Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105

Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105 - WASCA 2006 case summary — Zoe

[162]

(a) "This Information Memorandum has been prepared to assist investors considering participating in the $35 million Promissory Notes Issue by [the appellant], a special purpose company specifically established for this purpose."

(b) "[The appellant] is seeking to raise $35 million to lend [to the Developer as trustee of the Trust], the principal project company, to assist in the funding of the project. The funds raised will be allocated partly towards the purchase of the property as well as pre-construction development expenses that include consultants, marketing, advertising, selling and other project establishment costs."

(c) "The issue is of unsecured Promissory Notes in a special purpose company [the appellant]. [The appellant] will have a 2nd ranking mortgage over the property and 2nd ranking charge over the Trust. In addition, the Westpoint Group will provide a guarantee to the investors for all interest and capital payments due."

(d) "Investors will receive interest of 12% per annum payable monthly in arrears plus a flat 2% payable with the repayment of capital on the Expiry Date of the Promissory Note: 36 months from the issue date."

(e) "Each Promissory Note must have a minimum face value of $50,000 and is issued in accordance with the Bills of Exchange Act 1909 (Cth). Promissory Notes are not securities as defined by the Corporations Act (Section 9 'Debentures') and therefore are not covered by the Corporations Act."

(f) "Promissory Notes by nature are unsecured, however, the lending risk will be mitigated by issuing the Notes from a special purpose company which will have security over the project as noted in the financing structure below."

(g) "As you will see from the structure diagram, the Senior Debt Provider will hold a first ranking mortgage over the property and a first ranking charge over the Trust (the First Ranking Security). [The appellant] will hold a second ranking fixed and floating charge over the Trust and a second ranking mortgage over the property. In addition, Westpoint Corporation Pty Ltd and associated entities ('the Westpoint Group') will provide a guarantee to [the appellant] up until the redemption of all Promissory Notes and satisfaction of all interest payments due under those Promissory Notes."

[341]

"In my view the conclusion of the majority in Williamson is correct, but I myself would enlarge upon the reasons given for that. Danckwerts LJ adverted to the difference between a promissory note and a notice to quit but did not elaborate thereon. There is no doubt that the reasoning in Dagger v Shepherd is correct, and that a notice to quit (as in any contract) is not rendered void for uncertainty because something must be done 'on or before' a fixed date. There is in that situation certainty as to the date by which the obligation must be performed. But a promissory note (and any bill of exchange) creates rights and obligations which go well beyond mere contractual rights and obligations between parties. It cannot be overlooked that the critical feature of any bill of exchange is its negotiability, and rights may be acquired by a person, not a party to the original contract, namely a holder in due course, against the payer. The law also imposes obligations on the intending transferee of such a negotiable instrument, particularly with respect to what enquiries, if any, should be made before accepting the endorsement. ...

... Where there is either a fixed day for payment, or the note is payable on demand, there will be presentment of the note in accordance with its terms for payment. If it is then dishonoured that would be noted, normally, on the face of the note and thereafter any indorsee would have knowledge thereof. Paragraph 4 of this note gives the payer the right to make payment other than upon presentation of the note in accordance with its tenor. That introduces, in my view, a degree of uncertainty with respect to payment which has, or may have, marked consequences so far as the negotiability of the note is concerned.

Here the law is not concerned with whether the terms of a contract are so uncertain as to render the agreement a nullity, but with whether or not there is such uncertainty because of the contingency as to the time for payment as to make illusory the negotiability of the instrument. In my view cl 4 has the effect of rendering illusory the negotiability of this document as a promissory note. It may be there is good reason from the commercial point of view for the payer always to be in a position to redeem the bill. However, he may always purchase the instrument prior to maturity; that is a matter to which Danckwerts LJ referred in Williamson at 97 relying on a passage from Chalmers' Bills of Exchange. The payer of a promissory note always has the right to purchase it thus putting an end to his obligations thereunder; but that is a vastly different thing from creating a negotiable note containing a provision that it may be paid out at the option of the payer prior to maturity date.

The documents here are not, therefore, promissory notes and Octahim Wise can only succeed in recovering the total amount of A$6 million if it can prove a contract (or contracts) supported by consideration providing for the payment by part of that sum. ..."

[345]

"Counsel for the Credit Union pointed to the case of John Burrows Ltd et al v Subsurface Surveys Ltd [1968] SCR 607, followed in Ireland by Creative Press Limited v Harman [1973] IR 313. It was a case of a promise permitting the maker, at his own discretion, to make payment on account of principal from time to time in advance of maturity. Counsel contended that in such a case interest could not be calculated without extraneous information concerning possible prepayments. Nonetheless, the instrument was held to be a promissory note.

That case is not of any assistance to the Credit Union. It was decided on the basis that the instrument under consideration was a promissory note because it created no contingency and complied with the definition given in s 176(1) of the Act. ...

...

The case at bar has to do with the certainty of the amount, not the contingency of the promise.

The certainty of the amount payable was not discussed in the judgment of this court in the John Burrows case, either as to principal or interest, simply because it was not considered to be in issue.

If the maker of such a note, as was considered in that case, pays part of the principal prior to maturity, he pro tanto discharges it and would be wise to have the partial discharge acknowledged in writing on the instrument. He would otherwise run the risk of paying twice should the note be delivered to a holder in due course, who would have no reason to presume that the maker has availed himself of the prepayment privilege.

With respect to the time of payment, such a note is even more certain than a note payable on demand since it states a definite date beyond which it cannot run. There is no uncertainty as to the amount of principal payable: insofar as a holder in due course is concerned, the full amount is payable, less the amount of such prepayments as may have been acknowledged in writing on the instrument. As in the case of a note payable on demand, the amount of interest can be calculated at all times on the basis of the full amount of the principal or of what remains of it on the face of the document. It is true that a new prepayment on account of principal might be forthcoming and this creates a degree of uncertainty relating to the exact amount of interest that will ultimately be payable. But such uncertainty is of the same nature as the uncertainty of the amount of interest ultimately payable in the case of a note payable on demand, although it depends on the option of the maker, not the holder.

The note considered in the John Burrows case was thus sufficiently certain on its face with respect to its essential elements to comply with the requirements of negotiability."

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Judgment (424 paragraphs)

Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105 (15 June 2006)

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Legislation Cited (2)

Cases Cited (16)