Chimaera Capital Markets Pte Ltd v Kangaroo Resources Limited
[2014] VSC 419
•16 September 2014
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2013 02392
| CHIMAERA CAPITAL MARKETS PTE LTD (Company No 200908175Z) | First Plaintiff |
| and | |
| EMPIRE EQUITY LIMITED | Second Plaintiff |
| v | |
| KANGAROO RESOURCES LIMITED (ACN 120 284 040) | Defendant |
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JUDGE: | Judd J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 5, 6, 7 and 8 May 2014 |
DATE OF JUDGMENT: | 16 September 2014 |
CASE MAY BE CITED AS: | Chimaera Capital Markets Pte Ltd & Anor v Kangaroo Resources Limited |
MEDIUM NEUTRAL CITATION: | [2014] VSC 419 |
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CONTRACT — Construction and interpretation — Relevance of background and context — Objective framework of facts — Advisory Agreement — Capital raising — Ratings Advisory — Financial services — Termination — Exclusivity — Ambiguity and uncertainty — Contra proferentem rule — Expenses.
RESTITUTION — Payment made under a mistaken belief — Defences — Change of position.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P J Jopling, one of Her Majesty’s Counsel; Mr P D Corbett, one of Her Majesty’s Counsel; and Mr A D Nash | Holding Redlich |
| For the Defendant | Mr A J Myers, one of Her Majesty’s Counsel; and Mr J P Moore, one of Her Majesty’s Counsel | Clayton Utz |
HIS HONOUR:
The first plaintiff, Chimaera Capital Markets Pte Ltd, was one of a group of entities described as the Chimaera Financial Group, providing corporate finance and wealth management services. It is incorporated in Singapore. Salvatore and Angelo Catalano, brothers, are its directors. Salvatore said that the Group had offices in Australia, Singapore, West Africa and Hong Kong. Angelo lived and worked in Singapore. Salvatore lived and worked in Melbourne.
The second plaintiff, Empire Equity Limited, was controlled by Ashley Paul D’Sylva. The company and D’Sylva, its sole director, are based in Western Australia. D’Sylva described Empire as a venture capital and private equity firm. He said Empire mainly assisted junior resource companies with equity capital market deals. D’Sylva said he generally referred ‘large debt market work’ to Chimaera.
The defendant, Kangaroo Resources Limited, is an Australian company. Its shares are listed on the Australian Stock Exchange. From November 2008 until about April 2014, Mark Timothy O’Keefe was its chief executive officer. Mike Ralston was chief financial officer.
On 19 November 2010, Chimaera, Empire and Kangaroo entered into an Advisory Agreement, which was varied on 7 December 2010. Chimaera and Empire claimed to be entitled to fees and expenses payable under the Advisory Agreement as amended, assessed at more than $28 million, together with some shares in Kangaroo. Some of the claims are denominated in United States’ dollars. In the alternative, the plaintiffs claim damages for breach of ‘exclusivity rights’, including a ‘right of first offer’ for additional services during a ‘clear window of exclusivity of 180 days’ calculated by reference to the amounts they claimed under the Advisory Agreement.
Kangaroo counterclaimed for the return of a fee of USD750 000, paid to the plaintiffs in late 2010 by the issue of shares. Kangaroo alleged that the shares had been issued in the erroneous belief that the fee was payable. It contended that upon a proper construction of the Advisory Agreement, the occasion for payment had never arrived. Kangaroo also challenged some expenses claimed by Chimaera.
Background facts
In 2010, Kangaroo owned, or had an interest in, a number of coalmines or concessions in Indonesia. Two such projects are relevant. In 2009, Kangaroo provided funding of USD15 million to PPT Tanur Jaya, an Indonesian entity wholly owned by another Indonesian entity, PPT Ilthabi Bara Utama (IBU). The funding had been arranged through the issue of convertible notes. IBU was controlled by Romo Nitiyudo Wachjo, who was its major shareholder. In return for the advance, Kangaroo became entitled to 45 per cent of the production profits generated from the Tanur Jaya mine.
Wachjo, through various entities, also held a majority of the shares in Kangaroo. Ibrahim Habibe was another important shareholder in IBU and Kangaroo. While Wachjo was in a position to control Kangaroo, he was not an officer of the company.
In November 2010, Kangaroo was under financial stress. Its share price was declining due to an underperforming coalmine in Indonesia known as Mamahak. It sought to refinance the convertible notes and raise some working capital to alleviate its problem.
The Tanur Jaya mine was one of nine mining concessions that together constituted the Pakar assets, as they came to be known, located in East Kalimantan. All nine concessions were controlled by IBU through subsidiaries or related entities.
In late 2010, IBU was also under significant financial strain. It had raised capital by the issue of notes, through a wholly owned subsidiary. The notes had a face value of USD135 million. They were secured by the Pakar assets. IBU was unable to repay when the notes fell due.
In order to resolve its difficulty, IBU, through Prime Mine Resources Limited (PMR), a company incorporated in the British Virgin Islands, engaged Khronos Advisory Limited to invite bids for five ‘target companies’. Each target controlled one Pakar mining concession.
Advisory Agreement
It was against this background that Ralston met with D’Sylva on 10 November 2010. Ralston explained to D’Sylva that Kangaroo wished to refinance the notes. D’Sylva contacted Angelo Catalano the same day, who agreed to accept a joint retainer from Kangaroo. Chimaera and Empire agreed to split fees on a 50/50 basis.
As early as 9 November 2010, Ralston had told D’Sylva of Kangaroo’s interest in the Pakar assets. By 12 November, Kangaroo’s interests had crystallised into a proposal to buy out IBU noteholders and thereby achieve ownership of the Pakar assets. That is to say, all nine concessions. Ralston considered it might be possible to acquire the IBU notes for around USD100 million.
On 18 November 2010, D’Sylva wrote to O’Keefe and Ralston:
Dear Mike and Mark
As agreed, please find a joint mandate from Chimaera Financial Services and Empire Equity attached for the following scope of work:
(a)Ratings Advisor in connection with the proposed issuance of a bond offering by the Company (KRL Notes). The proposed issuance of the KRL Notes may be structured as a private placement offering under Regulation S of the United States KRL Notes Act of 1933 or substantially similar regulatory regime;
(b)Lead Manager and Sole Bookrunner for the proposed issuance of KRL Notes up to USD150,000,000; and
(c)Arrangement of a bridging loan facility of up to USD15,000,000 that is proposed to be refinanced upon issue of the KRL Notes.
The Mandate has been modified to reflect this scope of work and the nature of the services and their attendant costs required to deliver upon it.
The Advisory Agreement was attached. It was dated 17 November 2010, although it was not signed by Kangaroo until 19 November. The salient provisions are set out below:[1]
[1]Emphasis added.
Ratings Advisory Engagement
Lead Management and Sole Bookrunner of Private Placement of Corporate Bond Issue of USD150,000,000Arrangement of Bridge Financing of USD15,000,000
Chimaera Capital markets (CCM) and Empire Equity Limited (Joint Advisor) (collectively the Advisors) refer to the parties’ discussions in respect of the above matters and hereby confirm the appointment by Kangaroo Resources Limited (the Company) of the Advisors as the Company’s exclusive providers of the following services:
(a)Ratings Advisor in connection with the proposed issuance of a bond offering by the Company (KRL Notes). The proposed issuance of the KRL Notes may be structured as a private placement offering under Regulation S of the United States KRL Notes Act of 1933 or substantially similar regulatory regime;
(b)Lead Manager and Sole Bookrunner for the proposed issuance of KRL Notes up to USD150,000,000; and
(c)Arrangement of a bridging loan facility of up to USD15,000,000 within 30 days of signing this mandate that is proposed to be refinanced upon issue of the KRL Notes.
The Company and the Advisors acknowledge that:
(a)The Advisors will provide all of the services described in Section A Scope of work below (“the Services”);
(b)Each of CCM and the Joint Advisor will provide part only of the Services and that the particular services for which each shall be responsible are described in Appendix C as Schedule of Services to be Provided by CCM and the Joint Advisor Respectively; and
…
The purpose of this letter (Advisory Agreement) is to set forth the terms on which the Advisors will perform the Services and the respective obligations of each of CCM, the Joint Advisor and the Company.
A. Scope of Work
Subject to Appendix A, General Terms and Conditions and Appendix B, Conditions For Cessation Of Engagement, Services shall include the following:
(a)Ratings Advisory Services
(i)As the exclusive rating advisor for the bond issue, the Advisors will assist the Company in its efforts to obtain an international credit rating from one or more credit rating agencies (including Fitch Ratings, Moody’s Investors Service and Standard & Poor’s) both for the Company and the KRL Notes.
(ii)The Advisors’ role will be to act generally as an advisor in the rating process including providing assistance in the preparation of materials, liaising with the rating agencies and preparing the Company for its dealings with the rating agencies.
(iii)The Company will furnish, or cause to be furnished, to the Advisors such information as the Advisors reasonably deems necessary to successfully complete the rating advisory process within a reasonable time.
(iv)the Advisors provides no assurance that a particular rating or that any rating will be obtained by the Company.
(b)Bond Issue
(i)Assist the Company in preparing a preliminary offering circular which will be distributed to potential purchasers of the KRL Notes and a final offering circular;
(ii)Advise and assist the Company in connection with the structuring of the Bond Issue and the terms and conditions of the KRL Notes;
(iii)Identify and approach potential investors, including organizing and managing a roadshow;
(iv)Advise and assist the Company in connection with any listing of the KRL Notes on one or more stock exchanges;
(v)Render such other services as may from time to time be agreed upon by the Advisors and the Company in connection with the KRL Notes; and;
(vi)The Advisors’ participation in any Bond Issue will be subject to execution and delivery of an underwriting, purchase, subscription or similar agreement in a form satisfactory to the Advisors, such agreement to incorporate customary representations and warranties, conditions to closing (including the delivery of legal opinions and auditor’s comfort letters), termination provisions and indemnification and the satisfaction of any conditions to closing.
B. Fees and Expenses
The total fees payable to the Advisors for the Services are set out below and each of the Advisors and the Company acknowledge that these fees constitute valuable and sufficient consideration for the services rendered:-
(a)Retainer – a retainer of USD20,000 per month payable in monthly in advance provided however the Company shall pay the first three months of the retainer in advance upon signing of the mandate, in shares.
(b)The Ratings Advisory Fee – a fee of USD250,000 payable upon completion of the credit ratings process. This fee shall be comprised of USD125,000 cash and shares in the company to the value of USD125,000.
(c)Ratings Advisory Expenses – the Company will reimburse the Advisors, upon request, for all reasonable expenses incurred in connection with the ratings advisory engagement.
(d)Lead Management and Arranger Fees – a fee equal to 2.5% of the aggregate nominal principal amount of any capital raised pursuant to the Bond Issue and Bridge Financing. The Advisors may withhold this fee from the proceeds of any issuance or finance facility concluded by the Company.
(e)Lead Management and Arranger Expenses – the Company will reimburse the Advisors, all expenses relating to Lead Management and Arrangement of the Bond Issue and Bridge Facility respectively. Such expenses include, without limitation, applicable listing and processing fees of any exchange(s) on which the KRL Notes are to be listed; expenses in relation to the printing and distribution of the offering circular, due diligence meetings, roadshows, postage, courier, copying, translation and telecommunications; travel and accommodation expenses; and the fees and disbursements of legal and all other professional advisors appointed by the Advisors in connection with the offering or the listing of the KRL Notes. Such advisors will only be appointed by the Advisors after consultation with the Company. The expenses are payable regardless of whether the Bond Issue is closed.
(f)Joint Advisors Warrants – Upon successful completion of the capital raising contemplated by this mandate, the Company shall issue the Joint Advisors an amount of Warrants equivalent to 1% of the capital raised. The Warrants will have a strike price of 20 cents and a five year term to expiry.
(g)Termination Fee – If (a), (i) the Company terminates this Advisory Agreement before any of the abovementioned Bond Issue or Bridge Facility is completed, or (ii) one of the Conditions For Cessation Of Engagement applies, and (b) the Company subsequently completes an offering of debt KRL Notes within 12 months of the termination date with a different Advisors, the Advisors will be paid a fee (the Termination Fee) equal to the fee specified in paragraph (b) above in respect of the amount raised in that offering. The Advisors shall not be paid any fee if: (i) that offering of debt KRL Notes occurs after 12 months of the termination date of (ii) the Advisors declines the first right of refusal to match the terms (except for the Fee) of that offering.
…
C. Clear Window
The Company grants the Advisors a clear window of exclusivity of 180 days from the date of this letter in respect of the provision of the Services and a right of first offer in respect of any other financing, capital raising or advisory service.
APPENDIX A - General Terms and Conditions of the Engagement
1. Company Undertakings
The Company warrants that, at all times during the Engagement:
…
1.2That it will not pursue legal action against Chimaera in relation to any matters arising from this Advisory Agreement, except as otherwise is provided in this Advisory Agreement.
…
1.6Should the Company require any external funding or valuation support, including but not limited to Capital Raisings, Underwritings or Debt Funding (collectively “Funding Services”) the Company undertakes that it will provide Chimaera with a right of first offer for the provision by Chimaera of any such Funding Services (to be agreed or refused within 21 days), should it elect to proceed with any transaction and it will only negotiate provision of Funding Services with other parties if Chimaera fails to accept such first offer.
…
Chimaera and Empire were, of course, aware of Kangaroo’s interest in acquiring the Pakar assets through a ‘buy‑out of the noteholders’ before the Advisory Agreement was prepared and executed. Speaking of a meeting that took place in Singapore on 19 November 2010, at which the retainer was signed on behalf of Kangaroo, Angelo acknowledged that the ‘Pakar stake was mentioned … as a potential use of the funds’. That is, the funds to be made available through a proposed capital raising by Kangaroo, of up to USD150 million, described in the Advisory Agreement as the KRL notes.
When advancing their case, the plaintiffs sought to emphasise what they described as a significant shift in the purpose and scope of the retainer, reflected in the variation letter dated 7 December 2010. Both sides sought to advance evidence of the genesis of the Advisory Agreement and variation letter, including negotiations, as background and context. They sought to introduce that evidence, in part, to reveal intentions, aspirations and expectations. That evidence has been rejected, unless it established the objective framework of facts, known to all parties, within which the contract came into existence.
The applicable principles were not in dispute. They were recently reconfirmed by the High Court in Electricity Generation Corporation v Woodside Energy Ltd,[2] in which the plurality held:
Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
[2][2014] HCA 7; 306 ALR 25 at [35], citations omitted.
In Codelfa ConstructionsPty Ltd v State Rail Authority of New South Wales,[3] Mason J said:
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
[3]Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352.
The plaintiffs contended it was not until around 23 November 2010 that they were advised of the Khronos invitation to tender for the five target companies, described in an Information Memorandum as Project Champagne. D’Sylva said he was told of the invitation by O’Keefe in a telephone call on 23 November 2010, and was asked to assist in submitting a bid. D’Sylva claimed that around this time ‘the Pakar Project changed from being a prospect on KRL’s radar to a real opportunity for acquisition, with the announcement by Khronos of the tender for the purchase of IBU Notes’. He said, ‘(t)his represented a transformational opportunity for KRL’.
Angelo said that after he learned of the Khronos tender, on about 23 November 2010, his objective became one ‘to obtain a financial commitment letter to support a bid by KRL for the IBU Notes’. Salvatore also said that he was informed of the Khronos tender on about 24 November 2010. He, too, seemed to regard the tender opportunity as an invitation to bid for the IBU Notes.
Singapore, 1 December 2010
As is often the case, the most reliable and objective evidence of background facts and context was to be found in contemporaneous documents. The oral evidence given by the witnesses was often coloured by their direct interest in the outcome of the proceeding and their tendency to express aspirations, expectations and subjective understandings. The plaintiffs’ witnesses sought to emphasise events that took place after 19 November 2010 as material changes in the scope of the services they were invited to provide. There was a change, but it was not as the plaintiffs would have it. The change is reflected in documents recording the outcome of a meeting that took place in Singapore on 1 December 2010.
The meeting between representatives of the plaintiffs and defendant in Singapore on 1 December 2010, took place at the offices of O’Melveny & Myers, solicitors. There was a large cast of players, including Messrs O’Keefe and Ralston of Kangaroo; the Catalano brothers and D’Sylva; representatives of Standard Bank and Raiffeisen Zentralbank (RZB); a representative of Indika Energy, an Indonesian energy supplier with experience in the coal industry; Messrs Habibe and Wachjo; and Joel Hogarth, solicitor, of the firm O’Melveny & Myers.
The purpose of the meeting, and the substance of what was discussed, differed depending on who was asked. It was plainly a strategy meeting, at which the overall goal was the acquisition of the Pakar assets by Kangaroo, through its acquisition of the IBU Notes. There was discussion about a letter of commitment from a bank, and the development of a plan under which offers would be made, purportedly in response to the Khronos tender invitation, for the IBU Notes. The Khronos tender documents did not, of course, invite tenders for the IBU Notes. The offers that were subsequently made by Kangaroo, and a company associated with Chimaera, were non‑responsive to the invitation.
Angelo conceded that Wachjo was ‘calling the shots’ at the meeting on 1 December 2010. In relation to the position of IBU and Kangaroo, that was to be expected. After all, Wachjo controlled IBU and, effectively, controlled Kangaroo. It was understandable that Wachjo might seek to relieve his debt problem by having Kangaroo acquire the IBU Notes.
There were two significant strategies discussed and apparently agreed at the meeting. Both involved the acquisition of the IBU Notes, even though they were not the subject of the Khronos tender invitation. The first was to make two bids for the notes. One bid was to be made by Kangaroo, and the other by Chimaera, or an associated entity. The proposal that Chimaera would make a bid apparently originated with Kangaroo.
The second, and crucial part of the strategy required Chimaera to secure letters of commitment from banks to support the bids. According to Salvatore, that part of the strategy also originated with Ralston and O’Keefe, although Angelo said that it was his aim to secure a letter of financial commitment immediately he learned of the Khronos tender process on about 23 November. Ralston expressed the opinion that bank support for USD150 million, if provided, may result in another coal producer, PT Bayan Resources Tbk, withdrawing as a contender for the assets.
Angelo said that as a consequence of the matters discussed at the meeting, a change in the scope of the original letter of engagement was necessary. D’Sylva said Salvatore raised the issue at the meeting. Salvatore said he ‘flagged’ to O’Keefe and Ralston that ‘we would need to enter into a new arrangement to capture Chimaera’s participation in the transaction’. O’Keefe did not recall any such requirement until shortly before the deadline for tenders on 7 December 2010.
The plaintiffs placed great emphasis on the risks associated with the proposed bid by Chimaera to explain the need to renegotiate the mandate. Salvatore said, ‘Chimaera’s decision to make the proprietary bid meant a change from Chimaera having no balance sheet, regulatory, operational country risk in the engagement with KRL to being exposed to all the risks associated with undertaking cross border transactions’. The plaintiffs sought to elevate the importance of the proposed bid by Chimaera, pointing to the commercial risks and significance of a bid to the prospects for overall success. Salvatore said that there was a real likelihood that a bid by Chimaera would be accepted in favour of a bid by Kangaroo, who ‘may not be considered to have the financial strength or there was sufficient uncertainty about its financial position, to complete the purchase of the IBU Notes’.
According to Salvatore, Ralston and O’Keefe wanted Kangaroo’s bid to cover the face value of the notes, plus interest. He said they sought to persuade him to make a similar bid which would somehow persuade Khronos to accept Kangaroo’s bid.
It is unnecessary to dissect the differing recollections of the Catalano brothers, D’Sylva and O’Keefe about what was discussed at the meeting on 1 December. There was an objective account. An overview of the discussions had been prepared by Hogarth, in the form of a Transaction Structuring document. The document set out ‘transaction objectives discussed at today’s meeting’. In the introductory ‘Financing Proposal – Overview’, Hogarth made the following points:
•Kangaroo Resources Limited (KRL) wishes to raise up to US$[ ] million in bridge financing to support a bid for US$135 million in notes issued by PT Ilthabi Bara Utama (IBU) offered by competitive tender.
•Should the bid be successful, KRL has reached agreement with IBU’s sponsors (PMR) that KRL will become [99]% shareholders in IBU after restructuring the notes and subscription of PMR for shares in KRL.
•The sponsors of IBU’s main construction contractor (FoI) have agreed to subscribe for a stake in KRL as a preliminary step towards the bid and to work with KRL and IBU to develop the project going forwards.
•As holder of a [99]% stake in a substantially debt free IBU, with aligned interests with its main construction contractor, KRL will be in an excellent position to raise additional funds for working capital and operations of IBU.
•KRL intends to raise approximately US$150m through a high yield bond issuance to refinance the bridge loan and provide the additional funds required for working capital and operations.
The proposed transaction described by Hogarth involved some elements not explained in oral evidence of the meeting. There was to be an agreement between PMR and Kangaroo, a subscription by IBU’s main construction contractor, Indika for ‘a stake in KRL’, and Kangaroo was to acquire 99 per cent of the shares in IBU. These transactions were internal structural arrangements between the participants, to be contrasted with third party funding arrangements in the form of bridging finance from a bank and a subsequent bond offer.
There were five stages to the proposal. The Transaction Structuring document contained a Working Plan to Completion:
A. Next 72 Hours:
(1)Placement FoI – KR.
(2)MOU – KRL / FoI.
B. Bid Process – 7th December:
(3)BidCo (PMR/FoI) Low Bid 60M.
(a)Bank Support – Termsheet.
(b)Option over BidCo SPV.
(4)KRL Bid High Bid $135M – Non‑cash 12 months?
C. Financing Bid – 60 days from 7 December:
(5)Bridge Financing $60M.
(a)Negotiate and sign Agreements.
(b)Draw Down to Finance Bid.
D. Corporate reorganisation – to close on Bridge Financing Draw Down
(6)Share Exchange Agreement and related documents.
(a)KRL shareholder approval.
(b)Conversion of IBU into PMA company.
(c)Exercise option over BidCo.
(d)BidCo become owner of IBU through exercise of option / conversion of Notes.
E. High Yield Bond – 3 months process
(7)Note Purchase Agreement and related documents.
(a)Credit Rating Process.
(b)Offering Documents.
(c)Negotiate and sign Agreements and Security package.
(d)Bond closing / refinance Bridge Financing.
Mr Pereira was a representative of Wachjo and IBU, and go‑between for the purpose of communications with Kangaroo. Having received the Transaction Structuring document from Hogarth on 2 December 2010, Pereira responded, with a copy to Wachjo, O’Keefe, Ralston, D’Sylva, Salvatore, Angelo, Indika Energy and others:
Thanks for that Joel,
I think we need to show a letter of ability to pay up to US$150 million from the banks. If we only show US$60 million it shows that we may not be able to compete with GB. If we show the full US$150 million then we are in the position of power and then can negotiate the other bidders to back away and then negotiate the best possible outcome for the notes. This is vital to have this letter of commitment so that Rob is comfortable then to negotiate hard with GB to drop their bid.
Les
Hogarth was busy following the meeting. He prepared a draft option agreement under which a new company, described as BidCo, granted an option in favour of Kangaroo to acquire the whole of its issued share capital for USD1000. BidCo was mentioned in Hogarth’s plan as the entity that would acquire the IBU Notes with funds made available through Kangaroo.
Salvatore said that on 2 December 2010 he telephoned O’Keefe and Ralston and proposed a new agreement. He said O’Keefe and Ralston told him they would prefer to vary the existing mandate. Salvatore drafted a variation, Angelo signed it, and D’Sylva sent it to O’Keefe and Ralston.
At around the same time, Angelo requested Hogarth to provide some precedents for bank letters of financial commitment. Having regard to the raft of skills and experience claimed by Chimaera, such a request for ‘a precedent letter of commitment’ was astonishing. I did not find Angelo’s explanation satisfactory. He said, ‘The firm in Melbourne has used letters’, but ‘given the time frame … it would be better to use something from Joel [Hogarth]’. I infer that Chimaera was entering new commercial territory.
On 2 December 2010, Angelo wrote to Michael Wyer of Standard Bank:
Dear Mike,
Following our recent discussions concerning Kangaroo Resources’ (KRL) Indonesian assets and the meeting with your coal and metals team in Singapore last week, I have summarised below recent developments regarding the Company and the transaction.
Please note that the details I am sharing with you are not yet public knowledge and are highly price sensitive. These details will shortly be the subject of an ASX release, so please maintain a high level of confidentiality regarding this information.
Summary of Recent Developments
1.Initially our discussions were focussed on the Company’s short term financing needs in order to buy back convertible notes issued earlier this year and meet working capital requirements for their existing soft coking coal mine at Mamahak in Kalimantan. Your coal team were aware of the Company’s assets and had expressed some interest, although I note that your team had some reservations regarding the operational experience of management and their ability to fully exploit the considerable asset base they had acquired.
2.Following lengthy discussions with the USD2bn Indonesian conglomerate, Indika Energy, the Company has reached an in principal agreement with Indika under which the latter will inject USD20m of capital into KRL in exchange for a 19.9% stake in KRL. In addition, and more significantly, KRL and Indika, as part of the capital injection, have signed an MOU whereby the two companies will establish an operational JV. A key feature of the JV involves Indika and KRL jointly controlling developments and Indika managing the operational aspects of KRL’s projects.
3.The involvement of Indika, one of Indonesia’s most experience coal miners, will add considerable expertise and experience to KRL and significantly enhance the company’s ability to fully exploit its resource base. This capital raising from Indika means that the company will no longer require the bridge financing and also means they will not proceed with the sale of the GPK thermal coal mine.
4.The discussions between KRL and Indika have been ongoing however the parties have been able to conclude the arrangements outlined above within a shorter time frame than originally expected a measure of the strength of the relationship. As a result Indika and KRL, together with KRL’s Indonesian partners (and major shareholders) have agreed terms with respect to the subsequent acquisition of the Pakar coal assets which are currently held by PT Ilthabi Bara Utama (IBU) and which have recently been valued by ASEAMCO at USD570-710 million. The terms of the acquisition include the retirement of the existing IBU debt outstanding. The principal amount of this debt, which is now in default, is USD135 million, plus accrued and unpaid interest, including penalty interest. The total amount owing to lenders is now in the order of USD150 million. KRL has reached an agreement with IBU whereby, following the retirement of this debt, 100% of these assets will be transferred under KRL ownership, and some shares will be issued to the IBU shareholders.
5.The South Pakar project has been the subject of considerable capex and is very close to production, with world class production infrastructure already in place. We will shortly send you the relevant JORC certifications and valuations for the North and South Pakar project.
6.Initial bids for the purchase of the debt are due to be submitted early next week, with completion of the deal to follow some 60 90 days following the initial bid.
Standard Bank Participation
We will be seeking a letter of commitment from Standard Bank, subject to the usual credit and due diligence conditions, for the provision of the funding to retire the IBU debt. The final form of the debt is likely to be in the form of a 12 month bridge to a capital markets or loan take out.
At this stage we believe that we will be able to secure some form of letter of commitment form alternative lenders but, given our existing relationship and the fact that Standard was the first bank we approached for this deal, we are also extending our offer for provision of such a letter to yourselves. Both we, as advisers, and the company are aware of Standard’s Bank desire for any funding to be linked to some form of off take and we believe this may be accommodated, particularly given the enlarged production base following these transactions (notwithstanding the arrangement with Indika).
The ultimate facility will be the only debt in KRL and will have the benefit of a charge over all current and future assets of the company, including Pakar. The addition of Pakar to the existing assets will result in a certified resource base with a value well in excess of USD1 billion.
Of course any financing will be subject to final agreement with the IBU funding parties as well as full and final documentation regarding the transfer of the Pakar assets.
I am currently in Jakarta and will be here until late Friday. I understand that some of your Singapore coal team is also here. The company executives and representatives from Indika are available to meet should you require it, so please let me know.
Regards,
Angelo[4]
[4]Emphasis added.
On the following day, Angelo wrote to Dadik Zuhraidi at Standard Chartered Bank in similar terms:
Dear Dadik,
Firstly, thanks very much for making the time to meet with myself as well as the representatives from Kangaroo Resources and Indika.
Given the complex and lengthy nature of the discussions regarding the company’s funding plans, I thought it best to summarise our discussions yesterday as well as clearly spell out our requirements in the near term.
Please note that the details regarding the potential Indika transaction are not yet public knowledge and are highly price sensitive. These details will shortly be the subject of an ASX release, so please maintain a high level of confidentiality regarding this information.
Indika Deal
Following lengthy discussions with the USD2bn Indonesian conglomerate, Indika Energy, the Company has reached an in principal agreement with Indika under which the latter will inject USD20m of capital into KRL in exchange for a 19.9% stake in KRL. In addition, and more significantly, KRL and Indika, as part of the capital injection, have signed an MOU whereby the two companies will establish an operational JV. A key feature of the JV involves Indika and KRL jointly controlling future mining developments and Indika managing the operational aspects of KRL’s projects.
The involvement of Indika, one of Indonesia’s most experience coal miners, will add considerable expertise and experience to KRL and significantly enhance the company’s ability to fully exploit its resource base. This capital raising from Indika means that the company will not proceed with the sale of the GPK thermal coal mine which had previously been negotiated and which is in the financial model I provided to you.
IBU Deal
The discussions between KRL and Indika have been ongoing however the parties have been able to conclude the arrangements outlined above within a shorter time frame than originally expected — a measure of the strength of the relationship. As a result Indika and KRL, together with KRL’s Indonesian partners (and major shareholders) have agreed terms with respect to the subsequent acquisition of the Pakar coal assets which are currently held by PT Ilthabi Bara Utama (IBU) and which have recently been valued by ASEAMCO at USD570–710 million.
The terms of the acquisition include the retirement of the existing IBU debt outstanding. The principal amount of this debt, which is now in default, is USD135 million, plus accrued and unpaid interest, including penalty interest. The total amount owing to lenders is now in the order of USD150 million. KRL has reached an agreement with IBU whereby, following the retirement of this debt, 100% of these assets will be transferred under KRL ownership, and some shares will be issued to the IBU shareholders.
The South Pakar project has been the subject of considerable capex and is very close to production, with world class production infrastructure already in place. We will shortly send you the relevant JORC certifications and valuations for the North and South Pakar project.
Initial bids for the purchase of the debt are due to be submitted early next week, with completion of the deal to follow some 60–90 days following the initial bid.
Standard Chartered Bank Participation
In the near term we require a conditional letter of commitment from Standard Chartered Bank, subject to the usual credit and due diligence conditions, for the provision of the funding to retire the IBU debt. The final form of the debt is likely to be in the form of a 12 month bridge to a capital markets or loan take out. Of course the lender will have first and last right regarding any refinancing.
At this stage we believe that we will be able to secure some form of letter of commitment form alternative lenders but, we believe that Standard Chartered is uniquely placed to address all of KRL’s relationship banking needs on and offshore over the medium to long term, so we are also extending our offer for provision of such a letter to yourselves.
The ultimate facility will be the only debt in KRL and will have the benefit of a charge over all current and future assets of the company, including Pakar. The addition of Pakar to the existing assets will result in a certified resource base with a value well in excess of USD1 billion.
In addition, KRL, together with their onshore partners, have exciting plans for the future growth of KRL as a major force in Indonesian coal. This will provide Standard Chartered with an opportunity to acquire what ultimately will be a significant client with banking needs that span transactional, liquidity, funding, treasury and capital markets solutions, all of which Standard chartered is well positioned to provide.
Of course any financing will be subject to final agreement with the IBU funding parties as well as full and final documentation regarding the transfer of the Pakar assets.
We have provided a draft of what is required for the company by early next week as an attachment to this email (including the draft term sheet). We look forward to any comments or amendments which you have regarding the letter and/or termsheet.
The company executives and representatives from Indika are available to meet any of your colleagues at any time should you require it, so please let me know.
Regards,
Angelo
While the Structuring Proposal, prepared by Hogarth, was copied to most of those who attended the meeting, including O’Keefe, the emailed letters written by Angelo to each bank were not. Angelo’s emails to the banks were generally consistent with the proposed transaction outlined by Hogarth. The essential elements were the acquisition of the IBU Notes, requiring initial bridging finance to be replaced by capital raised through a bond issue. Kangaroo was to acquire 99 per cent of the shares in IBU and issue shares to IBU shareholders. Indika would inject capital into Kangaroo for a 19.9 per cent stake.
The variation and RZB letter
Each side relied on various discussions and events leading up to the variation letter, to assist with its construction. The variation was drafted by Salvatore. D’Sylva sent a draft to Ralston and O’Keefe on 3 December 2010, but it was not signed on behalf of Kangaroo until late in the day on 7 December 2010.
In the meantime, Angelo made efforts to persuade RZB, Standard Bank and Standard Chartered Bank to each provide a letter of financial commitment for USD150 million to support bids for the IBU Notes. The draft sent to Wyer, of Standard Bank, contained the following passage:
Financing Commitment
[BANK] commits to provide Senior Facilities in the amount of [USD150 million] representing the total of the principal sum and the accrued interest owing to noteholders of the IBU Notes subject to the conditions set forth in this letter.
Attached was an indicative term sheet.
The draft letter sent to Chan at RZB was in substantially the same form, with an identical paragraph, to those sent to Standard Bank and Standard Chartered Bank. There followed some communications between Angelo and the banks. It would appear that Standard Chartered Bank did not respond at all.
RZB made it clear to Angelo on 3 December 2010 that it did not ‘want to be seen committing ourselves to the financing’. But commitment, subject to the usual credit and due diligence conditions, was what had been expressly requested by Angelo. Accordingly, by 3 December 2010, Angelo knew that the commitment he had sought from RZB would not be forthcoming. He also knew that bank support for the bid was crucial.
Notwithstanding the clear negative response from RZB, Angelo was anxious to have something, even if the wording was less than adequate. He told Jacqueline Quek of RZB that ‘to be honest, for us, the timing (ie early next week) is more important than the actual wording, we have some flex there ….’.
Angelo said he obtained a draft letter from Standard Bank, although it did not find its way into evidence. What he described as a ‘signed commitment letter from RZB’, was not provided to Kangaroo until 8 December 2010. Kangaroo was provided with an unsigned copy of the letter after the variation agreement had been signed.
On 5 December 2010 there were email exchanges in which Ralston and O’Keefe expressed dissatisfaction to D’Sylva over the additional fees sought in the draft variation letter. D’Sylva insisted that Kangaroo execute the agreement ‘in order to be able to move forward with the bank letter of commitment today’. It is not clear whether D’Sylva knew of the status of negotiations between Angelo and RZB over the wording of the letter, or that the bank would not provide the anticipated commitment, conditional or otherwise. Whatever the state of his knowledge, D’Sylva willingly acted as agent for the plaintiffs to induce Kangaroo to execute the variation before it would be given a copy of the bank letter.
Negotiations over the level of fees continued on 6 and 7 December 2010, while Angelo waited for RZB to respond with some form of words. On the afternoon of 7 December 2010, the variation agreement had still not been executed by Kangaroo. In an attempt to induce Kangaroo to sign, D’Sylva wrote:
If this deal moves forward as proposed, KRL gets the Pakar assets and $150M in bank financing for a 1% staggered fee. Period. This is a transformational deal for the Company and represents extraordinary value for the equity holders in KRL. 4-weeks ago, I don’t think anyone anticipated the Company being in this position.
While I appreciate Chimaera are playing hard ball I don’t think they are being unreasonable.
Give me a call if you wish to discuss further.
At 4.30 pm on 7 December 2010, Ralston wrote to D’Sylva:
Paul
As per conversation a moment ago, can you please consider changing the 2nd 0.5% payment to fall upon the successful completion of the bank facility and the draw‑down of the cash. If ok please amend this document and send back to me.
A penultimate version of the variation was sent to Ralston and O’Keefe by Salvatore at 7.17 pm on 7 December 2010, under cover of the following email:
Attached is the revision to the variation letter. We have agreed to payment of the fees as suggested. Please note the further amendments we have made to the Advisory Agreement. Please sign and return to us as soon as possible.
At 8.00 pm, Ralston returned the variation with a handwritten change in the second last line on the first page. The sentence commencing, ‘The advisors agree that at least 50% of the fee …’ had been changed to read, ‘The advisors agree that the first 50% of the fee …’. Relevant parts of the executed version of the variation agreement are set out below:[5]
[5]Emphasis added.
7 December 2010
…
Variation of Advisory Agreement dated 17 November 2010
We refer to the Advisory Agreement and confirm the variation (First Variation) of that agreement as set out below. This First Variation shall form part of the Advisory Agreement and the terms of the Advisory Agreement shall apply to the First Variation. If any provision of the Advisory Agreement is inconsistent with the terms of this First Variation, the First Variation shall prevail.
Additional Services
The Company and the Advisors have agreed that the Advisors shall provide additional services over and above the Services (ie. As defined in the Advisory Agreement). These additional services (Commitment Services) shall include assistance in securing non‑binding letter(s) of financial commitment (Commitment Letter) to support the submission of tenders being conducted by Khronos Advisory Limited (Khronos Tender) in connection with the purchase of the underlying assets (Project Assets) of PT Ilthabi Bara Utama (IBU) and the repayment of the debt securities (IBU Notes) issued by IBU.
The parties acknowledge that the Company may adopt or support either or both of the following structures in connection with any Khronos Tender:
(a)The tender by a bid vehicle controlled directly or indirectly by the Company; and/or
(b)The funding of one or more third parties, including a related party of CCM, tendering independent of the Company.
The total fees payable to the Advisors for the Commitment Services shall be 1.0% of the level of indicative funding included in the Commitment Letter payable as follows:
(a)50% payable on presentation of at least one Commitment Letter to the Company; and
(b)50% payable on the first draw down by the Company, an associate of the Company or any of the bid vehicles described above under any financing arrangement related to the financing or refinancing of the Project Assets or the IBU Notes.
The Advisors agree that the first 50% of the fee shall be paid by way of the issue of fully paid ordinary shares in the Company at a price calculated as at the date of this letter by reference to the 10 day volume weighted average price.
All reasonable expenses incurred in connection with the provisions of the Commitment Services shall be for the account of the Company.
Amendments to Advisory Agreement
The Company agrees to the following amendments to the Advisory Agreement:
(a)The reference to a capital raising by way of the issue of KRL Notes shall be extended to include any capital raising, that is, not limited to a bond offering in the form described in the Advisory Agreement; and
(b)The Lead Management and Arranger fees shall be increased to 3% payable on the first draw down under the relevant capital raising facility concluded by the Company in the event that the capital raising is not a bond offering as described in the Advisory Agreement, the Company acknowledges that it shall be liable for a further capital raising fee of 2.5% if it elects to raise additional capital or refinance the original capital by way of a bond offering as described in the Advisory Agreement.
The RZB letter had still not been signed by the bank on the evening of 7 December 2010. An unsigned copy was not sent to O’Keefe until after 9.00 pm that evening. Once signed, the letter was scanned and sent to O’Keefe late on the morning of 8 December 2010. The RZB letter was in the following terms:
7 December 2010
Mr Mark O’Keefe Mr. Sal Catalano
Managing Director Chairman
and Chimaera Capital Management Pte Ltd
Mr. Mike Ralston 1 Fullerton road, #02-01
Chief Financial Officer Singapore 049213Kangaroo Resources Limited
Suite 3, Level 3
1292 Hay Street
West Perth WA 6005Dear sirs,
Project Kapur – Mandate Letter
You have advised us that Kangaroo Resources Limited (KRL) shall participate in the formal tender (Khronos Tender) conducted by Khronos Advisory Limited (Khronos) for the purchase of the existing debt securities (IBU Notes) issued by PT Ilthabi Bara Utama (IBU) (the Debt Refinancing). You have also advised us that KRL shall, directly or indirectly, acquire the Pakar project mining assets (Pakar Project) from IBU’s shareholders after the Debt Refinancing exercise (the Acquisition, and together with the Debt Refinancing, the Transaction).
You have also advised us that Chimaera Capital Markets (CCM) has been appointed as Lead Arrangers and Advisers to KRL with respect to a prospective fund raising and acquisition process for the Pakar Project, which includes acquisition of the IBU Notes.
Subject to the attached Term Sheet, the parties acknowledge that KRL may adopt either of the following structures in connection with its tender for the IBU Notes:
(a)The tender by a bid vehicle wholly owned by KRL; or
(b)The tender by Chimaera Capital Management Pte Ltd, which shall be financially supported by KRL.
You have advised us that the total cost of the Transaction (and related fees, commissions and expenses) will be approximately US$569 million and that the Transaction will be financed, among others, from up to US$150 million under a senior secured credit facility (Senior Facilities) having the terms set forth in the attached Term Sheet.
We are pleased to confirm the arrangements under which you have granted us the exclusive first right of refusal and last right to match any offer to act as sole and exclusive security agent and facility agent and co‑Mandated Lead Arranger (in such capacity, the MLA), together with CCM, in connection with the Transaction, on the terms and conditions set forth in this letter.[6]
[6]Emphasis added.
Mandate
In consideration of mutual promises and consideration, the adequacy and sufficiency of which is agreed and acknowledged by the parties hereto, you hereby grant us the exclusive first right of refusal and last right to match any offer to act:-(a)as sole and exclusive facility agent and security agent in respect of the Senior Facilities; and
(b)MLA, in each case in respect of the Senior Facilities,
such grant is hereafter referred to as the Option
In performing the services hereunder, we may at our sole discretion, involve and draw on the resources of any of our affiliates.
The Bayan transaction
Prior to the meeting in Singapore on 1 December 2010, Kangaroo had anticipated a bid for the Pakar assets by Bayan, one of the largest coal producing groups in Indonesia. Bayan presented as a potential bidder for the assets because of its existing business and infrastructure. In December 2009, Bayan had lodged a bid in a tender process for the acquisition of the Mamahak concessions. Its bid was unsuccessful, and the concessions were acquired by Kangaroo. The coal concessions for sale under the Khronos tender process were located adjacent to Bayan’s concessions at East Kalamantan.
Chin Way Fong, the chief executive officer of Bayan, gave evidence on behalf of Kangaroo. At the time of Bayan’s involvement in the Khronos tender process, Chin was familiar with IBU. He knew that it was controlled by Wachjo and Habibe. He was also aware of the IBU Notes, their face value of USD135 million, and that they were, or would soon be, due for repayment. He was also aware that PMR, the entity offering the Pakar assets for sale through Khronos, was a company incorporated in the British Virgin Islands that was affiliated with IBU, having the same shareholding.
Chin received the Khronos documents on about 19 October 2010. He formed the view that the coal concessions were valuable to Bayan, and that if a hostile party acquired them Bayan may lose control of a planned access road to the port which passed through the Pakar concession area. Chin also wanted more than the five concessions offered for sale. He gave instructions to Russell Neil, Bayan’s business development director, to undertake the work necessary to prepare and lodge a tender.
On 26 October 2010, Chin attended a meeting with Neil, Habibe and a principal of Khronos and some other Khronos staff members. Chin’s objective was to acquire all nine Pakar concessions, as well as the associated infrastructure. When he made that known, Habibe said, ‘We are open for discussions’.
Chin said that there were subsequent meetings with representatives of IBU at which the acquisition was negotiated. On 29 November 2010, he attended a meeting with Habibe and Wachjo, during which Bayan agreed to acquire all nine concessions and infrastructure assets at an all‑in price of USD200 million. In late November 2010, he was told by Rafael Nitiyudo, Wachjo’s son, of a proposal to bring Kangaroo and Bayan together in a transaction that would give control of Kangaroo to Bayan, and thus the Mamahak concessions.
Chin said that he met with Nitiyudo, Wachjo and Habibe at Bayan’s offices at 10.00 am on 1 December 2010. That was also the day of the meeting in Singapore. There was a meeting between Chin and O’Keefe on 2 December 2010. There were further meetings on 3 and 10 December 2010. Chin said that he had not met O’Keefe until 2 December.
Chin said that between the meetings on 29 November 2010 and 10 December 2010, a number of documents were prepared by Bayan’s in‑house legal team to record the agreement. Notwithstanding Chin’s evidence that he had reached a binding agreement with Wachjo and Habibe on 29 November 2010, Bayan made two tender proposals to Khronos on 7 December 2010. The first was an unconditional offer of USD90 million for an 80 per cent interest in each of the companies holding each concession. The alternative proposal, for USD200 million, was for 95 per cent of the shares in PMR, which in turn owned 99 per cent of the issued shares in each of the companies owning a concession.
It was put to Chin in cross‑examination that he had overstated the binding effect of his agreement with Habibe and Wachjo on 29 November 2010. In my opinion that is obvious. A Bayan offer to Khronos was inconsistent with a binding agreement to acquire the Pakar assets.
The Khronos bids
Before the close of the tender period, at 5.00 pm on 7 December 2010, Kangaroo and an entity associated with Chimaera submitted bids to Khronos. The Kangaroo bid was in the following terms:
Re: Pakar Coal Opportunity
We, Kangaroo Resources Limited (the “Bidder”), thank you for the opportunity to submit a proposal to work with Prime Mine Resources Limited (“PMR”) to develop the Pakar Coal project.
Background
As we understand it, PMR has the option to purchase all the issued shares in PT Ilthabi Bara Utama (“IBU”) which owns the nine concessions and infrastructure (together referred to as “the Mining Companies”). The Mining Companies are currently owned by and their shares are subject to a security interest in respect of US$135,000,000 in structured notes (the “Notes”) issued by IBU Finance Pte Ltd, and guaranteed by IBU. As the Notes are currently in default, PMR is unable to exercise its option until a settlement has been reached in respect of the Notes.
Our Offer
We are prepared to offer the cash sum of US$135,000,000 (“Consideration”) to purchase the Notes, subject to the following conditions:
1.The Consideration is for 100% of the Notes.
2.The Consideration is payable within and up to a period of 12 months from acceptance of this bid, with the timing of payment at the discretion of the Bidder.
3.The Bidder has a bank guarantee for US$135,000,000 in favour of this bid.
4.No further interest will accrue on the Notes, or any other fees payable, in this period between acceptance of the offer and payment of the Consideration.
5.No deposit is payable on this offer.
6.The offer is subject to Due Diligence to be completed within 60 days.
7.Full security will be given on all assets owned or controlled by the Bidder.
The Bidder acknowledges the following issues as material relating to the offer:
1.The Bidder has completed payment of US$15 million for a 49% economic interest in the Tanur Jaya Project, one of the concessions owned by PT Tanur Jaya. The Bidder will be able to take a 49% equity position in PT Tanur Jaya once the Notes have been settled.
2.The Bidder makes this offer with the full support of the equity owners and concession holders in PT IBU and the Mining Companies.
A second bid was sent under the letterhead of Chimaera Credit Opportunities Fund, an entity incorporated and resident in the Cayman Islands. That bid, also dated 7 December 2010, was in the following terms:
Pakar Coal Opportunity
We thank you for the opportunity to submit a proposal to work with Prime Mine Resources Limited (PMR) to develop the Pakar Coal Project.
Background
You have advised us that PMR has the option to purchase all the issued shares in PT Ilthabi Bara Utama (IBU), which owns approximately 99% of PT Apira Utama (AU), PT Bara Sejati (BS), PT Cahaya Alam (CA), PT Dermaga Energi (DE) and PT Tanur Jaya (TJ) (collectively the Mining Companies). The Mining Companies are currently owned by IBU and their shares are subject to a security interest in respect of US$135,000,000 in structured notes (the Notes) issued by IBU Finance Pte Ltd, and guaranteed by IBU. As the Notes are currently in default, PMR is unable to exercise its option until a settlement has been reached in respect of the Notes.
Our Offer
We are prepared to offer the cash sum of US$55,000,000 to purchase the Notes.
The abovementioned sum will be payable within 60 days after acceptance of this bid, subject to the terms of this letter.
Conditions
As purchaser of the Notes, we will benefit from security in respect of the shares in the Mining Companies. We will enter into a strategic co‑operation with PMR in accordance with a structure to be agreed by us.
This proposal is subject to legal, technical and financial due diligence and finalisation of transaction documentation with respect to the above structure.
The purpose of the Chimaera bid was unclear. The evidence given by Salvatore to explain the bid was wholly unpersuasive. Chimaera Credit Opportunities Fund had only nominal assets. There was nothing to suggest that it was in a better position to complete a purchase than Kangaroo. On the contrary, Kangaroo was controlled, through ownership, by those who controlled IBU. Given the disparate offers, and the status of the Chimaera candidate, there was no reasonable basis to conclude that the offer by Chimaera Credit Opportunities Fund would be given serious consideration. And yet, curiously, it appears to have its origins in a proposal made by Ralston or O’Keefe. But any assertions by the Catalano brothers to the effect that such a bid might expose Chimaera to financial or other risks seemed fanciful, or at least grossly overstated.
Heads of Agreement
Under the Heads of Agreement No 1, dated 10 December 2010, Bayan agreed to acquire 80 per cent of the capital of IBU for USD150 million, which would be used to retire the IBU Notes. The remaining 20 per cent would be held by Habibe and Wachjo. Thus, Bayan would control IBU and its coal concessions. The next stage in the transaction, recorded in Heads of Agreement No 2, also dated 10 December 2010, was the acquisition by Kangaroo of the coal concessions from Bayan in exchange for 1,925 million shares, with a further 380 million shares to be issued to Jedi.
Chin said that at a meeting in early December, Nitiyudo mentioned a company to be incorporated in the British Virgin Islands, to represent him and his family. He required a payment ‘to develop concept and actually undertake the work necessary to implement this deal’. Chin rejected the proposal, but was later informed that Kangaroo had agreed to pay the fee. An earlier version of the Heads of Agreement No 2 recorded Wachjo as the recipient of the 380 million shares. Wachjo was replaced by Jedi.
Other agreements, also dated 10 December 2010, were made between Kangaroo and entities associated with Bayan for the subscription of shares in Kangaroo, sufficient to permit it to repay its notes. On 28 December 2010, Bayan and Kangaroo entered into a share purchase agreement, which was restated on 13 June 2011 for the purpose of shareholder approval.
Commitment Services claim
The first, and perhaps most straightforward, claim by the plaintiffs was for the second portion of the fee for Commitment Services. The first part was invoiced by the plaintiffs in December 2010 and was due on presentation of at least one Commitment Letter. The invoice had been discharged by the issue of shares in Kangaroo. The plaintiffs alleged a shortfall in the value of shares allotted in satisfaction of the obligation to pay the first part of the fee. They claim a further 180 791 shares in the capital of Kangaroo. The plaintiffs contended that the Commitment Services included, but were not limited to, delivery of a Commitment Letter. Kangaroo contended that the RZB letter was not a Commitment Letter, and that the Commitment Services had not been provided. Accordingly no fee was payable. It counter claimed for repayment in full in the sum of USD750 000.
A question for determination on the counterclaim was whether the RZB letter was a Commitment Letter. Resolution of that question was, on Kangaroo’s case, also relevant to a determination of the plaintiffs’ claim for the second half of the fee.
The plaintiffs had alleged in their pleaded case that Kangaroo was estopped from denying that the RZB letter constituted a Commitment Letter. They did not pursue the allegation at trial.
The plaintiffs advanced elaborate, and sometimes elliptical submissions to contend that the RZB letter constituted a Commitment Letter. They submitted that, while the RZB letter did no more than acknowledge the bank may, at its option, assume responsibility for securing the funding, it nevertheless qualified as a non‑binding letter of financial commitment.
The plaintiffs argued that Kangaroo made too much of the word ‘commitment’ in the description of the letter to be procured. They submitted that the phrase, non‑binding letter(s) of financial commitment, was a contradiction in terms, even though it was their own formulation. They relied on what they described as unchallenged financial experience of Angelo, and his answer in cross‑examination, in which he said that ‘a firm commitment would be an offer of financing which would be a contingent liability which would result in a capital charge’. That answer was non‑responsive and unhelpful. Nor did Angelo’s purported experience assist this part of the plaintiffs’ case.
The plaintiffs submitted that the purpose of the letter from a bank was ‘to support the submission of tenders being conducted by Khronos Advisory Limited … in connection with the purchase of the underlying assets … and the repayment of the debt securities … ‘. Thus, they submitted, the relevant words did no more than describe a letter from a party having both means to secure the finance for a transaction and sufficient interest in it to put something in writing. I reject the submission.
Much of the terminology employed in the variation letter, drafted by Salvatore, was imprecise. It was sometimes contradictory. But the purpose for which a Commitment Letter was required was clear. The purpose was evident in the description of Additional Services in the variation letter, as well as the outcome of the meeting on 1 December. The Transaction Structuring document, prepared by Hogarth following the meeting on 1 December 2010, confirmed the crucial role of bank support for the proposed bid.
There was other evidence that bank support was crucial. Pereira, in his email of 2 December 2010, said:
I think we need to show a letter of ability to pay up to US$150 million from the banks … This is vital to have to have this letter of commitment so that Rob is comfortable then to negotiate hard with GB to drop their bid.
Pereira’s expectation was reflected in the drafts prepared by Angelo.
The letters from the banks were to arm Kangaroo with a written commitment, subject to the usual credit and due diligence conditions, to provide the funding necessary to enable Kangaroo to complete the acquisition with the IBU Notes. The letter eventually produced by RZB did not resemble anything of the kind.
The drafts prepared by Angelo, and sent to RZB, Standard Bank and Standard Chartered Bank on 3 December 2010, revealed what Angelo may be taken to have believed should be contained in a letter of commitment from a bank. Each of those draft letters contained the following paragraph:
Financing Commitment
[Bank] commits to providing Senior Facilities in the amount of [USD150 million] representing the total of the principal sum and the accrued interest owing to noteholders of the IBU Notes subject to the conditions set forth in this letter.
Simply because Angelo adopted a particular form of letter does not, however, determine the requirements of a Commitment Letter in the variation letter. But his drafts, obtained from Hogarth, are illustrative of what such a letter may contain if it is to constitute a non‑binding, or conditional, letter of financial commitment from a bank.
Each draft set out various conditions precedent, including a Due Diligence and Terms Sheet Conditions. The letters prepared by Angelo might be described as conditional letters of financial commitment. They might also be described as non‑binding letters of financial commitment. While the plaintiffs contended that the words, non‑binding letters of financial commitment, appeared to involve a contradiction, they had meaning. The words called for a conditional letter of financial commitment of the kind requested by Angelo. Only then would a letter from a bank achieve its intended purpose, and conform with what a reasonable bystander would expect such a letter to contain.
In the absence of conditional commitment by a bank to support the bid, the proposed letter would not achieve its intended purpose. In my opinion, the document ultimately procured from RZB was not a Commitment Letter under Advisory Agreement as amended.
The plaintiffs’ claim for the second part of the fee was made under part (b) of the Commitment Services fee regime in the variation letter which provided:
50% payable on first draw down by the Company, an associate of the Company or any of the bid vehicles described above under any financing arrangement related to the financing or refinancing of the Project Assets or the IBU Notes
The plaintiffs contended that the second part of the fee became payable no later than 4 January 2011, when shares were issued by Kangaroo to the investor group introduced by Bayan, who collectively subscribed for shares in Kangaroo in the sum of $23.8 million. They developed an elaborate argument to contend that the share placement ought to be characterised as a draw down by Kangaroo under the agreements with investors who each subscribed for shares in Kangaroo under the agreements dated 10 December 2010.
The plaintiffs submitted that the term draw down must be construed liberally, contending each of the five agreements amounted to a financing arrangement related to the financing or refinancing of the Project Assets or the IBU Notes. They submitted that the financing arrangement should be so characterised because of the coincidence in timing between the share subscription agreements and the other aspects of the Bayan transaction agreed on the same date, all of which concerned the ultimate acquisition of the Pakar assets. The plaintiffs contended that the transactions were obviously related, because the agreements had been drafted by the same party and that Bayan had arranged for the investments.
In support of their claim for the second part of the fee, the plaintiffs argued that the Commitment Services included, but were not confined to, securing a Commitment Letter. They argued that the Chimaera Credit Opportunities Fund bid constituted a Commitment Service, so that even if the RZB letter did not satisfy the requirements of a Commitment Letter, Commitment Services had nevertheless been provided. The plaintiffs did not suggest that the bid by Chimaera Credit Opportunities Fund constituted a letter of financial commitment from a bank.
Only one Additional Service was specifically mentioned as a Commitment Service in the variation letter — the procurement of one or more Commitment Letter. Such a letter was essential to any bid, and a condition for payment of the first tranche of the fee. The total fee was to be calculated by reference to the level of indicative funding included in the Commitment Letter. On this basis alone, the absence of a Commitment Letter meant that no part of the fee was payable.
In my opinion, the bid by Chimaera Credit Opportunities Fund was not a Commitment Service. The variation letter acknowledged that Kangaroo may adopt either or both of the following structures, (a) or (b), mentioned in the variation letter. One such option involved a Chimaera‑related party bid. That option, available to Kangaroo, did not have the effect of clothing the Chimaera bid with the character of a Commitment Service. The reference to the following structures did no more than describe the way in which Kangaroo might utilise the Commitment Letters.
Without the assistance of admissible background and context, the words describing the circumstances under which Kangaroo was required to make the second payment were imprecise, and incapable of defining an event or circumstance under which the fee would become payable. Kangaroo did not contend that the obligation was void for uncertainty. Rather, it contended that the words only had meaning if confined to the draw down of the debt financing facility contemplated by the Commitment Letter, to be employed in the acquisition or refinancing of the Pakar assets or IBU Notes. In my view, such a construction is too narrow. While the amount of the fee was to be determined by the level of the bank commitment, the parties contemplated more than one such letter. Thus, the funding might have been provided by any number of banks, or in combination.
Under the Advisory Agreement, the parties contemplated a bridging loan and the issue of KRL Notes up to USD150 000 000. The bridging loan, for the purpose of refinancing the existing KRL Notes, was up to USD15 000 000. At the meeting on 1 December 2010 the capital requirements changed. The material aspect of the change was described in the document prepared by Hogarth. Under that proposal, Kangaroo required bridge financing to support a bid of US$135 million to be repaid from a later bond issue. Thus, under the new proposal, Kangaroo was to borrow up to USD150 million to support the bid, and raise a further USD150 million to repay the bridging finance.
In my opinion, the phrase, financing arrangement, mentioned in the clause must coincide with a service to be performed by the plaintiffs’ mandate under the variation letter. In context, that phrase is inherently connected with the subject matter of the Commitment Letter(s) and consequential funding to be arranged by the plaintiffs. The nature and scope of such an arrangement is discernable from admissible background to the variation letter, and the terms of the amendments to the Advisory Agreement, considered below in connection with the Lead Manager and Arranger Fees. Following the meeting on 1 December 2010 in Singapore, the financing arrangements to be procured or assisted by the plaintiffs involved a loan, followed by a bond issue to retire the debt. Both were debt financing mechanisms.
The share subscription agreements formed part of the Bayan transactions. They were internal structural arrangements, made between the participants. Similar, although not identical transactions were in the contemplation the parties on and after 1 December 2010. Those transactions were not to be procured or assisted by the plaintiffs. The plaintiffs did not contend that they were of such a character. Rather, they contended that the words of the clause were sufficiently broad to include the Bayan transactions.
In my opinion, the share issue, transfer and placement aspects of the Bayan transactions were not intended by the parties to trigger fee obligations under the Advisory Agreement as amended. Had the author of the variation letter, and the parties to the agreement, contemplated that such transactions should attract fees, they could have readily included such terminology as share placement, transfer of shares, issue of shares, transfer of assets and the like. They must be taken to have recognised that internal structural arrangements of the kind then under contemplation were a matter for the participants, to be distinguished from the plaintiffs’ intended contribution of arranging third party debt funding through a bank and a subsequent bond issue.
A corresponding indication of the limited scope of financing arrangement is the notion of draw down. Such a concept has meaning in the case of a debt finance facility provided by a bank or similar lending institution. That was the kind of initial financing arrangement in contemplation at the close of discussions on 1 December 2010, and recorded by Hogarth in his overview and plan.
The subscription for shares by the Bayan‑related parties did not involve a draw down of a debt financing facility. Such a transaction was not intended by the parties to impose a fee obligation. Nor, for the same reason, did any other element of the Bayan transactions, which involved the transfer of the Pakar assets to Kangaroo in return for the issue of shares to Bayan.
It follows that the second part of the fee is not payable. That is so because, firstly, payment of the fee for Commitment Services depended on the plaintiffs providing non‑binding letter(s) of financial commitment. They did not provide even one such letter. Secondly, there was no relevant financing arrangement. Thirdly, there was no draw down.
Termination fee
Under the Advisory Agreement, a fee of USD250 000 was payable upon completion of the credit ratings process. Payment was to comprise cash and shares. The ratings advisory process had barely commenced when the agreement was terminated. It was never completed. Kangaroo terminated the agreement on 8 February 2011. The Advisory Agreement provided that a termination fee equal to the ratings advisory fee of USD250 000 was payable upon termination by Kangaroo in prescribed circumstances. The relevant clause provided:
(g)Termination Fee – If (a), (i) the Company terminates this Advisory Agreement before any of the abovementioned Bond Issue or Bridge Facility is completed, or (ii) one of the Conditions For Cessation Of Engagement applies, and (b) the Company subsequently completes an offering of debt KRL Notes within 12 months of the termination date with a different Advisors (sic), the Advisors will be paid a fee (the Termination Fee) equal to the fee specified in paragraph (b) above in respect of the amount raised in that offering. The Advisors shall not be paid any fee if: (i) that offering of debt KRL Notes occurs after 12 months of the termination date of (ii) the Advisors declines the first right of refusal to match the terms (except for the Fee) of that offering.[7]
[7]Emphasis added.
The plaintiffs conceded that they were not entitled to claim a termination fee and the Ratings Advisory Fee. The concession seemed unnecessary in present circumstances. The Termination Fee was to be determined by the amount of the Ratings Advisory Fee. Presumably, had Chimaera completed the ratings advisory work, and a termination became payable under one or more of the prescribed circumstances, the claims would not necessarily be inconsistent.
The plaintiffs contended that the Termination Fee was payable because Kangaroo terminated the agreement before the Bond Issue or Bridge Facility was completed. The Bond Issue was to be for USD150 million. The Bridge Facility under the Advisory Agreement was for only USD15 million. Under the variation, the structure of the proposed transaction changed, without any express change to the Termination Fee clause.
The plaintiffs approached the claim for a Termination Fee on the basis that all that was required was for termination to precede the completion of the Bond Issue or Bridge Facility. Both such facilities had changed in character on 1 December 2010. Accordingly, the plaintiffs must be taken to have relied on the extended meaning of KRL Notes in the variation letter to include any capital raising, that is, not limited to a bond offering in the form described in the Advisory Agreement.
The claim for the Commitment Services fee was advanced on the basis that the phrase, financial arrangement, mentioned in the relevant clause captured the Bayan transactions. I have rejected that contention. For the same reasons, I reject the contention that the extended meaning of capital raising in the variation letter was sufficiently wide to capture the Bayan transaction, including the subscription agreements.
The Bayan transactions, including the five share subscription agreements, do not correspond, in any relevant aspect, with transactions falling within the extended meaning of capital raising. The words, any capital raising, that is, not limited to a bond offering in the form described in the Advisory Agreement, were intended by the parties to capture third party debt financing arrangements such as those to be facilitated by the plaintiffs. The particular transactions they had in mind were the bridging loan of USD150 million to facilitate the acquisition of the IBU Notes, and the subsequent bond issue to repay the bridging finance.
There was obvious difficulty in the construction of these provisions, in part because of the multiplicity of rights upon which the plaintiffs relied, and in part because of the unusual and imprecise terminology. The plaintiffs argued that the right of first offer was equivalent to a right of first refusal. Accordingly, Kangaroo was required to offer Chimaera each opportunity to provide financing, capital raising and advisory services that Kangaroo may require; and in relation to Funding Services, mentioned in clause 1.6 of Appendix A, Chimaera had 21 days within which to accept or reject the offer. For services other than Funding Services, the plaintiffs submitted that Chimaera had a reasonable time within which to accept the offer.
The plaintiffs contended that the share subscription agreements of 10 December 2010 involved a business opportunity that should first have been offered to Chimaera. They further contended that the services provided by Jedi should have first been offered to Chimaera. They contended that they were ready, willing and able to perform each of the services, and had been denied their right to earn fees at least equivalent to those payable under the agreement.
Kangaroo submitted that the clear window clause was illusory and unenforceable. For example, the scope for advisory services was so broad and indefinite as to include legal advice. It argued that if the clause was to have meaning, it must be restricted to the kind of services the plaintiffs were to perform under the agreement. It argued that, with the exception of the rating advisory service, those services were confined to debt financing. Kangaroo argued, in effect, that there was no occasion for it to engage any such services from the plaintiffs in order to undertake the Bayan transactions; and neither Bayan or Jedi provided such services.
Kangaroo further submitted that even if it had acted in breach of an exclusivity or first right of offer obligation, the plaintiffs had suffered no loss. It submitted the only compensable loss that might arise in such circumstances was loss of opportunity, and there was no evidence on which the court could properly value such a loss. Furthermore, the evidence established that the plaintiffs were in no position to provide any of the services that might have facilitated the Bayan transaction.
The scope of rights the plaintiffs assert under this head of claim is so broad and indefinite as to capture every conceivable financing, capital raising or advisory service, unless limited by the terms of the Advisory Agreement as amended.
The task of construing the exclusivity, clear window and rights of first offer provisions into a meaningful regime was particularly difficult because of the drafting techniques employed by Salvatore. The clauses in the Advisory Agreement, on which the plaintiffs relied to define and establish their rights, resemble a collection of terms cobbled together from different sources, without regard to their coordinated operation. A superficial review would have alerted a reader to uncertainty and confusion. Thus, it seems highly unlikely that any attention was given to the operation of these provisions by either party. There is conflicting and vague terminology. There are differing time periods; and the unusual concept of a right of first offer. Thus, to attempt to discern the intention of the parties in relation to those rights seems artificial, even speculative. Nevertheless, the parties have executed documents which contain the provisions. The plaintiffs rely upon them, and the court must do the best it can to determine what, if any, rights and obligations were thereby created.
The maxim verba chartarum fortius accipiuntur contra proferentem[8] has application in this context. While this principle of construction is most commonly applied to insurance contracts, it is not so limited.[9] In State Lotteries Office v Burgin,[10] Kirby P said:
Where a contract is constituted by a printed form which is tendered by a party which has complete control over its terms, it is relevant to take such control into account in construing a term that may appear ambiguous or uncertain. This is not, as such the contra proferentem rule, which developed first as a principle for the construction of deeds against a grantor and in favour of a grantee. … It is rather a recognition of the difference which exists between a case where parties haggle about the terms of their agreement before fixing them (on the one hand) and where one party is presented with an agreement ready made which must be accepted, like it or not. In the latter case, at least … where it may be inferred that the vendor is well advised and the odds are deliberately stacked against the purchaser, it is not unreasonable to construe an ambiguity (if there be one) against the party which had complete control over the terms which it propounded.
[8]The words or deeds are taken most strongly against the person offering them.
[9]JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [53].
[10]Unreported, NSW Court of Appeal, Kirby P, Meagher and Sheller JJA, 19 May 1993.
The application of this rule of construction in the present case is justified, because the construction for which the plaintiffs contended would, if accepted, have the consequence that the plaintiffs would become the final arbiters of the terms and conditions upon which services would be provided to Kangaroo. The plaintiffs’ construction would require Kangaroo to engage them to provide all financial services unless, within 21 days (in the case of clause 1.6), or a reasonable time (in the case of the ‘clear window’ provision), the plaintiffs declined the offer. The ‘offer’ to be made by Kangaroo was not qualified by any requirement as to its terms. The plaintiffs did not suggest any such qualification ought to be implied.
Unless an offer were to be made on defined terms and conditions of engagement, including fees, expenses, termination provisions and the like, it would be open to the plaintiffs to impose them. What if Kangaroo formulated an offer on terms which Chimaera rejected as unreasonable? Would Kangaroo be entitled to modify an offer, once rejected by Chimaera, and then negotiate with an alternate adviser? Would Kangaroo be required to make a modified offer to Chimaera, before engaging an alternate advisor? If so, Chimaera’s right of first offer would become a ‘right of last refusal’. The agreement does not purport to confer any such right.
Rights such as those which the plaintiffs sought to enforce against Kangaroo must have sufficient clarity and certainty to enable the party to be bound to know exactly what it must do in order to satisfy the requirement. The Services, to which the Clear Window clause applied, were the Ratings Advisory Services and Bond Issue described under the heading Scope of Work in the letter of engagement. The description under Scope of Work does not, however, conform with the services listed in the preamble. The services, listed in the preamble, were Ratings Advisor Lead Manager and Sole Bookrunner for the KRL Notes, and the bridging loan facility.
The right of first offer under the Clear Window clause purported to apply in respect of any financing, capital raising or advisory service. In my opinion the absence of necessary clarity and definition rendered those provisions unenforceable against Kangaroo. The position was further confused by clause 1.6 of Appendix A. The Funding Services did not correspond with the other … services under the Clear Window provision, but required a response from Chimaera within 21 days.
Putting to one side the confusing terminology and lack of necessary definition, the plaintiff’s case for damages for breach of the so‑called right of exclusivity, must fail for at least three reasons. First, for reasons already given, the Bayan transactions, which included the subscription agreements, did not involve any of the services to be provided by the plaintiffs under the Advisory Agreement as amended. Second, Kangaroo did not negotiate the provision of any Funding Services with Jedi or Bayan; who did not, in any event, provide such services or any services comparable with those which the plaintiffs had agreed to provide. Third, the evidence did not purport to address, let alone establish, the basis upon which an assessment could be made of the value of any lost opportunity.
The plaintiffs contended that Jedi provided an advisory service, similar to the plaintiffs, and had been engaged by Kangaroo in breach of the exclusivity provisions. I do not accept that Jedi performed any such service. Its purpose was to receive a fee on behalf of the principals of IBU, to facilitate the transaction with Bayan. Any services it was to provide were not for Kangaroo, or comparable to anything to be provided by the plaintiffs, or which they could have provided. The plaintiffs could not have ‘facilitated’ the Bayan transaction as Wachjo, Habibe and Nitiyudo could, and no doubt did. Had Kangaroo offered the plaintiffs the role undertaken by Jedi, it would have been inconsistent with the purpose for which Jedi was involved, and the Bayan transaction would probably have stalled. The payment to Jedi was an integral part of the consideration for the coal concessions. The plaintiffs could not have performed the ‘service’.
Finally, the plaintiffs did not purport to advance a case for loss of opportunity. They assumed that the lost opportunity was their right to participate at all levels in every aspect of the Bayan transactions. Such an approach was misconceived. Having identified a breach, the plaintiffs were required to advance evidence of the value of the corresponding opportunity, with all of the contingencies and exigencies that would involve. The plaintiffs were required to establish that performance of the obligation, and lost opportunity, had some value. They were required to establish a breach of the exclusivity provisions, and that the breach caused a loss of a chance or opportunity.[11]
[11]Sellars v Adelaide Petroleum ML (1994) 179 CLR 332 at 355, 367.
Insofar as the evidence touched on the plaintiffs’ opportunity to perform the services it claims were wrongfully withheld, the facts compelled one conclusion: the plaintiffs could not have assisted Kangaroo in any aspect of the Bayan transactions. It was a privately negotiated transaction in which the principals were Wachjo and Chin. Kangaroo was a vehicle through which Wachjo resolved his debt crisis. There was no role for a financial adviser, such as the plaintiffs, to perform the agreed services.
Counterclaim
Having found that the RZB letter did not constitute a Commitment Letter under the Advisory Agreement, the fee paid, through the issue of shares, was not payable. Kangaroo contended that it paid the fee under the mistaken belief that it was obliged to do so, and had it realised that the fee was not payable, it would not have issued the shares to the value of USD750 000. It contended that, in the absence of a relevant defence to the claim, the plaintiffs are bound to repay that sum.
Kangaroo’s counterclaim for repayment was based on the principles enunciated in David Securities Pty Ltd v Commonwealth Bank of Australia.[12] In that case, the High Court accepted that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact. The plurality held:
If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.[13]
[12](1992) 175 CLR 353.
[13](1992) 175 CLR 353, 385; citations omitted.
Having rejected the traditional rule denying recovery in cases of payments made under a mistake of law, the court went on to consider the nature of the burden imposed on a claimant to establish a prima facie right to recover. The court rejected the proposition that the mistake must have been a fundamental one, which would only serve to focus attention, in a non‑specific may, on the nature of the mistake, rather than the fact of enrichment.[14] The court also rejected the contention that a claimant must prove ‘unjustness’ over and above the mistake. The plurality held:[15]
The fact that the claim had been caused by a mistake was sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution.
And continued:
Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognises would make an order for restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered from the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust.
[14]Ibid at 378.
[15]Ibid at 379.
The plaintiffs issued an invoice for the first part of the Commitment Services Fee, on about 9 December 2010. Kangaroo discharged the invoice through the issue of shares on about 22 December 2010. The plaintiffs contended that an additional 180 791 shares are required to discharge the obligation. O’Keefe said that he caused the payment to be made because he thought Kangaroo was obliged to do so under the Advisory Agreement, as a ‘letter’ had been provided to it. He explained that he did not seek legal advice as to whether Kangaroo was obliged to make the payment. O’Keefe said that had he known Kangaroo was not legally obliged to make the payment he would not have done so. That evidence was not challenged by the plaintiffs.
In their amended reply and defence to counterclaim, the plaintiffs alleged a representation by the defendant to the effect that the RZB letter was acceptable and satisfied the requirements of a Commitment Letter. They allege that Kangaroo used the RZB letter to its benefit, and that the plaintiffs relied upon the representation and conduct to dispose of the shares acquired in satisfaction of the obligation. They alleged that as a consequence, Kangaroo is estopped from denying that the RZB letter constituted a Commitment Letter. That case was not advanced at trial, and I take it to have been abandoned.
The plaintiffs appear to rely on the same representations and conduct, in their defence to the restitutionary claim. I say ‘appear’ to do so, because the extent to which those matters were invoked as part of a defence is uncertain. Taking a generous view of the plaintiffs’ defence to counterclaim, and written submissions, they may be taken to have raised the defence of ‘change of position’ coupled with an unarticulated allegation of estoppel. I will return to these defences after considering the plaintiffs’ case advanced in their written submissions. The plaintiffs did not address the claim for restitution in oral submissions.
The plaintiffs contended that Kangaroo did not lead any evidence of a mistake having been made by Ralston when issuing the shares in satisfaction of the invoice. They submitted that Ralston’s failure to give evidence gave rise to the inference that his evidence would not have assisted Kangaroo. That may well be so. But it was O’Keefe, the chief executive, who authorised the payment. He gave evidence and was cross‑examined. It was not put to him that he, or indeed anyone else in Kangaroo, had any doubt at the time about the obligation to issue the shares. That is perhaps understandable because, as the plaintiffs well know, it was Kangaroo’s lawyers who only recently formulated the challenge to the obligation to pay. Until shortly before the trial, no such challenge had been made, and to that point the plaintiffs were entitled to believe that the shares were theirs to deal with.
I reject the plaintiffs’ contention that there was no evidence of mistake. I am satisfied that when O’Keefe authorised the issue of the shares, he did so in the mistaken belief that Kangaroo was obligated under the agreement to make the payment. The plaintiffs’ contention that there was no relevant mistake of fact is inconsistent with David Securities, and more recently, Australian Financial Services & Leasing Pty Ltd v Hills Industries Limited.[16]
[16][2014] HCA 14.
On the premise that Kangaroo had not established a relevant mistake, enlivening a prima facie right of recovery, the plaintiffs argued that the only basis upon which it might recover was to establish a total failure of consideration. It is unnecessary to consider those contentions, as no such case was advanced by Kangaroo, whose claim was based solely on the mistaken payment.
The plaintiffs eventually submitted that, even if Kangaroo were to establish that the payment had been made under a mistake, it would not be inequitable to allow the plaintiffs to retain the proceeds from the sale of the shares. The plaintiffs’ case on this topic was unclear. On one view, they relied on the ‘same matters’ as those advanced in response to the phantom ‘total failure of consideration’ case, not advanced by Kangaroo. Nor was the plaintiffs’ position clarified by reference to the pleadings. In paragraph 15 of their amended reply and defence to counterclaim, the plaintiffs denied that Kangaroo was entitled to recover the proceeds from the sale of the shares, even if the fee was not payable, because
(1)it had made ‘Acceptability Representations’;
(2)it had deployed the RZB letter to its benefit;
(3)it was estopped from denying that the RZB letter constituted a ‘Commitment Letter’;
(4)the plaintiffs had changed their position; and
(5)it would be unconscionable for Kangaroo to recover the amount.
Having abandoned its representation and estoppel cases, it was difficult to discern, from the pleading, the facts and circumstances on which the plaintiffs relied to resist repayment, apart from the sale of the shares and conversion into cash.
There can be no doubt that the defendants to a claim for repayment, in the position of the plaintiffs in this case, may introduce any fact or circumstance relevant to the question of whether their retention of the proceeds would be against conscience. In Australian Financial Services & Leasing, the plurality identified the relevant enquiry:[17]
The entitlement to recover money mistakenly paid to another in an action for money had and received has its roots in the decision of the Court of King's Bench led by Lord Mansfield in Moses v Macferlan. Lord Mansfield expressly founded the action to recover money had and received to the use of the payer on the notion that retention of the money by the payee would be "against conscience".
Lord Mansfield explained that, in the case of mistaken payment, a plaintiff need not show special circumstances and may simply declare that the money was received by another to his use. His Lordship went on to say that, equally beneficially, a defendant "may go into every equitable defence, upon the general issue; he may claim every equitable allowance; ... in short, he may defend himself by every thing which shews that the plaintiff, ex aequo et bono, is not entitled to the whole of his demand, or to any part of it." In Sadler v Evans, it was said that "[t]he defence is any equity that will rebut the action."
…
[17][2014] HCA 14, [65]–[66] citations omitted.
While the plaintiffs did not address Kangaroo’s claim for restitution in their oral submissions, they did so in written submissions. The plaintiffs presented a bundle of facts and matters in response to the ‘no total failure of consideration’ case, and relied upon ‘those same matters as demonstrating why, even if a mistake is made out, it would not be inequitable to permit (them) to retain the benefits of the KRL shares’. The common bundle of facts and matters may be summarised as follows:
(1)The plaintiffs did more than simply provide the Commitment Letter. They participated in the Khronos tender ‘in a proprietary capacity’ on the instructions of Kangaroo.[18]
[18]Presumably, the plaintiffs would argue that they should be entitled to retain the fee in whole or in part as a consequence of the risks associated with the bid made by a related corporation based in the British Virgin Islands.
(2)The Commitment Letter was only ever intended as ‘support’ for a bid. In that regard, it served a useful purpose.
(3)Representatives of Kangaroo conceded that the letter would be used by Wachjo in dealing with competing bidders. Ralston conceded to the Catalano brothers, in an email and telephone call, that the letter was suitable for that purpose. Ralston conceded to D’Sylva that the RZB letter had been given to Wachjo to use in negotiations.
(4)It would not be unjust to allow the plaintiffs to retain the proceeds of sale because:
(a)the plaintiffs did, in fact, obtain the signed RZB letter and submit the Chimaera bid;
(b)in submitting the Chimaera bid, Chimaera (through a related entity) became exposed to the risk that the Chimaera bid would be accepted and the further risk that Kangaroo would not, or would not be able to, carry through with the subsequent acquisition of Chimaera’s tender vehicle;
(c)it can be inferred from the matters above that Ralston, at least, read a draft of the RZB letter. Despite this, any perceived efficiencies in the letter were not brought to the plaintiffs’ attention at the time, when something might have been done about them;
(d)Kangaroo, in fact, achieved its overall objective contemplated by the parties at the time the variation letter was signed — namely, the acquisition of the Pakar assets funded through the issue of shares;
(e)the plaintiffs disposed of the Kangaroo shares in the belief that they were entitled to do so.
The first three grounds repeat contentions made elsewhere to the effect that the plaintiffs had performed, at least to some extent, the Commitment Services, and Kangaroo derived some benefit. It was not clear how the plaintiffs sought to deploy these grounds in its defence to the claim for restitution. They submitted that there was some evidence of the letter having been deployed by Kangaroo, and that its failure to call Ralston, Wachjo and Pereira ‘weighs particularly heavily against KRL’. I assume that what was meant was that the court should infer that the evidence of those three persons would not have supported Kangaroo’s case. If so, that is to misunderstand Kangaroo’s case. Its singular contention was that the payment was made under the mistaken belief that Kangaroo was obliged to make the payment when as a matter of fact and law it was not. The payment was to be made on delivery of a Commitment Letter.
The plaintiffs submitted that O’Keefe had a copy of the letter and may have deployed it in some way. The fact that O’Keefe received a copy of the letter, and probably read it, is not inconsistent with payment under a mistake. Insofar as it is relevant, O’Keefe said that he did not use the letter, or provide a copy to anyone during the negotiations with Bayan. I accept O’Keefe’s evidence that the letter was not deployed in negotiations with Bayan. Even if a Commitment Letter had been available to O’Keefe, it was redundant to the transactions under negotiation.
It is only under the fourth ground the plaintiffs appeared to directly invoke equitable defences. Grounds (a) and (b) may be taken to support the proposition that because a Chimaera‑related entity made a bid for the IBU Notes, the plaintiffs should not be required to disgorge the payment made under mistake. No authority was advanced to support such a proposition as a basis upon which an order for repayment might be refused. These grounds were a relic of the plaintiffs’ ‘no total failure of consideration’ case. In any event, the letter was of such a character that it could not have usefully assisted any such negotiation.
The participation of Chimaera through the related company in the British Virgin Islands did not expose it to any risk ‘in a proprietary capacity’ or otherwise. There was no rational basis for the plaintiffs to have believed that the offer by the Chimaera‑related entity would be accepted. In any event, payment of the fee was contingent upon production of a Commitment Letter. The Chimaera tender was not of that character.
Under ground (c), the plaintiffs contended that Ralston may have read the draft, and yet no perceived defect was brought to their attention until recently. The plaintiffs alleged they were denied an opportunity to remedy any defect. That contention was characterised by Kangaroo, in oral submissions, as in the nature of an alleged estoppel. The better view, it seems to me, is to take that matter into account as a factor which might constitute a detriment, or material prejudice, sufficient to deny the relief sought.
I am satisfied that, in all likelihood, someone at Kangaroo read the RZB letter. I am not satisfied, however, that the plaintiffs thereby suffered any detriment or prejudice by reason of a lost opportunity to remedy any defect. It was not seriously suggested by the plaintiffs that there was any scope to obtain a letter of the kind required under the agreement. The evidence was firmly to the contrary. A letter of the kind initially sought by Chimaera was rejected by RZB.
The purpose of the Commitment Letter was to support a tender that closed at 5.00 pm on 7 December 2010. The plaintiffs withheld the letter until the last minute, insisting that Kangaroo sign the variation. Had they provided an unsigned copy, or even a draft to Kangaroo, prior to execution of the variation letter, it may never have been executed. Kangaroo did not, however, contend that the plaintiffs thereby engaged in some actionable wrong. Nor did it contend that such conduct might, of itself, disqualify the plaintiffs from relying upon the defence of change of position.
As for ground (d), the supposition that Kangaroo may have achieved its overall objective is of no consequence. The issue under consideration was whether Kangaroo made the payment, through the issue of shares, in the mistaken belief that it was obliged to do so; and whether the plaintiffs have established any equitable defence to the claim.
Under ground (e), the plaintiffs relied upon the conversion of the shares into cash. The shares issued by Kangaroo were divided between Chimaera and Empire. Empire sold its shares in two tranches. On 23 December 2010, it sold 1 666 667 shares for $250 000. The remaining shares were sold in February 2011 for a total price of $219 183 024. Chimaera sold its shares during 2011. Proceeds from the sale, executed through various Chimaera group entities, produced total proceeds of $463 969.37.
Kangaroo accepted that the plaintiffs sold the shares in the belief that they were entitled to do so. Accordingly, it confined its recovery to the proceeds of sale, up to USD750 000. It did not press for recovery of the whole of the proceeds. As Kangaroo submitted, the defence of change of position operates pro tanto. The conversion of the shares into cash was not of itself a relevant change of position, however, recoverability may be limited to the amount of the proceeds.
Kangaroo has established that the payment was made under the mistaken belief that it was obliged to do so. The plaintiffs have not established a relevant defence to the claim. Accordingly, the plaintiffs are required to repay to Kangaroo the sum of USD750 000.
Claim for additional shares
If, contrary to the findings made in relation to the obligation to pay the first instalment of the fee for the Commitment Letter, it might hereafter be found that the fee was payable, the plaintiffs alleged that they were underpaid. They alleged a miscalculation of the ’10 day volume weighted average price’. The plaintiffs claim an additional 180 791 shares. They contended that the correct price was $0.113 for the relevant period, whereas Kangaroo applied a price of $0.1339.
There were exchanges between an officer of Kangaroo and D’Sylva at the time concerning the price. Kangaroo pointed out that D’Sylva had not challenged the number of shares calculated by Zuvela, an employee of Kangaroo.
For the plaintiffs to succeed on this part of their claim, it was not sufficient to merely identify an alternative ‘screen shot’ from the Bloomberg data feed. The court required some expert assistance to explain why each competing ‘screen shot’ would yield a different price for the relevant period. In the absence of that assistance, and a coherent explanation, I find that the plaintiffs have not established their case for error in the calculation of the number of shares.
The plaintiffs are entitled to judgment on their claim for expenses in the sum of $19 831.48. The plaintiff’s claims are otherwise dismissed. The defendant is entitled to judgment on its counterclaim in the sum of USD750 000. I will hear the parties on interest and costs on a date to be fixed.
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