In the Matter of HIH Insurance Limited (In Liquidation) ACN 008 636 575; McGrath and Honey as the joint liquidators of HIH Insurance Limited (In Liquidation) ACN 008 636 575 v Perpetual Trustee Company Limited ACN 000 001 007

HIH INSURANCE LIMITED (IN LIQUIDATION) ACN 008 636 575

HIH HOLDINGS (N.Z.) LIMITED (IN LIQUIDATION) ARBN 084 759 866

on the cross claim PERPETUAL TRUSTEE COMPANY LIMITED ACN 000 001 007

AND: LM NOMINEES PTY LIMITED ATF THE MARTIN UNIT TRUST ACN 073 860 214

HIH HOLDINGS (NZ) LIMITED (IN LIQUIDATION) ARBN 084 759 866

HIH INSURANCE LIMITED (IN LIQUIDATION) ACN 008 636 575

Introduction 1 This case is concerned with 'redemption' and 'conversion'. However, neither word is to be understood in its biblical or religious sense. Rather, the case requires a meaning to be given to these words as used in an 'HIH NZ CONVERTING NOTES 1998 TRUST DEED' made 26 October 1998 ('the Trust Deed'), which provided for the creation and issue of 'Notes' by the directors of the second defendant/first cross-defendant, HIH Holdings (N.Z.) Limited (In Liquidation) ARBN 084 759 866 ('NZ').

The parties 2 When the proceedings were commenced on 7 August 2007 the only parties were the first plaintiffs, Anthony McGrath and Christopher Honey as the joint liquidators of HIH Insurance Limited (In Liquidation) ACN 008 636 575 ('the Liquidators'), the second plaintiff, HIH Insurance Limited (In Liquidation) ACN 008 636 575 ('HIH Insurance') and the first defendant, Perpetual Trustee Company Limited ACN 000 001 007 ('Perpetual'). 3 By an order made 8 February 2008 NZ was added as a second defendant. At the time it was noted that NZ did not object to being so joined upon the statement of its position as follows: 'HIH NZ, a company incorporated under the laws of New Zealand, is not opposing becoming a party to these proceedings strictly on the condition that the declaratory relief sought in the Plaintiffs' Further Amended Originating Process and Further Amended Points of Claim are not amended and any Cross-Claim is not filed by the First Defendant without the written consent of HIH NZ. That condition is sought so that the proceedings remain limited to the interpretation of documents governed by the law of New South Wales. Matters pertaining to the liquidation of HIH NZ, including the entitlement of any party to prove in the estate of HIH NZ, is a matter for the supervision of the Courts of New Zealand and any orders made by this Court in these proceedings do not seek to affect or limit in any way the discretion of the liquidators of HIH NZ in adjudicating upon any proofs of debt lodged in future in the liquidation of that company by the other parties to these proceedings.' 4 By an order made 12 March 2008 the third defendant, LM Nominees Pty Limited ACN 073 860 214 ('LM Nominees') was joined as a third defendant.

The relief sought 5 The relief sought by the first plaintiffs and the second plaintiff in the Second Further Amended Originating Process filed 12 March 2008 was as follows: '1. A declaration that the Converting Notes (as that term is defined in the HIH NZ Converting Notes 1998 Trust Deed dated 26 October 1998), issued by the Second Defendant [NZ] … have converted into Ordinary Shares in HIH [Insurance]. 2. A direction that, in the circumstances, the liquidator of HIH [Insurance] [the first plaintiffs] is justified in allotting shares in HIH [Insurance], in respect of the Converting Notes, in accordance with the Conditions of Issue. 3. A declaration that the liquidator of HIH [Insurance] [the first plaintiffs] is entitled to allot shares in HIH [Insurance], in respect of the Converting Notes, in accordance with the Conditions of Issue. …' 6 On 17 March 2008 Perpetual and LM Nominees, as trustee for the 'Martin Unit Trust' filed an 'INTERLOCUTORY PROCESS (CROSS CLAIM)' in which NZ and HIH Insurance were named as the cross-defendants. In that Cross-Claim the relief sought was relevantly as follows: '1. A declaration that all of the Notes Contracts were validly terminated as and from the notice by Perpetual to [NZ] … dated 15 November 2007. 2. A declaration that, as a result of the termination of the Notes Contracts on 15 November 2007, the direction given by LM Nominees by virtue of clause 6.5(b) of the Conditions of Issue, that LM Nominees directs [NZ] … to apply the money which it is entitled to receive from [NZ] … on the redemption of the Notes in subscribing for a number of ordinary shares in HIH [Insurance], was also terminated. 3. A declaration that, as a result of the termination of the Notes Contracts on 15 November 2007, [NZ] ... is not now entitled to redeem the Notes, either in whole or in part, or apply the moneys payable on redemption of the notes in subscribing for ordinary shares in HIH [Insurance]. 4. Further, or in the alternative to 1-3, a declaration that, regardless of the efficacy of the termination of the Notes Contracts on 15 November 2007, if HIH [Insurance] now proceeds to allot shares to LM Nominees or any other noteholder, such allotment will not be an allotment made pursuant to any subscription for shares by [NZ] … in accordance with any of: 1. the Notes Contracts or any equivalent notes contracts for other noteholders; 2. the Trust Deed; or 3. the Conditions of Issue. …' 7 On the hearing of the matter Fabian Gleeson SC appeared with J M White of counsel for the first plaintiffs and the second plaintiff/second cross-defendant, J R Sackar QC appeared with J A C Potts of counsel for the first and third defendants who were, respectively, the first and second cross-claimants and N A Coffey of Blake Dawson, Solicitors, appeared for the second defendant/first cross-defendant. 8 Mr Coffey did not seek to address the Court in relation to the issues raised by the Second Further Amended Originating Process or the Cross-Claim. However, he did not, on behalf of his client, submit to any of the orders that were sought and indicated that, in relation to any orders that are ultimately made, he would wish to be heard on the formulation of such orders so as to ensure that they are consistent with NZ's statement of its position as noted when the order was made adding NZ as a second defendant on 8 February 2008. 9 In relation to appropriate orders, there was apparent agreement between Mr Fabian Gleeson SC, Mr Sackar QC and Mr Coffey that the formulation thereof should be the subject of Short Minutes to be brought in after consideration by the parties of these reasons. With perhaps the exception of the declaration sought by the first plaintiffs and the second plaintiff as set out in paragraph 3 of the Second Further Amended Originating Process, I must say that I would have some difficulty in accepting the formulation of any of the proposed orders as sought in the Second Further Amended Originating Process filed 12 March 2008 or the Interlocutory Process (Cross Claim) filed 17 March 2008.

Difficulties with construction 10 One of the difficulties with the construction of the Trust Deed is occasioned by the fact that the words 'convert' and 'conversion' are given meanings which are quite artificial and not the natural meanings one would expect to find used in relation to shares in or debentures of a company (see generally s 92 of the Corporations Act 2001 (Cth) ('the Corporations Act') and the definition of 'debenture' in s 9 of the Corporations Act). 11 Another problem with the Trust Deed is that it uses the word 'redeem' but does not define that word or the word 'redemption'.

Redemption 12 In the Macquarie Dictionary (4th Edition, 2005) 'redeem' was relevantly defined as follows: '1. to buy or pay off; clear by payment: to redeem a mortgage. 2. to buy back, as after a tax sale or a mortgage foreclosure. 3. to recover (something pledged or mortgaged) by payment or other satisfaction: to redeem a pawned watch. 4. to convert (paper money) into specie. 5. a. to claim (an item) by presenting a coupon, voucher, etc. b. to claim (a prize) by presenting a winning ticket. 6. to discharge or fulfil (a pledge, promise, etc.). 7. to make up for; make amends for: a redeeming feature. 8. to obtain the release or restoration of, as from captivity, by paying a ransom. …' 13 'Redemption' was relevantly defined in the same dictionary as follows: '1. the act of redeeming. 2. the state of being redeemed. 3. deliverance; rescue. … 5. repurchase, as of something sold. 6. paying off, as of a mortgage, bond, or note. 7. recovery by payment, as of something pledged. 8. convertibility of paper money into specie. - phrase …' (Emphasis added) 14 In the Oxford English Dictionary (2nd Edition, 1989) Vol XIII, 'redeem' was relevantly defined as follows: '1. To buy back (a thing formerly possessed); to make payment for (a thing held or claimed by another). … b. To regain, recover (an immaterial thing). … c. To regain or recover by force. … … 2. a. To free (mortgaged property), to recover (a person or thing put in pledge), by payment of the amount due, or by fulfilling some obligation. … b. To buy off, compound for (a charge or obligation) by payment or some other way. … c. To fulfil, perform (a pledge, promise, etc.). … 3. To ransom, liberate, free (a person) from bondage, captivity, or punishment; to save (one's life) by paying a ransom. … 4. To rescue, save, deliver. … … c. To reclaim (land). … … 5. To free from a charge or claim. … 7. To obtain by purchase, to buy. … … b. To go in exchange for. … … 8. To save (time) from being lost. … 9. Of persons: To make amends or atonement for, to compensate (an error, fault, etc.). … b. To make up to oneself for (some wrong sustained); to repay. … … c. To make good (a loss). … … 10. Of qualities, actions, etc.: To make up for, compensate for, counterbalance (some defect or fault). … b. To save (a person or thing) from some defect or blot. … … 11. a. To restore or bring into a condition or state. … … b. To restore, set right again. … … 12. To gain, reach (a place). … …' 15 In the same dictionary 'redemption' was relevantly defined as follows: '… 2. a. The action of freeing a prisoner, captive, or slave by payment; ransom. … 3. a. The action of freeing, delivering, or restoring in some way. … … b. Improving (of time); reclaiming (of land). … c. That which redeems; a redeeming feature. … 4. a. The action of redeeming oneself from punishment; way or means of doing this; atonement made for a crime or offence. … b. A recompense. … … 5. The fact of obtaining a privileged status, or admission to a society, by means of purchase. … 6. The action of clearing off a recurring liability or charge by payment of a single sum. … 7. The action of redeeming or buying back from another, in various applications. … …' 16 'Redemption' was considered by Cohen J in Re Arrowfield Group Ltd (1995) 17 ACSR 649 at 654. In that case Tricontinental Corporation Ltd had been the holder of 3,604,974 ordinary shares in Arrowfield Group Limited representing 16.17 per cent of its issued capital. Tricontinental Corporation Ltd agreed to one quarter of those shares being cancelled and to the conversion of the balance of its shares to converting preference shares. The matter which came before Cohen J was an application by Arrowfield Group Limited for confirmation of resolutions for reduction of capital and the issue of converting preference shares. An issue raised by an objector was to the effect that s 198 of the Corporations Law, which allowed a company to vary rights in its shares, including dividing shares into classes on the passing of a special resolution, did not apply to redeemable preference shares. In that context Cohen J said, at 654-655, after referring to Ford & Austin's Principles of Corporations Law, 7th ed., p747: '… It is said by those authors that redeemable preference shares are a form of temporary shareholding, which is like debt finance, because the amount invested may have to be repaid before liquidation. The definition of redeemable preference shares in s 9 of the Corporations Law is that a redeemable preference share is a preference share liable to be redeemed. This is hardly of much assistance. The ordinary meaning of redemption in these circumstances, that is to say other than a theological one, is "to buy back, or to pay off". See Jowett, The Dictionary of English Law. The Macquarie Dictionary also refers to "recover (something pledged or mortgaged) by payment or other satisfaction". It might be thought that other satisfaction is the issue of ordinary shares. The general meaning however, in respect of the redemption of matters such as shares in this case, is to pay them off. In the light of s 192(3), I consider a right to repayment is an essential element of a redeemable preference share. The intention is to allow capital represented by those shares to be repaid, as long as the capital in the company is maintained. Thus, any payment out of moneys available for dividend, requires the establishment under s 192(5) of a capital redemption reserve, which for the purpose of reduction of capital is to be treated as paid up capital. In the proposed scheme, there is no right for the converting preference shares to be paid out at all. The only right is to receive, in lieu of those shares, ordinary shares in the company. Although the capital is maintained, this is not brought about by the issue of shares producing cash, which then becomes available to pay out the holders of the preference shares. There is merely the substitution of one type of share for another, and in my opinion, this could not be treated as a right of redemption.' (Emphasis added) 17 In Osborn's Concise Law Dictionary (4th Edition, 1954) redemption was defined as follows: 'The paying off of a mortgage debt or charge upon property; the "buying back" of the property. An action for redemption is one brought to compel the mortgagee to reconvey the property on payment of the debt and interest. …' 18 In s 6(1) of the Companies Act, 1936 (NSW) 'debenture' was defined to include: '…debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.' 19 In s 5(1) of the Companies Act, 1961 (NSW) 'debenture' was defined to include: '…debenture stock, bonds, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not.' (Emphasis added) 20 In s 9 of the Corporations Act 'debenture' was relevantly defined as follows: 'debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money. …' 21 Redemption is a word which is used in many different contexts. Where used in relation to debentures it should, in my opinion, bear a meaning which is consistent with that which is applicable when speaking of the redemption of mortgages or of redeemable preference shares. I do not gain any assistance from considering the use of the word redemption in the context of Workers' Compensation legislation where an obligation to effect weekly payments may be 'redeemed' by the payment of a capital sum on a once and for all basis. Similarly, I do not find it helpful to consider the use of the word redemption in the context of (say) an airline's loyalty programme where 'frequent flyer points' may be redeemed in exchange for airline tickets, goods or services. 22 I agree with Cohen J that in respect of the redemption of matters such as shares the general meaning of 'redemption' is 'to pay them off'. Similarly, the general meaning, in respect of the redemption of matters such as debentures is to pay them off. 23 Plainly, when law dictionaries speak of 'buying back' they are addressing situations where legal title has passed from an owner of property which has been provided as security for a loan and the borrower is left with an equity of redemption. Recovery of an unencumbered title is achieved by payment of the moneys secured. Paying off the money lent brings about a redemption. 24 Where a debenture takes the form of an unsecured note, redemption may be effected by the clearing of the debt by payment. 25 At the end of the day the question which arises in this case is whether or not NZ could redeem the so called 'converting notes' issued under the Trust Deed otherwise than by the payment of cash. It is common ground between the parties that the relevant date was 12 June 2003 and that, on that date, NZ was unable to clear the debt owing in respect of the Notes by the payment of cash. Mr Fabian Gleeson SC acknowledged that at the relevant time NZ had become insolvent and clearly did not have cash funds. If it was required, on the proper construction of the Trust Deed, to pay cash to the noteholders and then effectively forward that cash on to HIH Insurance, it could not have done so. 26 Mr Fabian Gleeson SC submitted that by agreeing to clause 12.3 in Schedule 1 to the Trust Deed the noteholders were taken to have directed that moneys due by NZ to the respective noteholders on 12 June 2003 be paid to HIH Insurance and that such a direction constituted consideration for the allotment by HIH Insurance of shares in HIH Insurance to the noteholders. His submission continued: '… If [NZ] paid in cash moneys to [HIH Insurance] before the allotment, that payment would only be a conditional payment, because [HIH Insurance] hasn't performed its side of the bargain. It follows that when [HIH Insurance] performs its side of the bargain and allots the shares, the direction to pay given by the noteholder to [NZ] then operates as an irrevocable and unconditional assignment of that fund of money to [HIH Insurance]. So the noteholder gets what it bargains for, it gets shares in [HIH Insurance].[HIH Insurance] gets what it's bargained for, it has a claim against [NZ] in debt for that fund of money.' 27 It is questionable whether HIH Insurance relevantly 'bargained' for anything. 28 Mr Fabian Gleeson SC conceded that clause 12.3 in Schedule 1 to the Trust Deed did not of itself effect the conversion of Notes issued by NZ into shares of HIH Insurance. 29 He submitted that by virtue of clause 12.3 noteholders were denied an opportunity to complain that cash did not actually flow from NZ to HIH Insurance. 30 Mr Sackar QC puts the contrary case that, if cash does not flow, then there cannot be a conversion, as sought by the liquidators and HIH Insurance, even though it may be assumed that any shares that would now be allotted in HIH Insurance to noteholders would be worthless. Mr Sackar submitted that in the context of the facts in this case redemption required payment and not simply assignment of a promise to pay.

Conversion 31 The relevant definitions of 'convert' and 'conversion' in the Trust Deed are to be found in clause 1.1. Those definitions were expressed as follows: '1.1 In this Deed, and all documents issued under or pursuant to this Deed, unless the context otherwise requires: … 'convert' in relation to a Note ['Converting Note' or 'Notes' was defined to mean (a) the June 1998 Notes [converting unsecured notes which were created and issued under a Deed Poll dated 17 March 1998]; and (b) the converting unsecured 1998 notes created on the terms of Schedule 1 and issued by the Company under the provisions of the Trust Deed and a Deed Poll dated 26 October 1998 to which reference will be made hereafter, and for the time being outstanding and a reference to a Note that was outstanding as at a particular date was defined to mean a Note that had not been converted or redeemed prior to such date], means the redemption of that Note in conjunction with the Company [NZ] applying, at the irrevocable direction of the Noteholder, the principal amount of that Note ["Principal Moneys" was defined to mean the total amount paid on issue of the Notes issued pursuant to the Trust Deed] in subscription for Ordinary Shares [meaning fully paid ordinary shares in the capital of HIH Insurance] (and, if applicable, X Class Convertible Notes [Convertible Notes to be issued by HIH Insurance which were convertible into voting shares in HIH Insurance in certain circumstances which would avoid breaches of the takeover provisions of the Corporations Act and/or provisions restricting foreign investment in the shares of Australian companies]) immediately in accordance with the Conditions of Issue [the conditions specified in Schedule 1 to the Trust Deed], and 'conversion' will be construed accordingly;' 32 Mr Sackar QC submitted that conversion within the meaning of the Trust Deed involved a two step process, the first of which required NZ to redeem the Notes and the second of which required NZ to apply the redemption fund in subscription for shares in HIH Insurance on behalf of the noteholders. 33 It may be observed that the converting notes issued under the Trust Deed were not converting notes within the traditional meaning of those words. Upon conversion, the Notes issued by NZ did not become shares in NZ. Rather, 'conversion' when effected involved NZ applying the principal under each note by way of subscription for fully paid ordinary shares and/or X Class Convertible Notes in HIH Insurance, which it was then for HIH Insurance to deal with. 34 Mr Fabian Gleeson SC did not submit that the Notes converted into shares at midnight on 12 June 2003. He acknowledged that his clients could not say that, because HIH Insurance still had to allot the relevant shares to the noteholders. The fact that there was not an automatic conversion of Notes in NZ into shares in HIH Insurance is confirmed by condition 6.2 of Schedule 1 to the Trust Deed which provided for 'Conditions of Issue of the 1998 Notes'. Condition 6.2 under the heading 'Allotment of Shares on Conversion' provided as follows: '6.2 The Ordinary Shares to which a holder of Notes is entitled in the case of conversion of Notes under Conditions 4.1(a), 9 or 12 must be allotted within 20 Business Days of the Conversion Date [a defined expression, but a definition that was applicable only 'where a notice is given'] and any such allotment will have effect and be deemed to have been made on that Conversion Date.

A short chronology 35 26 October 1998 Prospectus for the issue of unsecured converting notes by NZ signed by its directors Messrs R R Williams, G O Sturesteps, R M Chapman by his agent D Fodera and by D Fodera (misdescribed on the cover page as being a prospectus of HIH Insurance). 26 October 1998 Prospectus lodged with the Australian Securities and Investments Commission. 26 October 1998 Circular letter from the Chairman of HIH Insurance to 'Dear Investor' inviting participation in the issue of notes by NZ which included an assertion that 'the payment of the obligations of the Company [an apparent reference to NZ] on the Notes are guaranteed by HIH [apparently a reference to HIH Insurance]' (presumably a reference to clause 2.1 of a Deed Poll made on 26 October 1998 by HIH Insurance in favour of Perpetual in its capacity as trustee under the Trust Deed and the noteholders for the time being of converting unsecured notes governed by the Trust Deed ('the Deed Poll') - see Recital E to the Trust Deed. Whilst HIH Insurance was a party to the Trust Deed, its only covenants, somewhat curiously recorded as 'Covenants by Guarantor" (see clause 5B), related to the manner in which it would carry on its own business). 26 October 1998 The Trust Deed was made. 26 October 1998 The Deed Poll was made by HIH Insurance. 16 November 1998 Ten separate application forms for the issue of converting notes by NZ, each with application monies of $A 100,000, lodged by L M Nominees. Each form nominated 'Martin Unit A/C' as the designated account. Each application form generally accorded with the prescribed application form in the prospectus. Each form included: 'A. I/we lodge application moneys of A$100,000.00 by way of subscription for Unsecured Converting Notes at the Issue Price (as defined in the Prospectus) … By returning this Application Form I/We make an offer to apply for that number of Converting Notes calculated in accordance with section A of this Application Form…and hereby authorise HIH Holdings (N.Z.) Limited to complete and execute any documents necessary to issue Converting Notes to me/us and agree to be bound by the HIH Holdings (N.Z.) Limited Converting Note 1998 Trust Deed, as amended from time to time. …' Clause 3 of the Trust Deed contemplated the issue by NZ of Note Certificates generally in accordance with schedule 3 to the Trust Deed within two months from the date when the Principal Moneys represented by the Notes were subscribed. The relevant form of Note Certificate included: ' HIH Holdings (N.Z.) Limited … ISSUE OF UNSECURED CONVERTING NOTES WITH A FACE VALUE OF $5.00 EACH … THIS IS TO CERTIFY that: 1. on this day, of was/were registered the holder(s) of of Notes under a Trust Deed dated in October 1998 ('Terms and Conditions of Issue') between HIH Holdings (N.Z.) Limited ('Company') and Perpetual Trustee Company Limited('Trustee') and HIH Insurance Limited 2. the Notes: (a) are issued by the Company on and subject to the Terms and Conditions contained in the Deed, including the Conditions of Issue forming Schedule 1 to that Deed; and (b) convert into fully paid ordinary shares in HIH Insurance Limited ('HIH') in accordance with and pursuant to the Deed Poll dated in October 1998 by HIH ('Terms of Conversion, Guarantee and Subordination of Guarantee'). 3. The Terms and Conditions of Issue and the Terms of Conversion, Guarantee and Subordination of Guarantee are incorporated in and form part of this Certificate. …' 27 January 1999 NZ issued an allotment certificate to LM Nominees 'Martin Unit A/C' certifying that it was the registered holder of 200,000 7.535% per annum unsecured converting notes [with a face value, at $5 per note, of $1 million] issued upon and subject to the terms and conditions contained in the Trust Deed. The allotment certificate included: '3 This certificate constitutes an acknowledgement of indebtedness of the Company [NZ] in respect of the Notes but is not evidence of title or ownership of the Notes.' 19 February 2001 Shares in HIH Insurance traded in the range: 22.5 cents - 23.5 cents. 20 February 2001 Shares in HIH Insurance traded in the range: 22.5 cents - 23 cents. 21 February 2001 Shares in HIH Insurance traded in the range: 22 cents - 23 cents. 26 February 2001 Shares in HIH Insurance traded in the range: 15.5 cents - 19.5 cents. 27 February 2001 Shares in HIH Insurance traded in the range: 17 cents - 19.5 cents. 1 March 2001 Shares in HIH Insurance suspended from official quotation on the Australian Stock Exchange. 15 March 2001 Provisional liquidators appointed to HIH Insurance. 6 June 2001 Interim liquidators appointed to NZ. 12 June 2001 Commencement of the 'Conversion Period' in respect of the Notes issued by NZ under the Trust Deed. 4 July 2001 HIH Insurance removed from the official list of the Australian Stock Exchange at the request of HIH Insurance under listing rule 17.11. 19 July 2001 NZ wound up 19 July 2001 At the commencement of the winding up of NZ there were 42,620,000 Notes outstanding which had been issued under the Trust Deed. The said Notes had a face value of $A213,100,000. 27 August 2001 HIH Insurance wound up. 12 June 2003 End of the Conversion Period in respect of the converting Notes issued by NZ under the Trust Deed. 15 November 2007 Notice of Termination of HIH NZ Converting Notes Contracts served by Perpetual on NZ with a copy to HIH Insurance. The Notice of Termination provided as follows: '1 Perpetual Trustee Company Limited (Perpetual) as trustee under the HIH NZ Converting Notes 1998 Trust Deed (Trust Deed) hereby gives notice that: (a) Pursuant to the Conditions of Issue under the Trust Deed (Conditions of Issue) HIH Holdings (N.Z.) Limited (HIH NZ) was obliged to redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH. (b) HIH NZ is in liquidation and insolvent. (c) HIH NZ did not, and cannot, redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH. (d) By its continuing failure to redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH, HIH NZ has repudiated each of the contracts between HIH NZ and the individual noteholders (Contracts). (e) Perpetual and the noteholders are entitled to elect to terminate the Contracts. 2 Perpetual as a party to the Trust Deed and in its capacity as trustee on behalf of each of the noteholders under the Trust Deed, hereby terminates each of the Contracts. …' 36 It is a moot point whether, after 27 August 2001 it was open to HIH Insurance to issue shares in response to applications that may have been received from NZ on behalf of the relevant noteholders. Rule 11.2 of the Constitution of HIH Insurance as adopted on 19 November 1999 provided: '11.2 … the Directors may exercise all the powers of the Company to issue … shares on such terms and conditions as the Directors think fit …' 37 My first impression is that it would not be within the power of the liquidators of HIH Insurance to issue any shares in HIH Insurance and under s 471A of the Corporations Act it would appear that as from 15 March 2001 the directors were without power to issue shares, although it may be argued that, with the liquidator's written approval or with the approval of the Court, the directors could have done so after 27 August 2001. Section 471A of the Corporations Act relevantly provided: '471A(1) While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company. (1A) Subsection (1) does not apply to the extent that the performance or exercise, or purported performance or exercise, is: … (c) with the liquidator's written approval; or (d) with the approval of the Court. …' 38 Given that no argument has been addressed to the question of power to issue shares in the light of ss 471A and 477 of the Corporations Act, I will refrain from reaching any conclusions on the power of HIH Insurance to issue shares after 27 August 2001, but will proceed on the assumption that such power existed. 39 However, before leaving the point, I should observe that Ezishop.Net Ltd (in liq) v Veremu Pty Ltd (2003) 45 ACSR 199 at [33] deals with a quite different situation from the present one. In that case the question was whether or not a company in liquidation could enforce a subscription agreement to which it was a party and which required subscribers to pay in full for shares in it.

Conditions of issue of the 1998 notes and relevant terms of the Trust Deed 40 As previously mentioned, the conditions of issue of the 1998 Notes are to be found in Schedule 1 to the Trust Deed. Condition 1.1 of Schedule 1 provided: '1.1 Words and expressions defined in the Deed have the same meanings in these Conditions of Issue, unless the context otherwise requires.' Clause 1.1 of the Trust Deed itself contained a number of definitions including definitions of 'convert' and 'conversion' which have been set out above. Condition 1.2 of Schedule 1 itself added a number of other definitions. These included 'Commencement of the Conversion Period', 'Conversion Date', 'Conversion Event', 'Conversion Period' and 'End of the Conversion Period'. 41 Clause 3.2 of the Trust Deed provided as follows: '3. NOTE CERTIFICATES … 3.2 Conditions of Issue The Conditions of Issue are deemed to be included or endorsed on the Note Certificate (if any) or Allotment Certificate (if any) without the need for any specific mention of words of incorporation.' 42 Relevant provisions of the Trust Deed for present purposes include the following: '2A Covenant to pay and duration of trust 2A.1 Indebtedness of Company The Company [NZ]: (a) acknowledges that it is indebted to the Trustee [Perpetual] in respect of the Moneys Owing [the Principal Moneys and interest and all other monies payable to the Trustee or to any Noteholders from time to time under the Trust Deed] from time to time; and (b) must, subject to any obligation of the Company to convert the Notes into Ordinary Shares [Ordinary Shares in the capital of HIH Insurance] in accordance with the Conditions of Issue, pay to the Trustee … (i) the Principal Moneys represented by the Notes ...; and (ii) will, in the meantime and until the whole of the Notes have been redeemed or converted into Ordinary Shares in accordance with the Conditions of Issue, pay to the Trustee interest on the Principal Moneys in accordance with the Conditions of Issue. 2A.2 Payment to Noteholders Notwithstanding clause 2A.1, the payment by the Company of the Principal Moneys and interest in respect of all Notes will be made to the Noteholders, unless or until the Trustee otherwise directs, … … 6. EVENTS OF DEFAULT A Noteholder will, at the option of that Noteholder, have a right to convert its holding of Notes … in accordance with Condition 9 of the Conditions of Issue on the happening of any one or more of the following events: (a) if the Company does not pay any moneys which become payable by the Company pursuant to this Deed on their due date for payment … (b) where, …: (i) an order is made … for: (A) the winding up … of [HIH Insurance] or of [NZ] … … 14. DISCHARGE AND RELEASE By force of this clause, the Company will immediately be discharged and released from its liabilities, obligations and covenants under this Deed in respect of any Note on the first to occur of the date on which: (a) that Note and interest on that Note is redeemed or satisfied; and (b) that Note is converted. …' 43 The Conditions of Issue of the 1998 Notes as set out in Schedule 1 to the Trust Deed are of particular importance. Relevantly, conditions 2.1, 4.1, 6.5, 9, 11 and 12 provided as follows: '2. GENERAL TERMS OF ISSUE 2.1 Each of the Notes will: (a) have a principal amount (Face Value) of $5.00, and be issued at the Issue Price [as determined by the Directors of NZ from time to time]; (b) be convertible in the manner and at the times provided by Condition 4 and, subject to Conditions 7 and 12 below, into the number of Ordinary Shares [in HIH Insurance] determined in accordance with Condition 6.5; and … … 4. GENERAL RIGHTS OF CONVERSION 4.1 Notes are convertible: (a) on a Conversion Date during the Conversion Period into the number of Ordinary Shares [in HIH Insurance] determined in accordance with Condition 6.5 by a Noteholder delivering to the Company …: (i) a Conversion Notice requiring the Company to convert the Notes … on the next Conversion Date; and (ii) the Note Certificate …; or (b) in the circumstances and in the manner provided for in Conditions 9 or 12. … … 6. ALLOTMENT OF SHARES ON CONVERSION … [condition 6.2 has already been quoted above] … 6.5 On conversion of a Note: (a) the Company [NZ] must redeem that Note for an amount eq ual to its Face Value; and (b) the holder of that Note, by operation of this clause, hereby directs the Company to apply the whole of the moneys payable to it on redemption in subscribing for that number of Ordinary Shares [in HIH Insurance]: (i) calculated by dividing the Face Value of the total number of Notes the subject of the Conversion Notice by 95% of the Weighted Average Market Price of Ordinary Shares [the average of the prices at which ordinary shares in HIH Insurance were sold on the ASX for "the five Business Days", meaning days on which banks are open for business in Sydney, New South Wales and the ASX is open for trading in securities, prior to the day on which the price of ordinary shares is calculated under condition 6.5 weighted by the volume of shares sold on the ASX on each of those Business Days] (adjusted to the nearest whole cent) at the Conversion Date; (ii) subject to a minimum price of $0.25 per Ordinary Share, … … 9. CONVERSION EVENTS 9.1 A Noteholder may within 20 Business Days of any of the following events (each a 'Conversion Event') occurring (if any of these events occurs at any time prior to the end of the Conversion Period) serve a Conversion Notice on the Company … requiring the conversion of its Notes into the number of Ordinary Shares determined in accordance with Condition 6.5: … (b) on an announcement that it is proposed to delist [HIH Insurance] from the Official List of the ASX; or … (f) on the occurrence of an Event of Default [see clause 6 of the Trust Deed as set out above] …; or … 11. NATURE OF ORDINARY SHARES … Ordinary Shares [in HIH Insurance] to be allotted on conversion of the Notes will be shares with respect to which no provision is made … for changing or converting them into shares of another class … 12. MANDATORY CONVERSION AND REDEMPTION 12.1 If the Company [NZ] decides within 60 Business Days after a Change of Control that it wishes to redeem all … of the Notes, then the Company must give 20 Business Days notice in writing to the Noteholders of its intention to redeem all Notes for cash in accordance with this Condition 12.1. On the expiry of the 20 Business Day period, the Company must redeem all Notes that have not been the subject of a Conversion Notice under Condition 9.1(g) for cash at their Face Value plus 5% of such value by way of additional interest payable on those Notes. 12.2 If the Company decides that it wishes to redeem all … of the Notes for cash, then the Company must give not less than 20 Business Days notice in writing to the Noteholders expiring no later than the End of the Conversion Period of its intention to redeem all Notes for cash in accordance with this Condition 12.2. At the End of the Conversion Period, the Company must redeem all Notes for cash at their Face Value plus 5% of such value by way of additional interest payable on those Notes. 12.3 If the Company elects not to redeem all the Notes for cash pursuant to Condition 12.2, all Notes outstanding and not converted at the End of the Conversion Period must be automatically converted into the number of Ordinary Shares in HIH [Insurance] determined accordance with Condition 6.5. …'

The Deed Poll 44 The Deed Poll made by HIH Insurance on 26 October 1998 recited that on the same day NZ, HIH Insurance and Perpetual had executed the Trust Deed 'to create and issue converting unsecured notes subject to the terms set out in' the Trust Deed. By clause 6 of the Deed Poll, HIH Insurance covenanted to issue Ordinary Shares as required by the Conditions of Issue of the Notes. Clause 6 provided: '6. CONVERSION OF NOTES The Company [HIH Insurance] agrees to issue Ordinary Shares and X Class Convertible Notes pursuant to, and as required under, the Conditions of Issue [referring to the conditions specified in Schedule 1 to the Trust Deed].' 45 Just as the Trust Deed included definitions of 'convert' and 'conversion' in clause 1.1 thereof, the Deed Poll also included definitions of 'convert' and 'conversion' in clause 1.1 thereof. Whilst there is considerable correspondence between the definitions in the Trust Deed and the definitions in the Deed Poll, they are not identical. Clause 1.1 of the Deed Poll provided: '1.1 In this Deed, and all documents issued under or pursuant to this Deed, unless the context otherwise requires: … 'convert' means in relation to a Note, the redemption of that Note in conjunction with the Noteholder [the Trust Deed referred to NZ rather than the Noteholder. In addition the Trust Deed referred to NZ applying "at the irrevocable direction of the Noteholder". The words "at the irrevocable direction of the Noteholder" were not included in the Deed Poll] applying the principal amount of that Note in subscription for Ordinary Shares (and, if applicable, X Class Convertible Notes) in the Company [referring to HIH Insurance] in accordance with the Conditions of Issue, [the word "immediately" was not included before the words "in accordance with the Conditions of Issue" in the Deed Poll, although it had been included in the Trust Deed] and 'conversion' will be construed accordingly;' 46 The Deed Poll also included an important definition of 'Guaranteed Obligations' which was defined to mean '…the payment obligations of [NZ] … under the Trust Deed'. 47 In relation to the payment obligations of NZ under the Trust Deed clause 2.1 of the Deed Poll provided: '2.1 The Company [HIH Insurance] unconditionally and irrevocably guarantees to the Trustee [Perpetual] and the Noteholders the due and punctual performance and observance by …[NZ] of all of the Guaranteed Obligations.' 48 In relation to the preservation of rights of noteholders clauses 3.4 and 3.5 of the Deed Poll relevantly provided: '3.4 Subject to clause 5, to protect the Trustee [Perpetual] and the Noteholders in the event of the insolvency of … [NZ] or … [HIH Insurance], if payment is made to … [Perpetual] or the Noteholders under this Deed, … [Perpetual] or a Noteholder may, in the event of any such insolvency, prove for any amount payable to it under the Trust Deed or this Deed as if that payment had not been made. 3.5 … until all obligations of … [HIH Insurance] under this Deed have been permanently satisfied, … [HIH Insurance] is not entitled to the benefit of any security or other rights given to … [Perpetual] or the Noteholders and if … [NZ] or … [HIH Insurance] goes into liquidation … [HIH Insurance] cannot prove or claim in competition with … [Perpetual] or the Noteholders to diminish or delay … [Perpetual's] or the Noteholder's entitlements in such liquidation.'

Prospectus 49 As mentioned above, the prospectus for the issue of the NZ converting notes was dated 26 October 1998, issued by NZ and lodged with the Australian Securities and Investments Commission on that day. 50 To the extent to which background facts may be discerned from the prospectus and used in the interpretation of the Trust Deed and, in particular, the conditions of issue of the Notes, it may be observed that paragraph 1.2 of the prospectus contained a 'Summary of Terms of the Notes'. Against the marginal heading 'Conversion Events' the prospectus stated amongst other things 'Conversion for any notes unconverted on 12 June 2003 will be mandatory'. Later under the marginal heading 'Mandatory Conversion' clause 1.2 of the prospectus stated as follows: 'If the Company [NZ] decides not to exercise its right to redeem for cash, the Notes will upon expiry of the Conversion Period Convert into Ordinary Shares [ordinary shares in the capital of HIH Insurance credited as fully paid] at a rate calculated by dividing the Face Value of the total number of Notes held by 95% of the weighted average market price of an Ordinary Share for the 5 Business Days prior to the final date of Conversion. In no circumstances will the Conversion Price be less than $A0.25 per Ordinary Share.' 51 The prospectus commenced with a series of definitions preceded by the words 'The following definitions apply throughout this document unless the context requires otherwise'. The words or expressions which were defined included 'Conversion Date', 'Conversion Event', 'Conversion Period', 'Conversion Price' and 'Conversion' or 'Convert'. Once again there was no definition of 'Redemption' or 'Redeem'. 52 The definition of 'Conversion' or 'Convert' departed from that contained in the Trust Deed and that contained in the Deed Poll. In the prospectus 'Conversion' or 'Convert' were defined to mean: 'the process by which a Noteholder: − elects to redeem Notes for their Face Value; and − irrevocably instructs the Company [NZ] to use the redemption proceeds to subscribe for the Shares which the Noteholder is entitled to have allotted to it under the terms of this Issue.' 53 Whilst redemption was not defined in the prospectus, the 'Summary of Terms of the Notes', contained in clause 1.2 of the prospectus, included the following against the marginal heading 'Redemption': 'Noteholders do not have a right to redeem the Notes for cash. However, the Company [NZ] will have a right to redeem the Notes for cash upon: (i) expiry of the Conversion Period [12 June 2003]; or (ii) … On redemption, the Company will repay to the Noteholders in respect of each unconverted Note the Face Value of A$5.00 plus an additional amount of interest equal to 5% of the Face Value.'

Conclusions 54 It seems clear to me from the artificial definitions of 'convert' and 'conversion' contained in the Trust Deed that conversion invariably required NZ to engage in a two step process even when 'automatic' conversion was mandated by condition 12.3 of the Conditions of Issue. So far as NZ was concerned step 1 required 'redemption' of the relevant Notes and step 2 required NZ to apply the principal amount of the relevant Notes (but not any attendant interest obligation that may have to be satisfied) in subscription for shares in HIH Insurance. When that occurred, conversion, within the artificial meaning of that word, was complete. So long as the covenants contained in the Deed Poll remained in force, HIH Insurance 'agreed to issue' to the former noteholders Ordinary Shares and/or X Class Convertible Notes in accordance with clause 6 thereof. 55 Whilst it might be thought that condition 6.5 of the Conditions of Issue of the Notes was only concerned with the determination of the number of ordinary shares which could be allotted following 'conversion' of the Notes, it seems to me that condition 6.5 clearly casts light on what the process of conversion required, as well. Clause 6.5 highlighted, as Mr Sackar QC submitted, that conversion involved a two step process, as indicated above. That there was to be such a two step process is supported by the definitions of 'convert' and 'conversion' in clause 1.1 of the Trust Deed to which reference has already been made, the definitions of 'convert' and 'conversion' in the Deed Poll, the definition of 'Guaranteed Obligations' in the Deed Poll, when taken with clause 2.1 thereof, and the definition of 'Conversion' or 'Convert' in the prospectus. 56 Whilst noteholders may not have had the right to call for the redemption of their Notes for cash, nevertheless, in the context of the present case, redemption of the Notes, even as part of NZ's implementation of a mandatory conversion, required the Notes to be paid off. It was not open to NZ to discharge its conversion obligations otherwise than by applying the amount paid off, being an amount equal to the principal amount paid on the issue of the Notes, in subscription for ordinary shares in HIH Insurance on behalf of the noteholders.

Other issues 57 Mr Fabian Gleeson SC submitted that once the allotment of ordinary shares in HIH Insurance to the noteholders took place, the noteholders' direction to NZ contained in condition 6.5(b) of the Conditions of Issue of the Notes operated as an unconditional and irrevocable assignment of those funds to HIH Insurance. 58 In my opinion conversion required, as condition 6.5 made clear, redemption of each note for an amount equal to its Face Value and an application of the whole of the monies so payable to each noteholder on redemption in subscription for fully paid ordinary shares in HIH Insurance. The Conditions of Issue did not contemplate a mere assignment of a promise to pay the face value of the Notes from the noteholders to HIH Insurance. Apart from other considerations there is no evidence of any absolute assignment by writing under the hand of the noteholders of any debt or other legal chose in action to HIH Insurance of which express notice in writing has been given to NZ and there is no evidence to support a finding of an equitable assignment of any such debt or chose in action. Whilst HIH Insurance was a party to the Trust Deed it was not, in my opinion, a party to any contract referable to the issue of the Notes by NZ to the noteholders to which the Conditions of Issue set out in Schedule 1 to the Trust Deed applied (see generally s 12 of the Conveyancing Act 1919 (NSW) and the observations of Windeyer J on the assignment of choses in action in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 26-29). 59 The plaintiffs' submission that mandatory conversion 'telescoped' the two steps required for conversion of Notes into one should be rejected. The words 'must be automatically converted' as used in condition 12.3 of the Conditions of Issue of the Notes did not warrant any departure from the requirements for a valid 'conversion' in accordance with the process indicated in Condition 6.5 of the Conditions of Issue.

Frustration 60 Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. The law in relation to frustration of contracts is conveniently summarised in the judgments of Mason J, as he then was, and Aickin J in Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 356-367 and 375-383. It may be noted that Wilson J agreed with the reasons of Mason and Aickin JJ in respect of the application of the doctrine of frustration. 61 Given the findings which I have already made it is unnecessary to decide whether the contracts in relation to the Notes between NZ and the noteholders were frustrated by virtue of the fact that HIH Insurance had been removed from the official list of the Australian Stock Exchange on 4 July 2001 with the consequence that no shares in HIH Insurance were sold on the ASX during the five Business Days prior to 12 June 2003. Whilst it was not possible to establish a denominator, as contemplated by condition 6.5(b)(i) of the Conditions of Issue of the Notes, my present inclination is to the view that, in the circumstances, the minimum price of 25 cents per ordinary share became the relevant denominator, by virtue of condition 6.5(b)(ii) of the Conditions of Issue. In any event, it must be recalled that NZ was under no obligation to allot any shares in its capital to the noteholders nor was it required to cause HIH Insurance to issue any ordinary shares in that company. All that was required of NZ was that it apply the monies payable to the noteholders on redemption of the Notes by way of subscription for a particular number of ordinary shares in HIH Insurance. It was then a matter for HIH Insurance to address the issue of shares to the noteholders in accordance with its Deed Poll made 26 October 1998.

Termination of Notes Contracts 62 On the assumption that the contracts between the noteholders, Perpetual and NZ remained on foot as at 15 November 2007, I am inclined to the view that those contracts were repudiated by NZ when it failed to redeem and convert the Notes as required by the Conditions of Issue thereof in the manner indicated above within 20 business days of 12 June 2003. Accordingly, it was open to the noteholders and Perpetual to terminate each of the contracts on 15 November 2007, notwithstanding that the notice of termination was not given until after the commencement of the proceedings. 63 In the light of the findings which I have made and my observations in respect of relief, I propose to stand the matter over to enable appropriate orders to be made. I will direct the parties to bring in draft short minutes of appropriate orders for which they contend or upon which they are agreed. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Graham.

Associate: Dated: 8 May 2008 Counsel for the Plaintiffs: F Gleeson SC and J M White

Solicitor for the Plaintiffs: Kemp Strang

Counsel for the First and Third Defendants: J R Sackar QC and J A C Potts

Solicitor for the First and Third Defendants: Corrs Chambers Westgarth

Solicitor for the Second Defendant: N A Coffey of Blake Dawson