Duffy v Supercentre Development Corp Limited

Federal Court of Australia|2010-02-08|Before: Emmett J

BACKGROUND 4 In March 2006, the Famularo Parties entered into loan facility agreements with Lift Partners. Between 31 March 2006 and 7 April 2008, Lift Partners lent funds to the Famularo Parties under the terms of the respective loan facility agreements. Under clause 4.7 of the loan facility agreements, Lift Partners could give three business days' notice requiring that the full amount of all moneys outstanding was immediately due and payable. Under the loan facility agreements, the Famularo Parties agreed to mortgage, to Lift Partners, all securities acquired, wholly or partly, with the moneys advanced under the loan facility agreements. The mortgages were to secure all moneys owing under the loan facility agreements. Under the loan facility agreements, mortgaged securities were to be transferred to Lift Nominees, to be held by Lift Nominees as the bare nominee of the respective Famularo Parties, subject to the rights of Lift Partners as mortgagee. Under clause 7.1 of the loan facility agreements, the shares could be sold with the consent of Lift Partners, the proceeds being applied in reduction of the loans. 5 The Famularo Parties used the moneys lent to acquire shares in companies listed on the Australian Stock Exchange (ASX). In addition, they bought put options in respect of shares in listed companies, and sold call options in respect of shares in listed companies. The Famularo Parties mortgaged to Lift Partners the shares acquired with the funds advanced by Lift Partners, and those shares were transferred to Lift Nominees. The put options and call options were made in the name of Lift Nominees. 6 The shares, put options and call options were transferred by Lift Nominees to various Merrill Lynch Companies on the basis that the shares, put options and call options would be available to the Merrill Lynch Companies as security for advances made by the Merrill Lynch Companies to Lift Partners. The Famularo Parties claim that the transfer to the Merrill Lynch Companies was effected without their knowledge or consent, and in breach of trust, and in breach of contract. 7 On 7 April 2008, Lift Partners gave notice to the Famularo Parties requiring repayment of the amounts outstanding under the loan facility agreements. At that time, the Famularo Parties were not in default under the loan facility agreements. Under the notices of 7 April 2008, the money owing, amounting to approximately $331 million, was repayable on 10 April 2008. The Famularo Parties did not repay the amounts outstanding on that date. On that date, Messrs Hayes and McGrath were appointed as administrators of Lift Partners. That was an event of default under the arrangements between Lift Partners and the Merrill Lynch Companies. 8 Security in the sum of some $81 million had been provided by Lift Partners to Australian Clearing House (the Clearing House) for the exposed liability of the Famularo Parties under the call options. That sum of $81 million had been lent by the Merrill Lynch Companies to Lift Partners. Transfer of shares and options by Lift Partners to the Merrill Lynch Companies, albeit in breach of trust, was partial security for the loan of $81 million provided by the Merrill Lynch Companies as security to the Clearing House. Between 11 April 2008 and 17 April 2008, the shares in listed companies owned by the Famularo Parties were sold by the Merrill Lynch Companies for total proceeds of approximately $345 million. The put options were sold, giving rise to a surplus of some $16.6 million. The Merrill Lynch Companies also closed out the call options. The result of those transactions was to incur losses on the call options of approximately $42 million. 9 The Famularo Parties contend that those steps were effected as a result of breach of trust and in breach of contract. They claim that, if those steps had not been taken in the way that they were, they would be creditors of Lift Partners and Lift Nominees for the amount of the difference between the proceeds of sale of the listed shares, of approximately $345 million, and the amounts owing under the facility agreements, of approximately $331 million, together with the proceeds of the closing out of the put options of $16.6 million. In addition, they say, losses of $42 million should not have been incurred in respect of the call options. They say that, if they had been permitted to trade the call options, they would have derived profits of $53 million. 10 Mr McGrath, as the chairman of the meetings of creditors, decided that the proofs of debt that were lodged by the Famularo Parties in support of their claims to be entitled to vote at the meetings should be assessed at nil. The second and third proceedings relate to those decisions made by the chairman. The Famularo Parties also oppose the approval of the schemes on the basis that, had they been permitted to vote, the resolutions approving the schemes would have been defeated.

THE FAMULARO PARTIES' CLAIMS AGAINST LIFT PARTNERS AND LIFT NOMINEES 11 It is necessary to say something in more detail about the Famularo Parties' claims to be creditors of Lift Partners and Lift Nominees. 12 First, the Famularo Parties contend that the notice of demand of 7 April 2008 was ineffective. The reasons given are as follows: · The promise by Lift Partners to hold securities subject to sale, under clause 7.1 of the loan facility agreement, was in the nature of a trust obligation. · The promise by the Famularo Parties in clause 4.7 to pay within three days of demand, and the promise in clause 7.1 to permit the Famularo Parties to sell, with the consent of Lift Partners, were concurrent obligations, because it was obvious that the Famularo Parties would need the securities to satisfy their debt. · At the time of transfer of securities to the Merrill Lynch Companies, the Famularo Parties were not in default. · That transfer was in breach of contract and breach of trust, and was unconscionable. · The three day notice was in breach of contract and breach of trust, and itself was unconscionable (see Legione v Hately (1983) 152 CLR 406). · The insistence by Lift Partners on any right to demand payment within three days constituted an insistence on rights that was harsh and oppressive, and in the circumstances, unconscionable. · The demand of 7 April 2008 was made in circumstances where the subsisting breach by Lift Partners of its concurrent obligations precluded it from making such a demand. · Lift Partners knew, at all material times, that the position of the Famularo Parties could not be unwound in three days: - legally, because a transfer could not be cleared through the Clearing House in that timeframe, - economically, because to unwind the volume of shares required would flood and depress the market, - practically, because settlement of sales on ASX takes place three days after the sale is effected. · By expressly consenting to the purchase of shares by the Famularo Parties, Lift Partners created a common assumption or expectation, which the Famularo Parties adopted, that Lift Partners would not insist upon a strict contractual right that would result in the sacrifice of shares purchased. 13 Mr Famularo gave unchallenged evidence that, while he was aware of the provision entitling Lift Partners to give three days' notice of demand, he assumed that right would not be exercised, because it would not be in the interests of either Lift Partners, or the Famularo Parties, for such a right to be exercised. However, there was no evidence that Lift Partners made such an assumption or understood that Mr Famularo made such an assumption. 14 Accordingly, it was alleged, Lift Partners is estopped from insisting upon the Famularo Parties repaying the facility in whole, in a time frame short of a reasonable period necessary to dispose of the shares in a prudent manner, which was beyond the three days' notice. In the circumstances, the Famularo Parties say, Lift Partners is estopped from asserting that, at any relevant time, the Famularo Parties were in default, and the giving of notice in those circumstances was unconscionable on the part of Lift Partners. 15 The Famularo Parties also say that, even if the demands of 7 April 2008 were valid, they are creditors on the basis of the following claims. · Lift Nominees held relevant securities for the Famularo Parties as a fiduciary agent. · Lift Partners and Lift Nominees caused the relevant securities to be transferred to the Merrill Lynch Companies, such that the Merrill Lynch Companies claimed that they were subject to security entitlements of the Merrill Lynch companies. · That transfer was a breach of trust and a breach of contract. · The securities were trust property in the hands of the Merrill Lynch companies, which dealt with them for their own benefit, causing loss to the Famularo Parties. · The Merrill Lynch Companies acquired the trust property with notice of the rights of the Famularo Parties. · Assuming that the demand of 7 April 2008 was a valid demand, and Lift Partners exercised its rights as mortgagee, it was entitled only to sell securities to satisfy the outstanding debt, which was more than covered by the listed shares. · Had Lift Partners not transferred the securities to the Merrill Lynch Companies, it could have lawfully resorted to the securities only for the purpose of applying the proceeds of sale against the outstanding debt, leaving a credit of approximately $14 million, and leaving the call options with the Famularo Parties. · Accordingly, Lift Partners is not entitled to charge the Famularo Parties with the $42 million loss arising from the closing-out of the call options, because that loss was occasioned by the breach of trust. · Had Lift Partners merely exercised its rights as mortgagee, the Famularo Parties would have been left with a surplus of $11 million on the sale of the shares, plus the proceeds of the realisation of the put options of approximately $16.6 million, and would have had the opportunity of trading in respect of the call option positions, which might have generated a surplus of some $53 million. 16 The Famularo Parties claim to be creditors in respect to the surplus of the proceeds of sale over the amount of the loans. They claim that Lift Partners was not entitled to debit the loss on the closing out of the call options and, further, that the closing out of the call options deprived them of the opportunity of trading the call options in such a way as to generate a profit, rather than the loss that was occasioned by the closing out of the call options in the peremptory fashion adopted by the Merrill Lunch Companies. 17 By summons in the Commercial List, filed on 2 July 2009, Lift Partners claimed orders that the Famularo Parties pay the respective sums said to be owing following the actions of the Merrill Lynch Companies. In their Response and Cross- Claim filed on 22 September 2009, the Famularo Parties asserted that Lift Partners was not entitled to give notice for repayment and that, if it was entitled to do so, the notice did not take effect because of the appointment of the Administrators. Alternatively, they said there was a breach of an implied term of the trading relationship between Lift Partners and the Famularo Parties that Lift Partners would ensure that it remained solvent and able to perform its obligations to deliver securities to the Famularo Parties as and when obliged to do so. 18 In addition, in their Response and Cross-Claim, the Famularo Parties purported to rely on matters referred to in reasons for judgment given by the Supreme Court of New South Wales on 3 February 2009 in a proceeding between Lift Partners and the Merrill Lynch Companies. In that proceeding, the Supreme Court found that, to the extent that the combined effect of certain provisions of the loan facility agreements would be to allow Lift Partners to pass shares to the Merrill Lynch Companies free from the interest of the mortgagors, those provisions had an unconscionable operation in favour of Lift Partners, being an operation procured by unconscionable conduct of Lift Partners. The provisions imposed an impermissible fetter upon the right of the mortgagors to redeem the mortgaged shares. The Court held that the provisions were, therefore, and to that extent, inoperative and void. The effect of those findings would be that certain provisions of the loan facility agreements between Lift Partners and the Famularo Parties were ineffective. That is the basis for the conclusion that any transfer of shares belonging to the Famularo Parties by Lift Nominees and Lift Partners to the Merrill Lynch Companies was a breach of trust and in breach of contract. 19 The Famularo Parties' Response and Cross-Claim in the Commercial List proceeding also asserted that the giving of the notice of 7 April 2008 was unfair, unreasonable and unconscionable. That assertion was subsequently particularised in a letter of 28 October 2009. That letter asserted that the notice was given and expired after Lift Partners had become insolvent and unable to deliver shares and options owned by the Famularo Parties, which had been held by Lift Partners and Lift Nominees as mortgagee. The letter asserted that the notice did not permit sufficient time for the shares and options to be realised. Next, the letter asserted that Lift Partners gave Famularo Parties oral advice not to worry about the notice, saying that it was just a formality. That assertion was not supported by any evidence in this proceeding. Further, the letter asserted that the notice of 7 April 2008 was unreasonable, given the amounts that were the subject of the notice, and given that there were substantial option positions that would not mature within the period of the notice. Finally, the letter asserted that the notice was given for the purpose of enabling Lift Partners to dispose of the shares and options belonging to the Famularo Parties in order to satisfy its own solvency problems. There was no evidentiary support of that assertion. 20 In response to a request for particulars of loss and damage alleged to have been suffered by the Famularo Parties, including particulars that identify how the loss and damage was caused by breaches of trust, the letter asserted that the losses were caused by the Administrators' failure to protect the assets of the Famularo Parties and that, had they protected the assets, the losses would not have occurred. On 4 December 2009, the solicitors for Lift Partners wrote to the solicitors then acting for the Famularo Parties with reference to their Response and Cross-Claim, to which I have just referred. The letter referred to the first Court hearing in relation to the proposed schemes of arrangement on 27 November 2009, when senior counsel for the Famularo Parties informed the Court that they claimed to be creditors of Lift Partners in an amount in excess of $69 million. The letter of 4 December 2009 requested particulars of that claim, including details of how, as a matter of causation, it could be said that Lift Partners caused the alleged damage to be incurred and how the figure was calculated. 21 The letter also enquired whether the Famularo Parties intended to seek to be admitted as creditors for voting purposes at the scheme meetings convened for 22 December 2009. If so, they were requested to complete the enclosed Voting Proof of Debt Forms in detail. The Famularo Parties were also invited to provide full particulars of any claims that they contended they had against Lift Partners and Lift Nominees, including: · particulars of the causes of action; · terms of any relevant trust instruments or agreements; · the precise nature of any breach of duty; · how each breach was alleged to have caused the damage claimed; and · the amounts of damage that each of the Famularo Parties contended it had suffered. 22 The then solicitors for the Famularo Parties responded on 10 December 2009, enclosing a series of spreadsheets, one for each of the Famularo Parties. The spreadsheets outline various transactions up to April 2010. The assertion that appears to have been made is that strategies ought to have been adopted by the Administrators, or the Administrators ought to have permitted the Famularo Parties to have put such strategies in place, that would have resulted in a profit that would have exceeded the loss arising from the peremptory closing out of the call option positions. 23 On 20 December 2009, the Famularo Parties submitted Voting Proof of Debt Forms, making claims totalling in excess of $100 million. The amounts shown in the Proof of Debt Forms were different from the respective amounts shown in the spreadsheets enclosed with the letter of 10 December 2009. There was no attempt to reconcile the two sets of figures; nor was there any indication of a reconciliation between the figures shown in those documents with the assertion, made at the first Court hearing, that the claims of the Famularo Parties were in the order of $69 million. 24 On 21 December 2009, the solicitors for the Liquidators and Lift Partners and Lift Nominees wrote to the present solicitors for the Famularo Parties, indicating that the value of each of their claims would, pursuant to reg 5.6.23(2), be estimated by the chairman of the scheme meetings as being nil. The letter outlined in some detail the reasoning that led to that conclusion. There was no response to that letter.

THE DECISION OF THE CHAIRMAN 25 At the meetings held on 22 December 2009, the claims of the Famularo Parties were assessed by Mr McGrath as having a value of zero. Mr McGrath gave evidence by affidavit and in cross-examination concerning his decision that the proofs of debt submitted by the Famularo Parties should be estimated at zero and rejected. 26 On 10 December 2009 Messrs Allens Arthur Robinsons provided written advice to the Liquidators concerning the Response and Cross-claim in the proceeding in the Commercial List of the Supreme Court. The Voting Proof of Debt Forms submitted by the Famularo Parties on 20 December 2009 were reviewed by Mr McGrath on 21 December 2009. Mr McGrath also reviewed and approved the letter sent by Allens Arthur Robinson on 21 December to the solicitors for the Famularo Parties indicating the reasons why Mr McGrath proposed to estimate the value of the claims of the Famularo Parties at zero. 27 Mr McGrath understood at the time of the meeting that the Famularo Parties were in default after 10 April 2008 by reason of their failure to comply with the demand of 7 April 2008 and that Lift Partners was therefore entitled to cause or allow their shares and options to be sold and closed out and to charge the costs of doing so the Famularo Parties. Accordingly, at the time of the meetings held on 22 December 2008, Mr McGrath, having regard to his review of the proofs of debt, the advice of 10 December 2009 and the letter of 21 December 2009, coupled with the absence of any further information from the Famularo Parties in relation to their claims, concluded that the claims should be estimated at zero and be rejected. It is, as I have said, that decision from which the appeals in the second and third proceedings have been brought.

CLAIMS AGAINST MERRILL LYNCH 28 The Famularo Parties have, in the course of argument, asserted a possible claim against the Merrill Lynch Companies. That has not been particularised in any detail. It is irrelevant to the appeals, which are concerned only with the question of whether or not the Famularo Parties are creditors of Lift Partners or Lift Nominees. 29 However, one of the effects of the schemes of arrangement may be to bar any claim that the Famularo Parties presently have against the Merrill Lynch Companies arising out of their dealings with Lift Partners. While that is irrelevant to the appeals, it has a bearing on the question of approval of the schemes. 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 PROPOSED TRADING STRATEGY 30 A lynch pin in the claims of the Famularo Parties is the proposed trading strategy that Mr Famularo says could have been put in place as at 10 April 2008. He says that the sum of $81 million, which was provided as security for contingent obligations under the call options, would have been freed by the putting in place of a strategy that was first set out in detail in affidavits sworn by Mr Famularo on 2 February 2010 and 4 February 2010. While hints of some strategy had previously been given, there was no evidence that any particular strategy was ever suggested to the Administrators in April 2008 or at any time before February 2010. 31 The strategy that Mr Famularo says could have been and should have been put in place involves several steps, all of which would have needed to be put in place at the same time, following the demand of 7 April 2008. The steps were briefly as follows: · the shares in listed companies would be sold for approximately $345 million; · the proceeds of sale would be applied in repaying the debt owing to Lift Partners leaving a credit balance of approximately $14 million; · the put option positions would be sold generating a profit of approximately $16.6 million; · the average strike price of the sold call options was $40; all sold call options having expiration dates before March 2010 would be closed out and rolled forward into an equivalent number of sold call options, with the same strike price, but having expiration dates of March 2010, generating a surplus of $19 million; · 10,200 call options, with expiration dates of March 2009, and a strike price of $50, would be purchased, at a cost of $12 million. 32 Mr Famularo accepted that the risk in relation to the purchased call options, expiring in March 2009, as against the sold call options expiring in March 2010, would need to be managed. Mr Famularo's evidence was that, at the appropriate time, he would have sold BHP shares that enabled him to cover the liability in relation to the options. 33 There were 6,808 sold call options for BHP shares. Each option contract involved 1,000 shares. The expiry dates were June 2008, August 2008, September 2008 and March 2010. The strike price was an average of about $40. Mr Famularo says that he would have taken steps to convert all call options with an expiry date earlier than March 2010 into call options with an expiry date of March 2010 with the same strike price. That would have been achieved by buying call options with the earlier expiry dates and selling new call options expiring in March 2010. He says, having examined historical records, that rolling over the call options in that way would have generated approximately $19 million. 34 Mr Famularo then says that, shortly after 10 April 2008, and he gave no further detail as to how long after, he would have bought 10,200 call options at a strike price of $50 expiring in March 2009, as against the 6,808 sold call options expiring in March 2010 which had a strike price of $40. By further reference to historical records, Mr Famularo estimates that the cost of buying the 10,200 call options expiring in March 2009 would have been approximately $12 million. 35 Mr Famularo explained that the disparity in numbers between the 6,808 sold call options and the 10,200 bought call options was to provide further security in the event that BHP shares rose above $50. If the price of BHP shares increased significantly above $40, the open sold call options expiring in March 2010 would attract margin calls from the Clearing House, which the Famularo Parties would be liable to meet. Mr Famularo said that, in May 2008, when the price of BHP shares rose to $45 he would have purchased low exercise price options (LEPOs), expiring in December 2008, to protect against the liability for margin calls. Mr Famularo said he would have purchased 500 LEPOs, each contract being for 1000 BHP shares, at a cost of approximately $425,000. He says that, when the value of BHP shares fell below $45 in late June 2008, he would have closed out by selling the LEPOs. He estimates that the proceeds of closing out the LEPOs would have generated approximately $325,000 resulting in a loss of approximately $100,000 on the LEPOs. No indication was given as to how that loss would be funded. Indeed, in a letter to the Liquidators' solicitors, the solicitors then acting for the Famularo Parties indicated that the Famularo Parties have no assets. 36 Mr Famularo then went on to say, in his affidavit of 4 February 2010, that when, in late May or early June 2008, BHP shares reached a price of $48, he would have purchased 6,808 put options for a very small cost, with a strike price of $35 and an expiry date of March 2009. He would have taken that action because of his view that BHP shares had peaked at $48. However, he produced no record of having formed the opinion at that time, that the price of BHP shares had peaked. 37 Mr Famularo said that, once the BHP price fell below $45, the put options with a $35 strike rate would have become more valuable. He said that he would have held the put options while the BHP share price fell from $48 in May or June 2008 to $35 in September 2008. At that point, he would have sold the put options. He concludes that he would have made a profit on the sale of those put options of approximately $17 million. 38 A difficulty with the position of the Famularo Parties is that the strategy of purchasing call options to cover their liability under sold call options was not one that had been employed previously. Further, there was no suggestion that Mr Famularo, when faced with the demand of 7 April 2008, made any approach to the Administrators or Lift Partners or the Merrill Lynch Companies with a suggestion that there was a strategy that could be put in place that would have enabled the Famularo Parties to have complied with the demand, even if several days grace was needed. There was no suggestion that Mr Famularo ever asked for more time to comply with the demand. Even when faced with the proceeding in the Commercial List, the Famularo Parties failed to articulate the strategy outlined above as a basis for defending the claim by Lift Partners or as a basis for the cross-claim brought against Lift Partners. 39 In addition, in his affidavit of 2 February 2010, Mr Famularo gave evidence as to the trading strategy that he has employed for the Famularo Parties in the last 10 years. The strategy involved the following steps: · The Famularo Parties traded only in blue chip companies, being those in the top 10 of listed securities on the ASX, which had a high probability of dividend income. The strategy involved trading principally in BHP and Telstra shares. · Shares were bought with loan funds representing 100% of the purchase price. · Where shares were purchased, put options would be acquired under which the Famularo Parties were entitled to require the other party to the option, at a fixed point in time, to purchase the shares at the price paid for the physical shares. The acquisition of the put option was a guarantee that, if the market value of the shares fell below the purchase price, the Famularo Parties would be able to meet the loan obligation by exercising the put option. · Having purchased shares and put options, the Famularo Parties would then sell a call option entitling the other party to that option to purchase the shares for the price paid for the physical shares. The period of the sold call options would be a relatively long one, in the vicinity of three years. Because the period of the sold call options was a relatively long one, they attracted a premium. That is to say the other party to the call options would pay a price in excess of the price paid for the physical shares. 40 If the shares purchased in accordance with the strategy fell below the purchase price, the liability of the Famularo Parties to the lender was covered by the put options. If the share price increased above the purchase price, it was more likely that the call options would be exercised and the physical shares were available to meet those options. 41 The effect of such a strategy was that income was derived from dividends declared by the companies whose shares were purchased. Additional income was generated from the premiums received on the sale of the call options. The cost of the put options was funded by the Famularo Parties, but not with moneys lent by the financier. The combined effect of dividend income and premium payments was to generate sufficient income to meet the interest on the borrowed moneys, thereby generating a surplus or profit. 42 The strategy just outlined was adopted in relation to transactions with Lift Partners. The shares involved, as I have said, were principally BHP and Telstra shares, the purchase price for which was provided as to 100% by Lift Partners. Before any purchase, the Famularo Parties were required to outline the proposed purchase to Lift Partners and to obtain its consent, which was communicated on the basis that any purchase of shares would be covered by put options. The step of selling call options was not a requirement of Lift Partners, but was an additional strategy put in place by Mr Famularo himself. All shares purchased, together with put options, were held by Lift Nominees and were purchased by a broker approved by Lift Nominees, being Andrew West & Co or Morrison Securities. When shares and put options were purchased, the Famularo Parties received a contract note issued by one of those brokers. 43 It appears that, under trading rules of ASX the proceeds of the sale of shares are only available on the third day after the day of sale. Mr Famularo said that, had the shares owned by the Famularo Parties been available to sell when he received the notice of 7 April 2008, and he had taken immediate steps to sell them, the proceeds of sale could not have been available within the three days specified in the notice because of the trading rules just described. In any event, Mr Famularo said, the sale of the shares within three days would not have made any business sense, because such a sale would only depress the price. In that regard, Mr Famularo points to the fact that, when the Merrill Lynch Companies undertook the sale of shares, which yielded some $335 million, the sales took place over some 10 trading days. He says that selling more than $300 million worth of BHP and Telstra shares within three days would be likely to depress the sale price, thereby working to the disadvantage of both the mortgagor and the mortgagee. That is an aspect of the allegation that the giving of three days' notice, notwithstanding that it was in the contractual arrangement between the Famularo Parties and Lift Partners, was unreasonable and unconscionable, such that the notice itself was invalid or unenforceable. 44 In his affidavit of 4 February 2010, Mr Famularo said that Lift Partners, as mortgagee, could have sold the shares and put options to discharge the indebtedness to Lift Partners. It could have avoided exposing itself to a future liability under the call options by simultaneously transferring the sold call options to the Famularo Parties. He says that, by that means, the shares could have been released for sale, notwithstanding that they were held as security by the Clearing House, in circumstances where the Famularo Parties would then have had to manage the risk of exposure in the way described. Mr Famularo accepted that that would involve the provision of security. The provision of security would have been effected, he says, by the strategy that I have described. 45 While the strategy may have been feasible, it was never proposed to the Administrators of Lift Partners. It is hard to avoid the conclusion that much of the evidence summarised above was given with the benefit of hindsight. 46 In any event, Mr Famularo asserts that the Famularo Parties were deprived of a profit of approximately $51 million, determined as follows: · net proceeds of the sale of shares and put options after repayment of Lift Partners debt: $27 million; · plus surplus on rolling over call options to March 2010: $19 million; · less cost of purchasing call options expiring in March 2009: $12 million; · less the loss on the LEPOs: $100,000; · plus profit on the sale of further BHP options: $17 million. That is the amount for which Mr Famularo says the Famularo Parties should be treated as creditors.

THE DUTIES OF A MORTGAGEE 47 The power of sale given to a mortgagee is for the mortgagee's own benefit to enable the mortgagee better to realise the debt. A mortgagee is not a trustee of the power for the mortgagor. Further, the mortgagee may consult the mortgagee's own convenience as regards the timing of the exercise of any power, subject to the duty to act in good faith in the exercise of the power. In particular, a mortgagee is not bound to postpone the exercise of a power of sale in the hope of obtaining a better price at some later stage. On the other hand, the mortgagee must allow sufficient time for proper steps to be taken to ensure that the best price reasonably obtainable might be obtained. There might even be circumstances where delay would be required, for example, if there were very clear signs that the market was improving rapidly and substantially. That is not this case. Nevertheless, the mortgagee must pay regard to the interests of the mortgagor and should not act in a manner that sacrifices the interests of the mortgagor. Thus the mortgagee is under a duty to take reasonable care to obtain whatever was the true market value of the mortgaged property at the time when the mortgagee chooses to exercise a power. Exercise of a power in good faith entails taking reasonable steps or precautions to obtain a proper price. 48 The Famularo Parties complained that the closing out of the call options involved a breach of the duty owed by Lift Partners as a mortgagee in respect of the options. The complaint of the Famularo Parties must be considered against those principles, which were not in dispute. The question is whether it can be said that the decision to close out the call options, which was given effect to in the days following 10 April 2008, was conduct that disregarded the interests of the Famularo Parties, as mortgagors, in a way that sacrificed their interests. Putting it another way, the question is whether that involved a failure on the part of Lift Partners, as mortgagee, to take reasonable steps and precautions to obtain a reasonable price in realising the call options. The question is not whether some other course could have been taken, such as the course outlined by Mr Famularo in his affidavits of February 2010, but whether the steps that were in fact taken in April 2008 were unreasonable. The Famularo Parties say that it was unreasonable to take the steps that were taken. 49 Assuming that the demand of 7 April 2008 was valid and effective, there were three difficulties with the proposition that it was unreasonable to exercise the powers as mortgagee in the way that they were exercised. · 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.

DISPOSITION OF THE APPEALS 50 There was no particularisation or specification of the nature of the additional evidence that the Famularo Parties wished to adduce, other than by counsel in the course of argument. The proposed evidence was as to the circumstances surrounding the sale and closing out of the call options by the Merrill Lynch Companies and the loss and damage said to have been incurred as a consequence. The evidence before the Court already included evidence on affidavit by Mr Famularo as to the strategy that he says would have been appropriate to put in place as at 7 April 2008 or 10 April 2008, in order to comply with the notice of demand. Senior counsel for the Lift companies and the Liquidators and senior counsel for the Merrill Lynch Companies, who appeared to support the proposed schemes, indicated to the Court that they did not wish to cross-examine Mr Famularo as to the matters about which he deposed in his affidavits. It was not suggested that the steps deposed to by Mr Famularo were inconsistent with the ASX trading rules relevant to options, although the trading rules were not in evidence. 51 Having regard to the evidence that was already adduced on behalf of the Famularo Parties, I considered that there was no utility in an adjournment of the hearing of the appeals. Senior Counsel for the Famularo Parties indicated that they did not wish to stand in the way of the scheme, although they had foreshadowed notice of intention to oppose the application for approval of the schemes. Senior Counsel did not indicate that he wished to adduce further evidence in relation to the proceeding to approve the schemes. 52 The basis for the adjournment was to adduce further evidence on the assumption that the task of the Court in considering the two appeals involved a hearing de novo of the question of whether the Famularo Parties are creditors of Lift Partners and Lift Nominees. That would in effect entail the determination of issues effectively thrown up in the proceedings already on foot in the Supreme Court of New South Wales. That would be inappropriate both in the appeals and in the scheme proceeding. 53 The Lift companies and the Liquidators contend that the estimate of value to be made by a chairman in assessing a proof of debt must be of a somewhat summary nature. The chairman does not undertake a detailed enquiry or engage in extensive debate and deliberation in relation to that estimate. The chairman must do the best that can be done by reference to the factual material furnished by the claimant viewed in the total context in which the decision-maker is operating. The decision is to be made on the basis of the material available to the decision-maker at the time when the decision is made. Accordingly, they say, the Court's task is to determine whether the Famularo Parties can establish error in the way in which Mr McGrath approached that summary exercise. The Famularo Parties, on the other hand, contend that the proper basis for the appeal is to determine de novo, on whatever material is before the Court, whether the claimant is in fact, and in law, a creditor. 54 The purpose for the adjournment sought on behalf of the Famularo Parties was to adduce evidence as to the circumstances surrounding the sale and closing out of the call options by the Merrill Lynch companies and the loss and damage said to be incurred as a consequence. They accept that the additional material that they wished to adduce was not before Mr McGrath when he decided to assess the value of the claims of the Famularo Parties at nil. They accept that they have adduced all the evidence that they would wish to adduce as to the material that was available to Mr McGrath when the decision was made. 55 Clause 2.15 of the Federal Court (Corporations) Rules provides that, subject to the Act, the Rules and any direction of the Court to the contrary, regs 5.6.11 to 5.6.36A of the Corporations Regulations 2001 (Cth) apply to meetings ordered by the Court. Under reg 5.6.19(1), a resolution put to the vote of a meeting must be decided on the voices, unless a poll is demanded. Regulation 5.6.20(1) relevantly provides that, if a poll is demanded, the manner in which it is to be taken and the time at which it is to be taken must be determined by the chairperson. Regulation 5.6.21(2) relevantly provides that a resolution is carried if: · a majority of the creditors vote in favour of the resolution; and · the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed by all creditors voting. Regulation 5.6.23 relevantly provides that a person is not entitled to vote as a creditor at a meeting unless: · the person's debt or claim has been admitted wholly or in part; or · where the person has lodged, with the chairperson of the meeting or with the relevant person named in the notice convening the meeting, particulars of the debt or claim or formal proof of the debt or claims. Further, a creditor must not vote in respect of an unliquidated debt unless a just estimate of its value has been made. Such an estimate must be made by the chairperson. 56 Regulation 5.6.26 provides that the chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting. Under reg 5.6.26, a decision by the chairperson to admit or reject a proof of debt or claim for the purposes of voting, may be appealed against to the Federal Court within 10 days after the decision. The appeals constituted by proceedings NSD 57 of 2010 and NSD 58 of 2010 are effectively appeals under reg 5.6.26(3). 57 The Famularo Parties seek to draw a distinction between an appeal from the rejection of a proof of debt, on the one hand, and an appeal from a discretionary management decision, on the other. They say that an appeal from the rejection of a proof of debt involves a hearing de novo, whereas an appeal from a discretionary management decision may in effect be no more than judicial review of the decision under review, on the basis of the material before or reasonably available to the decision maker. 58 Where an appeal is brought against a discretionary evaluative decision of an administrator or liquidator, the scope for intervention by the Court is necessarily confined. The chairman of the meetings convened by the orders of 27 November 2009 was appointed by the Court. To the extent that decisions are made from time to time by a chairman so appointed, those decisions are, in effect, under the authority of the Court and are subject to review and control by the Court, should a proper case be made out requiring intervention. If there is some defect in the manner in which the chairman conducts his duties, such as want of good faith or some erroneous approach in law or in principle, that may be a basis for intervention by the Court on appeal (see Duffy v Supercentre Development Corp Limited [1967] 1 NSWR 382 at 383). 59 In considering an appeal under reg 5.6.26, the Court must have regard to the material available to the chairperson. However, there may be cases where it would be appropriate for the importance and defects of the chairperson's decision to be demonstrated by material not available to the chairperson. There are significant differences between proofs of debt and claims for voting purposes in relation to Part 5.3A meetings and proofs of debt and claims for the purpose of entitlement upon a distribution in a winding up. Any estimate of value undertaken pursuant to r 5.6.23 as well as any decision under r 5.6.26 to admit or reject, will, of necessity, be of a somewhat summary nature. Such a decision can only be undertaken by the chairperson (see Selim v McGrath (2003) 47 ACSR 537 at [39] and [103]). 60 There may be a difference between a meeting convened under Part 5.3A, on the one hand, and a meeting convened by the Court under Part 5.1 on the other. In particular, in the present case, the contention of the Famularo Parties is that, had they been permitted to vote in respect of the claims that they have made, the resolutions would not have been carried. The effect of the resolutions is to bar the claims by the operation of the schemes. In that sense it may be arguable that the particular circumstances of the present case are closer to the rejection of a proof of debt for distribution purposes. That is a reason why additional evidence may be permitted to show the importance of the decision to reject the voting proof and any defects in the decision. The Famularo Parties have adduced evidence as to those matters. 61 It is a different question, however, to embark on a hearing de novo as to whether or not the Famularo Parties have a claim against Lift Partners, in effect trying the issues raised by the Response and Cross-Claim in the Commercial List proceedings. I am not persuaded, either on the material before Mr McGrath as chairperson, or on the material before the Court, that Mr McGrath erred in concluding that the Famularo Parties are not creditors of Lift Capital and Lift Nominees. 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.

APPROVAL OF THE SCHEMES 64 Two creditors of Lift Partners and Lift Nominees made submissions in relation to the schemes. Beibei Proprietary Limited appeared by its solicitor but did not seek to be made a party. Beibei Proprietary Limited supported the application for approval of the schemes, substantially for the reasons advanced by the Liquidators. The other submission was made by Mr Andrew Carr. Mr Carr made a written submission but did not appear at the hearing. Mr Carr said that he was not satisfied with the return that he will receive as a creditor under the schemes. He asserted that the proposed return does not reflect the strength of the case that former client creditors of Lift Partners have against Lift Partners. One particular concern expressed by Mr Carr is that the proposed return to client creditors would be reduced significantly if the Famularo Parties succeed. However, of course, the effect of the schemes will be to bar any claim by the Famularo Parties that they would be entitled to make against Lift Partners and Lift Nominees 65 The Famularo Parties contend that they were denied the opportunity to vote in circumstances where their propounded claims would be leased 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. 66 As I have already said, I ordered that meetings of relevant creditors be convened to be held on 22 December 2009 for the purposes of considering resolutions in relation to the schemes. The proposed explanatory statement to be sent to creditors was approved on 27 November 2009. On 27 November 2009 the explanatory statement, covering letter and accompanying proxy forms and voting proof of debt form were made available to be downloaded from the Liquidators' website. A link to that site was sent to all creditors with a known email address. On 30 November 2009, the explanatory statement and covering letter, together with proxy forms and voting proof of debt form were sent to all creditors of the Lift Parties and Lift Nominees. I am satisfied that the despatching of that material was carried out in accordance with the orders made on 27 November 2009. 67 In compliance with those orders, meetings were convened by way of advertisement in each of The Australian and the Sydney Morning Herald newspapers on 30 November 2009. On 22 December 2009, in accordance with the orders of 27 November 2009, there were meetings of all Lift Clients and of all other creditors of Lift Partners. There was also a meeting of creditors of Lift Nominees. The outcome of the vote on the resolutions in relation to the schemes was reported to the liquidators. The resolutions in favour of the proposed schemes were passed by an overwhelming majority of creditors at each meeting as follows: · At the Lift Nominees scheme meeting, 92.86 % of creditors in value and 93.93 % of creditors in number present and voting, voted in favour of the Lift Nominees scheme. · At the trade creditor meeting of Lift Partners, 100% of creditors in value and 100% of creditors in number present and voting, voted in favour of the Lift Partners scheme. · At the Lift Client meeting of Lift Partners, 92.86% of creditors in value and 93.93 % of creditors in number present and voting, voted in favour of the Lift Capital scheme. This application for approval of the schemes was advertised in accordance with the orders of 27 November 2009 in The Australian and the Sydney Morning Herald newspapers on 25 January 2010. Australian Securities and Investments Commission has indicated that it does not intend to provide a statement under s 411(17)(b) of the Corporations Act because it does not consider that, in the context of a creditors scheme of arrangement, matters relevant to the avoidance of Chapter 6 of the Act, which deals with takeovers, are relevant considerations. 68 There is evidence before the Court that certain conditions precedent to the Lift Capital schemes have been satisfied or waived. In all of the circumstances, I am satisfied that orders should be made approving the schemes. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

REASONS FOR JUDGMENT 1 These three proceedings have been heard together. When the matters were originally called on for hearing, senior counsel for the plaintiffs in the second and third proceedings (together the Famularo Parties) foreshadowed an adjournment application. The basis for the application was that the Famularo Parties wished to adduce further evidence, which would take some weeks. The proceedings were conducted on the basis that Mr Anthony Famularo spoke for all of the Famularo Parties. I refused the adjournment application on the basis that there would be no utility in admitting the foreshadowed evidence. 2 The first proceeding, NSD1308 of 2009, has been brought under s 411 of the Corporations Act 2001 (Cth) (the Act). The plaintiffs in that proceeding, Lift Capital Partners Pty Limited (Lift Partners), and Lift Capital Nominees (No 1) Pty Limited (Lift Nominees), are both in liquidation. On 27 November 2009, I ordered that meetings of creditors of Lift Partners and Lift Nominees be convened for the purpose of considering proposed schemes of arrangement between those two companies and their creditors. I described the principal effects of the proposed schemes in my reasons of that day (see In the matter of Lift Partners Pty Limited and Lift Nominees No 1 Pty Limited [2009] FCA 1523). Meetings of creditors were held on 22 December 2009, and Lift Partners and Lift Nominees now seek approval of the proposed schemes pursuant to s 411 of the Act. 3 The Famularo Parties claim to be creditors of Lift Partners and Lift Nominees. However, the chairman of the meetings convened pursuant to the orders made on 27 November 2009 rejected proofs of debt by the Famularo Parties for the purposes of voting at the meetings. The Famularo Parties are plaintiffs in one or other of the second or third proceedings, NSD57 of 2010 and NSD58 of 2010. In the second and third proceedings, the Famularo Parties appeal from the decision of the chairman, refusing to permit them to vote at the meetings. The joint liquidators of Lift Partners and Lift Nominees, Messrs Anthony McGrath and Joseph Hayes (the Liqidators), are defendants in the second and third proceedings. Mr McGrath was the chairman of the meetings convened by the orders made on 27 November 2009. The Famularo Parties also seek to be heard in opposition to the application for approval of the schemes of arrangement.

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