GTW Investments (Aust) Pty Ltd v Pacreef Investments Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2022 0028

GTW INVESTMENTS (AUST) PTY LTD (ACN 161 035 909) (AS TRUSTEE OF THE GTW INVESTMENTS TRUST)	Applicant
v
PACREEF INVESTMENTS PTY LTD (ACN 602 608 891)	First Respondent
AND
PACIFIC BIOTECHNOLOGIES LTD (ACN 117 957 383) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)	Second Respondent

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JUDGES:	FERGUSON CJ, NIALL and MACAULAY JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	20 March 2023
DATE OF JUDGMENT:	7 December 2023
MEDIUM NEUTRAL CITATION:	[2023] VSCA 291
JUDGMENT APPEALED FROM:	[2022] VSC 56 (M Osborne J)

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CONTRACT – Construction of conditions precedent to obligation arising under ‘Guarantee Arrangement’ – Relevance of recitals to aid construction as part of the context – Capital raising required to be undertaken before liability arises – More than contemplation of or preparation for capital raising required – Condition not fulfilled – Appeal allowed.

CORPORATIONS – Redeemable preference shares – Redeemability separate consideration to preference – Priority of payment of capital over ordinary shareholders satisfies requirement for preference – Shares which are not redeemable preference shares within the meaning of the Corporations Act cannot be redeemed.

INSOLVENCY – Construction of defined term ‘Insolvency Event’ – Definition included as separate items the company’s inability to pay debts ‘as and when they fall due’ and ‘the entity is declared or taken under applicable law to be insolvent’ – Whether ‘debts as and when they fall due’ a different test to that in s 95A of Corporations Act – Reasonable business people would construe definition as involving cash flow test akin to test under the Corporations Act.

Corporations Act 2001 (Cth) ss 95A, 254A, 254J, 254K, 254L.

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 applied; Victoria v Tatts Group Ltd (2016) 90 ALJR 392 applied; Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd (2017) 54 VR 625, 667 considered; OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1 considered; Ex Parte Dawes; In Re Moon (1886) 17 QBD 275 considered; Re Capel Finance Ltd (2005) 52 ACSR 601 considered; Beck v Weinstock (2013) 251 CLR 425 applied; Comptroller of Stamps (Vic) v Ashwick (Vic) No. 4 Pty Ltd (1987) 163 CLR 640 considered; Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 considered.

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Counsel
Applicant:	Mr P D Crutchfield KC with Dr C O Parkinson KC and Mr B C Ryde
First Respondent:	Mr T J North KC with Mr C Salpigtidis
Second Respondent	No appearance
Solicitors
Applicant:	Gilbert + Tobin
First Respondent:	Fitzpatrick Legal
Second Respondent	No appearance

TABLE OF CONTENTS

FERGUSON CJ:

Introduction

The Agreements

(1).... The Share Sale Agreement, the issue of the A Class Shares and Vendor Finance
(2).... The Guarantee Arrangement

Grounds of Appeal

(1).... Ground 1: Was it necessary for Pac Bio to undertake a capital raising?
(2).... Ground 2: Did a capital raising take place?
(3).... Notice of Contention 1: Did clause 9.5 of the Implementation Deed satisfy clause 2.1(b) of the Guarantee Arrangement?
(4).... Ground 3: Were the A Class Shares preference shares?
(5).... Ground 4: Was GTW liable if the A Class Shares were not preference shares?
(6).... Ground 6: Was there an Insolvency Event at the relevant date?
(7).... Ground 5: Did the existence of an Insolvency Date have to be determined as at 4 February 2019?

Conclusion

NIALL JA:

MACAULAY JA:

FERGUSON CJ:

Introduction

Pacreef Investments Pty Ltd was the holding company of a subsidiary in the Pacific Reef Fisheries Group which owned a prawn farm and aquaculture facility in Ayr in Northern Queensland. In August 2017, Pacreef sold its shares in the subsidiary to Pacific Biotechnologies Ltd (‘Pac Bio’).
As part of the sale, Pacreef received 15 million fully paid A Class Shares in Pac Bio. This part of the transaction was documented in an agreement between Pacreef and Pac Bio titled ‘Subscription Agreement’. That agreement provides that the A Class Shares are redeemable by Pac Bio on notice from Pacreef at a price of $1 per share. At the same time, another agreement titled ‘Guarantee Arrangement’ was entered into between Pacreef, Pac Bio, and GTW Investments (Aust) Pty Ltd. GTW is a shareholder in Pac Bio holding 13 million ordinary shares out of more than 180 million shares on issue. The Guarantee Arrangement requires GTW to subscribe for capital in Pac Bio to fund the redemption of the A Class Shares if specified conditions are met.
On 7 January 2019, Pacreef served a redemption notice on Pac Bio. Pac Bio did not redeem the A Class shares. In those circumstances, Pacreef sued GTW to enforce the Guarantee arrangement.[1]
[1]A claim was also made against Pac Bio to enforce the redemption notice. Pac Bio was placed into voluntary administration and a deed of company arrangement has been entered into. Consequently, the claim against Pac Bio has been stayed: ss 440D, 444E Corporations Act 2001 (Cth).
GTW contended that it was not liable under the Guarantee Arrangement because:
(1)the A Class Shares are not preference shares and so cannot be lawfully redeemed by Pac Bio;
(2)the conditions precedent to GTW’s liability under the Guarantee Arrangement had not been satisfied because:
(a)Pac Bio was required to conduct a capital raising for the purposes of satisfying the redemption notice and did not do so; and
(b)an Insolvency Event (as defined in the Guarantee Arrangement) subsisted as at the relevant date.
There was a dispute as to whether the relevant date for determining the existence of an Insolvency Event was 4 February 2019 or 7 April 2019.[2]
[2]GTW also argued that (a) Pacreef was estopped from relying on the redemption notice; (b) the fact that Pac Bio was subject to a deed of company arrangement and that proceedings against it were consequently stayed disentitled Pacreef from the relief that it sought against GTW; and (c) it was a condition precedent to GTW’s liability that the Board of Pac Bio was required to pass a resolution that no Insolvency Event subsisted at the relevant date. There is no proposed ground of appeal in respect of the judge’s determination of these issues.
The trial judge gave judgment in favour of Pacreef and against GTW in the sum of $15 million.[3] The judge held that:
(a)the A Class Shares are preference shares and even if they were not, they were still redeemable or did not need to be redeemable to enliven GTW’s liability under the Guarantee Arrangement;[4]
(b)the first condition precedent was satisfied because it was not necessary for Pac Bio to conduct a capital raising; it was sufficient that no capital was raised and, in any event, Pac Bio had made a concerted effort to implement a capital fundraising strategy and that was sufficient;[5]
(c)the second condition precedent was satisfied because there was no Insolvency Event as at 4 February which was the relevant date; in any event, no Insolvency Event subsisted as at 7 April 2019.[6]
[3]Pacreef Investments Pty Ltd v Pacific Biotechnologies Ltd [2022] VSC 56 (‘Reasons’).
[4]Reasons, [245].
[5]Reasons, [291], [322], [335].
[6]Reasons, [388], [498]–[499].
GTW seeks leave to appeal based on six proposed grounds of appeal. Pacreef has filed a notice of contention with three grounds.
I would grant leave to appeal and allow the appeal. In short, Pac Bio was required to undertake a capital raising before GTW was liable under the Guarantee Arrangement. Pac Bio did not do so.
Before addressing each of the grounds of appeal, it is helpful to provide more information about each of the agreements.

The Agreements

On 28 July 2017, Pacreef entered into three agreements:
(a)a Share Sale Agreement by which Pacreef, among others, sold shares in entities owning the Pacific Reef Fisheries Group to Pac Bio;
(b)the Subscription Agreement, by which Pacreef agreed to subscribe for and Pac Bio agreed to issue the A Class Shares to Pacreef; and
(c)the Guarantee Arrangement, by which GTW agreed to subscribe for capital in Pac Bio to fund the redemption of the A Class Shares if certain conditions were met. Pacreef, Pac Bio and GTW were parties to the Guarantee Arrangement.
(1)The Share Sale Agreement, the issue of the A Class Shares and Vendor Finance
Under the terms of the Share Sale Agreement, Pacreef sold the shares in its subsidiary to Pac Bio in consideration for:
(a)receipt of a deposit of $6.5 million;
(b)three tranches of shares:
(i)15 million fully paid A Class Shares in Pac Bio at an issue price of $1 per share;
(ii)8 million fully paid B Class Shares in Pac Bio at an issue price of $1 per share;
(iii)5 million fully paid ordinary shares in Pac Bio at an issue price of $1 per share; and
(c)a completion payment of $35.5 million, together with further amounts for existing inventory as well as an ‘upfront profit’ amount of $3 million plus or minus certain adjustment amounts.
Pac Bio’s issue of the A Class Shares under the Share Sale Agreement was provided for in the Subscription Agreement between Pacreef and Pac Bio. The A Class Shares had no rights to dividends or distributions from the company; did not confer any voting rights on their holders; were not transferable; and carried conversion rights.
The terms of issue (set out in a schedule to the Subscription Agreement) provided that, subject to conditions, the A Class Shares were redeemable on 28 days’ notice at a price of $1 per share.
Pac Bio funded a small part of the purchase price ($3 million) and an adjustment payment of $2,893,817 through vendor loans that were documented in two agreements entered into respectively in August 2017 and on 23 November 2017 between Pacreef and Pac Bio (‘Vendor Finance Deeds’).
(2)The Guarantee Arrangement
The documents executed on 28 July 2017 also included the Guarantee Arrangement between Pac Bio, Pacreef and GTW.
The recitals to the Guarantee Arrangement record that the Share Sale Agreement was to be entered into and that as part of the transaction, Pacreef would be issued 15 million A Class Shares which may be redeemed. The recitals also recorded that GTW had agreed to guarantee any capital raising by Pac Bio to satisfy the redemption of the A Class Shares by Pacreef. Subject to certain conditions precedent, GTW was to do so by subscribing for and accepting sufficient fully paid $1 ordinary shares in Pac Bio to fully satisfy the redemption request by Pacreef. The conditions precedent included that Pac Bio did not raise the capital required to satisfy Pacreef’s redemption request and that there was no Insolvency Event (as defined) as at the date of redemption.
Central to the proposed grounds of appeal are questions concerning whether it was necessary for Pac Bio to undertake a capital raising before any liability of GTW under the Guarantee Arrangement could arise and, if so, whether a capital raising did take place; whether the A Class Shares were preference shares and, if they were not, whether GTW could still be liable under the Guarantee Arrangement; and whether an Insolvency Event existed at the date the shares were to be redeemed.
It is convenient to deal with the precise terms of the various agreements, other facts and the judge’s reasons when considering each proposed ground of appeal.

Grounds of Appeal

(1)Ground 1: Was it necessary for Pac Bio to undertake a capital raising?[7]
[7]Ground 1 reads: The trial judge erred in finding that the requirements of the Guarantee Arrangement and in particular condition 2.1(b) were satisfied in the absence of Pac Bio undertaking a capital raising carried out for the purpose of satisfying the redemption of the ‘A Class’ shares.

Clause 3 of the Guarantee Arrangement relevantly provided that, if certain conditions were fulfilled, GTW was to subscribe for shares in Pac Bio at the price of $1 each to satisfy a redemption request made by Pacreef in respect of the A Class Shares. At the direction of Pac Bio, the amount paid for the shares by GTW was to be paid to Pacreef. The conditions that had to be satisfied before GTW’s obligations under cl 3 arose are set out in cl 2.1 which provides:
The obligations of GTW under clause 3 of this deed are conditional only on:
(a)Pacreef giving notice to [Pac Bio] to redeem the A Class Shares in, or substantially in, accordance with the Subscription Agreement (Redemption Request);
(b)[Pac Bio] does not raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary shares in [Pac Bio] carried out for the purpose of satisfying the Redemption Request within 3 months after the date of the Redemption Request; and
(c)no Insolvency Event subsists in respect of [Pac Bio] as at the date the A Class shares are to be redeemed in accordance with the Subscription Agreement.
This ground of appeal concerns the proper construction of cl 2.1(b).
GTW contends that if there was no capital raising within the three months, then its obligations under cl 3 of the Guarantee Arrangement were not enlivened. The judge rejected that contention.
The judge held that cl 2.1(b) was clear and unambiguous. He pointed to the word ‘only’ in the introductory words to paragraph (b) and continued:
[T]he objective fact that Pac Bio did not raise the requisite capital is a condition of GTW’s liability under the Guarantee Arrangement. On a proper construction of clause 2.1, it does not matter how it arose that the requisite capital was not raised.[8]
[8]Reasons, [285].
The judge rejected GTW’s contention that recital 2 of the Guarantee Arrangement supported its argument that a capital raising must have been undertaken by Pac Bio before it could be liable. That recital reads:
GTW has agreed to guarantee any capital raising by [Pac Bio] to satisfy any redemption of the A Class Shares by Pacreef on the terms and conditions of this deed.
The judge stated that recitals may only be used to assist with the proper construction of the contract if they are capable of being read consistently with the operative part of the contract. He noted that where words in the relevant provision of the contract are clear and unambiguous, they cannot be controlled by the recitals.[9] The judge stated that GTW was in effect urging the implication of a further term into the contract; that is, that its obligation only arose if there was a capital raising by Pac Bio first. He concluded that this was precluded by the introductory words to cl 2.1 which state that GTW’s obligations are conditional only on the three events set out in paragraphs (a)–(c) of that clause. In any event, the judge was of the view that the contract was effective without the implication of such a term and consequently, it was not necessary to imply it.[10]
[9]Reasons, [282].
[10]Reasons, [290].
The judge also rejected GTW’s submission that the principle that contractual provisions in a guarantee will be construed in favour of the guarantor was to be applied.[11] The judge held that the contract was not one of suretyship.[12] First, payment by GTW under the Guarantee Arrangement was not a payment to Pacreef but rather was payment by way of subscription for shares which facilitates the redemption by Pac Bio of the A Class Shares.[13] Second, GTW had no right of reimbursement against Pac Bio. Rather, GTW received shares in consideration for this payment to Pac Bio.[14] The judge concluded that despite its title, the substance of the Guarantee Arrangement was not at law a guarantee.[15]
[11]The principle is often referred to in its Latin form — strictissimi juris.
[12]Reasons, [273].
[13]Reasons, [271].
[14]Reasons, [272].
[15]Reasons, [274].
GTW contends that the judge erroneously treated the Guarantee Arrangement as if it were a put option in favour of Pacreef. GTW submits that its obligations were more akin to those of an underwriter of a share issue undertaken for the purpose of satisfying the redemption of the A Class Shares.
GTW submits that cl 2.1(b) is clear. In its submission, the condition is satisfied if Pac Bio ‘does not raise all of the capital required… from a new issue of… shares… carried out’ to satisfy the redemption request within the three month period. It argues that there are two things that are evident from the language. First, a share issue must be undertaken (carried out). Second, that the share issue may not raise sufficient funds to meet the redemption request. On this basis it says, it is only if both events occur that the condition is satisfied. GTW contends that the judge ignored and gave no meaning to some of the words in cl 2.1(b). An example of this is that the judge construed the opening phrase as if it read ‘does not raise the capital’ or ‘does not raise any of the capital’ rather than as it appears in the document — ‘does not raise all of the capital’. GTW submitted, if the intended condition in cl 2.1(b) was that the redemption request was not satisfied within three months, it could simply have said that. Moreover, it contends that a construction which would permit Pac Bio to do nothing and still require GTW to comply with the Guarantee Arrangement is contradicted by the language in cl 2.1(b), is inconsistent with recital 2, and is contrary to common sense.
GTW also points to Pac Bio’s obligations once Pacreef served a redemption notice. It contends that Pac Bio had to pay Pacreef $1 for each share redeemed within 28 days of receipt of a redemption notice and the funds to make that payment had to be raised by a new share issue made for that purpose. Under cl 2.2 of the Guarantee Arrangement, Pac Bio had to take steps within its control to undertake a capital raising for the purpose of satisfying the redemption request. That clause provides:
Each party must take all steps within its own capacity to ensure that each Condition is fulfilled.
GTW also relies on cl 2.3 which reads:
2.3 Waiver
The Conditions are for the benefit of all parties and may only be waived by written agreement between the parties.
In this regard, GTW contends that the benefit to it of cl 2.1(b), namely the condition of a capital raising to redeem the A Class shares, was a key commercial driver designed to benefit it. If the offer price under the capital raising was over $1, it could pay the lesser amount of $1 per share for the shortfall to satisfy the redemption request; if under $1, it could subscribe under the capital raising at that price to assist in satisfying the redemption request rather than paying $1 per share as part of its obligations under cl 3.1 of the Guarantee Arrangement; if the offer price was $1, GTW had the option of subscribing under the capital raising or subscribing in accordance with cl 3.1.
GTW contended that it makes no commercial sense to treat the Guarantee Arrangement as if GTW gave a put option or a guarantee of the share redemption. In its submission, Pac Bio’s obligations to satisfy the redemption request were not burdensome and from Pacreef’s perspective was not a step that affected it because the source of the funds and the number of shares issued in Pac Bio was irrelevant to it.
Finally GTW contended that if cl 2.1(b) was ambiguous, the judge was wrong in not applying the principle of construction that contractual provisions in a guarantee will be construed in favour of the guarantor.
Pacreef submits that the wording of cl 2.1(b) is clear and unambiguous and there is no express obligation in that clause for Pac Bio to actively carry out a capital raising. It says that here, the position after the three months was that there had been no satisfaction of the redemption request from an issue of fully paid ordinary shares carried out for the purposes of satisfying the redemption request. As such, it says that the condition in cl 2.1(b) was satisfied. It contrasts cl 2.1(b) with cl 2.1(c) which makes specific reference to the obligations of Pac Bio in the Subscription Agreement. Clause 2.1(c) provides:
(c)no Insolvency Event subsists in respect of [Pac Bio] as at the date the A Class shares are to be redeemed in accordance with the Subscription Agreement.

Pacreef also points to the fact that under the Subscription Agreement Pac Bio had 28 days to redeem the A Class Shares once a redemption notice was served, while the timeframe in cl 2.1(b) is three months from the date of the redemption notice. Pacreef submits by reference to an earlier draft of the Guarantee Arrangement that it can be seen that the parties rejected the bargain for which GTW now contends. In this regard, the draft of the agreement provided in cl 2.1(b) that GTW’s obligations were conditional on Pac Bio ‘using all reasonable endeavours to raise capital from a new issue of shares carried out for the purpose of satisfying the Redemption Request...’.
Pacreef contends that the recital in the Guarantee Arrangement relied on by GTW does not take matters any further. It points in particular to the concluding phrase in the recital — ‘on the terms and conditions of this deed’. Consequently, Pacreef submits that all the recital does is to tell the reader they need to read the terms and conditions which are specified in the operative part of the agreement. Pacreef contends that if one were to reach the outcome for which GTW argues, a term would need to be implied but, as found by the judge, the requirements for implication are not satisfied. Finally Pacreef submits that if contrary to its contention, cl 2.1(b) is ambiguous, the principle of construction that a guarantee will be construed in favour of the guarantor does not apply and was correctly rejected by the judge.
The principles of construction of a commercial agreement are not in dispute. The principles were stated concisely by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd:
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone…
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[16]
[16](2015) 256 CLR 104, 116–7 [47]–[48], [51] (citations omitted). See also, Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640.
Recitals are part of the contract and provide part of the context to be taken into account when construing a contract,[17] albeit that where the words in the operative part of the contract are clear and unambiguous, they cannot be controlled by the recitals.[18]
[17]Victoria v Tatts Group Ltd (2016) 90 ALJR 392 [51], [65]–[66] (French CJ, Kiefel , Bell , Keane and Gordon JJ).
[18]Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd (2017) 54 VR 625, 667 [114] (Santamaria JA, Kaye and Ashley JJA agreeing); OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1, 21 [63] (Allsop P, Macfarlan and Meagher JJA agreeing).
Indeed, the three rules that apply to recitals in the construction task were set out by Lord Esher MR in Ex Parte Dawes; In Re Moon:
If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous, and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred.[19]
[19](1886) 17 QBD 275, 286.
Those rules have been applied on numerous occasions by this Court and others.[20]
[20]See for example, Macintosh v Bebarfield & Co (1911) 12 CLR 139, 161–3 (Isaacs J); Harpur and Ors v Levy and Ors (2007) 16 VR 587, 601 [63] (Neave JA), 601 [102] (Redlich JA); Adventure Golf Systems Australia Pty Ltd v Belgravia Health and Leisure Group Pty Ltd (2017) 54 VR 625, 667 [114] (Santamaria JA, Kaye and Ashley JJA agreeing); OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1, 21 [63] (Allsop P, Macfarlan and Meagher JJA agreeing).
In my view, cl 2.1(b) is clear — before GTW’s obligations under cl 3 arise, there must be a capital raising and that capital raising must raise less than the amount required to redeem the A Class Shares within three months.
Read as a whole and in context, cl 2.1(b) clearly presumes that there will be a capital raising carried out by Pac Bio. The language focuses on the capital raising as the means by which Pac Bio is to satisfy any redemption request as a first step and those words have to be given some content and meaning. In essence, the construction contended for by Pacreef would see the clause read as if all that is required for GTW’s obligations to be enlivened is that Pac Bio does not satisfy the redemption request within three months of it being made. But that is not what the clause says. In my view, it is unnecessary to add more explicit language specifying the need for a capital raising to be undertaken. It is implicit in the words that are used and is foundational before GTW’s obligations are triggered.
The inclusion of the word ‘only’ in the introductory phrase of cl 2.1 does not alter this analysis. As discussed above, the necessity for a capital raising is embedded in the language of paragraph (b). The word ‘only’ does not exclude the capital raising requirement.
The reference to the Subscription Agreement in cl 2.1(c) and its absence from cl 2.1(b) is not significant. The reference in paragraph (c) is necessary to establish the relevant date for assessment of whether an insolvency event subsists. Under the Subscription Agreement, the relevant date was 28 days after the redemption request. Other than by reference to the Subscription Agreement, that date could not be calculated for the purposes of cl 2.1(c). By contrast, the time period of three months set for the purposes of cl 2.1(b) is specified in that paragraph.
That the two time periods (28 days/three months) are different does not influence the meaning of cl 2.1(b). The parties could have had any number of reasons for not making the obligations of GTW immediate upon the 28 day period expiring.
As they do in this case, the recitals in an agreement often provide much of the context and can give a good guide to the circumstances that are to be addressed by the contract. In some senses, the recitals are like an introduction telling the reader in broad terms what is to come later in the document and what is to be achieved by the document. It is the parties’ summary of the context and purpose of the contract. Importantly, the construction task involves consideration of the words used by the parties to make their bargain bearing in mind the context and the purpose of the contract.
It is worth setting out the recitals in full. They provide:
1.[Pac Bio and related entities] and Pacreef propose to enter into a share sale agreement (SPA) pursuant to which [one of Pac Bio’s related entities] will acquire shares from Pacreef and [another entity] on the terms and conditions of that agreement (the Transaction). As part of the Transaction, Pacreef will be issued 15 million A Class Shares in [Pac Bio] which may be redeemed in accordance with the Subscription Agreement.
2.GTW has agreed to guarantee any capital raising by [Pac Bio] to satisfy any redemption of the A Class Shares by Pacreef on the terms and conditions of this deed.
3.In consideration of GTW entering into this deed, [Pac Bio] has agreed to grant the Initial Option and the Subsequent Option to GTW to purchase the Initial Option Shares and the Subsequent Option Shares on the terms and conditions of this deed.
The words, ‘any’ and ‘by’ in recital 2 make it clear that a capital raising was to be undertaken. If the capital raising was not undertaken, the recital reveals a clear intention that the guarantee would not operate.
Having regard to this, the Guarantee Arrangement was made in the following context:
•the arrangement is part of a broader transaction involving the purchase of shares from Pacreef and the issue of A Class Shares in Pac Bio to Pacreef;
•the A Class Shares were intended to be redeemable on terms set out in another agreement;
•Pac Bio was required to undertake a capital raising to satisfy any redemption of those shares;
•GTW guaranteed any shortfall in the capital raising and the basis on which it did so were set out later in the Guarantee Arrangement;
•as part of the bargain, GTW was entitled to purchase shares on terms set out in the Guarantee Arrangement.
This context reinforces my view that the meaning of cl 2.1(b) that I have set out above is to be preferred to that contended for by Pacreef and that which was found by the judge. In this regard, the commercial context of an intention that a request by Pacreef to redeem the A Class Shares would be satisfied by Pac Bio undertaking a capital raising that GTW guaranteed is important. This is not a case where there is an attempt for the recitals to control the meaning of cl 2.1(b) contrary to the rules described by Lord Esher MR in Ex Parte Dawes; In Re Moon.[21] Rather, both the recitals and cl 2.1(b) are consistent with each other and the recitals give context for that clause.
[21](1886) 17 QBD 275, 286.
Reading the contract as a whole, it seems clear that one of the objects of the Guarantee Arrangement was to provide some fall back mechanism which would operate should the presumed capital raising be undertaken but fail to raise sufficient funds to meet a redemption request fully. It does not seem to me that there was a broader objective in the Guarantee Arrangement of ensuring that Pacreef’s request would be met in all circumstances, regardless of whether Pac Bio met its obligations to undertake a capital raising. As to Pacreef’s submission based on an earlier draft of the agreement, even if it were permissible to have regard to it,[22] it does not assist Pacreef. As GTW submitted, the omission of a reference to the use of reasonable endeavours to raise capital from the final form of the Guarantee Arrangement is because there is a mandatory obligation on Pac Bio to undertake a capital raising. That is in accord with the Subscription Agreement which requires Pac Bio to pay the amount to be redeemed out of the proceeds of a new issue of shares within 28 days of receipt of a redemption notice.
[22]See Apple and Pear Australia Ltd v Pink Lady America LLC (2016) 343 ALR 112, 155 [137]–[138] (Tate JA).
In view of the conclusion which I have reached, it is not necessary to consider the principle of construction that applies to guarantees and favours the guarantor.
I would grant leave to appeal on ground 1 and would uphold that ground.
(2)Ground 2: Did a capital raising take place?[23]
[23]Ground 2 reads: The trial judge erred in finding that, for the purpose of condition 2.1(b), Pac Bio undertook a capital raising for the purpose of it satisfying the redemption of the ‘A Class’ shares.
Proposed ground 2 concerns whether Pac Bio did undertake a capital raising for the purpose of satisfying the redemption of the A Class Shares. The judge found that it was sufficient that Pac Bio had or had attempted to undertake a capital raising.[24] Before considering the judge’s reasons, it is necessary to set out more of the facts.[25]
[24]Reasons, [322].
[25]What follows is based on the parties Agreed Summary for the appeal.
By early to mid 2018 Pac Bio embarked on a strategy to recapitalise for the purpose of reducing its high-level interest debt obligations and to fund the expansion of the business. This was referred to as the ‘Recapitalisation Strategy’.
As part of that strategy, on 27 September 2018, Pac Bio entered into an ‘Implementation Deed’ with, GTW, Pacreef and various other stakeholders. GTW also entered into a $6 million short term debt facility agreement in favour of Pac Bio (‘GTW Facility Agreement’) on 27 September 2018 with a repayment date of 31 March 2019 or such other date as agreed by the parties in writing.
The recitals to the Implementation Deed record that, among other things, Pac Bio was proposing to conduct the ‘Proposed Recapitalisation’.
‘Proposed Recapitalisation’ was defined to mean ‘one or more issue(s) of securities in [Pac Bio]’ proposed to be undertaken before 31 March 2019, as contemplated in specified clauses in the Implementation Deed.[26] The terms of the Proposed Recapitalisation were to be determined by Pac Bio.
[26]Clause 3.3(c) (acknowledgment that the full terms of the proposed recapitalisation remained to be determined and that Pac Bio’s board would consider the terms as soon as reasonably practicable after entry into the Implementation Deed); cl 3.4 (‘Amount to be raised under the Proposed Recapitalisation’) and 3.5 (‘Notification regarding completion of the Proposed Recapitalisation’).
Under the terms of the Implementation Deed:[27]
(a)Pacreef agreed to withdraw a redemption notice that it had served on 20 July 2018, and not to issue a further notice until the completion of the proposed recapitalisation or 31 December 2018;
(b)Pacreef agreed to extend the repayment date under the Vendor Finance Deeds to the earlier of the completion of the proposed recapitalisation or 31 March 2019;
(c)GTW agreed to extend the period of the Guarantee Arrangement until 30 June 2019;
(d)GTW agreed to make available further finance in the form of the GTW Facility Agreement in order that the proposed recapitalisation could occur;
(e)each of Pacreef, GTW and other creditors agreed to a standstill period until 31 March 2019 during which, despite any provision in various agreements including the Vendor Finance Deeds and GTW Facility Agreement, they agreed not to take, nor instruct or permit any other party to take, any action under those agreements in respect of any default, potential default or review event arising before 31 March 2019.
[27]Reasons [65(a)–(e)].
Other steps taken during 2018 and 2019 as part of the Recapitalisation Strategy included:
(a)in about December 2018, Pac Bio engaged an investment bank, Greenhill & Co, to advise Pac Bio on a strategy for the proposed recapitalisation. On 7 December 2018, Pac Bio’s chief executive officer emailed the directors to convene a board meeting in part for the purpose of introducing the board to Greenhill’s representative, Mr Collett;
(b)on 18 December 2018, the members of the board received a document titled ‘Strategic Plan Update’ which referred to the proposed recapitalisation;
(c)before the Pac Bio board meeting on 21 December 2018, the board members received a document prepared by Greenhill titled ‘Project Poseidon — Discussion Materials’. In that document, Greenhill identified a set of preliminary recommendations in relation to the structure of the proposed recapitalisation, including testing multiple sources of funding, seeking early investors, and pursuing a rights issue to the extent possible alongside a broader equity raising to be conducted in parallel;
(d)before a board meeting which was to be held on 22 January 2019, the board members received a document titled ‘Recapitalisation Strategy — Update’, apparently prepared by Greenhill. The document set out two key options for raising capital, a private option and public option, and set out management’s current thinking in relation to the strategy for the proposed recapitalisation. It was contemplated that $78.1m of capital was required: $24.8m for expansion capital (including the acquisition of Australian Prawn Farms Pty Ltd) and $53.3m for ‘debt refinancing’ which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes. A detailed presentation was given by Greenhill at the meeting of the board held on 22 January 2019;
(e)before the Pac Bio board meeting on 20 February 2019, board members received a further document prepared by Greenhill titled ‘Project Poseidon — Recapitalisation Structure and Key Terms’. The key elements of the proposed recapitalisation strategy included a new equity investment by a cornerstone investor, the replacement of some short term debt with longer term debt, a rights issue and the proposed acquisition of Australian Prawn Farms Pty Ltd. In this document, Greenhill identified that $79.2m of capital was required: $25.9m for expansion capital (including $5m for working capital) and $53.3m for ‘debt refinancing’ which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes;
(f)before the Pac Bio board meeting on 20 March 2019, board members received a further document prepared by Greenhill which identified that $86.3m of capital was required: $28.9m for expansion capital (including $8.1m for working capital) and $57.3m for ‘debt refinancing’ which included the redemption of the A Class and B Class shares and the repayment of debt facilities and convertible notes. A detailed presentation was given by Greenhill at the 20 March 2019 board meeting;
(g)on 11 April 2019, draft term sheets were received from private investors Tsing Capital Pty Ltd and Orana Agriculture Pty Ltd (as trustee for the Tiverton Agriculture Impact Fund) (‘Tiverton’). Separate signed non-binding and conditional term sheets were entered into with each of Tsing Capital and Tiverton on 8 May 2019 respectively, and on 17 July 2019, Pac Bio entered into convertible loan agreements with Tsing, for $25 million, and Tiverton, for $15 million. Ultimately, funding from these cornerstone investors was never provided;
(h)in about July 2019, Pac Bio and GTW entered into a further variation of the GTW Facility Agreement. The variation increased the amount of the facility to $9 million.
Having set out the facts, the judge observed that there was a concerted effort by Pac Bio from at least 7 January 2019 (when the redemption notice was served) to 7 April 2019 to design and then implement a capital fundraising strategy which, if it came to fruition, would have effected the redemption of the A Class Shares.[28] The judge stated:
…Whilst it is true that the strategy did not in terms earmark that those who would provide the necessary capital to redeem the A Class Shares would themselves receive a new issue of shares, it defies credulity to suggest that the members of the board did not intend that those who provided the new capital would receive shares to facilitate the redemption of the A Class Shares in a manner which maintained the company’s capital. Each of [sic] board members owed fiduciary and statutory obligations to the company and must be taken to have been aware of the fact that the redemption could occur only out of the issuance of new shares.[29]
[28]Reasons, [318].
[29]Ibid.
The judge then held that there was nothing in the Guarantee Arrangement that required a singular and sole purpose capital raising to be undertaken by Pac Bio for GTW’s obligations under the Guarantee Arrangement to arise.[30] The judge went on to note that Mr Graeme Wood was a director of Pac Bio, including when the directors unanimously appeared to endorse the recapitalisation strategy.[31] GTW is a company associated with Mr Wood. Further, he observed that GTW would benefit from the strategy because if successfully implemented, it would mean that GTW did not have to subscribe for the shares at the price of $1 under the terms of the Guarantee Arrangement and would instead be able to participate in the anticipated rights issue at a price expected to be lower.[32] The judge described how the strategy was aimed at enhancing the value of the shares held by shareholders, including GTW.[33] Moreover, convertible notes issued under agreements entered into in 2017 and 2018 between Pac Bio and GTW were either to be paid out or converted into equity under the recapitalisation strategy and the debt under the GTW Facility Agreement was to be repaid.[34]
[30]Reasons, [320].
[31]Reasons, [321].
[32]Ibid.
[33]Ibid.
[34]Ibid.

The judge stated that GTW’s submission that ‘Pac Bio did not, for the purposes of [2.1(b)], attempt a capital raise sufficient to satisfy the redemption request from a new issue of fully paid ordinary shares carried out for the purpose of satisfying the redemption request is without substance’.[35]
[35]Reasons, [322].
GTW submits that Pac Bio’s board did not take any steps which were necessary under its constitution or the Corporations Act 2001 (Cth) for a capital listing to occur. In this regard, it says that the facts relied upon by the judge show that although Pac Bio’s board considered possible steps which could be undertaken to raise capital, the board did not approve a capital raising nor take steps capable of constituting a capital raising. In relation to this latter point, GTW submits that at least, a proposed board resolution to issue shares was necessary and likely also the preparation of a prospectus or similar disclosure document which complied with the obligations under the Corporations Act. GTW contends that some of the steps considered by the board were to give effect to the Implementation Deed pending Pac Bio effecting a proposed recapitalisation. But, it says, there was no failed rights issue or failed capital raising more generally.
Pacreef submits that the evidence of the design and attempt to raise capital was overwhelming, as found by the judge. It notes that in opening its case before the judge, GTW focussed on an argument that the capital raising had to be for the sole purpose of satisfying the redemption request. That argument was correctly rejected by the judge. Pacreef says that the evidence established that lawyers were engaged to prepare a prospectus for a rights issue and that it was only on 12 April 2019 that a decision was made to pause preparation of a prospectus to raise capital with a different path then being followed. In its submission, this was sufficient to satisfy the requirement in cl 2.1(b).
The judge was correct in his finding that it was not necessary for the capital raising to be for the sole purpose of satisfying the redemption request. However, in my opinion, more than contemplation of or preparation for a capital raising was required to satisfy cl 2.1(b). For example, it would at least require a resolution of the board to approve a capital raising. Dependent upon how the company proposed to raise the capital, one would likely also expect the issue of a prospectus or some type of disclosure document. None of those things were done. While the board was briefed on strategies for recapitalisation and was updated from time to time on management’s current thinking on those strategies, there was never any fully formed and implemented capital raising process. Clause 2.1(b) required there to be something concrete and in existence that could lead to the necessary capital being raised. It was not sufficient to have plans for such an eventuality or to have taken some steps towards it. A capital raising must have been attempted and failed. That was not the position.
I would grant leave and uphold this ground of appeal.
(3)Notice of Contention 1: Did clause 9.5 of the Implementation Deed satisfy clause 2.1(b) of the Guarantee Arrangement?[36]
[36]Ground 1 of the Notice of Contention reads: Clause 9.5 of the Implementation Deed: The judge erred in not holding that clause 9.5 of the Implementation Deed satisfied clause 2.1(b) of the Guarantee Arrangement.
By ground 1 of its Notice of Contention, Pacreef contends that the judge was wrong in his conclusion that cl 9.5 of the Implementation Deed did not satisfy the requirements of cl 2.1(b) of the Guarantee Arrangement. Clause 9.5 reads:
9.5 Proposed recapitalisation is a new issue of shares
The parties each acknowledge and agree that the Proposed Recapitalisation is to be treated as a new issue of fully paid ordinary shares in [Pac Bio] carried out for the purpose of satisfying a redemption request for the purposes of clause 2.1 of the GTW Guarantee Agreement, such that, if the Proposed Recapitalisation results in the issue of new ordinary shares sufficient to redeem all of the A Class Shares, the condition set out at clause 2.1(b) of the GTW Guarantee Agreement will not be satisfied (such that the obligations under clause 3 of the GTW Guarantee Agreement will have no effect).
As summarised above, the Implementation Deed defines ‘Proposed Recapitalisation’ to mean:
one or more issue(s) of securities in [Pac Bio] proposed to be undertaken prior to the End Date, as contemplated in clauses 3.3(c), 3.4 (‘Amount to be raised under the Proposed Recapitalisation’) and 3.5 (‘Notification regarding completion of the Proposed Recapitalisation’), the terms of which are to be determined by [Pac Bio].
The End Date under the Implementation Deed was 5:00 pm on 31 March 2019, or such later date as may be agreed in writing by all parties.
Under the Implementation Deed, Pacreef agreed that it would not issue a redemption notice until the earlier of the completion of the Proposed Recapitalisation or 5:00 pm on 31 December 2018. Any notice given earlier than this was deemed to be of no force or effect. This captured, a notice of redemption which had been given earlier (in July 2018).
As set out above, the Proposed Recapitalisation was defined as the issue of securities proposed to be undertaken. Pacreef argued before the judge at trial that by cl 9.5 the parties (including Pac Bio, GTW and Pacreef) agreed that the Proposed Recapitalisation (in contrast to the actual issue of shares) would be treated as a new issue of fully paid ordinary shares in Pac Bio carried out for the purposes of satisfying the redemption request condition in cl 2.1(a) of the Guarantee Arrangement.
The judge rejected that submission. He held that the words commencing ‘such that’ in cl 9.5 could not be ignored or read to address a different circumstance.[37] In the judge’s view, the purpose of cl 9.5 was twofold; (a) if there were sufficient shares from the Proposed Recapitalisation to redeem the A Class Shares, then a redemption notice did not need to be served; and (b) GTW’s obligations under the Guarantee Arrangement would not be enlivened if Pac Bio raised sufficient ordinary shares from the Proposed Recapitalisation but did not use the money raised to redeem the A Class Shares.[38]
[37]Reasons, [333].
[38]Reasons, [334].
Pacreef contends that the judge erred. Pacreef noted that under the Implementation Deed, the redemption notice given in July 2018 was deemed to be of no effect and it had agreed not to issue another redemption notice before 31 December 2018. However, Pac Bio was to complete the Proposed Recapitalisation by 31 March 2019. It follows, Pacreef contends, that cl 9.5 contemplated and assumed there would be a further redemption notice, otherwise the clause would have no utility.
In aid of the construction for which it contends, Pacreef relies on the context in which the Implementation Deed was entered into which included:
(a)Pacreef had chosen not to convert the A Class Shares and had instead issued a redemption notice in July 2018 so that it would be paid the sum of $15 million that was still outstanding to it from the Share Sale Agreement;
(b)Pac Bio sought to recapitalise its entire balance sheet and, as part of that, remove debt and raise sufficient capital to redeem the A Class Shares;
(c)all the debtholders that entered into the Implementation Deed agreed to give Pac Bio six months to complete the Proposed Recapitalisation;
(d)Pacreef would withdraw or not rely upon its July 2018 redemption notice;
(e)Pacreef could after three months, namely after 5:00 pm on 31 December 2018, issue a fresh redemption notice to redeem its A Class Shares, giving Pac Bio a further three months to 5:00 pm on 31 March 2019 to complete the Proposed Recapitalisation.
Although not required to do so, Pac Bio was permitted to implement the Proposed Recapitalisation by way of a rights issue. In this regard, Pacreef submits that cl 9.5 was not limited to a rights issue, but was linked to the Proposed Recapitalisation of which a rights issue was one option.
Pacreef contends that the words ‘such that’ and those which follow make plain that if the Proposed Recapitalisation results in the issue of new shares (as was required by the Subscription Agreement) then condition 2.1(b) will be satisfied. It says, that if the portion of the clause from ‘such that’ and continuing is only effective if an issue of new ordinary shares was sufficient to redeem all of the A Class Shares then the acknowledgment and agreement up to but excluding ‘such that…’ have no work to do.
So Pacreef contends, on the proper construction of cl 9.5 of the Implementation Deed, any attempt to raise capital in accordance with the Implementation Deed was sufficient to satisfy the condition in cl 2.1(b) of the Guarantee Arrangement. In its view, the evidence was overwhelming that this occurred.
In my view, the judge was correct in his conclusion that cl 9.5 of the Implementation Deed did not satisfy the requirement in cl 2.1(b) of the Guarantee Arrangement.
It may be accepted that the form of the capital raising contemplated by the Proposed Recapitalisation was not limited to a rights issue. However, that does not take matters far. Clause 9.5 makes clear that it was the particular issue of shares through the Proposed Recapitalisation (in whatever form it may take) that if fulfilled would equate to ‘a new issue of fully paid ordinary shares’ for the purpose of and referred to in cl 2.1(b) of the Guarantee Arrangement.
Clause 9.5 provides for a situation where there is an actual issue of shares, not just a proposal for or an attempt at the issue of shares. In this regard, the definition of Proposed Recapitalisation is important. It is directed to ‘one or more issue(s) of securities’ albeit that the definition goes on to describe when that issue of securities is intended to occur — by 31 March 2019 — and how — on terms to be determined by Pac Bio. By reference to cl 3.4 of the Implementation Deed, the definition of Proposed Recapitalisation also links the issue of the shares to the redemption of the A Class Shares (among other things). It is not just any share issue but rather one which is directed to the redemption of shares (including the A Class Shares) and repayment of debt. In this regard, cl 3.4 provides that Pac Bio agrees to use its ‘best endeavours’ to ensure that the amount raised through the Proposed Recapitalisation is sufficient to redeem in full the A Class Shares and B Class Shares and repay amounts outstanding under various loan agreements and the like. An actual issue of shares is essential before cl 9.5 has work to do.
Read as a whole and in context, both the words before and after ‘such that’ in cl 9.5 work harmoniously. The first part of the clause picks up the words ‘a new issue of fully paid ordinary shares in [Pac Bio] carried out for the purpose of satisfying a redemption request’ from cl 2.1(b). So it is that if the Proposed Recapitalisation took place, it would be regarded as fulfilling cl 2.1(a) (the requirement for service of a redemption notice) and that part of cl 2.1(b) in which those words appear would be satisfied. It would then be necessary to see if another component of cl 2.1(b) was satisfied; that is, whether sufficient shares had been issued to redeem the A Class Shares. If they had, then the precondition to GTW’s liability would not be satisfied.
As the judge observed, cl 9.5 does not address the situation where there is no issue of shares.
In light of the conclusions which I have reached in respect of grounds 1 and 2 and Notice of Contention ground 1, it is unnecessary to deal with the other proposed grounds of appeal and grounds 2 and 3 of the Notice of Contention. Nevertheless, I will address some of those matters for completeness.
(4)Ground 3: Were the A Class Shares preference shares?[39]
[39]Ground 3 reads: The trial judge erred in finding that the ‘A Class’ shares were preference shares for the purposes of s 254A of the Corporations Act 2001 (Cth).
Before the trial judge and before us, GTW contended that the A Class Shares are not preference shares for the purposes of s 254A of the Corporations Act. The argument proceeded on the basis that if they were not preference shares, they could not be redeemed because that would be in contravention of the provisions of the Corporations Act. If they could not be redeemed, GTW contends that it had no liability under the Guarantee Arrangement.
Under s 254A(1) of the Corporations Act, a company has power to issue preference shares, including redeemable preference shares. Section 254A then provides:
(2)A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company’s constitution (if any) or have been otherwise approved by special resolution of the company:
(a)      repayment of capital;
(b)      participation in surplus assets and profits;
(c)      cumulative and non‑cumulative dividends;
(d)     voting;
(e)priority of payment of capital and dividends in relation to other shares or classes of preference shares.
(3)Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable:
(a)at a fixed time or on the happening of a particular event; or
(b)at the company’s option; or
(c)at the shareholder’s option.
‘Redeemable preference share’ is defined in s 9 of the Corporations Act as meaning ‘a preference share in a body corporate that is, or at the body’s option is to be, liable to be redeemed’. There is no definition of ‘preference share’.
Sections 254J and 254K permit the redemption of fully paid redeemable preference shares out of profits or the proceeds of a new issue of shares made for the purpose of the redemption and on the terms on which they are on issue.
As noted above, part of the consideration Pacreef was to receive under the terms of the Share Sale Agreement was 15 million fully paid A Class Shares in Pac Bio at an issue price of $1 each. Under the terms of the Share Sale Agreement, completion was not to occur until a number of conditions were satisfied or waived. One of those conditions was that the requisite shareholder approval was obtained to issue the A Class Shares to Pacreef in accordance with the terms of the Subscription Agreement, Pac Bio’s constitution and the Corporations Act. Among other things, on completion, Pacreef was obliged to apply for and accept the A Class Shares.
The Subscription Agreement provided that the A Class Shares would be governed by the Terms of Issue which were set out in Schedule 3. As noted above, the A Class Shares carried no rights to dividends or distributions; no voting rights; and were not transferrable. There was a right until 3 July 2018 to convert the A Class Shares to ordinary shares. If they were not converted by that date and the ordinary shares had not been listed, then the A Class Shares could be redeemed by serving a redemption notice.
A general meeting of the shareholders of Pac Bio was convened on 10 August 2017 for the purpose of considering and passing special resolutions including a special resolution approving the issue of the A Class Shares. The notice of meeting was accompanied by an Explanatory Memorandum which referred to s 254A(2) and recited that a company could ‘only issue preference shares if the rights attached to the preference shares (including redeemable preference shares) in relation to particular matters are set out in the company’s constitution, or have been otherwise approved by special resolution of the company’. Relevantly, the Explanatory Memorandum went on to state that the Board was seeking shareholder approval, by special resolution, for the proposed terms of the A Class Shares and their issue to Pacreef. The rights attached to the A Class Shares were described in the Explanatory Memorandum and reflected the rights that had been included in the Terms of Issue. In relation to redemption, the Explanatory Memorandum stated:
Redemption
Subject to the Corporations Act and providing conversion has not occurred, then upon occurrence of a Redemption Event, the holders of A Class Shares or B Class Shares may require the Company to redeem the A Class Shares or B Class Shares (as applicable).
The Company must pay $1 for each A Class Share or B Class Share redeemed.
The Company must only pay the redemption amount out of existing equity capital or the proceeds of a new issue of shares made for the purpose of the redemption.
If the Company must raise capital and issue equity to satisfy a redemption request, and is doing so to comply with one of the exemptions to the takeover provisions in the Corporations Act then the Company may pay the redemption amount in instalments provided the amount is fully paid within nine months of the relevant redemption request.
Under the heading ‘Return of Capital’ the Explanatory Memorandum stated that ‘A Class Shares and B Class Shares have no preference or priority to return of capital in the end [sic] of a winding up of the Company’. The special resolution, as proposed in the notice of meeting, read:
That for the purposes of section 254A(2) of the Corporations Act 2001 (Cth) and for all other purposes, approval is given for the issue of 15,000,000 A Class Shares and 8,000,000 B Class Shares to Pacreef Investments Pty Ltd (as trustee for Pacreef Discretionary Trust) on the terms described in the explanatory memorandum accompanying this notice of meeting.
The Explanatory Memorandum noted that the directors unanimously recommended passing the special resolution. As noted above, those directors included Mr Wood who was associated with GTW.
The special resolution was passed with 94.56% of shareholders (including GTW) voting in favour.
The first question that the judge addressed was whether the A Class Shares were preference shares. Having reviewed a number of authorities, the judge noted that the right of redemption enjoyed by Pacreef in respect of the A Class Shares was a right that was not enjoyed by the ordinary shareholders.[40] By reference to s 254A(2)(b) and (e) of the Corporations Act, the judge stated that rights to repayment of capital, participation in surplus assets and profits and priority of payment of capital (and dividends) are all separate features. He reasoned that if those rights were set out in the company’s constitution or approved by special resolution and they confer an advantage over the holders of ordinary shares, then the shares could be regarded as preference shares.[41] He concluded that Pacreef as the holder of the A Class Shares has a right to repayment of capital (that is, the capital that Pacreef had paid of $1 per share) which is not enjoyed by the holders of ordinary shares.[42] He reasoned that not all redemption mechanisms represent an advantage to the shareholder; for example, when redemption is at the company’s option or at a fixed time.[43] Originally, preference shares were only redeemable at the option of the company and the judge said that this explains the need for the distinct concepts of redeemability and preference and in part explains their distinction in the text of the statute.[44] The judge also referred to the language of ‘redeemable preference shares’ reflecting the historical development of statutory redemption mechanisms rather than ‘any deliberate intent on the part of the legislature to keep the characteristics of redeemability and preference strictly separate’.[45] The judge concluded that there is little reason now to read in a strict distinction between the characteristics of redeemability and preference. And, in the judge’s view, while redeemability will not always constitute a preference, when it is at the option of the shareholder it may do, at least in circumstances like those here where the redemption amounts to a repayment of capital.[46]
[40]Reasons, [187].
[41]Reasons, [188].
[42]Reasons, [189].
[43]Reasons, [192].
[44]Reasons, [193].
[45]Reasons, [194].
[46]Reasons, [203].

GTW’s contention is straightforward; the share must be a preference share first before it can be a redeemable preference share. The characteristic of redeemability is the additional entitlement that distinguishes a ‘redeemable preference share’ from a ‘preference share’; that characteristic cannot be the entitlement that makes the share a ‘preference share’. Were it so, s 254A(3) would have no work to do. GTW relies in particular on a decision of Barrett J, Re Capel Finance Ltd.[47] The judge distinguished that decision and GTW is critical of the judge’s reasoning in this regard. I will consider Barrett J’s decision below.
[47](2005) 52 ACSR 601 (‘Capel’).
GTW contended that it was important to focus on the rights that attached to the share when considering whether it was preferential and this was to be distinguished from the enjoyment of those rights.[48]
[48]Beck v Weinstock (2013) 251 CLR 425, 449–50 [69] (Hayne, Crennan and Keifel JJ) (‘Beck’).
In any event, GTW contends that, even if redeemability were sufficient to satisfy the preferential requirement, the A Class Shares are not preferential to the rights of the ordinary shareholders. GTW submits that the holder of the A Class Shares is only entitled to the return of capital while in due course shareholders of ordinary shares are entitled to a return not only of capital but also any accumulated capital and income.
Pacreef submits that the judge was correct in his analysis. It contends that the A Class Shares do enjoy preferences over other shares — they enjoyed the right to repayment of capital at a fixed price of $1 per share which could benefit the holder by protecting them from unfavourable movements in price. In addition, the A Class Shares were part of the sale transaction and carried with them the benefit of the Guarantee Arrangement. A term of that agreement was that Pac Bio must not pay dividends or other distributions from its profits. Pacreef contends that this was a protection that was not available for the B Class Shares.
Capel concerned an application for the convening of a meeting of shareholders for the purposes of considering a proposed scheme of arrangement. The proposed scheme involved the cancellation of existing shares (other than those held by two nominated shareholders). The cancellation of the shares involved a reduction of capital. The shares to be cancelled were referred to as ‘scheme shares’. It was proposed that the holders of scheme shares would be entitled to elect whether they received new shares, cash (of 8.4 cents for each share) or a combination of new shares and cash. The cash was to come from the company’s cash resources. The new shares were described as ‘redeemable preference shares’. The proposed terms of issue entitled redeemable preference shareholders to redeem their shares by notice to the company. The terms also provided that there was no right of priority against other current or future shareholders to repayment of capital or during the winding up of the company; there was no right of participation in profits; there were no voting rights attached to the shares; there was no right to attend or address general meetings.
Justice Barrett held that the proposed shares were not redeemable preference shares at all because the shares would not be preference shares and therefore would not have one of the two essential characteristics specified in the s 9 definition.[49] His Honour noted that although not defined, ‘preference share’ is a well understood concept and such a share can ‘only exist by way of juxtaposition with other shares’ requiring some preference or priority over ordinary shares.[50] That preference or priority is ‘commonly with respect to one or more of the matters referred to in s 254A(2)’.[51] In the case before him, Barrett J noted that by comparison with other shares, there was no priority afforded to the ‘redeemable preference shares’ in respect of repayment of capital, on a winding up, participation in profits, voting rights, attendance and speaking at general meetings.[52] The shares could not properly be regarded as ‘preference shares’ because they would not carry priority in respect of any of the matters listed in s 254A(2).[53] Justice Barrett continued:
It was faintly suggested on behalf of the company that the right of the holder to require redemption by the company makes the shares preference shares. That cannot be so. That feature makes them redeemable shares, which represents one of the two attributes contemplated by the s 9 definition of ‘redeemable preference share’. The characteristics that make a share a ‘preference share’ are distinct from those that make it redeemable.[54]
[49]Capel (2005) 52 ACSR 601, 605 [10].
[50]Ibid.
[51]Ibid [11].
[52]Ibid [12].
[53]Ibid [13].
[54]Ibid [14].
To be a preference share, the holder of the share must enjoy a preference or priority over ordinary shareholders with respect to dividends or repayment of capital or voting rights or combinations of those things.[55]
[55]Beck (2013) 251 CLR 425, 429 [1] (French CJ), 454–5 [91]–[92] (Gageler J).
It is necessary to look at the matters in s 254(2)(a)–(e) to see if a class of shareholder is preferred over ordinary shareholders in respect of any of those matters — repayment of capital; participation in profits; dividends; voting rights; priority of payment of capital or dividends. Here, as the judge correctly identified,[56] Pacreef’s right on the happening of a redemption event (as defined) to repayment of capital at the price of $1 per share (that being the price paid by Pacreef to acquire the shares) is a right not enjoyed by the ordinary shareholders. That is a right captured within the scope of s 254A(2)(a) — repayment of capital. It is a right that existed on the issue of the shares albeit that the right could only be exercised in the future on the happening of a particular event. Indeed, a preference or priority in respect of repayment of capital will by its very nature always be a right that can only be enjoyed at some future time.
[56]Reasons, [187].
There is nothing in the text of the Corporations Act that militates against the conclusion that the A Class Shares were preference shares. As the judge observed,[57] a redeemable share will not always provide an advantage over ordinary shareholders. For example, shares may be redeemable at the option of the company rather than the shareholder or they may be redeemable at a price less than what was paid for them.
[57]Reasons, [192].
If a shareholder has priority over ordinary shareholders with respect to repayment of capital, then that share will be a preference share. It is the right to repayment of capital in priority that determines its preferential status; not the redemption mechanism to unlock it. In and of itself, a redemption right does not provide priority.
The s 9 definition of ‘redeemable preference share’ and s 254A(3) both require consideration first of whether the share is a preference share; that is, one giving priority over ordinary shares. For example, the preference may give an entitlement to payment of capital in priority on a winding up, without any right to require the company to redeem the shares. As noted above, however, the preference may, not necessarily must, be unlocked through a redemption process, as is the case here. Either way, once the preference is established, the second consideration is whether the share is redeemable. In the first example, (entitlement to payment of capital in priority on winding up with no right to redemption) the share would be a preference share, but not a redeemable preference share. In the second example (the case here) the share is both a preference share and a redeemable preference share.
Moreover, in my opinion, there is nothing in the decision in Capel that detracts from this reasoning. The facts here are in contrast to those in Capel, where it was specifically provided that the proposed redeemable shares carried no right of priority against other shareholders to repayment of capital. They also carried no right of priority in respect of the other matters listed in s 254A(2)(b)–(e). It is unsurprising that in Capel, Barrett J held that redeemability, of itself, did not afford a preference to the proposed ‘redeemable shareholders’.
I would grant leave to appeal in respect of ground 3. Had it been necessary to decide, I would have dismissed the appeal on that ground.
In light of this conclusion, it is unnecessary to consider grounds 2 and 3 set out in Pacreef’s notice of contention.[58]
(5)Ground 4: Was GTW liable if the A Class Shares were not preference shares?[59]
[58]Ground 2 of the Notice of Contention reads: The Judge erred in holding that in order to constitute a preference share, the A Class Shares were required to have some preference to the “ordinary shares” and not the B Class Shares.
Ground 3 of the Notice of Contention reads: The judge erred in not accepting that the terms of issue of the A Class Shares, were such that the A Class Shares could only be varied, abrogated, amended or substituted with the prior written consent of the A Class Shareholder, constituted a preference.
[59]Ground 4 reads: The trial judge erred in finding that, even if the ‘A Class’ shares were not preference shares for the purposes of s 254A of the Corporations Act 2001 (Cth), GTW was liable to Pacreef pursuant to the Guarantee Arrangement.
Ground 4 is founded on the assumption that the A Class Shares were not preference shares. If that were the position, (which it is not for the reasons given above) there would be an issue as to whether GTW was nevertheless liable under the Guarantee Arrangement. Although it is strictly not necessary to consider this ground, I will address it briefly.
In case he was wrong, the judge first considered whether the A Class Shares were redeemable if they were not preference shares.
Section 254K provides that a company may only redeem redeemable preference shares if they are fully paid-up and the payment is made out of the profits or the proceeds of a new issue of shares made for the purpose of the redemption. GTW contended that if the A Class Shares were not preference shares, then the most that could be sought by Pacreef was a reduction of capital procedure (ss 256B and 256C of the Corporations Act) or a share buyback (s 257A of the Corporations Act). GTW argued that neither of those avenues enlivened its obligations under the Guarantee Arrangement. The judge rejected these arguments. He observed that under the Subscription Agreement and Terms of Issue, as a matter of contract Pac Bio was to effect the redemption out of a new issue of shares made for the purpose of the redemption with GTW to subscribe for those new shares with the effect that Pac Bio’s capital would be maintained.[60] It followed, the judge stated, that the reduction of capital and buyback procedures did not have any application to the contract between Pacreef and Pac Bio.[61]
[60]Reasons, [215].
[61]Reasons, [217].
The judge next dealt with GTW’s submission that it would be unlawful to effect a redemption of the A Class Shares otherwise than in accordance with the Corporations Act with the consequence that Pacreef had no redress in contract. Having considered the principle of illegality, the judge stated that there was no ground to construe the Corporations Act as prohibiting the redemption of shares even if they were not preference shares provided the redemption did not result in a reduction of the company’s capital.[62] The judge referred to s 254L of the Corporations Act. In part, s 254L(1) provides that a contravention of s 254J or s 254K ‘does not affect the validity of the redemption or of any contract or transaction connected with it’ and ‘the company is not guilty of an offence’. Section 254L(2) is a civil penalty provision that applies to a person involved in a company’s contravention of s 254J or s 254K. If the involvement is dishonest, then the person commits an offence.[63]
[62]Reasons, [223].
[63]Corporations Act s 254L(3).
The judge concluded that there was nothing in the scheme of the Corporations Act which would suggest that in this case there could be no redemption to give effect to the contractual obligations between the parties, particularly as the redemption was to be facilitated by a new issue of shares.[64] The judge stated:
Accordingly, I do not accept GTW’s submission that the A Class Shares, assuming that they are not preference shares (which is not my view), could not be redeemed by Pac Bio. Nor do I accept the corollary that the burden of this illegality (whatever it may be) must rest with Pacreef as the holder of the A Class Shares, as opposed to Pac Bio which issued the shares.[65]
[64]Reasons, [225].
[65]Reasons, [226].
The judge went on to say that s 254E of the Corporations Act may have a role to play as that section entitles the company, a shareholder, a creditor, or any other person whose interests have been or may be affected, to obtain an order from the Court validating or confirming the terms of a purported issue of shares if the issue is or may be invalid for any reason or the terms of issue are inconsistent with or not authorised by the Act.[66]
[66]Reasons, [227]–[228].
In case he was wrong in his conclusion, the judge went on to consider if the A Class Shares were not redeemable, whether that would mean that GTW had no liability under the Guarantee Arrangement. The judge determined that GTW would still be liable.[67]
[67]Reasons, [229]–[245].
For ease of reference, I repeat some clauses in the Guarantee Arrangement that are relevant to this ground of appeal. Clause 2.1 of the Guarantee Arrangement provides:
Conditions precedent to obligations under this deed
The obligations of GTW under… this deed are conditional only on:
(a) …;
(b)[Pac Bio] does not raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary shares in [Pac Bio] carried out for the purpose of satisfying the Redemption Request within 3 months after the date of the Redemption Request; and
(c)no Insolvency Event subsists in respect of [Pac Bio] as at the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement.
Clause 3.1(a) of the Guarantee Arrangement provides that if the conditions precedent had been satisfied or waived:
(1)(subscription): GTW must subscribe for and accept the issue by [Pac Bio] of, such number of fully paid ordinary shares in [Pac Bio] at $1.00 each (Subscription Price) as is required to fully satisfy the Redemption Request (Subscription Shares), by means of an application substantially in the form in Schedule 2; and
(2)(Subscription Price): GTW must, subject to clause 3.1(c), pay to [Pac Bio] the Subscription Price in Immediately Available Funds without counter-claim or set-off.
Clauses 3.1(c) and (d) provide:
(c)[Pac Bio] must hold the Subscription Price on trust for the benefit of Pacreef for the sole purpose of redeeming the A Class Shares in accordance with the Subscription Agreement. Contemporaneously with the receipt of the Subscription Price, [Pac Bio] must redeem the A Class Shares and pay the Subscription Price to Pacreef in Immediately Available Funds without counter-claim or set-off, and without limiting the foregoing, [Pac Bio] hereby directs GTW to pay, and GTW must pay, the Subscription Price directly to Pacreef at each Subscription Completion, in Immediately Available Funds without counter-claim or set-off.
(d)The liability of GTW under clause 3.1(a) is not affected by anything that might operate to release or exonerate GTW in whole or in part from its obligations under this deed including any of the following, whether with or without the consent of GTW:
(1)the grant to GTW or any other person of any time, waiver or other indulgence, or the discharge or release of GTW or any other person from any liability or obligation;
(2)any transaction or arrangement that may take place between the parties or any other person;
(3)the failure or omission or any delay by Pacreef or [Pac Bio] to give notice to GTW or any default by [Pac Bio], Pacreef or any other person under this deed; and
(4)any legal limitation, disability, incapacity or other circumstances related to GTW or any other person.
The judge observed that the equitable principle which operates to discharge a guarantor’s liability in certain circumstances, including if there is a variation of the principal contract without the consent of the guarantor and which could prejudice the guarantor, did not apply.[68] The judge decided that GTW’s liability under cl 3.1(a) of the Guarantee Arrangement was not affected by an inability on the part of Pacreef to enforce the redemption as against Pac Bio.[69] The judge observed that such an outcome would be inconsistent with the introductory words to cl 2.1 which makes it clear that GTW’s obligations were only conditional on the three matters specified in that provision. Moreover, cl 3.1(d)(1)–(4) of the Guarantee Arrangement precluded such an outcome.[70]
[68]Reasons, [236]–[243].
[69]Reasons, [243].
[70]Reasons, [244]–[245].
GTW’s argument has two limbs. The first point is that Pac Bio could not redeem the A Class shares if they were not preference shares. As it had done before the judge at trial, GTW contended that if the redeemable preference share provisions were not engaged, then the only means by which a company can reduce its capital is by the reduction of capital[71] or buyback procedures.[72] GTW contends that one of the most basic principles of company law is the maintenance of capital. GTW says that the only way to avoid that principle is through one of the statutory exclusions to permit the reduction of capital. GTW submitted that the judge was wrong to rely on s 254L because that section only applies if the shares are redeemable preference shares which, for the purposes of this part of the case they were assumed not to be. The provision reads:
[71]Corporations Act s 256B.
[72]Corporations Act s 257A.
254L Consequences of contravening section 254J or 254K
(1) If a company redeems shares in contravention of section 254J or 254K:
(a)the contravention does not affect the validity of the redemption or of any contract or transaction connected with it…
GTW also submitted that the judge’s reliance on s 254E was misplaced as that provision does not permit or give the court some broad powers to remedy issues; it does not give the court power to do things not permitted by the Corporations Act such as to create a new class of share that does not exist. Rather, GTW submitted s 254E is directed to addressing concerns with the issue of shares that fall within the existing regimes in the Corporations Act.
The second limb of GTW’s argument is that if Pac Bio cannot redeem the A Class Shares because doing so would subvert the operation of the Corporations Act, the Guarantee Arrangement necessarily fails and GTW would not be liable. First, GTW relies on cl 3.1(a) of the Guarantee Arrangement. It focuses on the words ‘as required to fully satisfy the redemption request’. It says that as the shares cannot be redeemed (which is assumed for this part of the argument) there are no moneys required and no liability arises under cl 3.1(a).
GTW pointed to cl 3.1(c) of the Guarantee Arrangement which obliged Pacreef to ‘…hold the Subscription Price on trust for the benefit of Pacreef for the sole purpose of redeeming the A Class Shares in accordance with the Subscription Agreement’. It says that this clause affirms the construction it identifies for cl 3.1(a). Further, it says that as that cannot occur, Pacreef has no claim against it. In GTW’s submission, the money Pacreef would claim could never go to it because Pacreef cannot redeem the A Class Shares. As a consequence, GTW says, cl 3.1(d) is of no assistance to Pacreef. There is no release or exoneration of GTW; it is simply a case of the mechanism for payment failing.

The judge noted that the question was when the A Class Shares are ‘to be’ redeemed and that the construction contended for by GTW ignored those words.[115] Moreover, that construction left little work to be done by the reference to ‘28 days’ in cl 8.1(b).[116] The judge concluded:
In my view, the date that the shares are to be redeemed in accordance with the Subscription Agreement (as opposed to redeemed in general) is within 28 days of receipt of the 7 January 2019 Redemption Notice, save to the extent to which the events in clause 8.3 have application. Given that the clause 8.3 events had no application, that clause can be put to one side. The A Class Shares were therefore required to be redeemed on 4 February 2019. The fact that the A Class Shares were not able to be redeemed at that date out of the proceeds of a fresh share issue is a separate question which bears on the rights of Pacreef as against Pac Bio.[117]
[115]Reasons, [377].
[116]Ibid.
[117]Reasons, [378].
In addition, the judge noted that the Subscription Agreement and the Guarantee Arrangement were entered into contemporaneously with the Guarantee Arrangement expressly referring to the Subscription Agreement. Consequently, it was appropriate to have regard to the text of both, to interpret them as a reasonable business person would do and in a way that would see both agreements operating in conformity.[118] In this regard, under the Subscription Agreement, the A Class Shares are redeemed upon receipt of cleared funds into the bank account of Pacreef but there is a separate regime for redemption under the Guarantee Arrangement — GTW subscribing for shares under cl 3.1(a)(i) of the Guarantee Arrangement by paying the subscription price while cl 3.1(c) provides for the redemption of the A Class Shares by Pac Bio paying the subscription price to Pacreef in immediately available funds.[119] So the judge stated:
By choosing to refer in clause 2.1(c) of the Guarantee Arrangement to ‘the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement’, as opposed to the date the A Class Shares are to be redeemed in accordance with the Guarantee Arrangement, the parties can be taken to have contemplated a different reference point and a different regime by which to determine the relevant date to assess the subsistence or otherwise of any Insolvency Event.[120]
[118]Reasons, [379].
[119]Reasons, [381].
[120]Reasons, [383].
The judge then set out a further reason for rejecting GTW’s submission. Performance by GTW under cl 3 was only to take place after the conditions in cl 2.1 were satisfied.[121] The judge stated that if GTW’s argument was to be accepted, the obligations of GTW under cl 3 would never be enlivened:
…If the A Class Shares were redeemed by Pac Bio following a share issue otherwise than to GTW pursuant to the Guarantee Arrangement, clearly the Guarantee Arrangement would have no application. Conversely, if the A Class Shares were redeemed by such a process then on GTW’s submission, the A Class Shares could not be redeemed as there would have been no share issue: in such circumstances, GTW submits that the time for redemption under the Subscription Agreement would not have arrived, ergo the conditions precedent to GTW’s obligations under the Guarantee Arrangement would not have arisen. This is not a construction which produces a commercial result.[122]
[121]Reasons, [385].
[122]Ibid.
Finally, the judge noted the difference in wording between cl 2.1(b) and cl 2.1(c). He stated:
[T]he relevant time for satisfaction of the condition in clause 2.1(b) was three months after the date of the redemption request. This wording differs from that in clause 2.1(c). It should be inferred that they chose different wording for good reason. A consequence of accepting GTW’s submission is that the time for the satisfaction of the condition in clause 2.1(c) would be the same as that set out in clause 2.1(b). If that was intended, the parties would be expected to have chosen the same wording in 2.1(c) as occurred in the immediately preceding subclause.
Clause 2.1(b) has different work to do than clause 2.1(c). For the purposes of the conditions contained in the Guarantee Arrangement, Pac Bio had three months to attempt to raise the capital required before the obligations of GTW under the Guarantee Arrangement were enlivened. This did not happen in the allotted time. But that does not mean that Pac Bio did not have the obligation pursuant to clause 8.1(b) of the Terms of Issue (which formed part of the Subscription Agreement) to pay within 28 days of receipt of the 7 January 2019 Redemption Notice. Pac Bio’s obligation arose then. However, GTW’s obligation under the Guarantee Arrangement arose at a different and later point, as contemplated by clause 2.1(b) of the Guarantee Arrangement, three months hence.[123]
[123]Reasons, [386]–[387].
The judge concluded that the relevant date for determining whether an Insolvency Event subsisted was 4 February 2019 not 7 April 2019.[124]
[124]Reasons, [388].
GTW submits that the judge erred. It says that one available, and perhaps the best, construction is that the date in cl 2.1(c) has never arrived because the A Class Shares have not been redeemed. It contends that on the proper construction, cl 2.1(a) addresses the form of any notice seeking redemption and cl 2.1(c) confirms that redemption must be in accordance with the terms of issue, simply picking up the requirement that the A Class Shares can only be redeemed in accordance with their terms of issue, that is, by a new issue of shares (cl 8.1(d)). For the purposes of the case below, GTW contended that the correct date was 7 April 2019. It contends that the judge’s finding that the A Class Shares were to be redeemed within 28 days ignores cl 8.1(d) of Sch 3 of the Subscription Agreement and the requirement in s 254K of the Corporations Act. In particular, it submits that the timing for payment in cl 8.1(b) of Sch 3 of the Subscription Agreement must be read in light of cls 8.1(d) and 8.3. It notes that the introductory words to cl 8.1(b) states ‘subject to cl 8.3’ and that clause starts with the requirement for Pac Bio to raise capital through a fresh issue of ordinary shares to satisfy a redemption request.
On this basis, GTW says that the date for redemption in cl 2.1(c) is the end of the three month period contemplated in cl 2.1(b), being the earliest date that GTW’s underwriting obligation could arise (that is, 7 April 2019). On GTW’s proposed construction of the Guarantee Arrangement and the Subscription Agreement:
(a)once a redemption notice is served, Pac Bio must pay so much of the redemption amount as it raises from a new issue of shares made for the purpose of the redemption, within 28 days;
(b)if Pac Bio does not raise all of the capital required from a new issue of shares carried out to satisfy the Redemption Request, the condition in cl 2.1(b) is satisfied three months after the issue of the redemption notice, and GTW’s obligations under cl 3.1 would also arise three months after the issue of the redemption notice.
GTW submits that the judge’s construction does not lead to a sensible commercial outcome because on that construction if GTW’s obligations are triggered then the date for assessing solvency (being 28 days after the redemption notice) is different from the date for redemption (being at least three months after the redemption notice). By way of example, GTW suggested that this would lead to a situation where Pac Bio was ‘not insolvent’ as at day 28 but in external administration by day 90 when GTW had its obligations under cl 3.1 to subscribe for shares. In that event, the condition in cl 2.1(c) would be satisfied but the share issue to GTW could not occur (and neither could the redemption of the A Class Shares).
Finally, GTW relies on the principle that contractual provisions in a guarantee will be construed in favour of the guarantor and this principle compels a construction of cl 2.1(b) in favour of GTW.
In my opinion, the judge was correct to find that the date the existence of an Insolvency Event was to be determined was 4 February 2019.
Clause 2.1(c) is the starting point. That clause is directed to the date that the A Class shares are to be redeemed and directs attention to the Subscription Agreement to determine the answer to that question. In this regard, the relevant part of the Subscription Agreement is to be found in cl 8.1. Clause 8.1(b) is predominantly concerned with the time for redemption — within 28 days after receipt of a redemption notice. The fact that the clause is subject to cl 8.3 does not change that timeframe. Rather, those introductory words, the first sentence of cl 8.3(a) and cl 8.1(d) concern the origination of the funds to meet the redemption request; that is, Pac Bio’s obligation was to fund the redemption from a capital raising. The balance of cl 8.3(a) provides for a situation that the parties foresaw might arise. That situation was one where certain shareholders acquired shares through the capital raising. In that situation, the parties anticipated that this may result in a breach of the takeover provisions in the Corporations Act. In cl 8.3(a) they sought to address that possibility by providing for payments to Pacreef by instalments to give time for compliance with one of the exemptions to the takeover provisions. In that circumstance, the time for payment would be extended to the earlier of two events to occur — the earliest date that could be complied with for the exemptions to operate or nine months after the receipt of the redemption notice. It is in that situation of the issue of shares to certain shareholders that cl 8.3(a) is directed and that situation did not eventuate in this case.
It should be remembered that, so far as is relevant in this case, the Subscription Agreement regulated relations between Pacreef and Pac Bio. It also had a role to play in setting the date that was picked up for the purposes of cl 2.1(c) of the Guarantee Arrangement, but it did not regulate the relationship between Pacreef and GTW under the Guarantee Arrangement. How Pac Bio was to meet its obligations (that is, through a capital raising that did not in one way or another offend the provisions of the Corporations Act) had nothing to do with setting a date for determination of the solvency of Pac Bio. That is something completely different. As the judge said correctly, what recourse Pacreef may have against Pac Bio under the Subscription Agreement is a separate question as between those parties.
Part of the context for considering the proper construction of cl 2.1(c) is cl 2.1(b). As the judge correctly pointed out, different language was used in each clause and if it had been the intention of the parties to set the date in cl 2.1(b) in the way contended for by GTW, it would have been a simple matter for them to use the same wording as was used in cl 2.1(c).[125] Even more so, if the date for both cl 2.1(c) and cl 2.1(b) was intended to be the date three months after the redemption notice, one would expect the same language or mechanism to have been employed by the parties, but it was not.

[125]Reasons, [386].

As for GTW’s posited hypothetical about no insolvency event at day 28 but one at the date three months after the redemption notice, there may be many reasons why the parties bargained for the risk of Pac Bio’s insolvency after the 28^th day to lie with GTW rather than Pacreef.
For completeness and leaving to one side the question of whether the Guarantee Arrangement was one attracting the principle of construction in favour of guarantors, in construing cl 2.1(c) of the Guarantee Arrangement, there is no room for that principle to play any part. For the reasons given above, the proper construction of the Guarantee Arrangement, and in particular, cl 2.1(c) is clear.
Were it necessary to decide, ground 5 would fail.

Conclusion

I would grant leave to appeal and allow the appeal. I would set the orders below aside and in their place order that the proceeding be dismissed.

NIALL JA:

I have had the advantage of studying the reasons for judgment of the Chief Justice. Save in respect of ground 1, I agree with those reasons. Unlike the Chief Justice I would not uphold ground 1. In my opinion, the judge was correct in his construction of cl 2.1(b) of the Guarantee Arrangement.
The facts are fully set out in the reasons of the Chief Justice, and I respectfully agree with her Honour’s distillation of principle on which there was no disagreement between the parties. Accordingly, I can set out my reasons on ground 1 briefly and without any repetition.
The obligation on GTW under cl 3.1 of the Guarantee Arrangement arises if ‘the Conditions[126] have been satisfied’.
[126]Defined in cl 1 to mean the conditions set out in cl 2.1.
Clauses 2.1 to 2.3 are in the following terms:
2.1 Conditions precedent to obligations under this deed
The obligations of GTW under clause 3 of this deed are conditional only on:
(a)Pacreef giving notice to [Pac Bio] to redeem the A Class Shares in, or substantially in, accordance with the Subscription Agreement (Redemption Request);
(b)[Pac Bio] does not raise all of the capital required to satisfy the Redemption Request from a new issue of fully paid ordinary

shares in [Pac Bio] carried out for the purpose of satisfying the Redemption Request within 3 months after the date of the Redemption Request; and
(c)no Insolvency Event subsists in respect of [Pac Bio] as at the date the A Class Shares are to be redeemed in accordance with the Subscription Agreement.

2.2 Conduct of the parties
Each party must take all steps within its own capacity to ensure that each Condition is fulfilled.

2.3 Waiver
The Conditions are for the benefit of all parties and may only be waived by written agreement between the parties.

In short, I agree with the judge’s construction for the reasons he gave.
The effect of GTW’s construction is to divide up cl 2.1(b) into three components:
(a)the failure to raise all of the capital to satisfy the Redemption Request;
(b)the carrying out of a new share issue by Pac Bio; and
(c)a time period.
In respect of the second component, GTW contends that cl 2.1(b) imposes a condition in the form of an obligation on Pac Bio to ‘carry out’ the share issue. On that view, the Conditions are not satisfied unless and until Pac Bio ‘carries out’ a share issue.
The first notable feature about cl 2.1 is that each of the Conditions describe a state of affairs rather than being expressed in terms that are redolent of obligation. It is not couched in terms that seek to impose a liability on GTW for a breach of obligation, as is often the case in respect of guarantees and indemnities. In short, cl 2.1 does not expressly incorporate the obligation for which GTW contends, and to read it that way does no comfort to the structure of the clause as a whole.
Secondly, as a matter of text, cl 2.1(b) does not readily divide into three discrete components. In my view, the middle part of the clause is not intended to refer to an obligation, but is merely descriptive of what goes before. It is to be recalled that in order to redeem the preference shares, Pac Bio had to raise capital from a particular source, namely a share issue undertaken for that purpose. The words on which GTW relies serve to emphasise that the capital that Pac Bio would rely on to meet the Redemption Request must come from that source and no other. They ensure that any capital paid by Pac Bio to meet the redemption was obtained in accordance with the terms of issue of the redemption shares and s 254K of the Corporations Act.
Thirdly, GTW’s construction does not advance the evident purpose of the Guarantee Arrangement. The redemption shares were issued in the context of a sale of shares. Pacreef was entitled to redeem the shares at $1 per share. The purpose of the Guarantee Arrangement was to protect Pacreef against the risk that Pac Bio was not in a position to redeem the shares. It would neuter the protection that the Guarantee Arrangement was designed to provide if Pacreef had no claim against GTW in the event that Pac Bio took no steps, or inadequate steps, to raise the capital. On the other hand, the obligation plainly arises if Pac Bio fails to raise the capital, and in those circumstances it would be anomalous if the condition is not satisfied where Pac Bio completely fails to get past first base. It seems to me that that was part of the risk that the Guarantee Arrangement was designed to guard against.
GTW contends that an underlying commercial imperative was that there would be a capital raising as a condition of its liability in which it could participate before any prospect of a call under cl 3. I do not find that argument persuasive. I accept that it was contemplated that there would be a capital raising in answer to a redemption request. Pac Bio had bound itself to conduct a capital raising. The issue however is where, objectively ascertained, the risk of non-compliance with that obligation rests. In my view, the purpose of cls 2 and 3 of the Guarantee Arrangement was to shift the risk to GTW. For reasons already explained, that conclusion follows from the text and structure of cl 2. It would also preference the commercial imperative of GTW over that of Pacreef, which, given the broader context of using the preference shares as a means to finance the share sale, is unlikely. Moreover, although a relatively small shareholder, GTW was better placed to have a measure of control or at least influence over the performance of Pac Bio’s obligation to conduct the share issue necessary to answer the redemption request.
Fourth, and relatedly, the construction advanced by GTW gives rise to an uncertainty of meaning. At what point is the share issue carried out? On the other hand, the construction adopted by the judge construes cl 2.1(b) as imposing a condition that reflects a state of affairs or fact that does not require any qualitative assessment.
I do not regard cls 2.2 and 2.3 as assisting GTW.
When regard is had to the text of cl 2.1, cl 2.2 is oddly drafted. Starting with cl 2.1(a), which is the only condition in the control of Pacreef, it makes no sense to describe it as being obliged to take steps to fulfil that condition. Pacreef was under no obligation to redeem the shares and could, for example, decide to convert them to ordinary shares.
The conditions in cls 2.1(b) and (c) are expressed in the negative, which presents linguistic difficulty in describing the conditions as being ‘fulfilled’. Dealing with cl 2.1(b), it cannot have been intended that Pac Bio was required to take all steps to ensure that it did not raise all of the capital required to meet the request. It might be thought that what was intended by cl 2.2 was that Pac Bio take all steps within its capacity to carry out a capital raising in answer to a redemption request. If that is the correct construction then, to my mind, that presents another impediment to GTW’s construction of cl 2.1(b).
Having regard to the opening words of cl 2.1, which makes it clear that the obligations of GTW under cl 3 are conditional only on the three stipulated conditions, it could not have been intended that compliance with cl 2.2 would present an additional condition. Yet to construe cl 2.1(b) as imposing a condition that Pac Bio was required to carry out

a new issue of shares would in effect introduce those obligations and a discordant qualitative aspect to the conditions. The better view is that cl 2.2 provided the parties, including GTW, with additional protections so that they could hold Pac Bio to its obligations without diminishing the benefit that the conditions afforded Pacreef.

It follows that I agree with the judge.
For completeness I also agree with his conclusions that the Guarantee Arrangement was not a contract of guarantee or indemnity and GTW did not stand as a surety in relation to the transaction.[127] Rather than agreeing to perform Pac Bio’s obligations, GTW agreed to participate in a share issue. Whether it did that through the share issue or as a result of cl 3 did not mean that it was a surety for Pac Bio’s contractual obligations. Therefore, the principle of construction that applies to such contracts is not applicable and the general approach to the construction of commercial contracts must be applied.[128]
[127]Reasons, [258]–[274].
[128]Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; Bofinger v Kingsway Group Ltd (2009) 239 CLR 269.

In the result, I would dismiss the appeal.

MACAULAY JA:

Except in relation to ground 3, I agree with the reasons given by the Chief Justice for granting leave to appeal and allowing the appeal. Because the outcome of the appeal is, effectively, determined by allowing grounds 1 and 2, my views on ground 3 do not affect the outcome.
The Chief Justice would dismiss ground 3 and uphold the trial judge’s conclusion that the A Class Shares issued by Pac Bio to Pacreef were redeemable preference shares. In my view, they are not redeemable preference shares. I would therefore allow ground 3. In explaining my different position, I gratefully rely upon the facts as set out by the Chief Justice.[129]
[129]Above, [87]–[92].
Section 9 of the Corporations Act defines a redeemable preference share to mean
a preference share in a body corporate that is, or at the body’s option is to be, liable to be redeemed.
The preference nature of a share is established by virtue of rights being attached to it pursuant to the constitution of the company or by special resolution. Such rights must be in respect of repayment of capital, participation in surplus assets and profits, cumulative and non-cumulative dividends, voting, or priority of payment of capital and dividends in relation to other shares or classes of preference shares.[130]

[130]Corporations Act s 254A(2).

Section 254(3) of the Corporations Act amplifies that definition as follows:
(1)Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable:
(a)at a fixed time or on the happening of a particular event; or
(b)at the company’s option; or
(c)at the shareholder’s option
The trial judge held that the A Class Shares issued to Pacreef were preference shares solely because they were redeemable. In other words, he conflated the two qualifications — being preferred and redeemable — into one single qualification, namely that the shares be redeemable. To find that these particular A Class Shares satisfied the statutory definition in ss 9 and 254A of redeemable preference shares simply because they were redeemable required two conclusions:
(a)First, the bare fact that capital is returned to a redeemable preference share holder upon the company redeeming the shareholder’s shares denotes some sort of preferential character as regards the repayment of capital; and
(b)Secondly, a share does not need to have any independent preferential character in addition to it being redeemable.
For reasons which follow, I do not accept either of these conclusions.
Dealing with the second of the two conclusions, in my view, as a matter of statutory interpretation, the definition of a redeemable preference share establishes two independent qualifications: first, that the share be a preference share, and secondly that it be redeemable. This was the view of Barrett J in Capel.
As Barrett J stated in Capel, the mere fact that shares may be redeemed by the company is a feature of the redeemability of the shares, not a feature of preference. Barrett J explained:
It was faintly suggested on behalf of the company that the right of the holder to require redemption by the company makes the shares preference shares. That cannot be so. That feature makes them redeemable shares, which represents one of the two attributes contemplated by the s 9 definition of ‘redeemable preference share’. The characteristics that make the share a ‘preference share’ are distinct from those that make it redeemable.[131]
[131]Capel, [14].
I also disagree with the first of the two conclusions set out at [226] above.
The A Class Shares in this case were expressly stated to have no preference or priority to the return of capital in the event of a winding up of the company. This limitation is slightly (although not significantly) different to the limitation expressed in the terms of issue of the shares in Capel. In that case the relevant shares were stipulated to have no preference or priority to ‘the repayment of capital in Capel Finance or during the winding up of Capel Finance’. True it is that the limitation in the present case does not explicitly exclude any priority to the ‘repayment of capital’ outside of a winding up, but neither does the Explanatory Memorandum expressly confer any priority to the holder of the A Class Shares to the repayment of capital in Pac Bio outside of a winding up. In my view, the absence of such an express exclusion is not a relevant point of distinction.
Gageler J in Beck[132] expressly endorsed a passage in Capel in which Barrett J described the characteristic of a preference share as being something which entitles the holder to some ‘priority or superior position’ or ‘comparative advantage’ over and above ordinary shareholders.[133]
[132](2013) 251 CLR 425, 454 [90] (Gageler J).
[133]Capel, [11].
In Beck, the plurality (Hayne, Crennan and Kiefel JJ) also emphasised the importance of the rights attaching to the shares at the time of issue as compared with the time when those rights are to be enjoyed. It was the nature of the rights at the time of issue which determined whether or not shares were preference shares.[134] This point was reinforced by the plurality emphasising the importance of the ‘constituent documents’ which define the rights attached to the share at issue.[135]
[134]Beck, [69].
[135]Ibid [70].
The question in Beck was whether for a share to have preference attributes another class of shares had to have been issued against which the attributes of the so-called preference share could be compared. The alternative position was that it was sufficient to assess the preferential nature of a particular share from the constituent documents regardless of whether or not any of the comparator class of shares had yet been issued. The court held that it was unnecessary that there be another class of shares issued so long as the preferential character of the subject shares could be seen from the constituent documents at the time of issue.
In this case, the A Class Shares do not confer on a holder any priority, superior position or competitive advantage in the repayment of capital, compared to a holder of other shares, over and above their characteristic of being redeemable.
As stated in Beck, the preferential nature of redeemable preference shares must be judged at the time of their issue, not at the time of the redemption (that is, the time of the enjoyment of the right). Logically, that must mean that the preferential character of the share is ascertainable at the time of its issue from the terms of the constituent documents.
As stated in s 254(3), a redeemable preference share may be redeemable either at the option of the shareholder, or of the company, or at a fixed time or on the happening of a particular event.
A share that is redeemed at the option of the shareholder might put that shareholder in a superior position to the holder of an ordinary share because, at the time chosen by the shareholder, the price fixed for redemption is higher than the value that would be obtained by an ordinary shareholder on a winding up or, say, a reduction of capital. But a share redeemed at the option of the company is unlikely to put that shareholder in a superior position to ordinary shareholders. A share redeemed at a fixed time or on the happening of a particular event could go either way. An attribute which may well deliver a competitive disadvantage to a shareholder — namely, redeemability at the option of the company — cannot be taken as attributing to that share a preferential character.
There is no statutory support for the view that a redeemable preference share is a preference share depending upon the circumstance of its redemption. If a share gains its preferential character due to it being redeemable, its preferential character must be ascertainable at the time of the share’s issue rather than being dependent upon the circumstances — later to be determined — of the share’s redemption. Further, it is difficult to see how ss 9 and 254(3) can be construed as if the preferential character of a share hinges upon the election of the person at whose option, or the event upon which, a share may be redeemed. That a share is redeemable, by any or all of these means, must equally confer a preference, or equally be agnostic as to the conferral of preference status.
For the reasons stated, that position is not improved by observing that a shareholder who can require the company to redeem the shares enjoys a competitive advantage over other shareholders because they may be able to elect to have the return of their capital at a nominated value per share. An advantage may accrue because the distribution of capital upon redemption could result in a higher return than an ordinary shareholder would receive on a winding up or a reduction of capital. Such an outcome is simply the function of redemption at the election of a shareholder, being one of the three mechanisms by which a share may be made redeemable.
In substance, the approach preferred by the trial judge construes s254A(3) as if it contained the following words inserted in italics: ‘Redeemable preference shares are shares that are preference shares because they are issued on terms that they are liable to be redeemed’. In other words, it adopts the argument, rejected by Barrett J in Capel, that there is effectively only one attribute that is necessary for a redeemable preference share, namely that it is redeemable. This approach holds that because a share is redeemable, it will necessarily be preferential.
I reject this thinking. In my view, it distorts the plain statutory words. It also means that on account of an attribute which may well deliver a competitive disadvantage to a shareholder — namely, redemption at the option of the company, which may result in the shareholder receiving less than what the holder of other shares might receive on a repayment of capital in a winding up — a shareholder is nonetheless to be taken as holding a preference share.
The historical analysis provided by the judge is interesting and informative.[136] But, in my view, it does not support the result he reached.
[136]Reasons, [193]–[201].
First, the fact that preference shares were historically regarded as redeemable at the company’s option does not of itself supply a reason for thinking that, today, redeemable shares are therefore preferential. In other words, that a preference share was historically, by virtue of that fact, redeemable at the company’s option does not mean that a share that is now by statute permitted to be redeemable is necessarily preferential.
Secondly, the statute has expressly widened the mechanisms for the redemption of shares. Formerly, redemption only lay at the option of the company. It now may be granted at the option of the shareholder or by reference to some date or to the happening of an event. Hence, the historical rationale for equating redeemability with the preferential nature of the share — because a company was permitted to cancel shares which conferred preferential rights upon certain classes of shareholders by buying them back — can no longer account for the additional mechanisms of redeemability for which Parliament has specifically provided.
Thirdly, and relatedly, whatever may have been the historical rationale for redeemable preference shares, Parliament has chosen to express the qualifications for a share to be a redeemable preference share in quite new language. An understanding of the previous rationale for affording redeemability to a preference share cannot supplant or distort what is the plain meaning of the statute.
In my opinion, Barrett J was correct in Capel. That decision is not relevantly distinguishable from the present case. What Barrett J said, as set out above at [229], is the complete answer to this ground. It should be upheld.

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[2023] VSCA 291

7 December 2023