Hilldale v Leveraged Equities

DECISION : The statutory demand of 13 April 2007 is varied by reducing it by the figure of $381,221.

CATCHWORDS : CORPORATIONS - Application under s 459G of the Corporations Act 2001 (Cth) ("the Act") to set aside statutory demand - Moneys advanced for purchase of shares and options - Loan facility entitled lender to demand repayment absent default within 5 days of notice being given - Lender "closed out" borrower on grounds that borrower was acting in accordance with a strategy impermissible under the loan facility - Borrower contends that lender led borrower to believe strategy was permissible, raising an arguable conventional or promissory estoppel or misleading and deceptive conduct in contravention of either the Trade Practices Act 1975 (Cth) the Australian Securities and Investment Commission Act 2001 (Cth) or the Act - On the plaintiff's case detriment less than loan debt owed - Whether genuine dispute as to existence of debt or offsetting claim for equitable compensation - Demand varied by reducing amount to maximum detriment demonstrated

Corporations Act 2001 (Cth) LEGISLATION CITED : Trade Practices Act 1975 (Cth) Australian Securities and Investments Commission Act (2001) (Cth)

Macleay Nominees Pty Ltd v Belle Property East Pty Limited [2001] NSWSC 743 Solarite Airconditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411 CASES CITED : Commonwealth v Verwayen (1990) 170 CLR 394 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 Sewmail (Australia) Pty Limited v Booby Traps Pty Limited 23 ACSR 339

PARTIES : Hilldale Australia Pty Limited ACN 112 467 964 Leveraged Equities Limited ACN 051 629 282

COUNSEL : J.C. Giles (Plaintiff) P. Brereton (Defendant)

SOLICITORS : Levitt Robinson (Plaintiff) Allens Arthur Robinson (Defendant)

• 11 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2623/2007 HILLDALE AUSTRALIA PTY LIMITED ACN 112467964 -v- LEVERAGED EQUITIES LIMITED ACN 051629282 EX TEMPORE JUDGMENT 1 HIS HONOUR: This is an application under s 459G of the Corporations Act 2001 (Cth) ("the Act") to set aside a statutory demand dated 13 April 2007. 2 The demand claims $621,465.49 being the balance (after adjustments) of a loan outstanding by the defendant to the plaintiff. 3 The plaintiff asserts circumstances which, depending on their proper characterisation, it contends raise either a genuine dispute as to the existence of the debt or to an offsetting claim.

4 Mr Bruce Mackellar, is a director of the plaintiff. His son Mr Brendon Dale Mackellar is a stockbroker and former director of the plaintiff. References to Mr Mackellar in this judgment are to Mr Mackellar, the son. 5 In about January 2006 the parties entered into a FirstOption margin lending facility agreement ("the Facility"). 6 The Facility envisaged the plaintiff using loan funds advanced by the defendant to trade in shares and options. 7 Clause 3.2 of the Facility provided that: "You must repay to us all or part of the Total Amount Owing if we give you a Notice requiring you to repay, in which case you must repay the greater of the Total Amount Owing or the amount specified in the Notice before 4pm on the 5th Business Day after receiving the Notice ." 8 Mr Mackellar who recommended to his father that the plaintiff enter into the Facility and arranged for it to do so, had in his possession promotional material disseminated by the defendant which described the attributes of the Facility. 9 It was envisaged that the plaintiff would use the Facility to buy shares and might also buy (or write) put options entitling it to put corresponding shares which it had bought to other persons at a future date at a fixed (or strike) price. Such options would protect the plaintiff by way of its entitlement to receive that fixed price if the price of shares which it had bought (and which it could put under the options), fell. Such options would, in effect, guarantee a minimum price for shares which the plaintiff might buy. Such options are commonly termed "bought" put options or "long puts". 10 The defendant was prepared to lend to the plaintiff based on a percentage of amounts which might be received if the options were exercised, plus the value of shares which the plaintiff might buy and which might secure the plaintiff's obligations to repay. 11 Mr Mackellar devised a strategy for the plaintiff under which it would not only acquire bought put options giving it a right to sell shares but also enter into put options requiring it to buy shares from another party at a fixed price for which it (the plaintiff) received a premium. These options are commonly termed "sold" put options or "short puts". 12 Mr Mackellar's evidence was that from promotional material he had received, a conversation which he had with a representative of the defendant called Giri, and from the course of dealings between the plaintiff and the defendant, he came to the understanding or belief that the strategy which he had devised was permissible so far as the defendant was concerned. 13 For reasons which more fully appear below, it is not necessary for me to determine in these proceedings whether the strategy was or was not permissible under the terms of the Facility. 14 The last trade embarked upon by the plaintiff in pursuing the strategy was a purchase using the Facility (and therefore on the same account) by it of 64,000 shares in Woodside Petroleum Limited ("Woodside") and corresponding bought and sold put options each for an equivalent number of Woodside shares. 15 That plaintiff's position in Woodside was "closed out" by the defendant (on the evidence without the plaintiff's consent), after the defendant decided it would not allow the strategy. Its reasoning (which is not presently material) was that the "sold" options nullified the value of the "bought" options over which it had taken security for the plaintiff's obligations under the Facility.

16 On 30 January 2007 the plaintiff received from its stockbroker, Tricom, a letter which said, amongst others, the following: "We have reviewed your options account with us in light of recent discussions with you, correspondence from Leveraged Equities Limited and market movements. We require you to do one of the following by 2:00pm on Friday 9th February 2007: 1. transfer all positions in the account to another broker or other participant (which might also require an amount to be paid to Tricom for the transfer); or 2. provide collateral to Tricom in cash, or stock on terms acceptable to Tricom. The amount of collateral is currently $550,000 This amount may change at any later time. We will give you notice of the changed amount but until then this is the value of the collateral we require. All collateral will be held for Tricom in a separate account. If either of the above is not done by the required time, Tricom will close out some or all positions at any time after that, at your risk and cost." 17 On 8 February 2007, the defendant wrote to the plaintiff in the following terms: "We refer to the letter to you from Tricom dated 30 January 2007. Your instructions to Tricom to write short puts against your existing long puts breached your obligations under the FirstOption Agreement and Margin Lending Agreement. It also had the effect of substantially reducing the value of our security of your long puts. We are therefore writing to put you on notice that you must immediately: (a) instruct Tricom to transfer your short puts to a separate account from your long puts; and (b) provide any additional collateral which Tricom may require for that purpose, or otherwise provide Leveraged Equities with additional security equivalent to the amount of collateral which Tricom has demanded that you provide. You are also directed not to transfer your long puts over which we have security to another broker or participant. If you fail to comply with the above requirements then we may take further steps to protect our position without notice. These steps include enforcing our security and demanding repayment of all amounts owing. We fully reserve our rights in respect of your breach of your contractual obligations." 18 Mr Mackellar says when he bought the Woodside shares and options, he believed that the defendant had permitted the strategy. He says: "Had I known that LE [the defendant] would not permit that strategy I would not have bought the WPL [Woodside] shares and the corresponding options." 19 He also says that had he known that the defendant was going to close out its positions without reference to the plaintiff, and without giving it any chance to trade out of the positions, he would never have arranged for the entry by the plaintiff into bought and sold options within one account. In particular, had the defendant told him that it no longer permitted his strategy, he would not have entered into the Woodside transactions in November and December 2006. 20 He says that he believes the plaintiff was misled into entering into the Woodside transaction and that he has been informed by his solicitor that it is arguable that the defendant was estopped from closing out the plaintiff's "Woodside position". 21 The evidence shows that the plaintiff, using the Facility, traded various shares and options (not only Woodside) during the period 12 September 2006 to 30 January 2007. 22 The balance left owing to the defendant after the plaintiff's Woodside positions were closed out was $621,465.49.

23 Irrespective of the strategy which the plaintiff embarked upon, it is not in issue between the parties that the contractual arrangements between them enabled the defendant to demand moneys owing to it by the plaintiff and that they were, upon such demand, liable to be repaid before 4pm on the fifth business day after being demanded. It is also apparently not in issue for the purposes of this application (although it may be in any substantive proceedings) that in closing out the plaintiff's position as it did on 9 February 2007, the defendant did not give the plaintiff the required five business days within which to pay. 24 Mr J.C. Giles of counsel put the plaintiff's case primarily on the basis that there is an arguable conventional or promissory estoppel precluding the defendant from exercising any right it otherwise might have had to sell the plaintiff's shares and options in Woodside, and from demanding repayment. He put that, having acted contrary to the convention or promise, the defendant is now estopped from claiming the debt because the defendant induced the plaintiff to assume that combined trades (that is shares, and bought and sold put options) were permitted, and in reliance the plaintiff entered into them. 25 The plaintiff, he puts, will suffer detriment, being a loss of $647,753.83 (including brokerage) if the defendant enforces the alleged debt. This is the total negative balance on its account with the defendant. 26 Whether juridically speaking the position put on behalf of the plaintiff involves a dispute as to the existence or amount of the debt claimed, or an offsetting claim for equitable compensation (which I think is the correct position), need not be decided here.

27 In the alternative, Mr Giles put that the defendant had engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of either the Trade Practices Act 1975 (Cth), the Act or the Australian Securities and Investments Commission Act (2001) (Cth) as the case may be. 28 It was, he put, misleading for the defendant to have conveyed to the plaintiff that combined trades were permitted or not a breach of the Facility prior to the entry into of the Woodside trades, when (if it be the case) those transactions were not permitted under Facility. 29 He put that the plaintiff is at least arguably entitled to an order under one of the abovementioned statutory provisions preventing the defendant from claiming the debt or having the effect of extinguishing it. Hence, he says, there is a genuine dispute as to the existence of the debt. 30 Alternatively, and finally, he put that it was arguably unconscionable and in contravention of sections of those statutory enactments for the defendant to have changed its position and closed out the plaintiff's Woodside positions at a substantial loss to the plaintiff. This might be framed either as a dispute as to the existence of the debt or as an off-setting claim for damages. 31 It is necessary only briefly to refer to the now well-established principles which govern the approach to this type of application. 32 To satisfy the Court that there is a genuine dispute as to the existence or amount of a debt to which the demand relates the plaintiff need only show one issue having a sufficient degree of cogency to be arguable. That test is by no means a difficult or demanding one. It is not expected that the Court will embark upon any extended inquiry, this being a summary procedure. The Court does not seek to resolve competing claims, but to determine whether the claim is made in good faith - which means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful: see Macleay Nominees Pty Ltd v Belle Property East Pty Limited [2001] NSWSC 743 per Palmer J; Solarite Airconditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411 at [23] per Barrett J.

33 Although Mr P. Brereton of counsel who appeared for the defendant argued faintly to the contrary, Mr Mackellar's evidence that he thought, on the basis of conduct on the part of the defendant, that the strategy was permitted and not a breach of the lending arrangements must be accepted at this level of inquiry. 34 However, that is not the end of the matter. 35 The evidence establishes, and it was not put in issue by Mr Giles, that by implementing the strategy in its totality, the plaintiff did not make a loss but rather a profit of $223,466. The manner in which this figure was reached was set out in a schedule to written submissions on behalf of the defendant.

36 The evidence, so far as can be determined, reveals a loss on the Woodside transactions of $381,221. 37 The amount of the statutory demand is the net figure on the plaintiff's trading account with the defendant comprehending many transactions including, but not limited to, the Woodside ones. 38 In his affidavit evidence, Mr Mackellar restricts himself to what he would or would not have done with respect to the Woodside securities. 39 If it were the case that he would not have embarked upon the strategy at all (that is upon the entirety of the dealings carried out in pursuing it), it follows that he also would not have traded in a series of other securities (apart from the Woodside ones) which were part of the same strategy. These included CSR Ltd, Oxiana Ltd, Lihir Gold Ltd, Zinifex Ltd, Qantas Airways Ltd, Oil Search Ltd, AWB Ltd and AMP Ltd. 40 The measure of any loss or detriment here must be the difference between the position the plaintiff finds itself in, having embarked on the strategy, as opposed to the position it would have been in had it not done so. If expressed in terms of equitable principles that difference is the minimum equity: Commonwealth v Verwayen (1990) 170 CLR 394 at 413 per Mason CJ. If measured by reference to liability under the statutory provisions relied upon, tortious principles apply: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13. 41 Embarking upon the strategy as a whole brought about a benefit not a detriment. The plaintiff's principal contention that it is freed from repayment of the whole debt is thus illusory and cannot be accepted. 42 However, it seems to me to be arguable that the defendant's conduct complained of was continuing nature. Had Mr Mackellar known that the defendant would not have permitted the strategy at the point in time when the Woodside transactions were effected, he would not have procured the plaintiff's entry into them. In other words, if the Woodside transactions are looked at discretely, arguably a loss of $381,221 might have been avoided. 43 There are a number of possible answers to this from the defendant's perspective including the fact that it always had the contractual right to demand repayment of the loan at any time irrespective of the strategy which the defendant employed. On this basis the detriment the plaintiff could have suffered was by the defendant giving less than five day's notice. 44 However, in my view, the plaintiff's claim restricted to the Woodside loss cannot be said to be so devoid of substance that no further investigation is warranted: Solarite v Airconditioning Pty Ltd v York International Australia Pty Ltd at [23]. 45 At this level of inquiry, and particularly in light of the statutory relief claimed, it seems to me that the plaintiff meets the low threshold of raising either a genuine dispute or countervailing claim to the extent of $381,221, but no more. 46 There is the question of interest that would have been accrued on the loan account attributable only to the Woodside trades. On this issue, the plaintiff has, in my view, failed to put forth evidentiary material which would make it possible for the Court to determine what that amount is: see Sewmail (Australia) Pty Limited v Booby Traps Pty Limited 23 ACSR 339 at 342 - 343 per Burley J. 47 The plaintiff has established a genuine dispute or an offsetting claim with respect to the amount of $381,221. 48 A fall back position put on behalf of the defendant was that the Court should vary the demand pursuant to the provisions of s 459H(4) of the Act, which in the circumstances of this case I propose to do. 49 The orders of the Court will be that the statutory demand of 13 April 2007 is varied by reducing it by the figure of $381,221. 50 The parties are to bring in Short Minutes reflecting that outcome. 51 The statutory period for compliance with the statutory demand will be extended for 21 days from today's date. 52 I make no order as to costs. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.