Australia and New Zealand Banking Group Ltd v National Mutual Life Nominees Ltd

CATCHWORDS : CORPORATIONS - winding up - winding up under Companies (New South Wales) Code - surplus after payment in full of debts proved in accordance with bankruptcy rules - whether claims admissible apart from bankruptcy rules should be entertained - whether claims for post-liquidation interest should be entertained - priority between these two classes of claims - identifying point at which surplus established - efficacy of subordination provisons affecting convertible unsecured notes - where payment covenants between borrowing company and trustee - content of covenants affected by terms of issue of notes - equitable debts of noteholders

Companies Act 1862, s.158 LEGISLATION CITED : Companies (New South Wales Code), ss.438, 439 Judicature Act 1875, s.10

Australia and New Zealand Banking Group Ltd v National Mutual Life Nominees Ltd (1977) 137 CLR 252 Dunderland Iron Ore Co Ltd [1909] 1 Ch 446 Federal Commissioner of Taxation v Unilever Australia Securities Ltd (1995) 127 ALR 437 Fielding v Vagrand Pty Ltd (1992) 39 FCR 251 Gandy v Gandy (1885) 30 ChD 57 Gerah Imports Pty Ltd v The Duke Group Ltd (2004) 88 SASR 419 MacKenzie v Rees (1941) 65 CLR 1 Re Autolook Pty Ltd; O'Brien v Bills (1983) 2 ACLC 30 Re Empress Engineering Co (1880) 16 ChD 125 Re Fine Industrial Commodities Ltd [1956] Ch 256 CASES CITED : Re Gye and Perkes; Ex parte McIntyre (1989) 89 ALR 460 Re Humber Ironworks and Shipbuilding Company (Warrant Finance Company's case) (1869) LR 4 Ch App 643 Re Islington Metal and Plating Works Ltd [1983] 3 All ER 218 Re Milan Tramways Co; ex parte Theys (1884) 25 ChD 587 Re NIAA Corporation Ltd(1993) 33 NSWLR 344 Re Rolls-Royce Ltd [1974] 3 All ER 646 Re Tahore Holdings Pty Ltd (2004) 49 ACSR 550 Stewart v Latec Investments Ltd [1968] 1 NSWR 432 The Duke Group Ltd v Pilmer (1993) SASC 3991 United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1993) 11 ACSR 7 United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131

PARTIES : Scott Bradley Kershaw in his capacity as liquidator of Equiticorp Tasman Limited - Applicant

COUNSEL : Mr N. Manousaridis - Applicant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1187/89 - SCOTT BRADLEY KERSHAW IN HIS CAPACITY AS LIQUIDATOR OF EQUITICORP TASMAN LIMITED JUDGMENT 1 An order for the winding up of Equiticorp Tasman Limited was made by this court on 27 April 1989 under the Companies (New South Wales) Code. The current liquidator seeks the guidance of the court by way of direction in relation to the application of a surplus of some $8.5 million remaining after payment of admitted debts. Those debts did not include claims in respect of subordinated unsecured convertible notes issued under a trust deed dated 6 February 1986. With that exception, proofs of debt were assessed on the footing that the company was an insolvent company and that s.438(2) of the Companies (New South Wales) Code applied. 2 The liquidator's application is made on the footing that the winding up continues to be governed by the Companies (New South Wales) Code even though that legislation was, for most purposes, superseded by the Corporations Law of New South Wales from 1 January 1991 which was, in turn, itself superseded, for most purposes, by the Corporations Act 2001 (Cth) from 15 July 2001. For reasons stated in Re Tahore Holdings Pty Ltd (2004) 49 ACSR 550 at [3] and [4], I consider that to be the correct approach. 3 The direction the liquidator seeks has both a general aspect and a particular aspect. The general aspect entails a direction that, subject to the terms of the trust deed for the holders of the unsecured convertible notes, the liquidator would be justified in dealing with the surplus "in accordance with the provisions of s.438(1) of the Companies (New South Wales) Code and on the basis of the decision in Re Islington Metal and Plating Works Ltd [1983] 3 All ER 218". The particular aspect involves specific issues in giving effect to such a regime, particularly in light of the position occupied by the holders of the unsecured convertible notes. 4 Section 438 of the Companies (New South Wales) Code is as follows: " 438(1) [Debts admissible to proof] In every winding up, subject in the case of insolvent companies to the application in accordance with the provisions of this Code of the Bankruptcy Act 1966, all debts payable on a contingency and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value. 438(2) [Application of Bankruptcy Act 1966 ] Subject to sections 204 and 441, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the Bankruptcy Act 1966, in relation to the estates of bankrupt persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section." 5 It is also relevant to quote s.439: " 439(1) [Computation as at relevant date] The amount of a debt of a company (including a debt that is for or includes interest) is to be computed for the purposes of the winding up as at the relevant date. 439(2) [Exception] Sub-section (1) does not apply to an amount required to be paid under sub-section 442(1)." 6 The central question is whether, if s.438(2) applies at inception of the winding up (because the company is insolvent) but, in the course of the winding up, all proved debts and claims are paid in full, the company should be regarded as being no longer an insolvent company, with the result that s.438(1) begins to operate in such a way as to make a greater range of debts and claims cognisable in the winding up. A question of generally the same kind arises under ss.553(1) and 553E of the current legislation but because the coverage of the present s.553E is so much narrower than that of the former s.438(2), the question is now much less likely to be of any importance. 7 The practical significance of the issue under the Companies (New South Wales) Code is that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are excluded from proof under s.438(2): see, in relation to the corresponding provision of the Companies Act 1961, Re Autolook Pty Ltd; O'Brien v Bills (1983) 2 ACLC 30. That is because they are excluded from proof in bankruptcy by s.82(2) of the Bankruptcy Act 1966 (Cth). No such exclusion operates under the current corporations legislation. 8 The central issue lies in narrow compass: where a company is insolvent at the time of commencement of its winding up, is the case permanently branded as a case of the winding up of an insolvent company so that if, at some point during the winding up, it is shown that the company is solvent, the regime applicable under s.438(2) to the winding up of an insolvent company nevertheless continues to apply and any surplus emerging by-passes persons with claims recognised by s.438(1) (but not by s.438(2)) and accrues to the benefit of contributories? 9 Section 438 of the Companies (New South Wales) Code, with its recognition of the superior applicability of the bankruptcy rules in the case of "the winding up of an insolvent company", is a reflection of the United Kingdom law as it applied after 1875. The Companies Act 1862 provided in s.158 as follows: "In the event of any company being wound up under this act, all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as is possible, of the value of all such debts or claims, as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value." 10 This rule was later supplemented by s.10 of the Judicature Act 1875: "… in the winding up of any company under the Companies Acts, 1862 and 1867, whose assets may prove to be insufficient for the payment of its debts and liabilities and the costs of winding up, the same rules shall prevail and be observed as to the respective rights of secured and unsecured creditors, and as to debts and liabilities provable, and as to the valuation of annuities and future and contingent liabilities respectively, as may be in force for the time being under the Law of Bankruptcy with respect to the estates of persons adjudged bankrupt; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of any such company, may come in under the winding up of such company, and make such claims against the same as they may respectively be entitled to by virtue of this Act.' 11 Provisions which, like s.438 of the Companies (New South Wales) Code, contained both the general rule in s.158 of the 1862 Act and the qualification, with respect to insolvent companies, introduced by the Act of 1875, were imported into Australia. Because s.438 is modelled on United Kingdom law, it is appropriate to have regard to several English cases which, in the context of like legislation, have been decided on the basis that, if a company enters insolvent winding up but a surplus emerges at the completion of the administration in accordance with bankruptcy rules, persons with claims excluded under those rules but cognisable under the broader rules applicable to the winding up of a company that is not insolvent may come in and prove for those claims. 12 Re Fine Industrial Commodities Ltd [1956] Ch 256 concerned a company in the course of insolvent winding up under the Companies Act 1948 (Eng), ss.316 and 317 of which may be taken to be substantially the same as ss.438(1) and 438(2) of the Companies (New South Wales) Code. The liquidator was unexpectedly successful in an action to recover a significant sum of money after dividends totalling twenty shillings in the pound had been paid in respect of claims admitted to proof in accordance with the bankruptcy rules. Vaisey J said at p.262: "Although for some purposes during the winding-up proceedings this company must have been deemed to have been insolvent, it seems to me that when the time comes for dealing with the surplus it must no longer be deemed to be an insolvent company, but has to be treated as a company which is, and was, and always has been, solvent. … But I should have thought that as soon as it is found that there is a surplus, that the court must be deemed to be no longer winding up an insolvent company, but to be winding up a company which is solvent." 13 The same approach was taken in Re Rolls-Royce Ltd [1974] 3 All ER 646, a case also involving ss.316 and 317 of the Companies Act 1948. It was there held by Pennycuick V-C that the legislative history of the United Kingdom provisions showed that the introductory words - "In the winding up of an insolvent company" - were not to be understood as the equivalent of "In the winding up of a company which had been placed in liquidation on the basis that it was insolvent". As a result, the bankruptcy rules did not operate regardless of the outcome of the winding up and even if a surplus resulted. The Vice-Chancellor referred to the observation of Lord Selborne LC sitting in the Court of Appeal in Re Milan Tramways Co; ex parte Theys (1884) 25 ChD 587 at p.591 in relation to s.10 of the Judicature Act 1875: "The 10th clause of the Judicature Act 1875 refers only to a company unable to pay its debts, but I am of opinion that it must be treated as applicable to any company in liquidation until it is shewn that the assets are sufficient for payment of the debts in full." 14 Pennycuick V-C stated his own conclusion succinctly at p.652: "I conclude that on the proper construction of the statutory provision, and quite apart from authority, s.317 of the 1948 Act has no application once the liquidation throws up a surplus, whatever may have been the position at the commencement of the winding up."

In such an event, s.316 of the English Act (the equivalent of s.438(1) of the Companies (New South Wales) Code ) began to operate. 15 An anomalous result of this reasoning was recognised in Re Islington Metal and Plating Works Ltd [1983] 3 All ER 218, which also concerned ss.316 and 317 of the Companies Act 1948 (Eng). That case involved a company that was insolvent when a creditors voluntary winding up commenced, with the result that identification of provable debts and claims was governed by the bankruptcy rules via s.317, being the United Kingdom equivalent of s.438(2). With the probability of a significant surplus in sight as a result of misfeasance proceedings against former directors, the liquidator sought directions on the question now before me, namely, whether, upon its becoming clear that all debts and claims proved according to the bankruptcy rules would be paid in full, the governing law with respect to provable claims shifted so that the applicable regime became that under s.316 (the United Kingdom equivalent of s.438(1)) and claims admissible under that regime but not qualifying under the bankruptcy rules became cognisable by the liquidator. Harman J said at p.224: "The real difficulty arises when a liquidator, having paid a company's undoubted creditors and provided for the costs of winding up, is left with moneys in his hand but on turning to 'all claims' under s 316 finds that there are now claimants (such as the tort claimants here) whose claims exceed the apparent surplus. The company is thus again 'insolvent'. Does s 317 again apply? If so, there being no undisputed creditors left, an eternal state of oscillation between the sections would be created. This might be the secret of perpetual motion, but I cannot believe it is the law. In my judgment, once a company has passed from s 317 to s 316 all claims have to be admitted. I appreciate that this may result in some claims in an apparently solvent liquidation not being paid in full. But any other result seems to me a view that is impossible and, in my judgment, there is no legislative or authoritative compulsion enforcing such a result on me."

He also said: "In my judgment, the key to the whole problem lies in the concept that a company in liquidation starts subject to s 317 but can then move to s 316. The tests for admission to proof are different in the two sections. The fact that this shift of position may occur demonstrates, in my judgment, that the theory of simultaneous dealing has to be modified to this limited extent." 16 The decision in Islington Metal has been referred to in a number of Australian cases but not, it seems, in relation to any question resembling that now before me: see, for example, Re Gye and Perkes; Ex parte McIntyre (1989) 89 ALR 460, Fielding v Vagrand Pty Ltd (1992) 39 FCR 251, The Duke Group Ltd v Pilmer (1993) SASC 3991. I am, however, of the opinion that the approach sanctioned in Re Fine Industrial Commodities Ltd and Re Rolls-Royce Ltd is equally applicable under the Companies (New South Wales) Code and the brake placed upon perpetual motion by Harman J in Re Islington Metal and Plating Works Ltd is likewise applicable. It follows that, once a surplus emerges (in a sense I shall discuss presently) in a winding up that has proceeded according to the bankruptcy rules imported by s.438(2) of the Companies (New South Wales) Code, claims admissible under s.438(1) but originally precluded by s.438(2) became cognisable in that winding up. 17 It is now necessary to mention another line of cases. They concern the question whether creditors who have proved for interest bearing debts under provisions such as s.438(2) of the Companies (New South Wales) Code should, upon a surplus emerging after satisfaction of all admitted claims, receive payments out of the estate in respect of interest for periods after the commencement of the winding up. 18 The cases to which I refer are winding up cases applying the principle (originally a principle of bankruptcy) referred to by Dixon J in MacKenzie v Rees (1941) 65 CLR 1 (at p.8): "[N]o proof should be allowed for interest accruing after the commencement of the bankruptcy even upon interest-bearing debts … . But if there were a surplus then intermediate interest might be allowed against the debtor. If, according to the tenor of the obligation, a debt bore interest, the debtor could not obtain the surplus until interest accruing after the commencement of the bankruptcy had not been met thereout." 19 I need not mention all these cases. A recent analysis and discussion of them may be found in the judgment of Anderson J (with whom Mullighan J and Nyland J agreed in Gerah Imports Pty Ltd v The Duke Group Ltd (2004) 88 SASR 419. In that case, what was described as "a rule at common law which allowed for what has been called 'a second round of proofs'" was accepted as allowing and requiring surplus assets in the hands of the liquidator to be applied in meeting creditors' claims for post-liquidation interest before being distributed among contributories. The creditors concerned are those whose debts, according to the terms of those debts, carry interest until payment of the principal in full, where such payment had not been made at the commencement of the winding up so that interest continued to run thereafter. 20 The principle I have just mentioned proceeds on the basis that, after all proved and admitted claims have been satisfied in full, a creditor who has proved is remitted to any inadmissible balance of his or her claim. Thus, if a principal sum of $100 and accrued interest of $10 were owing at the commencement of the winding up and a further $20 of interest accrued in respect of periods after that commencement, satisfaction in full of the proved and admitted claim for $110 (the further $20 being excluded by s.439), as part of an outcome which saw all creditors receive 100 cents in the dollar upon their proved and admitted claims, would not in any way detract from the creditor's right against the company in respect of the additional $20. 21 There is thus a second class of claims cognisable if a surplus emerges. It consists of claims for further interest on interest bearing debt admitted as to principal plus interest to the commencement of the winding up. 22 It then becomes necessary to address a question about the priority to be observed as between the two classes of claims over and above those admissible under s.438(2) - that is, the class I have just mentioned and the class consisting of claims admissible under s.438(1) but precluded by s.438(2). The basic rule is, of course, that debts and claims provable in a winding up are confined to those existing at commencement of the winding up. This is the effect of s.439. Where s.438(2) applies, claims for interest accruing thereafter are precluded by s.82(3B) of the Bankruptcy Act 1966 (Cth) introduced by the Bankruptcy Amendment Act 1987 (Cth) and therefore applicable to the present case: "A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy." 23 This rule is equally applicable to a winding up to which s.438(2) does not cause the bankruptcy rules to apply. This is made clear by the case of Re Humber Ironworks and Shipbuilding Company (Warrant Finance Company's case) (1869) LR 4 Ch App 643. That case involved a winding up under the Companies Act 1862 at a time when s.158 of that Act had not been supplemented by s.10 of the Judicature Act 1875. The Court of Appeal in Chancery there laid down a rule applicable to solvent and insolvent winding up alike. This is made clear in the judgment of Giffard LJ at pp.647-8: "I am of opinion that dividends ought to be paid on the debts as they stand at the date of the winding-up; for when the estate is insolvent this rule distributes the assets in the fairest way; and where the estate is solvent, it works with equal fairness, because, as soon as it is ascertained that there is a surplus, the creditor whose debt carries interest is remitted to his rights under his contract; and, on the other hand, a creditor who has not stipulated for interest does not get it. I may add another reason, that I do not see with what justice interest can be computed in favour of creditors whose debts carry interest, while creditors whose debts do not carry interest are stayed from recovering judgment, and so obtaining a right to interest." 24 It follows, in my opinion, that the claims that become admissible under s.438(1) but were previously precluded by s.438(2) must be recognised and dealt in full with before claims for post-liquidation interest are entertained. Because the recognition of post-liquidation interest in the way emerging from the line of cases culminating in Gerah Imports is something that is to happen in both an insolvent winding up and a solvent winding up, that recognition must, in a winding up that begins under insolvent rules but later comes to be dealt with in accordance with solvent rules, be postponed until all debts and claims admissible on both bases have been dealt with according to their respective amounts as at the commencement of the winding up. There must therefore be a two-staged process. At the first stage, claims admissible under s.438(1) but previously precluded by s.438(2) must be ascertained and paid out of the surplus remaining after dividends totalling 100 cents in the dollar have been paid upon the admitted s.438(2) claims. If that process results in the payment of 100 cents in the dollar in respect of the further claims so admitted and dealt with at that first stage and a surplus still remains in the hands of the liquidator, he will proceed to a second stage under which claims for post-liquidation interest on all previously admitted claims are assessed and that surplus is applied towards satisfaction of those claims. 25 It is important to identify the point at which it becomes permissible to recognise the further claims involved in each of these stages. The English cases show that the relevant event is the emergence of a surplus after actual payments in respect of debts proved and admitted in accordance with the rules applicable before the commencement of the stage have been made to the extent of 100 cents in the dollar. It follows that, for the purposes of what I have called the first of the two stages, it will be necessary to see that claims in respect of debts admitted on the s.438(2) basis have been satisfied in full before there is any possibility of participation by claims admissible under s.438(1) but precluded by s.538(2). So far as claims of that kind are concerned, this accords with the position stated by O'Donovan in the last two sentences of the following passage at p.380 of the third edition (1987) of McPherson's "The Law of Company Liquidation": "Curiously, the general principle which excludes claims for unliquidated damages in tort from proof in the winding up of an insolvent company might enable the liquidator to pay the other unsecured creditors in full and even leave a surplus. It could be argued that the company would then be a solvent company in liquidation and that it would cease to be subject to s.82(2) of the Bankruptcy Act 1966, with the result that all claims would have to be admitted [ Re Islington Metal and Plating Works Ltd [1983] 3 All ER 218 at 224]. This would mean that the creditors, including the plaintiffs' seeking unliquidated damages in tort, would receive fewer than one hundred cents in the dollar on their claims. It is submitted, however, that the general principle should stand. Claims to unliquidated damages in tort should only be admitted when there is a surplus remaining after paying the other unsecured creditors in full. These surplus assets should then be shared rateably by the plaintiffs after the value of their damages claims have been estimated." 26 In Fine Industrial Commodities, a dividend of twenty shillings in the pound had already been paid to creditors who had proved under the equivalent of s.438(2). The position in Re Rolls-Royce Ltd was the same. In Islington Metal, on the other hand, there was reference only to an expected ability to pay admitted claims in full. But the extract at paragraph [15] above from the judgment of Harman J refers to the "difficulty [that] arises when a liquidator, having paid a company's undoubted creditors and provided for the costs of winding up, is left with moneys in his hand …" [emphasis added]. There was no suggestion in any of the cases that, upon its becoming clear that assets are more than sufficient to cover in full claims admitted initially under the equivalent of s.438(2), those claims must be reassessed ab initio and made to rank equally with claims qualifying under the equivalent of s.438(1) but excluded by the equivalent of s.438(2). 27 The correct approach is thus to make distributions in full in respect of admitted s.438(2) claims before entertaining claims admissible under s.438(1) but not under s.438(2), and to make distributions in full in respect of the latter claims before entertaining claims for post-liquidation interest. 28 I turn now to the issues concerning the convertible unsecured notes. Those notes are constituted by a trust deed dated 6 February 1986 made between Equiticorp Tasman and Burns Philp Trustee Company Ltd. Clause 5 of the deed empowered Equiticorp Tasman ("the Company") to create and issue notes under the deed, including notes convertible into shares or stock in the capital of the Company. The trust deed contained, in clause 1, definitions as follows: "'Issued Notes' means Unsecured Notes issued and for the time being and from time to time outstanding." "'Moneys Owing Hereunder' means the Principal Moneys including any premium and interest payable on the Issued Notes and any other moneys payable to the Trustee or any Noteholder under or pursuant to this Deed or the terms of issue of any of the Notes." "'Noteholders' means the several persons for the time being entered as the holders of Issued Notes in the Register. "'Principal Moneys' means the total amount (and includes any premium owing) paid up on the Issued Notes. "'Unsecured Notes' or 'Notes' means the unsecured convertible notes created by the Company pursuant to this Deed whether issued or unissued and so long as they remain uncancelled." 29 Clause 3 of the trust deed is as follows: " Acknowledgment of Indebtedness (a) The Company hereby acknowledges its indebtedness to the Trustee in respect of the Principal Moneys for the time being outstanding and interest thereon. Provided always that the payment to the Noteholders of principal and interest in accordance with the tenor of the Note Certificates shall operate pro tanto in satisfaction of the Principal Moneys and interest the indebtedness for which is acknowledged by this clause. (b) The Noteholders are to be regarded as the beneficial owners of the Issued Notes held by them respectively." 30 It is also pertinent to quote clause 9:

" Repayment of Principal, Payment of Interest (a) As and when the Issued Notes or any part thereof are to be redeemed or paid off in accordance with the provisions of their issue or of this Deed the Company will pay to the Trustee the Principal Moneys in respect of such Issued Notes. (b) Until any Issued Notes are redeemed or paid off the Company will pay to the Trustee interest thereon in accordance with the conditions upon which such issued Notes are held. (c) Notwithstanding the provisions of sub-clause (a) hereof every payment by the Company to the Noteholders on account of the principal Moneys payable hereunder shall operate as payment to the Trustee in satisfaction of the Company's obligations in that behalf. (d) Notwithstanding the provisions of sub-clause (b) hereof the Company shall unless and until otherwise requested by the Trustee pay to the Noteholders the principal, premium (if any) and interest payable as aforesaid by cheque in favour of the Noteholder or in the case of joint holders to the first named in the Register of Noteholders and crossed "not negotiable" and sent through the post or by airmail (as appropriate) to the Noteholder at his registered address or in the case of joint holders to that one of the joint holders who is first named in the Register of Noteholders and such payment shall operate as payment to the Trustee in satisfaction of the Company's obligations in that behalf PROVIDED HOWEVER that if the Company issues Notes for which permission to deal has been granted by or will be sought from any Stock Exchange such Notes may be issued on the condition that the first payment of interest thereon shall be paid to the allottee whether or not the allottee shall be the registered holder of any of the Notes allotted to him on the date such first payment of interest is made. (e) The Company hereby covenants with the Trustee that as and when the Note ought, in accordance with the conditions of issue of that Note, to be redeemed by conversion into a share or shares of the Company, the Company will so effect such redemption by allotting to the holder of the Note the share or shares required for that purpose. 31 Clause 10 required the Company to issue a certificate of the notes issued to a noteholder. The certificate was to be in the form set out in the second schedule to the trust deed. Clause 10(b) said that Issued Notes "shall also be held with the benefit of and subject to the conditions contained or referred to in the First Schedule hereto or such of them as are under the conditions of the issue thereof applicable thereto respectively". Clause 10(b) also said that "those conditions shall be binding on the Company and the Noteholders and all persons claiming through them respectively". Clause 27 provides: " Schedules The Schedules to this Deed and the provisions and conditions contained therein shall have the same force and effect as if set out in the body of this Deed." 32 The conditions in the first schedule include the following within condition 2: "(v) (a) So long as any liability of the Company in respect of the Moneys Owing Hereunder (as defined in the Trust Deed) remains outstanding a Noteholder will not in any circumstances whatsoever demand or accept payment of the principal moneys and premium (if any) or any part thereof in relation to a Note of which he is the holder or set off or attempt to set off such principal moneys and premium (if any) or any part thereof against any moneys which may or at any time be due from the Noteholder to the Company unless: (1) the whole of the amount so paid or set off is applied contemporaneously with repayment or set off in or towards satisfaction of the Noteholder's liability in respect of principal or premium or both on shares (other than redeemable shares) in the capital of the Company resulting from conversion of the said Note; or (2) there is furnished to the Trustee not more than twenty-one (21) days before such payment or set off a report by the Auditor stating [certain matters] … together with a report signed by two Directors of the Company stating [certain matters] … (b) If the Moneys Owing Hereunder (as defined in the Trust Deed) become immediately due and payable in consequence of the exercise of the option conferred on the Trustee by Clause 12 of the Trust Deed, the payment of all principal moneys interest and premium (if any) which are then owing or payable or thereafter become owing or payable in relation to that Note is postponed and shall be deferred until all liabilities of the Company and the Guaranteeing Subsidiaries (other than those in respect of that Note and in respect of other Subordinated Debt) are paid in full. (c) If the company goes into liquidation the holder of the said Note shall not be entitled to prove in such liquidation until all liabilities of the Company and the Guaranteeing Subsidiaries (other than liabilities in respect of that Note and in respect of other Subordinated Debt) have been paid in full." 33 Finally, I quote clause 24 of the trust deed: " Noteholder's Right to Enforce Each of the Noteholders shall be entitled to sue for the performance and observance of the provisions of this Deed so far as the Notes registered in his name are concerned save where the Trustee has a discretion under the said provisions." 34 Mr Manousaridis of counsel, who appeared for the liquidator, drew attention to the fact that the subordination provisions are included in the first schedule to the trust deed, so that their effect is derived from clause 10(b), with the result that they are, according to that clause, conditions subject to which (and with the benefit of which) notes are held by the holders. Clauses 2(v)(a) and 2(v)(c) of the conditions operate to curtail the rights of noteholders, but paragraph 2(v)(b) postpones payment in respect of notes in the event described, without identifying the person to whom payment is to be made. The Company's covenants to pay are, on the other hand, covenants given to the trustee in clauses 3(a) and 3(b), although their effect is qualified by clauses 3(c) and 3(d). There is accordingly a question about the efficacy of the subordination provisions to qualify the rights derived by the trustee under clause 3. 35 In Dunderland Iron Ore Co Ltd [1909] 1 Ch 446, holders of debenture stock issued under roughly analogous provisions were held not to be creditors capable of suing for a winding up order when interest in respect of their stock was not paid. This was because the covenant to pay was given by the company to the trustee. But I do not consider that factor (or the reasoning in the Dunderland Iron case) to be determinative in the present case. There are two reasons for this. 36 First, and as explained in some detail by Hill J in Federal Commissioner of Taxation v Unilever Australia Securities Ltd (1995) 127 ALR 437, there is good reason to think that the Dunderland case was wrongly decided. It was inconsistent with the earlier decisions in Gandy v Gandy (1885) 30 ChD 57 and Re Empress Engineering Co (1880) 16 ChD 125. Hill J outlined the reasoning and results in those cases as follows:

"In Empress , A and B agreed with C that an amount be paid to J. It was held that J could not claim the amount as J was not a party to the contract. Jessel MR said (at 129) that, as a general rule, an agreement between two parties that one of them will pay a certain sum to a third person, who is not a party to the agreement, will not make that third person a cestui que trust. Indeed, such an agreement between the two parties would allow those parties to come to a new agreement the next day, thereby releasing the old agreement - a result which would not be possible if the third person was a cestui que trust. However, he went on to hold that there may be agreements which do make the third person a cestui que trust, for example where the agreement was to pay out of property, and one of the parties to the agreement constituted himself a trustee of the property for the benefit of the third person. In Gandy ,Bowen LJ held (at 69-70) that at law, as a general rule, if two parties contract that one will do something for the benefit of a third person who is not a party to the contract, that third person cannot enforce the contract, except in certain exceptional cases. However, if the true intent and the true effect of the deed was to give the third persons a beneficial right under it, that is to say, to give them a right to have covenants performed, and to call upon the trustees to protect their rights and interests under it, then the third persons would be outside the common law doctrine, and would, in a Court of Equity, be allowed to enforce their rights under the deed." 37 Hill J also referred to other English cases and writings calling in question the correctness of the Dunderland case. Not mentioned but, it seems to me, supportive of his Honour's view is the decision of Street J in Stewart v Latec Investments Ltd [1968] 1 NSWR 432. That case leads to my second reason for thinking that the Dunderland result and reasoning are not applicable in the present case, namely, that the trust deed with which I am concerned contains specific provisions which do not allow that result to arise. 38 Stewart v Latec Investments Ltd concerned the right of a company which had issued debenture stock under a trust deed to credit principal and interest payable in respect of a holder's stock against that holder's indebtedness to it. Street J described the effect of the trust deed provisions as follows (at p.435-6): "The form of the trust deed constitutes the trustee the creditor of Latec Investments Ltd. In respect of the issued stock. But as regards each individual shareholder Clause 4 of the deed, which I have already quoted, provides that he is to be regarded as the beneficial owner of his stock. The trustee under the deed is accordingly the trustee for the stockholder of the debt owed by Latec Investments Ltd. Recorded on that stockholder's certificate. Mr. Stewart, at the date when his stock became redeemable, was at law himself a debtor to Latec Investments Ltd. For an amount exceeding the principal due to him in respect of his stock. There is authority which establishes that in a situation of this nature even a Court of Law will allow a set-off to be struck, and I quote from Bullen & Leake , 3rd ed., at p.571:- 'Courts of equity will allow a defendant sued for a debt due to the plaintiff to set-off debts due from the plaintiff to a trustee for the defendant, and such debts may be set-off in an action at law in a plea upon equitable grounds. And defendant may plead a set-off upon equitable grounds of a debt due to him from the person on whose behalf plaintiff is suing as trustee.' These statements provide direct support for the proposition that if Latec Investments Ltd. Had, on 20 May 1962, the day after the stock became redeemable, sued Mr. Stewart for the amount owed by Mr. Stewart to it, he could, in a defence at law, have pleaded his beneficial entitlement to the redemption of his stock, provided, of course, that he fulfilled the condition precedent of lodging the stock certificate. There may be room for argument whether, within the terms of this deed, Mr. Stewart would be entitled to sue at law for the amount of principal due to him after the due date for redemption of his stock. But for the purposes of the present question I am content to accept Mr. Kerrigan's contention that he could not sue at law. Mr. Stewart's position, however, as the equitable creditor of Latec Investments Ltd. would entitle Latec Investments Ltd. to strike a set-off of that equitable debt against Mr. Stewart's legal debt to that company itself." 39 In the present case, the trust deed contains a provision corresponding with clause 4 of the deed considered by Street J. I refer to clause 3(b) which declares that the noteholders are to be regarded as the beneficial owners of the issued notes held by them respectively, thus qualifying the effect of the company's acknowledgment of indebtedness to the trustee in the immediately preceding clause 3(a). That acknowledgment is, in any event, subject to a proviso that payment to the noteholders "in accordance with the tenor of the Note Certificates" will operate pro tanto in satisfaction of the acknowledged indebtedness to the trustee. It is also to be remembered that a direct contractual relationship arises between the company and the noteholder by reason of the application for and issue of notes. In Australia and New Zealand Banking Group Ltd v National Mutual Life Nominees Ltd (1977) 137 CLR 252 at p.267, the High Court saw such a direct contractual relationship as the source of the agreement by an earlier allottee of debenture stock that, despite his or her priority in time, the equitable interest would rank pari passu with those created by later issues under the same trust deed. 40 There is the added point - no less significant - that the payment covenants in clause 9 take their content from the terms of issue of notes. The covenant for the payment of principal in clause 9(a) is a covenant to pay the principal of particular notes "[a]s and when the Issued Notes or any part thereof are to be redeemed or paid off in accordance with the provisions of their issue or this Deed". The obligation with respect to interest under clause 9(b) is an obligation to pay "in accordance with the conditions upon which such Issued Notes are held". The conditions of issue of particular notes thus supply the substantive content of the payment covenants held by the trustee from the Company. And it is the content of the Company's payment covenants that delineates the chose in action held at law by the trustee and in equity by the noteholders. 41 It follows that the trustee cannot assert a right to payment under the Company's payment covenants unless the asserted right coincides with a right to payment arising from the conditions of issue. And it follows from a noteholder's status as beneficiary of the covenants held by the trustee (with the right of direct enforcement given to noteholders by clause 24), that the noteholder's right can be no greater than that of the trustee. In the result, therefore, the subordination provisions in clauses 2(v)(a), 2(v)(b) and 2(v)(c) in the first schedule to the trust deed must be accepted as operating as qualifications upon both the company's obligation to pay and the rights of the trustee and the noteholders to sue for payment. 42 The statement of facts placed before the court by the liquidator shows that the trustee did, on 3 April 1989, exercise the option conferred by clause 12. Clause 2(v)(b) of the first schedule conditions was therefore activated and the position today is accordingly that the deferral provided for in that clause is operative as against both the noteholders and the trustee. 43 It remains to consider briefly the question whether the subordination provisions of the trust deed and the conditions of issue, operating in the way I have outlined, are effective to vary what would otherwise be the order of application of assets in a winding up prescribed by the Companies (New South Wales) Code. That code contains no equivalent of s.563C of the Corporations Act 2001 (Cth), a provision first enacted by the Corporate Law Reform Act 1992 (Cth). 44 Section 440 of the Companies (New South Wales) Code says that, except as otherwise provided by the Code itself, all debts proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they shall be paid proportionately. It has been held by the Court of Appeal, however, that s.440 is not a mandatory provision. It is, rather, one that confers upon a creditor a private right that the creditor may waive or remove by contract or otherwise. The matter was examined in detail by Sheller JA (with whom Mahoney and Meagher JJA agreed) in United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131. It is sufficient to quote his Honour's conclusion (at p.141): "There is no public policy or good sense which prohibits one creditor deferring payment of its debt in favour of the payment of the debt of another creditor, if the rights or entitlements of the other creditors to payment remain unaffected." 45 Sheller JA referred with apparent approval to the decision of Santow J in Re NIAA Corporation Ltd(1993) 33 NSWLR 344 in relation to a corresponding provision of the Corporations Law in its original form. At first instance in United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1993) 11 ACSR 7, McLelland CJ in Eq had pointed out that, where a contractual subordination operates between debtor and creditor so as to preclude any claim for payment by the creditor until all the creditor's other liabilities have been satisfied in full, the subordinated debt is properly included among debts "payable on a contingency" (the contingency being payment in full of all other creditors) and "do not bear a certain value". It follows that if such a debt were proved and it was clear that available assets would be exhausted by unsubordinated claims, it would be taken into account by the liquidator at nil. 46 The principles emerging from the United States Trust Co case apply to the indebtedness represented by the convertible unsecured notes with which this application is concerned. 47 In light of the whole of the matters canvassed, the appropriate course for the liquidator to adopt is, in outline, as follows: 1. Steps should be taken to determine whether there exist claims (other than claims in respect of the convertible unsecured notes) that were not previously admitted in the winding up and are of a kind that are admissible to proof under s.438(1) but not admissible to proof under s.438(2). 2. All such claims found to exist should be assessed by the liquidator in the usual way and funds remaining available in the winding up should be applied in the manner specified in s.440 (as it operates upon and in relation to those claims as a class) towards such of them as are admitted. 3. If funds remain available in the winding up after the foregoing steps described at 1 and 2 above have been taken and the claims admitted pursuant to 2 above have been satisfied in full, steps should be taken to determine whether there exist claims (other than claims in respect of the convertible unsecured notes) for interest accruing after the commencement of the winding up by reason of interest-bearing liabilities existing at the commencement of the winding up in respect of which claims have previously been admitted and paid. 4. All such claims found to exist under 3 above should be assessed by the liquidator, the amounts of post-liquidation interest properly payable should be ascertained and the available funds referred to at 3 above should be applied towards satisfaction of that interest pro rata according to the respective amounts of interest. 5. Only if funds remain available in the winding up after the foregoing steps have been taken and the claims admitted under 2 and 4 above have been satisfied in full, will it be necessary or appropriate for the liquidator to ascertain and deal with claims in respect of indebtedness represented by the convertible unsecured notes. 48 It is, I think, desirable that the liquidator formulate such detailed directions as he wishes the court to make in light of the above. He should then bring in short minutes accordingly. **********

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