Many commercial agreements include clauses by which an event of default will include the appointment of an administrator. In ITC Ltd v Timbercorp Ltd (in liq), the Supreme Court of South Australia considered whether the appointment of a liquidator would be an event of default under a clause by which the relevant event of default was defined as appointing an administrator.
ITC Ltd and Timbercorp Ltd were both large companies in the forestry industry. They entered into a joint venture to construct and operate a wood chip terminal called PPT. ITC and Timbercorp each owned 50% of the shares in PPT.
The shareholder agreement provided that if one party offered to sell its shares in PPT to a third party, the other party had a right of pre-emption. If a 'default event' occurred to one party, then the shareholders deed provided that the other party, upon commissioning an independent valuation of the shares, had the option to purchase the defaulting party's shares at the lesser price of $1 per share, or the price of the shares as valued.
Timbercorp went into administration, then liquidation, and entered into an agreement with a third party to purchase the business and assets of Timbercorp, including the shares.
ITC claimed that by appointing a liquidator, Timbercorp was in default. ITC exercised its call option, had the shares valued, and then sought to purchase the shares at $1 each.
The Court held that the ordinary meaning of the term 'administrator', as it appeared in the shareholders agreement, was wide enough to include a liquidator. The Court noted that the manifest purpose of the provision was to provide for external control and management, in a situation of perceived or actual insolvency of an entity.
Further, by appointing a liquidator, the defendant had threatened to cease business. This constituted a 'default event' under the contract, giving rise to an entitlement in the plaintiff to exercise its default option, and to purchase the shares after valuation.
The court also held that ITC held an equitable interest in the PPT shares from the time of the appointment of an administrator and during the winding up process, because default events subsisted continuously during that time.
This is a sensible decision in which the Court recognised that the clear intention of the parties (as discerned by determining what would have been understood by reasonable people in the position of the contracting parties) was that an event of default would be constituted by the appointment of a liquidator, even though the default provisions referred only to the appointment of an administrator.
For further information please contact Special Counsel Tim Coyle on (08) 9288 6761 or tim.coyle@lavanlegal.com.au.
