting of 22 May 2013. The minutes of the meeting contain the following entry: Taifeng confirmed that it would not be providing any future cash injections to support Termite. 445 By reason of its own illiquidity, IMX itself did not have the means to provide capital funding to Termite. In their s 597 examinations, each of the defendants, other than Mr Pang, acknowledged that they had known this to be the case.

Absence of ongoing review of the adequacy of the $3 million Reserve 446 The evidence indicates that the defendants gave some consideration in April and May 2013 to the adequacy of $3 million as a reserve, but not thereafter until, at least, February 2014. 447 It is plain that the Termite Board, as a Board, never addressed the adequacy of the $3 million Reserve. After 12 March 2013 it did not meet again until June 2014, shortly before resolving that administrators be appointed.

The Outback Board meeting of 27 March 2013 448 The matter was, however, considered by the Outback Board. In relation to the cash flow forecasts provided as part of the Board Pack for its meeting of 27 March 2013, the minutes of that meeting record that: The CFO [Mr Hoskins] stepped through the cash flow forecast included in the Board papers, with particular reference to the following: • As a result of the recent decline in the price of iron ore, final invoices in the immediate future would now result in payments rather than receipts; • Work is currently being carried out to understand the cash required to be maintained in order to enable the Company to be manage[d] through any future sharp fall in the iron ore price; and • The Termite distributions policy reverts to the Board for ratification on a six monthly basis, however each month, Outback agrees on the cash reserve to be retained in order to ensure that the Company can meet its potential liabilities under different contracts. 449 Each of Mr Nitschke and Mr Hoskins said in their evidence that the reference in these minutes to "the Company" was a reference to Outback. That view may be open to question. There are several instances in which the term "the Company" in the minutes seems to have been used with reference to Termite. Further, it was Termite and not Outback which had the liabilities under the "different contracts". However, counsel for Termite accepted that the references to "the Company" were a reference to Outback. Accordingly, I will proceed on the basis that the quoted passage records a discussion by the Outback directors in respect of the position of Outback only. 450 If it be correct that "the Company" is Outback and not Termite, then it means that the consideration at the Outback Board did not extend to the adequacy of the Termite Cash Reserve for Termite.

Mr Hassard's draft analysis of 9 April 2013 451 The "work … being carried out" to which the Outback minute referred was initially undertaken by Mr Hassard and reviewed by Mr Hoskins. On 9 April 2013, Mr Hassard provided a draft analysis with four downturn scenarios: (a) the forecast 2013 iron ore prices but replicating the prices and duration of the September 2012 Downturn; (b) the same as (a) but with the iron ore prices being 10% less during the downturn and the downturn extending for 10% longer than had been the case in 2012; (c) the same as (a) but with the lowest price in the September 2012 Downturn (Platts 62% CIF of $88/tonne) continuing for one month before recovering in the same "curve" as it had in 2012; and (d) the same as (a) but with the lowest price in the September 2012 Downturn (again Platts 62% CIF of $88/tonne) continuing for two months before recovering in the same "curve" as it had in 2012. 452 Mr Hassard noted in the draft that, under all four scenarios, there were "multiple months of negative cash flows". I will indicate those shortly. Mr Hassard concluded his draft analysis with the following: A cash reserve would need to be held in order for the Joint Venture to stay cash positive and not require JV partner contributions of funds during these months of negative cash flows. In order to build these cash reserves, partner distributions would need to be reduced or suspended in the months leading up to the expected negative cashflow period. … Management will review the iron commodity market forecasts and indicates in advance of each monthly distribution. However given the 2012 iron price collapse occurred with no warning from forecasters, it may be prudent to ensure an additional $6.2m is maintained in cash reserves leading up to the October 2013 period. (Emphasis added) 453 In effect, Mr Hassard was recommending that the Termite Cash Reserve should be $9.2 million. 454 Mr Hassard revised this analysis following a critique by Mr Hoskins. Mr Hoskins suggested (and Mr Hassard agreed) that he remove the words "given the 2012 iron price collapse occurred with no warning from forecasters, it may be prudent to ensure an additional $6.2m is maintained in cash reserves leading up to the October 2013 period". Mr Hoskins suggested instead that the analysis refer to the low level of stockpiles at Chinese ports indicating that a decline like the September 2012 Downturn was unlikely and continue: Despite this, the 2012 downturn occurred very quickly so if prices drop significantly over a short period, it may be prudent to hold back a distribution. 455 That is to say, not only did Mr Hoskins intervene so that Mr Hassard's recommendation of an additional $6.2 million reserve did not go to the Outback Board, he suggested that the holding back of a distribution be considered only if "prices drop significantly over a short period". In his cross-examination, Mr Hoskins explained why he had not recommended to the Outback Board that distributions cease while Termite explored alternative means of protecting itself against a downturn: Well part of me as being part of IMX would have wanted distributions to occur. But like I said before, we were still deciding whether a cash reserve or hedging was the appropriate means for protecting Termite from those events. And this was an interim report that - the following month we would be able to come back on that. I thought that, with the exception of the first sentence, this evidence was unsatisfactory. I consider that there were two principal reasons why Mr Hoskins did not wish the recommendation to go the Board: IMX's need for cash (which he acknowledged in the first sentence), and the avoidance of the creation of the paper trail about which Mr Nitschke had cautioned him. In fairness to Mr Hoskins, I accept that later he did recommend an increase in the reserve to $6 million.

The Downside Analysis: Interim Report of 29 April 2013 456 The results of Mr Hassard's analysis were presented to the meeting of the Outback Board on 29 April 2013 in a report entitled "Iron Ore Price Downside Analysis - Interim Report". The report included the following: Scenario Negative Months Combined Negative Cash flows Scenario Forecast Cash Flow (Apr 13- Management Forecast Cash Flow (Apr 13-Mar 14) Variance* (A$) Mar 14) 1 Oct 13-Nov 13 ($6.2m) $21.0m $26.9m ($5.9m) 2 Jul 13-Nov 13 ($11.0m) $12.1m $26.9m ($14.8m) 3 Oct 13-Dec 13 ($10.0m) $17.2m $26.9m ($9.7m) 4 Oct 13-Jan 14 ($13.8m) $13.0m $26.9m ($13.9m)

*Variance not exactly equal to difference in negative cash flows due to timing of cash flows between months that could make a month cash flow positive or negative. A cash reserve would need to be held in order for the joint venture to stay cash positive and not require JV partner contributions of funds during these months of negative cash flows. In order to build these cash reserves, partner distributions would need to be reduced or suspended in the months leading up to the expected negative cash flow period. Regarding forecasting one of these downturns, Management will continue to monitor stock levels at discharge ports in China because if they remain at historically low levels, it is difficult to see one of these downturns occurring. Despite this, the 2012 downturn occurred very quickly so if prices drop significantly over a short period, it may be prudent to hold back a distribution. (Emphasis added) As is apparent, each scenario showed that Termite would suffer losses, with the minimum loss being a figure of $6.2 million and extending for two months. 457 I infer that the recommendation in Mr Hassard's draft analysis that an additional $6.2 million be maintained in the reserve was based on the forecast negative cash flows for October and November 2013 in Scenario 1, that is, the most favourable of the four scenarios. 458 The Executive Summary in the Interim Report also included the following: This analysis will be updated over the coming month and will be compared with the hedging alternatives available and presented as a strategy for the JV to manage the potential iron ore price downturns for the remainder of the Cairn Hill project. 459 The minutes of the meeting of the Outback Board on 29 April 2013 in relation to this item are as follows: The CFO [Mr Hoskins] explained the approach taken to the analysis of the most recent downturn in the iron ore price and the impact on the Company. Feedback was sought from Board members with a view to submitting a final report at the Board meeting on 22 May 2013. Action: Prepare final iron ore price downturn analysis report. 460 In respect of the draft analysis in April 2013, Mr Nitschke said that he would assign a high probability to Scenario 2 occurring and that, in April 2013, he had thought that Scenario 1 was the most likely. That is, Mr Nitschke thought it likely that Termite might trade at a loss for 2-5 months, and experience losses in the range of $6.2 million-$11 million. He also had said that he had appreciated that, based on the numbers in Mr Hassard's report, the $3 million Reserve would not be enough for Termite to survive a downturn of the same magnitude as the September 2012 Downturn. Mr Hoskins accepted that the $3 million Termite Cash Reserve was insufficient to enable Termite to trade through any of the four scenarios and that if any of them occurred, it was likely that Termite would pass into administration. 461 Mr Parsons said that he had thought that, while overall the cash flows would be positive, there would be months in which the cash flows would be negative, that Termite needed protection in respect of those months and that he had thought that $3 million would not be sufficient for that purpose. 462 In his cross-examination, Mr Nitschke confirmed that the Outback Board meeting on 29 April 2013 had not contemplated deferring the implementation of the Distributions Policy until the final downturn analysis report had been received. He said that there was no reason to do so because the project was, at the time, strongly cash flow positive.

The Outback Board meeting of 22 May 2013 463 The Iron Ore Price Downturn Analysis in its final form was presented to the Outback Board meeting on 22 May 2013 together with another document entitled "Risk Management Strategy - Iron Ore Price Downturn for Approval" (the Downturn Strategy Document). I am satisfied that this analysis was prepared by Mr Hassard but reviewed by Mr Hoskins before it went to the Board. At about the same time, by an email of 20 May 2013 to Mr Hassard and Mr Parsons, Mr Hoskins recommended a temporary deferral of the May distributions: I would recommend holding off on distributions for this week until the Board have had a chance to discuss the cash reserve. We all know it's quite difficult to get cash back out of Taifeng if we needed a contribution. 464 Mr Hassard's analysis included the following: Scenario Negative Months Combined Negative Cash flows Scenario Forecast Cash Flow (May 13 - Management Forecast Cash Flow (May 13 - June 14) Variance* (A$) June 14) 1 Oct 13-Nov 13 ($2.8m) $27.8m $34.4m ($6.6m) 2 Jul 13-Nov 13 ($6.7m) $21.7m $34.4m ($12.7m) 3 Oct 13-Dec 13 ($6.9m) $23.9m $34.4m ($10.5m) 4 Oct 13-Jan 14 ($11.8m) $19.9m $34.4m ($14.5m)

These numbers are better than the analysis presented in the previous month due to grades for final invoices being corrected to anticipated grade and not specification grade. So the negative cash flows are what the JV would experience this year but as grades deteriorate in Pit 2, the required cash reserve will need to increase. Regarding forecasting one of these downturns, Management will continue to monitor stock levels at discharge ports in China because if they remain at historically low levels, it is difficult to see one of these downturns occurring. Despite this, the 2012 downturn occurred very quickly so if prices drop significantly over a short period, it may be prudent to hold back a distribution as additional cash reserve in the JV. (Emphasis added) 465 As can be seen, although each of the four downturn scenarios produced combined negative cash flow for periods between 2-5 months, the figures shown were less than those presented in the interim analysis (being $3.4 million, $4.3 million, $3.1 million and $2 million respectively less than the counterpart figures). The paper attributed these changes to the "grades for final invoices being corrected to anticipated grade and not specification grade". 466 Both Mr Hoskins and Mr Parsons agreed in their evidence that the changes in the grades of ore could not explain these differences. They were correct to do so, given Mr Nitschke's evidence that a variation in the grade of ore would make a difference of only $1 and $2 per tonne only (a maximum of $600,000 in the 300,000 tonnes shipped in two months). Mr Nitschke said that he had not doubted the explanation of Termite management, but acknowledged that he may have been "remiss" in not doing so. 467 Termite's worksheets indicate that a number of assumptions upon which the forecasts were made had been varied between the April and May analyses. These included lower currency exchange rates (although the rates used were more optimistic than forecast by Consensus Economics), changes in the identity of the ships which would transport the ore, changes in the discounts applicable to different ships, and, for reasons which were not explained in the evidence, the exclusion of one invoice from Exact in the May analysis (with the effect that an expense of $5,644,281 was excluded). 468 I accept Termite's submission that, given these matters, a number of the changes in the assumptions were highly subjective, that the explanation provided to the Board of Outback was both incomplete and misleading, and that the circumstance that subjective changes to the inputs could have such a marked effect upon the projected outcome of a downturn, should it occur, only served to highlight the risks which Termite faced. 469 The Downturn Strategy Document indicated its purpose being to identify "a strategy to either protect the JV from the expected sharp but short-lived iron ore price downturn in the latter half of the 2013 calendar year or ensure enough cash is held to absorb losses incurred during the downturn". It concluded that hedging was unlikely to be effective, having regard in particular to its high cost. The Executive Summary in the document included the following: A cash reserve provides the JV with the ability to withstand the short term and sharp drop expected in the iron ore price and can also be used to absorb cash shortfalls experienced as a result of operational delays. A cash reserve will not however protect the JV from a prolonged iron price downturn. Given Management's expectation is that a sharp and short-lived downturn is likely to occur in the second half of calendar year 2013, its recommendation is that the JV's cash reserve is increased from $3m to $6m which would be enough cash for 2013 to withstand a downturn that is 10% worse or more prolonged than that experienced in 2012 and also to withstand potential operational delays. (Emphasis added) 470 Later, the Downturn Strategy Document identified some advantages and disadvantages of maintaining a cash reserve. The identified disadvantages were: • does not actually protect from downside risk, just gives JV the ability to withstand it in the short term; • still exposed to a long term downturn; • when establishing the cash reserve above $3m, it reduces distributions to JV partners (which is difficult for IMX given its current cash flow situation). (Emphasis added) 471 The Downturn Strategy Document also addressed some operational risks including rail and shipping delays and continued: It is clear from the table that a cash reserve of at least $6m should be held to protect the JV against operational delays. It should be noted however that these scenarios could occur at the same time as any one of the financial scenarios in section 2.0. (Emphasis added) 472 The Document also referred to the view expressed in the HSBC Steel Weekly that the iron ore price "tends to be 'dippy' in that it goes through periods of rapid decline and recovery … lasting approximately 25 trading days from start to finish …". The paper concluded: Due to Management's forecast that any downturns will again be short-lived, the establishment of a $6m cash reserve (from the current level of $3m) to withstand a downturn that is 10% worse or 1 month more prolonged than 2012 and any potential operational delays is recommended. IMX is not currently in a position to forego distributions from Cairn Hill but if the IMX cash position were to improve, distributions should be retained in the JV to build up a cash reserve of at least $6m. Whilst IMX remains secondary guarantor to the Flinders Ports contract, it would be preferable for the portion of this cash reserve equal to the prevailing termination payment to sit at Outback level. (Emphasis added) 473 The minutes of the Outback Board meeting for 22 May 2013 record in respect of this item: Mr Hoskins explained that owing to the cost of hedging and the relatively short duration of previous iron ore price downturns, hedging, in the form of put options or zero-cost collar structures, were unlikely to adequately protect the Company against a sharp downturn in iron ore prices. An alternative approach to managing such a downturn, involved retaining a cash reserve at Outback, the quantum of which was yet to be finally recommended, but was expected to be in the order of $6 million. The Board agreed to defer any discussion on the Company's approach to managing a downturn in iron ore prices until a decision on Cairn Hill Pit 2 had been made. Action: Assess the impact of spending an additional $3 million on mining additional material at Cairn Hill compared with spending the same amount of money on hedging. (Emphasis in the original) 474 As can be seen, Mr Hoskins confirmed to the Outback Board that hedging was unlikely to be adequate protection against a sharp downturn in iron ore prices and suggested that the Board consider retaining a cash reserve of the order of $6 million at Outback level. As counsel for Termite submitted, the retention of cash at the Outback level could not, of itself, protect Termite and its creditors: it could protect only Outback and IMX. 475 In his cross examination, Mr Nitschke said that he had been sceptical of the calculations provided in the papers, that he had agreed in principle with the suggestion that the Cash Reserve be increased from $3 million to $6 million, that he could not recall who had raised the alternative approach to managing a downturn recorded in the minutes, and that he did not recall what had been discussed. He also said that the case presented for more cash reserves in Termite was "compelling" and that, while he could not fault the calculations, he had thought they were extreme positions. He said that he had "a clear recollection" of holding the view that the September 2012 Downturn "was the worst possible scenario that we should consider". That evidence cannot be accepted. Mr Nitschke well knew that the length of any "perturbation" was uncertain, that Termite had survived the September 2012 Downturn only because of its recourse to the LinQ facility, and because of the fortuitous happenstance that it coincided with the change in the pricing mechanism in its contracts. The fact that the last two matters could not be repeated made it obvious that a repetition of the September 2012 Downturn would not be the worst possible scenario for Termite. 476 Mr Nitschke disputed that the need to ensure that IMX and Taifeng were "ring-fenced" from Termite was the basis for the decision to defer consideration of an increase in the Cash Reserve. Mr Meadows said that Mr Sun had told the Outback Board meeting on 22 May 2013 that Taifeng did not agree to an increase in the Cash Reserve and would not support the development of Pit 2 because it considered that it had too much exposure to the Cairn Hill operation. Mr Sun on the other hand said that he could not recall having said that and Mr Pang said that he had not heard Mr Sun make such a statement. Having regard to my assessments of the evidence of Mr Meadows and Mr Sun, I prefer the evidence of Mr Meadows. 477 Mr Hoskins confirmed that he had been the principal author of the Downturn Strategy Document and that, despite the risks it identified for Termite, he had recommended that it continue making the distributions until IMX could afford to forego them. He also agreed that retaining a reserve at the Outback level would provide protection for IMX but no protection to Termite. 478 Mr Parsons confirmed in his evidence that he had agreed with Mr Hoskins in May 2013 that the reserve should be increased so as to permit Termite to trade through the various downturn scenarios. 479 As noted, the Board decided on 22 May 2013 to defer discussion on the approach to managing a downturn in iron ore prices until it had made a decision on Pit 2 in Phase 1. That decision was made at the Board meeting of 25 June 2013. It was to proceed with Design 10a, which involved a shallower pit than originally anticipated. 480 Mr Nitschke said that he did not recall any specific discussion of the adequacy of the $3 million Cash Reserve at the Outback Board meeting on 25 June 2013, and acknowledged that had there been any such discussion, it would have been minuted, as would any consideration of management's recommendation that the Reserve be increased to $6 million. 481 Counsel for the defendants submitted that Mr Nitschke's concession that there had been no specific consideration of the adequacy of the $3 million Reserve was not entirely accurate. He noted that the two LoM CFFs considered at the 25 June 2013 Outback Board meeting (for no Pit 2 and Design 10a) showed that the forecast cash at bank at the commencement of every month exceeded $3 million. Counsel also noted that the pricing inputs for June, July and August 2013 were those for a downturn. This meant, counsel submitted, that there had, in effect, been some consideration of the adequacy of the $3 million Cash Reserve. 482 I do not accept that submission. The matters to which counsel pointed do not indicate that actual consideration of the adequacy of the Reserve, only matters to which reference could have been made had there been any consideration. It is pertinent that Mr Nitschke did not regard the presence of these matters in the documents as indicating an actual consideration.

The next consideration of the adequacy of the reserve 483 I am satisfied that the Outback Board did not return to consider the adequacy of the $3 million Cash Reserve until at least 19 February 2014. On 4 February 2014, Mr Hoskins prepared a document entitled "Hedging Recommendation" which was considered by the IMX Board at its meeting on 10 February 2014. 484 The report included the following on its fourth page: The respective Boards and management of IMX and Termite need to consider the amount of the cash reserve left in the joint venture to support the operation. Previous work recommended the JV maintain a cash reserve of $6m to withstand operational delays and short-lived iron ore price downturns. Management's recommendation is now for the cash reserve to be $3m for the following reasons: • The JV has operated effectively with cash reserve of $3m for the last 2years. • The recommended hedging solution will provide protection from short-lived downturns and reduce the risk of downturn similar to that in 2012 causing the JV to experience cash flow difficulties. • The iron ore market has proven to be quite stable and the iron ore price outlook for the remainder of the planned Cairn Hill life is positive. • The Cairn Hill operating life is short, with not more than 12 months of operations remaining. Pricing has been fixed for February and in part for March and as time passes without a sharp downturn in the iron ore price the Company's overall exposure to the iron ore price will decrease. (Emphasis added) 485 Mr Nitschke said that the Outback Board had considered this paper at its meeting on 19 February 2014 (at which the attendees included himself and Messrs Hoskins, Sun, Pang and Parsons) and I accept that that is so. However, the minutes of the meeting do not record any decision with respect to the Termite Cash Reserve, and there is no indication in the evidence that the recommendation was considered by the Outback Board. It could not have been considered by the Termite Board as it did not meet until June 2014. I also note that there is no indication that the adequacy of the $3 million Cash Reserve in Termite's interest was ever considered. The introduction to Mr Hoskins' paper suggests that it was the interest of IMX, and not that of Termite, which was prominent: With a short operating life at Cairn Hill and sole dependence by IMX on Cairn Hill for cash flow, the Company has for some time being reviewing available alternatives to provide greater assurance regarding cash flow from Cairn Hill and thereby ensure reliable distributions to IMX. (Emphasis added) 486 I am also satisfied that Mr Hoskins' recommendation contained in the Hedging Recommendation was affected by his failure to appreciate that the linear structure of the LoM CFFs, to which I will refer shortly, meant that they contained the "structural flaw" for which Termite contended.

The reasons for no continuing review of the adequacy of the reserve 487 Mr Meadows and Mr Hoskins gave the following evidence concerning the omission of the Outback Board subsequently to review the adequacy of the Termite Cash Reserve and, in particular, management's recommendation that it should be increased: IMX's need for cash and Taifeng's demand for monies to be remitted to China were competing considerations in any decision to increase the Reserve; the issue had been "parked" given Taifeng's expressed attitude with respect to loan repayments; other reasons for not revisiting the Reserve were that by June 2013, iron ore prices were recovering, Flinders Ports had agreed to the capping of IMX's liability under the guarantee at $3 million and Mr Meadows had not regarded the figure of $3 million as being a problem; and Mr Meadows had not asked for it to be included as an agenda item because "I think deep down we had all come to the view that it was going to stay at $3M and … we had sort of moved on to other stuff at that point". 488 Mr Nitschke's explanation for not revisiting the adequacy of the $3 million Termite Cash Reserve was not altogether clear. He said: I was probably fairly protective of the $3 million in the Distribution Policy because that was already there in place. But I acknowledged that some accommodation had to be made, and the way we dealt with that was when we approved the budget the following month … we decreased the price forecasts, which had the impact of increasing the cash reserve at Termite level without … changing the $3 million. 489 I do not regard that as an adequate explanation. It was a matter of fortuity that the actual iron ore prices for June, July and August were higher than those used in the LoM CFFs. In any event, Termite distributed the cash it received which was higher than forecast, so that it was no longer available to it. The only build up in cash reserves contemplated by the LoM CFFs was in the last few months of mining. That increase could not protect Termite from a sudden downturn occurring at time when its working capital was limited to the $3 million Reserve. 490 In his re-examination, Mr Nitschke said that he had taken into account the hedging arrangements put in place in late 2013 in his consideration of the adequacy of the $3 million Reserve. Again, I had the impression that this was retrospective rationalisation, and I have maintained that view on re-reading the evidence. There is no evidence of any contemporaneous consideration of the adequacy of the $3 million Reserve with reference to hedging. Nor was there any analysis of the potential impact of the hedging on the $3 million Reserve. I consider that this is a matter upon which Mr Nitschke has seized in retrospect. If that be wrong, and account had been taken of the hedging in late 2013 in relation to the adequacy of the Termite Cash Reserve, it points up the omission of any such consideration earlier in 2013. 491 I consider that the principal reasons for the Board not revisiting the adequacy of the Cash Reserve were Taifeng's expressed opposition to any increase and IMX's need for cash. As to the first, Mr Meadows and Mr Nitschke in particular considered it easier to allow the matter to drift than to confront Taifeng. They were in a position of weakness by reason of the requirement for decisions concerning distributions to be unanimous. By failing to ensure at the time of the adoption of the Distributions Policy that the Termite Cash Reserve was adequate, they had put Termite into a position in which it was at the mercy of agreement by Taifeng to any increase in the amount of the Reserve. 492 As to the second, it was the interest of IMX, rather than that of Termite, which prevailed.

Absence of obligation to make repayment of the Shareholder Loans 493 Each of the Shareholder Loans was undocumented, unsecured and interest free. They were made, as the defendants submitted, in the context, and for the purpose, of enabling Termite to pursue the Cairn Hill Project. 494 Termite submitted that, having regard to the status of the Outback-Termite Loan and, for that matter, the Shareholder Loans, it had been under no obligation at all in March 2013 to make any repayment to Outback. This meant that the adoption of the Distributions Policy required it to make payments which, considered from its perspective, were unnecessary. 495 Termite contended that the Shareholder Loans were a form of subordinated debt. In support of that submission, counsel referred to s 563C(2) of the Act which defines "debt subordination" for the purposes of that section as: [A]n agreement or declaration by a creditor of a company, however expressed, to the effect that, in specified circumstances: (a) a specified debt that the company owes to the creditor; or (b) a specified part of such a debt; will not repaid until specified debts that the company owes are repaid to a specified extent. 496 Counsel also referred to the description of subordinated debt by Eric Tse in "Subordinated Debt and the Effect of Adding Section 536c to the Australian Corporations Act" (2002) 9(4), Murdoch University Electronic Journal of Law: The predominant feature of a subordinated debt is that it is a debt that will rank behind other debts but before equity. Although subordinated debt is a form of debt financing, it is in effect a hybrid of both debt and equity. Subordinated debt is often considered as quasi-equity because it shares many characteristics of equity. This hybrid form of financing allows the debtor company to reap the financial benefits of equity together with the taxation and other benefits of debt finance. In fact, it serves as a capital base by providing funds from which the borrower can meet the financial costs of its other debts. (Footnotes omitted) See in addition Re NIAA Corporation Ltd (in liq) (1993) 12 ACSR 141 at 153. 497 Termite submitted that, having regard to this character of the loans, it had obtained no or only minimal advantage in adopting the Distributions Policy. This submission meant that the legal status of the loans, and the parties' understanding of their status, assumed some significance in the trial. 498 The defendants' position with respect to the character of the Shareholder Loans was relatively straightforward. They contended that, because there had been no agreement on the terms of repayment, the monies advanced by Outback to Termite were repayable on demand, in accordance with the principle stated in Ogilvie v Adams [1981] VR 1041, at 1043. In support, the defendants referred to the note in the Termite financial statements for the financial year ending 30 June 2012 to the effect that the Outback-Termite Loan "is currently interest free and has no specified repayment terms". They noted that Mr Nitschke, in his re-examination, had said that he believed that statement to be accurate at the time the accounts were promulgated and that Termite had not provided any evidence of repayment terms in respect of the Outback-Termite Loan. Hence, they submitted, that the Outback-Termite Loan was repayable on demand. 499 There are some indications that the funds advanced by Taifeng were not a loan but instead an investment of equity. For example, on one view of the HoA, Taifeng provided the project funding in exchange for the issue to it of the then contemplated 50% shareholding in Outback; in a public announcement dated 18 January 2011, IMX reported receipt of the final payment from Taifeng for its 49% equity interest in Outback; and, in its annual report of the 2010-11 financial year, IMX referred to Taifeng having made a "purchase" of 49% of Outback. Generally, however, the documents refer to the advances as loans, and the parties' submissions were made on that basis. Accordingly, I will proceed on the basis that that was their character. 500 It seems that the investments were recorded as loans having regard to taxation implications. That is what Mr Hoskins told Mr Pang (copied to Mr Sun and Mr Meadows) in an email on 6 March 2013 namely: [T]he loans were granted a few years ago. The reason it was set up as loans was so that the repayment of the loans was tax free. 501 The position for which Termite contended involved more complexity than that of the defendants. It drew a distinction between the character of the Outback-Termite Loan before the adoption of the Distributions Policy on 12 March 2013 and its character thereafter. In respect of the period before 12 March 2013, Termite submitted that the Shareholder Loans were: (i) interest free; (ii) governed by the HoA which provided for repayment only by distribution of profits and then only with the unanimous approval of the Outback Board; (iii) a non-current liability with the effect that the borrowers had the unconditional right to defer repayment for the following 12-month period; (iv) in the case of the Outback-Termite Loan, incapable of demand without the unanimous approval of the Outback Board; and (v) of a kind which would be written off at the expiration of mining if incapable of being repaid. 502 The HoA, which was the only contractual document between IMX and Taifeng before the funds were advanced, provides only limited assistance in the characterisation of the loan. It was structured on the assumption that the funds would be regarded as equity, so issues concerning the terms of repayment did not arise. Nor did the HoA provide for the duration of the investment, although it is apparent that the parties contemplated that the Joint Venture would encompass Phase 2. With respect to a return on the investment, the HoA provided only that "[a]ny decisions concerning the … distribution of profits are to be the subject of unanimous Outback Board decisions". 503 Termite submitted that the term "distribution of profits" in the clause in the HoA requiring distributions of profits, amongst other things, to be the subject of "unanimous Outback Board decisions", should be understood as encompassing the repayment of the Shareholder Loans and not confined to the meaning of "dividend" or the like. In my opinion, a number of matters indicate that this submission should be accepted. 504 First, the very fact that the Joint Venturers had funded the Joint Venture by loans suggests that they expected that a return on their investment would include repayment of the loans. As the HoA did not provide for any other form of payment or repayment, that makes it natural to understand the term "distribution of profits" as including repayment of the loans. 505 Secondly, the term "distribution of profits" may be understood as reflecting the understanding that, although expressed as loans so as to obtain the most advantageous tax treatment, they were a form of equity or, to use an expression of Mr Hoskins, "akin to equity". 506 I also consider it improbable that the Joint Venturers intended that a loan made by either of them should be repayable on demand. Such an expectation would be inconsistent with the very nature of the business of the Joint Venture, involving as it did a requirement for a long term commitment of funds and the prospect that, for a relatively long period, any such demand could not be satisfied. The Joint Venturers gave expression to this intention by making the distribution of profits the subject of a unanimous decision. 507 That this was important to them was confirmed in the Distributions Policy approved by the respective Boards on 12 March 2013: As per the Heads of Agreement, loans and distributions are subject to unanimous Outback Board approval. I agree with Termite that regard may be had to this post-contractual conduct for the purpose of identifying the terms on which the Shareholder Loans were made: Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [139]-[143]. Even if regard may not be had to this conduct for this purpose, it can indicate agreement by the parties on a new position. 508 There is other post-contractual conduct indicating that the Shareholder Loans were interest free, unable to be demanded by IMX, Taifeng or Outback and, if not repaid from profits on the completion of operations and the final distribution from Termite, would, in effect, be forgiven. Post contractual conduct is admissible for the purpose of ascertaining the terms of the contract (Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 264 ALR 15 at [13], [326]; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61, (2001) 53 NSWLR 153 at [25]-[26]). In particular, evidence of admissions, by words or conduct, of the presence in the contract of a particular term is admissible: Australian Energy Ltd v Lennard Oil NL [1986] 2 Qd R 216 at 237; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255. Conduct of these kinds in the present case includes the following. 509 In its financial statements for the periods ending 30 June 2010, 2011 and 2012, Termite recorded the Outback-Termite Loan under the heading "Borrowings" as a non-current liability. Notes in Termite's 30 June 2011 and 30 June 2012 financial statements included: Loans are made from the Company's parent entity, Outback Iron Pty Ltd. The loan is currently interest free and has no specified repayment terms. 510 There were also notes in Termite's 30 June 2012 and 30 June 2013 financial statements as follows: Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. As Termite had reported the Outback-Termite Loan as non-current, it is apparent that those responsible for its affairs at these times considered that it had an unconditional right to defer repayment until at least 1 July 2013 and 1 July 2014 respectively. 511 In Termite's financial statements for the financial year ending on 30 June 2013 (prepared after the adoption of the Distributions Policy), the classification of the Outback-Termite Loan changed from non-current to current. A note gave the following explanation: The classification of the loan from the Company's parent entity, Outback Iron Pty Ltd, at 30 June 2013 has been assessed as current due to the expectation of estimated cash flow distributions from the Cairn Hill Mining Operation from 1 July 2013 through to the end of June 2014. These forecast distributions have been determined based on the Company's expectations of production levels, iron ore prices and exchange rates being met. There is no contractual obligation to repay the loan over this period and if these expected cash flows do not eventuate, all or part of the loan will not be repaid. (Emphasis added) A note in identical terms was included in the financial statements for the IMX Group of Companies (including Outback and Termite) for the financial year ending on 30 June 2013. 512 Termite's 2012 financial statements were signed by Mr Meadows and the 2013 financial statements signed by Mr Nitschke. Both were prepared by Mr Hoskins. As is apparent, the financial statements for the 2013 year certified that, despite the change in classification of the Outback-Termite Loan to "current", Termite had no contractual obligation to repay the loan. Mr Meadows said that when he had signed the 2012 financial statement, he had satisfied himself that others within the organisation, including the Audit Risk Management Committee, had concluded with the auditors that the Shareholder Loans were a non-current liability. 513 The status of the Taifeng Loan at 30 June 2012 was a matter of concern to the then auditor of the IMX Group, BDO Audit (WA) Pty Ltd (BDO Audit). In a letter dated 21 September 2012 to the chair of the Audit and Risk Management Committee of IMX, Mr Burton of BDO Audit said: Due to the fact that there is no agreement and terms available in relation to the loan, there is a risk that the loan is repayable within the next 12 months and should be classified as [a] current liability. We understand the loan is to be dealt with under the shareholders agreement which has yet to be finalised. … As a consequence of the risks as detailed above we have discussed the classification with management and the implications and obtained [a] written representation from management regarding the classification as non-current. 514 Mr Burton wanted written confirmation of the circumstances which made it appropriate for the Taifeng Loan to be characterised as non-current. On 21 September 2012, he sent to Mr Pang a draft of a letter to be addressed to BDO Audit and signed by Mr Pang as the "authorised representative" of Taifeng. The substance of the draft letter was as follows: Dear Chris, Re: Outback Iron Pty Ltd Further to our conversation on 21 September 2012 in relation to your and Taifeng Yuanchuang International Development Co Ltd's understanding of the Co-operation Heads of Agreement (COHA) with IMX Resources Limited for the Outback Iron Pty Ltd loan in relation to Termite Resources NL, I can confirm the following 1. The balance of the loan is $AUD20,473,678.67 as at 30 June 2012; 2. The repayment of the loan is covered by the Co-Operation Heads of Agreement (COHA); 3. The repayment of the loan will only occur if: (a) There are sufficient funds generated by the Joint Venture Company to allow repayment; and (b) There is unanimous agreement of all Board members to repay the loans. 4. While management reporting forecasts may indicate that loans could be repaid in the next 12 months there is no obligation to repay and the classification as non-current is appropriate for Outback Iron Pty Ltd. 515 Mr Pang refused to sign that letter. This was a source of irritation to Mr Hoskins who returned Mr Burton's draft letter to Mr Pang on 24 September 2012 and again requested his signature. He reminded Mr Pang that BDO Audit required the letter in order to "sign off on the audit". 516 The status of the Taifeng Loan was discussed at the Outback Board meeting on 24 September 2012. The minutes of the meeting record: Mr Hoskins updated the Directors as to the current status of the Taifeng loan repayment terms, noting that IMX Auditors BDO have asked about this matter. Further discussion followed on the classification of this loan. ACTION: Mr Pang and Mr Sun to discuss and resolve this matter with Mr Hoskins. (Emphasis in the original) 517 In his evidence, Mr Nitschke confirmed that the Outback Board had sought confirmation from Mr Pang and Mr Sun that the Taifeng Loan was not repayable within the next 12 months in order to satisfy the auditors that it could be regarded as a non-current liability. Mr Pang gave evidence to similar effect. I accept that evidence. Mr Meadows said that what was also being sought from Taifeng was confirmation that repayment of the Taifeng Loan was to be characterised as a distribution of profits which, under the HoA, would require a unanimous decision by the Outback Board. I accept that evidence. 518 On 25 September 2012, Mr Pang responded to Mr Hoskins as follows: As discussed in Outback Iron Pty Ltd ("Outback")'s Board of Directors (the "Board") meeting yesterday, the loan from Taifeng to Outback would be repay (sic) to Taifeng within 12 months if: 1. Outback/Termite has fully repaid its loan due to financial institution, i.e. LinkQ (sic); 2. Termite has adequate cash flow to operate its mining activities after any repayment to Taifeng; and 3. the repayment shall be reviewed and unanimous[ly] agreed by the Board of Outback; The above understanding would be superseded or/and governed by the shareholder agreement between Taifeng and IMX, which will be executed in due course. 519 In his evidence, Mr Pang said that he had obtained approval from Taifeng before sending his response to Mr Hoskins. Mr Pang also acknowledged that, as an accountant, he knew that the Outback accounts had to reflect the commercial reality and that it was the obligation of directors, when preparing the accounts, to ensure that they did reflect that commercial reality and gave a true and fair view of the company's operations. 520 Later on 25 September, BDO Audit confirmed that Mr Pang's email was sufficient "to support keeping the classification as non-current for 30 June 2012" and it later provided the audit representation letter. 521 Two days later, on 27 September 2012, IMX provided a representation letter to BDO Audit which reflected the terms of Mr Pang's letter: The Group currently records a balance of $20,473,678.67 owed to [Taifeng] as a non-current liability on the Consolidated Statement of Financial Position. The Directors confirm that the balance is not repayable within the next 12 months on the basis that the following conditions to satisfy repayment criteria will not be met in the next 12 months: • Repayment of the external borrowings with LinQ Resources Fund has been made in full • Termite Resources NL, holder of ML 6303, has adequate cash flow to operate the mining activities after any repayment to [Taifeng] • Unanimous consent of the Outback Iron Pty Ltd Board of Directors. 522 Earlier, I referred to the concerns raised by KPMG in relation to the "going concern" statement in IMX's financial statements for the half year ending 31 December 2012. Because IMX was now forecasting the receipt of cash from the repayment of the Shareholder Loans, KPMG considered that the Taifeng Loan should be reclassified as a current liability within Outback's accounts (which, on consolidation, would also make it a current liability in IMX's accounts). Despite that, Mr Hoskins and others appreciated that the re-classification of the Shareholder Loans to current should not have the effect that they could be regarded as repayable on demand. It was that concern which led to the inclusion in the Distributions Policy of the passages set out earlier. 523 Further, the 31 December 2012 half year accounts for IMX included the notation: The classification of the loan from [Taifeng] at half-year end has been assessed as current due to the expectation of estimated cash flow distributions to both shareholders in their respective proportions from the Cairn Hill Mining Operation from 1 January 2013 through to the end of December 2013. These forecast distributions have been determined based on the Group's expectations of production levels, iron ore prices and exchange rates being met. There is no contractual obligation to repay the loan over this period and if these expected cash flows do not eventuate, all or part of the loan will not be repaid. (Emphasis added) 524 Mr Meadows signed the half yearly accounts on behalf of the IMX Board. 525 The position was confirmed again in the note to Termite's financial statements for the financial year ending on 30 June 2013 (made after the adoption of the Distributions Policy) which I set out earlier. 526 Mr Hoskins settled the draft of that note and the directors' declaration was signed by Mr Nitschke on 29 October 2013 upon a resolution of the Termite Board (the directors being Messrs Meadows, Parsons and Nitschke). 527 The consolidated accounts for IMX as at 30 June 2013 contained a similar notation. It was signed by Mr Meadows on a Board resolution (the Board including Messrs Nitschke, Meadows and Sun). 528 The defendants submitted that the notes in the accounts could not control the character of the loans, drawing a distinction in this respect between the classification of a loan as non-current for accounting purposes, on the one hand, and its classification as a loan repayable upon demand as a matter of law, on the other. They submitted that the true character of the loans should be determined independently of the classification given to them in the accounts. I do not accept that submission, for three reasons. 529 First, the distinction sought to be drawn by the defendants is of dubious validity. The accounts of a company, in particular a public company, should reflect the true legal and factual postion. 530 Secondly, s 1305(1) of the Act provides that a book kept by a body corporate under a requirement of the Act is prima facie evidence of any matter stated or recorded in the book. The keeping of financial records is one such requirement (s 286 of the Act). The term "books" includes the financial reports or financial records of a company. Thus, the various financial records are prima facie evidence of the matters included in them. 531 Thirdly, it is not the mere accounting classification which is pertinent for present purposes but rather the evidence which the accounting classifications afford, including their character as admissions by the defendants responsible for their admission and adoption. 532 It is not clear whether Outback kept separate accounts. If it did, they were not tendered, and it is not known how (if at all) Outback recorded the Outback-Termite Loan in its accounts. 533 There is other post-contractual conduct. On 8 March 2013, Mr Hoskins informed Ms Benda, one of IMX's independent directors, that "the loan is only payable if there are cash flows from Cairn Hill. If there were no cash flows, Taifeng couldn't demand repayment". 534 Mr Hoskins made a statement to similar effect in an email to Ms Benda of 6 May 2013: The loans that IMX and Taifeng have with Outback are akin to equity and represent each party's initial investment in Cairn Hill. They were structured as loans so the first distributions were not taxable to IMX. Once Termite has distributed its last dollar, if the loans remain they will need to be written off because the JV partners can't demand Termite repay them. Even if they did, how could Termite pay? It would need money from its JV partners which become circular. (Emphasis added) 535 In his email to KPMG on 5 March 2013, Mr Hoskins described the loan from Taifeng as follows: The shareholder loan from Taifeng is never due and can't be called. It will only be repaid out of cash flows from Cairn Hill. If Cairn Hill was shut tomorrow, that entire loan will be forgiven. It is not a debt. 536 All this evidence indicates that the submission of the defendants that there were no specific repayment terms for the Shareholder Loans, with the effect that they were repayable on demand, cannot be accepted. On the contrary, there were express terms to the effect that there could be no repayments of the loans without the unanimous approval of the Outback Board, that the loans did not have the character of current liabilities, and that repayments could be made only if Termite had adequate cashflows for its business. 537 With respect to the character of the Shareholder Loans after 12 March 2013, I have already referred to notes in the financial statements prepared after that date. In addition, the clause in the Distributions Policy which I have found to have contractual effect is pertinent: All shareholder loans between IMX, Taifeng and Outback and between Outback and Termite are interest free and are for a term of 5 years from 1 March 2013. Repayment of these shareholder loans is unable to be demanded by either Outback (of Termite) and IMX or Taifeng (of Outback). Upon completion of operations and payment of final distributions by Termite, if these shareholder loans remain unpaid, the loans will be forgiven. 538 Termite submitted that the effect of this clause was to declare that the respective loans were of a particular kind, being interest free, for a term of five years from 1 March 2013 and with repayment unable to be demanded by the respective lenders. Further still, if the loans remained unpaid on completion of the mining operations and payment of the final distribution, they would be forgiven. 539 The documentary evidence did not contain any other indication that the loans were for a term of five years commencing on 1 March 2013. Mr Hoskins explained to Mr Pang on 6 March 2013 that he had selected the five year term arbitarily so that the loans would not extend beyond the nine year period after which they could, for taxation purposes, be classified as equity but so it extends beyond the end of the mine life. 540 Termite submitted that this clause too made it apparent that the Shareholder Loans were a form of subordinated debt. It likened the circumstances of the present case to those considered by Gilmour J in Jones, in the matter of Great Southern Ltd (in liq) [2017] FCA 169 at [85]-[146]. Counsel for the defendants disputed the analogy. In the view I take, a detailed analysis of the reasons in Great Southern is unnecessary presently. 541 I consider that Termite's submission with respect to the character of the Shareholder Loans should be upheld. IMX and Taifeng had agreed expressly that the JV Loans were interest free and that repayment (distributions) could be made only with the unanimous agreement of the Outback Board. Neither IMX nor Taifeng (or for that matter Outback) could make an enforceable demand for repayment. The parties had declared expressly that that was so. They were a form of quasi-equity. The Outback-Termite Loan had the same character. 542 This also means that I do not accept the defendants' submission that Termite had an immediate liability with respect to repayment of the Outback-Termite Loan. The Distributions Policy had expressly acknowledged and confirmed that the Shareholders could not demand repayment of the respective Loans. From Termite's perspective, it was not under any obligation to make repayment of the Loan, and, from its perspective, the distributions were accordingly unnecessary. 543 In case it should become relevant later, I indicate that I regarded much of Mr Hoskins' evidence on this topic as unsatisfactory. Despite the numerous contemporaneous statements made by him to the contrary, he claimed in his evidence to have understood in March 2013 that the loan from Taifeng, being undocumented, was repayable on demand, that he had known that it was not true to say that the Shareholder Loans were for a term of five years from 1 March 2013, that the loans were capable of being demanded because there were no signatures to the Distributions Policy, and that he had inserted into the Distributions Policy the words concerning the loans being unable to be demanded purely for tax reasons. He also said in his evidence that he had not regarded as true his statement to KPMG that "[t]he shareholder loan from Taifeng is never due and can't be called … [i]f Cairn Hill was shut tomorrow, the entire loan would be forgiven. It is not a debt". 544 This was surprising evidence from a person holding the position of Chief Financial Officer in a publicly listed company. I had the firm impression that Mr Hoskins gave these answers only because they suited his purposes in the litigation. The true position is that in March and May 2013, Mr Hoskins had believed that the statements which he made to Ms Benda and to KPMG were truthful and he did have the understanding concerning the status of the Shareholder Loans which he reported to them. These were some of the many matters which had caused me to have reservations about the reliability of Mr Hoskins' evidence. 545 In summary, I accept Termite's submission that the Shareholder Loans were for the duration of the mining activities and, without a unanimous decision by the Outback Board permitting distributions in repayment of the loans, were not repayable earlier.

Termite's financial performance before 12 March 2013 546 Termite submitted that its financial performance before the adoption of the Distributions Policy was, by itself, a cause for circumspection by the defendants before adopting the Policy. 547 It will be recalled that Termite commenced mining operations in May 2010. Its financial reports indicate the following: 30.6.10 $'000 30.6.11 $'000 30.6.12 $'000 7 months to 31.1.13 $'000 30.6.13 $'000 Revenue from sales - 61,174 190,825 103,649 193,568 Cost of sales (2,706) (41,986) (182,510) (102,337) (194,183) Gross profit (2,706) 19,188 8,315 1,312 (615) Net profit (2,903) 8,674 6,023 (2,404) (2,821)

548 I have included the figures for the seven month period to 31 January 2013 because this was the last completed month for which the financial statements were available before 12 March 2013. Termite's financial performance for that seven month period had been affected by the September 2012 Downturn. 549 As is apparent, Termite's financial performance was variable, producing net profits at some times and losses at others. No doubt this reflected some of the inherent risks in mining operations and which are taken into account as a matter of course by those engaged in mining. The amounts of gross and net profits appear also to have been modest. I agree with Termite that its modest and variable financial performance before and after March 2013 was a cause for circumspection before any decision was made to pay away the proceeds of the operations, especially given the ongoing liabilities of Termite to the Services Contractors and the Tail Liabilities.

Termite's LoM CFFs and the ETPs 550 Until June 2013, the spreadsheets containing Termite's LoM CFFs did not include the ETPs at all. This may be explicable because, at least until late 2012, Termite had contemplated that mining would continue for the planned life of the mine, that is, until May 2015. 551 However, greater attention was given to the ETPs in relation to the cash flow forecasts after March 2013. The paper accompanying the spreadsheet for the March 2013 cash flow forecast (which was prepared after the adoption of the Distributions Policy) contained an estimate of the ETPs totalling $5.8 million at an end of mine life in February 2015. It also included the following note: As per the executed Distributions Policy, the Board will decide whether cash should be held back for these penalties at Outback prior to the next expected distribution on 20 April 2013. Any cash held back would decrease the forecast distributions reported above. 552 However, the minutes of the Outback Board meeting do not contain any reference to consideration of the issue. 553 In his draft of the paper accompanying the cash flow forecast of 19 April 2013, Mr Hassard again included the estimate of ETPs at February 2015 of $5.8 million. However, this section was not included in the version of the paper presented to the Board. This was because Mr Hoskins had directed its deletion: The Board didn't make a decision on keeping funds at Outback level for penalties but they did decide not to write it down every month due to creating a paper trail and … admitting that these penalties would be owed. So please delete the bottom section 3.0 and send through to Stuart M as final. (Emphasis added) 554 There is no reason to doubt that Mr Hoskins was reporting accurately on what the Board had decided. I am satisfied that the paper trail about which the Board was concerned was one which would be available to an administrator or a liquidator in the event of Termite's insolvency indicating its consideration of these liabilities and the Board's awareness of them. Mr Hoskins admitted as much in his cross-examination. IMX's need for cash at the time meant that it did not wish to have additional monies retained by Termite. Mr Hoskins explained this in an email exchange on 19 April 2013: Hassard email to Hoskins (copied to Dunstan and Parsons) Attached for review. Kept the document very short, but left on and rolled forward that the Board needs to decide if money to be held back for potential termination penalties at end of mine life (as far as I know, they did not make a decision on this yet). Hoskins email to Hassard (copied to Dunstan and Parsons) This will be a rolling item but given the current requirement by IMX for the cash, it may be a couple of months before a decision is made. Or they may wait until the cash is in the door at IMX level. (Emphasis added) 555 The ETPs were first included in the LoM CFFs in June 2013. In respect of the Design 10a alternative, ETPs of $6.5 million were shown as being payable in March 2015. The same figure was shown in the LoM CFFs presented to the Outback Board in July, August and September 2013. An unexplained curiosity is that in the LoM CFF for July 2013, the ETPs were, unlike the other months, forecast to be paid in April 2015. 556 In October 2013, the estimate of ETPs in the LoM CFF was increased to $7.5 million (the discovery of a band of waste in the mine meant that less ore could be mined) and forecast to be paid in March 2015. In the December 2013 LoM CFF, the ETPs estimated to be payable in March 2015, were reduced to $6.9 million. The Board papers did not explain the reason for the reduction. 557 It seems that comparable LoM CFFs were not prepared for the subsequent months because, in early 2014, modelling included the impact of Phase 2. 558 Two features of LoM CFFs are apparent. First, they related only to a planned cessation of mining or the end of the anticipated mine life. As such, they did not contain any provision for the contingency of an unplanned earlier termination of mining. Secondly, the LoM CFFs did not make any allowance for the fact that the ETPs would be payable at the end of mining whereas the effect of the earlier distribution of the profits (without any entitlement to recover them) would mean that they would not be available to meet the liabilities when mining ceased. 559 It was obvious that, in the event of an unplanned cessation of mining because it was uneconomic or because of Termite's insolvency, the ETPs would be much higher than the figures included in the LoM CFF model. A document prepared by Termite's management in early 2013 had demonstrated that ETPs of $25.4 million would be payable if mining activities ceased in January 2013 and that that figure would reduce with each passing month to $16.8 million in December 2013 and to $7.5 million by December 2014. Mr Hoskins indicated his awareness of the issue in his enquiry of Mr Hassard on 21 March 2013: Regarding the penalties, do we need to comment that these assume we can produce ore from Cairn Hill until February 2015 under Design 10a? Because [the Flinders Ports] penalty would be much higher if we went into liquidation tomorrow. 560 The evidence demonstrates amply, in any event, that each of the defendants knew that if mining ended prematurely, Termite would have a significant liability for ETPs.

Structural flaws in the LoM CFF 561 A principal submission of Termite was that, even it had been able, despite the distributions, to survive a short term downturn, the adoption and implementation of the Distributions Policy meant that it was dependent on the last few months of mining being sufficiently profitable to allow it to satisfy its liabilities to creditors at the end of the mining. That was a consequence of cash not being held back to allow it to meet its "back-ended" liabilities. That is to say, the continuation of distributions, subject to the Cash Reserve of $3 million, meant that the ETPs could be satisfied only if the last months of mining proceeded to at least the forecast levels. If they did not, Termite would not derive sufficient income with which to pay the ETPs. 562 Termite submitted that, had the defendants discharged their duties, they would have ensured that a sufficient reserve was kept so as to enable it to honour its ETP liabilities, if the risks that mining could not proceed to the conclusion as planned were realised. 563 The circumstances which led the directors of Termite to resolve on 18 June 2014 that administrators be appointed illustrates the position for which Termite contended. The concern of Termite's management at the time was that Termite would not be able to pay the liabilities which it was then incurring when they became payable in August. That was in a circumstance in which, with the exception of a few days around 10 March 2014, the iron ore price had been below Termite's calculated break-even price only since 28 April 2014, a period of 51 days. That is to say, it was a downturn only seven days longer than the September 2012 Downturn which caused the concerns about Termite's solvency, the decision to place it into administration, and therefore the incurring of the ETPs. By reason of having paid away the proceeds of mining when it was profitable, Termite had been deprived of the capacity to cope with a downturn which at that time was of less than two months duration. 564 Mr Hoskins' request to WAIS on 17 June 2014 for urgent advice pointed up the difficulty. He provided WAIS with a short term cash flow model and said: The key pieces of advice that we need in my opinion: … 2. The August 2014 issue in terms of when June's invoices will be due (debts we're currently incurring) has blown out to $4.1m. Whilst I think if we wanted to, we could manage it with our contractors, given the large negative number at the end of the mine life, I figured this would just be pointless and unethical to ask a contractor to take on this risk? … 565 Thus, Mr Hoskins appreciated that a negative cash flow of $4.1 million in the context of a predicated longer downturn was sufficient to trigger immediate concerns about Termite's solvency. 566 Termite identified a structural flaw in the LoM CFFs in their assumption that the mining and the receipt of its proceeds would be relatively uniform and linear, so that it did not matter when the profits were taken. 567 The structural flaw is evident in the LoM CFFs provided to the Outback Board at 25 June 2013. It is sufficient to refer to the LoM CFF in respect of Design 10a, as it was that design for Pit 2 which was adopted at that meeting. That LoM CFF contemplated payments pursuant to the Distributions Policy commencing in April 2013 and concluding in October 2014 (save that no payments were forecast for the months of May and July 2013 and a final balancing payment of $384,587 was contemplated for April 2015). The contemplated distribution payments totalled $50.4 million. The LoM CFF also contemplated that mining operations would cease in February 2015, that Termite would continue to receive the monthly revenue from the mining, and that Termite would pay ETPs of $6.5 million in March 2015. The effect of the distributions of $50.4 million being paid by October 2014 while mining would continue until February 2015 and the ETPs being paid in March 2015 meant however that Termite would be reliant on the proceeds of mining in the four months from November 2014 to February 2015, the Cash Reserve of $3 million and the amount of the forecast final distribution of $384,587 (which was in the nature of a balancing payment) in order to pay the ETPs. If the revenue generated in those months was insufficient for this purpose, Termite would not be able to do so. 568 The risk which this involved is evident in the fact that the LoM CFF contemplated 533,000 tonnes of ore being shipped in the four months. It also assumed that in those months, Termite would be paid at the rates of US$107, US$109, US$105 and US$104 respectively. These prices were only a little above Termite's break-even price. The buffer which the final balancing payment of $384,587 provided was fragile, as a drop in the average price per tonne of ore received by Termite of only $0.73 per tonne would result in it being wholly eliminated. 569 The back-ending of the liabilities in a manner which meant that Termite's ability to discharge them was dependent on mining in the last months being profitable is also evident in the LoM CFF presented to the Outback Board in January 2014. It forecast that distributions would cease in May 2014, that mining would cease in September 2014 and that ETPs of $6.9 million would be payable in March 2015. The ore to be shipped from June 2014 until shipping ceased was forecast to be 1,085,811 tonnes. The buffer in the form of a final distribution to be paid in March 2015 was $2,947,989. That meant that, if the price which Termite would receive for its ore was less than the forecast price by only $2.72 per tonne, creditors would not receive payment in full. 570 In effect, the implementation of the Distributions Policy and the LoM CFF involved the front-ending of the distribution of profits whilst significant liabilities were back-ended (that is, would not arise until late in the life of the Cairn Hill Mine). This meant that they involved necessarily the risk that Termite would not be able to pay its liabilities, even though it had had the profits with which to do so. It also meant that that those to whom the liabilities were owed, and not the Joint Venturers, carried the risk that there would be insufficient profits from mining in the last months. 571 The May 2014 LoM CFF had the same "flaw", although Termite's position had, by then, deteriorated. At that stage, distributions had ceased and it was very apparent that the ability of Termite to pay its creditors depended upon its receipts from the ore it would ship in the ensuing months in a deteriorating trade position. The notes accompanying the LoM CFF presented to the Outback Board on 21 May 2014 described the LoM cash flow as "very tight" with distributions of only $1.5 million forecast over the remaining mine life. This was so, even though the Consensus Economic forecast of the Platts Index Price was that it would not fall below US$114 per tonne during that period. 572 Mr Hoskins said that he had not appreciated the structural flaw in the LoM CFFs. Mr Meadows said that he had well understood that large payments may be due at the end of mining operations by way of ETPs but had thought that the absence of distributions in the last six months would allow the accumulation of the cash necessary to make those payments. In effect, he was prepared to have Termite run the risk that it would not be able to accumulate the cash. In relation to the minimal protection provided by the $0.73 per tonne margin, Mr Meadows referred to Termite's stockpiles. I will return to the significance attached to the stockpiles shortly. 573 Mr Meadows acknowledged that the structure of the LoM CFF involved the shifting of risk to the creditors. He claimed that that had been "front and centre" of his thinking at the time. However, he acknowledged that he had not discussed with anyone and that the way in which the Distributions Policy would work in this respect was not debated at Board level. 574 In the final submissions, counsel for the defendants claimed that Termite had not pleaded the structural flaw, but did not develop a submission as to the effect that should have. It is true that the Third Amended Statement of Claim (TASC) does not use the term "structural flaw", but I am satisfied that this complaint of Termite is within the scope of its pleading (see [41.4], [41.6]-[41.9], [42.4]-[42.5] in the TASC). 575 The defendants next contended that Termite's case concerning the structural flaw in the LoM CFFs contained its own flaws, which they identified as follows: (a) it overlooked that distributions could be stopped or reduced at any time, in the event that revenues were less than forecast; (b) it was not the case that all the risk was placed on the Services Contractors as, had the revenues been less, there would have been less money to distribute to shareholders; (c) Termite's claim assumed that a downturn would occur without warning and without being forecast. If instead there was some forewarning, the distributions could be stopped or reduced; (d) even if there was an unanticipated downturn, there were other mechanisms available to IMX, such as foregoing or deferring the monthly recharge for the services it provided to Termite; (e) the submission overlooked the prospect that Phase 2 and Phase 3 would proceed; (f) the submission overlooked the "shock absorber" available by reason of the deferral of the final distribution until after all creditors had been paid; (g) the submission assumed that Termite should have preferred the interests of one class of creditors (the Services Contractors) over another class (the Joint Venturers) even when Termite was highly solvent; and (h) there were months in which the forecast iron ore prices were much lower than the pricing inputs in the LoM CFFs. 576 In my opinion, none of these matters undermines the force of Termite's submissions regarding the structural flaw. Of course distributions could be stopped or reduced in the event of a forecast decline in iron ore prices, but, once they had been paid, Termite had no means of recovering them. That was the actual position after March 2014. It evidenced that, contrary to the defendants' submission, Termite did not have the ability to self-correct before it was too late to do so. 577 Further, the defendants' own experience was that a decline in prices could occur without warning. Further still, as noted earlier, it took a decline in prices below Termite's break-even point for only a relatively short period for the defendants to appreciate that Termite would be trading whilst insolvent if it continued mining operations and incurred the liabilities associated with those operations. 578 The front ending of the distribution payments meant that the risks that the Joint Venturers would not recover the Shareholder Loans were all but eliminated without them carrying any risk of a decline in revenues in the last months of mining operations and in shipping. It is not sensible to suppose that each of the Joint Venturers and the Services Contractors carried the same burden of risk in the model adopted for Termite. 579 The defendants' suggestion, supported by Mr Morris, that IMX could forego the monthly recharge payment by Termite as a means of mitigating the position had an air of speciousness about it. The monthly recharge payments never exceeded $50,000 and were commonly of the order of $30,000. Given that Termite aimed to ship 150,000 tonnes of ore a month, the saving of the recharge expenses of this order would have been equivalent to a decline in the iron ore price of between $0.20-$0.33 per tonne. In other words, the effect on Termite of being spared the recharge expense would have been miniscule compared with the impact of a decline in the iron ore price of even a few dollars per tonne. 580 Similarly, the defendants' reliance on the final forecast distribution to the Joint Venturers as a "shock absorber" is misplaced. As indicated above, the iron ore price had to decline by only quite minor amounts for that "shock absorber" to be eliminated altogether. 581 The defendants' submission concerning Termite not preferring one class of creditor over another appears to be self-serving. In fact, Termite did prefer some creditors over others, namely, the Joint Venturers in respect of the subordinated debt, leaving the Services Contractors and other creditors to bear the risk of a downturn in trade in the last few months of mining. They did so at a time when Termite was under no obligation at all to make any payment to the Joint Venturers and when they were themselves acutely conscious of the risk of Termite becoming insolvent. 582 Finally, the fact that there were months in which revenues exceeded forecast amounts is immaterial, given that the defendants had deprived Termite of the ability to take advantage of that circumstance by accumulating a greater Cash Reserve. In effect, Termite could not save for a rainy day. 583 I accept the following submission of Termite concerning the implementation of the Distributions Policy and the LoM CFFs: [889] The model was flawed because the pricing of Termite's product, and therefore its profitability, was inherently variable. As prior trading had illustrated in late 2012 and early 2013, there were likely to be material deviations from budget on a month by month basis. Termite could only avoid insolvency if the deviations from budget in the latter phases of mining were positive. Any positive deviations in the earlier phases of mining would provide no protection to creditors, merely larger distributions during that time. [890] It was (or ought to have been) readily apparent that if early mining operations were profitable (say through the months of March - September 2013), all of those profitable operations would yield significant distributions. If mining was then less profitable in the months that followed because, for example, of a downturn in price, cash would not then be accumulated as required in order to pay the outgoings that would fall due at the end of planned mining operations under the Logistics Contracts. By contrast, if early operations were less profitable and the price rebounded later in operations, there would then be little or no distributions in the early phases yet an accumulation of cash in later phases that could then be used to meet the liabilities falling due at the expiration of planned mining. [891] There was thus a need to recognise that cash flow over the entire life of mine was not a sufficient basis for analysis. The risk to creditors could not be viewed on an entire life of mine analysis because the creditor payments were not linear but substantially back-ended. Distributions in the early phase of mining would inevitably render creditors at risk should the later phases of mining be less profitable than those in the earlier phases because all cash from earlier profitable operations (down to the $3 million cash buffer) would already have been distributed. 584 In short, the LoM CFFs did contain the "structural flaws" for which Termite submitted.

The stockpiles of mined ore as a "cash equivalent"? 585 Earlier, I referred to Mr Meadows' evidence that the stockpiles of mined ore were a form of cash equivalent capable of bolstering the Termite Cash Reserve. 586 Mr Meadows said, when being cross-examined about the adequacy of the $3 million as a Cash Reserve, "there was also cash held in the stockpiles". He explained that by saying: [W]hat we also had to back us up all the way through was a stockpile that averaged around 250,000 tonnes of ore that would provide the rest of that. So even if things - in my mind even if things got really bad and you decided to suspend the operation, you still had roughly speaking … 250,000 tonnes of ore which was at least three shipments at about $7 or $8 million each. So that added up to the rest of it. 587 Mr Nitschke also said that he had taken account of the stockpiles when approving the Distributions Policy: [156] At the time of voting in favour of the Distributions Policy, I considered the cash reserve of $3 million sufficient to deal with unforeseen operational or financial issues. I felt that we had substantial certainty about the costs of our operations, substantial ore in stockpile at any point in time, a demonstrated ability to sell our product and cash certainty from our cash flow modelling based upon predicted ore prices that included provision for the full liability of Termite to all service providers. 588 Later, at [170], Mr Nitschke said that "the prevailing stockpiles" were one matter which he had considered in the period after the adoption of the Distributions Policy as indicating the adequacy of the $3 million Cash Reserve. 589 I did not understand Mr Nitschke to be saying in these passages that the stockpiles were "cash equivalent". Instead, I understood him to be referring to the protection which the stockpiles afforded to Termite in the event of an event causing a temporary interruption to mining operations or, perhaps, haulage operations. Mr Parsons had referred to this purpose in his affidavit. 590 Mr Parsons said that, when approving the Distributions Policy, he had been aware that, apart from the Cash Reserve, Termite had substantial stockpiles of ore which could monetised. 591 The monthly reports by Termite's management to the Outback Board contained figures for the stockpiles of ore, both actual and forecast, at the end of the previous month at the Cairn Hill Mine (Pre-Crusher and Post-Crusher stockpiles were listed separately), Rankin Dam and at Port Adelaide. From March 2013 to January 2014, the aggregate of these stockpiles was in the range of 223,183 tonnes to 296,374 tonnes. The Pre-Crushed ore at Cairn Hill was usually the largest of these stockpiles. 592 In my opinion, a number of matters indicated that the stockpiles could not be regarded as providing "the near cash equivalent" able to be called upon at relatively short notice to add to Termite's Cash Reserve as claimed by Mr Meadows. 593 First, at least some of the stockpiled ore could not be regarded as an additional resource available to Termite. That is because they would be used to make the shipments already factored into Termite's LoM CFFs. At two shiploads a month, that was potentially up to 150,000 tonnes, leaving only approximately 100,000 tonnes in stockpiles. The availability of the stockpiles depended on them being replenished by the continuation of the mining and haulage operations. 594 Secondly, at least by 31 January 2014, about 80% of the Pre-Crushed ore and about 70% of the Post-Crushed ore was "weathered". The ore was regarded as "weathered" when, by reason of its exposure to weather, the magnetite had changed to haematite. It was then much less valuable than "fresh" ore. Mr Meadows said that when "primary ore" (by which I understood him to mean unweathered ore) was selling at $110 per tonne, weathered ore would fetch $60-$70 per tonne. I infer that the weathered ore would fetch even less during periods of market downturn. 595 Mr Meadows' evidence concerning the price which weathered ore could fetch undermined his claim that the 250,000 tonnes of stockpiled ore could be sold for $21-$24 million. For the stockpiles to realise amounts of that order, they would have to be sold at average prices of between $84-$96 per tonne. Even allowing for the unweathered ore in the stockpiles, the realisation of those average prices does not seem feasible. It would be even less feasible in a declining market. If Termite had been able to achieve averages prices of $60-$70 per tonne for the stockpiled ore, it would have realised $14-$17.5 million. This may be compared with the likely costs of getting the ore in the stockpiles to China. Some indication of these expenses is seen in the Mine Suspension Plan of 10 September 2012, which estimated the costs of getting the then 237,000 tonnes held in the stockpiles to China at $15.1 million (including interest to LinQ). This indicates the marginal nature of the "cash equivalent" represented by the stockpiles. 596 Mr Meadows also gave some inconsistent evidence regarding the weathered ore. At one stage, he said that there had been no significant stockpiles of weathered ore in his time at IMX (he had resigned on 15 October 2013) but at another point, he said that he thought "we sold one or two shipments [of weathered ore] in my time". 597 Mr Meadows acknowledged that, ordinarily, Termite could not sell the weathered ore to fulfil its existing contracts. Had Termite shipped the weathered ore in an attempt to do so, it would have had to reimburse money to its customers under the True-Up arrangement by reason of the ore not meeting the required contractual grade. Mr Nitschke said that this problem could be overcome to an extent by blending weathered ore with fresh ore, but at levels which still met the required contractual grade. However, this required adequate supplies of fresh ore. The relatively low levels of unweathered ore in the stockpiles at 31 January 2014 appear to have been inadequate for that purpose. 598 This meant that Termite would have had to locate new customers for the weathered ore. 599 Thirdly, Termite is likely to have experienced logistical difficulties in transporting the stockpiled ore while maintaining its existing program. The number of rail wagons, containers and rail paths available to it was finite. Locating ships at short notice to transport the ore to a customer, once the customer had been identified, may have been difficult. Mr Meadows appeared reluctant to acknowledge these difficulties but accepted that use of the stockpiles to generate cash to protect against a downturn was only as good as Termite's ability to send more than two shiploads a month. He also accepted that "if you really pushed the supply chain, once you had the ability to" the result would be another part-shipment in a month. 600 Fourthly, it is pertinent that, with one exception, Termite does not appear at any time to have engaged in a formal analysis of the means by which its large quantities of weathered ore could be monetised. Nor did it ever prepare a contingency plan in that respect. The exception is the analysis of the costs of getting the stockpiles to China contained in the Mine Suspension Plan of 10 September 2012 to which I referred earlier. 601 Mr Tisdell gave the following evidence with respect to the ability of the stockpiled ore to add to the buffer constituted by the Termite Cash Reserve: … I am of the opinion that due to the low grade nature of the bulk of the stockpiles, no obvious blending options or support cash reserves, and the increasingly difficult nature of the market at the time, the stockpiles were of no material benefit to Termite's liquidity position in mid-2014 and did not provide any significant protection from falls in commodity prices and/or currency appreciation. 602 Despite the reservations I expressed earlier concerning Mr Tisdell's evidence, I accept that opinion as being appropriate. It is supported by the matters to which I have just referred. They indicate that Mr Meadows' claim that he had been "reasonably convinced" at the time that the 250,000 tonnes of ore could be sold for at least $15 million cannot be accepted. I do not accept that that was the fact, or that Mr Meadows held that opinion at any time from March 2013 until October 2013 when he left IMX. I consider that his evidence in that respect constituted an attempt at retrospective rationalisation of his position. 603 The principal benefit of the stockpiles was the buffer they provided against the effect of an interruption to the mining or haulage operations.

Contemporaneous forecasts of the iron ore price 604 The defendants emphasised that they had in the period 2012-2014 sought, in a diligent and appropriate manner, to inform themselves about iron ore pricing and the forecasts for that pricing. They submitted that, in the light of the forecasts, it had not been unreasonable for them not to have anticipated the "step change" in the long term trend price which occurred in 2014. There is a good deal of evidence to support both strands of this submission. 605 The defendants also emphasised that the mean of the iron ore price forecasts in the EMCFs throughout the period in which Termite made the distributions (March 2013-March 2014) was above US$110 CFR per tonne. A related matter is that at the time of each distribution, the prevailing iron ore price was favourable, as were the forecast prices. The defendants summarised these in the following table, and Termite did not contest its accuracy. Date of Distribution Distribution amount Iron Ore price at date 30 day moving average Consensus economics price June 2013 Consensus economics price December 2013 Consensus economics price June 2014 (AUD) (USD per tonne CIF) USD per tonne CIF) (USD per tonne FOB) (USD per tonne FOB) (USD per tonne FOB) 22 March 2013 $5,800,000 $134.75 $143.82 $127.12 $117.05 $115.27 (Survey Date 18.02.2013) (Survey Date 18.02.2013) (Survey Date 18.02.2013) 22 April 2013 $6,800,000 $137.75 $138.18 $131.69 $117.28 $113.27 (Survey Date 15.04.2013) (Survey Date 15.04.2013) (Survey Date 15.04.2013) 21 June 2013 $3,089,163 $118.75 $115.15 $123.99 $112.07 $111.66 (Survey Date 17.06.2013) (Survey Date 17.06.2013) (Survey Date 17.06.2013) 13 July 2013 $2,400,017.45 $128.00 $119.40 $123.99 $112.07 $111.66 (Survey Date 17.06.2013) (Survey Date 17.06.2013) (Survey Date 17.06.2013) 21 August 2013 $2,616,573.82 $136.50 $134.21 - $114.00 $111.00 (Survey Date 19.08.2013) (Survey Date 19.08.2013) 13 September 2013 $1,000,000 $134.50 $137.63 - $114.00 $111.00 (Survey Date 19.08.2013) (Survey Date 19.08.2013) 23 September 2013 $5,102,040.82 $131.50 $135.76 - $114.00 $111.00 (Survey Date 19.08.2013) (Survey Date 19.08.2013) 25 September 2013 $3,100,000 $132.00 $135.27 - $114.00 $111.00 (Survey Date 19.08.2013) (Survey Date 19.08.2013) 28 October 2013 $4,802,321.82 $130.75 $132.59 - $119.89 $113.13 (Survey Date 21.10.2013) (Survey Date 21.10.2013) 27 November 2013 $3,496,350.69 $136.00 $135.19 - $119.89 $113.13 (Survey Date 21.10.2013) (Survey Date 21.10.2013) 30 December 2013 $3,552,498.03 $134.75 $135.64 - $120.46 $112.77 (Survey Date 16.12.2013) (Survey Date 16.12.2013) 14 January 2014 $2,888,222.47 $130.75 $132.81 - $120.46 $112.77 (Survey Date 16.12.2013) (Survey Date 16.12.2013) 31 March 2014 $1,405,906.98 $117.25 $111.79 - - $116.73 (Survey Date 17.02.2014)

606 I accept that these matters are very pertinent to the assessment of whether the defendants acted with the required care and diligence. 607 Apart from the forecasts by the analysts on whom Consensus Economics reported in the EMCFs, the Court received evidence of the forecasts made by other analysts. These included Mr Tisdell's firm, Wood Mackenzie, and the Bureau of Resource and Energy Economics (BREE), a Commonwealth Government agency. I do not think that it is necessary to refer to all the forecasts by these analysts. I will, however, refer to the forecasts of BREE. 608 The BREE report for the March quarter 2013 included the following: Iron ore prices In 2012, iron ore contract prices averaged US$129 a tonne, a decrease of 16 per cent from the historic record of US$153 a tonne for 2011. Spot prices for cargos of 62 per cent iron content basis, FOB Australia averaged US$122 a tonne in 2012, with higher prices in the first half of 2012 being counterbalanced by a substantial downturn in the September quarter. The sharp drop in spot prices, to a low of around US$81 a tonne FOB Australia, was a result of de-stocking activities by traders in China and negative sentiment surrounding the Chinese steel industry, particularly production overcapacity. Iron ore price volatility has been increasing over the past four years which has coincided with the increased use of shorter term contracts and spot trading. Price swings of 30 per cent, or more, in response to stock cycles and sentiment are becoming regular features of the market. … The recovery in prices up to February 2013 can be attributed to improved sentiment surrounding China's outlook for steel demand combined with the re-stocking of ore at Chinese ports and steel mills. Spot prices, however, have declined in March 2013 due to surging inventories of steel products. For 2013 as a whole, contract and spot prices are forecast to average US$119 a tonne … Over the remainder of the outlook period, contract and spot prices are both projected to decline year-on-year and to average around US$90 a tonne in 2018 (in 2013 US dollars). The decrease in prices is expected in response to moderating demand, particularly in China, and substantial supply increases from mining projects that are already under construction and scheduled to commence operation over the medium term. (Emphasis added) 609 The BREE report for the June quarter 2013 included the following: Bulk commodity prices Iron ore spot prices for 62 per cent iron ore content free on board (FOB) Australia averaged around US$141 a tonne in the first quarter of 2013. Spot prices reached a high of around US$152 a tonne in February but have since moderated to around US$115 a tonne in June 2013 in line with changing sentiment over China's economic growth and steel output. For 2013 as a whole, contract prices for iron ore are forecast to average slightly above spot prices for the year, at around US$117 a tonne. Spot prices for 2014 are forecast to moderate due to increased seaborne supply and to average around US$112 a tonne. 610 The BREE report for the September quarter 2013 included the following: Iron ore prices Spot prices for cargos of 62 per cent iron free on board (FOB) Western Australia averaged US$118 a tonne in the June quarter 2013, down from an average of US$141 a tonne in the March quarter. Spot prices have since recovered and are expected to average around US$122 for the September quarter. This rebound in spot prices in the September quarter is contrary to what has happened in recent years, and primarily reflects lower port inventories in iron ore in China compared to previous years. For 2013 as a whole, spot prices are forecast to average US$125 a tonne (US$121 for contract prices; …), although there is a possibility of a stronger price decline in the December quarter 2013 as additional supply enters the market. 611 Finally, the BREE report for the December 2013 included the following: Bulk commodity prices Iron ore spot prices for 62 per cent iron ore content free on board (FOB) Australia averaged around US$122 a tonne in the third quarter of 2013. This represented an unseasonable increase of 4 per cent quarter-on-quarter. The likely cause of the sustained higher pricing in this quarter, and throughout 2013 as a whole has been the low levels of iron ore inventories at Chinese ports combined with record levels of China's monthly steel output. For 2013 as a whole, spot prices are expected to average around US$126 a tonne … In 2014, spot prices are forecast to moderate to average around US$119 a tonne. 612 I accept that during 2013 none of the analysts' forecasts contemplated the Platts Index price falling below US$100 FOB. No analyst thought it likely that there would be a long term downturn in prices until at least 2015. With the exception of Credit Suisse, all analysts were forecasting iron ore prices in 2013 and 2014 at which Termite could trade profitably. 613 From July 2013, the Credit Suisse forecasts were consistently lower than the forecasts of the rest of the analysts on whom Consensus Economics reported. Although Credit Suisse is a reputable analyst, no criticism can be made of the defendants for not framing the LoM CFFs on the basis of the Credit Suisse forecasts. It is sufficient to note that the forecasts of Wood Mackenzie (Mr Tisdell's firm) and BREE were consistently higher than those of Credit Suisse. Further, neither predicted the market correction which occurred in 2014. 614 I also accept Professor Trench's evidence that in the period between January 2013 and March 2014, there was an expectation generally in the iron ore production industry that the minimum price of iron ore would likely remain above US$110 CFR per tonne until mid-2015. 615 As indicated, the defendants submitted that, based on this material and the evidence of the contemporaneous forecasts made by other analysts, it is apparent that no reputable analyst was predicting the sharp long term decline in the iron price which commenced in March 2014. They also submitted that there was no basis in the forecasts (putting the forecast of Credit Suisse to one side) on the basis of which they should have anticipated that a long term sharp decline in prices was imminent. Subject to what I said earlier, I accept those submissions. To the extent that Mr Tisdell presented contrary opinions, I do not accept them. 616 However, it also appropriate to note other matters, including those which Professor Trench acknowledged in his cross-examination. 617 First, the forecasts of the iron ore price analysts, although expressed ultimately in a single figure, were accompanied by a detailed qualitative analyses. They were qualified to that extent and represented the forecaster's view of the "base case". It was common ground between Mr Tisdell and Professor Trench that forecasters used that term to indicate the best estimate of future prices made on the assumptions which the forecasters considered appropriate. Put slightly differently, it is the forecaster's expected view as to the future price but allows for the possibility that there may be a significant deviation from the forecast, both upwards and downwards. 618 Secondly, the fact that a downturn in price is not predicted does not mean that the risk that it may occur should be ignored. 619 Thirdly, the iron ore market outlook published by CRU, Professor Trench's firm, in January 2013 indicated CRU's then view that the sustainability of the current price levels was uncertain. While CRU forecast that the most probable outcome was that the iron ore price would remain above US$120 per tonne, its report stated: [B]ased on an analysis of both the Chinese and ex-Chinese cost curves and factoring in a decrease in Chinese crude steel production, we still believe that prices could fall to our realistic floor price level of US$70-75/t and this possibility will provide a check on some capacity coming on-stream. Indeed, depending on how demand/supply-side developments play out, we have not ruled out the possibility of prices falling to lower levels than in September 2012, but this is not our base case forecast. 620 Professor Trench said he had shared that view at the time, but that the report was speaking of the possibility of a price of US$70-$75 per tonne as a short term dip. 621 Fourthly, in the iron ore market outlook published by CRU in April 2013 for the second quarter of 2013, CRU said: In the short term, we expect the high level of volatility inherent in the iron ore market to persist. Over recent months, iron ore has fluctuated significantly, with prices moving in a range of over $70/t in the space of the last year. To put it another way, from September to January, prices nearly doubled, a stark contrast to the coking coal market where prices have increased by 16% during the same period. Greater liquidity on the futures markets, sentiment, speculation from traders and mills and stock cycles play a key role in driving swings and prices in iron ore, aside from the traditional supply/demand fundamentals. To add to this, iron ore market dynamics are much more reliant on China, where there is a fast reaction to change and consumers can be relatively impulsive, compared to more traditional markets where a more conservative approach is adopted. We maintain that the realistic floor for iron ore prices is approximately $70-75/t and, although these price levels do not form part of our forecast, we would not rule out the possibility of prices hitting this level if sentiment allowed for it. To hold in this range for any length of time, Chinese demand would have to pull back significantly, however, and we do not currently expect this. 622 It was common ground that Termite could not operate profitably at the price levels of US$70-$75 per tonne to which these reports referred. 623 Professor Trench agreed that, in the second quarter of 2013, he too had expected the high level of volatility inherent in the iron ore market to persist. 624 Fifthly, most analysts were forecasting a long term decline or, as Professor Trench put it, a downward "glide path" in the iron ore price. It was accepted that there could be material deviations from that glide path, whether downwards or upwards. 625 Sixthly, the fact that most of the demand for iron ore came from China, increased the risks associated with forecasting because the available data from China was not as "granular" as that from the western world. 626 These matters indicate that the defendants were entitled to proceed on the basis that no analyst was predicting the kind of sharp and prolonged downturn which occurred in 2014. However, they also indicate that the risk that such a downturn may occur was well recognised. It was not appropriate for the defendants to ignore that risk or to fail to make provision for it, to the extent that it was practical to do so.

The status of Messrs Hoskins, Sun and Pang 627 Before addressing the significance of the findings in the above sections of these reasons, it is appropriate to address Termite's allegations concerning the status of Messrs Hoskins, Sun and Pang.

Statutory provisions and principles 628 Both ss 180 and 181 impose duties on a director or other "officer of a corporation". The term "officer of a corporation" is defined in s 9 of the Act as (relevantly): (b) a person: (i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (ii) who has the capacity to affect significantly the corporation's financial standing; or (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); 629 Some aspects of the proper construction and application of this definition were discussed by the High Court in Shafron v Australian Securities and Investments Commission [2012] HCA 18; (2012) 247 CLR 465: (i) subparagraph (b)(i) is directed to the role which the person in question plays in the company. It is not confined to the role which the person played in relation to the particular issue in respect of which it is alleged there was a breach of duty, at [23]; (ii) each of the three classes of persons described in subpara (b) is different from (and a wider class than) the persons identified in the other paragraphs of the definition (a director, secretary, receiver, receiver and manager, administrator, liquidator and a trustee administering a compromise), at [25]; (iii) subparagraph (b) identifies persons by what they do (subpara (b)(i)), what capacity they have (subpara (b)(ii)), or what influence they have on the directors and continue to have (subpara (b)(iii)), at [25]; (iv) it is not to be supposed that the persons falling within subpara (b)(i) must be in substantially the same position as directors, that is, those to who the management and direction of the business of the company is usually given, at [25]; (v) subparagraph (b)(i) distinguishes between making decisions of a particular character and participating in making those decisions, at [26]; (vi) participating in the making of decisions should not be understood as intended primarily, let alone exclusively, to deal with cases of joint decision-making. It draws attention instead to the role which the person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons, at [26]; (vii) the question of whether a person participates in making decisions involves a question of fact and degree in which the significance to be given to the role played by the person in question must be assessed, that is, what contribution did the person make to the making of the decision, at [26], [27]; and (viii) the decisions in which the person participates must have a certain significance, namely, they be decisions which affect the whole, or a substantial part, of the business of the company, at [27]. 630 Termite has the onus of establishing that Mr Hoskins (and for that matter, Messrs Sun and Pang) were officers in the defined sense.

Mr Hoskins 631 Although the CFO of IMX, Mr Hoskins performed considerable work for Termite, which did not have its own CFO. Both in that capacity, and more generally, he participated to a significant extent in decisions affecting the business of Termite. Although the minutes of the Termite Board meetings record Mr Hoskins as having been in attendance as its CFO, that may have been a misdescription. 632 The evidence supporting the conclusion that Mr Hoskins was an officer within the terms of subs (b)(i) and (ii) includes: (a) on his own admission, Mr Hoskins spent up to 30% of his time in some months on Termite related work. IMX charged Termite on a monthly basis for the work performed by Mr Meadows and Mr Hoskins on its behalf. This was referred to as "the recharge". The recharge documents indicate that the time Mr Hoskins spent on Termite work was 30% for July 2012 and May 2013, 15% for each of June, July, September, November and December 2013, and 20% in February and May 2014. The recharge documents for other months were not in evidence. Mr Hoskins said that the monthly recharge of IMX head office costs "related to support for the operation" and that "[r]ather than employing accounts payable, company secretarial or a CFO for Termite, some additional services were provided by IMX to Termite" for which IMX made a charge on a monthly basis; (b) Mr Hassard reported to Mr Parsons in relation to day-to-day matters but to Mr Hoskins on financial matters, although he (Mr Hoskins) said that Mr Parsons had the "ultimate operating and financial responsibility for Termite". In my view that is true in a formal sense but in a practical sense it was Mr Hoskins who exercised that control in relation to financial matters. Mr Hoskins acknowledged that he approved the conduct of Termite management in relation to important matters of finance; (c) Mr Hoskins acknowledged that he sanctioned materials relating to financial matters provided to the Outback Board after they had been submitted to him by Mr Parsons or Mr Hassard; (d) the Board papers for Outback indicate that, after June 2012, Mr Hoskins attended all but one the Board meetings as an invitee until he was formally appointed as an Outback director on 5 November 2013. Further, at the Outback Board meetings, Mr Hoskins frequently made presentations concerning Termite issues. The range of matters on which he presented was extensive and diverse and indicates the extent to which he participated in decisions affecting Termite's business; (e) Mr Hoskins also participated in the meetings of the Termite Board and made presentations to it concerning matters of substance, including the loan agreement between IMX and Termite and the Cairn Hill Suspension Plan prepared in September 2012. In doing so, he participated in significant decisions concerning Termite's business; (f) Mr Hoskins attended the Termite weekly management meetings - the other attendees were generally Messrs Parsons, Hassard, Dunstan and Meadows; (g) the Independent Internal Controls Audit Report prepared by Kennedy & Co on 23 April 2012 confirmed the significant role which Mr Hoskins played in relation to Termite: he was one of four employees who had access to the accounting system (apparently shared by Outback and Termite); he had daily meetings with Termite's accounts payable officer in which he made the decisions for payments on the day based on the cash flow position; his signature was one of the two signatures required in order that an account which was substantial be approved for payment; he periodically reviewed the monthly management accounts; and most of the accountancy and financial work was performed by Mr Hoskins and the company accountant; (h) following the Kennedy & Co Report, Mr Hoskins prepared the document entitled "Termite Approvals Framework" which was presented to, and approved by, the Outback Board. That Framework stated that the management and control of the business and affairs of the Joint Venture rested with the Outback Board of directors but that, save for some matters which it had reserved for itself, the Board had delegated authority for other matters to "the Executive Team". Mr Hoskins was a member of the Executive Team at material times, the other members being Messrs Parsons and Hassard and the IMX Company Secretary; (i) Mr Hoskins engaged frequently in discussions about, and negotiations with, Termite's creditors, including Flinders Ports; (j) Mr Hoskins, together with Mr Parsons, attempted (albeit unsuccessfully) to negotiate floor pricing with some customers; (k) Mr Hoskins dealt on Termite's behalf with the consultant, Noah's Rule, in relation to possible hedging; (l) Mr Hoskins prepared a number of significant documents for Termite, including the document entitled "Financial Implications of Placing Termite in Administration as at 30 June 2012" and the document which recommended the adoption of Design 10a for Pit 2; (m) Mr Hoskins drafted both the Distributions Policy and the Termite-IMX Loan Agreement and arranged for approval of each by the respective Boards. This involved liaising with, and providing advice to, the other defendants; and (n) as found earlier, Mr Hoskins was a key decision-maker in relation to the timing and amount of the payments made by Termite under the Distributions Policy. 633 One may accept, as the defendants submitted, that there were respects in which Termite operated independently of Outback and IMX. It attended to the day-to-day matters affecting its operations, including bank reconciliations, accounts payable, short and long term cash flow forecasting, payments, management reporting, financial statements and tax compliance. In addition, Termite maintained its own office in Adelaide and employed persons based at the Cairn Hill Mine or nearby in Coober Pedy. Nevertheless, the matters to which I have referred indicate (and I so find) that Mr Hoskins did participate, to a very significant extent, in the making of decisions affecting a substantial part, if not the whole, of Termite's business. 634 In relation to Mr Hoskins' capacity to affect Termite's financial standing, I accept Termite's submissions that: (a) Mr Hoskins had a significant role in Termite's financial modelling; (b) budget and forecast documents for Termite were either prepared by Mr Hoskins or by others under his supervision; (c) Mr Hoskins generally managed Termite's logistics creditors; (d) Mr Hoskins was influential in determining the amount of the monthly distributions by Termite, at one time telling Messrs Hassard and Parsons that the question of whether monies should be held back for potential ETPs should be deferred "given the current requirement by IMX for the cash". As previously noted, in his cross-examination, Mr Hoskins acknowledged that every distribution made by Termite had been made with his concurrence and that, while Mr Meadows was IMX's Managing Director, each distribution had needed the "sign off" of himself and Mr Meadows before it was made. In this respect, Mr Meadows deposed that, before every payment, Mr Hoskins had informed him that there would be a distribution and of its proposed amount; (e) Mr Hoskins also gave instructions to Messrs Hassard and Parsons about delaying distributions, seemingly as a means of applying pressure on IMX's behalf to Taifeng; and (f) Mr Hoskins was instrumental in setting the $3 million Termite Cash Reserve and, on one occasion he overruled Mr Parsons, in requiring a distribution even though it resulted in the Termite Reserve going below $3 million for a short time. 635 Counsel for the defendants submitted that Mr Hoskins had engaged in many of the activities described above in his capacity as CFO of IMX. The submission seemed to be that that had the consequence that his participation in those activities could not evidence conduct on his part as an officer of Termite. It may well be the case that Mr Hoskins was participating as CFO of IMX in the sense that he had no other reason to be participating in Termite's affairs. But that does not alter the character of his conduct vis-à-vis Termite. He was still engaging in the kind of conduct which could constitute him as an officer of Termite. 636 These matters are sufficient to conclude that Mr Hoskins was an officer of Termite in the defined sense. It is accordingly unnecessary to address the remaining matters to which Termite referred in support of this finding.

Mr Sun and Mr Pang 637 Mr Sun and Mr Pang were appointed directors of Outback on 26 April 2012 and 9 January 2012 respectively. Mr Sun was also an "alternate" director of Mr Song on the IMX Board from 15 March 2012 to 23 May 2013, and an appointed director of IMX from 23 May 2013. Neither was ever an appointed director of Termite. Termite submitted nevertheless that each was one of its deemed directors. 638 The definition of "director" of a company in s 9 of the Act is as follows: director of a company or other body means: (a) a person who: (i) is appointed to the position of a director; or (ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and (b) unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body. Note: Paragraph (b) - Contrary intention - Examples of provisions for which a person referred to in paragraph (b) would not be included in the term "director" are: • section 249C (power to call meetings of a company's members) • subsection 251A(3) (signing minutes of meetings) • section 205B (notice to ASIC of change of address). 639 Termite relied on subpara (b) of this definition, submitting that, even though Mr Sun and Mr Pang were not appointed directors of Termite, they had acted in the position of a director or, alternatively, the directors of Termite were accustomed to act in accordance with their instructions or wishes. 640 For this purpose, Termite relied on the activities of Mr Sun and Mr Pang as directors of Outback. Earlier in these reasons, I found that the locus of decision-making for Termite was at the Outback Board level. In particular, I found that it was the Outback Board which exercised the functions of a Board of directors concerning matters of strategy, management and oversight of the operations of Termite. That being so, there is no difficulty in finding that Mr Sun and Mr Pang were acting in the position of directors of Termite in the sense discussed in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [62]-[73]. Each of them acknowledged in his evidence that, while Termite made the day-to-day operational decisions, it was the Outback Board which made the major and strategic decisions. 641 In addition to the matters to which I have already referred which support that finding, it is pertinent that, when the Termite Board did meet to consider the Distributions Policy, it noted that that Policy had already been approved by the Outback Board earlier that day. 642 Even if Mr Sun and Mr Pang were not deemed directors of Termite, the same factual matters indicate that they were persons who participated in the making of decisions affecting the whole, or at least a substantial part, of the business of Termite. In addition, in their capacity as representatives of Taifeng on the Outback Board, they had the capacity to affect significantly Termite's financial standing. 643 It is not necessary to refer to each decision in which Mr Sun and Mr Pang participated. I indicate, however, that I accept Termite's submission that each: (a) participated in the discussions before 12 March 2013 regarding the content of the Distributions Policy; (b) attended the successive meetings on 12 March 2013 of the IMX Board and the Outback Board which resolved unanimously to approve the Loan Agreement and Distributions Policy; (c) attended all subsequent Outback Board meetings (save the 25 June 2013 in the case of Mr Pang); (d) was involved in formulating the strategy for the "ring fencing" of Termite; and (e) supported the adoption of Design 10a for Pit 2. 644 It is their respective roles on the Outback Board, and its function in relation to Termite which indicates, by itself, that each of Mr Sun and Mr Pang were deemed directors of Termite. Were it necessary to do so, I would also find that they were officers of Termite within the meaning of subpara (b)(i) and (ii) of the definition of officer.

Did the defendants breach their duties? 645 As already noted, Termite alleges breaches of duties by the defendants at three stages: when resolving to adopt the Distributions Policy; when implementing the Distributions Policy by making the distribution payments; and by the omission to review the adequacy of the Termite Cash Reserve. Much of the evidence and many of the submissions concerning the breaches at each of these stages overlapped. In fact, there was no real submission that one of the three forms of breach may be found, but not either of the others. 646 As is apparent, the principal focus of Termite's case was on the adoption and implementation of the Distributions Policy. Subject to some matters to be mentioned shortly, Termite did not seek to establish, as its primary case, what it is that the defendants, acting with reasonable diligence should have done in the circumstances, other than that they should not have adopted the Distributions Policy and should not have allowed payments to be made pursuant to it. 647 Another feature of Termite's case is that it did not seek to differentiate between the distribution payments which were made. Termite did not seek to establish that, even if some of the payments had been reasonable or appropriate, others had not. It did not seek to demonstrate what its position would have been if only particular (and identified) payments had, or had not, been made.

An issue of principle 648 The structure of Termite's case was to allege breaches of duty by the defendants in the adoption and implementation of the Distributions Policy, to allege that the whole of the losses it alleges were caused by those breaches, and to contend that it was for the defendants, if they wished, to adduce evidence that it would have sustained some or all of the same losses even without their breach of duty. 649 That structure gave rise to an issue between the parties as to the proper approach in principle and as to the onus which each had. That issue involved, in part, whether consideration of the action which the defendants should have taken in the discharge of their duty is relevant at the stage of determining whether the defendants were in breach of their duties, or at the stage of determining the issues of causation and loss from an established breach of duty. 650 Termite acknowledged that it is for it to establish that a breach of duty by the defendants caused or materially contributed to the loss on one or other of its pleaded formulations. It submitted however that, once it has done so by establishing that the defendants should not have adopted the Distributions Policy and allowed it to be performed, it was for the defendants, if they wished to contend that it would have suffered the same loss irrespective of the breach of duty, to discharge an evidentiary onus of showing what the position would have been had they acted with reasonable care and diligence and in Termite's best interests. That meant that it was for the defendants, if they wished to contend that Termite would have suffered some or all of the same loss, even had they discharged their duties by determining on a higher cash reserve than $3 million, to adduce evidence to satisfy the Court of that fact. Termite's position was summarised in the following passage: [T]here is no onus on the part of Termite to plead and prove an (or perhaps a multitude of) alternative transaction(s) in order to establish loss. It must simply prove that the relevant transaction was entered in breach, and that it was loss-making. A defendant may then seek to demonstrate a different loss-making transaction would have occurred, such that some of the loss may still have been sustained. … [T]he Defendants have not sought to advance any alternative case by which losses might have been sustained under differing hypothetical scenarios. 651 The defendants, on the other hand, submitted that in order for Termite to prove a breach of duty it was necessary for it to prove, before issues of loss and causation, what directors and officers in their position acting with reasonable diligence would have done. That is to say, proof of breach required a comparison of what the defendants would have done, acting with reasonable care and diligence, in Termite's circumstances, on the one hand, with what they had in fact done, on the other. The defendants' alternative position was that, even if that not be correct, the identification of Termite's loss involved consideration of the position it would have been in, by making the same comparison. 652 It is of course well established that proof that a duty of care has been breached involves identifying the action which a reasonable person in the position of the defendant would have taken in response to the reasonably foreseeable risk. In ASIC v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 at [395]-[401], Edelman J referred to a number of authorities for that proposition. They include The Metropolitan Gas Co v City of Melbourne [1924] HCA 46, (1924) 35 CLR 186 at 194 (referred to in ASIC v Drake (No 2) by incorporation); Wyong Shire Council v Shirt [1980] HCA 12, (1980) 146 CLR 40 at 47-8; Nagle v Rottnest Island [1993] HCA 76, (1993) 177 CLR 423 at 431; Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54, (2002) 211 CLR 540 at [192]. 653 In the well-known passage in Wyong Shire Council v Shirt, Mason J said at 47: In deciding whether there has been a breach of the duty of care the tribunal of fact must first ask itself whether a reasonable man in the defendant's position would have foreseen that his conduct involved a risk of injury to the plaintiff or to a class of persons including the plaintiff. If the answer be in the affirmative, it is then for the tribunal of fact to determine what a reasonable man would do by way of response to the risk. The perception of the reasonable man's response calls for a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the tribunal of fact can confidently assert what is the standard of response to be ascribed to the reasonable man placed in the defendant's position. (Emphasis added) 654 In Romeo v Conservation Commission of the Northern Territory [1998] HCA 5; (1998) 192 CLR 431, Toohey and Gummow JJ said at [50], that whether there was a breach of the duty of care owed by the respondent depended on the action that a reasonable person in the respondent's situation would have taken to guard against the foreseeable risk of injury which existed. Likewise, at [79], McHugh J said that "once it is accepted that the risk of a fall was reasonably foreseeable, a reasonable person in the Commission's position was bound to consider what it "would do by way of response to the risk"" (citation omitted). And in Graham Barclay Oysters, Gummow and Hayne JJ said at [192]: A duty of care that is formulated retrospectively as an obligation purely to avoid the particular act or omission said to have caused loss, or to avert the particular harm that in fact eventuated, is of its nature likely to obscure the proper inquiry as to breach. That inquiry involves identifying, with some precision, what a reasonable person in the position of the defendant would do by way of response to the reasonably foreseeable risk. ... (Emphasis added and citations omitted) 655 In ASIC v Drake (No 2), Edelman J applied this approach in his determination of the breaches of s 180 alleged against the respondent. That was a case in which the impugned conduct consisted of an approval of an increase in a loan. ASIC alleged that the trustee, acting prudently, should not have approved the loan increase. However, ASIC did not present a positive case as to the action which the trustee, acting prudently and having regard to all the circumstances, including the circumstances of the existing loan, should have taken in relation to the application for the increase in the loan. With respect to the case presented in that way, Edelman J reasoned as follows: [12] [S]enior counsel for ASIC ultimately put ASIC's case on the basis that the imprudence by LMIM was making the decision to approve the August 2012 Variation. In other words, ASIC's allegation was imprudence in the outcome. [13] The difficulty with the submission about imprudence in outcome (ie imprudence in the decision taken) is that ASIC never explained what a prudent trustee in LMIM's position would have done. ASIC constantly reiterated that LMIM should not have made a decision to approve the August 2012 Variation. But despite numerous requests for ASIC to explain what decision should have been made, ASIC did not present any such case. [14] There were two possible alternatives concerning what a prudent trustee in LMIM's position should have done instead of approving the application to vary the limit of the loan. ASIC did not present a case on either basis. The first alternative was that the decision whether to approve the August 2012 Variation application, on the same or different terms, should have been deferred. The second alternative was that the August 2012 Variation application should have been refused. [15] An explanation of what a prudent trustee would have done required ASIC to examine whether a prudent trustee would have taken one of these alternatives. … (Emphasis in the original) 656 Counsel for the defendants referred to Arthur Young v Tieco International [1995] SASC 5173; (1995) 182 LSJS 367 which concerned the adequacy of a pleading of claims of breach of contract, misleading or deceptive conduct and fiduciary duties, several of which were expressed in terms that the defendant had failed to enquire "or properly enquire" or that it failed to carry out properly the duties required under its retainer. The thrust of the defendant's challenge to the pleading was that the plaintiff had not indicated what it was that the defendant ought to have done or what was said not to have been properly done. Lander J upheld the challenge to the pleading saying, at 381: The plaintiffs' case must be, in relation to those matters, either nothing was done, or something, but something less than appropriate was done. ... The plaintiffs must be able to give particulars of what would have been appropriate action and particulars of what was done, which would show the inappropriateness of the action, because unless it can do so, the plaintiffs have no case. (Emphasis added) 657 Counsel for the defendants also referred to Proudlove v Burridge [2017] WASCA 6. In that case, the primary Judge in a running down action had found that the defendant's breach of the duty of care had not caused or materially contributed to the plaintiff's injuries "because a reasonable person driving with due care and attention would not have been able to avoid the collision". Newnes and Mitchell JJA said: [168] [I]t was necessary for the appellant to prove on the balance of probabilities that the collision and the appellant's consequent injuries would have been avoided if the first respondent had taken reasonable care. The critical issue is whether a hypothetical reasonable person in the position of the first respondent, who was keeping a proper lookout and reacted appropriately to seeing [a person giving a warning], would have avoided the collision. On my understanding, Proudlove v Burridge concerned issues of causation and not negligence. 658 In support of the position for which it contended, Termite referred to two authorities. The first was Westpac Banking Corporation v Jamieson [2015] QCA 50; (2015) 104 ACSR 657. The case concerned an appeal against an award of damages in respect of the provision of advice by a financial adviser which was misleading or deceptive, negligent and in breach of the recipient's contract. That advice had resulted in the investor making investments which turned out to be unprofitable. By his cross-appeal, the investor contended that the primary Judge had erred by considering the other investments he may have made had he not made the unprofitable investments. The Full Court rejected that submission. Termite relied on the following passages in the reasons of Applegarth J (with whom McMurdo P and Morrison JA agreed): [143] For the reasons which follow I do not accept the unqualified proposition that it is irrelevant to inquire into what a claimant in a case such as this would have done if the negligent and misleading advice had not been given and the claimant had not entered into the loss-making transaction in reliance upon it. A claimant is not necessarily required to plead and prove an alternative transaction in order to establish loss. A defendant may seek to demonstrate that a different, loss-making transaction probably would have been undertaken. In a particular case a court may determine that an award of compensation should take into account a hypothetical, alternative transaction which probably would have resulted in a loss. In doing so the court is not engaging in impermissible speculation. [144] If it is apparent that the claimant would have entered into a different, loss-making transaction, then this fact can hardly be irrelevant. Its relevance follows from the basic compensatory principle that the object of compensation is to place the claimant in the position he or she would have been in if the contract had been performed, the defendant not been negligent or the relevant statute not been contravened. The present case does not concern differences between compensation for breach of contract based upon disappointed expectations and the usual measure of damages in tort. Proper performance of the contract required the bank to exercise reasonable care. Both Mr Jamieson's contract claim and his negligence claim involve an inquiry into the position he would have been in if reasonable care had been taken. Also, in this case one is not concerned with different approaches to compensation in respect of intentional wrongdoers and merely careless defendants, including the policy considerations which may apply in cases of deceit. However, even in deceit cases, "it is a question of determining how much worse off the plaintiff is as a result of entering into the transaction which the representation induced him to enter than he would have been had the transaction not taken place". [145] A plaintiff can claim damages on the basis of a lost opportunity to profit on an alternative investment that probably would have been made if the plaintiff had not been induced to make the subject investment. In such a case, reliance upon the defendant deprived the plaintiff of the opportunity to enter into a different transaction, and the plaintiff can seek to establish what that transaction would have been. If it is relevant to consider an alternative, profitable transaction, it is hard to see why, in principle, a defendant in a different case cannot contend that by entering into the subject transaction, the plaintiff did not make an alternative, loss-making investment, and thereby avoided that loss. [146] Any difference between the position of a plaintiff who seeks damages on the basis of a lost opportunity to profit and the position of a defendant who seeks to have an award of damages take account of the lost opportunity to make a loss is not based in principle. In neither case can it be said to be irrelevant to consider what the plaintiff would or might have done instead of entering into the subject transaction. This is not to say that a plaintiff in a so-called "no transaction" case must prove what alternative transaction would have been undertaken. It may be sufficient for the plaintiff to simply prove that he or she would not have entered into the subject transaction. Policy or pragmatic considerations suggest that a plaintiff should not necessarily be required to prove what else he or she would have done. A requirement for such proof increases the complexity and costs of litigation by exploring alternative transactions, including investments, which were not seriously considered. (Footnotes omitted and emphasis added) 659 The second case was Cummins Generator Technologies Germany GmbH v Johnson Controls Australia Pty Ltd [2015] NSWCA 264; (2015) 326 ALR 556 in which the approach in Jamieson was followed. Johnson Controls had succeeded in obtaining a judgment by reason of the misleading or deceptive conduct of the appellant on which it had relied in purchasing a generator. Cummins argued that Johnson Controls' case should fail by reason of its failure to prove that it had suffered damage. It submitted that it was necessary for Johnson Controls to prove that, either it would have not have entered into a transaction at all, or that it would have entered into a different transaction. Beazley P, with whom Gleeson and Leeming JJA agreed, rejected that submission. Her Honour said: [133] … [T]he trial judge was correct in stating that there was no strict requirement to prove a "no transaction" or "different transaction" case. Rather, it was necessary for a party to prove that in reliance on the misrepresentation it acted in a particular way that caused it loss and to then prove the quantum of that loss. That involves a consideration of the particular circumstances in which the conduct that caused the loss occurred. 660 Termite submitted that this was a "no transaction" case. But for the breach of duty, the defendants would not have caused it to adopt the Distributions Policy and to make the payments pursuant to it. Hence, it was not necessary (Termite submitted) for it to establish what action the defendants would have taken, had they exercised the requisite care and diligence. 661 In my opinion, neither Jamieson nor Johnson Controls can be understood as indicating that, in a case of breach of duty like the present, an applicant need prove only some breach of duty and resultant loss with the consequence that an evidentiary burden then shifts to the respondent. Neither case concerned the issue of what must be proved to establish a breach of duty. Instead, as the defendants submitted, each was concerned with issues of causation and damage, being the issues which arise only when a breach of duty or, as in this case a contravention, has been established. Furthermore, it is not to be expected that the Courts in Jamieson and in Johnson Controls were intending, by a form of side wind, to undermine the established principles stated in the authorities referred to above. 662 The general principle is that, an applicant is required to establish what it is that the respondent, acting with the required care and diligence, would have done in the circumstances, to discharge the duty which the law imposes on it. The issue is what that principle required in this case. 663 The essence of Termite's claim is that, although the Cairn Hill Mine had a finite life and fixed liabilities with respect to that life, the defendants had caused it to pay away its profits without maintaining a sufficient reserve of cash with which to sustain itself in the event that foreseeable adverse events affecting its very viability and solvency were realised. This was the characterisation of the case by Termite's counsel in the closing submissions: The plaintiff's case is that what was imprudent was to be distributing all the cash along the way in the knowledge that the creditors were in fact back-ended so that you needed tens of millions of dollars in your bank account at the end of mining operations in order to pay those creditors. By aggressively distributing along the way and then speculating that you might reach projections with only a very limited buffer, a dollar a tonne or three or four dollars a tonne, was relevantly imprudent. 664 Termite did not advance a case that it should not have made any distributions at all. 665 The circumstances which the defendants, as directors and officers acting with reasonable care and diligence and in Termite's interests, had to consider were not only the interests of the Joint Venturers in receiving a return on their investment, but the risk that Termite would not be able to satisfy the known obligations it had incurred to its suppliers, as well as its other liabilities, in the event that it did not, or could not, continue mining operations to the end of the planned mine life. Those circumstances included the prospect that mining might cease on either a planned or unplanned basis. It is the response of a reasonable director or company officer to those circumstances, in Termite's circumstances, which must be considered. 666 The response of such a director or officer in Termite's circumstances in March 2013 could have involved at least these possibilities: (a) a decision not to make any distribution at all of the mining proceeds until the completion of mining when the net profits from the overall project would be known; (b) a decision to make a distribution of the proceeds only to the extent that those proceeds exceeded the known and potential liabilities to creditors, calculated from time to time. As the mining operations neared completion and the Services Contracts were progressively performed, the potential liabilities would become progressively less and, correspondingly the amount of potential distributions could increase; or (c) making a reasonable estimate of the amount of the liabilities which took into account the various contingencies, favourable and unfavourable, affecting the prospect of mining continuing to be profitable, and then determining, accumulating and maintaining a reserve which was appropriate from time to time having regard to those matters. 667 The possibility that a director or officer acting reasonably could have determined that no cash reserve at all was necessary need not be entertained as a reasonable possibility. 668 Further, unlike many negligence and contravention cases, the present case is not one in which the breach question involves, in effect, a choice between the reasonableness of a respondent's conduct in taking the impugned action, on the one hand, and in not taking any action at all, on the other. 669 Termite did not seek to establish alternatives (a) and (b) or any variant of them. Despite that, it formulated its claim for damages on the basis that its loss was to be assessed on the basis that, but for the defendants' claimed breaches of duty, the full amount of the distributions paid away would have remained available to it in June 2014. I consider that, if that was the loss Termite wished to allege, it should have alleged positively, and sought to prove, that the discharge of the defendants' duties required either one of those actions. 670 Nor did Termite make alternative (c) or a variant the primary focus of its claim. Its principal case was that the defendants should not have acted as they did in adopting and implementing a distribution policy containing an insufficient cash reserve. Such a case involves implicitly the notion that the defendants breached their duties by failing to cause Termite to fix upon and maintain a sufficient reserve. Consideration of the reserve which would have been sufficient is closely connected to that case. 671 In my opinion, this means that it was for Termite to prove the reserve of cash which the defendants, acting with the care and diligence which the law required of them, would have maintained. Put the other way around, it was for Termite to prove the amount which would not have been distributed had the defendants discharged their duties. Without proof of one or other of those matters, Termite does not establish breach. 672 Even if I am wrong about that, and Termite is not required to prove as part of its case on breach the amount of the reserve on which the defendants acting, with the required care and diligence and in Termite's interests, should have fixed and maintained, it must establish the same matter in order to prove its loss. That is because the measure of loss is to be determined by comparing the position Termite is in with the position it could have been in had the defendants discharged their duties. 673 Although Termite did not make proof of a sufficient reserve its primary focus in the case, some of its pleading and some of its evidence was to that effect.

Termite's pleaded case about appropriate reserves 674 Termite's pleading of a minimum cash reserve upon which the defendants should have determined was somewhat indirect. 675 The plea in the TASC that the defendants had breached their duties by adopting the Distributions Policy with a Cash Reserve of $3 million included the following allegations: [41] By causing Termite to enter into the Distribution Policy, the defendants: … 41.4 failed to undertake any analysis, or alternatively any proper analysis, into the appropriate cash reserve that would allow Termite to continue to trade through a downturn in commodity prices or suspension of mining activity, which ought to have (but did not) include detailed consideration of: … 41.4.15 that in order to cover a single Downside Event, a cash reserve of approximately $10 million would be required; … 41.6 agreed on the Cash Reserve, that offered no, or no adequate, protection to Termite's creditors or Termite's ability to continue to trade; … 41.6.3 in order to reduce the prospect that Termite would fail to reach the conclusion of the Phase 1 life of mine and avoid premature crystallisation of the Tail Liabilities to not more than a 10% likelihood, retained funds of $50 million would be required. … 676 The TASC did not contain any other plea of a reserve which the defendants, acting with reasonable care and diligence should have adopted. 677 It is apparent that Termite drew the figures of $10 million and $50 million from Mr Tisdell's first report. Mr Tisdell had derived these figures from statistical and probability analyses based on the prices forecast in the ECMFs. His evidence about each was not easy to follow. Both Professor Everett and Professor Trench regarded Mr Tisdell's analyses as theoretically and statistically unsound. In his cross-examination, Mr Tisdell ultimately acknowledged that that was so. I am not prepared to act on Mr Tisdell's evidence in this respect. 678 I note in addition, that Mr Tisdell conceded that a "buffer" of $50 million was not required in March 2014, at which stage mining was expected to conclude in about May 2015. 679 Termite did not present any other evidence to support a finding that the defendants, acting with the care and diligence to be expected of directors in their position, should, in March 2013 or thereafter, have determined on a reserve of $50 million. That case must fail.

The adequacy of the $3 million Reserve 680 There was, however, evidence in the trial that a cash reserve of at least $10 million would have been appropriate. I will refer to that evidence shortly. 681 Before doing so, I will address Termite's claim that the $3 million Cash Reserve could not reasonably have been regarded as adequate. 682 My rejection of Mr Tisdell's evidence, based on his probability and statistical analyses, does not mean that all of his evidence bearing upon the adequacy of the $3 million figure is to be disregarded. On the contrary, some of his evidence was in accord with other evidence in the trial and with inferences naturally arising from it. These matters include the following: participants in the iron ore and copper mining industries in Australia well understood at relevant times that commodity price risk and currency risk outweighed other risks such as mine operational risks; the forecast in the commodity prices and currency movements is fraught with uncertainty, and predictions about them may be subject to significant error. The variability in the forecasts is apparent in the EMCFs prepared by Consensus Economics; account is usually taken of these risks by the use of sensitivity analyses in the cashflow forecasts. Termite had done this in the Long Term Mine Plan Analysis prepared in January 2013 in relation to the decision concerning Pit 2 but it had not been a feature of the monthly LoM CFFs; some cash reserve was appropriate having regard to these matters; a reserve of $10 million in respect of short term downturns was appropriate. Somewhat puzzlingly, Mr Tisdell said that, in expressing that opinion, he had not had regard to the particular circumstances of Termite's business. My understanding is that Mr Tisdell was referring to the position on an objective consideration, rather than taking account of all of Termite's particular circumstances; and a reserve of $10 million was appropriate to provide for both short and long term downturns as the Cairn Hill Mine neared the end of its anticipated life and, in particular, in early 2014. 683 Mr Morris, the forensic accountant called by the defendants, expressed the following opinions concerning the adequacy of the $3 million Reserve: [2.42] [T]he policy of retention of $3 million of cash reserves was appropriate subject, however, to consideration of the forecast levels of monthly cash inflows and outflows in the LOM Cash Budgets. … [2.43] The LOM Cash Budgets forecast that at the end of LOM, Termite would be required to meet significant cash outflows after receipt of the last sale proceeds. Accordingly, it was essential that an appropriate level of cash reserves was held as the LOM approached, in order that Termite would have sufficient funds to meet those outflows. [2.44] In my opinion, the appropriate level of cash reserves for this critical period were the levels forecast in the LOM Cash Budgets. (Emphasis added) 684 Termite's critique of these opinions of Mr Morris included the following: (a) Mr Morris had acknowledged that he did not have any particular expertise or experience in forecasting iron ore prices and that he had prepared his expert report from an accounting perspective, rather than taking into account the exigencies of mining and iron ore pricing; (b) although Mr Morris had opined that Termite's LoM CFFs were robust and modelled its cash flows with a high degree of accuracy, he had acknowledged that he had not seen a report prepared by Termite's management on 31 January 2014 comparing the actual and forecast iron ore prices on a month-to-month basis for the period between February 2012 and January 2014. He also admitted surprise at the extent of the fluctuations and the extent of the differences between the forecast and actual prices. In the light of that report, Mr Morris said that he would have to review the matters which had led him to his opinion about the robustness and accuracy of the LoM CFFs; (c) Mr Morris had agreed that he would not regard forecasts which involved a gross over-estimation of the price for six months of a financial year, and a gross under-estimation for the remaining six months, as being robust and modelling accurately the company's operating cash flow, whereas that had been the case in Termite's forecasts for the financial year ending on 30 June 2013; (d) Mr Morris also agreed that a LoM CFF for Termite at 31 January 2014 to which Mr Parsons deposed showed distributions continuing to January 2014, shipping continuing until November 2014, and a deficit on the overall conclusion of mining of $2,987,736 even with forecast iron ore prices in the range of US$114-126 CIF per tonne. This particular LoM CFF by itself made apparent the inadequacy of a reserve of $3 million; (e) Mr Morris had agreed that, in assessing the adequacy of a cash reserve, it would have been necessary for him to understand the extent of the variances in the iron ore price from the forecasts, and the extent to which the forecasts had historically been accurate, and that these were matters about which he had not been instructed; (f) Mr Morris had not appreciated the feature in the LoM CFFs which counsel for Termite characterised as the "structural flaw"; (g) Mr Morris acknowledged that he had not been provided with information about the extent of the ore loss at the Cairn Hill Mine and agreed that the information about those losses called seriously into question the reliability of the "physicals" on which the life of mine budget was based; (h) Mr Morris said that in expressing the view that $3 million was adequate as a reserve, he had been "endeavouring to express the view that historically [Termite] had maintained sufficient cash reserves to deal with the situations that [had] confronted it" and that he had simply been observing that for the years 2013 and 2014 (up to April), Termite had in fact survived on the cash it had. Understood in that way, Mr Morris' opinion did not really concern the adequacy of a reserve of $3 million in Termite's known and foreseeable circumstances; and (i) Mr Morris agreed that it had been imprudent of Termite to make distributions which had had the effect of leaving only a negligible cash buffer against the risk that the forecast iron ore prices would not be achieved in the last months of mining and that, in expressing his opinions concerning the adequacy of the $3 million Reserve, he had not contemplated that that would be so. 685 Mr Morris calculated Termite's break-even price at AU$94/tonne before making any allowance for IMX's overhead costs, and at approximately AU$98/tonne after making allowance for such costs. Mr Morris' calculation of the break-even price was based on the costs which Termite had forecast for the 12 months to 31 March 2015. I do not regard his calculation as appropriate for present purposes. First, it relates to a period after Termite had completed making the distribution payments; secondly, the forecast costs of Termite take account of Phase 2, about which Termite had made no decision when it was making the distribution payments; thirdly, it is based on forecast and not actual figures; fourthly, it is less than the equivalent US$105.70/tonne apparently used by WAIS in its letter to Termite of 3 September 2012; and, finally, it is well less than the figures calculated by Termite's own management in May 2014 (US$115.77/tonne averaged over the whole life of the mine and US$116.48/tonne forecast for the remainder of the life of the mine). I also note that Mr Morris' estimate matches, almost exactly, the estimates of Termite management in June 2013 of the break-even price for Pit 2 for the period July 2014-February 2015. 686 In my opinion, the critique which Termite made of Mr Morris' opinions based on these matters is appropriate, and I accept it. It has the consequence that I am not prepared to place reliance on Mr Morris' evidence concerning the adequacy of the $3 million as a cash reserve. 687 In submitting that the Court should find that a reserve of $3 million was reasonable in the circumstances prevailing on 12 March 2013, the defendants relied on a number of matters already mentioned. These included: (a) the reliability and stability of the logistics chain and the costs being incurred to the Logistics Service providers; (b) the ease with which Termite could find purchasers of the Cairn Hill ore; (c) the then healthy market price of US$134.75/tonne; (d) that both the forecasts of, and the prevailing view about, the iron ore price were to the effect that it would remain above US$110/tonne CFR; (e) that the LoM CFFs showed that payment of the liabilities to the contractors, including the ETPs, would be paid; (f) their confidence in the modelling of the cashflow; (g) the availability of the stockpiles as a "near cash equivalent"; (h) the prospect that Termite would be able to reduce its costs, including by negotiation with the Logistics Service providers; (i) the prospect that distributions could be withheld in the event of a downturn; (j) the level of reserve required by LinQ when its facility was on foot; (k) that Termite had been able to survive the September 2012 Downturn with the $3 million reserve required by LinQ; and (l) the prospect that the Joint Venturers could make further funds available to Termite. 688 Some, but not all, of these matters may be accepted. At 12 March 2013, the Platts Index price was US$145.50 per tonne, well above Termite's break-even price. Further, the forecast of the Platts Index provided to the Outback Board had indicated that the price would remain at levels which were profitable for Termite. Further still, the LoM CFFs for January 2013 had contemplated that, without distributions, Termite would steadily accumulate cash of more than $50 million by March 2014. 689 Nevertheless, I consider that a number of matters, in combination, indicate that a reserve of $3 million could not reasonably have been regarded as adequate and that the defendants, acting with reasonable diligence, should not have approved a Distributions Policy with that level of reserve. 690 Some of the reasons for that conclusion have already been mentioned in my earlier findings. The matters which indicate the inadequacy of the $3 million Reserve include: (a) the reserve of $3 million represented about 25% of Termite's monthly expenditure, that is, about one week of its costs, and it did not even cover Termite's monthly liability to just one of the Services Contractors (Exact); (b) if Termite realised its objective of shipping 150,000 tonnes per month, the Reserve of $3 million would be wholly eliminated if the average price it received for the ore for one month fell by $20 per tonne below its break-even price, for two months by $10 per tonne and for three months by $6.70 per tonne; (c) despite the matters which the defendants emphasised, the Cairn Hill Mine remained a marginal high cost operation. The defendants knew that was so and were also aware of the ever present prospect that Termite could quickly become insolvent; (d) the volatility in the iron ore price was well known and well appreciated; (e) a downturn in the iron ore price could have a terminal effect on Termite. It had had a "near death' experience in the September 2012 Downturn when the iron ore price had dropped below Termite's break-even price for only 44 days. It had been able to survive that Downturn by drawing down $4.495 million on the LinQ facility and because of the fortuitous happenstance that the Downturn had coincided with the change in the pricing mechanism in its contracts. Neither circumstance could reasonably be expected to be repeated after March 2013. Those matters considered by themselves indicate that the defendants' attempt to justify the $3 million Reserve by reference to the fact that Termite had been able to survive the September 2012 Downturn with a reserve of that order lacks a proper basis; (f) the distinction between a short term "perturbation" and a long term decline in iron ore prices was not as clear as the defendants sought to portray at the trial. That portrayal suggested a relatively benign view of a short term downturn and postulated that it was only a long term decline which could lead to Termite's insolvency. The evidence does not support that view. The September 2012 Downturn, now characterised as a short term "perturbation", was, as I have noted, a "near death" experience for Termite which it survived by reason of matters which were unlikely to be repeated; (g) the foreseeable risk that Termite would not be able to mine ore of the predicted amount and tonnage. The reality of this risk became more and more apparent as mining progressed; (h) at the very time the defendants were adopting the Distributions Policy, they were themselves contemplating the prospect of Termite's insolvency, for the reasons found earlier; (i) for the reasons given earlier, Termite's stockpiles could not reasonably have been regarded as a "near cash equivalent", let alone a cash equivalent of the order which Mr Meadows claimed; (j) it was unrealistic for the defendants to suppose (and I am not satisfied they did suppose) that Termite would be able to obtain further funding, if necessary, from the Joint Venturers. Without undertaking a capital raising which would necessarily have taken some time, IMX had no capacity to provide further funding, and was in fact already indebted to Termite for the amount of the IMX-Termite Loan of $5 million. Taifeng had made plain that it did not wish to contribute further funds to Termite; (k) it was not reasonable for the defendants to think that the Services Contractors would view favourably granting Termite relief from its contractual liabilities if they became aware that Termite was the author of its own predicament by paying away its profits unnecessarily; (l) while the prevailing Platts Index price in March 2013 was healthy and, as the defendants submitted, the forecasts were favourable, experience had indicated that the iron ore price could drop significantly and without warning; (m) the LoM CFFs contained the "structural flaw" about which I made findings earlier. This structural flaw by itself indicates the insufficiency of a reserve of $3 million; (n) the defendants ignored the advice from Termite's management that the $3 million Reserve was inadequate; (o) the uncertainty about whether Termite would proceed with Pit 2 or with Phase 2; (p) the risk that Termite might suffer from two or more adverse events simultaneously; (q) Mr Hassard's analysis of 9 April 2013 suggested that the Termite Cash Reserve should be $9.2 million; (r) the negative cash flows in the four Scenarios canvassed in the Downside Analysis Interim Report of 29 April 2013 were in the range $6.2-$13.8 million; (s) the negative cash flows for the same four Scenarios in the Risk Management Strategy presented to the Outback Board on 22 May 2013 (which had been revised downwards for reasons of dubious validity) were still in the range of $2.8 million-$11.8 million; (t) the very size of the potential Tail Liabilities. That potential is indicated by the quantum of the Tail Liabilities at June 2014 which in a later section of these reasons I find were of the order of $25.4 million. The potential liability must have been even higher in March 2013. 691 The defendants emphasised the close equivalence between the combined negative cash flow figure of $2.8 million for Scenario 1 in the May 2013 Downturn Strategy Document and the Reserve of $3 million. They submitted that that equivalence supported the reasonableness of the $3 million Reserve. That submission, which involved some selective reading of the Downturn Strategy Document, cannot be accepted. It ignores the fact that the $3 million figure is well less than the combined negative cash flows for each of the other three Scenarios considered in the Downturn Strategy Document. It also ignores the evidence that all four figures had been reduced from the April counterpart figures for reasons which were unsound or of dubious validity (for example, the stratagem of removing allowance for one of the monthly invoices due to Exact). 692 In my opinion, there is no difficulty in concluding that a cash reserve of $3 million was inadequate.

A reserve of at least $10 million was appropriate 693 Many of the matters which indicate the inappropriateness of the reserve of $3 million also indicate that Termite's claim that the reserve should have been at least $10 million should be upheld. In addition to the matters to which reference has already been made concerning the inadequacy of a $3 million reserve, I mention the following: (a) a reserve of $10 million represented about two-thirds only of Termite's monthly expenditures; (b) if Termite realised its objective of shipping 150,000 tonnes per month, it would take a fall below the break-even price of an average of $33.30 per tonne over a two month period, or $22.20 per tonnes over a three month period for the reserve of $10 million to be eliminated; (c) the sum of $10 million is less than the amount of a "month plus" or six weeks of expenditure which Mr Meadows said he had thought appropriate (being the equivalent of $12-$18 million); and (d) Mr Nitschke said that at the time of adopting the Distributions Policy, he had had in mind reserves at the Outback level of about $10 million for a "shortened" Pit 2 and about $7 million for no Pit 2. 694 In addition, it is to be remembered that Termite claimed a reserve of $10 million as being appropriate for a short term decline. The merit of a reserve of that order is all the more apparent if it was to provide for a long term decline in addition. 695 I consider that Termite has made good the claim that the defendants, acting with the care and diligence to be expected of directors in their position and in its interest, would have maintained in Termite a cash reserve of at least $10 million throughout the period from March 2013 to June 2014. A higher reserve may well have been appropriate in March 2013 and in the months which followed, but the case and evidence presented by Termite does not permit a finding as to any higher figure.

Conclusion on breach of duties 696 The defendants emphasised a number of matters. The business decisions which they made ought not to be viewed through the lens of hindsight. In particular, the Court should not determine Termite's claims by a consideration of what they could have done, in retrospect, to have avoided the insolvency of Termite and the losses to the creditors. Instead, the Court should consider whether, in the circumstances which the defendants faced and looking prospectively, they had fallen short of a standard of conduct which the law required of them. I accept that submission. 697 A number of matters may be accepted. In 2013-2014, it was commonly accepted that mining generally involved risks, especially for small miners like Termite. In particular, Termite was very susceptible to adverse movements in the iron ore price. The defendants were engaged in the conduct of difficult business requiring strategic, managerial and operational decisions of diverse kinds. 698 I accept, as already indicated, that it was appropriate for the defendants to rely on the EMCFs. These contained the estimates of movements in the iron ore price made by reputable analysts. It was reasonable for the defendants to suppose that, in making their forecasts, the individual analysts had attempted to identify, and give weight to, the various factors which impacted on the Platts Index. Some analysts may have attached greater weight to some matters than others but the Consensus Economics mean is likely to have added to averaged that out. 699 I have previously held that no criticism can be made of the defendants for not basing the LoM CFFs on the Credit Suisse forecasts. Reputable analysts had not predicted the marked long term decline in the iron ore price which occurred in 2014. Instead they were predicting prices at which Termite could operate profitably. 700 It is also apparent that, during 2013, the iron ore price remained high so that Termite was earning good income. 701 On the other hand, it is difficult to identify any countervailing consideration pointing against the appropriateness of a reserve of at least $10 million. The only disadvantage from the defendants' perspective is that there would have been less funds available to be distributed. 702 It was not suggested that not having the funds would have made any material difference to Taifeng. 703 The defendants submitted that it was in Termite's interest to make the distributions to alleviate the liquidity difficulties of IMX because: (a) if IMX became insolvent, Flinders Ports could terminate its contract with Termite, removing Termite's access to Port Adelaide for shipment of its products; (b) a healthy parent company would be more likely to raise capital on the market if that was required to assist Termite; and (c) IMX provided substantial administrative services to Termite. 704 In my opinion, these factors cannot be regarded as sufficient countervailing factors for present purposes. In the first place, the evidence does not indicate that it was inevitable that, without another $3.5million of distributions (the IMX share in round terms of an additional $7 million), IMX would have become insolvent. It seems improbable that it would have done so and there is, in any event, some inconsistency between the claim that, absent the distributions, IMX would have become insolvent and the claim made in support of the adequacy of a reserve of $3 million that IMX and Taifeng would have been able to provide assistance to Termite. There is also an inconsistency with the confidence which Mr Nitschke claims to have had about IMX's ability to effect a capital raising. 705 The second and third matters to which the defendants referred appear, on their face, to be "make-weight" submissions and I do not regard them as being of any substance. 706 The defendants submitted that the Court should be satisfied that circumstances involving the need for them to consider the interests of Termite's creditors had not arisen. They drew attention to the fact that Termite had been able to wholly discharge its liability to LinQ in 2012 and emphasised again that Termite had traded profitability in 2013 as evidenced by its very ability to make the distributions. The defendants also emphasised that a reserve of $3 million had been maintained, to their use of detailed and sophisticated LoM CFFs, that throughout 2013 these LoM CFFs had shown creditors being paid in full, to the fact that the price of iron ore at each distribution exceeded Termite's break-even price, the absence of any indication in the forecasts of an imminent downturn in the Platts Index price, and the fact that they had been budgeting for Termite to remain solvent. 707 Each of these submissions may be accepted. I am satisfied that it should not be held that Termite was, at the time of the adoption of the Distributions Policy or at the time of any of the payments in 2013, insolvent or nearing insolvency in the sense in which I understand that term to be used in the authorities. 708 However, the authorities to which I referred earlier indicate that test is broader than "nearing insolvency" or "doubtful solvency". They indicate that the duty of directors to consider the interests of creditors is enlivened when there is a "real and not remote risk of insolvency" and when the objective circumstances require consideration of the interest of creditors. That those circumstances were in existence on 12 March 2013 and at the time of each payment is confirmed by the defendants' own conduct. I refer to my earlier findings concerning the defendants' ongoing contemplation of the prospect of Termite becoming insolvent. The very fact that the defendants took action to protect IMX in that event indicates the defendants' appreciation of the reality of that risk. The defendants knew that the Cairn Hill Mine had a finite life and that it had entered into commitments to the Services Contractors for periods closely coinciding with the anticipated life. The prospect of Termite not being able to discharge its liabilities in the event that the mining ceased to be profitable was ever present and was appreciated by the defendants. 709 In my opinion, this is a matter which adds weight to my conclusion that the defendants should have determined on a Termite Cash Reserve of at least $10 million. 710 The adoption and implementation of the Distributions Policy with a reserve of less than $10 million cannot rationally be regarded as having been taken in Termite's best interests. It is plain that it was not. Instead it was undertaken in the interests of IMX and Taifeng. The locus of the decision-making for Termite at the Outback level was of itself conducive to Termite's interests not being considered and, instead, to those of IMX and Taifeng being given prominence. That is what occurred. It was IMX's desire to have the cash and its need to secure Taifeng's agreement to that course which were the driving considerations. The consideration by the Termite Board of the Distributions Policy appears to have been regarded as a matter of form only, and to have been perfunctory. No one appears to have considered what was in Termite's best interest. 711 It is not necessary to discuss the business judgment rule in relation to the breach of s 180(2) of the Act in any depth. That is because it is plain, on my findings, that it is not available to the defendants. Their decision, to the extent to which they positively made a decision, concerning the amount of the Termite Cash Reserve was not made for a proper purpose, as it was not made in Termite's interests. Instead, it was made in the interests of IMX and Taifeng. By reason of their respective positions in relation to IMX and Taifeng, each of the defendants had a material personal interest in keeping the Termite Cash Reserve low. It is very apparent that the defendants did not engage in a proper analysis of the amount required for the Termite Cash Reserve before adopting the Distributions Policy and thereafter did not keep themselves properly informed about the adequacy of the Reserve. On my findings, none of them could rationally have believed that a reserve of $3 million was in the best interests of Termite. 712 I conclude that Termite has made good its claim that each of the defendants breached the duties imposed by ss 180 and 181 of the Act, in respect of the adoption of the Distributions Policy, its implementation, and in their failure to review and revise it during the period in which the distributions were made. It has also established that Messrs Meadows, Nitschke and Parsons breached their common law duties. 713 As noted earlier, the parties' submissions did not address the positions of the defendants individually. I took it to be accepted that the findings of breach, if made, should apply to all defendants. That is my finding.

Accessorial Liability 714 Given my findings, it is not strictly necessary to consider Termite's claim, made in the alternative, that Messrs Hoskins, Sun and Pang are liable as accessories because they were persons "involved in" the contraventions by the other defendants of s 181 of the Act. Section 181(2) provides that a person who is "involved in" a contravention of subs (1) is deemed to have contravened that section. Section 79 of the Act provides examples of when a person may be deemed to be "involved in" a contravention: A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. 715 The terms "aided" and "abetted" in the context of s 79 are synonymous and they are used to describe the action of a person who takes some part in the commission of an offence. Similarly, "counselled" and "procured" are synonymous terms and describe the actions of a person who is an accessory before the fact even if not present at the action said to constitute the contravention: Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267; (2005) 53 ACSR 305. 716 In Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661, Mason ACJ, Wilson, Deane and Dawson JJ held, in relation to the counterpart of s 79(c) contained in s 75B(1) of the Trade Practices Act 1974 (Cth), at 670 that: [T]he proper construction of para (c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention. (Emphasis added) 717 Accordingly, in order for persons to have been "involved in" a contravention, they must have willingly participated in the contravention. Furthermore, there must be a practical connection between the person and the contravention: Leighton Contractors Pty Ltd v Construction, Forestry, Mining and Energy Union [2006] WASC 144, (2006) 154 IR 228 at [29], cited with approval in Qantas Airways Ltd v Transport Workers' Union of Australia [2011] FCA 470, (2011) 211 IR 1 at [324]. The practical connection does not necessarily require the person to have physically engaged in conduct to further the contravention. It is sufficient that the person says or agrees to do something that results in his or her association with the conduct constituting the contravention: Leighton Contractors at [29]. In R v Nifadopoulos (1988) 36 A Crim R 137 at 140, the Court noted that "a person cannot become criminally involved in an act made unlawful by mere knowledge or inaction on his part - some act or conduct on his part is necessary". 718 A person will only be found to have been "involved in" the contravention if they had knowledge of the essential elements constituting the contravention: Yorke v Lucas at 670. However, a person with the knowledge of the essential elements does not need to know that those elements amount to a contravention or that the conduct is unlawful: Yorke v Lucas at 667; Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) [1999] FCA 1161, (1999) 95 FCR 302 at [186]. 719 Imputed or constructive knowledge of the essential elements that constitute the contravention is insufficient. The person must have actual knowledge of the elements: Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 at [11]. 720 In many cases, the question of whether or not a person had actual knowledge of the essential elements of the contravention is a matter of inference from the surrounding circumstances. In respect of such cases, Mason CJ, Dawson, Toohey and Gaudron JJ in Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 35 A Crim R 382 at 385 said: …where knowledge is inferred from the circumstances surrounding the commission of the alleged offence, knowledge must be the only rational inference available. … the fact remains that a combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter. 721 In the present case, the parties addressed very few submissions to the alleged accessorial liability of Messrs Hoskins, Sun and Pang. I had the impression that this was because they tacitly accepted that, if Termite obtained the findings it sought, it was inevitable that primary contraventions by these defendants would be established. I take the same view. I indicate however that, had it been necessary to do so, I would have found that Messrs Hoskins, Sun and Pang were also involved in the contraventions of s 181 of the Act as contraveners.

The IMX Loan 722 At the commencement of these reasons, I referred to Termite's claim that the defendants had also breached their duties by causing it to make the IMX Loan of $5 million. Termite acknowledged that its claim in respect of the loan was subsumed in its principal claim, and that it was necessary for the Court to consider it only in the event that the principal claim fails. 723 That claim has not failed, although it has succeeded only for a lesser sum than that claimed by Termite. That means that the claim in respect of the IMX Loan need not be addressed. I note, however, that Termite faced the difficulty with respect to this claim that the IMX Loan had been repaid in September 2013. In that circumstance, and absent any claim for loss of use of the monies while the loan was outstanding, it is not easy to see that Termite had suffered any loss.

Causation 724 Section 1317H of the Act provides (relevantly): (1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if: (a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and (b) the damage resulted from the contravention. The order must specify the amount of the compensation. Note: An order may be made under this subsection whether or not a declaration of contravention has been made under section 1317E. 725 It was common ground that both ss 180 and 181 are civil penalty provisions. 726 Termite also relied on s 598(2) of the Act which provides: (2) Subject to subsection (3), where, on application by an eligible applicant, the Court is satisfied that: (a) a person is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation; and (b) the corporation has suffered, or is likely to suffer, loss or damage as a result of the fraud, negligence, default, breach of trust or breach of duty; the Court may make such order or orders as it thinks appropriate against or in relation to the person (including either or both of the orders specified in subsection (4)) and may so make an order against or in relation to a person even though the person may have committed an offence in respect of the matter to which the order relates. 727 There was little difference between the parties as to the principles of causation to be applied. The terms "resulted from" and "as a result of" used in s 1317H and s 598(2) respectively require that there be a causal connection between the alleged damage, on the one hand, and the identified contravening conduct, on the other. It is damage which, as a matter of fact, was caused by the contravention which may be the subject of an order for compensation under these provisions: Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 at [709]. 728 It has also been said that the words "resulted from" in s 1317H should be given their ordinary meaning of requiring a causal connection between the damage and the contravening conduct, free from the strictures of analogy with equitable claims against fiduciaries: ibid. Nevertheless, the common law principles of causation are of considerable assistance. 729 It is established that common law causation involves applying "common sense" to the circumstances of each case: March v E & MA Stramare Pty Ltd [1991] HCA 12, (1991) 171 CLR 506; Henville v Walker [2001] HCA 52, (2001) 206 CLR 459 at [95]. 730 Loss or damage may be the result of contravening conduct even though other factors have contributed to its occurrence: Henville v Walker at [97]. It is sufficient if the contravening conduct contributed in a material way to the loss and damage. 731 As already noted, Termite submitted that, while it was necessary for it to show that a breach of duty by the defendants caused or materially contributed to the loss and damage it alleges, it is for the defendants to discharge an evidentiary onus of establishing that, had they acted in some other way, it would still have suffered some or all of the same loss. I rejected that submission, holding that it was necessary for Termite as part of its claim on breach to prove the reserve which the defendants, had they acted with reasonable care and diligence and in Termite's best interests, would have caused it to adopt. I also held that, even if that conclusion be wrong, it was necessary for Termite to prove the same matter in order to prove that the defendants' conduct had caused it loss. 732 Both s 1317H and s 598(2), on which Termite relies, permit it to recover compensation only for the damage resulting from the defendants' failure to act with reasonable care and diligence. Unless the Court is able to make a finding to the effect that, had the defendants exercised reasonable care and diligence and in its best interests, some or all of the distribution payments would not have been paid, Termite would not establish the relevant causal link. In my view, the onus of establishing this to the Court's satisfaction rests on Termite. It cannot cast on to the defendants the evidentiary onus of showing what directors and officers, acting with reasonable care and diligence would have done, or of showing that, with the exercise of reasonable care and diligence, Termite would still have suffered some or all of the same loss. 733 I agree with counsel for the defendants that the circumstances of the present case are very different from those considered in Jamieson. But in any event, I do not understand Jamieson, or for that matter, Johnson Controls, to be suggesting, as a universal proposition, that an applicant is not ever required to establish the alternative action it would have taken had the contravening conduct not occurred. Justice Applegarth in Jamieson said only that a plaintiff should not necessarily be required to prove what else he or she would have done. And in Johnson Controls, Beazley P said only that there was no "strict" requirement for the plaintiff to prove either a "no transaction" or a "different transaction" case. Her Honour went on to say that the plaintiff's obligation was to prove the alleged misrepresentation, reliance on that representation, and the quantum of the loss. What that involved, her Honour said, depended on the particular circumstances in which the conduct causing the loss had occurred. 734 One of the particular circumstances of the present case is that the defendants were under a positive duty to exercise reasonable care and diligence and to act in Termite's best interests. This is not a case in which the defendants' obligation was only to refrain from acting in a certain way. Further, as previously noted, there is a close connection between a determination of the reserve which should have been maintained and the determination of the insufficiency of the reserve in fact maintained. 735 In my view, those matters support the conclusion that it is for Termite, at least at the causation/loss stage, to prove what its position would have been had the defendants discharged their duties. Termite asserts, implicitly, that the defendants should have taken some action. It is for Termite to prove what it has lost by the omission of the defendants to take that action.

The formulation of Termite's claims 736 As noted at the commencement of these reasons, Termite alleged that it had suffered loss on three alternative bases: (a) had Termite retained the amount of $46,053,095.08 paid away in distributions, it would have been able to continue mining operations and pay all creditors (apart from Outback) in full. On this basis, it claimed damages of $78,487,539.37, being the aggregate amount of the proofs of debt submitted by creditors ($80,515,351.18) less the amount of an interim dividend of $2,027,811.81; (b) had Termite retained the $46,053,095 but, contrary to Termite's position, the Outback-Termite Loan was not subordinated, Termite would have been able to repay all of the trade creditors and all of the Termite-Outback Loan save for $16.5 million. The difference between that position and its actual position is approximately $58.8 million; and (c) the amount of the contributions paid away, namely, $46,053,095.08.

Consideration of Termite's claims 737 Strictly speaking, it is not necessary to consider the first and second formulations. That is because Termite did not establish that the exercise of reasonable care and diligence by the defendants and their acting in its best interests would have required that no distributions at all be made. It would not be appropriate to find that Termite has suffered a loss from conduct of a kind which it not make part of its case, or which, because of my rejection of Mr Tisdell's evidence, it did not establish. 738 For the submission as to what Termite's position would have been had the distribution payments not been made with the consequence that it had the full amount of $46,053,095.08 available to it at the end of March 2014, Termite relied upon the opinion of Mr Tisdell. He expressed the view that, with the sum of $46,053,095.08 available to it in March 2014, Termite could have continued mining operations until it had completed Phase 1, including Pit 2, and, in fact, have improved its financial position. He also said that, with the benefit of those funds, Termite could, as at 31 December 2014, have discharged its obligations under the Services Contracts, discharged its trade creditors and used the remaining cash, which Mr Tisdell calculated at $32.2 million, to pay back the majority of the Outback Loan. 739 I would not have been prepared to act on these aspects of Mr Tisdell's opinion. First, I refer again to my general lack of confidence in Mr Tisdell as an expert witness. 740 Secondly, the basis upon which Mr Tisdell calculated Termite's revenue after March 2014 is not clear, and could not be replicated by Mr Morris. When the latter inserted the Platts Index prices into LoM CFFs apparently used by Mr Tisdell, this produced a difference between the experts of $11.8 million, which the evidence did not explain. This was because Mr Tisdell had not set out the bases for his calculations. It is an ordinary expectation of experts that they will set out in their report the factual basis and assumptions for their opinions. Mr Tisdell's second report did not meet that standard. I agree with the defendants' counsel that it is telling that Mr Morris, an experienced forensic accounting witness, could not understand the analysis performed by Mr Tisdell and had been unable to verify the provenance of the data upon which he relied. 741 Thirdly, Mr Tisdell made assumptions about the shipping costs likely to be incurred by Termite which were not verified by independent evidence. They were no more than his own estimates. 742 Fourthly, Mr Tisdell did not base his calculations on the LoM CFFs prepared for Termite in April 2014. 743 The consequence is that, even had I upheld Termite's claims with respect to the nature of the breaches of duty, I would not have been satisfied that it has established a proper basis for the first and second formulations of its claim. 744 That means that, at its highest, Termite's claim could have been for no more than the aggregate of the distributions paid after March 2013, namely, $46,053,095.08. For the reasons given earlier, Termite has not established that, had the defendants discharged their duties, it would have retained the $46,053,095.08. 745 Instead, Termite has shown only that, had the defendants maintained a minimum reserve of $10 million, it is likely to have had an additional $7 million available in mid-2014. Counsel for the defendants identified the consequence in damages of this conclusion: If this point we have made is accepted, then it follows that, even on the evidence that has been presented by Termite, the most that they could establish is that the defendants ought to have maintained a cash reserve of $10 million rather than $3 million, against the prospect of short-term volatility events. If that is right, the consequence is that the maximum amount of damages which could ever be awarded is $7 million because the cash reserve would only have been short by that amount, … 746 Counsel did not contend that there should be any reduction from the figure $7 million in damages for any other reason. Counsel for Termite did not make any submission in answer to the defendants' submission on this point, no doubt because of the different approach which Termite took to the issues of breach of duty and causation.

Administration in any event? 747 The defendants raised a further issue concerning Termite's pleaded loss. This was that, even had Termite retained the whole amount of the distributions it had paid away, it is likely that it would still have been placed into administration in about June 2014. The consequence, so the argument ran, was that Termite would have suffered the same losses in the administration and liquidation as it has in fact suffered. 748 This position seems counter-intuitive because, on the hypothesis being considered, Termite would have held an additional $46 million in June 2014. It seems improbable that in that circumstance it would have been placed into administration at that time. But even if it had, the Administrators and Liquidators would have had an additional $46 million. However, it is not necessary to address that circumstance in detail because of an antecedent difficulty with the defendants' contention. 749 Counsel for Termite submitted that the defendants' filed Defence had not raised this issue and, accordingly, that it was not open to the defendants to raise this as a defence. When counsel took the objection, I ruled that I would receive the evidence from Mr Nitschke that the defendants wished to lead and give a ruling in this judgment. Neither counsel opposed that course. 750 Counsel for the defendants did not contend that the filed Defence contained a positive plea to the effect that Termite's administration would have occurred in any event, even had it retained the whole amount of the distributions. He submitted, however, that the issue did arise squarely on the pleadings because the filed Defence denied Termite's allegation that, but for the defendants' breaches of duty, Termite would not, amongst other things, have been rendered insolvent. 751 I do not accept this submission of the defendants. The claim that Termite would have passed into administration at the same time it did with the same consequences is a matter which should have been expressly pleaded - see r 16.03(1)(b) and r 16.08 of the Federal Court Rules 2011 (Cth). Such a claim would give rise to a separate forensic enquiry in respect of which Termite should have been put on notice. It is the kind of matter on which both parties may well have wished to lead expert evidence. That being so, the defendants' failure to raise the issue in the Defence is, in my view, a cause of material unfairness to Termite. That is especially so given that the onus is on a defendant to plead and prove that a supervening event would have caused the applicants loss in any event: Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 at [429]; Muller v Lalic [2000] NSWCA 50 at [40]; and South Australia Stevedoring Company Ltd v Holbertson [1939] SASR 257 at 260.

Conclusion on causation and loss 752 For these reasons, I consider that Termite is entitled to judgment in the sum of $7 million and, subject to hearing from the parties, interest.

Damages 753 On the basis of the findings and conclusions set out above, it is not necessary to make findings concerning Termite's claim for damages. However, I will do so, in case the matter goes further and they become necessary.

Overview of Termite's damages claim 754 I have already recorded that Termite's pleaded claim was that, but for the breaches of duties by the defendants, it would not have entered into the Distributions Policy and made the payments to IMX and Taifeng; it would thereby have had an additional amount of $46,053,095.08 available to it with which to continue mining operations, that it would not then have ceased mining operations without making payment of the Tail Liabilities and without discharging its liabilities to other creditors; that it would have been in a situation in which Outback would have written off the Outback-Termite Loan; and it would not have been rendered insolvent. 755 On this basis, Termite's primary claim is for the deficiency on its liquidation, namely, $78,487,539.37 (unsecured creditor claims of $80,515,351.18 less the amount of the interim dividend of $2,027,811.81 paid by the Liquidators on 14 April 2015 and 7 June 2016). 756 Termite's first alternative claim is that, had the distributions not been made, it would have avoided the crystallisation of the Tail Liabilities and repaid its trade creditors and have been able to reduce the Outback-Termite Loan by approximately $32.2 million. It claims the difference between the total unsatisfied liabilities of $78,487,539.37 and this position, being a loss of $64.63 million. 757 Termite's next alternative position is a claim for the aggregate amount of the distributions, namely, $46,053,095.08. 758 The figures in the above three formulations differ from those in the TASC, but no point was taken about that in the trial. 759 I have already rejected Termite's claim with respect to the $5 million lent to IMX. 760 Termite's first and second formulations required it to prove the deficiency in the liquidation. It claimed that the deficiency was made up of four components: Category of Claim Debt (including GST) Total category claim (including GST) Trading debts (excluding logistics creditors) $2,492,200.10 Trading debts (logistics creditors) $814,252.37 $23,197,302.27 Cronos $13,578,532.36 Exact $1,842,806.20 Flinders Ports $6,961,711.34 SBR Non-trading claims by logistics creditors $2,206,798.75 $42,762,741.24 Cronos $10,124,495.08 Exact $15,033,279.36 Flinders Ports $4,125,445.45 Gemco $8,272,722.60 SBR $3,000,000.00 IMX Other claims: $3,853,034.77 $12,063,107.57 Australian Taxation Office $3,913,654.08 Juhua Group (Hong Kong) Ltd $1,406,293.35 Sinosteel International Holding Company Ltd $1,835,797.89 Sichuan Taifeng Group Co Ltd $1,046,892.12 Shanghai Guodian Shipping Co Ltd $4,265.53 Ikonomopoulos Family Trust $3,169.83 Life Together Unit Trust $80,515,351.18 Less the interim dividend $2,027,811.81 Amount of loss claimed $78,487,539.37

761 Termite's claim for damages in respect of these liabilities had this incongruity. It sought to establish its own liability to its creditors whereas it was the defendants who sought to minimise that liability.

The significance of the Liquidators' admission of the proofs of debt 762 In most but not all instances, the Liquidators have admitted proofs of debt for the amounts shown in the above table. This gave rise to two issues: the evidentiary effect of the Liquidators' admission to proof of a debt; and whether the amount of Termite's liability to a creditor is capped by the amount for which the debt has been admitted to proof. It is convenient to consider these two issues at the outset. 763 The defendants advanced two inter-related propositions: first, the fact that the Liquidators have admitted a proof of debt does not establish the validity of a claim and, secondly, Termite's liability to a creditor is capped by the amount of the admitted proof of debt. 764 As to the first of these issues, it is established that a liquidator's admission of a proof of debt from a creditor does not foreclose issues as to the existence and extent of the liability in proceedings between the company in liquidation or its liquidators, on the one hand, and a third party, on the other: The Duke Group Ltd (in liq) v Arthur Young (REG) [1991] SASC 2707; (1991) 3 ACSR 759 at 762-767 and in particular at 766, and on appeal Duke Group Ltd (in liq) v Arthur Young (R) (No 2) (1991) 4 ACSR 355 at 397. Counsel for Termite did not submit that this principle in Duke Group should not be applied in the present case. 765 The defendants submitted that, when a claim of a creditor has been admitted to proof, the amount which the company in liquidation can claim against a third party in proceedings like the present is "capped" by reference to the amount for which the debt was admitted. They acknowledged that they had no authority to support that proposition, but submitted for its correctness as a matter of principle. Counsel noted that, if no proof is submitted by a person who might be thought to be a creditor, then the company in liquidation is not liable to pay anything to that third party. Similarly, if the claim of a creditor is admitted to proof only in part, then the company in liquidation can have no liability to that creditor in respect of the excluded portion. 766 In my view, the defendants' submission concerning the capping effect of the admission of the proof of debt should not be accepted. First, it is inconsistent with the defendants' pleading in [56(a)] of the Amended Defence by which it denied that the admission of proofs of debt by Termite's Liquidators had any relevance to the quantification of the losses resulting from the defendants' alleged breach of duties. 767 Secondly, it is open to liquidators to revise their decision with respect to the admission of a debt to proof, and as to the amount for which it should be admitted: see reg 5.6.55 of the Corporations Regulations 2001 (Cth) in the form applicable to the liquidation of Termite. In the event that a court determines that the liability of the company in liquidation is greater (or, for that matter, less) than the liquidators have determined, it is to be expected that the liquidators would give effect to the court's determination. A court may make such a determination in proceedings like the present, on an application by the liquidators, or on application by a creditor for review by the court of a decision rejecting a proof of debt, whether in whole or in part: see reg 5.6.54 of the Corporations Regulations. 768 Accordingly, I do not accept that the amount for which a debt has hitherto been admitted to proof by the present Liquidators constitutes a form of cap on the defendants' liability.

The trading debts - excluding the Logistic Creditors 769 Subject to their submissions concerning liability and causation, the defendants did not dispute the amount of $2,492,199.10 of the claim by Termite for the trading debts of creditors other than the logistics creditors. As the difference between this figure and the amount claimed by Termite ($2,492,200.10) is immaterial, I will use the figure which the defendants admitted.

The trading debts - Logistic Creditors 770 The defendants admitted the quantum of the amount claimed by Termite for Cronos and Flinders Ports in respect of its pre-administration trading debts (again subject to the issues of liability and causation). The differences between the amounts admitted by the defendants and the amounts claimed by Termite in respect of the trading debts of the remaining two logistics creditors, Exact and SBR, were not large, but require findings.

Exact - trading debts 771 Termite claimed $13,578,532.36 (inc GST). This figure included an amount described as the "June Residual Claim" and interest on unpaid invoices. The defendants admitted a quantum of $12,733,598.49, this being the figure claimed in Termite's written opening. 772 The parties' submissions did not indicate how the difference of $844,933.87 between these two figures was to be reconciled. However, Mr Morris, who was called by the defendants, accepted that Termite was liable to Exact in respect of several components of the claim, totalling $11,921,546.60 (inc GST). The difference between that figure and the amount claimed by Termite is the June Residual Claim ($616,536.76) and the claim for interest ($1,040,449 at the higher level claimed by Exact). As the defendants did not submit that Mr Morris' opinion concerning the Exact trading debt should not be accepted, it is sufficient to give attention to those two items.

The June Residual Claim 773 The evidence supporting the June Residual Claim is not altogether clear. The affidavit of Mr Lewis indicated that Termite claimed $191,304.13 for "lost profits" in respect of the period 24-30 June 2014. 774 Mr Thwaites, the commercial and financial manager of Exact, deposed that, rather than being a claim for loss of profits, the June Residual Claim of $616,537.76 comprised a claim for the cost of work to 30 June 2014 for which Exact had already been committed at 24 June 2014 (the date Exact terminated the contract). The difference between the figure of $616,537.76 to which Mr Thwaites deposed and the amount Termite claimed ($616,536.76) is immaterial and can be disregarded. The difficulty with Mr Thwaites' evidence is that it did not rise above assertion. 775 Mr Holmes considered that the June Residual Claim was really a claim for a portion of Exact's fixed costs for the month of June 2014. He opined that claim was not justified and that Exact's claim for the period between 24 and 30 June 2014 should instead be for loss of profits. He quantified that claim at $224,070. 776 Mr Morris said that he was not able, on the information provided to him, to express a view on Exact's original claim which he noted, with GST, amounted to $210,434.54. He was not asked to express a view on the claim of $616,536.76. 777 The defendants did not make any particular submission with respect to the claim for $616,536.76, although I understood that they opposed its inclusion. 778 The position is therefore somewhat unsatisfactory. In principle, Mr Holmes' approach seems correct, and neither it nor his calculation was contested. Accordingly, I find that Termite's claim in respect of its liability to Exact for the period 24-30 June 2014 should not be characterised as a claim for a trading debt, but as a claim for loss of profits. I will allow it on that basis in the sum calculated by Mr Holmes, namely, $224,070 but on the basis that it should be in the category of a non-trading claim.

Interest 779 Exact's contention that Termite is liable to it with respect to interest is based on cl 11.6 of the General Conditions of the Mining Services Contract. That clause provides: If any moneys due to either party remain unpaid after the due date, then interest is payable on the amount due from but excluding the due date to and including the date upon which the moneys are paid. The rate of interest is the average bid rate for bills (as defined in the Bills of Exchange Act 1909 (Cth)) having a tenor of 90 days which is displayed on the page of Reuters Monitor System designated "BBSY" plus one percent. Interest must be compounded at 3 monthly intervals. (Emphasis added) 780 In his affidavit of 18 August 2016, Mr Thwaites indicated that Exact sought interest on "unpaid invoices" in the sum of $962,860.97. 781 Mr Holmes calculated Exact's interest entitlement in accordance with cl 11.6 of the Mining Services Contract to the commencement date of the trial at $676,129.45, if the running of interest is dependent on the delivery of an invoice, and at $1,040,449.57 if it is not. This was because Exact has not submitted an invoice in respect of the claimed June 2014 payment. 782 The question of when the interest starts to run turns on the proper construction of the term "due date" in cl 11.6. Although, Termite noted the issue, neither party made submissions concerning it. 783 In my view, cl 11.6 is to be construed in the context of cl 11 as a whole and, in particular, with regard to cl 11.4. That subclause required Termite to pay to Exact the amount in a "Payment Certificate" within 20 business days of receipt of a valid tax invoice. That identifies the "due date" for the purposes of cl 11.6. 784 Accordingly, I consider that the approach of Mr Holmes to the calculation of interest is correct. This means that Exact is entitled to interest in accordance with cl 11.6 in respect of its unpaid April and May invoices, but not in respect of its June claim. 785 Termite did not claim that the interest should continue to run after the first day of trial and did not seek an adjustment to the figure of $13,578,532.36 on account of the continued running of interest. 786 Accordingly, I consider it appropriate to regard Termite as liable to Exact for an amount of $676,129.45 in respect of interest.

Conclusion on the trading debt claim of Exact 787 I conclude that Termite is indebted to Exact in respect of its trading claim in the sum of $12,597,676.05. The amount for loss of profits in the period 24 to 30 June 2014 will be included in Termite's claim for non-trading debts, which is the subject of the next section of these reasons.

SBR - trading debts 788 Termite claimed $6,961,711.34 (inclusive of GST) as the trading debt to SBR. The defendants conceded $6,944,178.32, a difference of $17,533.02. 789 The figure of $17,533.02 is the aggregate of the sums SBR paid to GWA (North) Pty Ltd, a subsidiary of Genesee & Wyoming, for rail track access for the months of July and August 2014 (excluding GST). By a contract into which it entered on 21 July 2010, SBR had bound itself to pay monthly rail track charges to GWA (North)'s predecessor for a period of five years. The charges related to the use of the railway line between Rankin Dam and Port Adelaide. The liability to GW (North)'s predecessor had been transmitted to SBR. Termite had bound itself to reimburse the rail track charges incurred by SBR. 790 GWA (North) released SBR from its liability under the Rail Haulage Agreement from September 2014 onwards, but SBR remained liable to pay the contracted track charges for the months of July and August 2014. 791 Accordingly, I am satisfied that the amount of $17,533.02 is properly included as a trading debt of Termite to SBR, and that the whole of the amount claimed by Termite of $6,961,711.34 is properly claimed.

Conclusion on trading debts 792 This means that I am satisfied that Termite is entitled to recover the sum of $22,216,445.96 with respect to its trading debts to the Services Contractors, calculated as follows $ Cronos 814,252.37 Exact 12,597,676.05 Flinders Ports 1,842,806.20 SBR 6,961,711.34 Total 22,216,445.96

The non-trading debt claims by the Logistics Creditors and IMX 793 The non-trading debt claims are Termite's claims with respect to its Tail Liabilities or with respect to its liability for damages to the Services Contractors. A potential liability to IMX is also included. 794 The differences between the parties were much more stark with respect to this component of Termite's claim. That starkness is apparent in the following table: The entity Amount claimed by Termite $ Amount conceded by defendants (subject to liability and causation) $ Cronos 2,206,798.75 Nil Exact 11,012,868.57 Nil Flinders Ports 15,033,279.36 Nil Gemco 4,132,727.66 97,339.16 SBR 8,290,255.62 Nil IMX 3,000,000 Nil

795 As is apparent, the defendants concede only $97,339.16 with respect to the claim of Gemco. This means that findings are required with respect to each claim.

Cronos - non-trading claim 796 Termite claimed $2,206,798.75. Its submissions in support of this claim referred to a claim of US$1,889,880.12. Although the submissions did not make this express, I understand the claimed amount of $2,206,798.75 to be the Australian dollar equivalent of the United States dollar figure. The defendants did not dispute the rate of conversion. I add that Termite used USD figures because the Cronos Contract uses that currency.

Termite's contract with Cronos 797 In June 2010, Termite entered into an agreement with Cronos by which it agreed to lease shipping containers from Cronos for (effectively) five years. There were two documents comprising the agreement: the first entitled "Lease Agreement General Terms and Conditions" (GTAC) executed on 8 June 2010, and the second entitled "Lease Agreement Commercial Terms and Conditions" (CTAC) executed on or about 10 June 2010. The CTAC was amended on 16 July 2010. 798 Termite agreed to lease at least 3,050 marine cargo containers for a minimum of 1,825 days, with the earliest day on which it could redeliver being 31 (sic) September 2015. Termite bound itself to make two forms of payment relevant for present purposes: a "lease rental per diem charge" (LRPD) which at relevant times was US$2.56 (exc GST) per day, and a handling fee of US$25 per container. 799 By a letter dated 3 November 2014 to Cronos, the Liquidators confirmed that they had not exercised any interest in the 1,556 containers which were empty at the time of their appointment and disclaimed any interest in the 1,502 containers which had contained the ore shipped by the Liquidators on 2 November 2014. The Liquidators' reference to 1,556 containers appears to be a mistake or to include containers in respect of which no claim is made, as a number of other documents refer to 1,551 containers. 800 The figure of US$1,889,880.12 claimed by Cronos from Termite is made up of "balance amounts" (US$1,834,398.72 and US$38,775) and "recovery costs" (US$16,706.40). The figure of US$1,834,398.72 is the aggregate of the LRPD of US$2.56 per day for the period from 18 June 2014 to 15 September 2015 for 1,551 containers. Cronos calculated the number of days in that period at 462 but, as Mr Morris pointed out, it is in fact 454. The calculation should be: US$2.56 x 454 x 1,551 = US$1,802,634.24

801 The figure of US$38,775 is a handling fee at the rate of US$25 per container for 1,551 containers which Termite had, under the CTAC, bound itself to pay. The handling fee is also referred to as the "off-hire charge". It refers to the costs incurred at a container depot in receiving, processing, lifting and positioning the containers from the transporting vehicle. 802 The recovery costs relate to the removal, repositioning and redelivery of equipment to a suitable storage depot. 803 Neither the CTAC nor the GTAC contained provision for early termination by Termite. It had bound itself to the hire of the containers for a minimum period of 1,825 days. Clause 18 of the GTAC (as amended) provided for the rights of Cronos in the event of default by Termite: 18. DEFAULT [18.1] Upon occurrence of any of the following events, [Cronos] shall have the right to declare [Termite] in default of this Agreement, at which time [Cronos] shall provide [Termite] with written notice thereof (a "notice of default"): (a) [Termite] fails to perform in accordance with the terms of this Agreement; (b) [Termite] discontinues its business as a going concern, becomes insolvent, is subject to any proceeding of receivership or liquidation, files a petition for bankruptcy, voluntary or involuntary, or is subject to any act or event which, under the applicable law thereof, has a substantially similar effect to any of the said acts or events described above; or (c) all or part of [Termite's] assets are assigned for the benefit of creditors. [18.2] If [Termite] fails to correct such default within fifteen (15) days of receipt of the written notice of default, [Cronos] may, without releasing [Termite] of its obligations under this Agreement, declare due and payable all amounts owing under all CTACs and take possession of the Equipment free of any claims of [Termite] … Additionally, [Termite] shall pay any and all costs associated with the removal, repositioning and redelivery of the Equipment, and all storage, depot, repair or maintenance costs incurred as a result thereof. 804 It seems to be common ground that Cronos had not terminated its contract with Termite after it was placed in administration on 18 June 2014. 805 Mr Lewis deposed that the Liquidators had originally rejected the proof of debt of Cronos insofar as it concerned the non-trading claims. This was because Cronos had not provided an adequate justification for those claims. Subsequently, on 22 July 2016, Cronos provided a justification for its claim. Mr Lewis deposed that, on the basis of the further information provided by Cronos, its claim appeared to be valid. However, the Liquidators have not yet admitted the proof of debt of Cronos for the full amount claimed. 806 The defendants disputed, on several grounds, that Termite is liable to Cronos in respect of its non-trading debts.

Cronos non-trading debt not admitted to proof 807 The defendants' first submission was that, because the liability of Termite to pay Cronos is capped by the amount for which the Liquidators have admitted the claimed debt of Cronos, and because that amount does not include any sum in respect of the non-trading losses, Termite is precluded from recovering those losses as part of its damages. That submission is rejected, for the reasons given earlier. It is not reasonable to suppose that the Liquidators would not revise the amount for which they have admitted the claims of Cronos in the event that this Court finds that Termite is liable to Cronos in respect of its non-trading claim. If they refuse to do so, Cronos can exercise its right of review.

No notice of default 808 Next, the defendants submitted that there is no evidence of the provision by Cronos to Termite or the Liquidators of a notice of default under cl 18.1 of the GTAC, with the consequence that there has been no acceleration of Termite's liability pursuant to that clause. I accept that there is no evidence of a notice of default. However, its absence is immaterial. Cronos does not rely upon cl 18.1 for its claim with respect to its non-trading losses. Instead, it claims the payments to which it was entitled under its contract.

No continuing performance by Cronos 809 The defendants submitted that, in the absence of an acceleration of Termite's payment obligations, each party to the Termite-Cronos Contract was obliged to continue performing its respective obligations. These obligations were mutual with respect to the minimum period of 1,825 days. Termite had covenanted to hire the containers for that period, and Cronos had covenanted to make the containers available to Termite for that period. When it ceased doing so by taking back possession of the containers (as it had), Termite ceased to be required to pay the LRPD charges. Although the evidence did not disclose when the repossession occurred, it should be inferred that it was sometime before 15 September 2015. The consequence, the defendants submitted, is that Termite has not proved that it has the liability to pay the LRPD on which this part of its claim rests. 810 This submission requires reference to some underlying principles regarding the entitlements of the promisee on a breach of contract. When a contract is repudiated by one party, the other is not obliged to accept the repudiation: Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435. The innocent party may choose to keep the contract on foot and, in making that choice, is not obliged to act so as to mitigate its loss: White & Carter (Councils) Ltd v McGregor [1962] AC 413. When the innocent party does choose to keep the contract on foot, it is, subject to some qualifications, entitled to recover the contract price: White & Carter. That principle, however, is subject to the so called "co-operation limitation" described by the author of Carter's Breach of Contract, LexisNexis Butterworths, 2nd edition 2018 at [11-45] as follows: …If a promisor's obligation to pay the contract price is a dependent obligation, the ability of the promisee to earn the right to payment - by providing the agreed return - may depend on the co-operation of the promisor. If co-operation is withheld, the promisee will be unable to complete performance unless specific performance is available. … … General statements, to the effect that a plaintiff is restricted to a damages claim following breach or repudiation by the defendant unless specific performance is available, can therefore be understood as referring to a practical position. (Footnotes omitted) 811 Accordingly, if a promisee is able to complete its obligations under the contract without the co-operation of the promisor or if it has completed its obligations, it is entitled to payment in full of the contract price. If not, its claim will lie in damages. 812 The judgment of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 645 indicates the correctness of the position stated in Carter's Breach of Contract: A party by committing a breach of an essential promise cannot thereby compel the innocent party to put an end to the contract: the latter may go on with the performance of the contract if he chooses: … If, however, the terms or nature of the contract are such that the participation of the defaulting party is necessary to enable the innocent party to perform the contract on his part, and this participation is withheld, the innocent party is necessarily prevented and absolved from performance so long as the participation is withheld. And, if the innocent party insists on upholding the contract, he must in any action brought by him on the contract as a subsisting contract prove performance on his own part or readiness and willingness to perform, as the case may be, unless of course upon the pleadings he is not put to such proof … (Citations omitted and emphasis added) 813 In the light of these principles, I consider that the issue is not so much whether the obligations were mutual, but whether Cronos required the ongoing co-operation of Termite in order to fulfil its obligations under the contract. That question should be resolved in favour of Cronos. It had discharged its obligations under the contract by making the containers available to Termite in June 2010 and thereafter leaving them available. They were then under control of Termite. Cronos did not have to do anything more in relation to the provision of the containers. It was Termite which had the responsibility under the contract for maintenance and repair of the containers: GTAC cl 6. 814 I am willing to infer that Cronos did accept possession of 1,551 containers sometime between June and 3 November 2014 and that it accepted redelivery of the remaining 1,502 containers shortly after 3 November 2014. It is the former which is pertinent as Cronos' claim for the LRPD relates only to those containers. 815 It is apparent that Cronos accepted the containers only after Termite had, in effect, abandoned them. Accepting that abandonment did not mean that Cronos had ceased to make the containers available on hire to Termite. That is especially so as Cronos was entitled to redelivery of the containers at the end of the contract term. It had an interest accordingly in the preservation of the containers. Nevertheless, it remained "ready and willing to perform its contract". 816 I conclude therefore that the action by Cronos in taking possession of the containers in these circumstances does not preclude it recovering from Termite the unpaid LRPD. This defence of the defendants fails. 817 In light of this conclusion, it is not necessary to express a concluded view on Termite's submission concerning the "no deduction" clause contained in both the CTAC and the GTAC. I indicate, however, that I do not consider that it provides the answer to the defendants' contentions for which Termite contends. It applies only to amounts which Termite was liable to pay under the contract, and does not assist in the identification of those amounts.

Discount under s 554B of the Act? 818 The defendants submitted that, in the absence of a notice of default under the CTAC or the GTAC, Cronos was entitled to charge only rental on a month-by-month basis with the effect that its claim for the LRPD should be discounted as a future debt in accordance with s 554B of the Act and reg 5.6.44 of the Corporations Regulations. 819 Section 554B provides: 554B Discounting of debts payable after relevant date The amount of a debt that is admissible to proof but that, as at the relevant date, was not payable by the company until an ascertained or ascertainable date (the future date) after the relevant date is the amount payable on the future date reduced by the amount of the discount worked out in accordance with the regulations. 820 Termite disputed that s 554B had any application at all. However, its submissions in support were directed to a different issue, namely, a creditor's entitlement to post-liquidation interest. 821 The defendants did not indicate how s 554B was to be applied in the present case. It is to be remembered that s 544B is concerned with circumstances of early payment as reg 5.6.44 requires a discount of 8% "calculated from the declaration of a dividend to the time when the debt would have become payable according to the terms on which it was contracted". The first and interim dividend was declared by the Liquidators on 14 April 2015. Accordingly, s 554B could apply only to payments due to Cronos after that date (154 days). This would be a portion of the LRPD and, for reasons which will appear shortly, the handling fee. Account has to be taken of the fact that the LRPD would be paid progressively to Cronos in the period 14 April 2015 to 15 September 2015. In the absence of evidence or submissions from the parties as to how this should be calculated, I have assessed this by averaging the payments over the whole period. 822 Accordingly, my calculations are as follows: US$1,834,398.72 x 154/454 ÷ 2 x 0.08 = US$24,889.64 US$38,775 x 154/454 x 0.08 = US$1,052.22 Total US$25,941.86

Mr Lewis deposed to having applied an exchange rate of 0.9337 for the AUD/USD conversion. I did not understand the defendants to dispute the appropriateness of that rate. Applying it to the sum of US$25,941.86 produces the sum of AU$27,783.93. 823 The effect is that the debt to Cronos should be reduced by $27,783.93.

Off-hire Charge 824 The defendants did not make submissions in support of their contention that the off-hire charge was not payable. As both the CTAC and the GTAC provided expressly for Termite's liability for the off-hire charge at the rate of US$25 per container, I am satisfied that this debt (US$38,775) is owing by Termite to Cronos.

The Recovery Charge 825 An email from Cronos of 22 July 2016 indicates that it claims the recovery costs from Termite pursuant to cl 18.2 of the GTAC. However, cl 18.2 is applicable only when Cronos has served a notice of default. As indicated above, it has not served such a notice or, at the least, there is no evidence of such a notice. In those circumstances, I am not satisfied that Termite is liable to Cronos with respect to the recovery costs. In any event, this claim of Cronos appears, on its face, to involve some duplication of the off-hire charge. 826 The effect is that I disallow the claim of US$16,706.40 for recovery costs. Using the USD/AUD exchange rate to which Mr Lewis deposed, this means that Termite's claim with respect to the non-trading claim of Cronos should be reduced by $17,892.68.

Conclusion on the non-trading claim of Cronos 827 In summary, for the reasons just given, I consider that Termite has shown that it is liable to Cronos in respect of its non-trading claims for a total of AU$2,059,245.78.

Exact - non-trading claim 828 Termite claims $10,124,495.08.

The Contracts of Exact with Termite 829 As earlier indicated, Exact provided the mining services at the Cairn Hill Mine. It did so pursuant to a Mining Services Contract dated 1 May 2010 (amended on 28 November 2012). Under the Mining Services Contract, Exact was obliged to provide the services to develop the mine, to drill, blast and extract the ore and waste, and to crush, screen and stockpile the ore. It was to provide these services during "the Term", which was defined as the earlier of the completion of "the Mine Plan" and the "termination of these General Conditions of Contract". As amended on 28 November 2012, the Mine Plan showed mining concluding in April 2015. It also indicated the amount of ore and waste to be extracted by Exact each month. 830 In addition, under a separate contract (the Haulage Agreement dated 18 October 2010 and amended on 28 November 2012), Exact provided road haulage services from the mine site to the Rankin Dam siding and the loading of the ore onto the trains. 831 Clause 11.2 of the Mining Services Contract, as amended, required Termite, "[s]ubject to proper performance of the Mining Services" to pay Exact the "Service Fee" for the provision of the "Mining Services". This required payments of three kinds: (a) a Service Fee on a monthly basis; (b) a Safety Bonus of $41,666.67 per quarter; and (c) an Ore Extraction Bonus of $41,666.67 per quarter. 832 Clause 19.3 of the Mining Services Contract entitled Termite to suspend the provision of the whole or part of the mining services and provided for the respective obligations of Termite and Exact in that event. 833 Clauses 19.4-19.6 provided for circumstances in which the Mining Services Contract could be terminated. 19.4 Termination by Principal for convenience Notwithstanding any other provision of these General Conditions of Contract, the Principal may, at its sole discretion, terminate these General Conditions of Contract for its convenience at any time: (a) where in the sole opinion of the Principal to continue with the mining operation would cause it significant ongoing financial losses, by giving the Contractor 40 Business Days' written notice; or (b) for any other reason, by giving the Contractor 120 Business Days' written notice, in which case the Principal (without prejudice to any other rights or remedies it has) must pay to the Contractor the applicable Early Termination Amount (but the Contractor has no other Claim against the Principal of any nature whatever incurred or sustained by the Contractor as a result of or in connection with such termination). 19.5 Termination by Principal for termination of the Haulage Agreement If the Haulage Agreement is terminated for any reason whatever, the Principal may terminate these General Conditions of Contract by giving the Contractor not less than 10 Business Days notice to that effect. 19.6 Termination by either party on default Either party may terminate these General Conditions of Contract by 10 Business Days notice in writing to the other party given at any time if an Event of Default in respect of the other party has occurred and, the parties' rights and liabilities will be the same as they would have been under the general law had the party in respect of which the Event of Default has occurred repudiated these General Conditions of Contract and the other party had elected to treat these General Conditions of Contract as at an end and recover damages. The provisions of this clause 19.6 of these General Conditions of Contract survive the expiry or earlier termination of these General Conditions of Contract. 834 Finally, it is appropriate to note the amended cl 19.10 concerning Exact's entitlement in the event of termination: 19.10 Contractor's costs Except as expressly provided by these General Conditions of Contract, including without limitation the Schedule of Rates, if these General Conditions of Contract terminate for any reason, other than default by the Principal or for the convenience of the Principal, the Contractor has no Claim against the Principal for any amount on account of any liability incurred by the Contractor as a result of or in connection with the termination of these General Conditions of Contract. The provisions of this clause 19.10 of these General Conditions of Contract survive the expiry or earlier termination of these General Conditions of Contract. 835 Under the Haulage Agreement as amended, Termite was required to pay Exact: (a) a "Mobilisation Cost"; (b) a "Haulage Fee"; and (c) a "Rail Loading Fee". 836 With respect to termination, cl 13 of the Haulage Agreement provided (relevantly): 13.1 Breach (a) If a Party commits a material breach of this agreement which is capable of being remedied and does not remedy the breach within 20 Business Days of being notified in writing by the other Party, the other Party may terminate this agreement by notice to the former Party. (b) If a Party commits a material breach of this agreement and the breach is incapable of being remedied, the other Party may terminate this agreement by notice to the former Party. 13.2 Insolvency A Party may immediately terminate this agreement by notice to the other Party if an Insolvency Event occurs in relation to that other Party. … 13.4 Cessation of mining (a) If [Termite] permanently ceases to carry on mining operations at the Mine Site [Termite] may terminate this agreement by not less than 5 Business Days written notice to Exact. (b) If this agreement is terminated pursuant to clause 13.4(a) within 12 months of the date of commencement of this agreement, [Termite] must reimburse Exact its reasonable costs and expenses of removing all Equipment from the Mine Site within 20 Business Days of [Termite] receiving a tax invoice from Exact in respect of those costs and expenses. (c) Except as set out in clause 13.4(b), [Termite] is not liable to Exact for any costs or expenses of removal of Equipment from the Mine Site upon the expiry or earlier termination of this agreement. 13.5 Termination If the Mining Services Agreement is terminated for any reason whatever, [Termite] may terminate this agreement by giving Exact not less than 10 Business Days' notice to that effect. …

Termination of the Exact Contracts 837 On the day of their appointment, one of the Administrators, Mr Mableson, sent an email to Mr Mayberry, the Chief Operating Officer of Exact, informing him of their appointment. Mr Mableson continued: As a consequence of our appointment we have assumed responsibility for the Company's management and the control of its assets. We have also commenced an urgent assessment of the Company's financial position. At this stage the Company has ceased operating the Cairn Hill Mine whilst we urgently assess the status of the ore that is capable of being sold to customers, which relies on a number of stakeholders supporting the process. We will shortly advise you of our decision with respect to the operations of the Mine, including transferring any stockpiles of ore from the Mine area to Port Adelaide for shipment. It is acknowledged we will need to come to an arrangement with Exact Mining Services in this regard. (Emphasis added) 838 By an email of 19 June 2014 to the Administrators, Mr Malcik, the Chief Financial Officer of Exact, said "the Termite payment default is of great concern to Exact". He noted that the debt from Termite to Exact, excluding amounts owing in respect of the month of June 2014, was $8,141,906.43. 839 By an email of 19 June 2014 to Mr Malcik, Mr Mableson said that the Administrators were investigating the possibility of making a further shipment of ore, possibly using the stockpiles at the mine and at Rankin Dam, and that they may wish to make use of Exact's services in that respect. The email continued: In relation to Exact Mining's resources and equipment related to the Mine operations, we do not intend to recommence extracting iron ore from the Mine. The only aspect of the operations we are considering is the crushing plant for the purposes of producing iron ore for one further shipment to China. We therefore have no objection if Exact Mining wishes to start making the necessary arrangement to demobilise its plant and equipment at the Mine, with the exception of any plant and equipment related to the crushing plant which we would appreciate Exact Mining holding off pending our decision regarding dealing with the stockpile at the Mine as commented above. 840 By letter dated 24 June 2014, Exact terminated the Mining Service Contract. Mr Rhodes, the Managing Director of Exact, said in the letter: Administrators have been appointed to Termite pursuant to section 436A of the Corporations Act 2001 (Cth). The Administrators have advised Exact that they do not intend to cause Termite to continue with its obligations pursuant to the Mining Services Contract. That constitutes a repudiation of the Mining Services Contract. Exact accepts that repudiation with the consequence that the Mining Services Contract terminates with immediate effect. In addition to the above, under the Mining Services Contract, the appointment of an administrator is an "Insolvency Event" which in turn is an "Event of Default" giving rise to a right of termination under clause 19.6 of the Mining Service Contract. Exact hereby notifies Termite that, in accordance with clause 19.6 of the Mining Services Contract and as a result of Termite's Event of Default, Exact terminates the Mining Services Contract with effect on and from 2 July 2014 (being 10 business days from the date of this notice). 841 Although this letter did not refer to the Haulage Agreement, it seemed to be common ground that it had come to an end at the same time. With limited exceptions, neither Termite nor the defendants submitted that any distinction should be drawn, for the purposes of the assessment of damages, between Termite's liabilities under the Mining Services Contract and the Haulage Agreement.

The formulation of Exact's claim 842 Exact calculated its claim for loss of profits against Termite in the following manner. First, it determined the revenue it would have received from Termite had it continued providing the mining services and the haulage services between July 2014 and April 2015, both months inclusive. It calculated that 24% of that revenue would have been the margin of profit. It then made a downward adjustment to make allowances for income it derived from the subsequent utilisation of some of its plant and equipment in other work. 843 Mr Holmes reassessed Exact's calculated profit margin at 21.34%. On that basis, and after making some adjustments which it is not necessary to recount separately, Mr Holmes calculated Termite's liability to Exact for loss of profits between July 2014 and April 2015 at $9,177,000. 844 Mr Morris acknowledged that he had not been provided with the documents used by Mr Holmes which he said would have enabled him to comment on Mr Holmes' calculations. He accepted, however, that the methodology adopted by Mr Holmes was reasonable, noting that the issue of whether it accorded with the two contracts was not a matter for his opinion. 845 In their final submissions, the defendants raised three bases for disputing that Termite had any liability to Exact with respect to the claimed loss of profit. They did not otherwise raise any issue concerning the method of calculation adopted by Exact but adjusted in the manner Mr Holmes thought appropriate.

Was there a breach of contract by Termite? 846 The defendants' first submission was that Exact did not have a claim against Termite for damages for breach of contract because Termite had not breached the Mining Services Contract. They submitted that Termite had not had any obligation to continue mining or even to require Exact to perform any particular level of services in any month. They submitted, further, that the evidence did not establish any repudiation of Termite's contracts with Exact. 847 The defendants submitted that, on a correct analysis of the Mining Services Contract, Termite had not been bound to continue mining at the Cairn Hill Mine or to comply with the mine plan. Instead, its primary obligation under both the Mining Services Contract and the Haulage Agreement was to pay Exact the rates for the services and resources provided. Counsel supported this submission by reference to cl 11 of the Mining Services Contract which imposed the payment obligations on Termite, and by reference to cl 19. The defendants submitted in short that Termite could not be liable in damages to Exact for not doing that which it had not promised to do: Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 91. 848 As already seen, cl 19.3 entitled Termite to suspend the provision of the whole or part of the mining services, on notice to Exact and cl 19.4 permitted Termite, at its sole discretion, to terminate the contract "for its convenience" at any time, giving 40 business days' written notice if continuance of mining operations would cause it significant ongoing financial losses, and by 120 business days' written notice for any other reason. 849 In the light these clauses, I consider that the submission that Termite had not bound itself to continue mining at the Cairn Hill Mine until April 2015 should be upheld. However, contrary to the defendants' submission, it does not follow that Termite was not in breach of its contract at the time of Exact's letter of 24 June 2014 accepting the repudiation and terminating the Mining Services Contract with immediate effect. 850 The Mining Services Contract provided Termite with four alternatives with respect to the cessation of mining: suspension under cl 19.3; termination for convenience under cl 19.4; termination under cl 19.5 by reason of termination of the Haulage Agreement; and termination under cl 19.6 on default (which could be either party). Neither the Administrators nor Termite had purported to exercise any of these rights and there is no suggestion that Exact had been in default of any of its obligations under either the Mining Services Agreement or the Haulage Agreement. The Mining Services Agreement was therefore to continue to its term. The Administrators' email of 19 June 2014 by which it informed Exact that it did not intend to recommence extracting iron ore from the mine but without having exercised any of the rights of termination pursuant to cll 19.4, 19.5 and 19.6 constituted a breach (at the very least a anticipatory breach), capable of acceptance by Exact. 851 It follows that the first basis on which the defendants resisted Termite's loss of profits claim is rejected. 852 Further, and in any event, the appointment of administrators to Termite was an "Insolvency Event" as defined in cl 1.1 of the Mining Services Agreement which was in turn an "Event of Default" (also defined in cl 1.1). Exact was therefore entitled under cl 19.6 of the Mining Services Contract to terminate the contract in that circumstance. Doing so was not acceptance of a repudiation by Termite: it was simply the exercise of a contractual right to terminate. 853 The remaining two bases on which the defendants resisted Termite's claim concerning the loss of profits of Exact turned on the quantification of those losses.

An insurance claim cap? 854 The defendants next referred to cl 16.6 of the Mining Services Contract which provides: 16.6 Limitation of liability Except where a party, or its directors or employees, has committed fraud or an illegal act or omission or wilful misconduct, a party's liability in any way in connection with the Contract Documents for consequential or indirect losses shall not exceed the amount recoverable by that party under any insurance policy. 855 The defendants submitted that the effect of cl 16.6 was to limit the amount which Exact could recover for consequential losses to the amount covered by Termite's insurance. It then submitted that, as there was no evidence that Termite had any insurance to cover the claimed consequential losses, cl 16.6 meant that it could not have a liability to Exact in respect of the claim for consequential losses. 856 I reject that submission. The subject matter of cl 16 is the provision of an indemnity by Exact to Termite. Exact agreed to indemnify Termite, its officers, employees, agents, contractors or invitees (defined in cl 16.1 as the "Indemnified Parties") against, amongst other things, all claims caused or contributed to by any breach of the General Conditions of the Contract by Exact or its personnel. Clause 16.6 applies only to liabilities in connection with the "Contract Documents". That term is defined in cl 1.1 of the Mining Services Contract to mean "the Formal Instrument of Agreement and the documents referred to in the table in the Formal Instrument of Agreement". Considered as a stand alone provision, it is not altogether clear what the liabilities connected with those documents may be but, when read in the context of cl 16 as a whole, it is apparent that subcl 16.6 is applicable to circumstances in which Exact is liable to indemnify Termite in respect of a claim by a third party. It does not have any application to liabilities arising between Exact and Termite themselves. 857 Further, and in any event, on its proper construction, cl 16.6 has application only when there is in existence an insurance policy under which the amount claimed is recoverable. As the defendants' submission itself acknowledged, there is no evidence that Termite had any relevant insurance. It is not sensible to suppose that the parties intended that the liability should be "capped" by a non-existent insurance policy. Furthermore, proof of the existence or non-existence of an insurance policy is not made a condition of the operation of cl 16. 858 In these circumstances, it is not necessary to consider the submission of Termite with respect to the reach of the expression "consequential or indirect losses" used in cl 16.6, as to which Termite referred to Macmahon Mining Services v Cobar Management [2014] NSWSC 731 at [13] and Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356, (2013) 46 WAR 281 at [109].

Termite adopting the least burdensome course 859 Next, the defendants submitted that the liability of Termite to Exact for damages for breach of contract should be assessed on the basis that Termite would have adopted the course open to it under its contracts with Exact which involved the least burden to it. It sought to invoke in this respect the principle that, when there are two or more ways by which a defendant may perform a contract, the courts, when assessing damages, adopt the mode of performance which is most beneficial to it: Amann Aviation at 92-3 (Mason CJ and Dawson J). Their Honours had referred to TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 150-6 in which Hope JA accepted that "[when] a defendant in proceedings to recover damages for breach of contract has a right under the contract to alternative methods of performance, the court should, indeed must, assume that the defendant would have performed the contract in the way least advantageous to the plaintiff and most advantageous to the defendant". When applying that principle, courts will have regard not only to the terms of the parties' contract but to the surrounding circumstances so as to avoid the assessment of damages on the basis of a fiction that a defendant would have adopted one method of performance when the facts belie that possibility: TCN Channel 9 at 154-6. 860 The defendants submitted that this principle (the least burdensome principle) should be applied in the present instance as the inference is strong that, had Exact not terminated the Mining Services Contract, Termite would have exercised its entitlement under cl 19.4 to terminate the contract for its convenience and, further, would have done so pursuant to cl 19.4(a) by giving Exact 40 business days' written notice. 861 Counsel for Termite submitted that termination pursuant to cl 19.4 was not available to Termite and that, even if it was, Termite's exercise of the right would not have made any difference to its overall liability. 862 As to the first, counsel submitted that the least burdensome principle is usually applied in those cases in which a defendant has terminated a contract for a reason which turns out not to be justified but could, on other grounds, have terminated the contract lawfully: Walker v Citigroup Global Markets Australia Pty Ltd [2006] FCAFC 101, (2006) 233 ALR 687; Ramsey v Annesley College [2013] SASC 72. 863 That may be one situation in which the principle is applied, but its application is not confined to that circumstance. See, for example, Grout v Gunnedah Shire Council (No 3) (1995) 129 ALR 372 at 376; Black v Brimbank City Council (1998) 152 ALR 491; New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68 at 80-81. 864 Termite's second submission was that it would not have been able to terminate the agreement under cl 19.4 as it is an implicit condition for its invocation that it pay Exact during the notice period. It could not satisfy that condition as it did not have the capacity to make the payment and was, in fact, already in breach of its obligations by failing to pay Exact for its April and May invoices. 865 Termite also submitted that the Court should find that, had it given notice under cl 19.4, Exact would have exercised its rights under cl 19.6 to terminate on 10 business days' notice by reason of the "Event of Default". In that event, Termite submitted, Exact's rights would have been exactly the same as they were under the general law on Exact's acceptance of Termite's repudiation. 866 An initial issue in relation to this submission is the identification of the time at which the contract would have come to an end on the giving of a notice pursuant to cl 19.4: is it at the time notice is given, or at the expiry of the notice. The parties did not address any submissions to that issue. Both constructions appear open. On one view, the terminology of cl 19.4 appears more consistent with Termite being able to terminate the contract by the act of giving notice. 867 On the other hand, the requirement for the giving of notice suggests an intention by the parties that Exact should have a minimum period in which to make suitable arrangements before the contract ended. Further, in the employment context, it is accepted that, subject to any contrary indication in the parties' contract, an employment contract comes to an end at the expiration of the period of notice: Grout v Gunnedah Shire Council (1994) 125 ALR 355 at 365; Hill v CA Parsons & Co Ltd (1972) 1 Ch 305 at 313-314; Melbourne Stadiums Ltd v Sautner [2015] FCAFC 20, (2015) 229 FCR 221 at [178]. Further, it was open to Exact during any period of notice to accept a repudiation by Termite and to bring the contract to an end immediately. 868 In my view, the latter construction better serves the commercial purpose of cl 19.4. There is no other indication that the parties contemplated the giving of a notice would terminate the contract immediately. I conclude therefore that, had Termite given notice pursuant to cl 19.4, the contract would have remained on foot until the expiration of the period of notice which it gave. 869 I do not accept Termite's submission that it could only have given notice pursuant to cl 19.4 at a time when it was not itself in breach of the Mining Services Contract. Clause 19.4 is not expressed to be subject to that limitation. There is no basis upon which the Court should read into cl 19.4 a condition which parties themselves did not agree upon. Nor did the contract make the validity of a notice conditional upon Termite's continued performance of its obligations under the contract during the period of the notice. 870 On the hypothesis that Termite had given notice pursuant to cl 19.4 (whether of 40 or 120 days), the acceptance by Exact during the period of the notice of Termite's repudiation (by failing to pay its invoices) would have had the effect of bringing the contract to an end immediately. However, contrary to Termite's submission, that would not mean that Exact would be entitled to damages for loss of profit calculated to the end of the original term of the contract. The fact that the contract would have come to an end in any event by reason of Termite's earlier notice, could not be ignored. Exact's claim for loss of profits could not extend beyond the expiration of the period when the contract would have ended in any event. 871 In my opinion, there is no difficulty in finding that, had Exact not terminated the contract, the Administrators would have given notice pursuant to cl 19.4 at the earliest practical opportunity. There is, however, a question as to when that would have been, given the terms of Mr Mableson's email to Exact of 19 June 2014. It is apparent from that email that the Administrators wished to keep both the Mining Services Contract and the Haulage Agreement on foot until they had investigated the possibility of making a further shipment of ore to China. 872 The evidence does not indicate when the Administrators reached a view about that. Accordingly, there is some uncertainty as to when, acting in the way which was least burdensome to Termite, the Administrators would have given notice. 873 I consider it appropriate to proceed on the basis that the Administrators would, had it not been for Exact's earlier termination, given notice pursuant to cl 19.4 by 1 July 2014. That notice would have been given pursuant to cl 19.4(a). That means that the Termite-Exact Contract would have come to an end 40 business days after 1 July 2014, namely, 26 August 2014. 874 Ultimately, the parties were in agreement as to the adjustment to be made to the figure of $9,177,000 in the event that the Court decided that, in the absence of Exact's acceptance of the repudiation, Termite would have given 40 days' notice pursuant to cl 19.4(a) on 1 July 2014. That was that the figure should be reduced by 80% (40 business days being 20% of the 200 business days in the period from 1 July 2014 to 30 April 2015). That means that the amount to be allowed to Exact for loss of profits is $1,835,400.

Exact's liability to Outback Parks & Lodges Pty Ltd 875 Termite claims $135,930 in respect of the amount Exact paid in settlement of a claim by Outback Parks & Lodges Pty Ltd. 876 The defendants did not make any submission by way of resistance to that particular claim and I took it to be tacitly conceded. In that circumstance, it is not necessary to make findings concerning the evidence adduced by Termite to support the claim. It is sufficient to say that, on my consideration, Termite's evidence supports the claim and, given the defendants' attitude, I accept that the sum of $135,930 has been established.

Exact's liability to Maxam Australia Pty Ltd 877 Termite did not pursue this claim and it not need be considered further.

Exact's demobilisation costs 878 Finally, separately, Termite claims a total of $622,710 in respect of its liability to Exact for demobilisation and dis-establishment of site costs. Exact submitted an invoice to Termite on 12 August 2014 for this amount. 879 Termite was liable to pay each of these amounts to Exact pursuant to Schedule 8A.3 of the Deed to Amend Mining Services Contract executed on 28 November 2012. The defendants did not make any submissions contesting this liability and I am satisfied that it is an amount properly claimed by Termite as part of its damages.

Exact's 24-30 June claim 880 For the reasons given above, Termite is liable to Exact for the sum of $224,070 in respect of this claim.

Conclusion on the non-trading claim of Exact 881 In summary, I am satisfied that Termite has suffered a loss of $2,818,110.00 in respect of its liabilities to Exact.

Flinders Ports - non-trading claim 882 Termite claimed $15,033,279.36 in respect of its Tail Liability to Flinders Ports. 883 This amount was comprised as follows: Minimum Payment Amount for Contract Year 5 $13,391,732.96 Minimum Payment Amount for Contract Year 6 $3,224,175.40 Liability for repayment of previously applied discounts $1,417,371.00 $18,033,279.36 Less payment by IMX pursuant to its guarantee ($3,000,000.00) Total Claim $15,033,279.36

884 The defendants accepted the appropriateness of the amount claimed for repayment of previously applied discounts ($1,417,371) and the deduction of the $3,000,000 paid by IMX under its guarantee. The dispute between the parties concerned Termite's liability to pay the Minimum Payment Amounts for Contract Years 5 and 6. Apart from two matters to be addressed shortly, the defendants did not dispute Termite's quantification of those claims.

The Termite-Flinders Ports Contract 885 Termite entered into a contract with Flinders Ports entitled "Logistics Services Contract" on 13 October 2010. The Contract was varied by countersigned letters dated 15 August 2012 and 31 October 2012 and by a Deed of Amendment and Restatement dated 16 December 2013. 886 The terms of the Logistics Services Contract which are relevant for present purposes are these: (a) Termite engaged Flinders Ports to provide the "Services", being "Logistics Services" and "Additional Services", (cl 3.1). The Additional Services are not presently material and need not be mentioned further. In essence, the Logistics Services were the receipt, stockpiling and control of the containers of ore delivered to Port Adelaide, the loading of the ore from the containers into ships, and the handling of the empty containers; (b) Flinders Ports was to make available specified equipment (Service Equipment) to ensure that the Logistics Services could be provided, (cl 5.1); (c) Flinders Ports was required to provide the Services for up to 1.7 million tonnes of ore per "Contract Year" (cl 7.1(a)) and to procure the provision of the resources necessary to do so (cl 7.1 is set out in full later in these reasons); (d) in consideration of Flinders Ports providing the Services, Termite was required to pay Service Charges in accordance with cl 22, relevant subclauses of which are set out later in these reasons; (e) the principal element in the Service Charges was the "Minimum Payment Amount" in each Contract Year which Termite was obliged to pay whether or not it required the Services in that year, (cl 22.2(a)). The Minimum Payment Amount was to be calculated in accordance with a formula set out in Schedule 2, being a rate per tonne. At the end of each Contract Year, Flinders Ports was to calculate the "Actual Service Charge" for the provision of the Services and, if that amount was less than the Minimum Payment Amount, Termite was required to pay Flinders Ports the difference, (cl 22.2(c) and (d)). This was referred to as the "Shortfall Amount"; (f) by cl 22.2(f), once Termite had paid for the handling of 6.9 million tonnes of ore, it ceased, in effect, to be liable to pay the Minimum Payment Amounts and the amount it would pay would be based on actual tonnages; (g) the Contract was for an initial term of the earlier of: (i) a time-based formula set out in cl 4.1(a)(i); or (ii) the date on which 7,292,000 tonnes of ore had been handled, (cl 4.1(a)(ii)); (h) clause 27.4 required each party to do all things necessary to mitigate any "Liabilities" resulting from the other party's breach or negligence. The term "Liabilities" was defined to include all liabilities, losses, damages, outgoings, costs and expenses of whatever description, but excluded consequential loss; (i) clause 30 provided for the parties' rights of termination; and (j) by cll 35 and 36, Outback and IMX each provided guarantees to Flinders Ports of the performance by Termite of its obligations. By the Deed of Amendment and Restatement, the liability of IMX and Outback was capped at $3 million. 887 It was common ground that neither Flinders Ports nor Termite had terminated the Contract pursuant to cl 30. This meant that a cap of $1 million on Termite's liability fixed by cl 30.3 is not applicable. 888 The defendants disputed Termite's claim with respect to its Tail Liability to Flinders Ports on three bases. It contended, first, that on the proper construction of the Termite-Flinders Ports Contract, Termite had no liability to Flinders Ports. The second and third bases concerned the computation of the amount claimed by Termite.

Termite's liability under cl 22 889 The defendants submitted that, as a matter of contractual construction, Termite's obligation to pay the Minimum Payment Amounts to Flinders Ports was conditional on Flinders Ports being in a position to provide the Services required under the Logistics Services Contract and that, subject to one qualification, Termite had not established that Flinders Ports had done so. They submitted that the position was just as consistent with Flinders Ports having treated itself as discharged from its obligations under the Contract and utilising its resources and equipment to provide services to other customers. 890 The defendants are correct in submitting that there is little evidence supporting the view that Flinders Ports had continued to provide the Services after 18 June 2014. However, I am willing to infer that Flinders Ports had kept its resources available until at least 2 November 2014, as it was on that date that the last shipment of ore left Port Adelaide from the Flinders Ports' berth. Further, it had in the meantime held the stockpile of Termite's ore at its premises. There is no evidence as to what occurred thereafter. 891 In order to address the parties' submissions concerning this issue, it is necessary to set out some of the provisions in the Logistics Services Contract. Clause 22, under the heading "Payment", provided: 22.1 Service Charges (a) In consideration for Flinders Ports providing the Services, Termite must pay Flinders Ports the Service Charges in accordance with this clause 22; (b) All payments under this Agreement to be made by either party are to be made in accordance with this clause 22 without set off, deduction or counterclaim; 22.2 Minimum Payment Amount (a) In consideration for Flinders Ports agreeing to provide or procure the provision of, the Service Equipment and other necessary infrastructure and to provide the Services under this Agreement, Termite will, subject to this clause 22.2, pay to Flinders Ports the Minimum Payment Amount in each Contract Year whether or not Termite requires the Services in that Contract Year. (b) As soon as practicable for Flinders Ports, Flinders Ports will calculate the actual amount of the Service Charges paid or payable to Flinders Ports for the provision of the Services in the Contract Year just ended (Actual Service Charge). (c) If the Actual Service Charge for the Contract Year is less than the Minimum Payment Amount for that Contract Year, then Termite must pay to Flinders Ports an amount equal to the difference between the Actual Service Charge and the Minimum Payment Amount (Shortfall Amount). (d) If, in respect of any Contract Year, the Actual Service Charge is equal to or more than the Minimum Payment Amount, then, Termite will not be required to pay any more than the Actual Service Charge for that Contract Year. … 892 Clause 22.3 provided for the delivery of invoices by each of Flinders Ports and Termite (in Termite's case it could invoice Flinders Ports in relation to time lost in excess of Laytime). By cl 22.3(d), each of Flinders Ports and Termite was required to pay the total amount of invoice within 21 days. 893 Termite also relied on cl 12.3 which, under the heading "Suspension For Breach", provided: Despite any other provision of this Agreement, Flinders Ports is not bound to provide the Services under this Agreement if and for so long as Termite is in breach for 30 days or more of its obligation under this Agreement to pay for the Services previously provided (excluding, for the avoidance of doubt, amounts the subject of a dispute under clause 22.5(c)). 894 The defendants submitted that, while the obligation of Termite under cl 22.2 to pay the Minimum Payment Amount was not conditional upon it actually requiring any Services, it was conditional upon Flinders Ports' continued agreement to provide the Service Equipment and the Services. They referred to cll 5.1 and 7.1 which provided for Flinders Ports' obligations with respect to the provision of Service Equipment and the Services, respectively. Clause 5.1 provided (relevantly): (a) Flinders Ports must provide, or procure the provision of, all of the Service Equipment for the performance of the Services. 895 Clause 7.1 provided: Flinders Ports must, subject to and at the times and in the manner set out in this Agreement: (a) provide the Services for up to 1.7 million Tonnes of Termite Product per Contract Year; and (b) procure that all resources reasonably necessary for the provision of the Services are made available including the wharf at Berth 7 (according to the berth priority rules set out in clause 19), Hardstand Area, equipment contemplated by clause 5, labour and supervision. 896 The Logistics Services Contract also contemplated that Flinders Ports could discharge its obligations with respect to the provision of Service Equipment by procuring a third party to provide that equipment (and that is in fact what Flinders Ports did). 897 The defendants submitted that the Court should adopt a business-like construction of the Logistics Services Contract having regard to the language used in it, the surrounding circumstances and its commercial purpose. They referred to Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35], in which the plurality approved the statement that, unless a contrary intention is indicated, a court is entitled to approach the construction of a commercial contract on the assumption that the parties intended to produce a commercial result, with the effect that the contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience. 898 The defendants submitted that it did not make commercial sense to construe the Logistics Services Contract as though it provided for Flinders Ports to be entitled to the payment even though it did not continue to provide the Services. A more sensible construction is that Flinders Ports should be entitled to payment pursuant to cl 22 only if it had earned the right to payment by performing its part of the bargain, in accordance with the principle stated in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178 at 1180-1. 899 Termite submitted that it was unnecessary for it to adduce evidence that Flinders Ports had kept available all the resources and equipment necessary for the performance of its Services over the remainder of the Contract period. It referred to the requirement imposed by cl 22.1(b) that all payments be made without set off, deduction or counterclaim, to the take or pay provision in cl 22.2(a), and to the provision in cl 12.3 that Flinders Ports was not bound to provide the Services for so long as Termite was in breach for 30 days or more of its payment obligations under the Contract. 900 I do not regard cl 22.1(b) as being of assistance. It applied only to payments "under this Agreement", that is, to payments which Termite was obliged to pay under the Logistics Services Contract. It does not assist in the determination of the payments which Termite was obliged to pay. 901 In my opinion, it is reasonably plain that cl 22 imposed on Termite two distinct obligations with respect to payment: the overall obligation to pay the Service Charge and an obligation to pay a minimum amount. The first was contingent on Flinders Ports "providing" the Services (cl 22.1(a)). The second was not contingent upon the provision of Services but instead on Flinders Ports "agreeing" to provide or procure the provision of the Service Equipment and to provide the Services. It was in consideration of that agreement, and not the provision of the service, that Termite bound itself to pay the Minimum Payment Amount. 902 The inference that Termite's obligation to pay the Minimum Payment Amount was not contingent upon the actual provision of the service is strengthened by the parties' agreement that Termite was to pay the Minimum Payment Amount whether or not it required the Services in that Contract Year. In effect, Termite agreed to pay a minimum amount in consideration for Flinders Ports having agreed to make available the Service Equipment and Services. Put slightly differently, Termite bound itself to pay for the Services actually provided by Flinders Ports but, separately, agreed to pay a minimum amount for the agreement by Flinders Ports in October 2010 that the Services and the Service Equipment would be available for its use. That is when Flinders Ports procured the Service Equipment for the benefit of Termite. In this way, effect is given to the difference in terminology in subcll (1)(a) and (2)(a). 903 In my opinion, neither cll 5.1 nor 7.1 require a different conclusion. They serve to identify the Service Equipment and Services to be provided or procured by Flinders Ports. It is cl 22 which governed Termite's payment obligations in respect of the Service Equipment and Services. 904 Understood in this way, I consider that cl 12.3 has no application in the present context. It operates only with respect to the provision of the Services by Flinders Ports. It does not touch upon the liability Termite undertook in consideration of Flinders Ports' agreement to provide the Service Equipment and the Services. In any event, there is no evidence that Flinders Ports availed itself of that clause, it being a contractual provision for its benefit. 905 Accordingly, it was not necessary for Termite to show that Flinders Ports had continued to make its resources available to Termite. This ground of defence of the defendants fails.

The tonnage rate after 1 January 2015 906 The Flinders Ports Contract provided for payment by Termite at the rate of $12.28 per tonne. The defendants submitted, however, that the rate to be applied to Flinders Ports' claim after 1 January 2015 should be $9 per tonne. For this purpose they relied on email exchanges between Mr Hoskins and Mr Travers at Flinders Ports in March 2014. The email exchanges reflected negotiations between the two entities regarding their future arrangements. In his email of 26 March 2014, Mr Travers proposed that the ore shipped in the period 1 January 2015 to 30 June 2015 (which he assumed would be 1.036 million tonnes) would be "based on the $9.00/tonne rate". 907 With reference to that letter, Mr Morris opined that it was "arguable" that the liability to Flinders Ports in respect of the period after 1 January 2015 should be calculated at the $9/tonne rate. The defendants' submissions adopted that argument, with the effect that the amount claimed by Termite should be reduced by $1.312 million. 908 I consider that this submission should not be accepted. The email exchange to which Mr Morris referred contained negotiations between Termite and Flinders Ports. There is no indication that those negotiations culminated in agreement. Furthermore, Mr Travers said expressly in the email of 26 March 2014 that his proposed rates "remain[ed] subject to any further negotiations on the T&C's to be applied post 31 Dec 14 and IMX achieving the volume levels as expected". 909 As the negotiations did not culminate in agreement, the rate contained in the Logistics Services Contract should continue to be applied.

Section 554B of the Act 910 The defendants made the same submission with respect to the operation of s 554B and reg 5.6.44 which they made in respect to the liability to Cronos. I agree that s 554B would have application to the payments claimed by Flinders Ports in respect of the period after 14 April 2015 when the Liquidators declared the first interim dividend. However, the defendants did not provide any analysis of the claimed deduction, nor point to the evidence by which that deduction may be calculated. In that circumstance, had it been necessary, I would give the parties the opportunity to make further submissions concerning the effect of s 554B on the sum claimed by Termite.

Clause 27.1 of the Logistics Services Contract 911 In their opening submissions, the defendants indicated reliance on a limitation of liability provision in the Logistics Services Contract, presumably that contained in cl 27.1. However, the defendants made no reference to this in their final submissions, and I have taken it to be abandoned.

Conclusion on the non-trading claim of Flinders Ports 912 For these reasons, I consider that, subject to hearing from the parties concerning the effect of s 554B, Termite has made good its claim that it is liable to Flinders Ports in the sum of $15,033,279.36.

Gemco - non-trading claim 913 Termite claimed $4,125,445.45 (inc GST) in respect of its liability to Gemco. This amount comprised: Balance of lease payments (exc GST) $3,614,220.00 Storage fees July-December 2014 (exc GST) $54,315.00 GST on those two amounts $366,853.50 $4,035,388.50 Wagon movement charges (inc GST) $72,822.06 Additional transport costs (inc GST) $17,234.89 Total Claim $4,125,445.45

914 Ultimately, the defendants did not dispute the quantification of these claims but maintained that their liability did not exceed $97,339.16.

The Termite-Gemco contract 915 On 24 May 2010, Gemco and Termite entered into a lease agreement (the Master Agreement (Wagon)) pursuant to which Termite agreed to lease 194 rail wagons for a term expiring on 1 January 2016 at a price of $1,035 per month per wagon. These were the wagons used by SBR to haul the containers to and from Port Adelaide. 916 Clause 15.1 provided for Termite to deliver the wagons to Gemco "at the end of the Term or earlier termination of this Agreement". The Agreement did not contain any other provision by which Gemco became entitled to take possession of the wagons before the termination of the Agreement. 917 The defendants raised a number of defences to Termite's claim with respect to Gemco.

Non-performance by Gemco of its obligations? 918 Gemco's obligation under the Master Agreement was to lease the wagons to Termite for its use throughout the term, (cl 2.1). Termite was obliged to make rent payments to Gemco for each wagon from the date the wagon was delivered to it, (cl 2.2). Gemco had obligations with respect to the maintenance and repair of the wagons during the currency of the Master Agreement. Subject to that and Gemco's right of inspection, Termite was entitled to "quiet enjoyment" of the wagons, (cl 10). 919 The defendants submitted that Gemco's entitlement to the lease payments was contingent upon it continuing to perform its side of the bargain by making the wagons available to Termite throughout the term of the Master Agreement. They submitted that it had not done so. In this respect, the defendants referred to the evidence indicating that Gemco had assumed control of the wagons at the end of June 2014. Thereafter, the defendants submitted that the wagons had not been available to Termite. In that circumstance, having not performed its obligations under the Master Agreement, Gemco was not, so the defendants submitted, entitled to the payments for which the Agreement provided. 920 Before the appointment of the Administrators on 18 June 2014, the wagons were used by SBR in the performance of its contract with Termite and were under its control. On that appointment, SBR then placed the wagons in sidings at Penfield, a suburb of Adelaide, for storage. The sidings were either those of SBR or those of the Australian Rail Track Corporation (ARTC). SBR took this action pending indication from the Administrators as to whether further trains would be required to deliver ore from the mine to Port Adelaide. 921 On Friday, 20 June 2014, Gemco informed the Administrators that "Gemco Rail will continue to keep the wagons available for Termite Resources Administrator Appointed should you require the wagons to run more trains". At the same time, Gemco informed the Administrators that SCT Logistics, of which SBR is a subsidiary, required the wagons to be removed from the ARTC siding and indicated that they could be stored at its own rail yards at Broken Hill and Parkes. Later, on 20 June 2014, Gemco provided the Administrators with a quotation from SCT Logistics for the movement of the wagons to Broken Hill and Parkes, together with a quotation for lifting 35 wagons off the railway lines for storage. It indicated that the ongoing monthly storage fees would be $29,184 plus GST. 922 On 24 June 2014, the Administrators informed Gemco that the wagons were no longer required by Termite and, in accordance with s 443B(3) and (4) of the Act, informed it that Termite did not exercise its rights in relation to the wagons. They noted that any costs associated with the collection of the wagons and any lease arrears would form part of Gemco's unsecured claim against Termite. 923 Gemco then relocated the wagons to Broken Hill and Parkes, incurring the expense of doing so. 924 Mr Thorn, Gemco's Executive General Manager, attempted to locate other lessees of the wagons but without success. He said that the rail leasing market was very subdued generally due to the fall in the iron ore price in mid-2014. Gemco had been unable to re-lease or otherwise use any of the wagons until 1 July 2015 when it secured a two year lease of 11 wagons to SCT. 925 Gemco did not terminate the Master Agreement by reason of the default of Termite in making payment (as it could have pursuant to cl 19). The defendants submitted, however, that Gemco had, in the circumstances which occurred, accepted that the Master Agreement had come to an end. They referred in particular to Gemco's action after the Administrators' letter of 24 June 2014 in having the wagons transported to their own sidings at Broken Hill and Parkes. 926 In my view, this action of Gemco does not have the significance for which the defendants contended. Instead Gemco had continued to make the wagons available to Termite. So much was confirmed in Gemco's email of 20 June 2014. When Termite ceased its operations, the wagons had to be stored somewhere. The movement of the wagons to Broken Hill and Parkes was for storage reasons, as to avoid the storage charges of ARTC or SBR which would otherwise be incurred. The mere storage and safeguarding of the wagons by Gemco did not mean that they thereby ceased to be available to Termite. Had Termite been able to resume mining operations (whether during the administration or post-administration), the wagons continued to be available to it. Gemco was willing to perform its obligations in that respect. 927 The defendants did not seek to rely on Gemco's attempts to obtain alternative uses for the wagons as evidence that they had ceased to be available to Termite or as evidence that Gemco had accepted that the contract had terminated. Its submission with respect to those attempts was that Gemco had not done sufficient to mitigate its loss. 928 This defence fails. Termite has proved its loss.

The rent abatement provision 929 In my view, the defendants' reliance on the rent abatement provision in cl 5.2 of the Master Agreement is misconceived. That clause provided for rent abatement only when SBR notified Termite that the number of wagons had fallen below the minimum specified. SBR did not give any such notification and, for the reasons already given, the wagons did not cease to be available to Termite and SBR on their location for storage purposes to Broken Hill and Parkes.

Section 554B of the Act 930 The defendants again invoked s 554B of the Act and reg 5.6.44 of the Corporations Regulations. 931 It is only the claim of $3,614,220 plus GST which could be the subject of the s 554B deduction. 932 The number of whole months between 18 June 2014 and 1 January 2016 is 18 months. Looked at broadly, nine of those months were before 14 April 2015 and nine months after. Therefore, using the same approach as I applied in relation to the claim of Cronos, I calculate the deductions as follows: $3,975,642 (inc GST) x ½ x ½ x 0.08 = $79,512.84

933 Accordingly, the liability of Termite to Gemco should be reduced by $79,512.84.

A failure to mitigate? 934 Next, the defendants referred to cl 16.5 of the Master Agreement, which provides: Gemco and Termite shall be under a duty to act reasonably in respect of any possible mitigation of its losses, damages and/or expenses in relation to any claim which it may have against the other party arising under or in connection with this Lease (including, in the case Gemco, for any claim for which it seeks to be indemnified under clause 16.1). 935 The defendants submitted that, despite Mr Thorn's evidence of having made a marketing campaign for alternative use of the wagons, the Court should not be satisfied that that had occurred. It emphasised that Gemco had not produced any documents in support of the "marketing campaign" to which Mr Thorn referred. That meant, so the submission ran, that Gemco had not acted reasonably to mitigate its loss. In this circumstance, the defendants submitted that a portion of any liability which Termite might have to Gemco should be attributed to Gemco's own failure to mitigate its loss. 936 In my opinion, this submission ought not to be accepted. First, I considered that Mr Thorn was a reliable witness. I accept his evidence about the efforts which Gemco did make to locate alternative users of the wagons. 937 Secondly, the number of potential users of rail wagons appears to be reasonably limited and it is reasonable to expect that they were well known in the industry. Certainly they were known to Mr Thorn. It also reasonable to suppose that direct contact with the potential alternative users was more likely to produce results than would some form of more generalised "marketing campaign" on which the defendants' submission seemed to be premised. 938 Thirdly, the defendants, who in the present context have at least an evidential onus with respect to a failure to mitigate, did not establish that, had further efforts been made, any alternative user could have been located. I accept Mr Thorn's evidence that the fall in the iron ore price meant that the demand for rail wagons had declined.

The claim for storage fees 939 I uphold the defendants' submission that Termite is not liable to Gemco in respect of the "storage fees" associated with the storage of the wagons at Broken Hill and Parkes. The Broken Hill site was owned by Gemco and the Parkes site leased by it. It did not have to pay storage fees to itself in respect of the Broken Hill site and the lease charges it paid in respect of the Parkes site had been incurred in any event. They are not causally attributable to conduct of Termite or the defendants. 940 It is possible, as Mr Thorn deposed, that had Gemco not stored the wagons at the Parkes site, it could have made some alternative profitable use of the site. However, such an alternative profitable use was not proved and, even it had, Gemco's claim would have been for the loss of profit from the inability to engage in the alternative transaction and not for the "storage fees". 941 Accordingly, Termite's claim in respect of Gemco should be reduced by $59,746.50 ($54,315 in addition to GST).

Conclusion on the non-trading claim of Gemco 942 For these reasons, I am satisfied that Termite has established that it is liable to Gemco in the sum of $3,986,186.11.

SBR - non-trading claim 943 Termite claimed that it had a Tail Liability to SBR in the sum of $8,272,722.60. The defendants did not dispute the manner in which that sum had been quantified but denied that Termite had the liability to SBR. They submitted, in the alternative, that such liability as Termite did have was for a much reduced sum.

The Termite-SBR Contract 944 Termite entered into a Rail Haulage Agreement (the RHA) with SBR on 25 May 2010. Under the RHA, SBR was to provide "Haulage Services" between Rankin Dam and Port Adelaide. The Agreement commenced on 1 September 2010 and was to terminate on 1 May 2015 (56 months after commencement). 945 The RHA provided in cl 5.1 for Termite to make three kinds of payments to SBR: a "Capacity Charge", a "Haulage Charge" and a "Performance Charge". The Performance Charge is not presently material and need not be mentioned further. In essence, the Capacity Charge represented SBR's fixed costs and the Haulage Charge its variable costs. 946 Clause 11 of the RHA provided for acts of default and for termination. Because of its significance to the submissions made by the parties, it is appropriate to set out relevant parts of cl 11. 11.2 Default under this Agreement (a) If either party: (i) has a receiver, manager, receiver and manager, liquidator (including a provisional liquidator), special investigator, statutory manager or similar person appointed (whether by a court or other persons) concerning any of its property, assets, business or affairs; (ii) becomes bankrupt, insolvent or enters into a composition scheme or arrangement (whether formal or informal) with creditors; (iii) assigns its property, assets, business or affairs for the benefit of its creditors; (iv) has any bona fide distress, execution, attachment or other process made or levied against any of its assets which is not satisfied within seven days after service; (v) fails to pay an undisputed invoice in respect of this Agreement within 30 days of the due date for payment; (vi) fails to maintain the insurance required under clause 8 this Agreement; (vii) fails to comply with the requirements of all relevant laws, statutes, regulations, permits, licenses and codes in any way affecting or applicable to the Haulage Services; or (viii) fails to comply with any material term of this Agreement; then there has been an act of default. (b) The non-defaulting party is known as the "innocent party". (c) Each party undertakes to the other that it will promptly notify, in writing, the other of any event that constitutes an act of default by it. (d) Upon the occurrence of an act of default referred to in clause 11.2(a)(i)-(iv), the innocent party may immediately terminate this Agreement by notice in writing. (e) Upon the occurrence of an act of default referred to in clause 11.2(a)(v)-(viii), the innocent party may serve a Notice of Default upon the defaulting party, being a notice in writing requesting rectification of the act of default within a reasonable time (not being less than 14 days). (f) If the defaulting party has not rectified the act of default in accordance with the notice provided by the innocent party pursuant to clause 11.2(d) the innocent party may, in its absolute discretion, and at such times as it may determine do all or some of the following: (i) terminate this Agreement; and (ii) exercise any other power or right that the innocent party may have under this agreement or in law or in equity. (g) … (h) If this Agreement is terminated by SBR under clause 11.2(f)(i) before the Expiry Date for default by [Termite], [Termite] shall pay to SBR within 30 Days of the date of SBR's claim for payment an amount calculated in accordance with clause 11.3. The amount payable to SBR under clause 11.3 will be full compensation for the termination and [Termite] will not be liable to SBR for any claim in respect of the termination other than for the amount payable under clause 11.3. 11.3 Termination Payment (a) Within 60 days of the date of termination (or such longer period as agreed), SBR shall submit a claim for payment, accompanied by a worksheet containing the application of the formula in clause 11.3(b)(ii) and details of costs claimed under clause 11.3(b). Such worksheet must be accompanied by reasonable supporting evidence. (b) The termination payment shall comprise 2 components, being: (i) a payment to cover actual and reasonable demobilisation costs incurred by SBR by reason of the termination, including redundancy costs for train crew and relocation costs for plant and equipment used in the performance of SBR's obligations under this Agreement; and (ii) a payment calculated in accordance with the following formula which describes the extent to which the Capacity Charge payments have been based on less than average (across the initial Term) monthly Contracted Tonnage: TA = (TT * M/56 - TA) * CR Where: TA = the amount to be paid TT = Contracted Tonnage of ore to be railed over the Term as set out in Schedule 4 M = number of months from the Commencement Date to the date of termination of this Agreement TA = the number of tonnes on which the Capacity Charge has been paid up until the date of termination of this Agreement CR = the Escalated Capacity Rate per tonne as specified in Schedule 1 ... 11.4 Termination for Convenience Without prejudice to any of [Termite's] other rights and entitlements under this Agreement, [Termite] may at any time by 180 days written notice to SBR during the Term terminate this Agreement for convenience. If [Termite] terminates the Agreement under this clause 11.4, SBR will be entitled to payment calculated in accordance with clause 11.3. Payment shall be made by [Termite] within 30 days of the date of SBR's claim for payment under clause 11.3. The amount payable to SBR under clause 11.3 shall be full compensation for the termination and [Termite] will not be liable to SBR for any claim in respect of the termination other than for the amount payable under clause 11.3. 947 As is apparent, cl 11.2 provided for termination by an act of default in two different ways. If the particular act of default was of the kind specified in cl 11.2(a)(i)-(iv), the innocent party could terminate the Agreement immediately by notice in writing. Broadly speaking, those acts of default were insolvency related. 948 If, however, the act of default was of a kind set out in cl 11.2(a)(v)-(viii), the innocent party could not terminate immediately. Instead, it could, pursuant to cl 11.2(e), serve a notice of default on the defaulting party and, pursuant to cl 11.2(f), terminate the Agreement only if the defaulting party did not rectify the act of default in accordance with that notice. In that event, the innocent party could "exercise any other power or right that [it] may have under [the RHA] or in law or in equity". In the event of termination by SBR under cl 11.2(f)(i), the liability of Termite was limited to the amounts payable under cl 11.3 concerning demobilisation costs and the Capacity Charge, (cl 11.2(h)). 949 This understanding of the contractual arrangement is complicated by the reference in cl 11.2(f) to a notice pursuant to cl 11.2(d), but that appears to be a mistake. It should instead be a reference to cl 11.2(e). 950 By notice dated 26 June 2014 expressed to be given pursuant to cl 11.2(d) of the RHA, SBR terminated the RHA. The notice stated that it was made by reason of Termite's appointment of administrators. That is, it was based on cl 11.2(a)(i). 951 The defendants disputed Termite's claimed liability to SBR on six different bases.

No entitlement for damages for breach of contract? 952 The defendants' first submission was that SBR's claim had been presented on the basis of a claim for damages for breach of contract when, given the circumstances in which it terminated the RHA, it had no such entitlement. 953 This submission of the defendants, and the responsive submission of Termite, pointed up an issue of construction in cl 11.2. While a termination by SBR pursuant to cl 11.2(f)(i) would give rise to a liability in Termite to make the cl 11.3 payment, there was no express counterpart obligation in respect of termination pursuant to cl 11.2(d). As SBR had given its notice of termination pursuant to cl 11.2(d), did this mean that the Contract contemplated that SBR should have no further entitlement on its immediate termination (other than being relieved of the performance of its own obligations)? Alternatively, did the Contract contemplate that SBR would have the remedy for which cl 11.3 provides or, perhaps, the remedies otherwise available to it in law or in equity? 954 The defendants submitted that SBR was limited to the remedy for which cl 11.3 provided whereas Termite submitted that SBR had its common law remedies. 955 Several matters could favour the first alternative outlined above: the very structure of cl 11.2 suggests careful attention by the parties to the two forms of termination under the subclause; subcl 11.2(f) provides expressly that on a termination pursuant to that subclause, the innocent party may exercise any rights available to it in law or in equity (subject to the cap on Termite's liability fixed by cl 11.2(h)) and cl 11.2(d) does not; and cl 11.3 is referred to in cl 11.2(h) with reference to cl 11.2(f) and there is not such reference to cl 11.2(d). The parties' careful attention to those matters could be taken to indicate that they did not contemplate the innocent party having any further entitlement in the event of termination pursuant to cl 11.2(d). 956 On the other hand, for the reasons given earlier, cl 11.2 is to be construed so as to have a business-like operation. It is prima facie surprising that commercial parties intended that the innocent party would not have any further remedy following a termination for a cl 11.2(a)(i)-(iv) reason. That is particularly so given the contemplation in cl 11.3(b)(i) that SBR (as an innocent party) would on termination be likely to incur demobilisation, redundancy and relocation costs, just as it would in the event of a termination for a cl 11.2(a)(v)-(viii) reason. It is also apparent that the parties intended that cl 11.3 should delimit the remedy available on termination in a variety of contexts: on termination for breach pursuant to cl 11.2(f), on termination for convenience pursuant to cl 11.4, and for termination on an event of force majeure pursuant to cl 16.1. It is not readily to be supposed that the parties had intended that cl 11.3 should apply in all these circumstances but not when the Contract was terminated for a cl 11.2(a)(i)-(iv) reason. 957 Counsel for Termite submitted that the common law remedies for breach of contract should be regarded as excluded only when there is clear and unambiguous language in the parties' contract that that result was intended. He referred to Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693. It is not clear that Concut v Worrell is authority for such a proposition, but that question need not be considered. Even if the common law remedies for breach of contract were preserved, it would not avail SBR. Termite had not bound itself to SBR not to have administrators appointed to it, and that appointment did not constitute a breach of its contract. Even if it had, it would be a breach within cl 11.2(a)(viii) and therefore subject to the cl 11.2(h) cap. 958 I consider that cl 11.2 should be construed in the manner for which the defendants advocated. That makes commercial sense. Furthermore, cl 11.3 on its terms is capable of applying to any termination, including a cl 11.2(d) termination. The references to cl 11.3 in cll 11.4 and 16.1 indicate that it has an operation extending beyond cl 11.2(f) terminations. 959 It follows that I uphold the first defence of the defendants. That means that Termite's liability to SBR is governed by cl 11.3.

The claim under cl 11.3 960 Although the defendants had contended that cl 11.3 was applicable to a termination by notice pursuant to cl 11.2(d), they submitted that Termite had not adduced any evidence of the amount which would be due pursuant to that clause. They submitted in the alternative that such evidence as there was indicated that no amount would be payable. 961 In this respect the defendants noted that Mr Reed, the Business Capabilities Manager of SBR, had agreed with a calculation provided by a Mr Galbraith on 17 January 2014. The evidence did not disclose the capacity in which Mr Galbraith was then acting but it is apparent that he sent the calculation to Mr Reed at the request of Mr Parsons. The calculation, supported by worksheets, indicated the termination charges payable to SBR in the event of early termination during the 56 month initial term and the Capacity Charges applying to the end of the initial term. The calculation indicated that there was no termination payment payable to SBR after August 2012. 962 In his evidence, Mr Fiteni from SBR did not contest the calculation made by Mr Galbraith. 963 In his cross-examination, Mr Holmes said that he had made a calculation of the amount which would be payable if cl 11.3 applied. He said that it would be "very small". Later however, Mr Holmes acceded to the appropriateness of a calculation of $1,395,289 made by the cross-examiner. The defendants submitted that even that amount should not be allowed because it was based on the figures in documents containing SBR's calculation of its claim and not on primary business records. 964 I do not accept that submission. The inputs necessary for the cl 11.3(b) formula are relatively straightforward, and are in evidence. It is pertinent that counsel was able to identify the relevant inputs in the cross-examination of Mr Holmes. 965 This means that I accept the quantification of SBR's claim under cl 11.3 at $1,395,289.

SBR's claim not admitted to proof 966 The defendants submitted that the liability of Termite to particular creditors should be limited, for the purpose of Termite's claim against the defendants, to the amount admitted to proof by the Administrators/Liquidators. As SBR's claim for the Capacity Charge had not been admitted to proof, Termite could have no liability. I reject that submission for the same reasons given earlier.

An intervening event? 967 The defendants submitted, without reference to authority, that the liability of Termite with respect to the claimed Capacity Charge should be attributed causally to action of the Administrators and not to their conduct. The defendants referred to evidence indicating that SBR had made a claim for loss of profits only because of an invitation to do so by a member of the Liquidators' firm or by their solicitors. 968 The relevant sequence of events is as follows. On 17 September 2014, SBR lodged a proof of debt with the Liquidators for a total of $19,185,175.21. On 23 December 2014, it submitted a revised proof of debt for $19,109,145.98. Of this amount, some $12.2 million was attributed to the Capacity Charges after June 2014. 969 By correspondence dated 11 September 2014, 24 November 2014 and 12 January 2015, the Liquidators raised a number of queries with SBR regarding its proof of debt. Specifically, the Liquidators asked SBR why cl 11.3 of the RHA did not apply to limit its liability and asked SBR to quantify its claim on the basis that cl 11.3 did have that effect. On 27 January 2015, SBR responded saying that it would like to "park" the claim for the Capacity Charge because, in effect, the work involved in justifying the claim may not warrant the likely return. 970 By letter dated 30 March 2015, Turks Legal, a firm of solicitors who identified themselves as acting for SBR but who Mr Fiteni said had been instructed by SBR's trade credit insurer, said that they were instructed that SBR no longer pursued the Capacity Charge claim of $12,147,434.64. 971 Two weeks later, on 14 April 2015, SBR submitted a proof of debt limited to $6,961,711.34 for the purpose of participating in the initial dividend. It indicated, however, that it reserved its right to submit a proof of debt in respect of the balance of $12,147,434.64 in the event that sufficient funds materialised for a return to unsecured creditors. On the same day, the Liquidators declared a dividend at the rate of 3.024 cents in the dollar. 972 There things stood until mid-2016. On 11 July 2016, SBR sent a letter to the Liquidators making a claim for damages of $8.127 million. It said that it had formulated "a damages claim based on providing the relevant capacity tonnes per the Rail Haulage Agreement, multiplied by the given Capacity Rate after adjusting for costs that were progressively mitigated over time". 973 The opening paragraph of the letter referred to "recent discussions held with John Marsden of your office, and Natasha Riach from Fisher Jeffries, in respect of our claim amount for the Termination of Contract". Fisher Jeffries are the solicitors acting for the Liquidators in the present litigation. 974 Mr Fiteni said that, in these discussions, SBR had been "invited to submit a claim for damages for breach of our contract". 975 On that basis, the defendants submitted that any liability of Termite to SBR should be treated as having been caused by the Liquidators' invitation to SBR to revive the claim for the Capacity Charge and not by their own breach of duty. 976 That submission cannot be accepted, at least in the terms in which it was framed. The existence and cause of the liability to a creditor are separate and distinct from the matters which prompt the creditor to pursue a claim in respect of it. Whether Termite is "liable" to SBR rests not on the reasons of SBR for pursuing the claim but on the underlying facts and circumstances of their contractual relationship. 977 However, I understood the defendants to be submitting that the "loss" (if it be such) incurred by Termite was not caused by their conduct but by the Liquidators' encouragement to SBR to revive the claim which it had abandoned. Had the Liquidators not intervened in the way which they did, it could be inferred that SBR would not have sought to revive the claim. In that way, it was said that the Liquidators had brought the loss on Termite which it would not otherwise have suffered. 978 Again, I consider that the question of whether the "loss" of Termite by reason of its liability to SBR should be assessed by reference to the underlying facts and circumstances and not by the matters which motivated SBR to bring a claim in respect of that loss. The loss cannot be regarded as voluntarily assumed. Further, account must be taken of the responsibility of the Liquidators, acting as conscientious liquidators, in respect of a claim which they were aware SBR had foreshadowed but had "parked". I reject this submission.

The termination for convenience clause 979 Next, the defendants referred to cl 11.4 of the RHA which entitled Termite to terminate the Contract for convenience upon six months' notice. In the view I take, it is not necessary to consider this submission given my finding that cl 11.3 governs SBR's entitlements. I indicate, however, that if I am wrong in my conclusion about the effect of cl 11.3, I would uphold the defendants' submission with respect to the termination for convenience clause.

Conclusion on the non-trading claim of SBR 980 For the reasons given above, I consider that Termite has shown an indebtedness to SBR of $1,395,289.

IMX - guarantee claim 981 Several documents in the trial indicated that IMX had been called on to honour the guarantee, capped at $3 million it had given to Flinders Ports. Indeed, the non-trading claim of Flinders Ports set out earlier gave credit for the $3 million it had received from IMX. 982 This suggested that IMX may have a claim pursuant to a right of subrogation. Mr Lewis referred to IMX having such a claim but the evidence did not indicate whether IMX has sought to exercise that right. 983 Although Termite did not plead that it had a liability to IMX in respect of the $3 million guarantee payment, it did, in its written opening, include this as a component of the non-trading claims. Despite doing so, Termite did not refer again to this claim. In particular, although the defendants drew attention in their final submissions to the fact that the claim had not been pleaded, Termite made no submissions concerning it. 984 As this appears to have been an oversight, I would, had it been necessary, have given the parties the opportunity to make further submissions concerning it.

Other claims 985 The remaining amounts claimed by Termite are as follows: Entity Amount claimed by Termite (including GST) $ Australian Taxation Office (ATO) 3,853,034.77 Juhua Group (Hong Kong) Ltd 3,913,654.08 Sinosteel International Holding Co Ltd 1,406,293.35 Sichuan Taifeng Group Company Ltd 1,835,797.89 Shanghai Guodian Shipping Co Ltd 1,046,892.12 Ikonomopoulos Family Trust 4,265.53 Life Together Unit Trust 3,169.83 Total $12,063,107.57

986 Of these amounts, the defendants disputed only the claims with respect to the ATO and Shaghai Guodian Shipping Co Ltd (SGSC).

The ATO claim 987 The Liquidators have assessed that Termite has an "increasing adjustment" liability to the ATO pursuant to s 21-15 the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). Section 21-15 provides as follows: 21-15 Bad debts written off (creditable acquisitions) (1) You have an increasing adjustment if: (a) you made a *creditable acquisition for *consideration; and (b) the whole or part of the consideration is *overdue, but you have not provided the consideration overdue; and (c) the supplier of the thing you acquired writes off as bad the whole or a part of the debt, or the whole or a part of the debt has been overdue for 12 months or more. The amount of the increasing adjustment is 1/11 of the amount written off, or 1/11 of the amount that has been overdue for 12 months or more, as the case requires. … 988 Pursuant to s 58-60 of the GST Act, the Liquidators as representatives of Termite, were obliged to notify the Commissioner of Taxation of the increasing adjustment. The Liquidators did so 14 April 2015. The amount of the increasing adjustment notified was $3,853,034.77. The Liquidators calculated the increasing adjustment by reference to the Practice Statement Law Administration (General Administration) Statement (PS LA201/1(GA)) issued by the ATO. 989 There is, however, a difficulty in including the increasing adjustment as an item of Termite's damages. As the ATO Practice Statement points out: 25. A bad debt increasing adjustment does not necessarily arise as a result of interim dividend payment. This is because creditors may not write off the whole or part of a debt owed by the incapacitated entity as bad until it is certain that no further payments will be received. In any case, representatives will not usually know whether creditors have written off any part of a debt as bad at that point. The Commissioner therefore accepts that payment of an interim dividend does in itself trigger an increasing adjustment. 26. When a representative makes a final dividend payment, creditors will generally make a bona fide commercial decision that the unpaid portion of a debt is unlikely to be recovered and therefore write off the remainder of the debt. Thus, a bad debt increasing adjustment potentially arises when a final dividend is paid and it is at this point the bad debt increasing adjustment formula may be used calculate it. (Emphasis added) 990 A further complication is that this judgment would be used in determining the amount of the unsecured debts of Termite and, depending on what happens thereafter, the amount of any dividend. This means that the parties are not in a position presently to make any calculation until they know, at the least, the result of the case. 991 In these circumstances, I would, had it been necessary to do so, have acceded to the suggestion of counsel for Termite that the parties be given the opportunity of making further submissions concerning the claim for increasing adjustment after the delivery of these reasons.

Shanghai Guodian Shipping Co Ltd 992 Termite claims an amount of $1,046,892.12 (exc GST) in respect of an alleged liability to SGSC. 993 Termite had entered into two Contracts of Affreightment with SGSC (the CoAs) pursuant to which SGSC carried iron ore from Port Adelaide to China. Following the placement of Termite into administration, SGSC did not undertake three shipments which it had expected pursuant to the second CoA and suffered a loss of profit on a fourth. It claimed loss of the expected profit from each shipment as follows: Shipment No Claimed loss of profit AUD$ Shipment 7 275,592.44 Shipment 8 (unperformed) 257,099.89 Shipment 9 (unperformed) 257,099.89 Shipment 10 (unperformed) 257,099.89 Total $1,046,892.11

994 Mr Holmes expressed the view that these claimed losses of profit were likely to be materially misstated and set out the basis for that opinion. In addition, Mr Holmes expressed the view that a precise claim amount "is not reasonable" given that the claims are based upon a hypothetical, the charters' destinations were not certain, and the components making up each claim are variable. 995 In his cross-examination, Mr Holmes said that he had sought further information from SGSC but that the response provided did not satisfy his questions. 996 The defendants submitted that, in these circumstances, the Court could not be satisfied that SGSC had suffered any loss on the three unperformed charters, noting that SGSC may well have been able to use the ships for other profitable purposes. It conceded, however, that the loss of profit of $275,592.44 on Shipment 7 should be allowed. 997 Counsel for Termite conceded that there was no evidence as to the use made of the ships to be used on the three cancelled charters and, tacitly, conceded the claim with respect to those. In these circumstances, I uphold the defendants' submission that Termite has established a loss of only $275,592.44 in respect of SGSC.

Summary on quantum 998 I summarise the claim of Termite with respect to its creditors which I have upheld as follows: Category of Claim Debt (including GST) Total category claim (including GST) Trading debts (excluding logistics creditors) $2,492,199.10 Trading debts (logistics creditors) $814,252.37 $22,216,445.96 Cronos $12,597,676.05 Exact $1,842,806.20 Flinders Ports $6,961,711.34 SBR Non-trading claims by logistics creditors $2,059,245.78 $25,292,110.25 Cronos $2,818,110.00 Exact $15,033,279.36 Flinders Ports $3,986,186.11 Gemco $1,395,289.00 SBR ? IMX Other claims: ? $7,438,773.12 Australian Taxation Office $3,913,654.08 Juhua Group (Hong Kong) Ltd $1,406,293.35 Sinosteel International Holding Company Ltd $1,835,797.89 Sichuan Taifeng Group Co Ltd $275,592.44 Shanghai Guodian Shipping Co Ltd $4,265.53 Ikonomopoulos Family Trust $3,169.83 Life Together Unit Trust $57,439,528.43 Less the interim dividend $2,027,811.81 Amount of loss claimed $55,411,716.62

999 As earlier indicated, I would hear further submissions from the parties, were it necessary, with respect to claimed liabilities to the ATO and IMX and with respect to the application of s 554B of the Act in the case of the non-trading debt of Exact. 1000 However, for the reasons given earlier, I consider that Termite has shown an entitlement to damages of $7 million only.

Conclusion 1001 For the reasons given earlier, Termite is entitled to judgment against each defendant, in the sum of $7 million. Before entering judgment, I will hear from the parties with respect to interest and costs. I certify that the preceding one thousand and one (1001) 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