Bacnet Pty Limited (ACN 115 594 075) v Lift Capital Partners Pty Limited

Introduction and Overview 1 On 8 February 2010, the primary judge (Emmett J) made orders approving schemes of arrangement between Lift Capital Partners Pty Limited (in liq) and its creditors and Lift Capital Nominees No 1 Pty Limited (in liq) and its creditors. His Honour's reasons for judgment handed down that day dealt with the approval of the schemes and two other related proceedings brought by a group of companies described in the proceedings and in these appeals as "the Famularo Parties". 2 The Famularo Parties claimed to be creditors of the two Lift companies, which we will call respectively Lift Partners and Lift Nominees. Their claims arose out of margin loan facility agreements made between the Famularo Parties and Lift Partners in March 2006, and in particular, the circumstances in which Lift Partners demanded payment of the sum of $331 million outstanding under the facility. 3 We will describe in more detail later the way in which the Famularo Parties seek to characterise their claims. It is sufficient to say that the claims arise from the fact that securities provided by the Famularo Parties to Lift Partners as security for the loans, were disposed of by certain companies in the Merrill Lynch Group ("Merrill Lynch") to whom Lift Partners, in breach of trust, caused the securities to be transferred by Lift Nominees. 4 Merrill Lynch disposed of the securities after the date on which the demand made by Lift Partners on the Famularo Parties fell due. The demand having not been met, Merrill Lynch disposed of the securities and accounted to Lift Partners for the proceeds. However, the amounts realised by Merrill Lynch on the disposition of the securities left a shortfall of approximately $27 million on the amount outstanding by the Famularo Parties to Lift Partners. This loss (and certain consequential losses said to have been suffered by the disposal) formed the basis of the claim by the Famularo Parties to be creditors of Lift Partners. 5 The Famularo Parties submitted proofs of debt for the purpose of voting at scheme meetings ordered to take place on 22 December 2009. However, the Chairman of those meetings rejected the proofs of debt. The Famularo Parties appealed from the decision of the Chairman to reject the proofs. 6 The appeals against the refusal of the Chairman to permit the Famularo Parties to vote at the scheme meetings were heard together with the application brought by Lift Partners and Lift Nominees for approval of the schemes. The Famularo Parties opposed the approval of the schemes of arrangement. 7 The primary judge dismissed the appeals against the decision of the Chairman and, as we have said, approved the schemes. The Famularo Parties appeal against those orders. The appeals were resisted by the Lift Companies. Merrill Lynch was given leave to appear on the appeal against the approval of the schemes.

The Issues Before the Primary Judge 8 The essential issue before the primary judge in the proceedings brought by the Famularo Parties turned on the nature of those proceedings. As his Honour observed, the proceedings were effectively appeals under reg 5.6.26(3) of the Corporations Regulations 2001 (Cth) ("Corporations Regulations") against the decision by the Chairman to reject the proofs of debt submitted by the Famularo Parties for the purpose of voting at the scheme meetings which the primary judge had ordered at the first Court hearing. 9 The issue raised in the third proceeding, that is the application to approve the schemes, also turned on whether the Famularo Parties were wrongly excluded from voting at the scheme meetings. 10 In reaching the conclusion that there was no error in the Chairman's decision, the primary judge addressed the nature of an appeal against a decision to reject a proof of debt submitted for voting purposes. 11 His Honour also addressed at some length the material which was before the Chairman of the meetings and upon the basis of which the Chairman decided to reject the proofs. The material fell into five main categories. 12 The first category was the claim made by the Famularo Parties in a cross-claim filed in response to a proceeding brought against them in the Commercial List of the Supreme Court of New South Wales by Lift Partners. In that proceeding, Lift Partners sought to recover from the Famularo Parties the shortfall arising from the sale and closing out of the securities. The response and cross-claim asserted that Lift Partners was not entitled to give a notice demanding repayment of the loans and that Lift Partners was liable to pay compensation or damages to the Famularo Parties for loss suffered upon the disposal of the securities by Merrill Lynch in breach of trust. 13 The second category was the decision of Barrett J in Lift Capital Partners Pty Limited v Merrill Lynch International (2009) 73 NSWLR 404. That decision formed the basis for the claim by the Famularo Parties that the transfer of the securities and the sale or disposal of the securities constituted a breach of trust for which Lift Partners was liable. 14 The third category was detailed correspondence between the solicitors for the parties in relation to the Commercial List proceedings. The correspondence dealt with particulars of the Famularo Parties' cross-claim which included an assertion by them that the administrators of Lift Partners ought to have permitted the Famularo Parties to adopt a trading strategy which would have resulted in a profit on the open call option positions. 15 The fourth was the proof of debt forms submitted by the Famularo Parties on 20 December 2009 for voting purposes. 16 The fifth was a memo of advice from the solicitors for the liquidators dated 10 December 2009 and a letter of advice from the solicitors dated 21 December 2009 indicating the reasons why the Chairman of the meetings proposed to estimate the Famularo Parties' claims as having nil value.

The Factual Background 17 The principal factual material is described by the primary judge at [4]ff. The following narrative is taken largely from his Honour's judgment. 18 In March 2006, the Famularo Parties entered into loan facility agreements with Lift Partners. The agreements were in standard form and a sample of the agreements was in evidence. 19 We will refer below to the relevant terms of the loan facility agreements. The principal terms of the agreements, on which much of the argument turns, are: · Clause 4.7, under which Lift Partners could give three days' notice requiring payment in full of all moneys outstanding; and · Clauses 7.1 and/or 7.2 which permitted the Famularo Parties, in certain circumstances, and in particular, subject to the consent of Lift Partners, to sell shares or other securities provided by the Famularo Parties to Lift Partners as security for the loans. 20 Three other relevant provisions should be mentioned. Clause 10.2 required the Famularo Parties to mortgage to Lift Partners all securities acquired by the Famularo Parties with loan funds advanced to them by Lift Partners. Under clause 11.2, the Famularo Parties agreed that securities acquired by them would be held by Lift Nominees in its name as "bare nominee" for the Famularo Parties. 21 Clause 17.2 purported to authorise Lift Partners and Lift Nominees to transfer the securities to Merrill Lynch without notice to the Famularo Parties. 22 The whole of the moneys advanced by Lift Partners to the Famularo Parties was used by the Famularo Parties to purchase shares in companies listed on the Australian Stock Exchange ("the ASX"). In accordance with clauses 10.2 and 11.1 of the loan facility agreements, the shares were purchased in, or transferred into, the name of Lift Nominees and formed part of the security for the loans. 23 In addition, the Famularo Parties bought put options and sold call options, in respect of listed public companies. The reasons for the purchases and sales of these options were explained by the primary judge. It is sufficient to say that, although the options were not acquired with loan funds provided by Lift Partners, title was taken in the name of Lift Nominees and they became part of the security for the loans. 24 Unbeknown to the Famularo Parties, Lift Partners caused the shares, the put options and the sold call options to be transferred to Merrill Lynch as security for advances made by Merrill Lynch to Lift Partners. The transfers of those securities to Merrill Lynch were made pursuant to cl 17.2 of the loan facility agreements but in the proceedings between Lift Partners and Merrill Lynch, Barrett J found that the clause was inoperative and void. 25 On 7 April 2008 Lift Partners gave notice to the Famularo Parties under cl 4.7 of the loan facility agreements requiring the Famularo Parties to pay within three business days the whole of the amounts outstanding. At the time when the notice was given, the Famularo Parties were not in default under the loan facility agreements. 26 The total amounts outstanding were approximately $331 million. Those amounts were not repaid to Lift Partners on 10 April 2008 which was the due date. The failure to pay constituted default by the Famularo Parties under the loan facility agreements. 27 On the same day, 10 April 2008, Mr Anthony Gregory McGrath and Mr Joseph David Hayes were appointed as administrators of Lift Partners and Lift Nominees. At the second meeting of creditors of those companies, it was resolved that the companies be wound up and Mr McGrath and Mr Hayes were appointed as joint liquidators. 28 Between 11 April 2008 and 17 April 2008, Merrill Lynch sold the shares and the put options and closed out the sold call options. The shares and the put options were sold for amounts in excess of the sums outstanding on the loans but a loss was generated when the sold call options were closed out. This resulted in a shortfall on the sum owing by the Famularo Parties under the loan facility agreements. 29 The amount achieved from the sale of the shares was approximately $345 million and the surplus produced on the sale of the put options was approximately $16.6 million. The total sum generated from those two sales was therefore over $361 million and exceeded the sum due under the loan facility agreements by more than $30 million. 30 Various different figures appear in the evidence as to the loss generated on the closing out of the sold call options. The primary judge said the loss was $42 million. On any view, the loss was substantial and gave rise to a significant shortfall in respect of the funds owing by the Famularo Parties. 31 There was a complication in relation to the Famularo Parties' exposure on the sold call options to which we will refer again later. This was that security in the sum of $81 million was provided by Lift Partners to the Australian Clearing House ("the Clearing House") for the exposed liability of the Famularo Parties under the sold call options. That sum had been lent by Merrill Lynch to Lift Partners and the transfer of the shares and options by Lift Partners to Merrill Lynch was part of the security for the loan of $81 million from Merrill Lynch. 32 Thus, the shares and options which were transferred by Lift Partners to Merrill Lynch in breach of trust were the security for two different loans. They were the security for the advance by Lift Partners to the Famularo Parties but they were also part of the security held by Merrill Lynch for the advance of $81 million by Merrill Lynch to Lift Partners. 33 On 22 December 2008 the then solicitors for the Famularo Parties wrote to the solicitors for Mr McGrath and Mr Hayes claiming that the Famularo Parties were substantial creditors of Lift Partners. The claim was made on the basis that Lift Partners permitted Merrill Lynch to sell the Famularo Parties' shares and close out their open positions at a time when the Famularo Parties were not in default. The losses said to have been suffered by the Famularo Parties were claimed to be in excess of $140 million. 34 On 2 July 2009 Lift Partners commenced the proceedings in the Commercial List of the Supreme Court of New South Wales to which we referred above. The amount claimed against the Famularo Parties was in excess of $33 million. 35 The Famularo Parties' cross-claim in the Commercial List proceedings was filed on 22 September 2009. 36 The first Court hearing of the application to approve the schemes of arrangement proposed by Mr McGrath and Mr Hayes as liquidators of the Lift companies took place on 27 November 2009 before Emmett J: see Lift Capital Partners Pty Limited (In Liquidation), in the matter of Lift Capital Partners Pty Limited (In Liquidation) [2009] FCA 1523. 37 At that hearing, his Honour made orders for the convening of scheme meetings to be held on 22 December 2009. He ordered that Mr McGrath, or failing him Mr Hayes, be the Chair of the meetings. 38 In his reasons for judgment delivered ex tempore at the first Court hearing, his Honour described the proposed schemes and explained in some detail the background to the schemes which involved compromises between the Lift companies and their former clients as well as other creditors. 39 His Honour observed at [20] of his reasons for judgment at the first Court hearing that the schemes included compromises reached with Merrill Lynch. The compromises included a cash contribution to be made by Merrill Lynch to the scheme fund. The quid pro quo for this was that Merrill Lynch was to receive a release in respect of any claims that the Lift companies may have against Merrill Lynch. 40 When the first Court hearing was called, Mr Sweeney QC sought leave to appear for the Famularo Parties who claimed to be creditors of the Lift companies. His Honour observed at [2] that the liquidators disputed the claims by the Famularo Parties to be creditors. He noted at [10] the assertion made by Mr Sweeney that the Famularo Parties would have derived profits from the open positions in the options, had they not been closed out, of an amount in excess of $60 million. 41 On 10 December 2009, the solicitors for the liquidators sent a memorandum to Mr McGrath and Mr Hayes. The memorandum addressed the question of liability and quantum of the cross-claim brought by the Famularo Parties against Lift Partners in the Commercial List proceedings. The substance of the solicitors' advice was that although the Famularo Parties may be able to establish a breach of trust in relation to the transfer of the securities by Lift Partners to Merrill Lynch, they did not consider that the Famularo Parties would be able to establish any loss as a result of the transfer. 42 On 20 December 2009, the Famularo Parties submitted proofs of debt for voting purposes to Mr McGrath as the Chairman of the scheme meetings. The proofs of debt asserted claims against Lift Partners and Lift Nominees in amounts totalling in excess of $100 million, although these were said to be "preliminary calculations only". 43 On 21 December 2009, the solicitors for Mr McGrath and Mr Hayes wrote to the solicitors for the Famularo Parties about the proofs of debt. The letter stated that the liquidators considered that the proofs of debt should be valued as nil because all of the actions in respect of the securities were taken under the loan facility agreements at a time when the Famularo Parties were in default. 44 At the scheme meetings, held on 22 December 2009, Mr McGrath as Chairman of the meetings, assessed the proofs of debt submitted by the Famularo Parties as having nil value.

The Relevant Legislative Provisions 45 The legislative provisions for the determination of the appeals from the decision of Mr McGrath are contained in the Corporations Regulations. The relevant regulations are 5.6.23 and 5.6.26 which apply by virtue of clause 2.15 of the Federal Court (Corporations) Rules 2000 (Cth). 46 Regulation 5.6.23 deals with creditors who may vote at a meeting. Regulation 5.6.23(1)(a) provides that a person is not entitled to vote as a creditor at a meeting of creditors unless his or her debt or claim has been admitted wholly or in part by the liquidator or administrator. 47 Regulation 5.6.23(2) provides that a creditor must not vote in respect of, inter alia, an unliquidated debt or a debt the value of which has not been established, unless a just estimate of its value has been made. 48 Regulation 5.6.26 deals with admission and rejection of proofs of debt for the purpose of voting. Regulation 5.6.26(1) provides that the Chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting at the meeting. 49 Regulation 5.6.26(3) provides that a decision of the Chairperson to reject a proof of debt or claim for the purpose of voting may be appealed against to the Court within ten business days after the decision. 50 The relevant legislative provision in respect of the appeal against the primary judge's order approving the schemes is s 411(6) of the Corporations Act 2001 (Cth) ("the Act"). That subsection provides that the Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just.

The Primary Judge's Reasons 51 It was central to the learned primary judge's determination of the appeal against the rejection of the proof of debt that there are significant differences between proofs of debt for voting purposes and proofs of debt and claims for the purpose of entitlement to a distribution on a winding up. 52 His Honour observed at [59] that an estimate of value undertaken pursuant to reg 5.6.23 and any decision to admit or reject a proof will of necessity be of a summary nature. He referred in this respect to Selim v McGrath (2003) 177 FLR 85. 53 The learned primary judge also referred to Duffy v Super Centre Development Corporation Ltd [1967] 1 NSWR 382 in support of the proposition that the Court may intervene if it is demonstrated on an appeal from the Chairperson's decision that there has been a want of good faith, or some erroneous approach in law or in principle. 54 His Honour was mindful of the fact that even if an appeal against the Chairman's decision was a hearing de novo, he was not trying the issues raised by the Famularo Parties in their cross-claim in the Commercial List proceedings: see at [61]. 55 Nevertheless, the learned primary judge admitted affidavit evidence from Mr Famularo as to the proposed trading strategy which Mr Famularo said he could put in place following the demand for repayment made by Lift Partners. His Honour described this as the "lynch pin" of the claim by the Famularo Parties to be creditors of Lift Partners: see at [30]. 56 His Honour identified a number of difficulties with the proposition that the Famularo Parties would have put in place the suggested trading strategy. A number of significant difficulties were referred to at [38]. These included the fact that the strategy was not suggested to Lift Partners when the demand was made on 7 April 2008. Nor was it articulated as a basis of the cross-claim in the Commercial List proceeding. 57 Ultimately, the primary judge concluded that, even if the strategy was feasible, it was never proposed to the administrators and (at [45]): (i)t is hard to avoid the conclusion that much of the evidence (of the strategy) … was given with the benefit of hindsight. 58 The learned primary judge went on to say at [48] that the question was not whether Mr Famularo's strategy could have been followed but whether the steps which were taken to sell the securities and close out the options were unreasonable. 59 His Honour's analysis of this question was expressed in the light of the well established duties of a mortgagee exercising a power of sale. He considered that, assuming the demand of 7 April 2008 was valid, there were three difficulties with the proposition that it was unreasonable to exercise the powers as mortgagee "in the way that they were exercised". These were set out at [49] as follows: - It was not possible to put in place immediately the alternative strategy postulated by Mr Famularo. - At no time did Mr Famularo suggest to the Administrators that such a strategy was appropriate or even possible. - The strategy postulated by Mr Famularo runs counter to the strategy that he had applied over some 10 years of options trading; rather, the position of the Famularo Parties as at 7 April 2008 was consistent with strategy that Mr Famularo had adopted over that period of time. 60 The substance of his Honour's reasons for rejecting the appeals from the decision of Mr McGrath as Chairperson of the meetings was as follows: [62] I am not persuaded, on the balance of probabilities, on the material now before the Court, that the notice of demand of 7 April 2008 was invalid or unenforceable. I do not consider that the evidence justifies a conclusion that reliance by Lift Partners on the express provisions of the loan facility agreements was unconscionable. Nor am I persuaded, on the basis of the material before the Court, that the closing out of the sold call options by the Merrill Lynch Companies constituted a breach of duty by Lift Partners exercising powers as a mortgagee. Even if it was feasible for the Famularo Parties to have adopted the strategy explained by Mr Famularo, it was not a breach of duty by Lift Partners not to have put that strategy in place on or following 10 April 2008. [63] There was no error on the part of Mr McGrath in estimating the value of the claims made by the Famularo Parties at nil. It follows that the appeals should be dismissed. 61 The primary judge's reasons for rejecting the Famularo Parties' objection to the schemes were expressed in the following paragraph: [65] The Famularo Parties contend that they were denied the opportunity to vote in circumstances where their propounded claims would be released by the scheme. They say that, had they been afforded the opportunity to vote, the resolutions would not have been passed and, accordingly, the will of the meeting miscarried. For the reasons just indicated, I am not persuaded that the Famularo Parties are creditors of Lift Partners or Lift Nominees such that they were entitled to vote at the meetings. Their exclusion therefore is not a basis for withholding approval to the schemes, if approval would otherwise be given. 62 His Honour was satisfied that the meetings were convened in accordance with the orders made on 27 November 2009. Notably, his Honour observed that the schemes were passed by an "overwhelming majority" of creditors at each scheme meeting. The percentages ranged from approximately 93% in number and value to 100% in number and value at the trade creditors' meeting: see at [67]. 63 Earlier in his reasons, the learned primary judge referred to the fact that the schemes may bar any claim of the Famularo Parties against Merrill Lynch arising out of their dealings with Lift Partners. No point was taken at the second Court hearing that the scheme did not comply with s 411 because it included the release of claims against Merrill Lynch. Nevertheless, his Honour said that the release was relevant to the question of approval of the schemes. His Honour took this into account in the following paragraph: [29] … In considering whether or not to approve the schemes, it is necessary for the Court to have regard to the possible impact of their approval on any relevant party. However, I consider that the claims of the Famularo Parties against the Merrill Lynch companies are such of an ephemeral nature that it is difficult, on the material before the Court, to characterise them as being other than pure speculation. As against that speculation, there is the interest of the undoubted creditors of Lift Capital and Lift Nominees in sharing in the fund to be advanced by the Merrill Lynch Companies as consideration for the bar of the claims that creditors of Lift Capital and Lift Nominees may have against the Merrill Lynch Companies.

The Issues Arising on the Appeals 64 The orders made by the primary judge on the appeals against Mr McGrath's rejection of the proofs of debt would appear to be interlocutory so that leave to appeal is required: Federal Court of Australia Act 1976 (Cth) s 24(1A). 65 Nevertheless, no point was taken by the respondents as to the competency of those appeals, possibly because it was assumed that the essential issue raised on the appeals against the rejection of the proofs of debt is also raised on the appeals in relation to approval of the schemes. 66 It was not contended that the orders approving the schemes are interlocutory. We are therefore content to proceed on the basis that the appeals are competent, no suggestion having been made to the contrary. 67 There are two essential questions which arise on the appeals. The first is whether the learned primary judge was in error in failing to find that Mr McGrath erred in rejecting the Famularo Parties' proofs of debt or valuing them at zero. 68 The second question is whether his Honour ought to have refused to approve the schemes because the Famularo Parties were substantial creditors of Lift Partners and/or Lift Nominees. 69 In arguing the appeals, senior counsel for the Famularo Parties identified the following issues as bearing upon the determination of those questions: · first, whether the primary judge was in error in approaching the matter upon the basis that it was necessary for the Famularo Parties to demonstrate error in Mr McGrath's rejection of the proofs of debt as a summary exercise; · second, whether upon the proper construction of the loan facility agreements, it was open to Lift Partners to demand repayment of the loans at a time when Lift Partners had parted with possession of the shares and other securities in breach of trust; · third, whether, even if the Famularo Parties were in default under the loan facility agreements by failing to meet the demands, they were, nevertheless, creditors of Lift Partners by reason of the loss suffered by them on the sale or disposal of the shares and securities in breach of trust; · fourth, whether, assuming there was a breach of trust on the part of Lift Partners, it was incumbent upon the Famularo Parties to demonstrate that the disposal of the securities had caused them a loss; and · fifth, if the answer to the fourth issue is "yes", whether the Famularo Parties had established causation and loss. 70 Two further issues were raised by the Famularo Parties. The first was not pursued in oral argument. It related to a claim for discovery. The second was whether the Famularo Parties ought to be permitted to amend their notices of appeal to claim that the schemes of arrangement did not fall within s 411 of the Act because they provided for the release of claims against Merrill Lynch. This raised for consideration, amongst other things, the question of whether the Court ought to depart from the decision of the Full Court in Fowler v Lindholm (2009) 178 FCR 563.

The Nature of the Appeal Against Mr McGrath's Rejection of the Proofs of Debt 71 The nature of the appeal against Mr McGrath's rejection of the proofs of debt is critical to the determination of all of the issues that are raised in these proceedings. This is because it was fundamental to the position of the Famularo Parties in each of the proceedings before the primary judge that Mr McGrath was in error in rejecting the proofs of debt or, more precisely, in valuing them at zero. 72 The effect of the authorities to which we were taken is that the statutory scheme under which Mr McGrath decided to reject the proofs vested in him a discretion which will not be interfered with on an appeal to the Court unless it can be shown that he was in error. Where the dispute concerns a matter of professional judgment, ordinarily, proof of error will involve demonstrating that the decision was affected by bad faith or a mistake as to the facts or an erroneous approach to the law or an error of principle: Selim v McGrath at [36] - [38]; Rosseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) (2004) 50 ACSR 565 at [46] per Campbell J.

73 Importantly, for present purposes, those authorities indicate that the role of the Court on such an appeal is not to engage in a valuation of a claim as a valuation exercise in which the Court acts as a judicial valuer making its own just estimate of the value of the claims; cf Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath (2003) 47 ACSR 139 at [39] - [42] per Allsop J.

74 However, there are other authorities referred to by Finkelstein J, to which we were not taken in argument, which suggest that the appeal from the Chairperson may be a hearing de novo in which it is unnecessary to demonstrate error on the part of the Chair. We do not consider it necessary to decide that question because the primary judge admitted further evidence but found that it did not affect the correctness of the decision reached by Mr McGrath. For reasons stated later, we see no error in the primary judge's finding.

75 Accordingly, in the absence of full argument on the authorities discussed by Finkelstein J, we think it is preferable to leave open the question of the nature of the appeal. On either of the two views mentioned by Finkelstein J, the Famularo Parties' appeal from the primary judge fails. 76 The statutory scheme embodied in regs 5.6.23 and 5.6.26 of the Corporations Regulations was explained by Barrett J in Selim v McGrath at [88]ff. What is important for present purposes is his Honour's observation that the power to make a just estimate of the value of an unliquidated debt or claim under reg 5.6.23(2) and the power to admit or reject a proof under reg 5.6.26(1) are powers which are vested in the Chairperson; they "will, of necessity, be of a somewhat summary nature": Selim v McGrath at [103]. 77 The reason for this is explained by Barrett J in his discussion of the nature of the powers. As he pointed out at [93], the power under reg 5.6.26 is exercisable by the Chairperson of a meeting and cannot be exercised except in the context of the meeting. The same principle applies to the exercise of the power to make an estimate of the debt or claim. The power is different from that exercised by a liquidator in deciding whether to admit a debt for purposes of a distribution to creditors. His Honour continued by saying (at [103]): … the fact that it is a function that the legislation envisages only in relation to a meeting means that it will be undertaken, at the earliest, a short time before the time at which the meeting is to start. The situation is accordingly not one in which extensive debate and deliberation will be possible. As far as the regulation 5.6.26 function of admitting or rejecting is concerned, this is borne out by the fact that there is express provision acknowledging that the chairperson may be in doubt as to the correct course to take. In that instance, it is not expected that the chairperson will resolve the doubt. So too, it seems to me, regulation 5.6.23, in requiring a just estimate of value to be made, does not contemplate that the chairperson or administrator will undertake any detailed inquiry. He or she will do the best that can be done by reference to the factual material the claimant furnishes, viewed in the total context with which the decision-maker is dealing. If that material provides reasonable grounds, within that context, for ascribing a particular figure to the particular claim, the chairperson or administrator is no doubt expected to accept that position. If, on the other hand, there is little or no material from which a conclusion as to value can be drawn, a just estimate may be zero or perhaps the nominal amount of $1.00, assuming that admission is warranted at all. 78 Moreover, as Barrett J continued at [104], the reference to "particulars of the debt" in reg 5.6.23(1)(b) shows that it is necessary for a person claiming to be a creditor to show, at least at a prima facie level, the existence of the asserted debt or claim. Thus: (T)he person asserting creditor status must at least go to the extent of setting out facts or alleged facts which, viewed within the context of pre-existing knowledge of the person making a decision about the proof, are sufficient to warrant a finding that at least a claim exists in more than mere assertion. 79 As these passages from Barrett J's judgment make clear, the decision by the Chairperson is made by reference to the information and documents which the person claiming to be a creditor chooses to put before the decision-maker; see also at [123]. 80 It follows from those authorities that, even if the hearing before the primary judge on the appeals against Mr McGrath's decision was a hearing de novo, the scope for admission of further evidence was limited to the correctness of the Chairman's decision on the question of the Famularo Parties' eligibility to vote. The proceeding before the primary judge was not a trial of the Famularo Parties' cross-claim in the Commercial List. The primary judge correctly identified this and proceeded in accordance with the test stated in the authorities to which we have referred. 81 In any event, the primary judge gave the Famularo Parties an opportunity to adduce further evidence dealing with the decision to reject the proofs of debt and any defects in the decision. As his Honour noted at [60], the Famularo Parties adduced evidence addressing those matters. Importantly, his Honour rejected Mr Famularo's evidence of his investment strategy as tainted by hindsight. Accordingly, even if the hearing was a hearing de novo, the Famularo Parties failed on the evidence adduced at the new hearing: see Coal and Allied Operations Pty Limited v Australian Industrial Relations Commission (2000) 203 CLR 194 at [13]. 82 Thus, in order to succeed on the appeal on the authorities mentioned above, the Famularo Parties were required to demonstrate an error of principle (bad faith was not suggested) on the part of Mr McGrath in the exercise of his summary power as the Chairperson of the meetings. 83 Senior counsel for the Famularo Parties sought to meet this difficulty by contending that Mr McGrath failed to address the claim made against Lift Partners for breach of trust. This was said to be a sufficient basis for the Court to set aside the primary judge's decision to approve the schemes. For reasons set out below, we do not consider that any such error has been demonstrated. 84 Nor, as we have said, was any error shown in the findings made by the primary judge about the Famularo Parties' suggested investment strategy. For reasons stated below, there was no error in his Honour's findings of fact and, in any event, the investment strategy did not provide an answer to the essential question, namely the reasonableness of the steps taken to sell or close out the securities.

No Error in the Chairperson's Approach 85 We see no error in the approach adopted by Mr McGrath. He received, two days before the meeting, voluminous proofs of debt which contained, expressly or impliedly, assertions which could not be tested without careful and lengthy evaluation. If he were to admit the proofs and value them at the amount estimated by the Famularo Parties, they would carry sufficient votes to block the schemes. Yet the assertions were untested and put forward estimates of loss which were at odds with those that had been previously asserted. Mr McGrath relied upon legal advice which has not been shown to be wrong, and upon his own knowledge of the background to the claims. He was not bound to await the outcome of claims which can fairly be described as ephemeral or speculative. 86 In our view, the correct approach is to be found in a decision of the High Court of the Hong Kong Special Region in Re UDL Holdings Ltd [2000] HKCFI 1567. There, an issue arose as to the correctness of a decision as to a just estimate of a debt made in the context of eligibility to vote at a meeting of creditors to consider a scheme of arrangement. The facts were quite similar to the present case. The disputed creditor claimed to be a creditor of the scheme company in an amount of $343 million under parent company guarantees in respect of subcontract works in relation to an airport development. The claim was estimated at nil value and the disputed creditor was not permitted to vote at the meeting. 87 The judge at first instance, Le Pichon J, said at [40] - [41]: Nishimatsu's claims against the Company amount to over $343 million in the aggregate which it may or may not succeed in establishing. Their claims were rejected in whole for voting purposes. The evidence showed that specialist review and assessment of Nishimatsu's claims were taken before the claims were rejected by the chairman of the meeting. There is no evidence before the court to suggest mala fides on the part of the Company. In those circumstances, prima facie, it would not appear to be intrinsically unfair for a disputed creditor whose claims were valued at HK$0 not to be allowed to vote. Counsel for Nishimatsu accepted that Nishimatsu, being a disputed creditor, was not in a position to present a winding-up petition. What then is the justification for the disputed claim to be allowed in full for voting purposes? The Schemes are meant to stave off compulsory liquidation. If sanctioned, the winding-up petitions will proceed no further and fall to be dismissed. Assume the following scenario. A scheme has the support of the creditors of the Company whose debts are undisputed. There is a disputed claim, the value of which is sufficiently large to block the scheme. The disputed claim is valued at $0, an estimate made in good faith. If such disputed creditor has the right to vote for the full amount of his debt, he would be in a position to bring about the liquidation of the Company when, under the Companies legislation, he does not even have locus to present a winding-up petition. That cannot be right. 88 The decision of Le Pichon J was affirmed on appeal: see Re UDL Holdings Ltd [2000] HKCA 335. The following passage from the judgment of Seagroatt J at [36], is pertinent: How was Nishimatsu's potential debt to be valued? There was no admission of any part of it. Until the arbitration award, or any settlement of the claim, it would be impossible to determine any fixed amount to represent it. It may fail utterly. The counterclaim may succeed fully. It may fail in part with the counterclaim extinguishing part of the claim. It may succeed fully with the counterclaim failing. It would require a careful evaluation of the merits of claim and counterclaim to determine a range for its value. That would be an unrealistic course. In my view it would be impossible to give it any value for sensible purposes. In fact a nil value was attributed to it meaning that it had no voting rights. I do not see how there could be any different decision. The alternative would have made a nonsense of any idea of parity amongst the unsecured creditors giving a right to an unproved creditor (who may ultimately fail to prove a debt) which was possibly greater than that of a proven creditor. The decision was not only a bona fide decision. It was in my view the only patently equitable one. 89 The approach which was adopted in Re UDL Holdings Ltd is in accordance with the principle stated in the authorities referred to at [72] above. That approach illustrates the difficulties in going behind the decision of a Chair of a meeting and, in particular, the need to demonstrate an error of principle where the claim is bona fide disputed and involves a decision as to complex underlying factual assertions. 90 That was the difficulty which the Famularo Parties faced in seeking to challenge Mr McGrath's decision. In our view, nothing in their submissions as to the proper construction of the loan facility agreements or the claim for equitable damages arising from the breach of trust met the difficulties which they faced.

The Proper Construction of the Loan Facility Agreement: Concurrent Conditions or Independent Promises 91 The Famularo Parties submitted that upon the proper construction of the loan facility agreements, clauses 4.7 and 7.1 (or 7.2) were "concurrent" conditions so that it was not open to Lift Partners to give a notice demanding repayment of the loans within three days at a time when the securities were not available to them. 92 Senior counsel for the Famularo Parties called in aid other provisions of the loan facility agreements as well as their commercial purpose. He submitted that it was fundamental to the margin lending arrangements between the parties that the lender not be entitled to demand repayment of loans of over $300 million, on three days' notice, where the lender was not in a position to provide the borrowers with immediate access to the securities. This was said to be because it was obvious that the loans could not be repaid without the immediate sale of the securities by the borrowers. 93 The other clauses of the agreements on which senior counsel for the Famularo Parties relied included clause 6 which dealt with margin calls. Clause 6.4 provided for the borrower to sell part of the mortgaged property in the event of a margin call. This was said to support the proposition that the parties intended that the Famularo Parties would be permitted to have access to the securities to meet a demand for repayment. 94 It may be accepted that the effect of holding the promises in question to be independent of each other is to expose a party to the risk of having to perform the promise without any security for the performance of the other. Thus, a contract for sale of land will generally require conveyance of title and payment of the purchase price to take place concurrently. However, ultimately, the question of whether promises are independent or concurrent is one of construction of the contract: Peel E Treitel, The Law of Contract (12th ed, Street & Maxwell, London, 2007) pp 814 - 815. 95 The observations of Mason CJ in Foran v Wight (1989) 168 CLR 385 at 408 as to the limitations on the exercise of a power to terminate a contract do not deal with a contractual power expressed in clear categorical terms: Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd (2009) 178 FCR 57 at [52] - [55]. 96 There are three fundamental flaws in the argument of the Famularo Parties. The first is as to the construction of the loan facility agreements. The second and third are as to critical questions of fact. 97 Clause 7.1 was not applicable because the Famularo Parties had a floating rate loan. Clause 7.2 was the applicable provision. It permitted the Famularo Parties to sell the relevant loan securities provided two conditions were satisfied. These were, that the lender's prior consent to the sale be obtained, and that the borrower repay from the proceeds, at least enough to ensure that after the sale the facility amount outstanding was not more than the security value of the portfolio. 98 These clauses expose the flaw in the Famularo Parties' submission because they demonstrate that the borrower may not be able to satisfy the conditions stated in cl 7.2 when the lender makes demand under cl 4.7: the lender is not obliged to give its consent to a sale under cl 7.2. It must follow that the provisions of clauses 4.7 and 7.2 are not concurrent conditions. 99 In any event, the proposition that the lender must make the securities available immediately upon giving the demand is contrary to ordinary commercial principles under which the lender would be obliged to make the securities available to the borrower only at the time of settlement of the sale of the securities, and then, in the present case, only if the conditions in cl 7.2 are satisfied. 100 The second flaw in the submissions is that upon receipt of the demand from Lift Partners, the Famularo Parties did not seek the consent of Lift Partners to sell any of the securities. This is a fatal flaw in the Famularo Parties' submission because, even if the construction for which they contend is correct, Lift Partner's breach of trust was without consequence. 101 Indeed, the failure of the Famularo Parties to take any step to seek the consent of Lift Partners to sell the securities, or to request Lift Partners, or the administrators, to give them an extension of time to meet the demand exposes the absence of legal and commercial reality in their claims. 102 Moreover, Mr Famularo was not aware that the shares or other securities purchased by the Famularo Parties had been transferred by Lift Partners to Merrill Lynch, and there was evidence which established that during the period up to 7 April 2008 the Famularo Parties were able to sell, and did sell, securities that had been transferred by the Lift companies to Merrill Lynch. 103 It follows, in our view, that there is nothing to suggest that Merrill Lynch would not have made the securities available to meet a settlement of any sale of securities undertaken by the Famularo Parties, so long as the conditions of cl 7.2 were satisfied.

Breach of Trust 104 Central to the submissions of the Famularo Parties was the proposition that Lift Partners was in breach of trust when it gave notice under cl 4.7 and when it permitted the securities to be sold or realised. Senior counsel for the Famularo Parties relied upon the principle that the obligation of a defaulting trustee is to effect restitution of the trust estate. This would require the trustee to restore the trust assets or pay compensation for the loss suffered by the breach of trust: Maguire v Makaronis (1997) 188 CLR 449 at 469 - 470. 105 The principle stated in Maguire v Makaronis is well settled but we do not think it assists the Famularo Parties in these proceedings. 106 This is because, even if it be accepted that the transfer of the securities from Lift Partners to Merrill Lynch constituted a breach of trust, the powers and duties of Lift Partners as a fiduciary fell to be considered under the terms of the contractual relationship which provided the foundation for the erection of fiduciary duties: see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97. 107 As Mason J said in Hospital Products at 97, if a fiduciary relationship is to exist between parties to a contract, the fiduciary relationship must conform to the terms of the contract; the fiduciary relationship cannot be superimposed on the contract in such a way as to alter the operation which the contract was intended to have according to its true construction: see generally the discussion of the authorities in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 at [276] - [281]. 108 It is not sufficient merely to describe Lift Partners as a fiduciary. The scope of the fiduciary duties, if any, will vary and be determined by the nature of the relationship and the facts of the particular case: Hospital Products at 69 per Gibbs CJ, at 102 per Mason J. 109 The submissions made on behalf of the Famularo Parties proceeded upon the basis that the assertion that Lift Partners occupied a fiduciary capacity was a complete statement of its claim to which there could be no answer. 110 We reject those submissions, which in our view fail to recognise that any claim for damages which the Famularo Parties may have is founded in the contractual terms of the loan facility agreements to which any fiduciary obligations of Lift Partners must conform. 111 The substance of the loan facility agreements was to provide for a margin lending facility under which Lift Partners would advance 100% of the purchase price of shares to be acquired by the Famularo Parties. The terms of the contractual relationship embodied in those agreements included a requirement that the shares, as well as the put options and sold call options, be mortgaged to Lift Partners as security for the loans. 112 The security arrangements constituted by the agreements were described by Barrett J in Lift Capital Partners v Merrill Lynch International at [31]ff. His Honour observed at [32] that what was created was an equitable mortgage of the shares. He went on to say: The clear intention manifested by the terms and conditions is that mortgaged shares would, from the outset, be held in the name of Lift Nominees, but for the benefit of the client mortgagor (subject, of course, to the mortgage to Lift Capital) and with dividends, voting rights and other ongoing incidents of ownership being assured to the client mortgagor. It was made clear by clause 11.2(c) that Lift Nominees would hold mortgaged shares on behalf of the client, but "in accordance with this Agreement". It follows that shares actually registered in the name of Nominees must be taken to have been beneficially owned by the client mortgagor, subject to the security interest of Lift Capital as mortgagee and subject also to the ability of Lift Capital as mortgagee to deal with the shares in ways validly and effectually provided for by the facility agreement. 113 It follows that the rights and obligations of the Famularo Parties fell to be considered upon the basis that Lift Partners (or Merrill Lynch acting on its behalf) sold the shares as mortgagee exercising a power of sale under the terms of the loan facility agreements. 114 The Famularo Parties were in default on 10 April 2008 when they failed to meet the demands given to them under cl 4.7. Clause 5.2 authorised Lift Partners to exercise its rights as mortgagee to sell, appropriate or otherwise deal with the mortgaged property. Clause 44.2 authorised Lift Partners to close out the open positions in relation to the sold call options. 115 The learned primary judge dealt with the matter upon the basis that the question was whether Lift Partners as mortgagee failed to take reasonable steps to obtain a reasonable price. In our view, it follows from the authorities mentioned above that this was the correct test. 116 Moreover, we can see no error in the findings made by the primary judge as to the reasonableness of the steps that were taken. The effect of his Honour's findings, which were all findings of fact that were open to him, was that the mortgagee was not bound to carry out the investment strategy suggested by the Famularo Parties, even if it was reasonable and achievable. Indeed, it is difficult to see that any other finding was open, or how the failure to follow that strategy was unreasonable. 117 His Honour specifically found at [62] that the closing out of the sold call options was not a breach of duty by Lift Partners. It is difficult to see how any other conclusion could be reached. The effect of the submissions made by the Famularo Parties was that Lift Partners, as mortgagee, was required to take speculative positions in the options market to comply with its duties under the facility agreements. That proposition cannot be accepted. 118 Nor can we see any error in the primary judge's finding that reliance by Lift Partners on the express provisions of the loan facility agreement was unconscionable. 119 The substance of the Famularo Parties' submission on that issue was that it was unconscionable for Lift Partners to insist on repayment on three days' notice: see Legione v Hateley (1983) 152 CLR 406 at 444. However, here the parties to the loan facility agreements were corporations borrowing on margin loans and were engaged in sophisticated trading in shares and options. Both the borrower and the lender had substantial exposure to the market. There was no reason suggested as to why Lift Partners was not entitled to rely on the express provision entitling it to call the loans on three days' notice, other than the proposition that the loan could not be called because Lift Partners had parted with possession of the securities. For reasons stated above, we reject that proposition. 120 The submission put on behalf of the Famularo Parties steadfastly ignores the commercial and legal reality that their interest in the securities purchased with the money borrowed from Lift Partners was limited to the equity of redemption, and that, not unsurprisingly, the party whose money had been used to acquire the securities was entitled to exercise its rights to recover its loan. 121 The Famularo Parties did not seek to exercise their equity of redemption in respect of the securities: Lift Partners' breach of trust was, therefore, quite irrelevant to the non-exercise of the rights of the Famularo Parties in respect of the securities acquired with the funds borrowed from Lift Partners under the loan facility agreement. Lift Partners enjoyed rights under the loan facility agreement in respect of the shares in order to recover its loan: these rights were not forfeited in the eye of equity by reason of the breach of trust to which Lift Partners was a party. And contrary to the submission put on behalf of the Famularo Parties, the evidence of Messrs McGrath and Hayes was to the effect that, had Lift Nominees still held the securities, they would have been realised in substantially the same way as they were realised by Merrill Lynch.

No Loss 122 The Famularo Parties submitted that it was not disputed that the securities were transferred by Lift Partners to Merrill Lynch in breach of trust. They also submitted that Merrill Lynch sold the securities in breach of trust and the result of the sale, and closing out of the options, was a loss of $27 million. They said that this was sufficient to satisfy the causal nexus between the breach of trust and the loss. 123 Fundamental to this submission was the proposition that was said to flow from Maguire v Makaronis, that it was for Lift Partners, as the defaulting trustee, to establish that the actions taken by it, or by Merrill Lynch, did not cause the loss. 124 We do not accept that submission. In our view it is not supported by the authorities. It is true as Street J said in Re Dawson [1966] 2 NSWR 211 at 216 that the obligation upon a defaulting trustee to make restitution is of a more absolute nature than the common law obligation to pay damages for breach of contract or tort; see also Hagan v Waterhouse (1994) 34 NSWLR 308 at 346. 125 But as the High Court has observed, citing remarks made in an English authority, "(t)here is no equitable by-pass to the need to establish causation" and "in questions of causation it is important to focus on the relevant equitable duty": Youyang Pty Limited v Minter Ellison (2003) 212 CLR 484 at [44]. 126 What the Famularo Parties' submissions failed to address was how the breach of trust constituted by transfer of the securities from Lift Partners to Merrill Lynch caused any loss to the Famularo Parties in circumstances where Lift Partners was entitled to exercise its power of sale as mortgagee. 127 In any event, the equity of the Famularo Parties to have Lift Partners restore the trust assets was conditional upon the mortgagors repaying the principal and interest that was due under the loans: Maguire v Makaronis at 474 - 475. 128 As with the flaw in the breach of contract claim, the failure of the Famularo Parties to take any steps to seek to sell the shares or deal with the options is fatal to the claim of breach of trust because it shows the absence of a causal link. 129 The position is, as was stated in the letter of advice to Mr McGrath, that even if Lift Partners was in breach of trust, the Famularo Parties were unable to demonstrate any loss resulting from the breach. Mr McGrath did not err in this regard. 130 Moreover, there was evidence before the primary judge which, in our opinion, demonstrated that even if Lift Partners was bound to establish the absence of any loss, that onus was discharged. The effect of the liquidators' evidence was that if they had exercised the power of sale, they would have sold the shares and closed out the options in a similar manner to the process adopted by Merrill Lynch. It is unnecessary to set out the passages from the transcript but they are to be found at T1056 and T1089. 131 It is true that Mr McGrath and Mr Hayes acknowledged that they would have acted on the advice of experts in dealing with the large share portfolio and, in particular, with the open call option positions. But that evidence was not in conflict with the overall thrust of their evidence that they would have adopted a similar approach to Merrill Lynch with much the same result. 132 We reject the submission made on behalf of the Famularo Parties that it was for Mr McGrath and Mr Hayes to call evidence to prove that the steps taken to dispose of the securities were reasonable. There was sufficient evidence of the reasonableness of their conduct in the passages of the transcript to which we have referred. It was for the Famularo Parties to adduce evidence that the sale and closing out of the securities was unreasonable. They did not do so. 133 The evidence of Mr Famularo's investment strategy did not address the issue of whether it was unreasonable for Lift Partners (or Merrill Lynch) to have sold the shares and put options and close out the call options. It was no more than evidence of another course that might have been adopted. 134 In any event, there is no error in the learned primary judge's rejection of the evidence of the suggested investment strategy. It was plainly informed by hindsight, which included an ability to predict the peak in the market for BHP shares after the fact. As his Honour found, it could not have been put in place immediately. Indeed, the evidence suggests that it could not have been put in place at all because of the need to provide replacement security for the $81 million that had been deposited with the Clearing House.

Discovery 135 This was referred to in the written submissions. However, the submissions stated that the point would be developed in oral argument. It was not.

Fowler v Lindholm 136 There is a short answer to the contention that this Court should depart from the Full Court's decision in Fowler v Lindholm. The contention relies upon the decision of a differently constituted Full Court in City of Swan v Lehman Brothers Australia Ltd (2009) 179 FCR 243 ("City of Swan"). However in Lehman Brothers Holdings Inc v City of Swan (2010) 84 ALJR 275 at [54] and [73], the High Court did not endorse the criticisms made by the Full Court in City of Swan of the earlier decision of the Full Court in Fowler v Lindholm. 137 But even if it were open to us to reconsider the correctness of Fowler v Lindholm, there are a number of reasons why, in the exercise of our discretion we would decline to do so. 138 Less than two days before the hearing of the appeal, the Famularo parties gave notice of their intention to seek the leave of the Court to amend their Notice of Appeal to raise the contention that the scheme of arrangement was invalid for the reason that, because it contained provisions relating to Merrill Lynch other than in its capacity as a creditor of the Lift Companies, the scheme was not an arrangement or compromise between the companies and their creditors within s 411(1) of the Act. 139 It was acknowledged on behalf of the Famularo parties that this contention is contrary to the decision of this Court in Fowler v Lindholm. The respondents and Merrill Lynch opposed the grant of leave to amend the Notice of Appeal. 140 On behalf of the Famularo parties it was submitted that this Court should exercise its discretion in favour of the grant of leave because the contention sought to be raised involves a question of law in relation to which no evidence could have been adduced in answer by the respondents. Accordingly, the interests of justice are said to warrant the grant of leave to enable the question of the validity of the scheme to be resolved on its merits. There are compelling reasons to reject this submission. 141 First, this is not a case in which an issue of law was simply overlooked by the parties and the primary judge. At the first hearing under s 411(1) of the Act, counsel who then appeared for the Famularo parties indicated that he intended to raise the contention. The learned primary judge suggested that if this contention was to be raised by the Famularo parties, a more appropriate occasion would be the application for final approval of the scheme under s 411(4)(b) of the Act. On that occasion the Famularo parties were represented by different counsel and the contention was not advanced by them. It is said that the failure to raise the contention on that occasion was not the result of a deliberate decision by those counsel, but viewed objectively in all the circumstances of the case, the Famularo parties can be taken to have abandoned the contention foreshadowed by them at the earlier hearing. 142 Secondly, the contention sought to be agitated by the amendment affects the public interest in the proper interpretation of an important provision of the Act. It is a matter in relation to which the Australian Securities and Investments Commission ("ASIC") could be expected to seek to make submissions to assist the Court pursuant to ASIC's entitlement under s 1330 of the Act. As a result of the course taken at first instance, ASIC was not afforded the opportunity to be heard on the issue by the learned primary judge. And as a result of the lateness of the attempt to take the point by amendment to the Notice of Appeal, foreshadowed for the first time on the eve of the hearing of the appeal, ASIC could have been afforded the opportunity to be heard only if the hearing of the appeal was adjourned for that purpose. That would have been unfair to the creditors of the Lift Companies who voted overwhelmingly in favour of the scheme motivated no doubt in large part by the assurance of prompt payment given in the scheme papers. 143 Thirdly, for the reasons given above the claim of the Famularo parties to be creditors of the Lift Companies is unconvincing. Their interest in challenging the validity of the schemes of arrangement is commensurately exiguous. In these circumstances, their claim to the favourable exercise of the Court's discretion in the interests of justice is not compelling. 144 Fourthly, the appeal to the interests of justice affords little support to the favourable exercise of the discretion to permit the amendment when the contention sought to be agitated may be raised only if this Court were to conclude that its recent decision in Fowler v Lindholm is clearly wrong. In Fowler v Lindholm at [57] - [69] this Court gave careful consideration to the argument that, when s 411(1) of the Act speaks of a compromise or arrangement between a company and its creditors, it is not speaking of a compromise or arrangement which is also apt incidentally to alter the legal relationships between creditors of the company. In rejecting this argument the Court said at [66] - [69]: [66] Doubtless there are limitations on the extent to which a scheme of arrangement purporting to be between a company and its creditors or a class of its creditors can purport to affect the property of the creditor that has no connection with the company or with the relationship between the creditor and the company as creditor and debtor. The mere fact that a person or entity is a creditor of a company would not, of itself, justify an arrangement between that person or entity on the one hand and the company on the other whereby property of the person or entity were confiscated without any benefit to the person or entity. Such an arrangement would not be approved by the Court pursuant to s 411(4)(b). [67] A purported scheme of arrangement must involve some arrangement in a sense that is to be construed liberally. No narrow interpretation should be given to the expressions "compromise" or "arrangement". An arrangement within the meaning of s 411 connotes some element of give and take. A proposal that conferred no benefit on creditors and constituted the mere confiscation of interests would not be an arrangement within the meaning of s 411. An arrangement must involve some bargain giving benefit to both sides. However, there is no reason to construe the term in s 411 as restricting in any way the nature of the bargain that might be made between company and creditors (Re Sonodyne International Ltd (1994) 15 ACSR 494 at 497-498), subject only to the additional requirement that the arrangement must be within the power of the company and not in contravention of the Corporations Act. [68] A scheme of arrangement between a company and its creditors or a class of creditors is no more than a proposal to vary or modify the company's obligations in relation to its debts and liabilities owed to the creditors or class of creditors. There is nothing to prevent the company from posing, as part of the arrangement, a term to the effect that, in consideration of what the company has provided under the scheme, the creditors will discharge not only the debts and liabilities of the company, but also the liabilities of, for example, sureties for the same debts and liabilities of the company. [69] It is permissible to incorporate in a scheme of arrangement an involvement or participation by an outsider, being a person or entity who is not a party to the scheme as a company or creditor (see Re Glendale Land Development Ltd (in liq) (1982) 7 ACLR 171). Such arrangements are commonplace in relation to schemes involving takeovers. A scheme of arrangement made between a company and its creditors under s 411 binds only the company and the creditors. Nevertheless, there is no reason why a bargain might not be struck between a company and creditors whereby the creditors are bound to enter into an arrangement with third parties. So long as there is some element of give and take, such that the creditors receive something in return for the benefit conferred on a third party, there is no reason in principle why that term could not be part of a scheme of arrangement as contemplated by s 411. 145 We are respectfully unable to accept the contention that these views are clearly wrong. We are fortified in our scepticism in this regard by the views of the Court of Appeal of England and Wales in Re Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161 at [45] - [55] which agreed with the reasons of the Full Court in Fowler v Lindholm. 146 For these reasons the application for leave to amend the Notice of Appeal should not be granted. 147 The Famularo parties also argued that they were entitled to agitate this contention in the absence of amendment to the Notice of Appeal because this contention was open to them on the existing Notice of Appeal: it relevantly asserted that the learned primary judge was in error in approving the scheme. But the existing ground of appeal, while apt to give notice of arguments to the effect that the discretion conferred by s 411(1)(b) of the Act should not have been exercised because, for example, it was unfair, was distinctly not apt to alert the other parties to the contention that the scheme was one which could not be approved under s 411(4)(b) of the Act because it was not within the scope of s 411 at all. We cannot entertain the contention.

Fairness of the Schemes 148 The substance of the Famularo Parties' submission as to the fairness of the schemes was that the schemes were unfair because they had been wrongly excluded from voting. For reasons given above, that submission must be rejected. 149 The Famularo Parties also submitted that the schemes were unfair or oppressive because they were denied the opportunity of establishing their claims by curial process and that the primary judge's reasons avoided the trial of the issue in the Commercial List proceedings. The fallacy in this argument is that the same is true for all former clients of the Lift companies. 150 The Explanatory Statement for the schemes makes it clear that the schemes will result in a settlement of all claims between Lift Clients, the Lift Companies and Merrill Lynch. It also makes it clear that those claims include causes of action which might otherwise have been pursued for breaches of contract or breaches of trust in transferring mortgaged securities to Merrill Lynch. In return, Merrill Lynch will make a substantial cash payment to the Lift Companies which will enure for the benefit of the creditors. There is no reason to doubt that the overwhelming support of creditors for the schemes reflects a sound appreciation of the commercial realities of the situation. 151 The schemes therefore meet the test of fairness to the body of creditors as a whole; the test is not fairness to a particular creditor in the peculiar circumstances of its case: Re Grierson Oldham & Adams Limited [1968] Ch 17 at 32 per Plowman J; see also Re Allied Queensland Coalfields Ltd; Super John Pty Ltd v Marsford Investments Pte Ltd (1997) 23 ACSR 427 at 429 per Emmett J; and Re Elders Australia Ltd; Super John Pty Ltd v Futuris Rural Pty Ltd (1997) 25 ACSR 130 at 137 - 138 per ML Foster J dealing with compulsory acquisitions of shares.

Conclusion and Orders 152 The appeals must be dismissed with costs. I certify that the preceding one hundred and fifty-two (152) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justice Jacobson.

AND: LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500

LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) ACN 112 913 532

ANTHONY GREGORY MCGRATH IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS

JOSEPH DAVID HAYES IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS

AND: LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500

AND: LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500

LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) ACN 112 913 532

REASONS FOR JUDGMENT FINKELSTEIN J 153 I am indebted to the Chief Justice and Jacobson J for their detailed judgment, a judgment with which I am in full agreement. 154 I wish to make some observations regarding the nature of an appeal under reg 5.6.26(3) of the Corporations Regulations. It is unfortunate that this issue, which is an issue of considerable importance, was not fully argued. Still, it might be useful were I to express my view on the operation of the regulation. 155 The word 'appeal' has a chameleonic quality. Like many words its meaning depends on the context in which it is used. When a right of appeal is given from a particular decision, the appeal may bear one or other of the following characteristics: (1) it might be an appeal in the strict sense, requiring the finding of error based only on the material before the decision-maker; or (2) it might be an appeal in the nature of a rehearing, where it is necessary to show error but the appeal tribunal can try the case with new evidence; or (3) it might be a hearing de novo where all the issues are looked at afresh. 156 According to reg 5.6.26 the decision of a chairperson regarding voting entitlements may be 'appealed' to a court. While there have been many such appeals, the meaning of the word has not, at least directly, been considered. It is necessary to give that word its proper meaning. I propose to begin by looking at analogous cases. 157 It is convenient to look first at the position in England where the rules for voting by creditors are strikingly similar to those under the Corporations Regulations. Rule 4.70 of the Insolvency Rules 1986 (UK) provides that: (1) At any creditors' meeting the chairman has power to admit or reject a creditor's proof for the purpose of his entitlement to vote; and the power is exercisable with respect to the whole or any part of the proof. (2) The chairman's decision under this Rule, or in respect of any matter arising under Rule 4.67, is subject to appeal to the court by any creditor or contributory. (3) If the chairman is in doubt whether a proof should be admitted or rejected, he shall mark it as objected to and allow the creditor to vote, subject to his vote being subsequently declared invalid if the objection to the proof is sustained. (4) If on an appeal the chairman's decision is reversed or varied, or a creditor's vote is declared invalid, the court may order that another meeting be summoned, or make such other order as it thinks just. 158 The trend of modern authority in England is that an appeal under rule 4.70(2) is in the nature of a hearing de novo. The cases include Re a debtor (No 222 of 1990); ex parte Bank of Ireland [1992] BCLC 137; Re a Company (No 004539 of 1993) [1995] 1 BCLC 459; Re Philip Alexander Securities and Futures Ltd [1999] 1 BCLC 124; Re ASSICO Engineering Ltd [2002] BCC 481. 159 A recent case is Power v Petrus Estates Ltd [2008] EWHC 2607 (Ch); [2009] 1 BCLC 250. There Lewison J said (at BCLC 254-255) that the intention of rule 4.70 is to establish a simple procedure for dealing with proofs of debts for voting purposes, so as to facilitate a streamlined process for meetings to be held. In cases where the claim was neither plainly good nor bad, but there was a question or some doubt about the claim, the chairperson is required to admit the claim but mark it as objected. He observed (at 256) that the rule contemplates a quick decision by the chairman, with the possibility of a more leisurely examination of the objection to the proof by the court. For that reason, the court is not confined to considering material before the chairman. 160 Interestingly, Lewison J said that the creditor's claim is to be assessed as at the date of the meeting, so evidence regarding events subsequent to the meeting is irrelevant (at 256-257). It is not entirely clear why, in the case of an appeal which he held to be a rehearing, a court should limit itself to material that came into existence before a certain date. For my own part, I would not impose such a limitation. There seems to be nothing in the relevant regulation that requires that conclusion. And, to apply it could produce an unreasonable, if not unjust, result. 161 The second analogous context is meetings of creditors of a bankrupt estate. The Bankruptcy Act 1966 (Cth) provides that at such a meeting the trustee in bankruptcy is to determine questions relating to the entitlement of a person to vote: s 64ZA(8). There is no specific right to appeal a trustee's decision. It is, however, well-established that a court may review the decision under the general provisions that permit the supervision of bankruptcy proceedings: Forshaw v Thompson (1992) 35 FCR 329. 162 In Re Dingle; Westpac Banking Corporation v Worrell (1993) 119 ALR 265, the Full Federal Court considered the nature of such a review. It emphasised that the power of review is discretionary, and that the court is generally reluctant to interfere with the processes of holding a meeting and implementing its outcomes (at 272). Accordingly, when the complaint is that a person has been erroneously excluded from voting, the court should only intervene if two things are established. First, the excluded person is, in fact, a creditor - it is not enough to show that there is an arguable case for being a creditor (at 273). Second, it must be shown that the excluded creditor's vote would have affected the fate of the meeting proposal. Given its task of finally determining a creditor's status, the court is entitled to take into account all the material placed before it, and is not bound to limit itself to the material before the trustee (at 272). 163 Turning now to the cases which have considered appeals under reg 5.6.26, it is immediately apparent that they have adopted a variety of approaches as regards the nature of the proceeding. 164 One of the earliest cases is Re Oriel Homes Pty Ltd [1998] 1 Qd R 652. The company was in administration. At the first meeting of creditors a resolution was put that the administrator be removed. The respondent claimed to be a creditor and entitled to vote. Its proof of debt was entirely rejected. Thereafter the administrator brought action seeking a declaration that the respondent was not a creditor and not entitled to vote at the meeting. Thomas J found that the respondent was a creditor but in view of the uncertainty surrounding its claim, should have had the value of its claim assessed at $1.00. In the course of his reasons, Thomas J observed (at 654): Under reg. 5.6.26(1) the power to admit includes the power to admit in part. If the position is clear, the chairperson should make a just estimate of the value of the debt. If, however, he or she is in genuine doubt, the claim must be allowed at the amount that the creditor has claimed and should thereupon be marked as "objected to". The creditor should then be allowed to vote at that value. Any error, and any effect that the error may have on the result, may be corrected in due course by an appeal to the Court under reg. 5.6.26(3). It is unclear, and perhaps doubtful, whether Thomas J considered that on an appeal the court could only take into account material before the chairperson. Interesting, although Thomas J found the respondent to be a contingent creditor, he did not rule on the value of its claim for voting purposes. Perhaps this was because, even if allowed in full as claimed, it would not have affected the result of the vote. 165 Vincent, White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93 also concerned a company in voluntary administration. A creditor claimed a debt of $1.4 m. At the second meeting of creditors, its claim for voting purposes was assessed at $422,577. This decision was challenged. It was not clear whether the challenge was brought by way of appeal, under s 1321 of the Corporations Act, by an action for a declaration or some other process. The judge, Hodgson CJ in Eq, said that the normal procedure to be followed by a person wishing to challenge a chairman's decision on voting rights would be to appeal the chairman's decision. He did not, however, rule out other grounds of attack. 166 Hodgson CJ in Eq said that when an appeal is brought from such a decision the approach taken in Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 is the applicable approach. There Street CJ in Eq said that the ultimate question was whether the decision "has such importance, and can be seen to have such defects, as to justify the court exercising its supervisory power". Hodgson CJ in Eq then said that an appeal under both s 1321 and reg 5.6.26(3) focuses on the action of the decision-maker. Since the court is asked to reverse or modify that decision, the court should have regard to the material available to the decision-maker. However, Hodgson CJ in Eq, did not suggest that the court was restricted to that material. On the contrary he said (at 100) "there may be cases where the importance and defects of the [decision-maker's] action should be permitted to be demonstrated by material not available to the [decision-maker]." 167 In the case itself, Hodgson CJ in Eq did consider evidence not before the chairperson. While doing so his Honour emphasised that a finding on appeal under reg 5.6.26 did not require the final determination of the existence and value of a contested debt. In that regard (at 102) he distinguished decisions (some referred to above) made under analogous bankruptcy provisions. 168 A number of observations can be made about that approach. First, it is doubtful whether the decision in Re Mineral Securities Australia Ltd and, for that matter, Duffy v Super Center Development Corporation [1967] 1 NSWR 382, provide any assistance on the meaning of reg 5.6.26(3). Both involved a challenge to the exercise of a power of sale, in one case by a receiver and in the other by an official liquidator. No doubt, and quite correctly, a court will be reluctant to interfere with the exercise of a commercial decision in the absence of evidence of bad faith or the like. This seems to have little to do with assessing whether a person is a creditor and whether his claimed debt has been justly assessed. In Westpac Banking Corp v Totterdell (1998) 29 ACSR 448, 455, which was an appeal from the rejection of a proof of debt for distribution purposes, the Court of Appeal of Western Australia considered that there was no need for judicial reticence where the liquidator's decision was made in a quasi-judicial capacity, citing Tanning Research Laboratories Inc v O'Brien (1991) 169 CLR 332 at 338-339. I favour that approach to a decision of the chairperson of a meeting. There must ultimately be a single correct answer to the questions whether a person is a creditor and entitled to vote and for what amount - the fact that those questions are to be summarily determined in the first instance by the chairperson does not alter that. 169 The second observation about Vincent, White & Associates v Vouris concerns the proposition that the evidence which can be considered on an appeal can vary depending on whether the relevant decision has such importance or has such defects so as to warrant new evidence being considered. This approach seems to assume there are the different types of appeal under reg 5.6.26(3). This is not consistent with Coal and Allied Operations Pty Ltd v AIRC (2000) 203 CLR 194. There the legislation under consideration conferred a right of appeal to the Australian Industrial Relations Commission from a variety of different decisions. The Full Federal Court had held that the appeal provision was intended to create different types of appeal with differing characteristics dependent upon the nature of the decision appealed. This approach was rejected by the majority of the High Court (Gleeson CJ, Gaudron and Hayne JJ), who observed (at [18]) that the nature of the appeal under the relevant provision did not differ according to the nature of the decision under appeal. 170 Most of the cases since Vincent, White & Associates v Vouris have implicitly treated an appeal under reg 5.6.26(3) as an appeal in the strict sense. The leading case, which conveniently summarises most of the earlier authorities, is Selim v McGrath (2003) 47 ACSR 537. The inquiry that was undertaken by the judge, Barrett J, was to investigate whether the chair had made a correct decision. The material examined for that purpose was the material that the putative creditor had produced to the chairperson. The cases have also permitted reference to surrounding facts known to the chairperson. Spiteri v Lindholm [2003] VSC 42 is an example. 171 In other words, according to these cases, the question on appeal is whether the chairperson erred in his or her decision regarding the right to vote or the value of the creditor's claim for voting purposes. However, none of the cases has considered directly the nature of the appeal under reg 5.6.26(3). In fairness, many were concerned with the (potentially confusing) interaction between reg 5.6.23 and reg 5.6.26. 172 It is not, to my mind, immediately apparent why an appeal under reg 5.6.26(3) should be regarded as an appeal in the strict sense. One possible explanation is that courts are mindful of the speed with which voting disputes must be resolved: see, for example, the discussion by Barrett J in Selim at ACSR 557-558 regarding the application of regulations to the expedited nature of the Part 5.3A process. On this view, it might be reasoned that the objectives of Part 5.3A would be subverted if appeals under reg 5.6.26(3) were based on new material and required final resolution of rights which, if undertaken, would hold up the process. But, in the end, one can only speculate about the rationale for the assumption of a strict appeal in Selim and like cases. 173 As I noted at the outset, the nature of the appeal under reg 5.6.26(3) is ultimately a matter of construction. The starting point is, I think, that an appeal under reg 5.3.26(3) may be brought against different types of decisions. An appeal lies from a decision to accept, partially accept or reject a proof, or from a 'just estimate' of the value of a claim. The nature of the appeal (ie whether it is an appeal in the strict sense, a hearing de novo or something else) will not vary depending on the type of decision. By the same logic, the nature of the appeal - whatever it might be - must be the same regardless of the 'importance of or the nature of defects' in the chairperson's decision, or the provisions of the Corporations Act under which the relevant meeting is convened (for example, under s 439A or s 411). 174 In determining the nature of the appeal, reg 5.6.26(2) is of some importance. That regulation provides that if the chairperson is in doubt about whether to admit a proof, the chairperson should mark the proof as objected to and allow the putative creditor to vote, "subject to the vote being declared invalid if the objection is sustained" (emphasis added). The reference to the objection being sustained no doubt assumes a decision on an appeal under reg 5.6.26(3). The language "the objection is sustained" seems to speak of a fresh consideration of the issue. 175 This is not surprising. A chairperson's decision is only a temporary ruling, made in a summary manner, often based on limited evidence. Further evidence may come to light which was not available at the time of the meeting. While there are doubtless good practical reasons for streamlining the chairperson's assessments of voting entitlements, it must always be remembered that the decision potentially has important consequences for substantive rights. A good example is a scheme of arrangement (like the one in the present case) which provides for the release of creditor's claims against third parties. Given the limitations of the manner in which a chairperson assesses voting entitlements, and given the potential importance of this decision, this rather suggests that new evidence should be permitted on the appeal and that the matter should be considered afresh. 176 I consider that an appeal under reg 5.6.26(3) is a hearing de novo. I am, I must confess, influenced by the English authorities to which I have referred. 177 Finally I should say that, unlike the position adopted in the bankruptcy cases, in my view the appeal court need not always make a final determination of all issues. Appeals under reg 5.6.26(3) must be brought within 10 business days of the decision. The assumption here is that the appeal will be determined relatively quickly. Yet, it may take considerable time to resolve issues finally, which would delay the outcomes of meetings being implemented. In some cases, it will therefore be appropriate for the court to decline to finally rule on the status and quantum of a claim. These considerations are particularly important where there is an appeal in respect of the 'just estimate' of a claim. The evident intent of the 'just estimate' procedure is to establish a summary procedure which bypasses, for the purposes of allowing a vote to proceed, the need to finally quantify the value of debts whose value may be inherently uncertain. That process might be undermined if a putative creditor could, on appeal, insist on having his claim finally valued. An appeal court may be justified in only making a 'just estimate' without more. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.