17.3. If the Lender or Nominees have any right, interest in or entitlement to any Relevant Loan Security or New Right as a result of clauses 17.1 or 17.2 above, the Lender or Nominees:
(a) holds that right, interest or entitlement and any deposit derived from it on its own behalf, and not for you or on your behalf;
(b) can deal with that right, interest or entitlement or any profits derived from it in accordance with the Lender's discretion (including without limitation by way of securities loan); and
(c) is under no duty to account to you in relation to that right, interest or entitlement or any deposits derived from it."
13 Pausing there, there is at least a tension between clause 17 and clause 10, in that clause 10 seems to create a mortgage in which the client has the rights of the mortgagor and clause 17 (in the circumstances in which it applies) seems to deny those rights, at least to the extent that they are proprietary rights. As senior counsel for the plaintiffs pointed out, there may be an issue as to whether clause 17 operates as a clog on the equity of redemption created by clause 10, but that question is not an easy one to resolve and will depend in part on careful construction of the agreement as a whole.
14 The Companies obtained the funds that they lent to clients primarily from Merrill Lynch International ("MLI") and Merrill Lynch (Australia) Limited ("MLIA"). The evidence includes several agreements between Merrill Lynch companies and Lift Capital, namely:
(a) an International Prime Brokerage Agreement dated 21 November 2007 with an Australian addendum ("the November IPBA");
(b) an International Prime Brokerage Agreement dated 12 March 2007 with an Australian addendum ("the March IPBA");
(c) Global Master Securities Lending Agreements date 13 February 2007 ("the GMSLA"), which are based on the standard securities loan documentation prepared by ISLA, the International Securities Lenders Association;
(d) an Australian Master Security Lending Agreement dated 7 June 2005.
15 There are issues of fact, evidently quite complex, as to whether particular transactions were carried out under one or other of these agreements.
16 The November IPBA is an agreement whereby MLI undertakes to provide certain services, in its discretion, to Lift Capital. The services are clearance and settlement, the making of advances, the lending of securities and the holding of securities in safe custody. The provisions for making advances are in clause 3, and the securities lending facility is in clause 4. There are margin requirements in clause 5.
17 In clause 12 there are provisions for Lift Capital as customer to charge its right title and interest to assets from time to time held by it to the order of MLI or any of its affiliates, as continuing security for the due payment of liabilities. Clause 12.9 says that Lift Capital as Customer authorises MLI to utilise any Assets consisting of Securities for MLI's own purposes, and for its own benefit. Once again this creates a tension between what would otherwise perhaps appear to be proprietary rights and the apparent waiver of any such rights by that clause. The Australian addendum to the November IPBA adds clause 12.9A which provides:
"For the purposes of clause 12.9.1, the instrument which shall be used to enable MLI to utilise Securities as described in clause 12.9 shall be the Global Securities Lending Agreement and any return or re-delivery of Securities by MLI to the Customer under clause 12.9.3 shall be effected under the Global Master Securities Lending Agreement".
18 That appears to have the consequence that if a transaction between Lift Capital and MLI is by way of the provision by Lift Capital to MLI of Securities for the purpose of satisfying its Securities obligations under clause 12.9 in respect of credit provided to it under clause 3, then to a degree the relationship between the parties is governed by the Global Master Securities Lending Agreement. The Global Masters Securities Lending Agreement contains provisions that permit either party to lend securities to the other upon the provision of "collateral" to support the "loan". There is a good description of securities lending in the judgment of Finkelstein J in Beconwood Securities Pty Ltd v ANZ Banking Group Ltd [2008] FCA 594 at [5]. It may not be easy to work out just how the provisions of the GMSLA, especially with respect to collateral, apply to what otherwise might be characterised as a credit and security arrangement rather than a securities lending arrangement.
19 In fact, under one or more of these various agreements the Merrill Lynch companies provided funds to Lift Capital amounting to some $621 million, which Lift Capital on-lent to its clients under the margin lending arrangements. The clients provided listed securities to the value of some $761 million to Nominees, as well as managed fund units of some $128 million. Nominees provided those listed securities to the value of approximately $761 million (at that time) to Merrill Lynch companies. The submissions of the plaintiffs treat the provision of those securities to the Merrill Lynch companies as securities loans. That may be because they were conducted directly under the GMSLA or because they were conducted under the November IPBA, having some characteristics of securities lending by virtue of the clauses to which I have referred.
20 On 10 April 2008, the day the administrators were appointed, MLI and MLIA purported to terminate the agreements under which they were providing funding to the Companies, for an event of default (presumably, the appointment of administrators). Their notification was purportedly given under the November IPBA. Some provisions of that agreement appear to be intended to operate as an overriding agreement applicable to permit termination of everything described in clause 14 of the November IPBA as a "Designated Principal Agreement". Merrill Lynch's notice declared that all Designated Principal Agreements were immediately terminated; that any obligation of Merrill Lynch to settle would immediately cease; that advances would become immediately due and payable; and all outstanding obligations of Merrill Lynch and Lift Capital to deliver or re-deliver Securities or equivalent Securities would be terminated and replaced by an obligation to pay the "Default Market Value in Base Currency" of those securities.
21 The last statement has some significance to the present application because if it is right, it suggests that the obligation of the Merrill Lynch companies is not, in any case, an obligation to re-deliver Securities or Equivalent Securities on the termination of lending arrangements, but is in each case an obligation to pay a cash amount reflecting a determination of value. There are provisions in the November IPBA dealing with the determination of the value of securities: see especially the definition of "Default Market Values". Once again, there is a question for careful consideration as to whether the correct position is that the Merrill Lynch companies are permitted and obliged to account to the Companies only in cash or partly or wholly in Securities. If the Merrill Lynch companies must or can account in cash, and they in fact account in cash, it may become more difficult for any class of investors to assert proprietary rights (such as a "resuscitated" equity of redemption) in priority to unsecured creditors.
22 After giving their notice dated 10 April 2008, the Merrill Lynch companies engaged in a sale process of the Securities provided to them by the Companies, and it now appears that the sale process is close to completion. Mr Hayes said in his affidavit that the expected result of the sale process is that there will be a surplus of "loaned" Securities, in excess of funding provided by the Merrill Lynch companies, of approximately $92 million. As I have said, there will be a question whether that is to be accounted for by cash or Securities or partly cash and partly Securities, and the answer to that question may well influence the entitlement of some classes of investors of the Companies to assert proprietary claims over any assets in the hands of the administrators.
23 In summary, the web of contractual relationships between the Companies and their clients on the one hand and the Companies and the Merrill Lynch companies, on the other hand, creates some very considerable and complex issues of fact and law. The resolution of these issues may substantially determine the respective positions of the various classes of investors who have claims in the administration of the Companies.
24 The administrators have some important decisions, and further investigations, to make before the entitlements of the various classes of investors and other creditors can be ascertained.
25 It is necessary for the administrators to decide whether the appropriate course is to accept the anticipated surplus from the Merrill Lynch companies in the form of securities or cash or partly securities and partly cash. This decision that may affect the ability of classes of investors to claim particular securities in specie or to assert proprietary rights over them.
26 It is necessary for the administrators to discover what, if any, funds will be available from the sale process once it is has been completed.
27 It is necessary for the administrators to ascertain the facts concerning, and then analyse, the rights of the various classes of investors under their agreements, and in respect of any surplus funds that the Companies acquire, so as to ascertain whether any classes of claims are proprietary claims to certain assets having priority over the claims of unsecured creditors. This may involve the allocation of "loaned" securities among different clients and the development of a strategy for realisation of any securities made available by Merrill Lynch.
28 It seems to me that until the position with respect to these matters is much clearer than it now is, it would be virtually impossible for the administrators to express coherent opinions on the matters that, under s 439A, they will be required to address in their report.
29 Mr Hayes, a person of considerable experience as an insolvency practitioner, has given an estimate that it will take a period of some six to eight weeks before the position becomes clear on these matters. It will then be necessary for the administrators to undertake financial analysis to establish the potential returns available to the Companies' creditors. He notes that on some issues, it may be necessary to seek directions of the Court under s. 447D.
30 Clarification of these various matters could have a considerable impact on the terms of any deed of company arrangement that might be proposed, and on the administrators' and creditors' assessment of the desirability of any such proposal. Therefore it would be premature to report to the creditors until substantial additional work has been undertaken to clarify these matters.
31 Those are the justifications for the application for extension of the intervening period for two months.
32 The proposal to make the present application was disclosed to the members of the committee of creditors, appointed by creditors at their first meeting. The majority of the members of the committee of creditors expressed the view that a delay for a period of two months was too long, and they urged that it would be preferable for the second meeting of creditors to be delayed for only one month. The administrators responded to the views of the committee of creditors by a circular which they distributed on 29 April 2008. They pointed out the complexity of the issues that needed to be addressed and the amount of work that was required to attend to them.
33 In my view, the response given by the administrators is convincing. One understands that creditors on the committee, approaching these problems from a commercial point of view, would wish to see them resolved as quickly as possible. One appreciates that they may find it difficult, until the issues are fully explained, to understand why a period as long as two months would be required before the creditors could be given the opportunity to hear the administrators' opinions and make their decisions. But once one enters into the complexities of the matters which the administrators must address (and I have merely skated over the surface of those complexities in the remarks that I have made), one sees the amount of work that will be involved to clarify the issues, to ascertain the true facts and then to analyse the position so as to make sensible recommendations for the creditors to consider.
34 The views of members of the committee of creditors are, of course, relevant to the Court's decision, but they are not a determinative consideration in matters of this nature (Re Pan Pharmaceuticals Ltd (admins apptd) (2003) 46 ACSR 77 at [43])
35 In all the circumstances, I am persuaded that the case for an extension of the convening period to 9 July 2008 has been well and truly made.
Application under s 447(A)
36 If the convening period were extended to 9 July without any further order, then s 439A(2) would have the effect that the second meeting of the creditors of each of the Companies would have to be "held" (as distinct from "convened") within five business days before, or five business days after, the end of the extended convening period. Meetings of creditors could not be held earlier than five business days before the end of the extended convening period, even if the administrators were in a position to call a meeting at some earlier stage. Therefore, an application is made under s 447A(1) inviting the Court to make an order that Pt 5.3A should operate so as to permit the administrators to hold the second creditors meeting at any time within the convening period or the period of five business days thereafter. Such an order was made by Lindgren J in Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446.
37 I am persuaded that the Court has the power under that section to make such an order, for the reasons given by his Honour, and that it is appropriate for such an order to be made in the present case. If the administrators are in a position to report to, convene and hold the second meeting of creditors at a time earlier than five business days before 9 July, there should be no artificial obstacle to their doing so. The efficient administration of these companies demands that the meetings be held at the earliest practicable time.
Costs related to the application
38 The administrators also seek an order that the costs of the application be costs in the administration of each of the Companies. An order of this kind was made in Re Daisytek Australia and in my experience such orders are common. The order is appropriate, given the nature of the application and, in particular, the connection of the application with the conduct of the administration of the Companies.
39 For these reasons I have made the orders sought in the originating process.
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