Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2)
[2019] FCA 354
•15 March 2019
FEDERAL COURT OF AUSTRALIA
Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354
File number: SAD 99 of 2016 Judge: WHITE J Date of judgment: 15 March 2019 Catchwords: CORPORATIONS – directors’ duties – Defendants were directors and/or officers of a mining company (Termite) operating a mine with a life of about five years – Termite conducted the mining and associated activities through contractors pursuant to contracts for terms closely corresponding to the estimated life of the mine – Defendants caused Termite to adopt and implement a distributions policy by which, subject to the retention of a reserve of $3 million, all the proceeds from the mining were distributed to the joint venturer shareholders – part way through the expected life of the mine, the iron ore price dropped and Termite went into voluntary administration and subsequently into liquidation - claim that several of the Defendants breached their common law duties to act with care, skill, diligence and good faith for the company as a whole – claim that the Defendants breached ss 180 and 181 of the Corporations Act 2001 (Cth) – claim that the reserve of $3 million was inadequate – claim that a reserve of at least $10 million was necessary for Termite to survive even a short term downturn in the iron ore price.
CORPORATIONS – claim for damages pursuant to s 1317H of the Corporations Act or at common law for the deficiency in Termite’s liquidation – in the alternative, claim that the distributions would not have been made and that Termite would have repaid its creditors and reduced a loan from its parent company – in the further alternative, claim for the aggregate of the distributions paid pursuant to the Distributions Policy.
Held:
1. A cash reserve of at least $10 million should have been retained – each of the Defendants, acting as either directors or de facto directors, breached their duties under ss 180 and 181 in respect of the adoption and implementation of the distributions policy and in failing to review and revise it during the period that distributions were made – three of the defendants breached their common law duties.
2. An additional $7 million would have been available in mid-2014 when the administration occurred if a $10 million cash reserve had been retained – damages of $7 million awarded.
CORPORATIONS – consideration of claim for damages and review of deficiency in the liquidation – liquidators have admitted proofs of debt – whether the amount for which a debt has been admitted to proof by the liquidators was a cap on the Defendants’ liability – assessment of creditors’ claims.
Legislation: A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 21‑15, 58‑60
Corporations Act 2001 (Cth) ss 9, 79, 180, 181, 286, 439C, 443B, 554B, 563C, 597, 598, 1305, 1317H, 1317S, 1318
Defence Act 1903 (Cth)
Trade Practices Act 1974 (Cth) s 75B(1)
Corporations Regulations 2001 (Cth) regs 5.6.44, 5.6.5, 5.6.54, 5.6.55
Defence Forces Regulations Reg 35
Federal Court Rules 2011 (Cth) rr 16.03, 16.08
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New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68
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Ogilvie v Adams [1981] VR 1041
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Date of hearing: 5-7, 10-13, 18-21 April, 25-29 September and 3‑4 October 2017 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 1001 Counsel for the Plaintiff: Mr B Roberts SC with Mr M Burnett Solicitor for the Plaintiff: Fisher Jeffries Counsel for the Defendants: Mr J Thomson SC with Mr I Thomas Solicitor for the Defendants: Clayton Utz ORDERS
SAD 99 of 2016 IN THE MATTER OF TERMITE RESOURCES NL (IN LIQUIDATION) ACN 112 036 398 BETWEEN: TERMITE RESOURCES NL (IN LIQUIDATION) ACN 112 036 398
Plaintiff
AND: NEIL EUGENE MEADOWS
First Defendant
JOHN STEPHEN NITSCHKE
Second Defendant
SIMON ROBERT PARSONS (and others named in the Schedule)
Third Defendant
JUDGE:
WHITE J
DATE OF ORDER:
15 March 2019
THE COURT ORDERS THAT:
1.The matter is adjourned to 12 noon (SA time) on 22 March 2019 for submissions with respect to interest and costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
WHITE J:
Introduction
[1]
Factual overview
[6]
The defendants
[19]
The evidence in the trial
[27]
Termite’s evidence
[28]
The defendants’ evidence
[44]
Factual setting
[57]
The Heads of Agreement
[74]
The LinQ Capital facility
[82]
The locus of decision-making for Termite
[87]
Termite’s cash flow forecasting
[100]
The adoption of the Distributions Policy
[109]
The illiquidity of IMX and the loan from Termite
[111]
The advice from KPMG
[129]
The development of the Distributions Policy
[137]
The Board meetings approving the Distributions Policy
[145]
The terms of the Distributions Policy
[149]
The binding effect of clauses in the Distributions Policy
[151]
The making of the distributions
[164]
Directors’ duties - overview
[171]
Section 180
[179]
Section 180(2) - the business judgment rule
[187]
Section 181
[192]
The interests of creditors
[197]
Duties to Termite as a subsidiary
[210]
The actions constituting the alleged breaches
[214]
Previous issues concerning the solvency of Termite
[219]
January 2012
[220]
The September 2012 Downturn
[223]
The liabilities to the Services Contractors
[243]
The foreseeable risks: Cairn Hill a marginal high cost operation
[258]
The foreseeable risks: the iron ore price
[269]
The determination of the iron ore price
[271]
The pricing mechanism in Termite’s contracts
[275]
Fluctuations in the iron ore price
[281]
The iron ore price - difficulties in prediction
[282]
The defendants’ awareness of the iron ore price volatility
[307]
Defendants’ knowledge of the effects of a decline in the iron ore price
[316]
The foreseeable risks: exchange rate fluctuations
[326]
The foreseeable risks: ore tonnage and grade
[329]
The uncertainty as to proceeding with Pit 2
[344]
The uncertainty about proceeding with Phase 2
[360]
The continuing contemplation of the prospect of Termite becoming insolvent
[367]
The email exchange of 8 February 2013
[369]
The avoiding of a paper trail
[374]
The inclusion in the Distributions Policy of an Outback reserve
[381]
Ring fencing IMX and Taifeng from Termite’s liabilities
[388]
The repayment of the Termite-IMX loan
[401]
Other manifestations of the prospect of Termite becoming insolvent
[407]
Fixing the Termite Cash Reserve at $3 million
[410]
The defendants’ explanations
[411]
Mr Nitschke
[412]
Mr Hoskins
[418]
Mr Meadows
[422]
Mr Parsons
[430]
Mr Sun
[433]
Mr Pang
[435]
The $3 million figure was adopted without a proper basis
[439]
Absence of ongoing review of the adequacy of the $3 million Reserve
[446]
The Outback Board meeting of 27 March 2013
[448]
Mr Hassard’s draft analysis of 9 April 2013
[451]
The Downside Analysis: Interim Report of 29 April 2013
[456]
The Outback Board meeting of 22 May 2013
[463]
The next consideration of the adequacy of the reserve
[483]
The reasons for no continuing review of the adequacy of the reserve
[487]
Absence of obligation to make repayment of the Shareholder Loans
[493]
Termite’s financial performance before 12 March 2013
[546]
Termite’s LoM CFFs and the ETPs
[550]
Structural flaws in the LoM CFF
[561]
The stockpiles of mined ore as a “cash equivalent”?
[585]
Contemporaneous forecasts of the iron ore price
[604]
The status of Messrs Hoskins, Sun and Pang
[627]
Statutory provisions and principles
[628]
Mr Hoskins
[631]
Mr Sun and Mr Pang
[637]
Did the defendants breach their duties?
[645]
An issue of principle
[648]
Termite’s pleaded case about appropriate reserves
[674]
The adequacy of the $3 million Reserve
[680]
A reserve of at least $10 million was appropriate
[693]
Conclusion on breach of duties
[696]
Accessorial Liability
[714]
The IMX Loan
[722]
Causation
[724]
The formulation of Termite’s claims
[736]
Consideration of Termite’s claims
[737]
Administration in any event?
[747]
Conclusion on causation and loss
[752]
Damages
[753]
Overview of Termite’s damages claim
[754]
The significance of the Liquidators’ admission of the proofs of debt
[762]
The trading debts - excluding the Logistic Creditors
[769]
The trading debts - Logistic Creditors
[770]
Exact - trading debts
[771]
The June Residual Claim
[773]
Interest
[779]
Conclusion on the trading debt claim of Exact
[787]
SBR - trading debts
[788]
Conclusion on trading debts
[792]
The non-trading debt claims by the Logistics Creditors and IMX
[793]
Cronos - non-trading claim
[796]
Termite’s contract with Cronos
[797]
Cronos non-trading debt not admitted to proof
[807]
No notice of default
[808]
No continuing performance by Cronos
[809]
Discount under s 554B of the Act?
[818]
Off-hire Charge
[824]
The Recovery Charge
[825]
Conclusion on the non-trading claim of Cronos
[827]
Exact - non-trading claim
[828]
The Contracts of Exact with Termite
[829]
Termination of the Exact Contracts
[837]
The formulation of Exact’s claim
[842]
Was there a breach of contract by Termite?
[846]
An insurance claim cap?
[854]
Termite adopting the least burdensome course
[859]
Exact’s liability to Outback Parks & Lodges Pty Ltd
[875]
Exact’s liability to Maxam Australia Pty Ltd
[877]
Exact’s demobilisation costs
[878]
Exact’s 24-30 June claim
[880]
Conclusion on the non-trading claim of Exact
[881]
Flinders Ports – non-trading claim
[882]
The Termite-Flinders Ports Contract
[885]
Termite’s liability under cl 22
[889]
The tonnage rate after 1 January 2015
[906]
Section 554B of the Act
[910]
Clause 27.1 of the Logistics Services Contract
[911]
Conclusion on the non-trading claim of Flinders Ports
[912]
Gemco - non-trading claim
[913]
The Termite-Gemco contract
[915]
Non-performance by Gemco of its obligations?
[918]
The rent abatement provision
[929]
Section 554B of the Act
[930]
A failure to mitigate?
[934]
The claim for storage fees
[939]
Conclusion on the non-trading claim of Gemco
[942]
SBR - non-trading claim
[943]
The Termite-SBR Contract
[944]
No entitlement for damages for breach of contract?
[952]
The claim under cl 11.3
[960]
SBR’s claim not admitted to proof
[966]
An intervening event?
[967]
The termination for convenience clause
[979]
Conclusion on the non-trading claim of SBR
[980]
IMX - guarantee claim
[981]
Other claims
[985]
The ATO claim
[987]
Shanghai Guodian Shipping Co Ltd
[992]
Summary on quantum
[998]
Conclusion
[1001]
Introduction
This judgment concerns a claim by a mining company, now in liquidation, against its former directors and officers in respect of alleged breaches of duty.
On 12 March 2013, the plaintiff, Termite Resources NL (in liq) (Termite), adopted a policy (the Distributions Policy) for the distribution to its parent company of the proceeds from mining at Cairn Hill in the Far North of South Australia. The Distributions Policy involved Termite retaining a reserve of $3 million and distributing the remainder. The amount Termite paid in the 13 month period from March 2013 to March 2014 pursuant to the Distributions Policy was $46,053,095.
Termite alleges that the adoption and implementation of the Distributions Policy left it at serious risk of insolvency, especially given the operational and market risks of the marginal iron ore mining operation in which it was engaged. The risk was realised in 2014 when the price which Termite received for its iron ore declined markedly.
The $3 million reserve was then inadequate to meet Termite’s existing and expected liabilities and, on 18 June 2014, it was placed into voluntary administration. Three months later, on 15 September 2014, the creditors of Termite resolved, pursuant to s 439C(c) of the Corporations Act 2001 (Cth) (the Act), that Termite be wound up. Messrs Lewis, Mableson and Kidman, who had been the appointed administrators, were also appointed liquidators.
Termite has substantial unsatisfied liabilities including, in particular, liabilities to the logistics services contractors (the Services Contractors) to whom it had subcontracted the principal aspects of its mining and associated activities for, essentially, the life of the Cairn Hill Mine. These liabilities include amounts (sometimes referred to as “Tail Liabilities” and sometimes as “ETPs”) due to the Services Contractors by reason of the early cessation of mining. Termite claims that, had it not made the payments in accordance with the Distributions Policy, it would have been able to continue mining activities and would have had the means of satisfying some or all of the liabilities to its creditors. It alleges that its losses were caused by the defendants’ breaches of duty.
Factual overview
Termite was the vehicle by which a mining joint venture was conducted by IMX Resources Ltd (IMX) and Taifeng Yuanchuang International Development Co Ltd (Taifeng), a company incorporated in Hong Kong. The Joint Venture had commenced in December 2009 with the execution of a heads of agreement. Termite was wholly owned by Outback Iron Pty Ltd (Outback), a company in which IMX and Taifeng held, respectively, 51% and 49% of the shares. Outback had no other business and functioned solely as the holding company of Termite.
Taifeng was a significant shareholder in IMX, holding 13.06% of its shares as at 30 June 2013 and 10.22% of its shares as at 30 June 2014.
Each of IMX and Taifeng had provided funding for the conduct of Termite’s mining operations. They did so by advances to Outback which Outback then on‑lent to Termite (unsecured and interest free) (the Outback‑Termite Loan). By 30 June 2012, Outback had advanced $48.905 million to Termite. Of this amount, $21,309,673.50 had been advanced by IMX and $20.474 million by Taifeng. These advances were characterised as unsecured interest free loans from IMX and Taifeng to Outback (the JV Loans). The balance of the total amount of $48.905 million advanced by Outback to Termite ($7,121,326.50) was said to be equity advanced by IMX and Taifeng to Outback.
The precise status of the JV Loans and of the Outback‑Termite Loan (together, the Shareholder Loans) was an issue in the trial as Termite claims that they were a form of subordinated debt. Before March 2013, there had been no repayment by Termite of the Outback‑Termite Loan at all and Termite claims that, at the time of the adoption of the Distributions Policy, it had not been under any obligation to make a repayment on that loan.
The principal elements of the Distributions Policy were that, provided that there were no “unfavourable developments” in the current or forecast iron ore price, copper price, or the AUD-USD exchange rate which would warrant additional cash being held by Termite, its management was each month to distribute to Outback all of its cash, after payment of operating expenses, which exceeded $3 million. That sum was to be kept as a reserve (referred to as the “Termite Cash Reserve”). Outback in turn was to distribute all the cash it received from Termite to its shareholders, apart from a reserve of “a nominal amount of $5,000 plus an amount covering any potential Termite liabilities”. Despite the terms of the Distributions Policy, in practice Termite paid the distributions directly to IMX and Taifeng.
In early 2014, there was a sudden and unanticipated decline in the iron ore spot price. It fell from about US$130 per tonne CFR in January 2014 to about US$100 per tonne CFR by May 2014, and continued to decline thereafter. In September 2014, when the creditors of Termite resolved that it be wound up, the spot price was about US$80 per tonne. Some of the experts referred to the decline in price in early 2014 as a “sharp correction” and others referred to it as a “step change”.
It was common ground in the trial that movements in the price of copper at material times had not impacted significantly on the price at which Termite sold its ore. It was also common ground that movements in the foreign exchange rate in 2014 had not affected in a significant way the amount received. It was the reduction in the iron ore spot price in the context of Termite not having accumulated sufficient reserves of cash which was the principal cause of Termite’s insolvency.
Termite also alleges that, during the period of Termite’s implementation of the Distributions Policy, it had become apparent that the amount available to be mined had been significantly over‑estimated.
The defendants are persons who were, or are claimed by Termite to have been, its directors and officers at relevant times so as to have owed duties to it under ss 180 and 181 of the Act and under the common law. Each was at one time an appointed director of either IMX, Outback or Termite. In the case of those who were not an appointed director of Termite, it alleges that they exercised control over its activities, so as to be deemed directors.
Termite claims that, by causing it to enter into and perform the Distributions Policy producing the effect just described and by failing to cause it to review, revoke or vary the Policy, the defendants breached their common law duties to act with care, skill, diligence and in good faith for its benefit as a whole. In addition, Termite alleges that the defendants breached the statutory duties imposed by ss 180 and 181 of the Act. Its principal claim is that the figure of $3 million as the Termite Cash Reserve was inadequate. However, Termite also pleaded that a reserve of $10 million was required to provide for a short term downturn in the iron ore price and a reserve of $50 million for a long term downturn. That has a significance for the fate of Termite’s claim to which I will return.
Termite’s Third Statement of Claim also alleges breaches of duty by the defendants in respect of the interest free unsecured loan of $5 million which it made to IMX between 11 January and 12 March 2013 (the IMX Loan). It alleges that the defendants breached the same statutory and common law duties to it in respect of the making of that loan. However, Termite acknowledged that its claim in respect of the $5 million loan was “subsumed” within its principal claim so that it would be necessary for the Court to consider it only if that claim failed. As the loan was repaid in September 2013, the defendants’ conduct could not in any event have been causative of loss.
Termite claims damages from the defendants pursuant to s 1317H of the Act or at common law. It quantifies its loss on three alternate bases: the whole of the deficiency in the liquidation ($78,487,539.37); the difference between that figure and the position on the hypothesis that the Outback‑Termite Loan had a different character from that for which Termite contended ($64,634,444.37); and the amount of the distributions themselves ($46,053,095.08). Again, this method of formulating its claim has a significance for the outcome of Termite’s claim.
In my opinion, Termite’s claims succeed only in part, and it is entitled to judgment for $7 million and, subject to the parties’ submissions, interest. That is because Termite has not established that, on a proper discharge of their duties, the defendants would have caused it to maintain a cash reserve of more than $10 million at material times. My reasons follow.
The defendants
The six defendants, and the positions held by them at material times, are as follows:
· Neil Eugene Meadows (first defendant) Chair of Board of Directors of Termite 17/01/2012‑15/10/2013 Chair of Board of Directors of Outback 09/01/2012‑15/10/2013 IMX Managing Director
28/11/2011‑15/10/2013
· John Stephen Nitschke (second defendant) Termite Director 27/02/2012‑01/05/2014 Chair of Board of Directors of Termite 00/03/2013‑01/05/2014 Outback Director 09/01/2012‑01/05/2014 Chair of Board of Directors of Outback 09/01/2012‑01/05/2014 IMX Director 23/12/2009‑31/01/2014 Acting IMX Managing Director 00/10/2013‑00/04/2014 Chair of IMX Board of Directors
00/02/2012‑00/09/2013
· Simon Robert Parsons (third defendant) Termite Director From 10/05/2010 General Manager of Cairn Hill Mine · Philip Ross Hoskins (fourth defendant) Termite Director 05/11/2013‑01/05/2014 Outback Director 05/11/2013‑01/05/2014 IMX Chief Financial Officer 00/01/2012‑00/09/2014 IMX Chief Executive Officer 00/09/2014‑00/10/2015 IMX Managing Director
Since 00/10/2015
· Wei “Robert” Sun (fifth defendant) Outback Director Since 26/04/2012 IMX “Alternate” Director 15/03/2012 & 23/05/2013 IMX Director
Since 23/05/2013
· Kee “Jack” Chau Pang (sixth defendant) Outback Director Since 09/01/2012
In summary, during the period commencing in March 2013 and concluding in March 2014 in which Termite adopted and implemented the Distributions Policy, Mr Nitschke and Mr Parsons were appointed directors for the whole period, Mr Meadows was an appointed director between March 2013 and 15 October 2013, and Mr Hoskins an appointed director from November 2013. During the same period, Mr Sun and Mr Pang were appointed directors of Outback.
Both Mr Sun and Mr Pang were employees of TFA International Pty Ltd, a wholly owned subsidiary of Taifeng. The sole director of Taifeng was Yuan Gang Song (Mr Song). Mr Song was a director of Outback between 10 December 2010 and 2 April 2012, but this was before the events on which Termite relies for its claim. Mr Sun and Mr Pang were on Outback’s Board as representatives of Taifeng.
Mr Meadows and Mr Nitschke (who was later replaced by Mr Hoskins) were on Outback’s Board as representatives of IMX.
In addition, Termite alleges that, having regard to subpara (b) of the definition of “director of a corporation” in s 9 of the Act, each of Messrs Hoskins, Sun and Pang was a de facto director of it for such period as they were members of the Board of Directors of Outback. This was because the nominated directors of Termite were “accustomed to act in accordance with [their] instructions or wishes” within the meaning of subpara (b) of the definition of “director of a corporation”.
Each of Messrs Meadows, Nitschke, Parsons and Hoskins was, by virtue of his de jure directorship and the definition of “officer of a corporation” in s 9 of the Act, also an officer of Termite during the period of the respective appointments.
Termite alleges in addition that each of Messrs Hoskins, Sun and Pang was a deemed officer because each was a person who, within the meaning of subpara (c)(i) of the definition of “officer” in s 9 of the Act, made, or participated in making, decisions which affected the whole, or a substantial part, of its business.
Finally, Termite alleges that, if Messrs Hoskins, Sun or Pang are not liable as a principal, they were persons “involved in” the contraventions of ss 180 and 181 of the Act by Messrs Meadows, Nitschke and Parsons. However, in its final submissions, Termite acknowledged that only s 181(2) provides for this form of liability.
The evidence in the trial
The evidence in chief of all the non‑expert witnesses in the trial was in affidavit form. All but one were required to attend for cross‑examination.
Termite’s evidence
Termite led evidence from only four non‑expert witnesses. This was because a large amount of its case was documentary. Mr Lewis, who is a Chartered Accountant, an experienced liquidator and one of Termite’s joint and several liquidators, gave evidence concerning factual matters. He deferred, appropriately, to some of the expert evidence concerning the claims of the Services Contractors. I regarded his evidence as honest and reliable, and accept it.
The remaining non‑expert witnesses from whom Termite led evidence were from three of the Services Contractors: Mr Thwaites, Mr Fetini, and Mr Thorn. I considered that the evidence of each of these witnesses was honest and generally reliable. Except when otherwise indicated, I have accepted it.
Termite led expert opinion evidence from two witnesses. The first was Mr Dominic Tisdell whose formal qualifications are a Bachelor of Engineering (Mining) obtained at the University of New South Wales in 1997 and a Master of Business Administration obtained at the University of Melbourne in 2005. At the time he gave evidence, Mr Tisdell was the head of the metals and mining consulting team in the Asia‑Pacific division at Wood Mackenzie, a global energy, metals and mining research and consultancy group. In that role, Mr Tisdell (and the team of which he is part) provide advice as to the markets and market dynamics relating to minerals to major banks, hedge funds, investors, mining companies and others.
I am satisfied that Mr Tisdell has considerable experience in the engineering, mining and consultancy fields. Early in his career, he was employed by gold, coal and iron ore mining companies, including Hargraves Resources, BHP Steel and Rio Tinto. Between February 2002 and December 2003, Mr Tisdell was the mine planning team leader for the Hamersley Iron business of Rio Tinto which, at the time, had seven medium to large scale iron ore mines in Western Australia.
Mr Tisdell has also held senior positions with Mitsubishi Corporation, Accenture Australia Ltd, Rio Tinto, Hamersley Iron Pty Ltd and Robe River Mining Company Pty Ltd. At Accenture, Mr Tisdell was a member of its business strategy consulting team managing projects for clients which included Rio Tinto and BHP Billiton.
Between 2013 and 2015, Mr Tisdell was the Chief Executive Officer of Apollo Minerals Ltd and between 2011 and 2013 its Chief Operating Officer. Apollo Minerals is a publicly listed mineral exploration and development company involved in the exploration for, and development of, iron ore, base and precious metal minerals around the world. During Mr Tisdell’s time at Apollo Minerals, it was engaged in defining and assessing the viability of iron ore resources in South Australia and in Gabon.
The principal topic which Mr Tisdell addressed in his reports was the adequacy of the $3 million Cash Reserve having regard to several matters affecting the market for iron ore and the financial outlook in March 2013, movements in the exchange rate, and hedging. This involved Mr Tisdell giving evidence of the matters bearing on the risks in conducting mining operations (both operational and marketing), and the manner in which the risks are appropriately identified, forecast and managed.
Mr Tisdell also addressed the counter factual position, namely, what Termite’s position would have been had it retained the profits until concluding mining operations. He considered that in that event, Termite would not have become insolvent.
The defendants mounted a major challenge to Mr Tisdell’s expertise and objectivity. That challenge was made good in several respects. Mr Tisdell had made a “probability analysis” based on the forecasts of iron ore prices. On the basis of that analysis, he said that Termite would require a reserve of approximately AU$50 million if it was to reduce its risk of becoming insolvent to 10%, which he regarded as an acceptable level, at [1.58]. Under cross‑examination, and faced with the critique of Professor Everett who was called by the defendants, Mr Tisdell acknowledged that his analysis was neither theoretically nor statistically sound. It was apparent that Mr Tisdell had exceeded the bounds of his expertise in making the analysis. Ultimately, Termite did not rely on Mr Tisdell’s evidence based on his probability analysis.
By itself, this caused me to have doubts about the value of Mr Tisdell’s evidence more generally. In addition, there were several respects in which I considered Mr Tisdell’s evidence to lack clarity and his opinions to lack a clearly articulated basis.
I also considered that Mr Tisdell displayed at times an over willingness to advance Termite’s cause in his opinions and, when shortcomings in his reasoning were exposed, a tendency to rationalise and defend doggedly and inappropriately those opinions. Some of Mr Tisdell’s opinions were inconsistent with the forecasts made by his own firm, Wood Mackenzie. They were also inconsistent with the contemporaneous forecasts of other reputable analysts.
The effect is that, while I accept some matters about which Mr Tisdell gave evidence, I am not willing to proceed on the basis that his evidence and opinions were generally reliable or useful.
The second expert from whom Termite led evidence was Mr Peter Holmes, a forensic accountant. His evidence concerned the liabilities of Termite to the Services Contractors. The defendants challenged Mr Holmes’ independence as an expert witness, given that he, like the joint and several liquidators of Termite, is a member of the firm Ferrier Hodgson. Counsel made it plain, however, that the defendants did not suggest any conscious bias by Mr Holmes or that he had not attempted to fulfil his duties to the Court as an independent witness. They submitted, nevertheless, that he may unconsciously have wished to promote the interests of Ferrier Hodgson or at least have found it difficult to be critical of decisions made by his partners.
I considered that Mr Holmes revealed in his evidence a well‑developed understanding of the obligations of independence of an expert witness under this Court’s Rules and Practice Notes and that he conformed to the standards they require. He showed an appreciation of the limitations of his expertise and of the limits of the matters on which he was asked to advise.
Further, and in any event, the defendants did not identify any of Mr Holmes’ evidence which was affected by the unconscious bias which they sought to attribute to him. I consider it appropriate to accept his evidence.
Termite’s documentary evidence included the signed transcripts of the examination of the defendants conducted by its liquidators pursuant to s 597 of the Act. Mr Sun’s examination took place in June 2015 and Mr Pang’s in February 2016. The remaining examinations took place in March 2015, with those of Messrs Nitschke and Meadows being completed in June 2016.
The defendants’ evidence
The defendants led evidence from 10 witnesses, six of whom were the defendants themselves. One of the defendants’ witnesses, Mr O’Sullivan, was not required to attend for cross‑examination.
Mr Nitschke was the first defendant to give evidence. He is well‑qualified, having an Honours Degree in Mining Engineering from Melbourne University, and a Master’s Degree and a Diploma in Mineral Production Management of the Imperial College Royal School of Mines at the University of London. Mr Nitschke has over 40 years of experience in the resource industry and is a Fellow of the Australian Institute of Mining and Metallurgy, a Chartered Professional in Mine Management at the Australian Institute of Mining and Metallurgy, and a Graduate of the Australian Institute of Company Directors. Mr Nitschke also has considerable experience as a director of listed resource companies and their subsidiaries.
During the course of his evidence, Mr Nitschke impressed as being intelligent, capable and experienced and as having a wide range of knowledge of matters affecting the mining and marketing of minerals.
I was concerned about the extended duration of Mr Nitschke’s cross‑examination and have taken into account the potential for fatigue to have affected his evidence as the cross‑examination unfolded. I also considered it unsurprising that, at times, Mr Nitschke displayed some impatience and exasperation while giving his evidence.
Nevertheless, even taking these matters into account, I consider that care is required before acting on some aspects of Mr Nitschke’s evidence, especially that evidence which was marked by defensiveness and argumentativeness. It was apparent that Mr Nitschke was at times engaged in reconstruction or attempting retrospectively to rationalise or justify his conduct. I thought that Mr Nitschke had a good appreciation of where his interests, and those of the defendants, lay in the litigation and that at times this affected his answers. The result is that, while there is much of Mr Nitschke’s evidence which I accept, there is some which I do not. This is particularly so in relation to his evidence which is inconsistent with the contemporaneous documents, the inferences arising naturally from those documents or the admissions which he made in his s 597 examination.
Several of the other defendants had a tendency to be argumentative and self‑justificatory in their cross‑examination and to give evidence of a rehearsed kind. To an extent, that is unremarkable as serious claims are made against them and it is common for witnesses whose conduct and decision‑making is impugned to wish to justify themselves. I considered that the evidence of Messrs Hoskins, Meadows and Parsons was affected, to an extent, by a retrospective rationalisation or justification for their conduct.
In the case of Mr Sun, I have taken into account that English is not his first language and that he may not be familiar with the manner in which court proceedings are conducted. Nevertheless, I considered that he was not an impressive witness. Mr Sun was very self‑justificatory in his cross‑examination. I had the strong impression that he had a very quick understanding of the questions put to him and their potential significance in the litigation. I considered that he allowed this to affect the answers which he gave in the cross‑examination.
Termite accepted that Mr Pang was a witness of truth.
Several of the defendants sought to qualify, resile from, or withdraw, admissions which they had made during their s 597 examinations. Some attributed this to having reflected in more detail on the issues and the events which had occurred, as part of their preparation to give evidence. Some referred to the assistance they had derived from recourse to contemporaneous documents. At a general level, I accept that the fact that they are defendants to serious claims is likely to have sharpened their focus on relevant events. I also accept that they may have thought about events more deeply than they had at the time of the s 597 examinations. Nevertheless, I thought that these factors could not explain many of the variances in the respective cross‑examinations from the s 597 answers. I have maintained that view on re‑reading the transcript. I consider that several of the defendants realised the damaging nature of answers in the s 597 examinations and sought to modify them. This explains the rehearsed character of some of their evidence. When this occurred, I have thought, generally that the s 597 examination answers are more likely to be accurate.
The three experts called by the defendants were Professor Everett, Professor Trench and Mr Morris. Before his retirement in 2006, Professor Everett was the Professor of Information Management at the University of Western Australia. He has expertise in the application of statistical techniques in the mining and petroleum industries. He has also consulted to a number of entities in the mining industry. I considered that his evidence was more reliable than that of Mr Tisdell and accept it whenever it was in conflict with his evidence.
Professor Trench obtained a PhD in Geophysics from the University of Glasgow in 1989 and has tertiary level qualifications in science, mineral, economics and business. He has a part‑time profession position in the Business School at the University of Western Australia as well as an Adjunct Professorship in the Centre for Exploration Targeting at the same University. I regarded his evidence as generally reliable.
Professor Trench has significant experience in the mining industry and, since 2008, has been engaged as an Associate Consultant by CRU Consulting, a well‑respected provider of specialised independent market research, commodity market forecasting and business advisory services to the metal and mining industries.
Mr Morris is an experienced forensic accountant. I indicate later some respects in which I do not accept his evidence.
Factual setting
In this section of the reasons, I will make findings of fact providing the context in which the issues for the Court’s determination arise. For the most part, the matters I now record were not contentious.
IMX was a publicly listed mining and resources company. In the years 2011 to 2014, its principal activities were mineral exploration and mining. The IMX group of companies held (wholly or as part owner) mineral tenements in South Australia (Cairn Hill and Mt Woods), Tasmania, Tanzania and Mozambique, and held a 26.63% interest in Uranex NL (a uranium exploration and development company). Of these tenements, mining in 2012 and 2013 was carried out only at Cairn Hill. Exploration activities were conducted on the remaining tenements. This meant that IMX was dependent for its income on capital raisings, the sales of assets and the distributions from Termite.
Before Taifeng’s involvement in the Cairn Hill Mine, IMX had owned all of the issued share capital in Outback and had fully funded its operations.
Termite was incorporated on 1 December 2004 and, at all material times, has been a wholly owned subsidiary of Outback. On 14 May 2008, it was issued Mineral Lease No. 6303 (ML 6303) for an area of about 80 square km which encompasses the Cairn Hill Mine. Trial mining operations commenced shortly afterwards and full scale mining commenced in May 2010.
ML 6303 is within the Woomera Protection Area established pursuant to the Defence Act 1903 (Cth) and regulations made pursuant to that Act. The effect of reg 35 of the Defence Forces Regulations was that, despite the grant of any mining tenement, the permission of the Commonwealth was required for entry into the prohibited area. The Commonwealth had by a Deed dated 13 May 2008 (the Woomera Access Deed) (amended by a Deed of Variation dated 12 July 2010) granted Termite such permission but it was a condition of the grant that the Commonwealth could, in effect, preclude any foreign investment in Termite having regard to the geographic proximity of the Cairn Hill Mine to the Woomera Defence Zone.
It was common ground at the trial that, by reason of this restriction, Taifeng had made its investment into Outback and not Termite. The evidence also indicated that the Outback Board made the strategic, and many of the operational, decisions concerning Termite. I will return to this topic shortly.
Outback contemplated that Termite would carry out mining in successive phases: Phase 1 and Phase 2. A Phase 3 had also been contemplated but the area of the proposed Phase 3 was some 30‑40 km away from the area of Phase 1 and Phase 2. It later became known as the Mount Woods Project. The areas of Phase 1 and the proposed Phase 2 of the Cairn Hill Mine were adjacent. Phase 1 was a magnetite‑copper mine, whereas Phase 2 was to be a magnetite mine only, involving lower grade ore than Phase 1.
Outback and Termite contemplated that Phase 1 of the Cairn Hill Mine would have a life of 4.5 to 5 years and would involve the excavation of two pits: Pit 1 and Pit 2. An estimate adopted by IMX in November 2009 was that some 7.3 million tonnes of ore could be mined from Pits 1 and 2. The finite life of the Mine, together with the fact that the Services Contracts were for terms which corresponded closely with that life, is an important aspect of Termite’s case.
Termite did proceed with Pit 1. Nearly all the ore it mined came from that Pit. The question of whether to proceed with Pit 2 and, if so, its form was the subject of active consideration by Outback after October 2012. Eventually, at its meeting on 29 June 2013, the Outback Board resolved to proceed with a modified (shallower) Pit 2 known as “Design 10a”. Some mining in Pit 2 had occurred before Termite went into administration.
At its meeting on 26 March 2014, the Outback Board resolved, conditionally, to extend the mining operations to include Phase 2 (which would comprise Pits 3 and 4). The condition to which the resolution was subject was resolved by 1 April 2014. However, in the events which happened and, in particular, Termite’s administration, it did not ever proceed with Phase 2.
The Cairn Hill Mine is located about 55 km southeast of Coober Pedy. It is approximately 12‑15 km east of the Stuart Highway and about 60 km east of the Darwin‑Adelaide railway line. Termite established a siding (the Rankin Dam siding) on the railway line and constructed an unsealed road between the Cairn Hill Mine and the siding.
Termite sold the product of the mine on a CFR basis to Chinese buyers, initially to Jilin Tonghua Iron and Steel (Group) Mining Co Ltd (Tonghua) but from January 2011 to Taifeng and others. This meant that Termite incurred the shipping costs. It did not have difficulty in locating purchasers of the mined ore.
The sequence of steps in delivering the ore to the Chinese buyers was as follows. Termite mined the ore comprising magnetite and copper and crushed it on site so that it was “40 mm topsize”. The ore was then taken by truck to the Rankin Dam siding where it was loaded into specially designed containers. It then travelled by rail to Port Adelaide where it was loaded onto the ships which took it to China. Termite aimed to have 150,000 tonnes of ore on ships every month (two ships each with 75,000 tonnes). In order to avoid interruptions in the delivery chain, Termite maintained stockpiles of ore at the mine (both crushed and uncrushed), at Rankin Dam and at Port Adelaide. It attempted to maintain a stockpile of 30,000 tonnes in Port Adelaide in addition to the amount of 75,000 tonnes needed for a full ship load.
Termite did not carry out the work in this series of steps by its own employees. Instead, it engaged the Services Contractors as follows:
(a)Exactmix Mining Pty Ltd (which later changed its name to Exact Mining Services Pty Ltd) (Exact) conducted the mining and crushing operations at the Cairn Hill Mine and hauled the ore to Rankin Dam. It did so pursuant to two separate contracts: a mining services contract and a haulage contract;
(b)Termite leased from Gemco Rail Pty Ltd (Gemco) the rail wagons used to carry the ore to Port Adelaide;
(c)Termite leased from Cronos Containers Limited (Cronos) the containers used on the rail wagons and to store the product at Port Adelaide before it was loaded onto ships;
(d)Specialised Bulk Rail Pty Ltd (SBR) provided the rail haulage services, including the locomotives and drivers, to transport the ore from Rankin Dam to Port Adelaide; and
(e)Flinders Ports Pty Ltd (Flinders Ports) provided the loading, storage and port services at Port Adelaide.
The terms of the Services Contracts were, in different ways, aligned with the expected duration of Phase 1. Termite had contracted with the Services Contractors only for Phase 1.
The liabilities to the Services Contractors which Termite undertook pursuant to the respective contracts underpin its present claims against the defendants. I will make detailed findings about those liabilities when considering the quantum of damages claimed by Termite. Termite alleges that the contracts contained “take or pay” provisions, giving rise to the ETPs or “Tail Liabilities” in the event that it ceased mining earlier than the termination dates in the respective contracts. The earlier the cessation of mining before the end of the contracts, the greater would be the Tail Liabilities.
Commencing in May 2014, the USD price for 62% iron ore fines dropped below $100 per tonne. The parties disagreed as to the break‑even price for Termite (Termite alleged it was about AU$106 per tonne whereas the defendants said it was in the range of AU$90‑$94 per tonne) but it was common ground that the Cairn Hill Mine was not viable at the prices prevailing after May 2014. That led to the appointment of administrators and in turn to the liquidation of Termite.
The Heads of Agreement
The arrangements between IMX and Taifeng were governed by a “Co‑operation Heads of Agreement” (HoA) executed on 29 December 2009. The principal terms of the HoA were that, subject to Taifeng’s completion of a due diligence assessment:
(a)Taifeng was to subscribe for, and IMX was to issue, shares in IMX;
(b)Taifeng could nominate one non‑executive director to the Board of IMX;
(c)Taifeng would match IMX’s past expenditure on the Cairn Hill Mine (Matching Expenditure) and all the money invested by Taifeng would be used in the development of the Cairn Hill Mine;
(d)following Foreign Investment Review Board (FIRB) approval, Outback would register Taifeng as an equal shareholder with IMX, the existing Board of Directors of Outback would resign and, simultaneously, IMX and Taifeng would nominate two directors to the Outback Board, with IMX nominating the Chairperson of the Board;
(e)management control of the project was to comply with the Woomera Access Deed;
(f)after the Matching Expenditure had been spent, all capital contributions to Outback by IMX and Taifeng would be funded pro‑rata according to their respective shareholdings in Outback;
(g)any decisions concerning the issue of new shares, assets disposals, budgets, investments, new contracts and distribution of profits were to be the subject of unanimous Outback Board decisions;
(h)the implementation and operation of all projects within ML 6303 were to be overseen by the Board of Outback with responsibility for the day‑to‑day operations within the framework approved by the Board to be delegated to management;
(i)IMX and Taifeng would negotiate a detailed shareholder agreement concerning their shareholding in Outback. The parties contemplated that the shareholder agreement would be finalised within three months and would provide for major decisions concerning the issue of new shares, asset disposals, budgets, investments, new contracts and distribution of profits to be the subject of unanimous decisions;
(j)Taifeng expressed willingness to assist IMX in financing the development of Phase 2; and
(k)Taifeng would have first rights to purchase 100% of the ore production at the prevailing market price from Phase 2 onwards and first right to take over Termite’s existing offtake contract for Phase 1.
IMX also executed a Supplementary Heads of Agreement on 8 April 2010 (the Supplementary HoA) by which it confirmed that, upon the issue to Taifeng of a share certificate representing 50% of the shares on issue in Outback, Taifeng would have 50% ownership of Cairn Hill ML 6303.
Although negotiations for the contemplated shareholders’ agreement continued until about September 2012 with the exchange of several drafts, a shareholders’ agreement was never finalised nor executed. Accordingly, the arrangements between IMX and Taifeng were governed only by the HoA and the Supplementary HoA.
Taifeng completed its payment of the Matching Expenditure in January 2011. It had been issued with 490 of the 1,000 ordinary shares issued by Outback. IMX had the remaining 51% interest. The evidence did not disclose the reason for the departure from the 50:50 arrangement contemplated by the Supplementary HoA (although it may have been related to the restrictions concerning the Woomera Protection Area or to conditions imposed by the FIRB). IMX and Taifeng later advanced further amounts to Outback (which were on‑lent to Termite) with the consequence that, by 30 June 2012, the total of the Outback‑Termite Loan was $48,905,000.
The IMX Annual Report for the 2011‑12 year records that Taifeng had advanced $16.352 million and $20.474 million by the end of the 2011 and 2012 financial years respectively.
There were, however, occasions when Taifeng did not meet its commitment under the HoA to provide, pro‑rata, additional funds to meet Termite’s operating requirements. On 14 November 2011, IMX called on Taifeng to pay AU$4,121,601 but it refused to do so. Subsequently, Taifeng relented and paid the claimed amount. However, Taifeng did not meet the next cash call of $3.675 million which was required by 31 December 2011. Its failure to do was addressed at the meetings of the Outback Board held on 12 January 2012 and 7 February 2012. The Minutes of the Meeting held on 12 January 2012 include the following:
Mr Meadows requested Mr Song to confirm if Sichuan Taifeng would be making their share of the cash calls that had been requested by Termite. Mr Song did not answer this question and noted that he must have time to review his investment decision. Mr Meadows again noted that the cash call is not an investment, but an obligation. Mr Song noted that he recognises his obligations and commitments, but also requested that the Board recognise that he had not approved some past decisions and that he believes they must first be cleaned up.
…
Mr Meadows again asked Mr Song to confirm if the cash calls would be made by Sichuan Taifeng and Mr Song noted that the cash calls were not fair and that he must be given more time to assess his decision.
The Minutes of the Meeting held on 7 February 2012 indicate that the discussion on this topic concluded with:
Mr Song responded that Taifeng would not invest further into the project until management was changed because he believed current management was not effective.
The consequence of Taifeng’s refusal to pay its pro‑rata contribution was that IMX had to fund Termite’s operations itself. On 20 January 2012, IMX entered into an agreement with Termite whereby IMX agreed to advance monies to Termite. A copy of this agreement was not in evidence but it can be inferred from other evidence that the amount of the advance provided by IMX was $9 million.
The LinQ Capital facility
On 30 May 2012, Termite and Outback entered into a financing facility with LinQ Capital Limited. It is evident that Termite entered into the LinQ facility in order to obtain funds with which to repay the amount advanced by IMX and to obtain access to funds for its operations. It also had the effect that Taifeng would have to meet its pro rata share of financing Termite’s operations.
The essential terms of the LinQ facility were:
(a) the amount of the facility was $15 million;
(b)Termite was to use the funds advanced pursuant to the facility for defined purposes only, which included using an amount not exceeding $11 million to repay the IMX loan, and paying the working capital requirements and development costs in respect of the Cairn Hill Project (cl 3.2);
(c) Termite was to pay LinQ a “signing fee” of $50,000 (cl 1.1);
(d)Termite was to pay LinQ a “success fee” of $850,000 on the execution of the facility agreement (cl 13.1);
(e)Termite was to pay a “commitment fee” each quarter, being 6.5% of the undrawn amount of the facility (cl 13.1);
(f)Termite was to pay interest on the portions of the facility which it drew down at the rate of 13% per annum (cl 5.3(a) and the definition of funding rate);
(g)Termite was to pay interest at the rate of 15% per annum on any amounts due to LinQ but unpaid (cl 14 and the definitions of funding rate and overdue margin);
(h)Termite was to repay any outstanding principal at the end of each quarter and at the expiration of the facility (cl 5.2);
(i)if Termite had made the repayment each quarter, it could withdraw the repaid amount (subject to compliance with certain conditions, one of which was that its actual cash flow had not varied (adversely) by more than 20% from the initial cash flow forecast) (cll 2.2, 5.4);
(j)Termite was at all times during which it had drawn down on the facility to maintain a cash reserve of at least $3 million and, if there was no money drawn down, a cash reserve of $1 million (cl 8.26);
(k)LinQ’s security included IMX’s shares in Uranex Ltd, the shares in Termite and ML 6303 itself;
(l)Outback guaranteed the performance of Termite’s obligations (cl 11.1); and
(m)Termite and Outback were not to sell, transfer or dispose of any assets except in the ordinary course of business or in the expenditure of cash (cl 8.12). This clause precluded Termite and Outback respectively from making any repayment of the Outback‑Termite Loan or of the JV Loans, at least without the consent of LinQ.
Termite drew down $9 million on the LinQ facility shortly after it was put in place and used these funds to repay the advance from IMX. There were also some suggestions that the amount drawn was $11 million. In any event, Termite had borrowings from LinQ (including redraws) until December 2012 and terminated the facility altogether on 12 March 2013.
I am satisfied that the primary reason for the termination of the LinQ facility was to clear the way for Termite to lend money to IMX and/or to make distributions. Nevertheless, the decision to terminate the facility had another rationale. Even though Termite had repaid the amount which it had drawn down on the LinQ facility, it remained obliged to pay LinQ a substantial “commitment fee” (potentially $975,000 per annum) in respect of the undrawn amount of the facility. By terminating the facility, it removed that liability.
As the LinQ facility was the only source of credit available to Termite, it then became reliant on the earnings from its own mining activities for its capital.
The locus of decision-making for Termite
The Boards of IMX and Outback met regularly and usually every month. The Board of Termite met only infrequently and usually only if a particular authorisation or resolution was required. In 2012, the Termite Board met only on 27 January, 31 August, 10 September and 24 September. In 2013 it met only on 12 March and in 2014, it met only on 13, 17 and 18 June. The three meetings in June 2014 were prompted by Termite’s deteriorating cash flow position and culminated in the decision that administrators should be appointed. The meetings on 27 January 2012 and the three meetings in August and September 2012 were also associated with concerns at those times about Termite’s solvency. As is apparent, the Termite Board did not meet at all between 24 September 2012 and 12 March 2013, or between 12 March 2013 and 13 June 2014.
There is a considerable body of evidence indicating (and I so find) that it was the Outback Board which exercised the functions of a Board of Directors determining matters of strategy, management and oversight of the operations of Termite.
A principal reason for this was that the Woomera Variation Deed provided that a foreign national could not, without the consent of the Commonwealth, be appointed as a director of Termite. This precluded Taifeng having its preferred representatives on Termite’s Board. In particular, Mr Sun and Mr Pang could not sit on the Termite Board (although Mr Sun became an Australian citizen in 2013).
The potential difficulties created by the Woomera Access Deed and the Variation Deed were avoided by Taifeng making its investment into Outback and by the appointment of its representatives to that Board, and it then making the decisions for Termite.
As already seen, the HoA contemplated that decision‑making concerning Termite would be made at the Outback Board level. Further, Finlaysons, a firm of lawyers in Adelaide had informed the FIRB on 12 October 2011 when seeking its approval for the investment by Taifeng that “all activities and projects at the Cairn Hill Project will continue to be overseen and implemented by the Outback Board”.
A number of witnesses gave evidence that effect was given to this agreement and commitment. The evidence of each of Messrs Nitschke, Hoskins and Meadows was to the effect that it was the Outback Board which provided the oversight, supervision and direction for Termite’s operations, with Termite management involved only at the day‑to‑day operational level. In general, the Termite Board met only when it was necessary to deal with more formal issues. Mr Parsons said “Outback effectively controlled the major decision‑making which affected Termite”. Mr Hoskins agreed that it was the Outback Board which provided the oversight of management and the provision of strategic direction for Termite’s management and that this was a consequence of the Joint Venture arrangements struck between IMX and Taifeng. Mr Pang said that, while the Outback Board did not make “day‑to‑day operation decisions” relating to Termite, it did make “the major decisions which related to the Joint Venture”. Mr Sun said that Termite dealt with the operational issues involved in running the Cairn Hill Mine, but that important issues regarding the Joint Venture and strategic issues, such as decisions on hedging, Pit 2 design adoption and Phase 2, were dealt with at the Outback Board level.
It was the practice for the directors of IMX and Outback to be provided in advance of each meeting with a “Board Pack”. In addition to the agenda, minutes of the previous meeting and the like, it was common for the Board Packs to include a detailed report concerning Termite’s operations, a cash flow forecast, a report on commodity prices and other papers prepared by the management of Termite concerning the matters for discussion and decision.
It is apparent (and I so find) that the directors of Termite were not provided with Board Packs with corresponding content for their meetings.
At its meeting on 22 May 2013, the Outback Board adopted an “Approvals Framework” to define “the limits of authority designated to nominated positions of responsibility within the Outback Iron Pty Ltd joint venture including [Termite] (the JV or the Company)” and to establish “the type and maximum amount of obligations that may be approved by individuals”. The Approvals Framework also provided:
All IMX and JV employees should be aware that conduct that violates this Approvals Framework is always considered outside the scope of their employment. Violation of this Approvals Framework could significantly damage the JV and expose it to unintended legal and commercial liability. In addition, individuals who violate these policies are subject to appropriate disciplinary action by the Company, including possible termination of employment.
…
The management and control of the business and affairs of the JV rests with the Outback Board of Directors (the Board). The Board has reserved some matters to itself for decision and, save for those matters, has delegated authority for other matters to the Executive Team.
(Emphasis added)
The Executive Team was identified as comprising three persons from IMX being its Managing Director (Mr Meadows and later Mr Nitschke), its Chief Financial Officer (Mr Hoskins) and its Company Secretary (Mr McKenzie) and three from within Termite, including Mr Parsons and Mr Hassard, an accountant employed by Termite as its Commercial Manager.
One of the matters which the Outback Board reserved for its own decision was “approval of strategy and annual budgets”.
As decisions concerning the strategies and overview of Termite’s operations were made by the Outback Board, it was not necessary for there to be meetings of the Termite Board of the kind which one would otherwise expect of an operating mining company. That explains why it was the Outback Board, and not the Termite Board, which met monthly to make decisions concerning the business and operations of Termite.
The following email exchange between Mr Parsons and Mr Hoskins on 10 December 2013 made plain where the locus of decision‑making lay:
Parsons: As a philosophical question why do we have a TR Board?
Hoskins:I guess Termite is the operating entity that takes direction from Outback being the entity at which the JV is conducted. I think that technically, if Termite is entering large contracts, it should be approving them there however it’s probably dealt with in the Outback approvals framework.
Parsons:I suppose I just don’t want to [get] caught out somehow as a TR Director if a decision is made at IMX level without ever going to the TR Board.
Maybe I should ask John if I can get of[f] the TR Board.
I did not understand the defendants ultimately to dispute the proposition that the Outback Board functioned, in practice, as the Board of Directors for Termite. To the extent that they may have disputed it, I am satisfied that it is unsound. The evidence points overwhelmingly to the Outback Board having been the decision‑making Board for Termite’s operations.
Termite’s cash flow forecasting
Termite’s management prepared for each Outback Board meeting a reasonably detailed cash flow report. Each of the reports included as an appendix a Life of Mine (LoM) cash flow forecast (the LoM CFF) which was updated from month to month. Initially, the appendices contained, in spreadsheet form, forecast details for each of the next 12 months and the whole of a financial year thereafter. This changed over time. The LoM CFF presented to the Outback Board at its meeting on 20 February 2013 (the last before the adoption of the Distribution Policy) showed details for each month to June 2014. Thereafter, the LoM CFFs were generally to March or April 2015.
The LoM CFFs contained estimates of the ore which would be mined each month, the forecast prices (based on both iron and copper), and the forecasts of the revenue to be received, the costs to be incurred, and the pre and post‑tax net cash flows. The resultant figure was then added to the previous end of month cash at bank, indicating the cash forecast to be available. In addition, the appendices contained details of any debt funding and the forecast cash at bank. Until March 2014, the modelling was with respect to Phase 1 only.
The estimates of the ore to be mined were updated each month as the details of the amounts actually mined became known. Generally, the cost inputs were reasonably constant, by reason of the nature of Termite’s contracts with the Services Contractors.
It is evident, and I accept, that Termite gave considerable attention to attempts at forecasting future iron ore prices. From July 2012, Termite’s management used for its revenue forecasts the Energy & Metals Consensus Forecasts (EMCFs) published every two months by the firm Consensus Economics. Before July 2012, it had used data in forecasts by the Commonwealth Bank of Australia.
The EMCFs contained (relevantly) a compilation of the quarterly forecast prices for iron and copper made by a number of reputable analysts (13 in the case of iron ore and 25 in the case of copper). The forecast figures were for the last month of each quarter, for the next nine quarters. Typically, there was a wide range in the forecasts of the analysts. The EMCFs contained a calculation of the mean of the forecasts for each quarter, the standard deviation for the spread of the mean estimates and identified the highest and lowest of the forecasts. The standard deviations were typically less than +/- US$10 per tonne. Termite used the EMCF mean figure in its LoM CFFs.
Following the adoption of the Distributions Policy on 12 March 2013, Mr Hoskins and Mr Parsons used the monthly forecasts in determining the amount to be available for distribution.
Mr Hassard also prepared a daily cash flow model which he provided to Mr Parsons, Mr Hoskins and other IMX finance staff on a weekly basis. This model was called the “daily cash flow” because it projected cash receipts and payments on a daily basis, not because it was updated on a daily basis.
In addition, Termite management prepared “daily dashboards” which were circulated to the directors of Outback and Termite and to Mr Hoskins every Monday. The daily dashboards contained details of Termite’s immediate future cash position, spot margin, margin using 30 day averages, a summary of shipments, and summary of any hedges.
Termite did not contend that the defendants had not undertaken appropriate and diligent cash flow forecasting, although it did contend that there was a “structural flaw” in the LoM CFFs with respect to the implementation of the Distributions Policy. I will return to that later.
The adoption of the Distributions Policy
In this section of the reasons, I make findings about the adoption of the Distributions Policy by the Boards of IMX, Outback and Termite, and concerning the distributions made pursuant to it.
Two considerations were particularly important in the adoption of the Distributions Policy by each of IMX, Outback and Termite on 12 March 2013. The first was the illiquidity of IMX and its reliance on cash from Termite, and the second was the view of KPMG, IMX’s new auditors.
The illiquidity of IMX and the loan from Termite
IMX’s illiquidity arose from the circumstance that, while it and its subsidiaries had a number of active exploration projects, only the Cairn Hill Mine was producing income. Further, with the exception of the $5 million loan from Termite to be mentioned shortly, it had not before 12 March 2013, received any return on its investment in the Joint Venture. IMX’s liquidity issues were acknowledged by Mr Nitschke in his evidence and they are in any event apparent in the documentary evidence.
A comparison of the financial statements of the IMX Group with those of Termite for the financial year ending on 30 June 2013 indicates that, independently of Termite:
(a)IMX’s revenue had been approximately $116,000 whereas its expenditure had been approximately $24.6 million; and
(b)IMX held only $2.9 million in cash or equivalent.
As at 31 March 2013, and after receipt of the $5 million loan from Termite, IMX’s cash at bank was only $2 million. I accept Termite’s submission that, without a capital raising, IMX was, throughout 2013, dependent on the cash from Termite’s operations to remain solvent.
In late 2012 and early 2013, IMX had taken steps in relation to its own capital position. On 21 November 2012, it obtained $3.7 million from a capital raising ($0.11 per share). It considered undertaking a further capital raising but this had not occurred by March 2013 (and, in the events which happened, did not occur at all).
In November 2012, IMX agreed to sell its interest in the Mt Woods copper and gold joint venture to Oz Minerals Ltd. This was to realize $8.7 million in cash.
I am satisfied that IMX agreed to this sale in an endeavour to raise cash. Amongst other things, it is evidenced by an email to Mr Sun on 9 January 2013 in which Mr Hoskins said that one of the reasons for the transaction with Oz Minerals was that “it solved our cash flow requirements through until March/April when we could embark on a raising to fund the 2013 Tanzanian exploration program”. Mr Hoskins also told Mr Sun that IMX expected that it would require $1 million before the end of January.
However, on 12 February 2013, Oz Minerals informed IMX that it would not proceed with the transaction and IMX announced this to the market on 18 February.
Given its illiquidity, IMX sought the approval of Taifeng for it to borrow money from Termite, as a temporary measure. It appreciated that Taifeng’s agreement was needed having regard to the HoA and to the terms of the confirmation by Taifeng through Mr Pang on 25 September 2012 concerning the signing off on the accounts of IMX, to which I will refer later.
The possibility of Termite making a loan to IMX was raised by Mr Hoskins on 31 December 2012. In an email addressed to Messrs Parsons, Meadows and Nitschke, he noted that IMX needed cash in the first two weeks of January in order to pay bills as they fell due. He said that IMX’s short term cash flow had been dependent on payment by Oz Minerals of a $3 million deposit, and noted that negotiations with Oz Minerals were continuing. Mr Hoskins identified six options by which IMX could raise funds, of which two were either a loan from, or a distribution by, Termite.
The email exchanges during January 2013 reveal the following:
(a)the consciousness within IMX that its short term cash flow was “extremely tight”;
(b)discussion of the alternatives of a loan from, or a distribution by, Termite;
(c)Taifeng’s approval on 9 January of a loan of $1 million from Termite to IMX (communicated to Mr Hoskins by Mr Sun);
(d)IMX managing the payment of its creditors, with some accounts being overdue to the extent of one or two months;
(e)as January proceeded, the discussion of the prospect of further loans by Termite to IMX; and
(f)Taifeng’s approval by 29 January 2013 of a loan from Termite totalling $5 million (on this occasion communicated by Mr Sun to Mr Meadows).
Mr Hoskins made apparent IMX’s difficulties in an email of 31 December 2012 to Messrs Hassard, Parsons, Dunstan (an accountant within IMX), Meadows and Nitschke:
IMX’s short term cash flow has been dependent on receiving the $3m deposit from Oz Minerals and then the $2m remainder a month later. Negotiations with Oz continue and will continue into January. But IMX needs cash in the first week or two of January to pay bills as they fall due.
When Mr Parsons raised a query later that same day, apparently in the interest of Termite, Mr Hoskins responded:
IMX’s cash position is a lot tighter than Termite’s. IMX has less than $0.5m. It has salaries and bonuses by 15 Jan and various other things that cannot be deferred. We will not pay any creditor that is discretionary however.
It is also apparent that Mr Hoskins contemplated that Termite should advance monies to IMX, even though that would leave Termite with insufficient cash to pay its own creditors. In his email of 29 January 2013 to Mr Parsons and Mr Hassard (Termite’s Management Accountant/Commercial Manager), Mr Hoskins said:
I know the 15 Feb date is tight for you guys depending on when that ship money comes in but can we either back ourselves or hold off on EMS’s [Exact’s] 2nd payment if we haven’t got it in? IMX has some payments to make this week that are urgent.
Mr Nitschke also made apparent IMX’s funding difficulties in an email to IMX Board members on 6 March 2013 in which he said:
I met with Neil [Meadows] last week.
He confirmed that he and Phil [Hoskins] had been unable to come up with an acceptable loan arrangement with Taifeng.
This means that we have an immediate (before 30th June) requirement to raise $5M. We may actually need to raise closer to $10M to provide a buffer against the uncertainty in the iron ore price as the work plan proposed by management at the strategy session would leave us with $4M at the end of the calendar year assuming that we raise $10M.
The loan from Termite to IMX (the Termite‑IMX Loan) was formalised in a “Working Capital Loan Agreement” executed on 14 March 2013. It provided for an interest free loan of $5 million repayable on or before 30 June 2013.
The Termite‑IMX Loan was made by the following advances:
Date Amount loaned 11 January 2013 $500,000 15 January 2013 $300,000 25 January 2013 $200,000 30 January 2013 $500,000 6 February 2013 $500,000 13 February 2013 $1,000,000 21 February 2013 $1,000,000 6 March 2013 $500,000 12 March 2013 $500,000 Total $5,000,000
As is apparent, all of these advances were made before the execution of the Loan Agreement.
It is convenient to record here my satisfaction that IMX continued after March 2013 to be financially dependent on payments from Termite. In his evidence, Mr Nitschke claimed to have been confident that IMX could have obtained funds from a capital raising, and there is some evidence that it had explored that possibility. I consider that, even had IMX been able to raise some funds by a capital raising, the amount involved would have been relatively modest, and may not have relieved altogether IMX’s reliance on payments from Termite.
The advice from KPMG
KPMG was the auditor of IMX and Termite for the financial year ending 30 June 2013. It replaced BDO Audit (WA) Pty Ltd which had been the auditor of the two companies in (at least) the two previous financial years.
By 1 March 2013, KPMG was raising issues with IMX about the “going concern” note to appear in IMX’s half year accounts. KPMG was concerned that the consolidated accounts for IMX would have to show the Taifeng loan to Outback as current, which would mean that IMX’s liabilities would exceed its assets by a significant margin.
In an email of 1 March 2013 to Mr Hoskins, Mr Cowell from KPMG said:
From our perspective the loan agreement with Termite and the distribution agreement with Taifeng are important to the company’s going concern position, as we’re sure they are from the directors’ point of view. Can you keep me informed if you envisage any difficulty in getting these finalised next week?
(Emphasis added)
Mr Cowell elaborated this in an email of 5 March 2013 to Mr Dunstan at IMX (and copied to Mr Hoskins):
The main [query] being the fact that with a distribution policy being formalised, part of the Taifeng loan will now become current and this may lead to a working capital deficiency in the consolidated accounts, hence the need for a going concern note and for the Taifeng loan and distribution policy to be finalised before the accounts are signed.
(Emphasis added)
The RHA provided in cl 5.1 for Termite to make three kinds of payments to SBR: a “Capacity Charge”, a “Haulage Charge” and a “Performance Charge”. The Performance Charge is not presently material and need not be mentioned further. In essence, the Capacity Charge represented SBR’s fixed costs and the Haulage Charge its variable costs.
Clause 11 of the RHA provided for acts of default and for termination. Because of its significance to the submissions made by the parties, it is appropriate to set out relevant parts of cl 11.
11.2 Default under this Agreement
(a) If either party:
(i)has a receiver, manager, receiver and manager, liquidator (including a provisional liquidator), special investigator, statutory manager or similar person appointed (whether by a court or other persons) concerning any of its property, assets, business or affairs;
(ii)becomes bankrupt, insolvent or enters into a composition scheme or arrangement (whether formal or informal) with creditors;
(iii)assigns its property, assets, business or affairs for the benefit of its creditors;
(iv)has any bona fide distress, execution, attachment or other process made or levied against any of its assets which is not satisfied within seven days after service;
(v)fails to pay an undisputed invoice in respect of this Agreement within 30 days of the due date for payment;
(vi)fails to maintain the insurance required under clause 8 this Agreement;
(vii)fails to comply with the requirements of all relevant laws, statutes, regulations, permits, licenses and codes in any way affecting or applicable to the Haulage Services; or
(viii)fails to comply with any material term of this Agreement;
then there has been an act of default.
(b) The non-defaulting party is known as the “innocent party”.
(c)Each party undertakes to the other that it will promptly notify, in writing, the other of any event that constitutes an act of default by it.
(d)Upon the occurrence of an act of default referred to in clause 11.2(a)(i)‑(iv), the innocent party may immediately terminate this Agreement by notice in writing.
(e)Upon the occurrence of an act of default referred to in clause 11.2(a)(v)‑(viii), the innocent party may serve a Notice of Default upon the defaulting party, being a notice in writing requesting rectification of the act of default within a reasonable time (not being less than 14 days).
(f)If the defaulting party has not rectified the act of default in accordance with the notice provided by the innocent party pursuant to clause 11.2(d) the innocent party may, in its absolute discretion, and at such times as it may determine do all or some of the following:
(i) terminate this Agreement; and
(ii)exercise any other power or right that the innocent party may have under this agreement or in law or in equity.
(g)…
(h)If this Agreement is terminated by SBR under clause 11.2(f)(i) before the Expiry Date for default by [Termite], [Termite] shall pay to SBR within 30 Days of the date of SBR’s claim for payment an amount calculated in accordance with clause 11.3. The amount payable to SBR under clause 11.3 will be full compensation for the termination and [Termite] will not be liable to SBR for any claim in respect of the termination other than for the amount payable under clause 11.3.
11.3 Termination Payment
(a)Within 60 days of the date of termination (or such longer period as agreed), SBR shall submit a claim for payment, accompanied by a worksheet containing the application of the formula in clause 11.3(b)(ii) and details of costs claimed under clause 11.3(b). Such worksheet must be accompanied by reasonable supporting evidence.
(b)The termination payment shall comprise 2 components, being:
(i)a payment to cover actual and reasonable demobilisation costs incurred by SBR by reason of the termination, including redundancy costs for train crew and relocation costs for plant and equipment used in the performance of SBR’s obligations under this Agreement; and
(ii)a payment calculated in accordance with the following formula which describes the extent to which the Capacity Charge payments have been based on less than average (across the initial Term) monthly Contracted Tonnage:
TA = (TT * M/56 – TA) * CR
Where:
TA = the amount to be paid
TT = Contracted Tonnage of ore to be railed over the Term as set out in Schedule 4
M = number of months from the Commencement Date to the date of termination of this Agreement
TA = the number of tonnes on which the Capacity Charge has been paid up until the date of termination of this Agreement
CR = the Escalated Capacity Rate per tonne as specified in Schedule 1
...
11.4 Termination for Convenience
Without prejudice to any of [Termite’s] other rights and entitlements under this Agreement, [Termite] may at any time by 180 days written notice to SBR during the Term terminate this Agreement for convenience.
If [Termite] terminates the Agreement under this clause 11.4, SBR will be entitled to payment calculated in accordance with clause 11.3. Payment shall be made by [Termite] within 30 days of the date of SBR’s claim for payment under clause 11.3.
The amount payable to SBR under clause 11.3 shall be full compensation for the termination and [Termite] will not be liable to SBR for any claim in respect of the termination other than for the amount payable under clause 11.3.
As is apparent, cl 11.2 provided for termination by an act of default in two different ways. If the particular act of default was of the kind specified in cl 11.2(a)(i)‑(iv), the innocent party could terminate the Agreement immediately by notice in writing. Broadly speaking, those acts of default were insolvency related.
If, however, the act of default was of a kind set out in cl 11.2(a)(v)‑(viii), the innocent party could not terminate immediately. Instead, it could, pursuant to cl 11.2(e), serve a notice of default on the defaulting party and, pursuant to cl 11.2(f), terminate the Agreement only if the defaulting party did not rectify the act of default in accordance with that notice. In that event, the innocent party could “exercise any other power or right that [it] may have under [the RHA] or in law or in equity”. In the event of termination by SBR under cl 11.2(f)(i), the liability of Termite was limited to the amounts payable under cl 11.3 concerning demobilisation costs and the Capacity Charge, (cl 11.2(h)).
This understanding of the contractual arrangement is complicated by the reference in cl 11.2(f) to a notice pursuant to cl 11.2(d), but that appears to be a mistake. It should instead be a reference to cl 11.2(e).
By notice dated 26 June 2014 expressed to be given pursuant to cl 11.2(d) of the RHA, SBR terminated the RHA. The notice stated that it was made by reason of Termite’s appointment of administrators. That is, it was based on cl 11.2(a)(i).
The defendants disputed Termite’s claimed liability to SBR on six different bases.
No entitlement for damages for breach of contract?
The defendants’ first submission was that SBR’s claim had been presented on the basis of a claim for damages for breach of contract when, given the circumstances in which it terminated the RHA, it had no such entitlement.
This submission of the defendants, and the responsive submission of Termite, pointed up an issue of construction in cl 11.2. While a termination by SBR pursuant to cl 11.2(f)(i) would give rise to a liability in Termite to make the cl 11.3 payment, there was no express counterpart obligation in respect of termination pursuant to cl 11.2(d). As SBR had given its notice of termination pursuant to cl 11.2(d), did this mean that the Contract contemplated that SBR should have no further entitlement on its immediate termination (other than being relieved of the performance of its own obligations)? Alternatively, did the Contract contemplate that SBR would have the remedy for which cl 11.3 provides or, perhaps, the remedies otherwise available to it in law or in equity?
The defendants submitted that SBR was limited to the remedy for which cl 11.3 provided whereas Termite submitted that SBR had its common law remedies.
Several matters could favour the first alternative outlined above: the very structure of cl 11.2 suggests careful attention by the parties to the two forms of termination under the subclause; subcl 11.2(f) provides expressly that on a termination pursuant to that subclause, the innocent party may exercise any rights available to it in law or in equity (subject to the cap on Termite’s liability fixed by cl 11.2(h)) and cl 11.2(d) does not; and cl 11.3 is referred to in cl 11.2(h) with reference to cl 11.2(f) and there is not such reference to cl 11.2(d). The parties’ careful attention to those matters could be taken to indicate that they did not contemplate the innocent party having any further entitlement in the event of termination pursuant to cl 11.2(d).
On the other hand, for the reasons given earlier, cl 11.2 is to be construed so as to have a business‑like operation. It is prima facie surprising that commercial parties intended that the innocent party would not have any further remedy following a termination for a cl 11.2(a)(i)‑(iv) reason. That is particularly so given the contemplation in cl 11.3(b)(i) that SBR (as an innocent party) would on termination be likely to incur demobilisation, redundancy and relocation costs, just as it would in the event of a termination for a cl 11.2(a)(v)‑(viii) reason. It is also apparent that the parties intended that cl 11.3 should delimit the remedy available on termination in a variety of contexts: on termination for breach pursuant to cl 11.2(f), on termination for convenience pursuant to cl 11.4, and for termination on an event of force majeure pursuant to cl 16.1. It is not readily to be supposed that the parties had intended that cl 11.3 should apply in all these circumstances but not when the Contract was terminated for a cl 11.2(a)(i)‑(iv) reason.
Counsel for Termite submitted that the common law remedies for breach of contract should be regarded as excluded only when there is clear and unambiguous language in the parties’ contract that that result was intended. He referred to Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693. It is not clear that Concut v Worrell is authority for such a proposition, but that question need not be considered. Even if the common law remedies for breach of contract were preserved, it would not avail SBR. Termite had not bound itself to SBR not to have administrators appointed to it, and that appointment did not constitute a breach of its contract. Even if it had, it would be a breach within cl 11.2(a)(viii) and therefore subject to the cl 11.2(h) cap.
I consider that cl 11.2 should be construed in the manner for which the defendants advocated. That makes commercial sense. Furthermore, cl 11.3 on its terms is capable of applying to any termination, including a cl 11.2(d) termination. The references to cl 11.3 in cll 11.4 and 16.1 indicate that it has an operation extending beyond cl 11.2(f) terminations.
It follows that I uphold the first defence of the defendants. That means that Termite’s liability to SBR is governed by cl 11.3.
The claim under cl 11.3
Although the defendants had contended that cl 11.3 was applicable to a termination by notice pursuant to cl 11.2(d), they submitted that Termite had not adduced any evidence of the amount which would be due pursuant to that clause. They submitted in the alternative that such evidence as there was indicated that no amount would be payable.
In this respect the defendants noted that Mr Reed, the Business Capabilities Manager of SBR, had agreed with a calculation provided by a Mr Galbraith on 17 January 2014. The evidence did not disclose the capacity in which Mr Galbraith was then acting but it is apparent that he sent the calculation to Mr Reed at the request of Mr Parsons. The calculation, supported by worksheets, indicated the termination charges payable to SBR in the event of early termination during the 56 month initial term and the Capacity Charges applying to the end of the initial term. The calculation indicated that there was no termination payment payable to SBR after August 2012.
In his evidence, Mr Fiteni from SBR did not contest the calculation made by Mr Galbraith.
In his cross‑examination, Mr Holmes said that he had made a calculation of the amount which would be payable if cl 11.3 applied. He said that it would be “very small”. Later however, Mr Holmes acceded to the appropriateness of a calculation of $1,395,289 made by the cross‑examiner. The defendants submitted that even that amount should not be allowed because it was based on the figures in documents containing SBR’s calculation of its claim and not on primary business records.
I do not accept that submission. The inputs necessary for the cl 11.3(b) formula are relatively straightforward, and are in evidence. It is pertinent that counsel was able to identify the relevant inputs in the cross‑examination of Mr Holmes.
This means that I accept the quantification of SBR’s claim under cl 11.3 at $1,395,289.
SBR’s claim not admitted to proof
The defendants submitted that the liability of Termite to particular creditors should be limited, for the purpose of Termite’s claim against the defendants, to the amount admitted to proof by the Administrators/Liquidators. As SBR’s claim for the Capacity Charge had not been admitted to proof, Termite could have no liability. I reject that submission for the same reasons given earlier.
An intervening event?
The defendants submitted, without reference to authority, that the liability of Termite with respect to the claimed Capacity Charge should be attributed causally to action of the Administrators and not to their conduct. The defendants referred to evidence indicating that SBR had made a claim for loss of profits only because of an invitation to do so by a member of the Liquidators’ firm or by their solicitors.
The relevant sequence of events is as follows. On 17 September 2014, SBR lodged a proof of debt with the Liquidators for a total of $19,185,175.21. On 23 December 2014, it submitted a revised proof of debt for $19,109,145.98. Of this amount, some $12.2 million was attributed to the Capacity Charges after June 2014.
By correspondence dated 11 September 2014, 24 November 2014 and 12 January 2015, the Liquidators raised a number of queries with SBR regarding its proof of debt. Specifically, the Liquidators asked SBR why cl 11.3 of the RHA did not apply to limit its liability and asked SBR to quantify its claim on the basis that cl 11.3 did have that effect. On 27 January 2015, SBR responded saying that it would like to “park” the claim for the Capacity Charge because, in effect, the work involved in justifying the claim may not warrant the likely return.
By letter dated 30 March 2015, Turks Legal, a firm of solicitors who identified themselves as acting for SBR but who Mr Fiteni said had been instructed by SBR’s trade credit insurer, said that they were instructed that SBR no longer pursued the Capacity Charge claim of $12,147,434.64.
Two weeks later, on 14 April 2015, SBR submitted a proof of debt limited to $6,961,711.34 for the purpose of participating in the initial dividend. It indicated, however, that it reserved its right to submit a proof of debt in respect of the balance of $12,147,434.64 in the event that sufficient funds materialised for a return to unsecured creditors. On the same day, the Liquidators declared a dividend at the rate of 3.024 cents in the dollar.
There things stood until mid‑2016. On 11 July 2016, SBR sent a letter to the Liquidators making a claim for damages of $8.127 million. It said that it had formulated “a damages claim based on providing the relevant capacity tonnes per the Rail Haulage Agreement, multiplied by the given Capacity Rate after adjusting for costs that were progressively mitigated over time”.
The opening paragraph of the letter referred to “recent discussions held with John Marsden of your office, and Natasha Riach from Fisher Jeffries, in respect of our claim amount for the Termination of Contract”. Fisher Jeffries are the solicitors acting for the Liquidators in the present litigation.
Mr Fiteni said that, in these discussions, SBR had been “invited to submit a claim for damages for breach of our contract”.
On that basis, the defendants submitted that any liability of Termite to SBR should be treated as having been caused by the Liquidators’ invitation to SBR to revive the claim for the Capacity Charge and not by their own breach of duty.
That submission cannot be accepted, at least in the terms in which it was framed. The existence and cause of the liability to a creditor are separate and distinct from the matters which prompt the creditor to pursue a claim in respect of it. Whether Termite is “liable” to SBR rests not on the reasons of SBR for pursuing the claim but on the underlying facts and circumstances of their contractual relationship.
However, I understood the defendants to be submitting that the “loss” (if it be such) incurred by Termite was not caused by their conduct but by the Liquidators’ encouragement to SBR to revive the claim which it had abandoned. Had the Liquidators not intervened in the way which they did, it could be inferred that SBR would not have sought to revive the claim. In that way, it was said that the Liquidators had brought the loss on Termite which it would not otherwise have suffered.
Again, I consider that the question of whether the “loss” of Termite by reason of its liability to SBR should be assessed by reference to the underlying facts and circumstances and not by the matters which motivated SBR to bring a claim in respect of that loss. The loss cannot be regarded as voluntarily assumed. Further, account must be taken of the responsibility of the Liquidators, acting as conscientious liquidators, in respect of a claim which they were aware SBR had foreshadowed but had “parked”. I reject this submission.
The termination for convenience clause
Next, the defendants referred to cl 11.4 of the RHA which entitled Termite to terminate the Contract for convenience upon six months’ notice. In the view I take, it is not necessary to consider this submission given my finding that cl 11.3 governs SBR’s entitlements. I indicate, however, that if I am wrong in my conclusion about the effect of cl 11.3, I would uphold the defendants’ submission with respect to the termination for convenience clause.
Conclusion on the non-trading claim of SBR
For the reasons given above, I consider that Termite has shown an indebtedness to SBR of $1,395,289.
IMX - guarantee claim
Several documents in the trial indicated that IMX had been called on to honour the guarantee, capped at $3 million it had given to Flinders Ports. Indeed, the non‑trading claim of Flinders Ports set out earlier gave credit for the $3 million it had received from IMX.
This suggested that IMX may have a claim pursuant to a right of subrogation. Mr Lewis referred to IMX having such a claim but the evidence did not indicate whether IMX has sought to exercise that right.
Although Termite did not plead that it had a liability to IMX in respect of the $3 million guarantee payment, it did, in its written opening, include this as a component of the non‑trading claims. Despite doing so, Termite did not refer again to this claim. In particular, although the defendants drew attention in their final submissions to the fact that the claim had not been pleaded, Termite made no submissions concerning it.
As this appears to have been an oversight, I would, had it been necessary, have given the parties the opportunity to make further submissions concerning it.
Other claims
The remaining amounts claimed by Termite are as follows:
Entity Amount claimed by Termite (including GST)
$Australian Taxation Office (ATO) 3,853,034.77 Juhua Group (Hong Kong) Ltd 3,913,654.08 Sinosteel International Holding Co Ltd 1,406,293.35 Sichuan Taifeng Group Company Ltd 1,835,797.89 Shanghai Guodian Shipping Co Ltd 1,046,892.12 Ikonomopoulos Family Trust 4,265.53 Life Together Unit Trust 3,169.83 Total $12,063,107.57
Of these amounts, the defendants disputed only the claims with respect to the ATO and Shaghai Guodian Shipping Co Ltd (SGSC).
The ATO claim
The Liquidators have assessed that Termite has an “increasing adjustment” liability to the ATO pursuant to s 21‑15 the ANew Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). Section 21‑15 provides as follows:
21‑15 Bad debts written off (creditable acquisitions)
(1) You have an increasing adjustment if:
(a)you made a *creditable acquisition for *consideration; and
(b)the whole or part of the consideration is *overdue, but you have not provided the consideration overdue; and
(c)the supplier of the thing you acquired writes off as bad the whole or a part of the debt, or the whole or a part of the debt has been overdue for 12 months or more.
The amount of the increasing adjustment is 1/11 of the amount written off, or 1/11 of the amount that has been overdue for 12 months or more, as the case requires.
…
Pursuant to s 58‑60 of the GST Act, the Liquidators as representatives of Termite, were obliged to notify the Commissioner of Taxation of the increasing adjustment. The Liquidators did so 14 April 2015. The amount of the increasing adjustment notified was $3,853,034.77. The Liquidators calculated the increasing adjustment by reference to the Practice Statement Law Administration (General Administration) Statement (PS LA201/1(GA)) issued by the ATO.
There is, however, a difficulty in including the increasing adjustment as an item of Termite’s damages. As the ATO Practice Statement points out:
25.A bad debt increasing adjustment does not necessarily arise as a result of interim dividend payment. This is because creditors may not write off the whole or part of a debt owed by the incapacitated entity as bad until it is certain that no further payments will be received. In any case, representatives will not usually know whether creditors have written off any part of a debt as bad at that point. The Commissioner therefore accepts that payment of an interim dividend does in itself trigger an increasing adjustment.
26.When a representative makes a final dividend payment, creditors will generally make a bona fide commercial decision that the unpaid portion of a debt is unlikely to be recovered and therefore write off the remainder of the debt. Thus, a bad debt increasing adjustment potentially arises when a final dividend is paid and it is at this point the bad debt increasing adjustment formula may be used calculate it.
(Emphasis added)
A further complication is that this judgment would be used in determining the amount of the unsecured debts of Termite and, depending on what happens thereafter, the amount of any dividend. This means that the parties are not in a position presently to make any calculation until they know, at the least, the result of the case.
In these circumstances, I would, had it been necessary to do so, have acceded to the suggestion of counsel for Termite that the parties be given the opportunity of making further submissions concerning the claim for increasing adjustment after the delivery of these reasons.
Shanghai Guodian Shipping Co Ltd
Termite claims an amount of $1,046,892.12 (exc GST) in respect of an alleged liability to SGSC.
Termite had entered into two Contracts of Affreightment with SGSC (the CoAs) pursuant to which SGSC carried iron ore from Port Adelaide to China. Following the placement of Termite into administration, SGSC did not undertake three shipments which it had expected pursuant to the second CoA and suffered a loss of profit on a fourth. It claimed loss of the expected profit from each shipment as follows:
Shipment No Claimed loss of profit
AUD$Shipment 7 275,592.44 Shipment 8 (unperformed) 257,099.89 Shipment 9 (unperformed) 257,099.89 Shipment 10 (unperformed) 257,099.89 Total $1,046,892.11
Mr Holmes expressed the view that these claimed losses of profit were likely to be materially misstated and set out the basis for that opinion. In addition, Mr Holmes expressed the view that a precise claim amount “is not reasonable” given that the claims are based upon a hypothetical, the charters’ destinations were not certain, and the components making up each claim are variable.
In his cross‑examination, Mr Holmes said that he had sought further information from SGSC but that the response provided did not satisfy his questions.
The defendants submitted that, in these circumstances, the Court could not be satisfied that SGSC had suffered any loss on the three unperformed charters, noting that SGSC may well have been able to use the ships for other profitable purposes. It conceded, however, that the loss of profit of $275,592.44 on Shipment 7 should be allowed.
Counsel for Termite conceded that there was no evidence as to the use made of the ships to be used on the three cancelled charters and, tacitly, conceded the claim with respect to those. In these circumstances, I uphold the defendants’ submission that Termite has established a loss of only $275,592.44 in respect of SGSC.
Summary on quantum
I summarise the claim of Termite with respect to its creditors which I have upheld as follows:
Category of Claim Debt (including GST) Total category claim (including GST) Trading debts (excluding logistics creditors) $2,492,199.10 Trading debts (logistics creditors)
Cronos
Exact
Flinders Ports
SBR
$814,252.37
$12,597,676.05
$1,842,806.20
$6,961,711.34
$22,216,445.96
Non-trading claims by logistics creditors
Cronos
Exact
Flinders Ports
Gemco
SBR
IMX
$2,059,245.78$2,818,110.00
$15,033,279.36
$3,986,186.11
$1,395,289.00
?
$25,292,110.25
Other claims:
Australian Taxation Office
Juhua Group (Hong Kong) LtdSinosteel International Holding Company Ltd
Sichuan Taifeng Group Co Ltd
Shanghai Guodian Shipping Co Ltd
Ikonomopoulos Family Trust
Life Together Unit Trust
?
$3,913,654.08
$1,406,293.35
$1,835,797.89
$275,592.44
$4,265.53
$3,169.83
$7,438,773.12
$57,439,528.43 Less the interim dividend $2,027,811.81 Amount of loss claimed $55,411,716.62
As earlier indicated, I would hear further submissions from the parties, were it necessary, with respect to claimed liabilities to the ATO and IMX and with respect to the application of s 554B of the Act in the case of the non‑trading debt of Exact.
However, for the reasons given earlier, I consider that Termite has shown an entitlement to damages of $7 million only.
Conclusion
For the reasons given earlier, Termite is entitled to judgment against each defendant, in the sum of $7 million. Before entering judgment, I will hear from the parties with respect to interest and costs.
I certify that the preceding one thousand and one (1001) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White. Associate:
Dated: 15 March 2019
SCHEDULE OF PARTIES
SAD 99 of 2016 Defendants
Fourth Defendant:
PHILIP ROSS HOSKINS
Fifth Defendant:
WEI SUN
Sixth Defendant:
KEE CHAU PANG
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