Oppression - assessment
205The characterisation thus advanced by Sumiseki is, in my opinion, both open and justified. The evidence shows that, in mid-2009, attention was given to the terms of the loan agreement between Wambo and PAML because of a concern that the loan, in its then current form, might have to be reflected as a financial liability in the group's consolidated accounts. There was an allied concern about the attitude of the Australian Taxation Office. The apprehensions arose mainly because of the absence of a fixed loan term. On 1 July 2009, Mr Mawby (Peabody's head of tax in Australia) suggested three modifications of the loan arrangement to address this concern: inclusion of a fixed term of up to ten years, addition of a provision permitting capitalisation of interest and the adoption of a floating interest rate. He said nothing about dividend payment restrictions, from which one infers that that matter was irrelevant to the concerns that caused the loan terms to be examined.
206After her appointment to Australia in August 2009, Ms de Santana became concerned about the loan arrangement for a different reason. The on-demand nature of the loan raised in her mind a question about the appropriateness of the classification of Wambo's indebtedness as a non-current liability in its accounts, a matter that had potentially serious implications for Wambo's solvency. The concern Ms de Santana developed in the latter part of 2009 was, to some extent, mitigated by a view or expectation that PAML would not call the loan in the following 12 months. But Ms de Santana was of the view that the Wambo directors needed longer-term certainty than could be provided by ad hoc assurances of the kind given by PAML.
207It was at that point that investigation of external funding of Wambo was undertaken and "indicative terms" of a three-year loan by an outside financier were identified. These involved financial ratios that Wambo's then existing financial position did not satisfy. The indicative arms length terms did not involve any covenants against the payment of dividends.
208A draft agreement that neither restricted dividend payments by Wambo nor imposed financial ratios had been prepared in Australia and approved by certain Peabody personnel by the end of December 2009. These included Mr Hawkins, the officer who, according to Ms de Santana, agreed some time after 14 January 2010 that the loan should be on arms length terms. But no agreement in terms of that draft (approved by Mr Hawkins and others) was executed. In January 2010, Ms de Santana returned to the matter of financial covenants. Proposed loan terms were revised after receipt of indicative proposals from ANZ and NAB during February 2010. That revision caused the draft already approved by certain persons to be expanded to include financial covenants. Significantly, however, none of those covenants restricted dividend payments.
209The final form of agreement submitted to Wambo's board on 27 March 2010 included restrictions on the payment of dividends in the form of clause 8.1 (see [177] above). There was, on the evidence, no articulated reason why PAML required those covenants. It had, for many years, been content with a loan agreement that did not contain them; and the concerns that had caused the loan terms to be re-examined (that is, the taxation issue addressed in mid-2009 and the balance sheet classification issue relevant to Wambo's solvency addressed after August 2009) in no way involved or turned upon the absence of contractual controls on the payment of dividends. Nor was there any articulated reason why Wambo should willingly accept the covenants restricting the payment of dividends. Yet the agreement containing the covenants was approved by the Wambo board on 27 March 2010 and executed by Wambo on 29 March 2010. Then, on the very next day, the board met again and resolved that no dividend be paid for the six months to 31 December 2009 because, among other reasons, the restriction on the payment of dividends adopted by Wambo some 24 hours earlier would be infringed if a dividend were paid.
210Ms de Santana accepted in cross-examination that it was her idea that the revised loan agreement should include covenants restricting the payment of dividends by Wambo. Ms de Santana also accepted that she had played a leading role in the events that caused Wambo to accept, as against PAML, contractual restraints destructive of its ability to pay B class dividends on the basis that had, until at least late 2008, been uncontroversial.
211Of particular significance is the fact that acceptance of the dividend restriction by Wambo followed an unsuccessful attempt by PAML to persuade Sumiseki to agree to a revised dividend regime with respect to B class shares. On 29 October 2009, Wambo, through Ms de Santana and others, put to Sumiseki the proposal outlined in the draft presentation of 20 October 2009 referred to at [161] above. Ms de Santana confirmed in cross-examination that Sumiseki simply rejected the idea that the B class dividend rights should be varied. She also confirmed that the summary, in the draft of 20 October 2009, of existing B class dividend rights (to the effect that there was a discretion in the Wambo board to pay or withhold) had been formulated with a view to persuading Sumiseki to agree to change. It is relevant to note the following part of Ms de Santana's cross-examination (the reference to "the left hand column on 2366" is a reference to the left hand column at [161] above):
"Q. The reason you set out what appears in the left-hand column on 2366 was to persuade my client to accede to changes to the class B share rights to overcome Peabody's accounting problem in the US. That's correct, isn't it?
A. Yes.
Q. You were saying to them we're in a position as a matter of commerce to see that you don't get profits under the class B shares because we have a discretion to exercise, and if we exercise it unfavourably to a distribution you will never see that profit again. That's what you were saying, weren't you?
A. That's as is written.
Q. That's what you were intending to put to my client, correct, when you approved this document. That's correct, isn't it?
A. That's what's on the document, yes.
Q. Would you address my question and answer it. That's what you were intending as a senior executive of Peabody to put to my client; correct?
A. Yes.
Q. And also as a director of Wambo; correct?
A. Yes."
212The sequence of events disclosed by the evidence shows that, in the second half of 2009, two objective reasons for possible variation of the loan agreement between Wambo and PAML were identified, that neither of those reasons had anything to do with the absence from the agreement of restriction on the payment of dividends by Wambo and that resolution of the two identified concerns did not involve or envisage the creation of any such restriction. In or about late October 2009, Peabody attempted to persuade Sumiseki to agree to a variation of the dividend rights attached to the B class shares. Sumiseki did not agree. Thereafter, Ms de Santana (embracing the "better view" expressed by Freehills after examining the bare words of the constitution) promoted an interpretation of article 2B.1 that effectively put B class dividends at the mercy of board decisions and pursued the idea that the revised loan agreement should include covenants restricting the payment of dividends by Wambo. It is not clear precisely when she began to do so. The "discussion term sheet" dated 1 March 2010 (see [174] above) envisaged various ratios and restrictions, but none limiting the payment of dividends. A Wambo document entitled "Analysis of financing options" and also dated 1 March 2010 concluded that "the only viable financing option available to Wambo in the short term" was to request PAML to do one of two things: "provide a letter of comfort supporting Wambo's financial position for the next 12 months"; or "renegotiate the loan to remove the 'at call' nature of the loan". There followed a comparison of the terms of the existing PAML loan and the proposals obtained from ANZ and NAB. Under a heading "Dividend Restrictions" it was recorded that the existing loan agreement imposed no such restrictions and that ANZ proposed a restriction of "25% of Net profits (and compliance with other covenants)". "N/A" appeared in respect of NAB and there was a concluding "comment":
"No dividends assumed in our financial projections, ANZ loan would allow Wambo to pay B Class dividends."
213A provision restricting dividends to 25 per cent of net profits would have accommodated payment of the B class dividend on the basis that had been adopted over several years.
214A document headed "Consideration of funding options" dated 26 March 2010 was prepared for the Wambo board. It recorded that Wambo had requested PAML to adopt one of the two courses identified in the document of 1 March 2010, that is, provide a letter of comfort supporting Wambo's financial position for the next 12 months or renegotiate the loan "to remove the 'at call' nature of the loan". There followed a statement that PAML had "provided a letter and term sheet proposing new loan terms including" several then set out. Among these were "Cash distribution covenants" (debt service cover ratio, interest cover ratio and gearing ratio), followed by "Other restrictions":
"* All three covenants must be in compliance before cash can be distributed outside of Wambo.
* When all three ratios are in compliance, 50% of CFADS [cash flow available for debt service] will be available for dividend distribution."
215In an email dated 25 March 2010 to Mr Busch, Teresa Wiseman asked for "PAML's rationale behind the linkage of the covenants to dividend distributions". Mr Busch replied on 26 March 2010:
"The Undertakings set-out in clause 8 of the Unsecured Loan Facility Agreement are reasonable, typical, and provide a level of comfort to the lender. The covenants are modelled after term sheets received from independent 3rd parties and are typical of what is found in a financing of this nature. Unlike a typical financing however where these covenants are used for companies with the loan, and a breach would mean default by the borrower, in the Unsecured Facility Agreement they merely restrict the usage of cash. The covenants ensure that until Wambo has reached a level of financial stability, cash is retained and is only used to repay debt and facilitate the day-to-day operations."
216Ms Wiseman was the author of a Wambo board paper dated 26 March 2010. The paper explained briefly the need to eliminate the "at call" nature of the PAML loan. Reference was made to loan proposals received from ANZ and NAB and reasons why they were not acceptable from Wambo's perspective. There was then an outline of the new terms proposed by PAML, including:
"(Significantly) a breach of financial covenants by Wambo under the PAML agreement results only in restrictions over dividend payments to shareholders (in their capacity as a shareholder) as opposed to default and accelerated repayment."
217The Wambo board met on Saturday 27 March 2010. The directors present were Ms de Santana and Mr Hedges. Handwritten notes made by Mr Hedges were in evidence. These show that there was fairly detailed discussion of the differences between the terms proposed by ANZ and those of the agreement proposed to be entered into with PAML. It was noted that, under the ANZ terms, breach of financial covenants would mean that "ANZ could put W into receivership", whereas under the PAML proposal cash flows were restricted to meeting of loan repayments and "once covts [sic] met can then make divd [sic] distributions". The terms proposed by PAML were thus presented as less onerous to Wambo than those proposed by ANZ. It was resolved by the Wambo board that the PAML loan agreement "is approved subject to resolution of outstanding issues". Ms de Santana explained in an affidavit that these involved confirmation that there was no requirement to offer the funding opportunity to the B class shareholder and "a number of administrative details".
218The formulation of the restriction on the payment of dividends was something that arose only after the failure of efforts to persuade Sumiseki to agree to a modification of the B class dividend right. The restriction, as ultimately included in the loan agreement, was proposed by PAML after Ms de Santana had embraced the idea that B class dividends were essentially discretionary and had indicated in January 2010 that she "wanted to include some covenants" in the loan agreement. No rationale for that desire consistent with the interests of Wambo suggests itself: from Wambo's perspective, the fewer covenants there were, the better its position would be; and covenants, as such, had nothing to do with the two matters of concern that had prompted an examination of the loan terms. Some reason unrelated to Wambo's welfare was behind the stated desire. Ultimately, the expressed reason was, in effect, that the loan should appear to be an arms length loan or, at least, to have features of an arms length loan - although why there should be any need for arms length terms does not appear to be explained. The terms proposed by ANZ were used as a yardstick - but, at the same time, it was made clear that, as regards financial covenants, PAML was prepared to adopt a position more benign to Wambo that that indicated by ANZ. Whereas breach of the covenants in a hypothetical ANZ agreement would create grounds for the calling up and enforcement of the loan, the consequence under the PAML agreement as eventually executed was merely a restraint on the payment of dividends. Thus, resort was had to arms length terms proposed by ANZ to justify a provision that did not reflect those arms length terms and was more benign to the borrower. Furthermore, the ink on the loan agreement containing this provision was scarcely dry when the board of Wambo determined that no B class dividend should be paid and gave two reasons for that decision, one being that payment would breach the dividend restriction provision.
219It is relevant to refer to the structure of the Wambo board. As at 27 March 2010, Ms de Santana and Mr Hedges were the only directors of Wambo. Both were present at the meeting. Ms de Santana had been appointed to the board on 17 September 2009; Mr Hedges on 24 March 2010, three days before the meeting. Ms de Santana was a director of PAML from 5 October 2009 to 24 March 2010, that is, for all but the last few days of the period commencing in early 2010 during which the proposal to include dividend restrictions was developed and implemented. Mr Hedges' handwritten notes of the meeting include the following:
"Directors' disclosures - no personal interest in proceedings. Noted we are all PEAL employees."
220The situation was one in which the two directors of Wambo who deliberated upon the loan agreement proposal were employees of PEA (the Australian holding company of the lender, PAML) and one of those directors had been a director of the lender until three days before the meeting and was the initiator of the plan to subject Wambo to dividend restriction provisions. While a board structure of that kind may be relatively commonplace within a wholly-owned group (where, in broad terms, the interests of the subsidiary and those of the parent may be expected to coincide, at least while insolvency is not foreseeable), it does emphasise that no mechanism was at work within the Peabody group to ensure that the separate interests of Wambo, a company with a non-Peabody shareholder, were considered or assessed by anyone capable of bringing to bear judgment attuned solely to Wambo's welfare, unclouded by allegiance to PAML and the Peabody group more widely.
221Ms de Santana's failure to appreciate and deal with the situation of conflict in which she was placed was made plain by her own evidence. In answers to questions put to her by the primary judge, Ms de Santana acknowledged that the loan agreement covenants were to protect PAML as lender and that, in causing them to be inserted into the agreement, she was "looking at the interests of PAML". When asked whether she had someone else look after the interests of Wambo or was acting on behalf of Wambo as well, she said:
"I was acting on behalf of both."
222An objective appraisal of the circumstances as a whole leads comfortably to the conclusion that the contractual provision restricting payment of dividends by Wambo was not born of any compelling commercial requirement of Wambo or of PAML or of any rational desire of either party to adopt arms length terms for the sake of adopting arms length terms. It was, rather, a calculated reaction to the lack of success in attempting to persuade Sumiseki to agree to modification of the B class dividend rights to its disadvantage. The revised loan agreement was used as a means of forcing (or attempting to force) on Sumiseki, as a matter of fact and commercial reality, a position with respect to enjoyment of its legal rights to which it had declined to agree and which it could not legitimately be forced to accept. Mr Hawkins accepted as much in cross-examination (see [192] above).
223The revised loan agreement was deployed in that way just three days after Wambo's board resolved to commit their company to it. Non-satisfaction of the financial covenants in clause 8.1 was one of two expressed reasons for the board's decision on 30 March 2010 that there should be no dividend on the B class shares for the period to 31 December 2009. The same rationale was expressed for like decisions at the 27 September 2010 board meeting (in respect of the period to 30 June 2010) and the 27 March 2012 board meeting (in respect of the period to 31 December 2011).
224It may be accepted that the primary judge, in his assessment of the relevant aspect of the conduct of Wambo's affairs, referred to a "thwarting" of Sumiseki's "legitimate expectation" to have B class dividends paid according to the course that had been established over several years - and which, on my assessment, represented the legal entitlement of Sumiseki under Wambo's constitution. But I do not regard his Honour as having resorted to any impermissible analysis according to subjective factors. The Court of Appeal of Western Australia (Steytler P, McLure and Buss JJA), in Smolarek v Liwszyc [2006] WASCA 50; 32 WAR 101, noted, at [77], that, notwithstanding the criticism of the expression "legitimate expectation" by Lord Hoffman already noticed, that expression has been used in this kind of context to describe "an understanding or expectation of a member which, because of equitable considerations, can make it unfair for a party to exercise legal rights". Lord Hoffmann said that the real question is as to the "correlative right" that may be sourced in the relationship between company members making it unfair, on equitable principles, for a majority to exercise a power available to them to the prejudice of another member.
225Brennan J observed in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; 180 CLR 459 (at 472) that conduct will be oppressive if that conduct was unfair according to ordinary standards of reasonableness and fair dealing; and oppression, at a minimum, imports unfairness. In Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55, the Full Federal Court (Siopis, Rares and Davies JJ) put the matter this way (at [9]):
"The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material."
226In this case, objectively fair behaviour within Wambo entailed adherence to the established course of conduct with respect to B class dividends. Sumiseki had a right that made it unfair on equitable principles for Wambo to depart from that course and, in particular, to resort to the proposal for revision of the loan agreement put forward by PAML as a means of doing so. It is true that the loan agreement covenants did not play a direct part in two of the five relevant decisions concerning B class dividends. But the adoption of the contractual constraint was a means of unfairly bolstering the asserted ability of Wambo to deny dividends. The judge was right to regard Wambo's departure as within the composite description in s 232 of the Corporations Act ("oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member").