Elders Forestry Ltd v BOSI Security Services Ltd - [2010] SASC 223

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
ELDERS FORESTRY LTD v BOSI SECURITY SERVICES LTD & ORS
[2010] SASC 223
Judgment of The Honourable Justice Kourakis
21 July 2010
CORPORATIONS - SHARE CAPITAL - SHARES - TRANSFER - ARTICLES RESTRICTING OR AFFECTING TRANSFER
CORPORATIONS - CONSTITUTION AND REPLACEABLE RULES - EFFECT AS CONTRACT
ESTOPPEL - ESTOPPEL BY CONVENTION
MORTGAGES - PRIORITY OF SECURITIES - BETWEEN EQUITABLE INTERESTS
Plaintiff and fourth defendant each owned half of shares of fifth defendant, a joint venture company – fifth defendant’s constitution adopted on incorporation and plaintiff and fourth defendant also entered into shareholders’ deed, which was later amended, to regulate their rights and obligations in the joint venture – in earlier proceedings between plaintiff and fourth defendant, orders were made declaring plaintiff had validly and lawfully exercised option to acquire fourth defendant’s shares in fifth defendant – fourth defendant opposed order for specific performance on grounds of impossibility by reason of first defendant’s interests in shares – fourth defendant had earlier granted first defendant charge over all of its assets, including its shares in fifth defendant – fourth defendant had also granted equitable mortgage over its shares in fifth defendant in favour of first defendant as security – plaintiff brought proceedings against first defendant, both claiming equitable interests in the shares.
Held: Fourth defendant’s rights and obligations under the shareholders’ deed as amended are incidents of the shares over which first defendant holds its securities – first defendant as mortgagee is as bound by the shareholders’ deed as amended, to which the shareholders and the company were parties, as it is by the company’s constitution – first defendant therefore has no greater interest than fourth defendant in the shares – by granting charge to first defendant over the shares, fourth defendant committed a default event pursuant to shareholders’ deed as amended giving rise to plaintiff’s equitable interest in the shares – first defendant is therefore bound by plaintiff’s exercise of option to acquire the shares – plaintiff is entitled to the equitable interest in the shares – fourth defendant should transfer the shares to plaintiff – fifth defendant should register that transfer – on the transfer of the shares, first defendant will have no further interest in or right over the shares.
Corporations Act 2001 (Cth) s 9, s 53, s 107, s 111J, s 134, s 136, s 140, s 233, s 249A, s 249L, s 254D s 1322; Acts Interpretation Act 1915 (SA) s 14B, referred to.
Adelaide Building Co Pty Ltd (in liq) v ABC Investments Pty Ltd and Anor (1990) 8 ACLC 445; Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 65; Australian Associated Motor Insurers Ltd v NRMA Insurance Ltd (2002) 124 FCR 518; Bluebottle UK Limited v Deputy Commissioner of Taxation (2007) 232 CLR 598; Bridge Wholesale Acceptance Corporation (Australia) Ltd v Burnard (1992) 27 NSWLR 415; Carew-Reid v Public Trustee (1996) 20 ACSR 443; Cockell v Taylor (1852) 15 Beav 103; 51 ER 475; Grant v John Grant and Sons Pty Ltd (1950) 82 CLR 1; Government of Newfoundland v The Newfoundland Railway Company (1888) 13 App Cas 199; Inland Revenue Commissioners v Crossman [1937] AC 26; ITC Limited v Timbercorp Limited (in liquidation) [2009] SASC 342; J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; Puric v State of South Australia [2009] SASC 107; Ramsay v Pigram (1967) 118 CLR 271; Rani v Minister for Immigration and Multicultural Affairs (1997) 80 FCR 379; Rathner v Lindholm (2005) 194 FLR 291; Redman v The Permanent Trustee Company of New South Wales Limited (1916) 22 CLR 84; Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197; Russell v Northern Bank Development Corporation (1992) 3 All ER 161; Société Générale De Paris v The Tramways Union Company Ltd (1884) 14 QBD 424; Southern British National Trust Limited (in liquidation) v Pither (1937) 57 CLR 89; Stylus v United Medical Protection [2007] NSWCA 109; Territory Realty Pty Ltd v Garraway [2009] FCA 292; Tooth v Brisbane City Council (1928) 41 CLR 212; W & R Pty Ltd v Birdseye (2008) 102 SASR 477; Wallace v Evershed [1899] 1 Ch 891; Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; In re White Rose Cottage [1965] Ch 940; Wood v W & G Deane Pty Ltd (1929) 43 CLR 77; White v Shortall (2006) 68 NSWLR 650, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"share"

ELDERS FORESTRY LTD v BOSI SECURITY SERVICES LTD & ORS
[2010] SASC 223
Civil
KOURAKIS J:
Introduction

In proceedings which were before me late last year, the plaintiff (ITC) and the fourth defendant (Timbercorp) contested the validity and lawfulness of ITC’s notice of 30 September 2009 of the exercise of its option to acquire 50,000 shares in the fifth defendant (PPT) registered in the name of Timbercorp (the default option). On 6 November 2009, I delivered written reasons finding for ITC and, on 18 November 2009, I made orders declaring that ITC had validly and lawfully given notice of the exercise of the Default Option pursuant to cl 7.2 of the Shareholders’ Deed dated 13 September 2005, as supplemented and amended by a Supplemental Deed dated 18 September 2007. After I delivered my reasons, Timbercorp opposed orders for specific performance of its obligations under cl 7.2 on the ground that it was impossible for it to perform by reason of the interests held over Timbercorp’s shares in PPT by the first defendant (BOSI). That defence had not been pleaded by it. I shall refer to the earlier proceedings as the 2009 proceedings. BOSI was not a party to the 2009 proceedings.
The substantive controversy between the parties in the present proceedings concerns competing claims of equitable rights over Timbercorp’s shares in PPT (the shares). Over a period of time preceding Timbercorp’s liquidation, BOSI advanced substantial finance to Timbercorp on various securities including a floating charge over Timbercorp’s assets and later a mortgage over the shares. BOSI claims equitable rights over the shares pursuant to its securities. ITC claims an equitable right to the shares pursuant to the default option granted by the terms of a Shareholders Deed into which it entered with Timbercorp.
The parties
The plaintiff, Elders Forestry Ltd, undertakes forestry operations in the Albany region of Western Australia for the purposes of producing and exporting woodchips. At the time of the events which are the subject of this dispute, the plaintiff was known as ITC Limited. I shall refer to the plaintiff as ITC in these reasons. ITC was represented by Mr Hoffmann QC, Mr Roberts and Mr Phillips.
The fourth defendant, Timbercorp Ltd (in liquidation), held and managed extensive agri-business operations throughout Australia including forestry and other horticulture. In 2009, Timbercorp found it difficult to continue to finance its business. Mr Mark Korda and Ms Leanne Chesser, who are partners of the firm KordaMentha Pty Ltd (KordaMentha), were appointed as administrators of Timbercorp at a meeting of creditors held on 23 April 2009. Mr Korda and Ms Chesser were subsequently appointed as liquidators of Timbercorp at a meeting of the creditors held on 29 June 2009. The fourth defendant did not take part in the trial of the present proceedings and agreed to abide by the outcome. I shall refer to the fourth defendant as Timbercorp in these reasons.
In about 2003, ITC and Timbercorp agreed to enter into an incorporated joint venture arrangement for the purpose of establishing and operating a woodchip export facility at Albany in Western Australia. PPT was the corporate vehicle through which the joint venture was undertaken. ITC and Timbercorp each hold, and have always held, fifty per cent of the 100,000 issues shares of PPT. PPT also did not participate in the trial and agreed to abide by the result.
The first defendant, BOSI Security Services Ltd (BOSI), was at all material times from 29 January 2007 registered as chargee of property of Timbercorp pursuant to the terms of an instrument entitled “Featherweight Fixed and Floating Charge” dated 15 December 2006 (which I shall refer to as the December 2006 Charge). BOSI was at all material times from 1 October 2007 registered as chargee of interests held by Timbercorp in PPT pursuant to the terms of an instrument entitled “Mortgage of Shares and Contractual Rights (Plantation Pulpwood Terminals Limited)” dated 28 September 2007 (which I shall refer to as the Mortgage Deed) and the charge given by it as the equitable mortgage. BOSI was represented in these proceedings by Mr Robertson SC and Mr Cox up until 7 April 2010, and thereafter by Mr Anastassiou SC and Mr Cox.
The second defendant, Mr Carson, and the third defendant, Mr Crosbie, were both appointed on 18 December 2009 by BOSI as its agent to take possession of the shareholding and related interests held by Timbercorp in PPT pursuant to the December 2006 Charge and the Mortgage Deed. They both had the same representation as BOSI and in these reasons any references to BOSI should also be taken to include the second and third defendants.
A summary of transaction documents
A constitution was adopted by the shareholders of PPT on its incorporation (the PPT constitution). ITC and Timbercorp entered into a Shareholders’ Deed dated 25 August 2004 (the Shareholders’ Deed 2004) to regulate their respective rights and obligations in the joint venture. ITC and Timbercorp purported to amend the constitution after entering into the Shareholders’ Deed 2004 by subscribing to a circular resolution. The effect of the amendment was to add a r 94 which provided that rights in the Shareholders’ Deed 2004 would prevail over the terms of the constitution. The Shareholders’ Deed 2004 was amended in 2005 but not in a way which is material to these proceedings. For that reason, I shall also refer to the Shareholders’ Deed as it existed on the making of those amendments as the Shareholders’ Deed 2004. The Shareholders’ Deed 2004 was amended again by a Supplemental Deed dated 18 September 2007. I shall refer to the Shareholders’ Deed 2004 as varied by the Supplemental Deed as the Shareholders’ Deed as amended.
The Supplemental Deed effected substantial changes. First, it acknowledged that the operations of PPT had been funded by loan capital provided by the Shareholders (the Shareholders’ loans). It recorded the amount and terms of repayment of those loans. In summary, the loans were repaid by setting off charges levied by PPT for use of its export facility against the shareholders’ loans. The Supplemental Deed also conferred a right on ITC and Timbercorp to call for a transfer of the shares of the other in the event that the other requested a repayment of the balance of the capital of its loan. The right has been referred to by ITC as a “stapling” of the loans to the shares. I shall refer to it as the repayment option. The purchase price for the shares on the exercise of the repayment option was fixed at the lesser of $1, or the value of the shares as determined by an independent valuation in accordance with a procedure prescribed in Sch 5 of the Shareholders’ Deed as amended (the independent valuation). The Supplemental Deed also changed the purchase price payable on the transfer of a share in exercise of the default option to reflect the same formula. Finally, the Supplemental Deed amended Sch 6 of the Shareholders’ Deed 2004 so that the charging of any shares by one shareholder was proscribed unless the other shareholder consented and the chargee undertook to exercise its power of sale consistently with the pre-emption procedure established by the schedule (the encumbrancing conditions). The encumbrancing conditions had been expressed in the alternative in Sch 6 of the Shareholders’ Deed 2004.
On or about 28 September 2007, Timbercorp and BOSI entered into the Mortgage Deed pursuant to which Timbercorp granted an equitable mortgage over its 50,000 shares in favour of BOSI as security for a further advance.
Schedule 2 to the Mortgage Deed was a notice of assignment (the assignment notice). The assignment notice was provided to ITC. It made provision for ITC to subscribe to it and thereby indicate its agreement not to exercise any right it may have to terminate the Shareholders’ Deed as amended without first giving BOSI not less than 30 days notice of its intention to do so. ITC did not execute the assignment notice.
On 22 October 2007, ITC and BOSI entered into a Deed of Acknowledgment pursuant to which BOSI acknowledged that it had been supplied with the Shareholders’ Deed as amended and covenanted to observe, perform and be bound by Sch 6 of the Shareholders’ Deed as amended (the Deed of Acknowledgement).
Witnesses
ITC called as witnesses Mr Erasmus, chief executive officer of ITC, Mr Russo, its manager of legal and corporate affairs, and Mr Serls, general manager of finance and administration with ITC. I received the affidavit of Mr Hargreaves, the secretary of PPT. I was favourably impressed with the demeanour of all of the witnesses who were called by ITC. I proceed on the basis that their evidence is generally reliable.
I indicate in particular that I accept the evidence of Mr Serls that he had no knowledge, through his dealings with Mr Murray of Timbercorp, that Timbercorp had granted a floating charge over the shares. His understanding was only that “the [Timbercorp] financing would be arranged and there would be a condition of that financing that said that Timbercorp would need to provide the mortgage or encumbrance, whatever the description was by some later date”.
I also accept Mr Russo’s evidence that he believed that, by executing the Deed of Acknowledgment, BOSI took its encumbrance over the shares, subject to all of the rights set out in the Shareholders’ Deed as amended. His lack of recollection of some details and the transactions in which he was involved did not cause me to doubt his testimony generally. Nor does the failure to call the solicitor on whom he relied for advice give me sufficient cause to doubt his evidence.
BOSI called Mr Chapman. He was the officer of BOS International (Australia) Limited (BOSIAL) responsible for the Timbercorp client relationship from January 2006 until 30 September 2009. I was favourably impressed by his demeanour. In particular, I accept his evidence about the extent of his knowledge and understanding of the obligation of Timbercorp to obtain the consent of ITC to the grant of any charge and his belief at different times as to whether any such charge had been granted.
BOSI also called Mr Fenwick who, at the time, was a senior associate at Blake Dawson in Melbourne. I was favourably impressed with his evidence.
The liquidator, Mr Korda, was called by BOSI. I was favourably impressed with his evidence and proceed on the basis that it is generally reliable. In particular, I accept that he did not hear anything about impossibility as a defence to ITC’s claim for specific performance of the default option until 24 May 2010.
BOSI also called Mr Webster, an employee of KordaMentha and a certified accountant. I was generally impressed with his evidence and proceed on the basis that it is reliable. In particular, I accept Mr Webster’s evidence concerning his knowledge of the delivery of alternative forms 312 for the release of BOSI’s security over the shares. I accept his evidence that he sent draft forms 312 because, irrespective of any decision about releasing the charge and equitable mortgages over the shares, it was necessary to free Timbercorp’s harvesting equipment from any encumbrance. Moreover, I accept, on the basis of his evidence, Mr Korda’s evidence and Mr Chapman’s evidence that, even though releases of the security over the shares were sought, BOSI, and the bankers behind it, did not ever agree to release the encumbrances.
I was invited by ITC to draw an adverse inference against BOSI by reason of its failure to provide full discovery and call other witnesses who could have testified about BOSI’s knowledge of the terms of the Shareholders’ Deed and whether Timbercorp had obtained ITC’s consent to charge the shares. In Puric v State of South Australia,[1] I described the principle involved in the following terms:
[77]The failure to call a witness will not support a positive inference that the witness would have given evidence damaging to the party who omitted to call him or her, and make up for a deficiency in the case of the opposing party. For that reason, to speak of an adverse inference is apt to mislead. The failure to call a witness does not support an inference of guilt in the way that circumstantial evidence does. It cannot be maintained that as a matter of human experience a failure of a party to call a material witness in his or her ‘camp’ makes it more probable that the allegations made against that party are true. The failure to call a witness is not a species of circumstantial evidence; it is an absence of evidence. The only effect of an unexplained failure to call a witness in the party’s ‘camp’ is to ‘assist materially in determining what findings or inferences might fairly be made or drawn from the evidence of the opposing party’. Doubts about the reliability of witnesses, or the inferences that can be drawn safely from the evidence, may be more readily discounted in the absence of evidence from a party who might be expected to give or call it.[2] (citations omitted)
[1] [2009] SASC 107.
[2] Puric v State of South Australia [2009] SASC 107 at [77].
I have taken the absence of the documents for which ITC called at various times into account in assessing Mr Chapman’s evidence. However, my confidence in his evidence, having heard his testimony and having regard to its consistency with such documentation as has been discovered, remains. He was the officer of BOSIAL who was primarily responsible for the conduct of the financing file. It is unlikely that any other officer had any more information than Mr Chapman. I am confident that he truthfully disclosed all of the information that he had.
Transactions and dealings with the shares
At all material times, ITC and Timbercorp each held 50,000 of the 100,000 issued shares in PPT. Those shares were issued at a price $1 per share.
The PPT constitution was adopted on incorporation. The Shareholders’ Deed was entered into on 24 August 2004.
In late 2005, Timbercorp took steps to obtain loans from BOSIAL. To that end, on 9 December 2005, Timbercorp sought ITC’s consent to Timbercorp granting an equitable mortgage. On 14 December 2005, ITC replied, declining to consent to an encumbrance until certain issues it had raised were resolved. Mr Murray, the chief financial officer of Timbercorp at the time, decided to negotiate finance subject to a condition subsequent that the encumbrance would be provided later.
On 22 December 2005, Timbercorp entered a loan agreement with BOSIAL (the 2005 Loan Agreement). Clause 10.4(f) of the 2005 Loan Agreement obliged Timbercorp to provide an equitable mortgage of the shares within 90 days. Notwithstanding ITC’s refusal to consent to the grant of an encumbrance, Timbercorp granted BOSIAL a fixed and floating charge in respect of all of Timbercorp’s interests “in all its property anywhere real and personal, and present and future”. ITC was not informed of the charge and had no knowledge of it until these proceedings were commenced. BOSIAL was at all material times from 3 January 2006 to 30 March 2007 registered as the chargee under the 2005 Loan Agreement.

Timbercorp did not comply with cl 10.4(f) of the condition subsequent. Mr Murray continued to negotiate with ITC about the giving of consent. Mr Chapman agreed that the timeframe for compliance with the condition subsequent would have to be reconsidered. Mr Chapman was aware of Timbercorp’s negotiations with ITC. He understood that the discussions between Timbercorp and ITC included negotiating changes to the Shareholders’ Deed 2004. Mr Chapman understood that the negotiations included discussion of a procedure which would allow ITC to “buy the outstanding PPT debt due to [Timbercorp] at face value to preserve PPT’s solvency” and would allow ITC to maintain control of the shares “through the pre-emptive rights and options under the Shareholders’ Deed”.
On 8 August 2006, the time for compliance with cl 10.4(f) was extended by a further 90 days.
On 30 October 2006, Mr Chapman was informed that the amendments to the Shareholders’ Deed 2004 then under negotiation would allow a shareholder who was not requesting repayment of its shareholders’ loan (the non demander) to acquire the other’s loan at face value and to call for its shares at the price of the lesser of $1 per share or the independent valuation. A draft of the Supplemental Deed was provided to BOSI in December 2006.
On 15 December 2006, Timbercorp entered into a Syndicated Loan Agreement with BOSIAL and BOSI as a security trustee. At the same time, Timbercorp granted the December 2006 Charge over all of Timbercorp’s assets including its shareholding in PPT. Clause 10.4(f) of the Sydicated Loan Agreement required Timbercorp to provide an equitable mortgage of the shares by 28 February 2007. ITC was not aware of the existence of the December 2006 Charge until some time in April 2009.
Mr Chapman testified that, even though he was aware that Timbercorp had been unable to provide an equitable mortgage over the shares because of ITC’s refusal to consent to it, it did not occur to him that Timbercorp was bound by the Shareholders’ Deed 2004 to obtain the consent of ITC to give the 2006 Charge.
On 16 May 2007, Australia and New Zealand Banking Group Limited (ANZ) and Westpac Banking Corporation (Westpac) were added as financiers to the Syndicated Loan Agreement. Clause 10.4(f) of the Loan Agreement was amended to give Timbercorp until 30 September 2007 to grant an equitable mortgage over the shares and a charge over its shareholders’ loan to PPT in favour of BOSI. I accept Mr Chapman’s evidence that he received a copy of the Shareholders’ Deed 2004 and a draft Supplemental Deed for the first time on 3 September 2007.
Mr Chapman agreed that he had read emails which recorded that ITC did not consent to any encumbrance, but he did not turn his mind to the 2006 Charge which had already been taken. In my view, the correspondence he saw, although using the general expression “encumbrance”, was on its face directed towards the equitable mortgage of the shares sought by BOSI. Mr Chapman so understood the emails. He thought ITC’s refusal was with respect to “a fixed charge of shares”. By fixed charge, he meant an equitable mortgage. I accept his evidence to that effect.
When Mr Chapman eventually read the Shareholders’ Deed 2004 in September 2007, he appreciated that ITC’s consent was a necessary prerequisite to the grant of any encumbrance over the shares. However, even at that time he was not aware whether or not ITC had given consent to the floating charge. He regarded the discussions concerning the conditions subsequent and the refusal to execute an equitable mortgage of the shares as limited to an encumbrance of that type. I accept Mr Chapman’s evidence on that issue. Mr Chapman agreed that he understood the effect of cl 7.2 and cl 2.5B of the Supplemental Deed to give the non-defaulting shareholder a right to acquire the shares at $1 per share.
In late September 2007, there was correspondence by email between the solicitors for BOSI and the solicitors for Timbercorp about the interrelationship between the Shareholders’ Deed 2004 and r 27 of the constitution. Both Sch 6 of the Shareholders’ Deed 2004 and r 27 of the constitution enacted regimes for the exercise of rights of pre-emption. The consensus reached by the solicitors was that the terms of the Shareholders’ Deed as amended would prevail.
BOSI was advised by its solicitors Blake Dawson about the default option granted by the Shareholders’ Deed as amended in the following terms:
The termination clause in the Shareholders’ Deed gives a Non Defaulting shareholder the option to purchase a defaulting shareholder’s shares if there is an un-remedied default under the Shareholders’ Deed (see the revised form of clause 7.2 set out in the Supplemental Deed). We propose to give the financiers a right to cure any default by Timbercorp (see paragraph (f)) of the form of notice of assignment attached to the mortgage of shares and contractual rights.
I do not regard that advice, and Mr Chapman’s understanding of it, as supporting a conclusion that BOSI understood that its rights under the mortgage would necessarily be affected by the default option.
The Mortgage Deed was executed by Timbercorp and BOSI on 28 September 2007. The Deed of Acknowledgement was signed by Mr Erasmus on the same day. It was later countersigned by BOSI on 22 October 2007.
I record here evidence given by Mr Russo about the steps he took to ensure that ITC’s interests were protected notwithstanding the execution of the Mortgage Deed:
I have gone to Mr Kedzior [a solicitor] engaged by ITC [for advice] relating to the effect of the Deed of Acknowledgement and the context of the Mortgage. I specifically pointed out that I wanted ITC’s rights to be protected.
Mr Russo testified that he proceeded on the basis that, in the absence of advice that anything further needed to be done to protect ITC’s rights under the Shareholders’ Deed, BOSI would be bound by the exercise of those rights.
On 24 October 2007, ITC received a letter dated 23 October 2007 from Blake Dawson enclosing a notice of assignment in the form annexed as Sch 2 to the Mortgage Deed. ITC did not execute or return the assignment notice on advice from its solicitors.
BOSI never provided executed certificates of transfer of the shares, as it was required by cl 2.2 of the Mortgage Deed.
The appointment of KordaMentha as Timbercorp’s administrators was a Default Event for the purposes of cl 7.2 of the Shareholders’ Deed as amended, the December 2006 Charge, and the Mortgage Deed. On 29 June 2009 they were appointed as the liquidators of Timbercorp. In July 2009, Timbercorp by its liquidators published an information memorandum inviting expressions of interest in the sale of Timbercorp’s forestry assets. The syndicate financiers entered into funding agreements to provide funds to the liquidators to realise the assets of Timbercorp.
ITC served a notice to exercise the default option on PPT on 30 September 2009. Timbercorp by its liquidators refused to settle on the date specified in the notice, 8 October 2009.
The liquidators executed a share sale and purchase agreement for the sale of PPT’s forestry assets with Australian Bluegum Plantations Pty Ltd (Bluegum) on 8 October 2009. The sale of the shares was included, but was subject to any rights which ITC may have pursuant to the default option and was conditional upon the consent of BOSI. The purchase price for the shares was $8,000,000 less the amount of Timbercorp’s loan (approximately $7,591,000). In addition to the purchase price, Bluegum was obliged, on completion, to pay Timbercorp Securities Limited the sum of $9 million, which was described as a tree accretion value.
On 8 October 2009, Timbercorp by its liquidators purported to issue a Notice of Sale to ITC under Sch 6 of the Shareholders’ Deed as amended.
On 12 October 2009, ITC commenced proceedings in this Court in action number 1550 of 2009 asserting the validity of its exercise of the default option and the invalidity of Timbercorp’s Notice of Sale. The 2009 proceedings were heard by me between 28 October and 6 November 2009. Judgment was delivered on 6 November 2009. On 18 November 2009, I made a declaratory judgment in the following terms:
1.The plaintiff has by its notice dated 30 September 2009 validly and lawfully given notice of the exercise of its option to acquire the 50,000 shares in Plantation Pulpwood Terminals Pty Ltd registered in the name of the defendant from the defendant for an aggregate purchase price of $50,000 pursuant to clause 7.2 of the Shareholders’ Deed dated 13 September 2005 as amended by a Supplemental Deed dated 18 September 2007 between the plaintiff and the defendant.
On 18 December 2009, I ordered that the defendant do all that was reasonably possible to procure the release of BOSI’s security.
The PPT constitution
It is convenient to now set out the provisions of PPT’s constitution and the Shareholders’ Deed as amended which affect the exercise by the shareholders of PPT of their rights and obligations as such.
The constitution of PPT provides that it was not bound to recognise or investigate any equitable, contingent or future interest in any share or any other right in respect of a share except an absolute right of ownership in the registered holder. Rule 28(3) of the constitution provides that a transferor of a share remains the holder of the share until the transfer is registered and the name of transferee is entered in the register of members. The directors of PPT are entitled to decline to register any transfer of shares without giving any reason therefore: r 30.
There is a dispute as to whether the constitution of PPT was validly amended on 25 August 2004 to include a rule numbered 94.
Rule 94 provides:
If there is any inconsistency between the terms of this Constitution and the terms of the Shareholders’ Deed between [ITC], [Timbercorp] and [PPT] dated 25 August 2004 then the terms of the Shareholders’ Deed shall prevail to the extent of the inconsistency and this Constitution shall be read and construed accordingly.
I find that r 94 was validly made for the following reasons.
Section 249A of the Corporations Act 2001 (Cth) (the Act) allows a convenient procedure for the passing of resolutions without the holding of a general meeting. A company may pass a resolution without a general meeting being held if all the members entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution.
Section 249A of the Act is not a replaceable rule. It is, in my view, not possible therefore to expressly deny the facultative power it gives to shareholders by express provision in a constitution, contract or deed. The section on its terms applies to resolutions which the company’s constitution “requires” to be passed at a general meeting.[3] It may be possible to construe s 249A(1) as applying only to those constitutions which do not themselves provide an alternative and more limited power to pass resolutions by circulating a document. However, in my view the better construction, which promotes the manifest purpose of the section, is that it applies whether the company’s constitution is silent on the possibility of circulating a written resolution, where it provides a limited facility to do so, or even where it expressly prohibits it. It is significant, in my view, that s 249A of the Act is not described as a replaceable rule.
[3] Corporations Act 2001 (Cth) s 249A(1).
Rule 38(3) of PPT’s constitution provides for the passing of a “prescribed resolution” by the signing of a document of all of its members stating that they are in favour of it. In that event, the resolution is deemed to have been passed at a general meeting of the company held at the time that the document was last signed by a member. However, by r 38(5)(b) a prescribed resolution does not include a resolution that is required to be passed by a majority other than a simple majority. The Act requires that a constitutional amendment be effected by a special resolution which in turn requires a majority of 75 per cent of the votes. Accordingly, a resolution amending the constitution in accordance with replaceable r 38 cannot be passed by circulating the resolution in written form in accordance with r 38(3) of the constitution.
If it were possible for a provision of a company’s constitution to exclude s 249A of the Act, I would have held that r 38(3) did so even though on its face it is permissive. Rule 38 does not expressly refer to s 249A and purport to exclude its operation. However, in my view it is a necessary implication of the exclusion of prescribed resolutions, from the procedure for adopting resolutions by circular allowed by r 38(3), that it was intended to exclude prescribed resolutions from that facultative mechanism.It could hardly have been intended to exclude resolutions requiring a special majority from the procedural facility given by r 38(3), but at the same time to have intended to allow the very same result by resort to the use of the statutory power. Moreover, the procedure allowed by r 38(3) is not significantly different to the procedure in s 249A. As a matter of the intention of the founding members of PPT, there is no reason why a constitutional provision excluding prescribed resolutions from the ambit of r 38(3) would have been adopted at the same time as leaving the door open for the application of s 249A with respect to those same resolutions.
Section 249L of the Act prescribes the procedure for giving notice of a meeting. In my view, the requirement of s 249L that a notice of a general meeting contain a statement of intention to propose any special resolution is inapplicable to the procedure prescribed by s 249A. The very purpose of the facultative power in s 249A is to avoid holding a meeting at all. The purpose of s 249L is to give members notice of the special resolution so that they might consider their attitude to it, and the steps which they wish to take to advocate for or against it, at the meeting. Notice is not required for that purpose when the procedure prescribed by s 249A is adopted; a member who does not wish the special resolution passed need only refrain from signing the circulated resolution.[4]
[4] Corporations Act 2001 (Cth) s 249A(2).
I find that r 94 was validly made pursuant to the procedure prescribed by s 249A of the Act.
Having found that the resolution was valid and effective, the application of s 1322 of the Act, which empowers this Court to make orders declaring the validity or invalidity of irregular proceedings, does not arise. However, for the sake of completeness, I shall deal with ITC’s submissions on its application. Section 1322 of the Act provides:
Irregularities
(1)     In this section, unless the contrary intention appears:
(a)     a reference to a proceeding under this Act is a reference to any proceeding whether a legal proceeding or not; and
(b)     a reference to a procedural irregularity includes a reference to:
(i)the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation, at a joint meeting of creditors and members of a corporation or at a meeting of members of a registered scheme; and
(ii)a defect, irregularity or deficiency of notice or time.
(2)A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.
(3)A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void.
(3AA) A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the inability of a person to access the notice of meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void.
Note:Under paragraph 249J(3)(cb), a company may, in certain circumstances, give a member notice of a meeting by notifying the member that the notice of meeting is available and how the member may access the notice of meeting.
(3A)If a member does not have a reasonable opportunity to participate in a meeting of members, or part of a meeting of members, held at 2 or more venues, the meeting will only be invalid on that ground if:
(a)     the Court is of the opinion that:
(i)    a substantial injustice has been caused or may be caused; and
(ii)     the injustice cannot be remedied by any order of the Court; and
(b)     the Court declares the meeting or proceeding (or that part of it) invalid.
(3B)If voting rights are exercised in contravention of subsection 259D(3) (company controlling entity that holds shares in it), the meeting or the resolution on which the voting rights were exercised will only be invalid on that ground if:
(a)     the court is of the opinion that:
(i)    a substantial injustice has been caused or may be caused; and
(ii)     the injustice cannot be remedied by any order of the court; and
(b)     the court declares the meeting or resolution invalid.
(4)Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a)     an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
(b)     an order directing the rectification of any register kept by ASIC under this Act;
(c)     an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)     an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;
and may make such consequential or ancillary orders as the Court thinks fit.
(5)An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence.
(6)The Court must not make an order under this section unless it is satisfied:
(a)     in the case of an order referred to in paragraph (4)(a):
(i)that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii)that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii)that it is just and equitable that the order be made; and
(b)     in the case of an order referred to in paragraph (4)(c)--that the person subject to the civil liability concerned acted honestly; and
(c)     in every case--that no substantial injustice has been or is likely to be caused to any person.

BOSI does not seek an order pursuant to s 1322(2). In the alternative to its primary submission, which I have already accepted, ITC seeks an order pursuant to s 1322(4)(a) that the circular resolution is not invalid. However, s 1322(4) must be read together with s 1322(2), and is expressly made subject to s 1322(6) of the Act. It follows that an order declaring that a proceeding is not invalid for contravention of a provision of the Act or a corporate constitution should not be made if to do so will cause a substantial injustice to another.
In my view, an order pursuant to s 1322 of the Act should not be made in this case if it would deny or discount a proprietary interest held by BOSI in the shares. On the other hand, if BOSI does not have a proprietary interest which defeats the equitable interest claimed by ITC, no occasion for the exercise of the power conferred by s 1322(4) arises in these proceedings.
ITC contends in the further alternative that Timbercorp, which remains the legal holder of the shares, should be ordered to comply with the covenant in cl 10.2 of the Shareholders’ Deed as amended to procure the amendment of PPT’s constitution to give effect to the Shareholders’ Deed.
I accept that, even though ITC does not seek specific performance of an executory agreement compelling the execution in specie of the contract so as to complete the agreed transaction, the relief it seeks is analogous to it.[5] Plainly, had the matter not been complicated by the assignment of the shares to BOSI, ITC’s claim for a mandatory injunction would have been a strong one.
[5] J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 at 297 per Dixon J; Bridge Wholesale Acceptance Corporation (Australia) Ltd v Burnard (1992) 27 NSWLR 415.
In my view, it is doubtful that an amendment of the constitution made after the charging of the shares by the December 2006 Charge and the equitable mortgage can affect those interests. If the effect of granting a mandatory injunction compelling the constitutional amendment would be to deny an equitable interest which BOSI has, that would, in my view, be a good reason not to order a mandatory injunction. It is difficult to see how, if BOSI is not bound by the obligations of Timbercorp by the very nature of the property over which it has security, an order made as between ITC and Timbercorp could affect its interest. I deal below with the question of whether or not the nature of the shares over which BOSI holds its securities includes the infirmities arising out of Timbercorp’s obligations under the Shareholders’ Deed as amended. BOSI took its equitable mortgage on the basis of the constitution as it then stood. If by that assignment BOSI took the share free of any interest ITC may have had in the shares under the default option, it is doubtful that an order made now requiring Timbercorp to do all that is necessary to amend the constitution could affect BOSI’s interest in the shares.
The next question which arises is whether the reference to the “Shareholders’ Deed dated 15 August 2004” in r 94 includes amendments made to the Shareholders’ Deed 2004 from time to time.
The common law position with respect to references in statutes to other parliamentary enactments was that, in the absence of an indication that a reference to another piece of legislation was to be ambulatory, the reference was taken to be to the legislation in the form it took at the date the referring legislation was made.[6] The common law presumption has now been repealed.[7] In Rani v Minister for Immigration and Multicultural Affairs,[8] Sackville J held that the common law principle did not apply to a reference in the Migration Act 1958 (Cth) to regulations made under that Act.[9] Sackville J commented that it must have been understood at the time of the enactment of the Migration Reform Act 1992 (Cth) that the migration regulations would be frequently amended.
[6]    D C Pearce and R S Geddes, Statutory Interpretation in Australia (6th ed, 2006) at [6.19].
[7]    Acts Interpretation Act 1915 s 14B.
[8] (1997) 80 FCR 379.
[9]    Rani v Minister for Immigration and Multicultural Affairs (1997) 80 FCR 379 at 395.
The manifest inconvenience of a rule of construction that precludes a reference to a document including amendments to that document is recognised by the statutory abrogation of the common law rule with respect to statutes and the decision of Sackville J in Rani. The existence of the common law rule is, I think, explicable by the very nature of a parliamentary enactment. It is also explicable by reference to the difficulties in ascertaining the purpose of a legislature particularly at a time when a very restrictive view was taken to secondary materials.
However, there is no such difficulty in adopting a purposive approach to the construction of a commercial document, even one which is the constitutional document of a corporation.
In Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd,[10] the Full Court of the Federal Court recognised that the ordinary principles of contractual interpretation require some modification in their application to a corporation. Nonetheless, the court may have limited recourse to the context of the constitutional enactment.[11]
[10] (2006) 156 FCR 1.
[11] Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at 13 [59] per Wineberg J, at 22 [100] per Kenny J, at 48 [238] per Lander J. Stylus v United Medical Protection [2007] NSWCA 109 at [14], [32]-[36] per McColl JA. See also at [61] per Basten JA.
The extent to which the context in which a constitution is made can be considered will, in my view, vary according to the nature and shareholding of the company.[12] I respectfully agree with the observations of Mansfield J in Territory Realty Pty Ltd v Garraway[13] to the effect that the circumstance that a company is a “quasi-partnership” is an important part of the context in which to construe provisions which are calculated to control the internal management of the company.
[12] Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at 28-9 [126] per Kenny J, at 51 [258] per Lander J.
[13] [2009] FCA 292.
The resolution which adopted r 94 was circulated and made on the same date as the execution of the Shareholders’ Deed 2004. The execution of both the resolution and the Shareholders’ Deed 2004 demonstrates that the shareholders intended to control the internal management of the company by reference to the Shareholders’ Deed 2004.
There is no logical reason why the shareholders would have intended that any future amendment to the Shareholders’ Deed 2004 should be accompanied by a minor and consequential amendment to the terms of r 94. The Shareholders’ Deed 2004 could after all only be effective if executed by both of the then existing shareholders who could therefore be expected to attend to the amendment of the constitution as a mere formality. If any other shares were issued, PPT was obliged to ensure that the holders of those shares agree to be bound by the Shareholders’ Deed 2004 as if a party to it: cl 3.4. In my view the existing parties to the Shareholders’ Deed 2004 would equally be bound to recognise the other holders of shares as parties with the effect that the Shareholders’ Deed 2004 could not be amended without the consent of all existing shareholders. In the event that either ITC or Timbercorp assigned its shares, each was bound to ensure that the assignee agreed to be bound by the deed as a party: cl 3.5(b). The Shareholders’ Deed 2004 could not be modified in any way unless made in writing and duly executed or signed by or on behalf of the parties: cl 10.2. If in some way subsequent holders of the shares did not become parties to the Shareholders’ Deed 2004, they would understand that the terms of the constitution would necessarily be read subject to the Shareholders’ Deed 2004 and any amendment to it.
The next question which arises is whether there is an inconsistency between the default option arising under the Shareholders’ Deed as amended and the terms of the constitution. I discuss the nature of the default option in more detail below, but the question of inconsistency can be adequately dealt with in advance.
The constitution conferred rights of pre-emption but did not subject the shares to the exercise of a default option. It was silent on the question. In my view, there is nonetheless an inconsistency between the constitution and the Shareholders’ Deed 2004. The constitution did not burden the shares of its members with an obligation to transfer them should a Default Event occur. The Shareholders’ Deed 2004 did limit the rights of ownership in that way.
However, it is important to observe that r 94 falls short of incorporating the terms of the Shareholders’ Deed 2004 as terms of the constitution. It requires only that the express terms of the constitution be read and construed in a way which does not conflict with the Shareholders’ Deed 2004. It does not, however, subject the shares of its members to the additional obligations contained in the Shareholders’ Deed 2004. If properly construed r 94 did incorporate the terms of the Shareholders’ Deed 2004 as amended from time to time as terms of the PPT constitution, a stricter construction of the phrase “Shareholders’ Deed … dated 25 August 2004” might have been necessary for the reason appearing in the following paragraph.
Apart from the text of r 94, there is a further reason that it cannot be construed as incorporating the provisions of the Shareholders’ Deed 2004 as terms of the constitution. Section 136(2) of the Act provides that a company may modify or repeal its constitution by a special resolution. If r 94 is given the wide construction urged by ITC, the effect would be to allow the constitution to be modified not by special resolution but by amendment of the Shareholders’ Deed 2004. It is one thing to accept, as I do, that the terms of a constitution may be expressed by reference to an external document. It is quite another thing to accept that it is permissible to give that reference an ambulatory operation if its affect is to modify the constitution by an unconstitutional process.
In my view, the purpose of r 94 is to deal with the possibility of conflicting rights and obligations in the provisions of the constitution which are given contractual force by s 140 of the Act and the Shareholders’ Deed 2004. Rule 94 provides that the provisions of the constitution are binding on PPT and its members only to the extent that they are not inconsistent with the Shareholders’ Deed as amended. Clause 10.1 is a reciprocal provision in the Shareholders’ Deed 2004. In a practical sense a variation to the Shareholders’ Deed as amended may effectively alter the rights and obligations of the company and those of its members who are parties to the Shareholders’ Deed 2004 even though that variation does not amend the constitution itself. The change to the rights and obligations of the company and its members when any amendment is made to the Shareholders’ Deed 2004 is a result of r 94 of the constitution and cl 10.1 of the Shareholders’ Deed 2004 which render the rights and obligations found in the terms of the constitution defeasible and subject to the rights and obligations conferred by the provisions of the Shareholders’ Deed 2004.
However, r 94 does not as I have observed incorporate the provisions of the Shareholders’ Deed 2004 into the constitution. It would not be permissible to subvert s 136 of the Act in that way. The practical result may be the same for so long as there is an identity between the members of PPT and the parties to the Shareholders’ Deed 2004. However, for a member who is not a party to the Shareholders’ Deed as amended, the result of that construction is significant. For such a member, the provisions of the Shareholders’ Deed as amended cannot “prevail” over the contractual force given to the corporate constitution of PPT because they have no application to that member.
Rule 94 also creates an ongoing rule of construction of the provisions of the constitution. Those provisions must be construed against the Shareholders’ Deed as amended so as to avoid as far as is reasonably practicable any inconsistency. In effect r 94 allows reference to the Shareholders’ Deed 2004 as a secondary document for the purposes of construing the provisions of the constitution itself. I acknowledge that there is no clear bright line between the construction of existing terms and the amendment of those terms by reference to a secondary document, but that problematic question does not arise here because the existing terms of the PPT constitution cannot possibly be construed in a way which incorporates the default option terms of the Shareholders’ Deed as amended.
Having construed r 94 to be a reference to the Shareholders’ Deed 2004 as amended from time to time, but without incorporating those provisions as constitutional term, it is not strictly necessary to consider whether, if the construction were otherwise, a term to that effect should be implied. However, it is convenient to record my view that no such term should be implied for the following reasons. First, if the proper construction of r 94 as an express term of the constitution is that it is limited to the Shareholders’ Deed 2004, it is in my view necessarily inconsistent with that express term to imply a term which refers to the Shareholders’ Deed as amended. Although the implication of such a term in the constitution may be reasonable and equitable as between the parties to the Shareholders’ Deed as amended, it is more difficult to so characterise the implied term for which ITC contends in its operation against the company and any future shareholders who are not parties to the Shareholders’ Deed as amended. Nor is such an implication necessary to give business efficacy to the constitution. It creates no substantial obstruction to the internal management of the company to require a reference to the Shareholders’ Deed as amended to be incorporated into the constitution by resolution. In particular, having regard to my conclusion that the amendment to the constitution can be made by circular resolution, a failure to imply such a term results in no more than a minor inconvenience. Equally, it would be inconsistent with my construction of r 94 to imply a term by which the provisions of the Shareholders’ Deed 2004 were actually incorporated into the constitution. Incorporation of the terms of the Shareholders’ Deed as amended into the constitution could also be easily affected. It follows that an implied term with ambulatory effect which incorporates the term of the Shareholders’ Deed as amended from time to time as terms of the constitution should not be implied.
The Shareholders’ Deed
PPT, together with its only shareholders ITC and Timbercorp, was party to the Shareholders’ Deed 2004 as amended.
An important issue between the parties is whether Timbercorp disposed of its shares within the meaning of the Shareholders’ Deed 2004 by giving BOSI a charge over its shares.
Disposal is defined in cl 1 of the Shareholders’ Deed 2004 as follows:
Dispose means any dealing with a Share, including but not limited to, a sale, transfer, assignment, trust, Encumbrance, option, swap, any alienation of all or any part of the rights attaching to a Share or interest in a Share, and includes any attempt to so deal or the taking of any steps for the purpose of so dealing;
The Shareholders’ Deed 2004 defines an encumbrance to include an interest created or otherwise arising in or over any interest in any asset under a Bill of Sale, mortgage, charge, lien, pledge, trust or power. That definition remains in the Shareholders’ Deed as amended.
Clause 3.4 of the Shareholders’ Deed 2004 provides that PPT must, before issuing any shares to any person other than an existing shareholder, ensure that that person enters into a Deed with the shareholder parties to the Shareholders’ Deed 2004 and agree to be bound by it as if named as a Party and Shareholder.
Clause 3.5 of the Shareholders’ Deed 2004, which was also not affected by the Supplemental Deed, provides:
3.5 Assignment or other dealing in Shares
(a)A Shareholder must not Dispose of any share to any third party and a purported disposal of any Share will not be effective, except in accordance with clause 7.2 or schedule 6.
(b)A Shareholder who disposes of Shares to anyone other than another shareholder must ensure that the transferee, before registration of the transfer of the Shares, enters into a deed with the other Parties agreeing to be bound by this deed as if named as a party and a shareholder, amended as reasonably required by the other Shareholders.
(c)The Company must refuse to register the transfer of any Shares if clause 7.2 or schedule 6 has not been complied with.
(d)The Parties intend to be bound by the terms and the intention of this clause 3.5. The intention is to offer the other shareholders an opportunity of taking the Shares, or economic benefits attached to them, before offering the Shares or economic benefits attached to them to any other person who is not a Party. The Parties must not enter into any arrangements or use any technique which will breach the intention of this clause 3.5.
Clause 7.2 of the Shareholders’ Deed 2004 provides that if a “Default Event” occurred in relation to a shareholder, the non-defaulting shareholder had an option to purchase the defaulting shareholder’s shares on certain terms and conditions as defined by the Deed. A Default Event includes a shareholder ceasing or threatening to cease to carry on business, the appointment of an administrator or receiver or the disposal of its shares in breach of the constitution or the Deed. The definition of a Default Event is not relevantly affected by the Supplemental Deed.
Clause 10 of the Shareholders’ Deed 2004 provides that its terms were to prevail over the constitution to the extent of any inconsistency and to the extent that it was necessary to include the terms of the Deed in PPT’s constitution that the shareholders would procure an amendment of the constitution in those terms. That clause continues in the Shareholders’ Deed as amended.
Schedule 6 of the Shareholders’ Deed 2004 (before it was amended) prescribed the procedure for the exercise by the shareholders of a right of pre-emption over the shares of the other which was a condition precedent to a lawful disposal of the shares pursuant to cl 3.5. Schedule 6 also allowed the disposal of shares to a wholly owned subsidiary of a shareholder with the prior written approval of the other shareholder.
The Supplemental Deed recorded the terms on which each joint venturer had contributed capital for the establishment of the terminal operated by PPT in Albany in Western Australia. The parties had agreed to each advance to PPT the sum of about $10 million. The loans were interest free, unsecured and repayable on six months’ notice. The Supplemental Deed provided that ITC and Timbercorp would be charged the running costs and depreciation expense for the plant and equipment of the Albany Terminal and that the charges would operate to reduce their respective loan accounts.
By the Supplemental Deed, ITC and Timbercorp agreed to proscribe dealings with and the disposal of the loans which the shareholders had made to PPT in a similar way to the way in which the Shareholders’ Deed 2004 had proscribed dealings with their relevant shares.
Clause 2.5 of the Supplemental Deed provides that, in the event that a shareholder demanded repayment of its loan, the other shareholder was entitled to call for the transfer of the demanding shareholder’s shares. The effect of cl 2.5 of the Supplemental Deed was described by ITC’s counsel as “stapling” the loans to the shares by reference to a term appearing in cl 3 of Sch 6 which I set out below. The purchase price payable on the exercise of the repayment option is the lesser of $1 per share and the independent valuation of the shares undertaken pursuant to Sch 5 of the Shareholders’ Deed.

The Supplemental Deed also amended the two methods of disposal of a shareholder’s equity authorised by cl 3.5 of the Shareholders’ Deed 2004: cl 7.2 and Sch 6. It is necessary to set out parts of those provisions:
Clause 7 of Shareholders’ Deed 2004 with Clause 7.2, as amended by the Supplemental Deed, provides as follows:
7.     TERM AND TERMINATION
7.1     Term
(a)     This Deed shall commence and be of force and effect as and from the date of execution by the Parties; and
(b)     This Deed shall continue in full force and effect until terminated by the written agreement of all Shareholders, or by the winding up of the Company, or pursuant to clause 7.2 or until one Shareholder holds all of the Shares.
(c)     Any Shareholder who ceases to hold any Shares is no longer bound by this Deed, except for clause 8, and no longer has any Power under this Deed, except in respect of clause 8.
7.2     Termination by Shareholder for default
Without limitation to any other rights a Shareholder may have under this Deed or otherwise, if at any time:
(a)     any Shareholder (‘Defaulting Shareholder’) or a director appointed by a Shareholder breaches any of its Material Obligations;
(b)     the non-defaulting Shareholder gives to the Defaulting Shareholder notice specifying the breach and requiring that the breach be remedied; and
(c)     the breach is not remedied within 20 Business Days after such notice is served on the Defaulting Shareholder,
or a Default Event occurs in relation to a Shareholder, then ~~and~~ the non-Defaulting Shareholder has an option to purchase the Defaulting Shareholder’s Shares at a purchase price determined in accordance with clause 2.5(b) of the Supplemental Deed dated on or about 13 September 2007 between the parties, which it may exercise by giving notice to the Defaulting Shareholder prior to the breach being remedied or the Default Event ceasing to subsist and within 10 Business Days after the date of service of the independent valuer’s determination under Schedule 5 that it wishes to purchase all of the Defaulting Shareholder’s Shares, in which case the Defaulting Shareholder must sell all of its Shares to the non-Defaulting Shareholder on the basis that:
(d)     completion of the sale and purchase of the relevant Shares (‘Completion’) shall occur at 11am at the registered office of the non-Defaulting Shareholder on the fifth Business Day after the giving of notice of the Defaulting Shareholder;
(e)     at Completion the Defaulting Shareholder shall deliver to the non-Defaulting Shareholder the following documents:
(i)all share certificates for the relevant Shares;
(ii)a completed transfer of the Shares to the non-Defaulting Shareholder, duly executed by the Defaulting Shareholder;
(iii)the written resignations of all directors and secretaries of the Company appointed by the Defaulting shareholder; and
(iv)any release required to transfer the Shares free of any Encumbrance;
(f)     at Completion, and subject to receipt of the documents referred to in paragraph (e) above, the non-Defaulting Shareholder shall pay to the Defaulting Shareholder the Share Purchase Price by way of bank cheque or electronic transfer of funds;
(g)     at Completion, and subject to receipt of the documents referred to in paragraph (e) above, the Company shall repay to the Defaulting Shareholder the Shareholders’ Loan by way of bank cheque or electronic transfer of funds in accordance with its obligations under clause 2.2(c) or clause 2.2(d) of the Supplemental Deed dated on or about 13 September 2007 between the parties (whichever is applicable); and
(h)     the Defaulting Shareholder shall pay all stamp duty payable in relation to the transfer of the relevant Shares and repayment of the Shareholder Loan.
7.3     Effect of termination
Termination of this Deed shall be without prejudice to the accused rights of any Party against any other Party in respect of any antecedent breach of this Deed by that other Party.
7.4     Default Events
It is a Default Event, whether or not it is within the control of any Shareholder, if:
(a)     ceasing business: any Shareholder ceases or threatens to cease to carry on business;
(b)     change in law: any Shareholder is prohibited from being a shareholder in the Company by a change in any law;
(c)     administrator: an administrator is appointed or a resolution is passed or any steps are taken to appoint, or to pass a resolution to appoint, an administrator to any Shareholder.
(d)     receiver: a receiver, receiver and manager, official manager, trustee, administrator, other controller (as defined in the Corporations Act) or similar officer is appointed over the assets or undertaking of any Shareholder;
(e)     arrangements: any Shareholder enters into or resolves to enter into any arrangement, composition or compromise with, or assignment for the benefit of, its creditors or any class of them; or
(f)     disposal of shares: any Shareholder Disposes of any of its Shares in breach of the Constitution or this Deed.
The revised Sch 6 of the Shareholders’ Deed as amended provides:
DISPOSAL OF SHARES
1.     NOTICE OF SALE
A Shareholder who wants to Dispose of any Shares (Offeror) must serve a notice of sale (‘Notice of Sale’) on each Shareholder specifying:
(a)     the number of Shares (which must be all the Shares held by the Shareholder) the Offeror wishes to sell (‘Sale Shares’) and the sale price per share in Australian dollars;
…
2.EXERCISE OF OPTION TO PURCHASE SALE SHARES
(a)     Each Shareholder may exercise its option to purchase the Sale Shares by giving notice to the Company and the Offeror that it wishes to buy the Sale Shares within 10 Business Days after the date of service of the Notice of Sale.
(b)     If a Shareholder exercises its option to purchase Sale Shares then:
(i)the Offeror must sell to that Shareholder all of the Sale Shares (and if more than one Shareholder accepts, then to each accepting Shareholder in proportion to their respective interests in the Company) and the Shareholder must purchase them on the terms set out in the Notice of Sale;
…
3.     SHAREHOLDER LOAN
(a)     Each party acknowledges that it is the intention of the parties that the shareholding of the relevant Shareholder be stapled to the outstanding balance of the Shareholder’s Shareholder Loan.
(b)     The Offeror must not offer any Shares for sale or transfer unless such offer is conditional upon:
(i)the purchaser lending to the Company the amount specified in clause 3(c) of this schedule on the terms specified in that clause; and
(ii)the purchaser (if it is not a Shareholder already) entering into a deed pursuant to which the purchaser agrees to be bound by this Deed and the Supplemental Deed entered into between ITC, Timbercorp and the Company on or about 13 September 2007 (Supplemental Deed).
(c)     Completion shall be conditional upon the purchaser of any Sale Shares lending to the Company in immediately available funds:
(i)if the purchaser is purchasing all of the Sale Shares, an amount equal to the balance of the Offeror’s Shareholder’s Loan as at Completion (Completion Balance); or
…
(d)     The amounts lent pursuant to this clause shall become part of the Shareholder’s Loan of the relevant purchaser for the purposes of the Supplemental Deed, and must be advanced pursuant to the terms set out in that deed.
(e)     At Completion, and subject to receipt of the documents referred to in clause 2(b)(iii), and lending of the amounts referred to in clause 3(c), the Company shall repay to the offeror:
(i)if all the Offeror’s Shares are being transferred, the Completion Balance, or
(ii)if a portion of the Offeror’s Shares are being transferred, an amount calculated in accordance with clause 3(c)(ii),
by way of bank cheque or electronic transfer of funds;
4.     SALE SHARES NOT PURCHASED BY SHAREHOLDERS
(a)     Subject to clauses 2 and 3, the Offeror may sell any Sale Shares offered in accordance with clause 1 of this schedule 6 not purchased by the other Shareholders to the buyer named in the Notice of Sale within 20 Business days after the date of service of the Notice of Sale.
(b)     The Offeror must not sell the Sale Shares:
(i)for a purchase price less than the price specified in the Notice of Sale; or
(ii)on terms more beneficial to the purchaser than those set out in the Notice of Sale.
…
6.ENCUMBRANCE OVER SHARES
No Shareholder may create an encumbrance over a share or a Shareholder’s Loan unless:
(a)The person to whom the Encumbrance is granted enters into an agreement with all other Shareholders not to Dispose of the Shares and Shareholders Loan unless that person complies with this Schedule 6 and
(b)All other Shareholders give prior written consent. (underlining added)
7.     DEFINITION
For the purposes of this Schedule 6, the term Shareholder’s Loan has the same meaning as set out in the Supplemental Deed dated 13 September 2007 between the parties.
Default Events
I shall deal first with the question whether giving the December 2006 Charge was a Default Event.
Clause 7.4 defines a Default Event, which allows a shareholder to exercise the default option, to include a disposition of any shares in breach of the constitution or the Shareholders’ Deed 2004. BOSI contends that the disposal therein referred to is a disposal by way of sale or other transfer of legal title in the shares and not an encumbrance.
The immediate obstacle in the way of the success of that contention is the wide definition of the word “dispose”, which expressly includes an encumbrance. In the ordinary course, that definition requires cl 7.4(f) to be read as including an encumbrance of the share. BOSI, however, responds that the extended definition of the word dispose cannot apply to every occasion on which the word “dispose” is used in the Shareholders’ Deed 2004 because if it were so applied manifestly absurd results would be produced. In particular, on its face an encumbrance is lawful for so long as the encumbrancee consents to be bound by the pre-emption rights, or alternatively if the encumbrance is given with the consent of the other shareholder. However, if the word dispose in cl 3.5 includes granting an encumbrance over the share, the encumbrancee must agree to be bound by the terms of the Shareholders’ Deed 2004 which on their face would be inapplicable to it as a mere encumbrancee. Moreover, as BOSI points out, a notice of sale would have to be given in accordance with the pre-emption provisions of Sch 6 even though no sale of the share was contemplated.
To my mind, BOSI’s submission does no more than illustrate how the definitions given in the Supplemental Deed can only apply to the extent that the context allows. Indeed, cl 1.1 of the Shareholders’ Deed 2004 commences “in this Deed, unless the context requires otherwise”. Plainly, for the purposes of cl 3.5(b) and the pre-emption provisions of Sch 6, disposal does not include encumbrance. However, it is not at all obvious to me why the word dispose in cl 7.4 should not extend to a disposal by way of an encumbrance. The very fact of an encumbrance creates a risk as to the beneficial operation of the joint venture agreement which the other shareholder may wish to protect and preserve. If one of the two shareholders were to encumber its shares without the consent of the other and without the encumbrancee agreeing with the other shareholders to comply with Sch 6, the other shareholder may choose to exercise the default option to preserve and protect its interest in the joint venture conducted through PPT. Moreover, the exercise of the default option will be all the more effective and uncomplicated by the creation of any adverse interest in a third party, if the other shareholder is entitled to exercise that option, not only after the encumbrance is given, but as soon as any attempt to give an encumbrance is made.
In my view, the expression in the alternative of the necessary conditions for a lawful encumbrance, namely consent or agreement to abide the pre-emption provisions in the Shareholders’ Deed 2004, does not assist BOSI’s contention. It is not the case that an encumbrancee may unilaterally satisfy cl 5 of Sch 6. On a proper construction, that clause requires the consent of the other shareholder, which can be given without requiring compliance with the pre-emption provisions, or an agreement between the other shareholders and the encumbrancee that the encumbrancee will comply with Sch 6. It is doubtful that a unilateral expression of an intention to comply with Sch 6 would in any way bind an encumbrancee, particularly if it remains uncommunicated. In my view, the reference in cl 5 of Sch 6 to an agreement to be bound means an agreement actually reached between the parties. It may well be that an offer by an encumbrancee to be bound cannot be unreasonably refused by the other shareholder. Clause 5 may in that sense import an element of mutuality such that, if the other shareholder unreasonably refuses to make a binding agreement with the encumbrancee the encumbrancee’s offer will satisfy the clause. However, that is quite a different proposition to the contention that the encumbrancee can unilaterally make the agreement in silence. In my view, the amendment made by the Supplemental Deed merely confirmed the proper construction of the clause.
I therefore find that Timbercorp committed an Event of Default by giving the 2006 Charge.
I found in my earlier judgment in the 2009 proceedings that the default option was validly exercised.[14] I also found that, by reason of the valid exercise of the default option, ITC held as against Timbercorp an equitable interest in the shares from the time of the appointment of KordaMentha as administrator.[15] I also found that by the very process of liquidation Timbercorp threatened “to cease to carry on business”.[16] Even though the administrators’ appointment ended with the appointment of KordaMentha as liquidators from 23 April 2009, there has always existed a Default Event, albeit not the same Default Event, empowering ITC to exercise its default option giving rise to an equitable interest in the shares.
[14] ITC Limited v Timbercorp Limited (in liquidation) (2009) 76 ACSR 467 at [87], [92], [99].
[15] ITC Limited v Timbercorp Limited (in liquidation) (2009) 76 ACSR 467 at [121].
[16] ITC Limited v Timbercorp Limited (in liquidation) (2009) 76 ACSR 467 at [68], [78].
In the 2009 proceedings I found that the Notice of Sale served by Timbercorp was ineffective.[17] On the evidence in these proceedings, I make the same findings.
[17] ITC Limited v Timbercorp Limited (in liquidation) (2009) 76 ACSR 467 at [122].
The incidents of the shares
Where the constitution of a company restricts a shareholder’s right to transfer or assign the shares, other members of the company are entitled by action to restrain the shares being transferred in contravention of the restrictive provisions of the constitution.[18]
[18] Grant v John Grant and Sons Pty Ltd (1950) 82 CLR 1 at 29 per Williams J.
A share is a chose in action.[19] By that chose, a shareholder can claim a “proportionate ‘interest’ in the assets of the company, an interest consisting of a congeries of rights in personam”.[20]
[19] Archibald Howie Pty Ltd v The Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 156 per Williams J.
[20] Archibald Howie Pty Ltd v The Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 154 per Dixon J.
In Inland Revenue Commissioners v Crossman,[21] Lord Russell of Killowen said of the nature of property in a share that:
It is the interest of a person in the Company, that interest being composed of rights and obligations which are defined by the Companies Act and by the memorandum and articles of association of the company.[22]
[21] [1937] AC 26.
[22] Inland Revenue Commissioners v Crossman [1937] AC 26 at 66.
Lord Russell went on to explain that the sale of a share is the sale of the interest so defined and the subject matter of the sale is effectively vested in the purchaser by the entry of his name in the register of members. Lord Russell noted that the sale may not be effectively vested in the purchaser if the directors were to refuse to enter it in accordance with a power given them by the Articles of Association. Lord Russell observed that the purchaser could then secure the benefit of the sale by the registered shareholder becoming a trustee for him of those rights with an indemnity in respect of the obligations. In such a case, the risk of a refusal to register might be reflected in the sale price. Lord Russell concluded “the share was property with that risk as one of its incidents”. Similarly, where the Articles provide that a shareholder must give other shareholders a right of pre-emption, a sale to an outsider must necessarily include, as an incident of the subject matter of the sale, the right to receive the fixed price if the right of pre-emption is exercised by the other shareholders.[23]
[23] Inland Revenue Commissioners v Crossman [1937] AC 26 at 66-7 per Lord Russell of Killowen.
I would adopt the following passage from Ford’s Principles of Corporations Law as a correct statement of principle:
A share as an item of property differs from physical subjects of ownership such as land in that its characteristics are fixed not by nature but by whatever is put into the contract between the company and shareholder. Rights and duties which would be external to natural forms of property can be an integral part of a share. For example, a restriction on use of land may be created by contract but under general law it may not be enforceable against later owners of the land except where it is enforceable under the law relating to restrictive covenants. In a company, however, the rights attached to shares may be so framed that the shareholder is restricted (for example as to transfer of the shares) and those restrictions will apply to anybody who becomes the owner of the share … In other words, in a share, the restrictions can, within limits set by the legislation, go to defining the property itself instead of being something external that is imposed in respect of a pre-existing item of property.[24]
[24] R P Austin & I M Ramsay, Ford’s Principles of Corporations Law (14^th ed, 2010) at [17.210].
Section 140 of the Act provides that a company’s constitution, if any, and any replaceable rules that apply to it, have effect as a contract between the company and each member, between the company and each director and company secretary and between a member and each other member.
A company’s internal management may be governed by the provisions of the Act that apply to the company as replaceable rules, by a constitution, or by a combination of both.
Section 134 of the Act provides:
Internal management of companies
A company's internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution or by a combination of both.
Note: There are additional rules about internal management in ordinary provisions of this Act and also in the common law.
A company adopts a constitution when each person who becomes a member of the company on registration agrees in writing to its terms. A company adopts a constitution after registration if it passes a special resolution adopting it or if a court orders that the company adopt a constitution pursuant to s 233 of the Act.[25] A company may modify or repeal its constitution by special resolution.[26] A special resolution must be passed by at least 75 per cent of the votes cast by the shareholders of the company entitled to vote on the resolution and who vote at the meeting in person or by proxy.[27]
[25] Corporations Act 2001 (Cth) s 136(1).
[26] Corporations Act 2001 (Cth) s 136(2).
[27] Corporations Act 2001 (Cth) s 9.
Internal management is not defined by the Act.[28] However, what is encompassed within the phrase “internal management” appears from the content of the replaceable rules which apply in the absence of the adoption of a contrary constitutional rule. The replaceable rules include rules affecting the transferability of shares.[29]
[28] Internal management is referred to in ss 134, 111J and 53 of the Corporations Act 2001 (Cth).
[29] Corporations Act 2001 (Cth) ss 1072A, 1072B, 1072D, 1072F, 1072G, 254D.

If an assignee of a chose in action proceeds to exercise the action before his or her ascension to the legal title of the chose, the assignor must be joined as a party. It is, I think, an ineluctable result of that procedural consequence of the assignee’s lack of legal title that all defences against the assignor must also be available against the assignee.
I turn next to consider the nature and timing of BOSI’s charges against the principles just stated. The December 2006 Charge was registered on 29 January 2007. Pursuant to s 130(2) of the Act, ITC is deemed to have had notice of the existence of the Charge from that time. The Charge became enforceable upon the happening of an insolvency event which occurred on 23 April 2009, but BOSI did not appoint agents pursuant to the Charge until 18 December 2009. However, it held a power of sale from April 2009.
A floating charge is an equitable charge which is subject to the right of the company to dispose of the assets in the ordinary course of business.[62]
[62] Wallace v Evershed [1899] 1 Ch 891 at 894 per Cozens-Hardy J; In re Spectrum Plus Ltd [2005] 2 AC 680 at 729-30 [139] per Lord Walker of Gestingthorpe.
In Relwood Pty Ltd v Manning Homes Pty Ltd (No 2),[63] McPherson SPJ stated that a chargee under a floating charge has:
rights at least as extensive as those of the assignee of future property described by Dixon CJ in Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 at 26-7; but, even if it is then properly described as an ‘equity’, the right before crystallisation is nevertheless not … an equity of such a kind as to prevail in a competition with a proprietary interest in a particular asset.[64]
[63] [1992] 2 Qd R 197.
[64] Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197 at 201.
The floating charge only crystallised after the Shareholders’ Deed 2004 had been amended by the Supplemental Deed to give ITC the default rights over the shares of Timbercorp, which it exercised on 30 September 2009. Moreover, at the time the Charge was taken, ITC had a right to call for a transfer of the shares, albeit at a purchase price fixed by an independent valuer.
BOSI was also entitled pursuant to the Mortgage Deed to sell the shares and had the right to transfer them from Timbercorp to itself. The Mortgage Deed was also registered on 28 September 2007. BOSI appointed agents pursuant to the Mortgage Deed on 18 December 2009.
An equitable mortgagee of shares has an implied power of sale on default. The exercise of such a power does not involve the vesting of the shares in the mortgagee prior to sale. A mortgagee must, in exercising the power of sale, comply with the procedures prescribed by the company’s constitution. An equitable mortgagee is also entitled to foreclosure which is effected by order of the Court. The effect is to extinguish the mortgagor’s equity of redemption and to vest the entire beneficial ownership in the mortgagee. Any subsequent sale by the mortgagee will be in his capacity as a beneficial owner. Foreclosure operates to vest only the equitable interest. The legal title to shares depends upon registration on the company’s share register. The entitlement of the mortgagee to registration and legal title is subject to restrictions on transferability in the constitution of the company.[65] In Adelaide Building Co Pty Ltd (in liquidation) v ABC Investments Pty Ltd,[66] King CJ held:
The mortgagee can receive no more a security than the mortgagor has to transfer. In the present case the property transferred by way of security whether shares, subject to the restrictions on transferability which are an incident of those shares. Those restrictions on transferability are as binding on the mortgagee as they are on the mortgagor.[67]
[65] Adelaide Building Co Pty Ltd (in liquidation) v ABC Investments Pty Ltd (1990) 8 ACLC 445 at 448-9.
[66] (1990) 8 ACLC 445.
[67] Adelaide Building Co Pty Ltd (in liquidation) v ABC Investments Pty Ltd (1990) 8 ACLC 445 at 449.
BOSI was, on the occurrence of the Mortgage Deed, an equitable assignee of the shares. It took that assignment after the amendment to the Shareholders’ Deed 2004 which allowed ITC to exercise the default option at a price as low as $1 per share and at a time when the shares were vulnerable to the exercise of the default option. As an equitable assignee, BOSI took its interest subject to those rights. It is one of the infirmities of the title of the assignor of an equitable interest that his right to it may be disputed and defeated by litigation in a competent court between competent parties.[68]
[68] Redman v The Permanent Trustee Company of New South Wales Limited (1916) 22 CLR 84 at 91 per Griffith CJ and Barton J.
In contending that its interest is not affected by the default option BOSI places particular emphasis on its statutory power of sale. BOSI contends that the power of sale of an equitable charge extends to the sale of the legal interest in the charged property. Next, BOSI contends that that power of sale may be exercised free of any other restrictions on the property. The first proposition can be accepted. The second cannot be accepted without qualification. It is also necessary to distinguish between restrictions which result from charges subsequently given by the legal owner to third parties and restrictions which are inherent in the very nature of the property itself.
Property is defined by s 18 of the Property Law Act 1958 (Vic) to include any thing in action and any interest in real or personal property. Section 101 of the Property Law Act 1958 (Vic) provides:
101    Powers incident to estate or interest of mortgagee
(1)A mortgagee, where the mortgage is made by deed, shall, by virtue of this Part, have the following powers, to the like extent as if they had been in terms conferred by the mortgage deed, but not further, namely—
(a)     a power, when the mortgage money has become due, to sell, or to concur with any other person in selling, the mortgaged property, or any part thereof, either subject to prior charges or not, and either together or in lots, by public auction or by private contract, and for a sum payable either in one amount or by instalments, subject to such conditions respecting title, or evidence of title, or other matter, as he, the mortgagee, thinks fit, with power to vary any contract for sale, and to buy in at an auction, or to rescind any contract for sale, and to re-sell, without being answerable for any loss occasioned thereby, with power to make such roads, streets and passages and grant such easements of right of way or drainage over the same as the circumstances may require and he thinks fit; and
(b)     a power, at any time after the date of the mortgage deed, to insure and keep insured against loss or damage by fire any building, or any effects or property of an insurable nature, whether affixed to the freehold or not, being or forming part of the property which or an estate or interest wherein is mortgaged, and the premiums paid for any such insurance shall be a charge on the mortgaged property or estate or interest, in addition to the mortgage money, and with the same priority, and with interest at the same rate, as the mortgage money; and
(c)     where the mortgage deed is executed after the thirty-first day of December One thousand nine hundred and twelve, a power, when the mortgage money has become due, to appoint a receiver of the income of the mortgaged property, or any part thereof; or, if the mortgaged property consists of an interest in income, or of a rent charge or an annual or other periodical sum, a receiver of that property or any part thereof.
(2)Where the mortgage deed is executed after the thirty-first day of December One thousand nine hundred and twelve, the power of sale aforesaid shall include the following powers as incident thereto, namely—
(a)     a power to impose or reserve or make binding, as far as the law permits, by covenant, condition or otherwise, on the unsold part of the mortgaged property or any part thereof, or on the purchaser and any property sold, any restriction or reservation with respect to building on or other user of land, or with respect to mines and minerals, or for the purpose of the more beneficial working thereof, or with respect to any other thing;
(b)     a power to sell the mortgaged property, or any part thereof, or all or any mines and minerals apart from the surface—
(i)with or without a grant or reservation of rights of way, rights of water, easements, rights and privileges for or connected with building or other purposes in relation to the property remaining in mortgage or any part thereof or to any property sold; and
(ii)with or without an exception or reservation of all or any of the mines and minerals in or under the mortgaged property, and with or without a grant or reservation of powers of working, way leaves, or rights of way, rights of water and drainage and other powers, easements, rights and privileges for or connected with mining purposes in relation to the property remaining unsold or any part thereof, or to any property sold; and
(iii)with or without covenants by the purchaser to expend money on the land sold.
(3)The provisions of this Part relating to the foregoing powers, comprised either in this section, or in any other section regulating the exercise of those powers, may be varied or extended by the mortgage deed, and, as so varied or extended, shall, as far as may be, operate in the like manner and with all the like incidents, effects and consequences as if such variations or extensions were contained in this Part.
(4)This section shall apply only if and as far as a contrary intention is not expressed in the mortgage deed, and shall have effect subject to the terms of the mortgage deed and to the provisions therein contained.
(5)Save as otherwise provided, this section shall apply where the mortgage deed is executed after the thirty-first day of January One thousand nine hundred and five.
I accept that the power given by s 101 of the Property of Law Act 1958 (Vic) extends to the equitable mortgagee of shares.[69] However, the terms of s 101 of the Property of Law Act 1958 (Vic) do not speak to the identification of the property which is mortgaged. It may be in the very nature of a chose in action that it cannot be sold or at least can only be sold in restricted circumstances.
[69] Adelaide Building Co Pty Ltd (in liquidation) v ABC Investments Pty Ltd (1990) 8 ACLC 445.
BOSI relies on the decision of the Court of Appeal in In re White Rose Cottage.[70] In that case, there was an equitable charge granted over real property. The proprietor of the land had executed a memorandum of deposit of the land under seal with a bank to secure advances. The proprietor had also undertaken to execute a legal charge on the bank’s request and to hold the property as trustee for that purpose. The bank was given an irrevocable Power of Attorney to vest the legal estate in its name. Later, contractors, who had become the judgment creditors of the company, obtained charging orders and lodged cautions protecting those charging orders in the land registry. The bank subsequently transferred the land to a purchaser for value.
[70] [1965] Ch 940.
Lord Denning MR commented on the extent of the power of sale of an equitable mortgagee in these terms:
The subject of the mortgage here was the property itself, both the legal and equitable estate in it: and I see no reason why an equitable mortgagee, exercising his power of sale, should not be able to convey the legal estate.[71]
[71] In re White Rose Cottage [1965] Ch 940 at 951C-D.
However, Lord Denning MR found that the conveyance in the case before him was not effected by the exercise of the power of sale as mortgagee, but was in fact a transfer by the registered proprietor who had charged the property. In those circumstances, it was his title which remained subject to the contractors charges which was conveyed. The priority that the bank enjoyed over those charges was peculiar to it.
Harmon LJ said:
I think that an equitable mortgagee under a Deed in terms of the memorandum of March 31, 1962, can by virtue of the Power of Attorney contained in it convey to a purchaser the legal estate in the mortgaged property without first going through the form of calling for the execution by the mortgagor of a legal mortgage.[72]
[72] In re White Rose Cottage [1965] Ch 940 at 955G-956B.
The decision in White Rose Cottage does not contradict the principles and authorities referred to in [131] to [148] above because of the well recognised distinction between the real property and a chose in action. I reject BOSI’s contention that its statutory and other powers of sale are not affected by ITC’s equitable interest which it held pursuant to the Shareholders’ Deed as amended.
Execution of the Mortgage Deed – agency and estoppel
The Mortgage Deed gave BOSI an equitable mortgage over the shares and Timbercorp’s contractual rights in PPT. The mortgaged contractual rights included the right to demand and receive payment of Timbercorp’s chose in action under the Shareholders’ Deed as amended and the right to compel its performance. The mortgaged rights are defined to mean Timbercorp’s present and future interest in, to, under or derived from the Shareholders’ Deed as amended and the right to any proceeds of any chose in action under it. The mortgaged securities as defined by the Mortgage Deed are the shares.
By cl 2.1 of the Mortgage Deed, Timbercorp mortgaged the shares and its contractual rights. By cl 2.7, Timbercorp is entitled, and licensed by BOSI as its agent, to deal with the mortgaged rights and the contractual rights until an Event of Default. That term had the same meaning as Event of Default in the syndicated loan agreement. It is accepted that the appointment of KordaMentha as administrators was an Event of Default.
Clause 2.8 provided that until an Event of Default the mortgagor can exercise all rights in connection with the mortgaged securities.
Clause 2.9 continues;
If an Event of Default occurs;
(a)     the mortgagor’s rights under clause 2.8 immediately cease;
(b)the mortgagee may exercise or refrain from exercising any rights in connection with the mortgage securities; and
(c)…
(d)the mortgagee may at any time by notice to the Mortgagor, terminate with immediate effect the licence granted to the Mortgagor by cl 2.7 and the Mortgagee shall thereupon have the sole and exclusive right to:
(i)    hold, deal and exercise the Mortgaged Rights without any interruption or disturbance from the Mortgagor or any other person lawfully claiming through, under or in trust for the Mortgagor; and
(ii)     receive the Receivables and to apply the Receivables in accordance with cl 13.
Clause 2.11 provided that, if an Event of Default occurs, the mortgagor must, if required by the mortgagee, do everything necessary to ensure that the mortgage securities are registered in the name of the mortgagee or its nominees.
Clause 8.1 provided that all of the advances made by the syndicate banks became immediately payable on the occurrence of an Event of Default or if:
(c)     a Mortgaged Agreement is terminated or otherwise comes to an end other than:
(i)    in the circumstances contemplated by clause 7.2 of the Shareholders’ Deed (as amended by the Supplemental Deed) or clause 2.5 of the Supplemental Deed, in each case whether purchase price contemplated by the relevant clause is paid or received (as the case may be) by the Mortgagor; or
(ii)     in any other circumstances acceptable to the Mortgagee (acting on the instructions of the Majority Beneficiaries acting reasonably).
I make these observations about those terms. Clause 2.7 constitutes Timbercorp as BOSI’s agents with respect, relevantly to these proceedings to the rights it held under the Shareholders’ Deed as amended. The agency with respect to those rights continues until a Notice is given pursuant to s 2.9(d). No such Notice was given. However, the right to deal with the shares themselves came to an end immediately on the occurrence of an Event of Default.
ITC argues that cl 8.1(c) necessarily contemplates, and therefore is an acceptance by BOSI, that its rights as mortgagee are subject to the exercise of the default option in cl 7.2. However, that is not a necessary implication of the existence of that term. More probably, the term recognises that Timbercorp, in the ordinary course of its business, might engage in conduct which would entitle it to repayment of its loan to PPT, but would also have subjected its shares to the exercise of a right of purchase by ITC. The purpose of the clause is to provide that, in the event that the money recovered from PPT was paid to BOSI, there would be no occasion for BOSI to exercise its rights under the mortgage.
ITC relies on the appointment of Timbercorp as BOSI’s agent to attribute to BOSI the conduct of Timbercorp in the conduct of the 2009 proceedings. I reject that contention. In my view the agency in cl 2.7 is impliedly limited to dealings with the rights under the Shareholders’ Deed as amended in the ordinary course of business. It ensures that the proceeds of any such dealings are held by Timbercorp as BOSI’s agent. The agency does not extend to taking steps to preserve those rights in litigation. Timbercorp was independently obliged to act in that way pursuant to the other terms of the Mortgage Deed. There is no evidence that BOSI acted in a way from which KordaMentha could reasonably have inferred that it had been appointed an agent.[73] I am also satisfied that KordaMentha was not BOSI’s agent for the purpose of the sale of the forestry assets of Timbercorp. KordaMentha negotiated the sale independently of BOSI. The sale agreement it negotiated was subject to BOSI’s consent. I am satisfied on the evidence that BOSI and KordaMentha communicated about the 2009 proceedings on the basis that the latter was acting independently to protect the legal assets of Timbercorp.
[73] Bowstead and Reynolds on Agency (18th ed, 2006) at [2-032].
On 22 October 2007 BOSI and ITC subscribed to the Deed of Acknowledgment. The Deed recited that various financiers provided financial accommodation to Timbercorp in return for which Timbercorp had agreed to provide BOSI with security over the shares. The recital to the Deed of Acknowledgement also recorded that BOSI had agreed to be bound by Sch 6 of the Shareholders’ Deed 2004.
BOSI then acknowledged that it had been provided with the Shareholders’ Deed 2004 and Supplemental Deed and that it covenanted to be bound by Sch 6 which prescribed the manner in which shareholders of PPT could dispose of their shares. By cl 2 of the Deed of Acknowledgment, ITC gave its prior consent to the giving of security over the shares and agreed “that, in the event the Security Trustee exercises its Security and complies with clause 1 of this deed, the Security Trustee will have the rights of a ‘Shareholder’ and ‘Offeror’ under Schedule 6 of the Shareholders [sic] Deed”.
In my view, both parties have attempted to give the Deed of Acknowledgement greater legal effect than its terms can carry. For its part, ITC contends that the Deed of Acknowledgment serves as a foundation for a conventional estoppel based on the assumption shared by ITC and BOSI that, as a result of the amendment of the Shareholders’ Deed 2004, the exercise of the default option was not affected by Timbercorp’s entry into the Mortgage Deed.
ITC contends that it proceeded on the basis that its legal rights were unaffected by the Mortgage Deed. I need not stay to characterise the assumption as one of law or fact because conventional estoppel can operate on a common understanding of either kind. [74] I accept that that was the relevant assumption of Mr Russo and Mr Erasmus of ITC. Not only did they impress me as generally credible and reliable witnesses, it is inherently improbable that they would have consented to the Mortgage Deed if they did not have that belief.
[74] Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 415 per Brennan J; W & R Pty Ltd v Birdseye (2008) 102 SASR 477 at 487-9 per Doyle CJ.

There was some discussion between BOSI’s solicitors and Timbercorp’s solicitors concerning the interaction between the rights of pre-emption in the constitution and in the Shareholders’ Deed as amended and which would prevail. However, there is no evidence that anyone from BOSI formed a positive belief that the mortgage was subject to the default option.
In the absence of direct evidence that BOSI shared its assumption, ITC relies on the Deed of Acknowledgement as the means by which the mutual assumptions were communicated between the parties. I do not accept that the mere fact that ITC consented to the Mortgage Deed is a communication to BOSI that it was proceeding on the basis that the mortgage was subject to the default option. Even if someone from BOSI turned his or her mind to the question of ITC’s belief about its rights against BOSI, they would not have reasonably perceived, from the mere fact that ITC had consented to the Mortgage Deed, that it was proceeding on the basis that the default options, if they were ever exercised, would be effective against BOSI. Equally, ITC could not have understood from the events concluding with the execution of the Deed of Acknowledgment that BOSI was proceeding on that basis.
When BOSI sent the equitable mortgage to ITC it included with it a document entitled Notice of Assignment. ITC never subscribed to the Notice and did not return it to BOSI. However, the Notice in part read:
Please acknowledge receipt of this Notice and confirm: …
(f)that you will not exercise any right to terminate the Deed upon the occurrence of any breach or default by the Mortgagor without first having given the Mortgagee not less than 30 days notice of the occurrence of such breach or default and given the Mortgagee the opportunity to remedy such breach or default or to agree to pay a reasonable compensation in lieu.
ITC did not subscribe to the document because they were advised that they were under no legal obligation to do so. Plainly on its terms paragraph (f) would have placed an obstacle in the way of the exercise of the default option by ITC. However, paragraph (f) does not disclose that BOSI was proceeding on the assumption that it would be bound by an exercise of the default option. Indeed, it seeks to avoid that question ever arising. It is a provision which would allow it to remedy any default without having recourse to its rights under the mortgage. It is a provision which might equally be sought by a mortgagee which has not turned its mind to the question of whether it would be bound, as it would by a mortgagee which had considered the question and decided that it would not be bound.
In any event, I am not satisfied that ITC organised its affairs by reference to that assumption. It certainly has not ordered its affairs on the basis of a mutual assumption shared with BOSI.
Equally, BOSI makes too much of ITC’s consent. By its consent, ITC did not excuse any earlier conduct of Timbercorp which constituted a Default Event. Nor did it undertake not to exercise its default option in the future with respect to such an event in a way which would prejudice BOSI’s interest. Nor did it agree that BOSI could exercise rights against it and PPT which Timbercorp could not.
I reject the respective contentions of ITC and BOSI that the circumstances surrounding the execution of the Mortgage Deed and the Deed of Acknowledgement support an estoppel which precludes the other from relying on the rights and obligations sourced in the PPT constitution, the Shareholders’ Deed 2004, the December 2006 Charge or the Mortgage Deed.
Anshun estoppel
ITC contends that BOSI is estopped from denying that it is bound by ITC’s exercise of the default option by reason of the way in which the 2009 proceedings were conducted by Timbercorp. In those proceedings, ITC sought declarations that it had validly exercised its default option and sought orders giving effect to it. The 2009 proceedings were brought against Timbercorp and the liquidators. Timbercorp did not plead in those proceedings that it was impossible to perform and execute the share transfers which were necessary to effectuate the default option. Rather, it disputed the validity of the notice to exercise the default option and asserted the validity of its notice of sale in accordance with the pre-emption provision.
I declined to make orders of specific performance against Timbercorp because, after the 2009 proceedings were heard and determined, Timbercorp asserted that it could not execute the share transfers because of BOSI’s interest. I declined to make the orders sought because BOSI was entitled to be heard on a question which would potentially affect the equitable interest it claimed.
ITC now contends that BOSI is bound by the failure of Timbercorp to plead the defence of impossibility.
In Port of Melbourne Authority v Anshun Pty Ltd,[75] Gibbs CJ, Mason and Aickin JJ limited the operation of the estoppel which arises from the way in which litigation is conducted by saying:
In this situation we would prefer to say that there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it.[76]
[75] (1981) 147 CLR 589.
[76] Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 602.
The application of the principle requires “an evaluative judgment”.[77]
[77] Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 at [64]-[65] per French J; Habib v Radio 2UE Sydney Pty Ltd [2009] NSWCA 231 at [82] per McColl JA.
The Ashun estoppel can only be deployed against BOSI if it is Timbercop’s privy. The concept of privity, for the purposes of res judicata and issue estoppel, was considered by the High Court in Ramsay v Pigram.[78] In that case, the issue was whether a police officer who had been involved in an accident was a privy of the Crown. The discussion in Ramsay shows that the concept of privity, for these purposes, was developed in cases that considered proceedings by or against joint tortfeasors or joint debtors.[79]
[78] (1967) 118 CLR 271.
[79] Ramsay v Pigram (1967) 118 CLR 271 at 285-7 per Taylor J, at 289-90 per Windeyer J.
In one sense, it is true that BOSI claims a right to exercise a power of sale over property, the shares, which are in essence the bundle of the rights of Timbercorp against PPT and its co-shareholder ITC. In that sense, BOSI’s rights are, if not completely dependent on, are largely dependent on, the interest held by Timbercorp. However, BOSI does not seek in these proceedings to re-litigate the determination of the rights and obligations of Timbercorp as against ITC and PPT. Its claim is that its rights as chargee and mortgagee of the shares are simply unaffected by that determination. The question is whether it should have intervened in the 2009 proceedings. Simply instructing Timbercorp to raise the defence of impossibility would not have, by direct operation of the judgment itself, bound BOSI. The principles of Anshun estoppel do not readily fit the contention that the distinct and different rights of a third person, who was not a constituent party to the earlier litigation, have been finally adjudicated in those proceedings.
For the purposes of the application of the principle in Anshun, the question is whether it was unreasonable for BOSI not to have, in effect, made an application to be joined as a defendant in the 2009 proceeding or to direct Timbercorp to raise impossibility as a defence. Even if I were to accept that Timbercorp was and remained BOSI’s agent when it defended the 2009 proceeding, it would not follow that BOSI is bound by the result of those proceedings. The question is whether in equity BOSI should be denied the opportunity to assert its rights as mortgagee given the failure of Timbercorp and BOSI to raise the issue in the substantive proceedings.
In Australian Associated Motor Insurers Ltd v NRMA Insurance Ltd,[80] AAMI sought declarations in the Federal Court that NRMA did not have any right of subrogation with respect to certain benefits it had provided to its insured which were collateral to the indemnity provided by the insurance policy itself. However, when many claims were brought by NRMA in the name of its insured against the insured of AAMI, AAMI failed to raise as an issue the right of NRMA to claim the costs of providing the collateral benefits. Conti J held:
[96]I do not think that AAMI can avoid or circumvent the consequences of the non-existence of defences having been raised by the AAMI Insured in the Local Court as to the absence of the right of subrogation of NRMA, to the extent that judgments have been entered in the Local Court in favour of the NRMA Insured against the AAMI Insured. The submissions of AAMI which I have just recorded do not come to grips with the implications of that critical circumstance. Those consequences constitute the imputation of Anshun estoppel in favour of NRMA arising out of the privity of NRMA's relationship with the NRMA Insured, in conformity with the authorities to which I have earlier referred. The absence of rights of subrogation was an important issue open to be raised by the AAMI Insured in the now concluded Local Court proceedings, and the opportunity was available to AAMI to cause that defence to be raised by the AAMI Insured in those proceedings. My identification of the issues raised by the amended statement of claim demonstrates in my opinion that an essential element in each of the causes of action, the subject of the amended statement of claim was that of absence of rights of subrogation held by NRMA. Whether the retainer agreements which have been obtained by NRMA from the NRMA Insured since Anthanasopoulos will answer any future challenges in the Local Court advanced on behalf of the AAMI Insured, particularly in the light of cll 4 and 5 thereof, will be matters to be resolved by the Local Court at the hearing of each proceeding yet to be resolved in the Local Court.
[97]It follows that the analysis of the amended statement of claim, and the causes of action the subject thereof, which I have earlier examined in the foregoing segment as to issue estoppel and res judicata, though not attracting the application of those doctrines, directly applies in the context of the doctrine of Anshun estoppel, so as to estop AAMI from pursuing each and every one of those causes of action in the Federal Court to the extent that the same would purportedly apply or relate to the subject matter of proceedings already finalised by entry of judgment in the Local Court. I cannot accept that any of the matters advanced by AAMI, as summarised in [94]-[95] above, gainsay the effective application of Anshun estoppel to that limited extent. The same result may be alternatively or additionally founded upon the related doctrine of abuse of process, to which reference appears in the passage earlier cited from Haines; see also in that regard Rippon at 204.[81]
[80] (2002) 124 FCR 518.
[81] Australian Associated Motor Insurers Ltd v NRMA Insurance Ltd (2002) 124 FCR 518 at 569 [96]-[97] per Conti J.
NRMA is distinguishable from this case because the identical issue which AAMI sought to litigate in the Federal Court fell within the scope of the matter raised by the initiating process in the earlier claims. Moreover, AAMI was effectively a party in those proceedings because they were defended by it pursuant to its rights of subrogation. My finding that Timbercorp and KordaMentha were not BOSI’s agents for the purpose of the 2009 proceedings does not allow the application of the decision in NRMA to the facts of this case. A determination of BOSI’s rights did not arise on ITC’s pleadings in the 2009 proceedings.
In my view, ITC’s contentions relying on Ashun estoppel must fail for the following reasons. First for the reason given in [165] Timbercorp and the liquidators were not acting as BOSI’s agents in that litigation. Secondly, the senior solicitor, Mr L, responsible for the conduct of the proceedings for ITC was aware of the existence of the Mortgage Deed. He had turned his mind to the possibility that the determination of those proceedings would not finally determine any controversy between ITC and BOSI. It appears from notes of a conversation between Timbercorp’s solicitor, Mr C, and a solicitor acting for the liquidator on 14 October 2009 that he was content not to address that issue until after the proceedings against Timbercorp and the liquidator were determined. The solicitor appears to have had confidence that for commercial reasons a favourable compromise could be reached with BOSI. I set out a note of that conversation made on 14 October 2009:
Mr C:Only way could get unencumbered shares is consent of BOSI.
Mr L:Degree of overlap between financiers – not anticipating a problem with BOSI (not in a binding sense).
Mr C:- Haven’t spoken to BOSI so don’t know.
- Hope to come back before lunch.
- Hope to give client’s position on each or orders sought.
- Simply won’t be in a position to respond on final relief.
The evaluative judgment which must be made, must be made in the light of the fact that ITC made a deliberate decision not to implead BOSI in the 2009 proceeding. BOSI should not in those circumstances be estopped from raising its defence now.
Relief
The relief sought by ITC can be summarised as follows.
ITC sought declarations against BOSI that:
·    ITC had validly exercised its default option on 30 September 2009.
·    the interest of BOSI under the fixed and floating charge on the Mortgage Deed was limited to a right to enforce those charges against the proceeds payable as a result of the exercise of the default option.
·    ITC’s interest in the shares took priority over the fixed and floating charge on the Mortgage Deed.
·    ITC also sought an order directing BOSI to provide a full discharge of its charges over the shares to enable a transfer of the shares from Timbercorp to ITC.
·    BOSI’s rights in the shares are subject to the restrictions on their transferability pursuant to cl 3.5, Sch 6 and cl 7.2 of the Shareholders’ Deed as amended.
·    BOSI’s agents were not empowered to effect a sale or disposition of the legal interest in the shares without observing restrictions on their transferability including ITC’s exercise of its default option.
ITC also sought against Timbercorp a declaration that it was obliged to procure an amendment of the constitution of PPT to give effect on the restrictions to dispose of shares in the Shareholders’ Deed as amended and a mandatory injunction compelling Timbercorp to vote its shares in support of that amendment. This part of the prayer for relief must be refused for the reasons given in [62] to [64].
ITC sought as against PPT a declaration that PPT is not obliged or permitted to register BOSI as a shareholder until BOSI enters into a Deed with ITC and PPT agreeing to be bound by the Shareholders’ Deed as amended as if named as a party and that PPT is not obliged or permitted to register any transfer of shares affected by BOSI unless BOSI has complied with cl 7.2 of the Shareholders’ Deed as amended.
In light of my finding that BOSI has no greater interest than Timbercorp in the shares, it is appropriate that I declare that it is bound by ITC’s exercise of its default option under the Shareholders’ Deed as amended. I shall also declare that ITC is entitled to the equitable interest in the shares. I shall order that Timbercorp transfer the shares to ITC and that PPT register that transfer. I shall declare that, on the transfer of the shares, BOSI has no further interest in or right over the shares. I shall hear the parties as to the precise form of orders.