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

ORDERS

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    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.

2    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.

3    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.

4    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.

5    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

6    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.

7    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.

8    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.

9    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.

10    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.

11    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”.

12    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.

13    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.

14    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.

15    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.

16    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.

17    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.

18    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

19    The six defendants, and the positions held by them at material times, are as follows:

20    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.

21    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.

22    Mr Meadows and Mr Nitschke (who was later replaced by Mr Hoskins) were on Outback’s Board as representatives of IMX.

23    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”.

24    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.

25    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.

26    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

27    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

28    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.

29    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.

30    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.

31    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.

32    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.

33    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.

34    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.

35    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.

36    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.

37    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.

38    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.

39    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.

40    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.

41    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.

42    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.

43    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

44    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.

45    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.

46    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.

47    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.

48    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.

49    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.

50    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.

51    Termite accepted that Mr Pang was a witness of truth.

52    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.

53    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.

54    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.

55    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.

56    Mr Morris is an experienced forensic accountant. I indicate later some respects in which I do not accept his evidence.

Factual setting

57    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.

58    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.

59    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.

60    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.

61    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.

62    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.

63    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.

64    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.

65    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.

66    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.

67    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.

68    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.

69    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.

70    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.

71    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.

72    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.

73    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

74    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.

75    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.

76    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.

77    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.

78    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.

79    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.

80    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.

81    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

82    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.

83    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.

84    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.

85    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.

86    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

87    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.

88    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.

89    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).

90    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.

91    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”.

92    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.

93    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.

94    It is apparent (and I so find) that the directors of Termite were not provided with Board Packs with corresponding content for their meetings.

95    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.

96    One of the matters which the Outback Board reserved for its own decision was “approval of strategy and annual budgets”.

97    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.

98    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.

99    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

100    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.

101    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.

102    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.

103    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.

104    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.

105    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.

106    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.

107    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.

108    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

109    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.

110    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

111    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.

112    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.

113    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.

114    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).

115    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.

116    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.

117    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.

118    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.

119    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.

120    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).

121    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.

122    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.

123    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.

124    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.

125    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.

126    The Termite-IMX Loan was made by the following advances:

127    As is apparent, all of these advances were made before the execution of the Loan Agreement.

128    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

129    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.

130    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.

131    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)

132    This led to the following email exchanges:

5 March 2013 at 2.01 pm – Mr Hoskins to Mr Cowell

The shareholder loan from Taifeng is never due and can’t be called. It will only be repaid out of cash flows from Cairn Hill. If Cairn Hill was shut tomorrow, that entire loan would be forgiven. It is not a debt.

Let’s discuss but I’m unwilling to add much more to the going concern disclosure in the year end accounts.

5 March 2013 at 2.33 pm – Mr Hoskins to Messrs Sun, Pang and Meadows

Please find attached the draft distributions policy. Please provide me with comments as soon as possible because IMX’s auditors have said that they need to see the Distributions Policy agreed by the Outback Board prior to signing off on the IMX half year accounts.

6 March 2013 at 9.26 am – Mr Cowell to Mr Hoskins

[W]e have considered if there [is] an alternative to having to classify part of the Taifeng loan as current based on forecast distributions. Unless Taifeng were to formally convert their debt to equity, the balance remains as a loan and therefore will need to have a portion reclassified to current. In this regard, can you have the forecast distributions to Taifeng calculated and adjust the balance sheet in the accounts? As discussed, we can assist with the disclosure that will help explain this once we see what the numbers come out with.

(Emphasis added)

133    On 12 March 2013, KPMG provided a draft of its report to the IMX Audit and Risk Management Committee (ARMC). KPMG raised as a significant matter the “going concern” statement. Having noted the assumptions on which IMX was proceeding in the event that a capital raising did not occur, the draft report continued:

This assumption however is heavily dependent on ongoing provision of a loan from Outback and the commencement of distributions to IMX. The company reached verbal agreement with Outback in January 2013 for a loan of up to $5 million (currently drawn to $4 million) to be provided to IMX to assist its short-term cash requirements. The draft loan agreement indicates a repayment date of 30 June 2013.

Repayment of the loan is dependent upon the commencement of distributions by Outback to IMX and Taifeng. The cash flow forecast assumes these distributions commence in March 2013, with IMX’s share through to 31 December 2013 totalling $20 million. Given the relative informality of these arrangements and assumptions (and yet their importance to IMX), we have emphasised to management the need to have such arrangements appropriately documented before the half year financial statements are signed.

(Emphasis added)

134    Ms McComish and Mr Cowell from KPMG attended a meeting of the ARMC at 7.35 am on 12 March 2013. The attendees at that meeting included Messrs Nitschke, Meadows and Hoskins. The minutes of the meeting record that Ms McComish and Mr Cowell stepped the meeting through the draft report and confirmed that:

[I]n order to deliver an unmodified opinion on the financial statements for the half year ended 31 December 2012, [KPMG] requires a copy of an appropriately documented loan agreement between [Termite] and IMX and an approved distributions policy of Termite, due to the reliance on these items in the Company’s cash flow.

(Emphasis added)

135    There was no suggestion that these minutes were inaccurate. To the contrary, Mr Hoskins deposed that KPMG had advised IMX management, including himself, that it would place “an emphasis of matter” in the audited IMX accounts as to whether IMX could continue as a going concern unless the distributions IMX had forecast to be received from Termite, were documented under a distribution policy setting out the parameters under which distributions would be made.

136    I am satisfied that KPMG’s insistence on a distribution policy being appropriately documented was a factor in the approval of the Distributions Policy later on 12 March 2013.

The development of the Distributions Policy

137    As already noted, it was Mr Hoskins who, on 31 December 2012, had raised the prospect of Termite making distributions of some of its profits. Before that date, the prospect of distributions had been contemplated in a general way, for example, in cash flow forecasts in June, October and November 2012 and in IMX’s announcement to the ASX on 10 December 2012 concerning payment of the amount advanced under the LinQ facility. However, while the LinQ facility itself remained in place, it was not open to Termite to make any distribution of profits.

138    The making of distributions and the development of the Distributions Policy was given impetus by a suggestion of Mr Nitschke at the time IMX was arranging the loan from Termite. Having confirmed with Mr Hoskins that the JV Loans were to Outback, he asked Mr Hoskins in an email of 8 February 2013:

So why can’t we just do a distribution to Outback and decide to preferentially repay our loan?

139    The following email exchange then occurred on 8 February 2013:

(Hoskins email to Nitschke)

We could do that but I’m assuming this would also require Taifeng’s approval.

I’m not sure why this is a big issue John? Can you bring me to into the loop as to why with the questions?

A loan agreement is supported by Taifeng and no interest is supported by Robert [Sun].

(Nitschke email to Hoskins)

… A loan from Termite is repayable to Termite. A distribution to Outback is not. Could be significant depending on our strategy going forward.

140    The concept of distributions by Termite followed by a loan from Taifeng to IMX was pursued in discussions between Mr Meadows and Mr Sun, as the following email exchange between Mr Sun and Mr Meadows (copied to Mr Nitschke and Mr Hoskins) on 17 February 2013 indicates:

(Meadows email to Sun)

What we are hoping to achieve this afternoon is as follows in line with our discussions since Friday:

The current idea that money is provided from Termite to IMX ($3m at the moment) would be eliminated and replaced by a system whereby:

•    Distributions from Termite to Outback would be formalised;

•    The 51% from Termite to IMX would go straight through to IMX via Outback;

•    The 49% to Taifeng would initially accumulate at Outback level and a loan of up to $6m would be provided from Taifeng’s funds at Outback level to IMX;

•    The debt would be paid back at a date to be agreed as cash and partial conversion to equity at an agreed price or would be paid back fully as cash. The stated preference of Taifeng would be to get back to close to 20% IMX shareholding at the same share price as at the last placement.

The details of all of this to be worked through with you [in] the week commencing 25th February after the strategy for IMX for 2013 has been agreed this week.

I hope this is an accurate transcription of the current discussions.

(Sun email to Meadows)

Yes, these are what we have talked about except we have not touched [on] how Taifeng’s share of [the] distribution [is] to be provide[d] to IMX as a loan.

Phil [Hoskins] told me about your distribution model on the whole on Friday. My understanding was that Termite physically distributed cash surplus pro rata to IMX and Taifeng at the same time and then Taifeng lent its money to IMX whenever IMX needed. It was very similar to a bank facility. We did not mention accumulation process of Taifeng’s share in Termite. Do you mean that IMX takes its share of distribution away and Taifeng leaves its share in Termite to let Termite use it before IMX borrows it?

(Meadows email to Sun)

Accumulation at Outback (not Termite) level is suggested as a means to conduct the loan as the banking facilities are in place and that way we would minimise bank charges that would be caused by movements of funds across IMX and Taifeng accounts but it is not a mechanism that anyone is fixed on, just suggested as being the most cost effective system to work within.

(Sun email to Meadows)

Thank you for the explanation, Neil. We can look into any mechanism that serves us best. To keep the distribution as what it is, I would like the distribution to be a separated matter from the loan.

141    Further discussions then occurred in which Mr Sun, on behalf of Taifeng, proposed that any drawdown by IMX from Taifeng’s funds would be for a maximum term of six months. This was not acceptable to Mr Meadows. He proposed instead that the existing loan arrangement be documented in a loan agreement and at the same time a distributions policy from Termite to Outback should be developed.

142    By 28 February 2013, the attitude of Taifeng had changed. Mr Meadows reported on that day that Taifeng’s position was that now that Termite was “finally achieving returns from the mine, they need to repatriate them to China to satisfy the State and their financiers who at the very least want them to show that they got the loan back by mine life end”. Mr Pang also proposed that the loan from Termite to IMX be for three months, and that, on its repayment, the $5 million should be distributed to IMX and Taifeng.

143    Drafting of the terms of the Distributions Policy commenced after 26 February 2013 and Mr Hoskins completed the first draft on 1 March 2013. He circulated the draft to Messrs Sun, Pang and Meadows on 5 March 2013.

144    Some revision of the terms of the draft Distributions Policy occurred over the ensuing days. The Distributions Policy was approved by the Boards of IMX, Outback and Termite on 12 March 2013.

The Board meetings approving the Distributions Policy

145    The IMX Board meeting (in which Messrs Nitschke, Meadows and Sun participated as directors) occurred first, at 9.50 am. The Board noted, amongst other things, that KPMG required an approved distributions policy by Termite. Read literally, the minutes of the IMX Board meeting of 12 March 2013 do not record the approval of the Distributions Policy, but it was common ground that the IMX Board had approved the Policy at that meeting.

146    The meeting of the Outback Board (in which Messrs Meadows, Nitschke, Pang and Sun participated as directors) commenced at 10.50 am and, with one amendment to the draft, approved the Distributions Policy.

147    The Board of Termite (in which Messrs Meadows, Nitschke and Parsons participated as directors) met at 1.30 pm and resolved to approve the Distributions Policy.

148    Mr Hoskins attended each of the Board meetings in his capacity as CFO.

The terms of the Distributions Policy

149    The Distributions Policy approved by the three Boards was in the following terms:

CAIRN HILL JOINT VENTURE DISTRIBUTIONS POLICY

The Cairn Hill Joint Venture (“JV”) Distributions Policy outlines the JV’s policy on equitably distributing excess cash and profits to its shareholders.

POLICY

Termite Resources NL (“Termite”)

The Distributions Policy dictates that as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate that would warrant additional cash being held by Termite, Management of Termite will distribute 100% of excess cash (after deducting operating expenses and the required Termite Cash Reserve) to Outback Iron Pty Ltd (“Outback”).

The Termite Cash Reserve is $3m and Termite Management should ensure that the short term cash flow at all times shows a minimum cash balance above this figure.

Outback

Outback will distribute 100% of excess cash after deducting the Outback Cash Reserve.

The Outback Cash Reserve = a nominal amount of $5,000 plus an amount covering any potential Termite liabilities.

Given the shareholders of Outback would currently prefer distributions from Outback in preference to holding cash at Outback level, the Outback Cash Reserve will become a standing agenda item at Outback Board meetings and Management will provide the amount of any potential Termite liabilities to each meeting. The Outback Board will continue to monitor the Outback Cash Reserve.

PROCEDURE

Termite Management will produce a weekly short term cash flow from which they will monitor the forecast cash position of Termite over the upcoming 6 months. On a monthly basis, and as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate, Termite Management will distribute the highest amount to the nearest $100,000 that leaves Termite with at least the Termite Cash Reserve.

Cash returned by Termite to Outback will represent a repayment of the shareholder loan from Outback to Termite until that loan is fully repaid. When the loan is fully repaid, payment of dividends will commence.

All shareholder loans between IMX, Taifeng and Outback and between Outback and Termite are interest free and are for a term of 5 years from 1 March 2013. Repayment of these shareholder loans is unable to be demanded by either Outback (of Termite) and IMX or Taifeng (of Outback). Upon completion of operations and payment of final distributions by Termite, if these shareholder loans remain unpaid, the loans will be forgiven.

Closer to the time of the shareholder loans being repaid, Management will consider whether it needs to amend this Distributions Policy to outline how dividends will be approved and paid.

APPROVALS

No Termite or Outback Board approval will be required for monthly distributions. This policy will be reviewed by the Outback Board on a six monthly basis to determine its ongoing applicability to the JV however it can be amended at any time if approved by the Outback Board.

As per the Heads of Agreement, loans and distributions are subject to unanimous Outback Board approval.

Distributions will be formally reported to the Board of Outback and IMX.

DATE OF LAST REVIEW

This policy was last reviewed on 12 March 2013

150    The effect of the Distributions Policy was that, in the absence of unfavourable developments in the iron ore price, the copper price or in the foreign currency exchange rates, Termite’s management would distribute all of its excess cash to Outback, after deducting its operating expenses and “the required Termite Cash Reserve” of $3 million. The amount of the distribution was to be calculated by Termite management so that its cash balance would not drop below $3 million at any time. That is to say, the requirement was not just for there to be a minimum reserve of $3 million at the time of the distribution, but at any time during the period of the short term cash flow forecast. This meant that, depending on the timing of the receipts and of the payments to creditors, the amount held by Termite could well exceed $3 million from time to time.

The binding effect of clauses in the Distributions Policy

151    Because of its significance to an issue to be considered later, it is convenient to address at this point the parties’ submissions concerning the binding effect of the Distributions Policy.

152    In its opening submissions, Termite submitted that the adoption of the Distributions Policy by the respective Boards of Termite, Outback and IMX had contractual effect by which the Joint Venturers had agreed that the Shareholder Loans were to be subordinated, that is, repayable only to the extent that the remaining creditors of Termite and Outback respectively had been repaid fully. In its closing submission, Termite’s contention was more confined. It contended that one paragraph in the Distributions Policy had binding effect, being:

All shareholder loans between IMX, Taifeng and Outback and between Outback and Termite are interest free and are for a term of 5 years from 1 March 2013. Repayment of these shareholder loans is unable to be demanded by either Outback (of Termite) and IMX or Taifeng (of Outback). Upon completion of operations and payment of final distributions by Termite, if these shareholder loans remain unpaid, the loans will be forgiven.

153    The contractual status of this clause is to be determined objectively: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165 at [40]; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 at [59], [98]-[100]. Accordingly, the evidence of the defendants as to their understanding of the effect is inadmissible. Instead, regard should be had the subject matter of the Distributions Policy, the status of the parties, their relationship to one another and to the surrounding circumstances: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at [24]-[25].

154    It is pertinent that the term in question appears in a document which is described as a “Policy”. That tends to point against any part of the document having binding effect. Further, some parts of the document are expressed in terms which do not appear apt as the language of contract. In particular, the condition “as long as there are no unfavourable developments in current or forecast iron ore price, copper price or AUD:USD foreign exchange rate that would warrant additional cash being held by Termite” does not appear to be contractual in nature. Further, as the defendants submitted, it would be unusual for one clause in a document to be characterised as having binding effect when the balance does not.

155    The defendants submitted that other matters also point against there being an intention, objectively considered, that the Distributions Policy should have binding effect: there was no evidence of an intention that the Distributions Policy should impose new repayment terms upon Termite; no evidence that it was intended to confer any legally enforceable benefit upon third party creditors; and a company is entitled to pay dividends to its shareholders even if the company is not indebted to them, or if the shareholders have no right to demand any payment from the company.

156    One may accept each of the matters mentioned in the previous paragraph but I do not regard any of them as being of great moment. It was not necessary for the Distributions Policy to impose new repayment terms on Termite in order for it to have legal effect; the absence of conferral of a legally enforceable benefit upon third party creditors is not material; and, while it is obvious that a company may pay dividends to its shareholders even when not indebted to them and in circumstances in which they have no entitlement to demand payment, that does not preclude participants in a joint venture from agreeing, in a binding way, on the duration of the advances which fund the joint venture.

157    The clause in question is in some respects declaratory of the position previously agreed by the Joint Venturers. The provision that the Shareholder Loans were for terms of five years from 1 March 2013 was new. However, in context, to the extent to which this introduced a finite term, it was one expiring well after the expected conclusion of mining operations at Cairn Hill.

158    Despite the matters to which the defendants referred, I consider that the clause on which Termite relies should be regarded as having contractual effect. It appears in a section of the Policy headed “Procedure”, thereby distinguishing it from the section headed “Policy”. The paragraph which precedes that relied upon by Termite contains the parties’ agreement as to the character of the distributions. Both the subject matter and the manner of expression are apt to indicate a binding agreement. The Policy specified that Termite’s payments “will” represent a repayment of the Shareholder Loans until that loan is fully repaid. When that occurred, the parties agreed that payment of dividends “will” commence. These were matters about which it is understandable that companies would wish to agree in a binding way.

159    The clause on which Termite relies is expressed in declaratory terms, and in a manner which is apt to record the parties’ ongoing agreement with respect to the Shareholder Loans. In a context in which there had previously been difficulties in obtaining the unanimity of views about the loans, and in which KPMG was pressing for the position to be documented in a formal way, it is understandable, objectively considered, that the Companies wished to bind themselves in this way.

160    There was no suggestion of a lack of consideration.

161    The Distributions Policy had been adopted by resolutions by the Boards of each of IMX, Outback and Termite, so that there is no difficulty in accepting that those Companies were accepting for themselves the terms of the loans for which it provided. Taifeng can also be taken to have agreed to those terms, given that it had instructed Mr Sun and Mr Pang to agree to the terms of the Distributions Policy and to supports its adoption.

162    Accordingly, I reject the defendants’ submission on this topic. I conclude that the two clauses in the Distributions Policy concerning the agreed character of the contemplated payments and of the Shareholder Loans were intended, objectively considered, to have contractual effect, and that they did have that effect.

163    As already indicated, it is not necessary to refer in any detail to the evidence of the defendants concerning their own understanding of this clause in the Distributions Policy. I note however that, with the exception of Mr Hoskins, each gave evidence which was broadly consistent with the understanding of the clause for which Termite contended.

The making of the distributions

164    Termite made distributions as follows:

165    Generally, Termite paid the distributions directly to IMX and Taifeng (in proportion to their respective interests of 51% and 49%). The payments between 23 March 2013 and 30 December 2013 constituted a full repayment of the JV Loans. It seemed to be common ground that the payments made on 14 January and 31 March 2014 were appropriately characterised as a return of capital of Outback to IMX and Taifeng.

166    Mr Meadows said that the amounts of the monthly distributions were discussed each month at one of the weekly Termite management meetings. The participants in those meetings were usually Messrs Meadows, Hoskins, Parsons, Hassard and Dunstan (an accountant with IMX). He said that the amount of the payment was determined in the meetings by consent although it was for him, as a director of Termite, to agree with Mr Parsons on the amount of the payment.

167    Mr Hassard conferred with Mr Parsons about the distributions before the management meetings. Mr Parsons said that he approved the distributions on the basis of Mr Hassard’s advice because of his confidence in him and his confidence in the forecasting model and assumptions used for costs and revenue purposes. He said that in some months he decided that no distributions should be made or that the distribution should be less than had been requested by Mr Hoskins or Mr Dunstan. He made these decisions having regard to the amount available for distribution under the terms of the Distributions Policy. I note, however, that there were only two months in which distributions were not made, being May 2013 and February 2014.

168    I accept the evidence of Mr Meadows and Mr Parsons as being broadly correct although it is apparent that IMX’s need for cash was a dominant consideration in the decisions which were made.

169    At one stage in his evidence, Mr Hoskins denied having any “input” as to whether a payment was to be made by Termite. I regarded that evidence as untruthful. Later, when challenged, Mr Hoskins conceded his involvement:

Q:    There was not a single distribution that was made without your concurrence being sought as to whether it should be made; do you agree with that?

A:    Maybe with my concurrence. I wasn’t – yes. That’s probably right. I was the ultimate financial officer of the entire group. Moving money around within it should – should be run by me before its finalised.

…

Q:    And I suggest that prior to the making of distributions you would say to Mr Meadows words to the effect of “This is what we” – that is you and Hassard and Parsons – “were thinking about the relevant distribution”?

A:    Yes. I might not be walking into his office, but might have forwarded an email where the three of us have conversed about it.

…

Q:    Do you agree that Termite management, that is, Mr Hassard and Mr Parsons, weren’t making any decision regarding distributions without the concurrence of you and Mr Meadows?

A:    The concurrence is that – that we concurred with that being – yes, well, Neil was the managing director of the group and I was the CFO of the group, and so it would need our – our sign off.

170    I am satisfied that, as CFO, Mr Hoskins had a very real interest in the amount, and timing, of the payments by Termite. That was because IMX was reliant, at material times, on the distributions from Termite for its operating cash. Mr Hoskins participated in the decision-making concerning each distribution.

Directors’ duties - overview

171    Termite alleges that each of Messrs Meadows, Nitschke and Parsons, while its directors and officers, owed it the duty pursuant to s 180 of the Act to act with the degree of care and diligence which a reasonable person in a like position would exercise in Termite’s circumstances, and the duty, pursuant to s 181 of the Act, to act in good faith in its best interests and for a proper purpose. Termite also alleges that Messrs Meadows, Nitschke and Parsons owed it the common law duties of directors, namely, the duty to act with care, skill and diligence and the duty to act in good faith for the benefit of the company as a whole.

172    Termite alleges that, in the period from January 2012 to 5 November 2013, Mr Hoskins, as a de facto director and as one of its officers, owed it duties pursuant to ss 180 and 181 of the Act. In respect of the period commencing on 5 November 2013 when Mr Hoskins became one of its appointed directors, Termite alleges that, as a de jure director and one of its officers, he owed the same duties as did Messrs Meadows, Nitschke and Parsons.

173    In respect of Mr Sun and Mr Pang, Termite alleges that from 26 April 2012 they were its de facto directors and, as directors and officers, owed it the statutory duties pursuant to ss 180 and 181 of the Act. It does not allege that either Mr Sun or Mr Pang owed it the duties imposed by the common law as directors.

174    Termite alleges that each of the defendants breached the duties he owed.

175    Each of Messrs Meadows, Nitschke and Parsons admits that he owed the duties alleged by Termite, but only in respect of the period in which he held office as a director of Termite (to 15 October 2013, 1 May 2014 and 23 July 2014 respectively). The ASIC Extract for Termite indicates that Mr Parsons continued as a director after 23 July 2014, but nothing turns on that presently.

176    Mr Hoskins admits only that he owed duties to Termite as one of its directors in the period from 5 November 2013 to 1 May 2014. Both Mr Sun and Mr Pang deny that they were deemed directors of Termite and deny that they owed duties to Termite as alleged by it.

177    All of the defendants deny Termite’s allegations of breach of duty. In relation to the alleged breach of s 180(1), the defendants invoke the business judgment “defence” contained in s 180(2) of the Act. The defendants also pleaded that if any breach of duties by them is established, they ought fairly be excused pursuant to s 1317S(2) or s 1318 of the Act from any liability. However, they did not make any submission to that effect in their closing submissions and, in particular, did not resist Termite’s submission that they ought not be afforded relief from liability under ss 1317S and 1318 of the Act. I have taken that part of the filed Defence to have been tacitly abandoned and will not mention it further.

178    It was common ground that the statutory and common law duties of directors are owed to the company: Daniels v Anderson (1995) 37 NSWLR 438 at 505, although there may be a public aspect to a breach of the statutory duties: Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023, (2016) 336 ALR 209 (ASIC v Cassimatis (No 8)) at [455]-[478].

Section 180

179    Section 180(1) imposes an obligation on a company’s directors and officers to act with care and diligence, as follows:

Care and diligence—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:    This subsection is a civil penalty provision (see section 1317E).

Section 180(2) concerns the business judgment rule invoked by the defendants.

180    The principles developed by the Courts concerning the duty imposed by s 180(1) were not in issue. It is convenient to adopt the summary which Brereton J gave in Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373:

[99]    The statutory duty imposed by s 180(1) reflects, and to some extent refines, that which obtains at general law. As Santow J (as his Honour then was) explained in ASIC v Adler … both the common law and equity imposes on directors a duty of care and skill … the content of which is essentially the same as the statutory duty … . Similarly, the statutory duties imposed by s 181 and s 182 reflect, and to some extent refine, corresponding obligations of directors under the general law.

[100]    In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case … .

[101]    Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances … And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company … they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance … .

[102]    The constitution of the corporation, and concomitantly the identity of those to whom the duty is owed, is of importance because the duties referred to in ss 180, 181 and 182 are not duties owed in the abstract, but duties owed to the corporation. As Clarke and Sheller JJA observed in Daniels v Anderson (at NSWLR 504), the duties imposed by former s 232 (the predecessor of s 180) reflected the concept of negligence at general law, in that a director owes to the company a duty to take reasonable care in the performance of the office. In Vrisakis v ASC (1993) 9 WAR 395, 449–50; 11 ACSR 162, 211–13; Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ) held that although the statutory duty of care and diligence would be contravened if a director had not exercised a reasonable degree of care and diligence in the exercise of his powers or the discharge of his duties, even if there was no actual damage, that could only be so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company - and, moreover, that in determining whether the relevant duty had been breached, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct [see also ASIC v Doyle (2001) 38 ACSR 606, 641]. As His Honour explained:

Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.

Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

181    The standard of care required by s 180(1) is objective but account must be taken of the circumstances of the company and of the particular director or officer involved. The Court enquires as to what an ordinary person, with the knowledge and experience of the director or officer, could be expected to have done in the circumstances if he or she was acting on their own behalf: Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [372]. The “corporation’s circumstances” include the type of company, the size and nature of its business, the provisions of its constitution, the composition of the Board and the distribution of the work between the Board and other officers: Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 (ASIC v Rich) at [7201]. In Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589; (2015) 241 FCR 502, Beach J elaborated the position:

[440]    It is not in doubt that the circumstances of the particular company concerned inform the content of the duty. These include the size and type of the company, the size and nature of the business it carries on, the terms of its Constitution, and the composition of the board of directors.

[441]    It is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director’s position and responsibilities, the director’s experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company’s business has been distributed between the directors and the company’s employees, the informational flows and systems in place and the reporting systems and requirements within the company.

[442]    Further, one then looks at the relevant acts, omissions and circumstances in the given case.

182    In ASIC v Cassimatis (No 8), Edelman J reviewed the historical basis and nature of the common law, equitable and statutory bases for the duty of directors and officers to act with due care and diligence. His Honour’s conclusions included the following:

(a)    the dominant position is that directors owe a single general law duty, recognised by both common law and equity, to take reasonable care, at [427]; and

(b)    the duty is concerned with negligence and not gross negligence, at [428].

183    Edelman J also concluded that the foreseeable risk of harm to be considered in relation to an alleged breach of s 180(1) is not confined to financial harm but includes harm to all of the interests of the company, including its reputation; that the question of whether a director has exercised reasonable care and diligence is to be answered by balancing the foreseeable risk of harm against the potential benefits which could be expected to accrue to the company from the conduct in question; that the balancing of the risk against potential benefits should be carried out in a way which is similar to the negligence calculus discussed by Mason J Wyong Shire Council v Shirt [1980] HCA 12, (1980) 146 CLR 40 at 47-8; and that the exercise is “forward looking” to what a reasonable person would have done, not “backward looking” at what would have avoided the injury: ASIC v Cassimatis (No 8) at [483]-[487]. See also Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75 (ASIC v Drake (No 2)) at [395]-[401].

184    The duty imposed by s 180(1) requires directors and officers to be familiar with the fundamentals of the company’s business, to keep themselves informed about the company’s activities, to monitor generally the company’s affairs, to maintain familiarity with its financial status and, in most cases, to have a reasonably informed opinion of the company’s financial capacity: ASIC v Rich at [7203]. Questions of whether a director or officer has failed to meet the required standard of care and diligence are to be assessed with regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment kept firmly in mind: ibid at [7242]. Section 180(1) is not directed to mere mistakes or errors of judgment. The position was stated by Robson J in Australian Securities and Investments Commission v Lindberg [2012] VSC 332 at [72]:

… Making mistakes does not by itself demonstrate lack of due care and diligence. The business judgment rule in s 180(2) also recognises that business judgments made in good faith and on a proper basis do not fall within s 180(1). Directors and officers of corporations are expected to take calculated commercial risks. A company run on the basis that no risks were ever taken would be unlikely to be successful. The proper taking of risk in making business decisions is entirely consistent with exercising care and diligence. The proper assessment of the risks and potential rewards is a matter that demands the exercise of care and diligence. The two concepts complement each other in the management of corporations.

185    Hence, the question is what a reasonable person in each of the defendants’ positions would have done in response to the foreseeable risk: ASIC v Drake (No 2) at [398]-[400].

186    Ordinarily, the circumstances of each individual director and officer should be considered, at [491]. However, the parties did not in the final submissions suggest that the individual positions of the defendants could warrant different conclusions. Instead their submissions proceeded on the basis that it was not necessary to distinguish between the respective defendants. It is also convenient to note in this respect the concession by the defendants’ counsel that the distinction sometimes drawn between the position of executive and non-executive directors has less significance in the present case.

Section 180(2) - the business judgment rule

187    Section 180(2) of the Act provides:

Business judgment rule

A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)    make the judgment in good faith for a proper purpose; and

(b)    do not have a material personal interest in the subject matter of the judgment; and

(c)    inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)    rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note:    This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under any other laws.

188    In s 180(3) “business judgment” is defined to mean “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation”.

189    The four elements in s 180(2) are cumulative.

190    It is a person who invokes the business judgment rule who has the onus of proving that he or she falls within its terms: ASIC v Rich at [7269]; Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; (2011) 190 FCR 364 at [197]. The business judgment rule applies only to business decisions. A failure by directors to turn their mind to a particular issue does not attract the defence: ASIC v Rich at [7271]-[7284].

191    The circumstances to which the business judgment defence rule relate will ordinarily be encompassed by the obligation of care and diligence to which s 180(1) refers. However, as explained by Austin J in ASIC v Rich, s 180(2) may still have some work to do, at [7242], [7254]-[7255].

Section 181

192    Section 181 of the Act provides:

181 Good faith—civil obligations

Good faith—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

Note 1:    This subsection is a civil penalty provision (see section 1317E).

Note 2:    Section 187 deals with the situation of directors of wholly-owned subsidiaries.

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

193    Despite the decision in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 (WBC v Bell Group (No 3)) at [923], [1988], [2027], [2772] and [2795], the authorities favour the view that the question of whether or not directors or officers have exercised their powers and discharged their duties in the manner required by s 181 is to be determined objectively: ASIC v Drake (No 2) at [494]; FAL Healthy Beverages Pty Ltd v Xenos [2017] NSWSC 476 at [59]; Australian Securities and Investments Commission v Flugge [2016] VSC 779, (2017) 342 ALR 1 (ASIC v Flugge) at [1965]-[1990]; Re Colorado Products Pty Ltd [2014] NSWCA 789 at [419]-[421].

194    Nevertheless, an allegation of breach involves both subjective and objective elements: subjective in the enquiry as to the directors’ subjective purpose, and objective in the assessment of whether that purpose was improper: ASIC v Flugge at [1976].

195    In considering whether the s 181(1) duty has been breached, the Court seeks to balance “the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question”: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450; ASIC v Cassimatis (No 8) at [465], [479]. That is because the mere fact that a director participates in conduct which carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that the director has failed to exercise a reasonable degree of care and diligence in the discharge of his or her duties. The management and direction of companies involves the making of decisions and embarking upon actions which involve risk: Vrisakis at 449.

196    The common law duties and the statutory duties are of a similar character: Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451 at [142].

The interests of creditors

197    The duty of directors to act in the best interests of a company may require them to take account of the interests of its creditors, as well as the interests of its shareholders. In Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1 at 7, Mason J (with whom Barwick CJ agreed) said:

[I]t should be emphasized that the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a “group” of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent.

198    Termite did not allege that the defendants owed any duty directly to its creditors, in particular the Services Contractors, which might support an action by them against the directors. This was appropriate, given the position explained by Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 444-5:

It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company. The restriction is similar to that found in cases involving fraud on the minority. Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... the result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.

(Emphasis added)

199    This passage was referred to with approval by the plurality in Spies v R [2000] HCA 43; (2000) 201 CLR 603 at [94].

200    In Geneva Finance Ltd v Resource & Industry Ltd [2002] WASC 121; (2002) 169 FLR 152, Heenan J summarised the principle as follows:

[26]    [I] consider that the orthodox articulation of the duty is that a director of a company, especially if the company is approaching insolvency, is obliged to consider the interests of creditors as part of the discharge of his duty to the company itself, but that he does not have any direct duty to the creditors and certainly not one enforceable by the creditors themselves, except in “special responsibility” cases or under statutory provisions now prevailing in a liquidation.

201    As this passage makes apparent, the obligation of directors to consider the interests of creditors is enlivened particularly when a company is insolvent or nearing insolvency. The Courts have avoided formulating any general test of the degree of financial instability necessary to give rise to a duty by directors of a company to consider the interests of its creditors. Thus, in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 733, Street CJ (with whom Hope and McHugh JJA agreed) said:

I hesitate to attempt to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors. For present purposes, it is not necessary to draw upon Nicholson v Permakraft as authority for any more than the proposition that the duty arises when a company is insolvent inasmuch as it is the creditors’ money which is at risk, in contrast to the shareholders’ proprietary interests. It needs to be borne in mind that to some extent the degree of financial instability and the degree of risk to the creditors are inter-related. Courts have traditionally and properly been cautious indeed in entering boardrooms and pronouncing upon the commercial justification of particular executive decisions. … Moreover, the plainer it is that it is the creditors’ money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all of the shareholders, can justifiably expose the company.

202    There are numerous illustrations in the authorities of actual or prospective insolvency being held to enliven a duty by directors to consider the interests of creditors as an aspect of the duty to act in the best interests of the company. See, for example, Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242 at 249 (“doubtful solvency”); Kinsela at 732 (“an insolvency context”); Linton v Telnet Pty Ltd (1999) 30 ACSR 465 at 471, 478 (“financial instability” and “should have been concerned for [solvency]”); Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425 at 444 (“insolvent or nearing insolvency”); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, (2008) 39 WAR 1 (Bell Group v WBC (No 9)) at [4440] and [4421] (“prejudicial to creditors” and “facing insolvency”); WBC v Bell Group (No 3) at [2046] (“a real risk that the creditors of a company in an insolvency context would suffer significant prejudice”); and Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191, (2007) 63 ACSR 557 at [162] (“a real and not remote risk of insolvency”).

203    In Grove v Flavel (1986) 43 SASR 410 at 421, Jacobs J said that directors should consider the interests of creditors when they are aware of “a real and not a remote risk” of insolvency. In Speis v R, at [95], the plurality doubted the correctness of Grove v Flavel insofar as Jacobs J had suggested that directors owe an independent duty to, and enforceable by, creditors. The plurality, however, did not suggest that Jacobs J had been incorrect in holding that directors may owe a duty to creditors when they are aware of a real and not remote risk of insolvency.

204    In Kalls v Balaglow, Giles JA (with whom Ipp and Basten JJA agreed on this issue) said:

[162]    It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question.

205    In Australian Securities and Investments Commission v Somerville [2009] NSWSC 934; (2009) 77 NSWLR 110 at [37], Windeyer AJ considered it “clear” that, “unless the interests of the creditors are taken into account where objective circumstances require this, … and only the interests of shareholders considered, the directors cannot be acting in good faith” (emphasis added).

206    After his review of the authorities in Bell Group v WBC (No 9), Owen J said:

[4445]    In my view these statements all suggest that a financial state short of actual solvency could be sufficient to trigger the obligation to take into account the interests of creditors. Again, in my view, this approach accords with principle. The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore.

(Emphasis added)

207    In Nicholson v Permakraft at 249, Cooke J regarded the fact of actual or approaching insolvency as being but one instance of a circumstance in which directors may be required to consider the interests of creditors. His Honour went on to say that directors may be under a duty to consider the interests of creditors “if a contemplated payment or other course of action would jeopardise its solvency” (emphasis added).

208    It is also convenient to refer to the summary by the authors of Ford, Austin and Ramsay’s Principles of Corporations Law (16th edition) at [8.100.12]:

In summary, what directors must do to satisfy their obligation to consider the interests of creditors will vary according to the context. The steps required to be taken by directors will depend upon a number of factors, and these factors will vary from company to company. The factors will include the financial situation of a company (the closer the company is to insolvency, then the greater the weight that should be given by directors to the interests of creditors); the number of creditors the company has; the types of creditors the company has and the amount owed to each creditor; whether the company is part of a corporate group (the existence of a corporate group in the Bell Group litigation meant the directors faced a more complex task in relation to considering the interests of creditors); and the potential impact of any contemplated transactions being considered by the directors on the creditors.

209    In the application of these principles, it will be necessary to have regard to matters bearing upon the solvency of Termite at the time that the Distributions Policy was adopted, and during its implementation. I indicate now, however, that I do not accept the submission of the defendants to the effect that the directors or officers of a company are required to consider the specific interests of creditors only when their actions are likely, on a balance of probabilities, to lead to the insolvency of the company. That was so, the defendants submitted, because it is only at that point that their decisions are effectively managing assets which belong to the creditors and not to the shareholders. I agree with the defendants that that is one circumstance in which directors and officers of a company will be obliged to consider the interests of the company’s creditors, but the authorities reviewed above indicate that it is not the only circumstance.

Duties to Termite as a subsidiary

210    The directors of a company which is a member of a corporate group owe their duties to the particular company, and not to the group as a whole: Walker v Wimborne at 6-7. It is the interests of that particular company alone which are to be considered. In Re McGrath: HIH Insurance Ltd [2010] NSWSC 404; (2010) 266 ALR 642, Barrett J said in [39] of the appendix to the judgment:

It is axiomatic that, in the context of a group of companies, the propriety of the exercise of powers by directors (or liquidators) of a particular company is to be judged by reference to the interests of that company rather than some perceived transcending interest of the group.

211    Nevertheless, there are circumstances in which the advance of monies by one member in a corporate group to another may be regarded as being in the interests of the former. Mason J spoke of this in Walker v Wimborne, at 6:

The word “group” is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder and company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company.

(Emphasis added)

212    The defendants referred to Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 in which Giles JA said at [148]:

It was necessary for the directors to consider the interests of Constructions, as a separate legal entity, in deciding whether to participate in the debt restructuring … It has nonetheless been recognised that a transaction benefiting one company in a group may have derivative benefits for another company in the group, even if the companies are not parent and subsidiary. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 Brennan J observed (at 183) that “it may be for the benefit of solvent companies in a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group”. In Equiticorp Finance Ltd (In Liquidation) v Bank of New Zealand Clarke and Cripps JJA said …

“It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B.”

213    In Ford, Austin and Ramsay’s Principles of Corporations Law (16th edition), the authors summarised the position by reference to the judgment of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404 as follows:

•    The powers of directors of a company must be used for the purposes of that company.

•    This does not preclude the exercise of a power with a view to an advantage to be received by another company if the transaction is one for the benefit of the company entering into it. The benefit need not be direct and immediate; it may arise indirectly. The purpose of obtaining an advantage for a related company does not necessarily result in a breach of duty. There would not be a breach of duty where a benefit is derived from a transaction by two or more companies or if the company entering into the transaction receives some indirect benefit. Considering the interests of the group does not automatically result in a breach of duty. What does result in a breach of duty is lack of regard for the interests of the company entering into the transaction.

(Emphasis added)

The actions constituting the alleged breaches

214    Termite alleges that three different kinds of actions by each of the defendants breached the pleaded duties: causing Termite to enter into the Distributions Policy; causing or permitting Termite to perform the Distributions Policy by making each of the payments; and failing to review, revoke or vary the Distributions Policy or to cause Termite to do so.

215    There is considerable overlap in the pleaded particulars of each form of breach, although the respective pleas were not entirely co-extensive. In substance, Termite alleged with respect to each breach that the defendants had failed to take into account the interests of Termite as a whole (including its unsecured creditors), failed to consider the impact on the Services Contractors, failed to undertake any proper analysis of an appropriate cash reserve, failed to consider and take into account the foreseeable risks affecting Termite’s future profitability including the size and length of potential downturns in the iron ore price, approved a distributions policy which meant that Termite had back-ended liabilities and potentially limited income with which to meet those liabilities and, accordingly left Termite vulnerable to insolvency, and failed to take account of the emerging evidence that its forecast revenues were based on models which over-estimated the amount of ore available to be mined.

216    In relation to the Termite-IMX Loan, Termite alleges that each of the defendants breached the duties described above by causing it to make the loan and, separately, by causing it to enter into the transactions for its repayment by a round robin of payments sourced in Termite’s own funds.

217    Termite alleges that a number of circumstances, together with the defendants’ knowledge of those circumstances, indicate the defendants’ breaches of duty. It is convenient to list these matters. Later I will make findings concerning them and address the allegations that these matters indicate breaches of the defendants’ duties. The circumstances on which Termite relies are:

(a)    Termite’s brushes with insolvency in the recent past;

(b)    the extent of Termite’s liabilities, in particular, the liabilities it would incur in the event of early termination of the contracts with the Services Contractors on an early cessation of mining activities;

(c)    the foreseeable risks which, if realised, would affect Termite’s ability to continue operations and, in the event that that occurred, would crystalise the Tail Liabilities. These included the marginal nature of the Cairn Hill mining operation, the known volatility of iron ore prices, the effects of currency fluctuations and the uncertainty as to the life of the Cairn Hill Mine;

(d)    the continuing contemplation of the prospect of Termite’s insolvency and the taking of steps in 2013 to “ring fence” Termite, so that neither IMX nor Outback would have any liability in the event that the prospect was realised;

(e)    the absence of proper consideration by the defendants of the adequacy of the $3 million Termite Cash Reserve, as well as the advice to the Outback Board in May 2013 that the Termite Cash Reserve should be increased by an additional $6 million, on which the defendants chose not to act (Mr Tisdell considered that the Cash Reserve should have been at least $10 million);

(f)    the absence of any ongoing review by the defendants of the adequacy of the $3 million Termite Cash Reserve;

(g)    the absence of alternate sources of funding making Termite wholly reliant for its capital on the cash it generated from its operations;

(h)    the modest buffer which the Termite Cash Reserve of $3 million provided against the foreseeable risks in the event that they were realised;.

(i)    the lack of any obligation on Termite at the time of adoption of the Distributions Policy to make repayments to Outback, given the terms of the Outback-Termite Loan;

(j)    Termite’s modest financial performance before March 2013;

(k)    inherent but unrecognised risks in the LoM CFFs (to which Termite referred as “structural flaws”); and

(l)    the known over estimation (by approximately 309,000 tonnes) of the amount of ore available from the Cairn Hill Mine.

218    More generally, Termite alleges that the defendants disregarded the duties which they owed to it, as a separate entity, and preferred instead the interests of IMX and/or Taifeng.

Previous issues concerning the solvency of Termite

219    The prospect of Termite becoming insolvent or having to appoint voluntary administrators had arisen before June 2014.

January 2012

220    A file note by a firm of chartered accountants, WA Insolvency Solutions (WAIS), dated 11 January 2012 records a telephone conversation with a Mr Stewart acting on behalf of IMX:

Taifeng aren’t paying their way and they are looking at putting a VA into Termite.

I am satisfied that the reference to a “VA” was a reference to a voluntary administrator.

221    Email exchanges occurring at the same time involving Messrs Meadows, Parsons, Hoskins and a Mr Steers at IMX indicate that IMX was considering at that time withdrawing further support for Termite, given Taifeng’s then refusal to meet the calls for contributions made pursuant to the HoA. I referred to those events earlier.

222    There is no evidence that the question of voluntary administration was pursued at that time. Counsel for the defendants submitted that the consideration of the appointment of a voluntary administrator in January 2012 was not a symptom of endemic insolvency but, instead, a consequence of the dispute between the two Joint Venturers. I accept that submission.

The September 2012 Downturn

223    The possible insolvency of Termite rose again in a more serious way in August and September 2012. The iron ore price had dropped without forewarning from approximately US$123.25 per tonne on 23 July 2012 to approximately US$88.50 per tonne on 6 September 2012 (the parties referred to this as the “September 2012 Downturn” and I will do likewise). This had serious implications for Termite as the Outback Board noted at its meeting on 30 July 2012 that, if commodity prices remained at their current levels for another 30 days (at 30 July 2012, the spot price for iron ore was US$117.50 CFR/tonne) the Joint Venture would incur a cash loss of 62 cents/tonne. At the same meeting, the Board considered three cash flow forecasts, one indicating a profit for the Joint Venturers over the anticipated life of the Cairn Hill Mine, and the other two, significant losses.

224    During August and September 2012, IMX, Outback and/or Termite took a number of steps in relation to the September 2012 Downturn.

225    First, IMX negotiated with some of the Services Contractors for short term reductions in the rates paid under their Service Contracts. Flinders Ports was one of the Services Contractors to agree to such a reduction. The evidence indicates that Termite investigated other cost cutting options but it does not disclose the precise nature of those nor their outcome. In addition, Termite asked the South Australian Government to agree to a deferral of the royalty payment of approximately $620,000 due on 31 July 2012.

226    Secondly, IMX commissioned Finlaysons to provide a review of the Cairn Hill Mine contracts and to identify the liabilities which would be incurred in the event of suspension or cessation of mining. Finlaysons provided their report on 17 August 2012.

227    Thirdly, on 10 August 2012, Mr Hoskins prepared, at the request of the Outback Board, the document entitled “Financial Implications of Placing Termite in Administration on 30 June 2012”, to which I will refer later.

228    Fourthly, IMX raised with its Chinese purchasers the introduction of a floor price. However, these purchasers (including Taifeng) had no interest in agreeing such a price.

229    Fifthly, on 30 August 2012, Termite drew down $4,495,000 on the LinQ facility. That this input of funds was much needed is evidenced by Mr Hoskins’ contemporaneous statement that confirmation of the receipt of those funds was a “massive relief”.

230    Finally, IMX retained WAIS to provide advice in relation to the financial affairs of Termite. Mr Meadows met Mr Strickland of WAIS on 14 August 2012. In a letter of 15 August, Mr Strickland identified the matters on which WAIS had been retained to assist as including the potential for a voluntary administration:

•    reviewing cash flows and other pertinent data in respect to the operations of Termite;

•    review/consider any legal advices obtained as to Termite’s contractual obligations to others;

•    review/consider the potential consequences and effects of potential actions/decisions going forward (including any action to suspend operations);

•    advise of the effect/impact of a Voluntary Administration appointment; and

•    provide any other specific advice/assistance as agreed.

231    WAIS provided letters of advice (addressed to IMX) dated 28 August, 29 August and 3 September 2012. As each letter was an updated version of the previous letter, it is sufficient to refer only to the letter of 3 September 2012. The advice of WAIS included the following:

In our view Termite is not currently cash flow insolvent. From the balance sheet provided and other information obtained by us, we believe Termite was balance sheet solvent at 31 July 2012. Consequently from both a cash flow perspective and balance sheet perspective, we do not believe that Termite is currently insolvent.

We do not believe that the Directors are currently exposed to any claim for insolvent trading. However, we recommend that this position be constantly monitored especially with the current declining iron ore price.

…

With each ship loaded with approximately 75,000 tonnes of iron ore at a spot price of US$99.50/tonne, there is potentially a loss to Termite equivalent to approximately $464,250 per shipload. We note however that for ships already in transit the price to be paid for that ore will be calculated taking into account average prices from August 2012.

It should be noted that for each US$1/tonne that the spot price decreases during the period between now and 17 November 2012, there will be approximately $345,000 less funds available to meet creditor claims at 17 November 2012, if that US$1/tonne decrease occurs throughout the period. Consequently if the spot price falls to an average in the period US$91.50 or less, Termite will be unable to pay its debts as and when they fall due, before taking into account the cost of getting the inventories to the customers.

…

In our opinion it would be best to consider suspending current mining operations on an informal basis for the next few months, while the future of the iron ore price is assessed.

… We do not recommend appointing Voluntary Administrators (VAs) at this time. We believe the informal suspension of mining services allows less opportunity for suppliers to terminate contracts and causes less adverse publicity and sentiment towards Termite and IMX. It is also cheaper than having VAs in terms of professional costs.

At this point of time we believe that it is in the best interests of Termite and the Directors to immediately consider suspension of mining operations on an informal basis, without the appointment of VAs. We also believe this is in the best interests of IMX as it preserves the value of the investment in Termite, an investment that is currently declining in value.

(Underlined emphasis in the original and italicised emphasis added)

232    WAIS also reviewed in some detail the liabilities, including the Tail Liabilities, which Termite would incur to the Services Contractors on a cessation of mining. Its calculation of a loss to Termite of approximately $464,250 per ship load of 75,000 tonnes at the spot price of US$99.50 per tonne indicates that Termite’s break-even price at that time was of the order of US$105.70 per tonne.

233    It was not suggested that there was any inaccuracy in the factual matters recounted by WAIS reported in this letter.

234    A copy of the WAIS advice of 29 August 2012 was provided to all the appointed directors of IMX, Outback and Termite.

235    Mr Strickland attended meetings of directors of Termite and IMX held on 31 August 2012 and 4 September 2012 respectively to discuss his letter of advice. Mr Sun said, and I accept, that:

[Mr Strickland] told us about insolvent trading in general and about the obligations of directors in respect thereof. I believe he educated us on the law relating to insolvent trading.

236    The key recommendation by WAIS in the letter of 3 September 2012 was that Termite “consider suspending current mining operations on an informal basis for the next few months, while the future of the iron ore price is assessed.” WAIS identified for Termite some of the risks involved in doing this, including the possible reallocation of the stock of Gemco and Cronos as well as liabilities under the Services Contracts.

237    Following the WAIS advice, Termite prepared a “Cairn Hill Suspension Plan” dated 10 September 2012 which addressed a possible temporary suspension of mining operations at Cairn Hill. This plan was considered by the Termite Board at its meeting on 10 September 2012 (attended by Messrs Meadows, Nitschke, Parsons and Hoskins). The plan contained the following:

(a)    a recognition that “reduced commodity pricing” had led to the Cairn Hill operations becoming cash flow negative;

(b)    a statement that management had considered what might be done to address the commodities pricing downturn;

(c)    a recommendation that, if the strategies described in the plan had been tried and failed (that is, agreements with suppliers or purchasers or a suspension of mining), the directors would then need to place Termite into voluntary administration.

238    The suspension plan noted that the placement of Termite into administration “would trigger the termination clauses in Termite’s contracts resulting in only partial payment of all creditors unless the administrator convinced all contractors that continuing with the operation was the preferred alternative.”

239    Termite did not implement the suspension of mining operations recommended by WAIS. On 10 September 2012, a meeting of its Board of Directors resolved to defer implementation of that aspect of the WAIS advice and to monitor the situation. The minutes record that this was because of “positive indications with respect to the negotiation of floor pricing and the apparent stabilisation of the iron ore benchmark prices”.

240    An analysis carried out by Termite’s management in April 2013 revealed that a fortuitous happenstance had accounted for Termite not being affected as severely by the September 2012 Downturn as would otherwise have been the case. That was that the Downturn had coincided with the change in the pricing mechanism in Termite’s sales contracts. Termite had made three shipments during the period of the Downturn, but only one of these was subject to the new pricing arrangement (which I will describe shortly). If the change in the pricing mechanism in the contracts had occurred two or three months earlier, Termite would have had to reimburse customers in respect of all three shipments, whereas it had been required to make a reimbursement in respect of only one. Management noted, however, that the iron ore price had been below the then break-even price of US$107/tonne for 44 days.

241    Termite submitted that the experience in July, August and September 2012 indicated a number of matters of present relevance:

(a)    a downturn in iron ore prices could occur suddenly and without anyone having predicted it;

(b)    a downturn could be quite marked;

(c)    the duration of a downturn could be uncertain;

(d)    the reduction in iron ore prices could make Termite’s operations unprofitable;

(e)    access to the LinQ facility had been of a significant benefit to Termite;

(f)    in a future downturn, Termite could not expect to have the fortuitous happenstance which had worked in its favour during the September 2012 Downturn to be repeated; and

(g)    a downturn could lead, relatively quickly, to Termite becoming insolvent and to it having to appoint administrators.

242    Termite also submitted that each of the defendants can be taken to have known these matters at the time. I accept these submissions.

The liabilities to the Services Contractors

243    Termite’s liabilities were in three broad categories: its liabilities to the Services Contractors, including the potential ETPs; liabilities to other trade creditors; and liabilities to non-trade creditors. Termite’s claims in these proceedings focussed on the first of these, although its damages claim encompassed all three categories.

244    Later in these reasons, in relation to Termite’s claim for damages, I make findings as to the liabilities which Termite has to the Services Contractors after being placed into administration and later liquidation in 2014. For the present purposes, it is sufficient to indicate my satisfaction that:

(a)    Termite had contracted with Cronos to lease 3,050 marine cargo containers for a minimum of 1,825 days, with the earliest day on which it could redeliver being 31 (sic) September 2015. The daily lease rate was US$2.56 (excluding GST) and Termite was also obliged to pay a handling fee of US$25 per container on termination. Termite’s contract with Cronos did not contain any provision for early termination by Termite. This meant that Termite’s monthly and annual liability to Cronos was US$237,500 and US$2,849,920 respectively, and it would be liable to pay US$76,250 for the handling fee;

(b)    Termite had contracted with Gemco to lease 194 rail wagons for a term expiring on 1 January 2016, at a price of $1,035 per month per wagon. This meant that Termite’s monthly and annual liabilities to Gemco were $200,790 and $2,409,480 respectively. The lease did not contain any provision for early termination by Termite;

(c)    Termite had two contracts with Exact, one for the provision of Mining Services, and one for the provision of Haulage Services. The former was to continue, in effect, until April 2015 but could be terminated by Termite for convenience on 40 days’ notice if continued mining operations would cause “significant ongoing financial losses”, and on 120 days’ notice for any other reason. The Haulage Agreement could be terminated on five days’ notice in the event of cessation of mining operations. The remuneration payable by Termite to Exact varied according to the extent of the mining operations and haulage, but typical monthly payments to Exact were of the order of $5.6 million ($67.2 million per annum);

(d)    Termite had contracted with SBR to haul the rail wagons between Rankin Dam and Port Adelaide. The contract was to terminate on 1 May 2015. It provided for Termite to pay three kinds of payments, some of which reflected SBR’s fixed costs and some its variable costs. Typical monthly payments to SBR were of the order of $3.56 million. Termite could terminate its contract with SBR for convenience on 180 days’ notice; and

(e)    Termite had contracted with Flinders Ports for it to provide port services for the receipt and loading of ore onto ships. The contract was to end on the earlier of a date fixed by a time-based formula or the date on which 7.292 million tonnes had been handled. It required Termite to pay for a minimum of 6.9 million tonnes. Typically, monthly payments to Flinders Ports were of the order of $2 million. Termite did not have an entitlement to terminate its contract with Flinders Ports early.

245    Each of IMX and Outback had, as part of Termite’s contract with Flinders Ports, provided guarantees to Flinders Ports in respect of Termite’s liability under that contract. Outback was the first guarantor and IMX the second, with the effect that its guarantee could be called on only if Outback failed to honour its guarantee. These guarantees, in particular the guarantee by IMX, had some significance in the defendants’ conduct in 2013 to which I will return. There were no guarantees in respect of the liabilities to the other Services Contractors.

246    It is very apparent (and I so find) that the defendants had actual knowledge that Termite could have significant Tail Liabilities to the Services Contractors and, in particular, that IMX or Outback could be called upon under their guarantees to Flinders Ports. The Boards of IMX and Outback had considered these very matters at the time of the September 2012 Downturn.

247    As already noted, on 10 August 2012, Mr Hoskins had prepared, at the request of the Outback Board, a document entitled “Financial Implications of Placing Termite in Administration”. Mr Hoskins appreciated that Termite going into administration would involve the immediate termination of the long term Services Contracts whereas, if it was not placed into “a sudden administration”, it could manage the termination of these contracts in accordance with contractual notice provisions. Mr Hoskins’ analysis shows that, had Termite been placed into administration as at 30 June 2012, its liabilities to creditors (other than to employees and to statutory and secured creditors) would have amounted to $45,883,737. This amount included the following liabilities to the Services Contractors:

(a)    Flinders Ports – $2,775,363;

(b)    Flinders Ports’ termination fee – $8,500,000;

(c)    Specialised Bulk Rail Termination Fee – $5,546,560;

(d)    Cronos – $1,500,000; and

(e)    Gemco – $1,100,000.

248    Mr Meadows said, and I accept, that he had requested Mr Hoskins to prepare the Financial Implications document. He had done so because he considered it necessary “that the Board of Termite understood exactly where Termite stood from a financial point of view to avoid insolvent trading and [to] fulfil our statutory duties if the downturn should continue for a prolonged period”. I am satisfied that the Financial Implications document was viewed at least by the Termite Board and think it probable that it was also seen by the Outback Board members.

249    The review of the liabilities of Termite under nine contracts, including those with the Services Contractors, provided by Finlaysons on 17 August 2012 identified the terms of the respective contracts, the provisions for termination and some strategies open to Termite to mitigate the liabilities it would incur under those contracts, including on termination.

250    Mr Meadows said, and I accept, that he had decided to engage Finlaysons to provide advice to the Boards of Outback and Termite about the extent of the potential Tail Liabilities to the Services Contractors. He also said, and I accept, that the advice from Finlaysons was provided to the Boards of both Termite and Outback.

251    In its letters of advice addressed to IMX dated 28 August, 29 August and 3 September 2012 in relation to the September 2012 Downturn, WAIS reported that Termite may have liabilities to the Services Contractors as follows:

(a)    Exact – Mining Services Contract – $568,000;

(b)    Exact Haulage Agreement – $108,000;

(c)    Cronos – $13.7 million;

(d)    Gemco – no amount stated;

(e)    SBR – no amount stated; and

(f)    Flinders Ports – $8.5 million.

Although no amounts were stated in the WAIS advice for Gemco and SBR, the description given by WAIS indicated that Termite’s liabilities to them could be substantial.

252    The advice from WAIS was provided to the Boards of each of IMX, Outback and Termite. I am satisfied that the directors of each of those Boards was provided with the advice and can be taken to have the knowledge which it contained.

253    By a letter dated 7 November 2012 to Mr Parsons, Finlaysons advised that IMX could have a liability under its guarantee to Flinders Ports of approximately $2 million if mining ended in December 2014 and a liability of about $16 million if it ended in May 2014.

254    On 5 December 2012, Mr Hassard provided Mr Meadows with an analysis of the “Early Contract Termination Penalties” which estimated the liabilities to the Services Contractors at 30 April 2014 in the event that Termite did not proceed with Pit 2 to be $23.5 million ($5.9 million as at 30 December 2014 if Termite proceeded with a shallow Pit 2).

255    Mr Parsons said, and I accept, that Mr Hoskins had made regular reports at Outback Board meetings of the estimated liabilities to the Services Contractors.

256    Later in these reasons, I will make findings concerning the consideration by the Outback Board of whether Termite should proceed with Pit 2. As will be seen, that consideration provided yet further occasions on which the defendants received information as to Termite’s liabilities to the Services Contractors.

257    I accept Termite’s submission that each of the defendants knew:

(i)    by at least March 2013, and throughout the period in which the Distributions Policy was implemented, that significant amounts would be due to the Services Contractors should it cease mining before the planned completion of Phase 1;

(ii)    that the earlier mining ceased, the greater the ETPs for which Termite would be liable; and

(iii)    until June 2013, Termite’s own LoM CFFs did not make any provision for its liabilities in the event of early cessation of mining and then, only to the extent that the life of mine plan, as modified from time to time, required payment at the conclusion of mining activities. They did not make any provision for the ETPs in the event of a sudden cessation of mining.

The foreseeable risks: Cairn Hill a marginal high cost operation

258    It seemed to be common ground that the Cairn Hill Mine was a marginal high cost mining operation because, over the anticipated life of the mine, the anticipated revenue was likely to exceed the costs by only a relatively small margin, and the prospects of the anticipated revenue being received were attended with a number of risks. The following matters indicate that that was the case and that it was known to the defendants.

259    In his s 597 examination, Mr Meadows described the Cairn Hill Mine as “the most marginal iron ore operation in Australia”. However, in his cross-examination in the trial, he said that that had not been his thinking at the beginning of 2013. Mr Meadows accepted, however, that he had thought at that time that “we were a relatively high marginal cost operation” and that Cairn Hill was “a relatively high cost and unique iron ore operation”.

260    In an email of 30 July 2012 addressed to Ms Rainsford (IMX’s then Company Secretary), Mr Parsons and Mr Pang and copied to Mr Sun, Mr Nitschke had identified the marginal nature of the Cairn Hill Mine by noting:

Under the current approved LOM plan and assumed pricing we make an operating surplus of $16M from July 2013 to the end of the Mine Life about 30 months later. In this period we spend $383M and income is $399M. Is this a sound plan in hindsight?

261    In his cross-examination, Mr Nitschke confirmed that he had sent this email in response to the cash flow forecast which formed part of the Board papers for the Outback Board meeting on Monday, 30 July 2012. He also confirmed that he had understood the cash flow forecast to indicate that, after the first year of mining operations to the end of the mining activities, a margin of some $16 million only was expected. He agreed that this indicated a “substantially marginal operation”.

262    In the same email, Mr Nitschke asked the question:

What are the terms for the major leases in take or pay contracts? Is there a suspension status for these? How long can things stay suspended until the contracts terminate?

263    In cross-examination, Mr Nitschke said that he had asked these questions because of his concern that Cairn Hill was a marginal operation and that, accordingly, IMX should explore the potential for suspension of operations if that could be done properly under the contracts.

264    Mr Sun agreed that the marginal costs of Cairn Hill remained high “relative to most or all other mines in Australia”.

265    In his s 597 examination, Mr Sun acknowledged the following matters:

    when he first started representing the Taifeng group in relation to the Joint Venture he had thought that it was “a stupid project” and he would not have recommended it to Taifeng;

    the project was marginal and did not make sense;

    he had thought that, if the iron ore price fell below the very high break even point, the mine would move into losses more quickly than a better project;

    the fact that the prices for Termite’s ore were fixed at the spot price or closely aligned to the spot price, rather than being fixed price contracts, meant that there was a material prospect that the project would be loss making when the iron ore spot price fell; and

    had it not been for the Services Contracts, he would not have favoured proceeding with Pit 2.

266    In his cross-examination, Mr Sun sought to qualify and explain many of these answers. He said that the market had changed after he started representing Taifeng, so that the project become profitable and his view about it had changed. He also said that he had been speaking in general terms rather than expressing a view at any particular time. I gained the very strong impression that Mr Sun was attempting in these answers to distance himself from the admissions in his s 597 examination which he regarded as damaging. He acknowledged that he had reviewed the transcript of that examination before giving evidence. It was apparent that Mr Sun had a keen appreciation of the significance of those answers in the case which Termite brought against him. This was one of the matters which caused me to doubt the veracity of much of Mr Sun’s evidence and to exercise caution before accepting any part of it which was not adverse to his own interests. I find that his statements in the s 597 examination reflected his views about the Cairn Hill Mine at relevant times.

267    Mr Tisdell and Professor Trench agreed that, by reason of the Cairn Hill Mine being a high cost operation, the volatility in commodity prices and foreign currency exchange rates were more relevant to its solvency and cash flow position than would have been the case had it been a lower cost mining operation.

268    The consultancy firm, Noah’s Rule, which Termite engaged in late 2013 in relation to hedging against currency fluctuations, described the position in this way:

Termite has high operating costs relative to revenues and therefore its net cash flows are highly sensitive to movements in the USD Iron Ore price and the AUDUSD exchange rate.

The foreseeable risks: the iron ore price

269    Termite submitted that, for present purposes, four kinds of risks were particularly pertinent. The three biggest risks were the iron ore price, the foreign exchange rate, and the technical performance of the mine. Mr Tisdell considered (and I accept) that commodity risk and foreign exchange constituted Termite’s two biggest risks, as by 2013 the mining operations were reasonably stable.

270    It was common ground that there was a significant correlation between the iron ore price, on the one hand, and Termite’s profitability, on the other. It was also evident that Termite was a price taker rather than a price setter.

The determination of the iron ore price

271    The price at which Termite sold the ore was fixed by reference to the Platts Iron Ore Index (Platts Index). The Platts Index is a price series published daily in Singapore which benchmarks (in USD) the spot price of iron ore (62% Fe, 2% Al and 4.5% Si). It is a widely used global price reference for iron ore delivered to the Port of Qingdao in China. The index uses data collected from iron ore producers, traders and steel mills of the prices in market tenders for iron ore (from completed transactions to inquisitive offers).

272    The spot pricing of iron ore sold from Australia to China was introduced in 2010. Before then, a benchmark pricing system had been applied. This meant that during the period of operation of the Cairn Hill Mine, the historical experience of movements in the spot price had been relatively limited.

273    The ore from the Cairn Hill Mine was approximately 53% iron. Accordingly, the calculation of the price for its ore used a proportion of the prevailing Platts Index figure.

274    The London Metal Exchange (LME) price was used to determine the price of the copper content. Copper made up approximately 20-25% of the value of the Cairn Hill ore.

The pricing mechanism in Termite’s contracts

275    Before August 2012, the price Termite received for its ore was the price per tonne fixed in the sales contract for each shipment. Termite would receive an initial payment of 80% of its invoice amount with a later payment determined when the final weight and grade of the ore were verified on its discharge in China.

276    From August 2012, Termite’s contracts with its purchasers provided for the initial price of the ore to be the 30 day rolling average to the 10 days before the first day of Laycan (the day of notification that the ship was ready for loading at Port Adelaide) and for Termite to be paid that amount at the time of loading. The initial price was later adjusted to reflect the rolling average spot price in the Platts Index and LME for the 30 day period after the date of the bill of loading (the date of loading). This was equivalent approximately to the 30 day period before the discharge of the ore in China. Depending on movements in the Platts Index and LME prices, and variations in the tonnage and grade of the shipped ore, this adjustment could result in Termite receiving more, or in having to refund an amount to the purchaser. This adjustment was referred to as the “True-Up”.

277    Mr Hoskins claimed in his evidence that the new payment system created significant certainty regarding Termite’s cash flows as the amounts of the provisional payments were known some 30-40 days prior to the ship being loaded.

278    In my view, that evidence cannot be accepted without qualification. Mr Hoskins is correct as to the certainty in times of stability in the iron ore price. It is obvious, however, that in times of volatility, it could not be correct. Further, even if Termite had certainty in relation to the provisional payment, it had the uncertainty in relation to the True-Up. Termite received a benefit when the price rose over the 30 day period after loading, but was disadvantaged if prices declined in the same period. When that occurred, there was the potential for Termite to have to reimburse to its customers portions of their provisional payments. The downturn in the iron ore price in 2014 provides a practical illustration of how this could work to Termite’s disadvantage. Termite had three shipments leave Port Adelaide on 16 and 30 March and 14 April 2014 respectively. It was called upon to make reimbursements of over $2 million in respect of each of these shipments. Some portion of these reimbursements was attributable to variations in the weight and grade of the ore but a significant portion ($524,796 in the case of the third shipment) was attributable to the downward movement in the price of the ore.

279    I do not accept Mr Hoskins’ evidence that the revised pricing mechanism in Termite’s contracts gave the “significant certainty” which he claimed.

280    I am satisfied that the risk of Termite having to make reimbursement on the True-Up was a matter which directors, acting prudently, would have taken into account in March 2013. I am also satisfied that the prospect of Termite having to make payments pursuant to the True-Up was a matter to be taken into account in setting the amount of the Termite Cash Reserve.

Fluctuations in the iron ore price

281    During 2011, 2012 and the first quarter of 2013, there had been significant fluctuations in the iron ore spot price. The variations in the Platts Index for the period between 18 March 2012 to 18 March 2013 are seen in the following graph:

The iron ore price - difficulties in prediction

282    A number of matters affected the Platts Index at any one time. Mr Nitschke referred to some of these in his evidence. These included the “complex interactions between a large number of suppliers and a large number of buyers”; the level of demand by Chinese buyers given that they purchased close to 80% of the “seaborne iron ore” (the iron ore not sold within the country or region of origin but exported to another); the macro-economic position in China; predictions as to the economic position in China; unforeseeable events in China, including any change in stance by the Chinese Government; and some irrational or sentiment-driven market behaviour.

283    IMX had summarised the commodity price risk in its response to Patersons Corporate Finance in relation to a capital raising in late 2012:

Revenue derived by the Group is solely through the sale of ore from the Cairn Hill Mining Operation. As a result, the Group is exposed to commodity price risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Group. Such factors include supply and demand fluctuations for minerals, technological advancements, forward selling activities and other macro-economic factors.

284    The same document identified many of the other risks faced by IMX in the operation of the Cairn Hill Mine.

285    Earlier, I referred to Termite’s use after July 2012 of the EMCFs published bi-monthly by Consensus Economics, and noted that they listed the prices forecast by a number of analysts, the mean of those forecasts, and the calculated standard deviation in the spread of the estimates.

286    There was no criticism of Termite’s use of the EMCFs. Mr Tisdell said of them:

These EMCFs published by Consensus Economics are widely regarded as the most comprehensive collection of forecasts made by reputable forecasters, are published quarterly, cheap to access and used by many mining companies for cash flow forecasting and business planning, including Termite and all businesses I have worked for. In my experience junior mining companies in particular commonly use these Consensus (mean) forecasts as the basis of their cash flow projections and business planning.

287    Professor Trench also agreed that Termite’s use of the EMCFs for mine planning purposes was appropriate. He said (and I accept), that that there is “no generally accepted methodological ‘standard’ in either the iron ore or copper industries for deriving a commodity price forecast for budgeting and other uses”.

288    Mr Tisdell did consider, however, that Termite had failed to recognise the limitations of the EMCFs and the uncertainties inherent in them.

289    Mr Tisdell and Professor Trench agreed that the standard deviation in the EMCFs could be commonly misconstrued in the industry as providing a standard deviation relating to the possible range of future prices. They also agreed that the mean figure in the EMCFs was not a consensus figure resulting from conferral by analysts, but only the average of the forecasts listed.

290    In addition, Mr Tisdell and Professor Trench agreed that the mean forecasts in the EMCFs were not certain, noting that the standard deviation in the forecast prices “were typically below +/- US$10 per tonne”.

291    There was no seasonality in the Platts Index which could inform industry expectations as to price. Professor Trench reported (and I accept) that his review of the literature did not support the hypothesis of predictable seasonal variations which could be used to forecast prices with a high degree of confidence.

292    Termite identified one matter which seemed to affect the price which Chinese purchasers were willing to pay and, in turn, the iron ore spot price as being the level of stockpiles held at Chinese Ports. There was thought to be an inverse relationship between the two. When the stockpiles were large and purchasers could make use of them, it reduced their need to rely on the ore supplied by miners such as Termite and consequently in a reduction of price. It was thought that from time to time the Chinese purchasers would choose to use the iron ore in their stockpiles and wait for a better iron ore price before purchasing more ore. The amount held in the stockpiles was of course finite so that the extent to which use of the stockpiles impacted on the spot price depended upon the size of those stockpiles. From September 2013, Termite management provided data to the Outback Board concerning the known extent of those stockpiles.

293    Despite Mr Tisdell saying that the stockpile levels in Chinese Ports was one matter to which he would have regard in making a forecast of iron ore prices, counsel for Termite disparaged the stockpile-price relationship, pointing out that the defendants had not produced the document containing the analysis said to support it; that Mr Meadows had acknowledged that the relationship was not supported by the expert forecasters; and that it was not supported in the literature. Counsel also submitted that Professor Trench had debunked the relationship between stockpiles and price. In my view, that particular submission was based on a misreading of the evidence, as Professor Trench was referring to an absence of seasonality in the iron ore price, and not to an absence of a relationship between stockpiles and price. I also note that some analysts, including the Australian Bureau of Resources and Energy Economics, referred to the influence of the stockpile levels at Chinese Ports. In the view I take, it is not necessary to express a concluded view concerning the existence of a relationship between the level of the stockpiles and the price of iron ore. It is sufficient to accept that Termite had sought to identify matters influencing the price and had identified, reasonably, the Chinese Ports stockpile levels as one such matter.

294    Termite management also considered that there was a direct correlation between the Platts Index figure and the price of “Asia Hot-Rolled Steel”. Termite management provided the following chart to the Outback Board meeting of 21 May 2014 as evidence of the correlation.

295    Several of the defendants acknowledged in their evidence the difficulties in accurate forecasting of the iron ore price. Mr Nitschke was cross-examined extensively about these matters. The admissions which he made included:

(a)    none of the analysts on whom Consensus Economics reported in the EMCFs had predicted the September 2012 Downturn. In July 2013, Termite’s management had provided the Outback Board with a comparison of the forecast iron ore prices by the 12 analysts on whom Consensus Economics reported and the actual prices. It indicated that in their June 2012 forecasts each analyst had over-estimated the September 2012 iron ore price, by margins in the range of 11-31%. The forecasts by 14 analysts in April 2012 of the September 2012 prices had over-estimated the actual price by margins in the range 12-39%. Further, all but four of the analysts had in April 2012 over-estimated the June 2012 price, in one case by as much as 22%

The actual figures were of course affected by the September 2012 Downturn. However, the difficulty in accurate forecasting is evidenced by these illustrations;

(b)    some of the fall and subsequent rebound in the iron ore prices (to which Mr Nitschke referred it as a “perturbation” (a period of temporary divergence from the forecast trend line)) was irrational and sentiment driven;

(c)    there was no certainty as to how long a “perturbation” may last – it may be a matter of weeks or a matter of months (although Mr Nitschke doubted that they would be as long as three or four months). Relevantly though, Mr Nitschke acknowledged that one could not say with any degree of confidence how long any “perturbation” might last;

(d)    during the September 2012 Downturn, no one within Termite or Outback had had any confidence as to its likely duration, and the same would be the case in respect of any future “perturbation”. In fact, whether the next downturn would “play out in precisely the same way” was really a matter of conjecture;

(e)    Termite’s own forecasting was affected by errors in 2012 and early 2013. In particular, Termite’s budgeted profit and loss figures for the 2012 year and the first quarter of the 2013 year were wrong because of errors in its forecast of the iron ore and copper prices as well as the forecast of exchange rates. In the first half of the 2013 financial year, Termite’s budget had involved a significant over-estimation of the iron ore price, whereas in the second half it had involved a significant under-estimation of the iron ore price; and

(f)    he had understood by mid-2012 that movements in commodity prices or a strengthening of the AUD against the USD could very quickly move Termite from a positive cash margin down to a break even position or even worse.

296    Mr Nitschke drew a distinction between short and long term volatility in the iron ore price. He regarded the first (“perturbations”) as “largely sentiment driven” and tending to last over a few months. Long term volatility occurred when the long term trend price declined over a longer period. Mr Nitschke said that the Termite Cash Reserve was intended to address the situation of perturbations, and that he had not really been concerned about them because, even if things got “tight”, he had thought that Termite could “find a way through”. He had thought that it would be a decline in the long term price leading to long term volatility which could result in Termite’s administration and the creditors not being paid in full.

297    In other evidence, Mr Nitschke said:

[T]he cash provision at Termite level was adequate to sustain the reasonably expected perturbations that might occur in iron ore price [and] exchange rate due to sentimental reasons. But there certainly wasn’t a cash reserve at Termite level to protect against a prolonged – a prolonged decrease in iron price or an adverse move in exchange rate. That’s a risk of mining.

298    Mr Nitschke elaborated this answer in re-examination:

Q:    [W]hy did you consider it unnecessary to have a cash reserve to protect against the risk of a prolonged decease in iron ore price or an adverse movement in exchange rate?

A:    I saw that as a risk of mining and … an inherent risk of the operation. If … the iron ore price rerated, which it did in 2014, the business would become unviable. And that was a risk that we, as venturers, carried and also any contractors engaged by Termite carried to the extent that they … hadn’t taken precautions such as Flinders Ports.

299    Mr Hoskins also referred to the distinction between short and long term volatility.

300    Professor Trench also distinguished between short term volatility and long term trend lines which he described as “glide paths”. He said that in 2013, analysts’ forecasts related to the “glide path” rather than attempting to predict periods of short term volatility. He also said that he had not been able to determine with accuracy what expectation market participants had regarding the duration of short term falls in the price of iron ore below US$110 CFR per tonne, whether for two, four, six or eight weeks.

301    I considered that there was an element of hindsight and retrospective rationalisation by Mr Nitschke and Mr Hoskins in their evidence on this topic. In particular I considered that Mr Nitschke tended to underplay the significance of “perturbations” because it suited his position in the litigation. Mr Nitschke’s somewhat benign characterisation of the September 2012 Downturn as a “perturbation” is one which could be made in retrospect. It is very apparent from the contemporaneous documents at the time of the September 2012 Downturn that those involved in it did not have any confidence that they were experiencing merely a short term “perturbation”. Mr Nitschke himself described the September 2012 Downturn as a “near death” experience for Termite. Termite survived that Downturn principally because it had access to funds from LinQ and because of the fortuitous happenstance that it coincided with the change in the pricing mechanism in its contracts.

302    But even if the evidence of Mr Nitschke, and to a lesser extent that of Mr Hoskins, on this topic is taken at face value, it has this consequence. As will be apparent in the later findings, the Outback Board, including Mr Nitschke, contemplated during 2013 and the first part of 2014, Termite becoming insolvent and took active steps to protect IMX against that risk. If it be the case that Mr Nitschke had thought that a short term “perturbation” would not result in insolvency, then that must be because he thought that there was a real risk of a long term decline in iron ore prices or a significant adverse movement in the exchange rate. That is to say, if this particular evidence was accepted, the very fact that the defendants contemplated Termite’s insolvency suggests therefore that they had contemplated a long term decline in the iron ore price or some other adverse event. There is accordingly an inconsistency in Mr Nitschke’s claim that he had not thought, before April 2014, that there was “a high risk” of a long term decrease in the iron ore price or an adverse movement in the exchange rate.

303    In my opinion, Mr Nitschke did not, in 2012-2014, make the clear distinction between short and long term price reductions which he now claims.

304    Several witnesses referred to both a personal and generally prevailing belief that the price of iron ore would not drop below US$110 CFR per tonne (US$100 per tonne FOB) at any time before the end of Phase 1, that is, about mid-2015. These included Messrs Meadows, Nitschke, Hoskins and Parsons. The figure of US$110 CFR per tonne was thought to be the base price at which iron ore could be produced in China. The prevailing belief was that the Chinese Government would not permit the price to fall below the cost of its own production for a sustained period because, if it became cheaper for Chinese iron and steel producers to import ore, the effects on the mining industry in China would be severe. Mr Tisdell and Professor Trench agreed that there had been a commonly held view that the iron ore price would be maintained above US$110 per tonne. Professor Trench also noted, however, that the price had fallen below that level for a total of 32 days during the September 2012 Downturn.

305    Mr Tisdell and Professor Trench also agreed that the concept of a “floor price” for iron ore was a commonly discussed topic between 2012 and mid-2015, but that there had been no unanimity of views about what that term actually meant, in particular as to the extent or duration of a fall below such a price.

306    The defendants submitted that, in the light of this evidence and of the various contemporaneous forecasts, they had been entitled to proceed on the basis that, if there was a long term drop in the iron ore price, it would follow a slowly declining “glide path” to a point around US$110 CFR per tonne into 2015. I accept that that is what the forecasts were predicting, but it does not follow that the defendants acting with the reasonable diligence the law required of them, need not have provided for the contingency that a long term drop in the iron ore price would be much more marked and much more rapid. In particular, I do not accept the defendants’ submission that the views about the long term trend price meant that it was not necessary for them to maintain a reserve against a step change in the long term trend price of iron ore.

The defendants’ awareness of the iron ore price volatility

307    The evidence contains numerous contemporaneous statements indicating the defendants’ awareness of the potential volatility in the iron ore price and the potential for it to decline markedly.

308    In an email to Mr Meadows on 20 October 2012, Mr Nitschke reported that the new shareholders on the IMX Register were concerned “about the exposure to Cairn Hill as we all are. In fact, they all would prefer to see us sell it to eliminate this risk”. It was in that same email that Mr Nitschke said:

[W]e should in fact not be mining pit two based on our forecast pricing. We lose $13M by mining it. The only reason to keep going would be to try and avoid the costs of terminating the contracts and leases.

309    I referred earlier to Mr Nitschke’s email to IMX’s Board members of 6 March 2013. In that email Mr Nitschke informed Board members that IMX may need to raise closer to $10 million to provide a buffer against “the uncertainty in the iron ore price”.

310    In March 2013, IMX retained Azure Capital to provide advice with respect to a capital raising. In its report to IMX of 8 March 2013, Azure Capital stated:

In sizing the raising, in our view IMX should not be overly reliant on cash flows from Termite. Even though base case forecast distributions appear attractive, the iron ore price has been volatile and has the potential to drop materially in a short period of time.

(Emphasis added)

311    The minutes of the IMX Board meeting of 28 March 2013 record:

Mr Hoskins stepped through the key aspects of the commodities outlook, noting the generally pessimistic view on the iron ore price.

(Emphasis added)

The minutes then record that the Board requested four actions:

    a paper from management on the September 2012 Downturn, management’s response to those circumstances and the overall impact on IMX;

    a four quarter retrospective comparing forecast commodity and foreign exchange prices with actual prices be included in the commodities outlook;

    additional information including the steel price and stock levels in China to be included in the price chart of iron ore; and

    the Managing Director identify a suitable iron ore industry analyst to address the Board.

312    In an email of 12 May 2013 to Messrs Parsons, Nitschke and Meadows concerning negotiations with Flinders Ports, Mr Hoskins noted:

There are 2 scenarios of outcomes with respect to the market/iron price:

1.    Iron ore price stays high and we mine through until Feb 2015 (6.8Mt)

2.    Iron price drops and stays low causing the decision to stop mining and we don’t achieve the 6.8Mt.

313    In an email of 28 May 2013 to Messrs Meadows, Hoskins and Parsons concerning the Flinders Ports’ guarantee, Mr Nitschke said:

In my mind it is paramount that we limit the exposure of IMX to the downside of Cairn Hill. Once we do this we can aggressively set about trying to extend the life of Cairn Hill Phase 2 etc without being too concerned about the volatility of the Iron Ore price.

(Emphasis added)

314    In an email to Mr Meadows on 6 August 2013, Mr Hoskins said:

Remember we are still forecasting a crash in the next 4 months or so.

315    Numerous other examples could be given.

Defendants’ knowledge of the effects of a decline in the iron ore price

316    The defendants’ knowledge of the effect of a decline in the iron ore price is evidenced by the cash flow analysis provided by Termite management to the Outback Board in July 2012. The cash flow forecast modelled three scenarios, the most favourable of which would result in the LinQ debt being repaid in December 2012 and total partner distributions of $63 million over the life of the Cairn Hill Mine. The next two forecasts were based on the forecasts of the analyst SSY. Termite management had found the SSY forecasts to be generally 10% less than the Consensus Economics’ mean. Because of this, the second scenario was based on the SSY July 2012 forecast figures adjusted by adding 10%. The third scenario reduced the estimated sales price by 10%. The cash flow analysis on the third scenario indicated that the Shareholder Loans would never be repaid and, indeed, that additional contributions would be required by the Joint Venturers over the life the mine. As Mr Nitschke pointed out, that scenario would never be realised because it would be inconceivable in that circumstance that Termite would continue mining operations. But of course in that event, the Tail Liabilities would be triggered. It is pertinent that this analysis indicated to the defendants that, if iron ore prices fell to a level 10% below the SSY forecast, the Cairn Hill Mine was unprofitable.

317    The forecast based on the SSY forecast figure with an upward adjustment of 10% indicated that the LinQ debt could be repaid in March 2013 but the total partner distributions over the life of the mine would only be $26 million.

318    Apart from this paper, no sensitivity analysis of this (or any other) kind was carried out by the Boards of IMX, Outback or Termite in March 2013 before adopting and implementing the Distributions Policy. Professor Trench confirmed that he had not seen “a standard sensitivity analysis” in the Board papers.

319    I am satisfied that each of the defendants was well aware of the potential for significant deviations in the actual price of iron ore from the forecast price and of the effect on Termite’s viability if the potential was realised in an adverse way. Each acknowledged as much in their s 597 examinations.

320    Mr Meadows admitted that he had been aware that it was in the nature of iron ore as a commodity that the forecast prices, however carefully prepared by expert analysts, may be materially wrong. He acknowledged that he had known this at the beginning of 2013. Mr Meadows also acknowledged that he had known that any forecast might turn out to be too bearish or too bullish, that there was plenty of evidence as to the imprecision of forecasts, and that he and IMX’s accountant, Mr Dunstan, had been so concerned about the effect of “an adverse shock” on Termite’s business that at some time, apparently after September 2012, they had reviewed the history since the Global Financial Crisis in 2008 with a view to seeing if they could identify any feature which might indicate when a problem in the iron ore price may emerge. In his evidence at trial, Mr Meadows corrected this evidence and said that he and Mr Hoskins had requested Mr Dunstan to undertake that task. I accept that that was so.

321    In the case of Mr Nitschke, I have already referred to some of his admissions. In short, Mr Nitschke knew that there could be unforeseen deviations from the forecast prices and that Termite was highly susceptible to fluctuations in the iron ore price.

322    Mr Parsons acknowledged that he had been aware that, depending on the duration of a decline in the iron ore price, Termite may need significant cash in order to be able to continue trading through that period.

323    Mr Sun acknowledged that he was aware that the volatility in the iron ore price meant that mining could be potentially very profitable or potentially loss making, and that the volatility of the price meant that it had to be monitored on month-by-month basis to see whether mining operations could continue.

324    Mr Hoskins acknowledged that the forecast in iron ore prices was, of its nature, a difficult exercise.

325    Mr Pang acknowledged that he had been aware that the cash flow forecast was dependent on the forecast iron ore price.

The foreseeable risks: exchange rate fluctuations

326    The second significant risk to which Termite was susceptible was movement in the Australian dollar (AUD) against the United States dollar (USD). It sold its product in USD but incurred expenses in AUD. The lower the AUD exchange rate against the USD, the better for Termite’s profitability. The higher the AUD, the less AUD which Termite would receive upon the conversion of its sales revenue from USD.

327    This susceptibility was recorded in a number of contemporaneous documents. In his Director’s Report for IMX for the financial year ending on 30 June 2013, Mr Meadows explained the commodity price risk and the exchange rate risk as follows:

During the year, the Group continued mineral production at the Cairn Hill Mine and the revenue it derives through the sale of ore exposes the Group to commodity price and exchange rate risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Group. Such factors include supply and demand fluctuations for minerals, technological advancements, forward selling activities and other macro-economic factors.

Furthermore, international prices of various commodities are denominated in the United States dollars, whereas the income and expenditure of the Company are primarily incurred in Australian dollars and are reported by the Group in Australian dollars, exposing the Company to fluctuations and volatility in the rate of exchange between the United States dollar and the Australian dollar, as determined in international markets.

The Group currently operates as an unhedged magnetite and copper producer and is therefore currently exposed to both commodity price and exchange rate risk.

(Emphasis added)

328    Both Mr Meadows and Mr Nitschke gave evidence that they were aware, at relevant times, that Termite’s profitability was highly susceptible to both the iron ore price and AUD/USD exchange rate movements. Each of the other defendants (apart from Mr Pang) admitted in their s 597 examinations that he had been aware of the risks associated with the iron ore price and the foreign exchange rate. Although Mr Pang did not give evidence of a like kind, I am satisfied that he must also have been aware of these risks, and find as a fact that he was. He accepted in his evidence that he had been aware that the cash flow forecast was dependent on the iron ore price, that it could vary from time to time, and that it was difficult to forecast the spot price of iron ore. Mr Pang also said, that he had assumed that management had taken account of exchange rate fluctuations “in coming up with the $3 million Cash Reserve”.

The foreseeable risks: ore tonnage and grade

329    Termite was also subject to the reasonably foreseeable risk that it would not be able in fact to mine the predicted tonnage and grades of ore. Mr Nitschke acknowledged that that was so.

330    As it happened, the mining to the first quarter of 2013 had shown that the forecasts of the grade and quantity of the iron ore reserves were reasonably reliable. However, Mr Nitschke said that it was understood that this could be proved wrong at any point in the future. He also acknowledged that another common risk in mining is the occasional occurrence of waste bands (bands of material other than ore) which alter the cost structures in undertaking the mining. Subsequent events proved Mr Nitschke to be correct in both respects.

331    Mr Parsons recognised the risks of mining in an email of 13 May 2013 to Mr Hoskins and Mr Nitschke (copied to Mr Meadows) in relation to the consideration of developing Pit 2:

My comment … about not achieving 6.8mt revolves more around the unknowns associated with mining.

For example (and not that I am expecting this) what would happen say if we had a wall failure at the bottom of Pit 2 which meant we couldn’t mine say the last 10 Vm of ore.

When we nominate a specific # it doesn’t give us any wriggle room in case for whatever reasons we don’t exactly achieve (or better) it.

(Emphasis added)

332    Some of these risks were confirmed by Professor Everett. He said that the composition of an ore deposit can only be coarsely sampled before mining, that there are numerous uncertainties inherent in estimating the mineral grade, and that any mine plan is at best tentative and subject to revision in the light of changing knowledge about the ore deposit as it is progressively exposed, as well as changing prices, costs and market demand.

333    These foreseeable risks were realised in the case of the Cairn Hill Mine. Termite’s management provided monthly Operation and Financial Reports to the Outback Board. These reported on the extent to which the actual tonnages and grades of ore mined matched the expected ore reserve. From May 2013, the Reports informed the Outback Board of the discovery of a waste band of material. The waste band had two effects: first, it meant that less saleable ore could be recovered over the life of the mine; secondly, the need to remove the waste increased the operating costs. In addition, Termite reported on “hot spots”, that is, the presence of geological conditions which were insufficient to support ramps or other infrastructure necessary for the mining.

334    In June 2013, the shortfall of ore against the predicted reserve was estimated at 16,000 tonnes but, over time, the estimate increased: 101,000 tonnes in July 2013, 122,000 tonnes in August 2013, 159,000 tonnes in October 2013, 211,000 tonnes in January 2014 and 249,000 in February 2014. These were significant amounts. At prices of AU$100-$120 per tonne, they represented a loss of approximately $25-$30 million in forecast income (Mr Tisdell’s calculation was $29.7 million).

335    An analysis tendered by the defendants indicated that the tonnes withdrawn from the LoM CFF in July 2013 had increased to a cumulative total of 309,000 tonnes in January 2014.

336    On 29 January 2014, the north wall of the bottom of Pit 1 collapsed unexpectedly, resulting in significant ore losses. It is not clear whether these losses were included in the figures mentioned above. I note, however, that the LoM CFF prepared by Mr Parsons in February 2014 “booked” a reduction in the opening estimate of the available ore resource by 192,000 tonnes.

337    In addition to the reduction in the amount of available ore, from December 2013, the Reports of Termite management to the Outback Board reported on the “loadport grades being lower than contract spec grades”. The report of 26 March 2014 included the following:

Ore mining FYTD is considerabl[y] worse than forecast – this primarily is a result of underperformance of the Pit 1 ore body at depth (impact of internal waste bands etc.) as well as not mining same benches as the forecast. This will be further impacted by the required pit ramp design change which resulted from unexpectedly poor north wall ground conditions.

338    Despite the deteriorating position, it was not until February 2014 that the Outback Board resolved to put distributions on hold temporarily. However, distributions resumed in March 2014.

339    Mr Parsons suggested that it had not been necessary for any allowance to be made for the lost tonnages because of the possibility of recovery of additional ore from “glory cutting”. He described a glory cut as “when the pit is finished, you basically dig whatever ore you can out of wherever the hell you can because the pit has finished”. I considered that this was a justification on which Mr Parsons has seized only in retrospect. It is inconsistent, amongst other things, with the view expressed by Mr Parsons in the email of 13 May 2013 quoted earlier in these reasons. In 2013 and 2014, Mr Parsons did not think that glory cutting could make up the shortfall. I reject that as a possibility. Likewise with respect to Mr Parsons’ claim that the lost tonnages could be made up from Pits 2 and 3.

340    At no stage did the defendants consider the adequacy of the Termite Cash Reserve in the light of the evidence before them of the less than forecast production from the Cairn Hill Mine.

341    The deterioration in the grade of the mined ore and its failure to meet the contract specification meant that Termite became liable to make payments on the True-Up. As noted by Mr Tisdell, at 17 March 2014, Termite was liable to reimburse approximately US$2.4 million for Shipments 65, 66 and 67, principally, in his opinion, because of the lower than expected grades of ore at the bottom of Pit 1.

342    Each of the defendants can be taken to have known of the risks associated with grade and tonnage.

343    The reduction in ore quantities and grade was also a factor contributing to Termite’s insolvency in June 2014. This was a matter of which the defendants, acting with reasonable care and diligence should have, but did not, take account. Even after Mr Parsons had had booked the loss of ore of 192,000 tonnes in February 2014 and had predicted a cash shortfall at the end of mining of $3 million, the defendants still allowed Termite to make the distributions in March 2014.

The uncertainty as to proceeding with Pit 2

344    Following the September 2012 Downturn, the Outback Board began to consider whether to proceed with Pit 2. It was obvious to all involved that, if Termite did not proceed with Pit 2, the life of the Cairn Hill Mine would be shorter than planned, as indicated by Termite management in a document entitled “Cairn Hill Update” in October 2012:

345    The document also referred to two other options, one of which involved delaying Pit 2 to July 2013 and the other to a different method of extraction.

346    It was appreciated by all defendants that, in the event of no Pit 2 or a shallow Pit 2, that Termite would incur Tail Liabilities to the Services Contractors. In fact, Mr Nitschke had told Mr Meadows on 20 October 2012 that “[t]he only reason to keep going would be to try and avoid the costs of terminating the contracts and leases”. Accordingly, one of the factors bearing on the consideration of whether to proceed with Pit 2 was the extent of those liabilities.

347    Mr Parsons presented a paper entitled “Mine plan excluding Pit 2” at the meetings of the Outback Board on 17 October and 22 November 2012 but, after some discussion, consideration was deferred.

348    In January 2013, Mr Hoskins contacted each of the Services Contractors with a view to identifying their position in the event that Termite did not proceed with Pit 2. He summarised the results of his discussions in an email to Messrs Parsons, Meadows and Hassard of 15 January 2013. Mr Parsons added his comments to Mr Hoskins’ summary the same day.

349    In January 2013, Mr Parsons prepared a document entitled “Long Term Mine Plan Analysis” for consideration by the Outback Board. He focussed on the alternatives of proceeding with a shallow Pit 2 and not proceeding with Pit 2 at all, as he had identified that they yielded the highest cash margins. Mr Parsons analysed each alternative, noting that shipping would be complete in May 2014 if there was no Pit 2, and in December 2014 if Termite proceeded with a shallow Pit 2 only. He also noted that if Termite did not proceed with Pit 2, the estimated ETPs to the Services Contractors would be $25.8 million, and, in the event that the shallow Pit 2 option was adopted, these liabilities would be $7 million. The plan contained sensitivity analyses showing forecasts at different levels of iron ore pricing and at different foreign exchange rates. Mr Parsons concluded with a recommendation for proceeding with a shallow Pit 2.

350    The position with respect to the ongoing discussions concerning Pit 2 is apparent from the minutes of the meetings of the Outback Board:

351    The first two recitals to the Board’s resolution of 25 June 2013 were:

A.    Determination of the Cairn Hill mine life is dependent on whether or not mining operations extend to a Pit 2 development;

B.    Key factors in assessing the economics in any Pit 2 development include iron ore prices, copper prices and costs associated with the early termination of [the Services Contracts].

(Emphasis added)

352    As is apparent, the stark divergence of views at the Board Meeting of 22 May had been resolved by 25 June. The Board minutes refer to discussions with Flinders Ports and to legal advice concerning IMX’s liability to Flinders Ports, but do not detail the discussions nor the advice. It seems, however, that by 25 June 2013 Flinders Ports had agreed to cap the liability of Outback and IMX under the guarantee at $3 million. The inference is strong that it was resolution of concerns about the potential liability of IMX to Flinders Ports which was a significant factor in the change of mind.

353    With the exception of the meeting on 25 June 2013 which Mr Pang did not attend, all of the defendants were in attendance at each of these meetings.

354    In his s 597 examination, Mr Sun said that he had been opposed to Pit 2, but had been ultimately persuaded to support it by information from Mr Meadows and Mr Parsons that mining Pit 2 would minimise the liabilities to employees, contractors and suppliers.

355    The minutes of the February, March and June Board meetings indicate a number of matters of present relevance:

(a)    as at 12 March 2013, no decision had been made about the continuation of mining, whether with a shallow Pit 2 or no Pit 2;

(b)    as at 12 March 2013, the amount of Termite’s liabilities to the Services Contractors was unknown, but it was evident that there were likely to be ETPs of at least $7 million and possibly as much as $25 million;

(c)    the uncertainty as to whether Termite should proceed with Pit 2 continued until 25 June 2013; and

(d)    one consequence of the Board deciding on Design 10a for Pit 2, was that it was then inevitable that Termite would have a liability for ETPs which had been estimated to be of the order of $7 million.

356    Accordingly, I am satisfied that, at 12 March 2013, a significant matter concerning the life of the Cairn Hill Mine and the liabilities of Termite to the Services Contractors, and therefore a matter bearing on the adequacy of the Termite Cash Reserve of $3 million, remained unresolved.