"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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