New Cap Reinsurance v Chase Manhattan

Proceedings 10 The applications which are the subject of these reasons for judgment arise out of three proceedings in this Court. Proceeding 2388/99 is an application by summons by New Cap Bermuda, and Mr McKenna as its Bermudan provisional liquidator, for an order for winding up so far as its assets in Australia are concerned. On 3 June 1999 Young J appointed a provisional liquidator, exercising jurisdiction under the Corporations Law of New South Wales as well as cross-vested jurisdiction under the Corporations Law of Victoria. For the purposes of the motion before him, his Honour held that there was a prima facie case that New Cap Bermuda, though not a registered foreign company, carried on business in New South Wales and Victoria and was, therefore, a Part 5.7 body for the purposes of the winding up provisions of the Corporations Law. 11 Proceeding 2515/99 is an application by summons by New Cap Australia and its administrator, Mr Gibbons, for declarations that a certain security is void against the administrator or does not extend to specific assets, and an order that the defendants account for those assets to the plaintiffs. The defendants in those proceedings are Chase and Chase Fiduciary Services. The defendants claim security interests in amounts of USD60.128 million and Stg 5.583 million held in accounts with Chase's Sydney Branch, held (say the plaintiffs) to the credit of Chase Fiduciary Services. I shall refer to them as the assets claimed by New Cap Australia. The summons also seeks directions to Mr Gibbons as administrator under s 447D of the Corporations Law as to the manner of resolution of the issues concerning whether the security is void as against him, whether the security extends to the assets claimed by the defendants, and whether the defendants are liable to account to the plaintiffs for those assets. The directions which are sought include directions whether it is appropriate for Mr Gibbons to prosecute proceedings 2515/99 for the final relief sought in the summons, and to seek joinder of a representative unsecured creditor in those proceedings, and to conduct any necessary examinations under ss 596A and B of the Corporations Law. 12 Proceeding 2826/99 is an application by summons by New Cap Bermuda by its Australian provisional liquidator, against Chase and Chase Fiduciary Services as defendants, either for a declaration that the defendants hold no security over assets of the plaintiff held or controlled by them and an order for the defendants to account to the plaintiff for those assets, or, alternatively, for an order that the defendants account to the plaintiff for the balance of the assets after satisfaction of their secured debts. The evidence indicates that the assets which are the subject of the defendant's claim for security include an account in the sum of USD107 million with Chase's Sydney Branch. The exact designation of the account, a matter which may be very material, is not clear on the evidence before me at this stage. 13 In both proceedings 2515 and 2826 there are carefully drawn interlocutory injunctions in place, evidently designed to preserve the assets in this jurisdiction in which the defendants claim to have security interests. New Cap Australia has given the usual undertaking as to damages and New Cap Bermuda has given the usual undertaking, but has limited the undertaking to its assets within New South Wales and Victoria. Mr Gibbons has given the usual undertaking, but has limited the undertaking to the amount ultimately available to him as administrator pursuant to his right to an indemnity out of New Cap Australia's assets. The orders presently in force were first made on 27 May and 21 June 1999 respectively. Prior to my dealing with the present applications yesterday, the orders were due to expire at 5pm on that day unless any order were made (as I did) to extend their operation. 14 By letter dated 7 July 1999 the solicitors for the defendants in both proceedings indicated that the defendants intended to contest the continuation of the injunctions 'on the adequacy of [the plaintiffs'] undertaking as to damages'. On 13 July 1999 the plaintiffs' solicitors responded, asking to be informed 'of the nature and extent of any loss or damage to which [the defendants] consider they are exposed by the reason of the injunction'. The defendants' solicitors replied by two letters, each dated 14 July 1999, one for each of these two proceedings. 15 By those letters the defendant claimed that New Cap Australia and New Cap Bermuda were in default under the letter of credit facility and their collateral agreements and that Chase was, therefore, entitled to enforce the security which it held against them. If it did so, the letter said, it could deploy the funds elsewhere. The letters annexed schedules which indicated the security position of each company. In the case of New Cap Australia the letter indicated secured obligations of some USD58 million plus Stg 5.846 million, and loan values of USD60.57 million and Stg 5.622 million. Consequently, there was surplus collateral of USD2.54 million and Stg 0.136 million. In the case of New Cap Bermuda the secured obligations were stated to be USD91.83 million and Stg 8.85 million and the loan values were USD97.356 million and USD10.325 million leaving no surplus collateral in the latter case and surplus capital of USD5.236 million in the former case. 16 According to the letters of 14 July 1999 the defendants claimed that the measure of any damages which Chase may suffer by reason of the continuance of the injunctions should be quantified as the difference between the return Chase is presently earning on its investment and the return it would otherwise enjoy if it was able to enforce the security and redeploy the funds. An estimate of that loss totalling approximately USD430,000 per annum was given. The letters respectively said that the loss was proportioned as to USD150,000 to New Cap Australia and as to USD280,000 to New Cap Bermuda. The letters required, as a term of any orders for continuance of injunctions, acknowledgments by the plaintiffs in both proceedings that the surplus collateral held by the defendants secures the plaintiffs' obligation to pay damages which the defendants may suffer as a result of the continuation of the injunctions. 17 The letters also asserted the view that the defendants would be entitled to be indemnified by the plaintiffs for the costs incurred in defending the proceedings pursuant to clause 8.03 of the letter of credit agreement and clause 6.03 of the respective collateral agreements. Those costs were said to total USD450,000 as at 8 July 1999. In light of the substantial costs which were being incurred, the defendants required a written acknowledgment from the plaintiffs in both proceedings that if an order were to be subsequently made for the plaintiffs to pay the defendants' costs, those costs may be paid from surplus collateral held by the defendants. 18 The plaintiffs' solicitors responded to these letters, by letters dated 15 and 16 July. In those letters the plaintiffs in both proceedings gave the acknowledgments which the defendants sought, subject to this Court directing Mr Gibbons that, in proceeding 2515 of 1999 he was justified in giving the acknowledgments as administrator and also causing New Cap Australia to give the acknowledgments; and in proceeding 2826 of 1999 he was justified in causing New Cap Bermuda (the sole plaintiff in that proceeding) to give the acknowledgments. 19 The applications which came before me on Monday 19 July 1999 were brought by Notice of Motion in proceeding 2388/99 and by Notice of Motion and pursuant to the Summons in proceeding 2515/99. By the motion in the former proceeding Mr Gibbons, as Australian provisional liquidator of New Cap Bermuda, seeks directions in connection with the exercise of his functions or powers as provisional liquidator under s 479(3) of the Corporations Law. In the latter case Mr Gibbons, as administrator of New Cap Australia, seeks directions in connection with the exercise of his functions or powers as administrator under s 447D. Since I decided on 20 July 1999 to grant the substantial relief sought by the plaintiffs as applicants and I made orders accordingly, the simplest way of explaining the relief sought by the applicants is to set out the orders which I made on that day. I ordered as follows:

Proceeding 2388 of 1999 1. The provisional liquidator, Mr John Gibbons, is justified in: (a) commencing and prosecuting proceedings no. 2826 of 1999; and (b) causing the first plaintiff, New Cap Bermuda, to provide acknowledgments in the terms set out in the letter from Henry Davis York to Allen Allen & Hemsley dated 16 July 1999 being the letter marked 'JKM4' annexed to the affidavit of John Kenneth Martin sworn 16 July 1999. Proceeding 2515 of 1999 The administrator (Mr John Gibbons, the second plaintiff in proceeding 2515 of 1999) is justified in

(a) seeking in this proceeding: (i) a declaration that the Security (as defined in the second schedule to the Summons) is void against the Administrator; (b) causing the first plaintiff to seek in this proceeding: (ii) a declaration that the first defendant, Chase or the second defendant, Chase Fiduciary Services hold no security interest, under the Security or otherwise, in respect of the Assets as defined in the third schedule to the Summons; (c) seeking and causing the first plaintiff to seek in these proceedings: (iii) an order that Chase and/or Chase Fiduciary Services account for the Assets to New Cap Australia and the Administrator; (d) providing acknowledgments in the terms set out in the letter from Henry Davis York to Allen Allen & Hemsley dated 15 July 1999 being the letter marked 'JKM4' annexed to the affidavit of John Kenneth Martin sworn 15 July 1999; (e) causing the first plaintiff, New Cap Australia, to provide acknowledgments in the terms set out in the letter from Henry Davis York to Allen Allen & Hemsley dated 15 July 1999 being the letter marked 'JKM4' annexed to the affidavit of John Kenneth Martin sworn 15 July 1999.

The issues alleged by the plaintiffs 20 The plaintiffs say that it is appropriate for them to bring and maintain proceedings 2515/99 and 2826/99 because in their view there is a reasonable prospect of obtaining orders which would have the effect that very substantial assets in Australia would be freed from any claim by the defendants under the collateral agreements. They say it is appropriate for them to give the acknowledgments sought by the defendants, in order to secure the continuation of injunctions and thereby preserve substantial assets within the jurisdiction. Their case arises in the following way. 21 In the Collateral Agreement affecting New Cap Australia the charging clause (3.01) grants the security to 'the Administrative Agent, for the benefit of the Administrative Agent, the Issuing Bank and the Banks as hereinafter provided'. 'Issuing Bank' and 'Banks' are defined in the letter of credit agreement. The Issuing Bank is Chase Manhattan, Sydney Branch in its capacity as issuer of letters of credit. The property charged by the Collateral Agreement includes the Collateral Account, the US Treasury securities credited from time to time to the Collateral Account and all cash held from time to time in the Collateral Account, and other ancillary interests. 'Collateral Account' is defined in clause 1 as 'one or more cash and securities collateral accounts in the name of the Administrative Agent established and maintained by the Collateral Agent'. In its original form the Collateral Agreement provided that it could only be amended by an instrument in writing executed by the Company and the Collateral Agent (clause 6.05). The original Collateral Agent was, as I have mentioned, the Bank of Bermuda (New York). Pursuant to clause 6.09(a) the Agreement is governed by New York law. There is some evidence on what New York law would say on relevant issues of law and construction. 22 As far as the New Cap Australia Collateral Agreement is concerned, the plaintiffs have broadly two kinds of contention with respect to the validity and efficacy of the charge asserted by the defendants. The first arises out of the charging clause. The original Collateral Agreement created a charge in favour of the Administrative Agent, namely Chase, for its benefit and the benefit of other specified banks. The subsequent Amending Agreements purported to alter the charging clause by providing that the security was granted to the 'the Collateral Agent, for its benefit and for the Administrative Agent, Issuing Bank and the Bank as hereinafter provided'. The plaintiffs claim that the Amending Agreements did not amend the original charging clause because they were not executed by the Bank of Bermuda (New York) as required by the original Collateral Agreement. They claim that the defendants cannot assert that assets remain subject to the charge in the original Collateral Agreement because the defendants did not purport to hold assets pursuant to the Original Agreement after the amendments were made; and there has been no assignment or other succession from the Bank of Bermuda (New York) to Chase Fiduciary Services; and there was no power for Chase to replace Bankers Trust Co with Chase Fiduciary Services under the original Collateral Agreement. They assert that any charge arising under the Amending Agreements cannot give security over the Collateral Account to which the original Collateral Agreement refers. They point to the fact that the two Amending Agreements were entered into by parties which did not include the Original Collateral Agent. They also point to the fact that neither of the Amending Agreements was registered under Part 2K of the Corporations Law, and they contend that lodgment for registration was necessary under s 263. They therefore say that any charge created for the benefit of the Collateral Agent pursuant to the Amending Agreements is not a charge which is valid against Mr Gibbons as Administrator having regard to s 266 of the Corporations Law. 23 The second broad issue in respect of the New Cap Australia relates to the proper construction of the definition of 'Collateral Account'. As I have mentioned, according to that definition the Collateral Account is an account in the name of the Administrative Agent established and maintained by the Collateral Agent. The two accounts to which I have referred are, according to the plaintiff, accounts maintained by Chase as banker in the name of the Chase Fiduciary Services. In other words, the plaintiffs say that the accounts do not fall within the definition of 'Collateral Account' because the roles of Administrative Agent and Collateral Agent has been reversed, even if one assumes that Chase Fiduciary Services is properly the Collateral Agent in the present circumstances. There is some evidence before me that the styling of the two accounts has been changed in recent times. It may be that the change reflects some substantive alteration of legal rights having the effect that the two accounts now fall within the definition of 'Collateral Account' even though, at an earlier time, they may not have done so. I am not in a position to make a determination on this point, except to say that there appears on the present evidence to be some substance in the plaintiffs' view that the accounts are still properly described as accounts with Chase in the name of Chase Fiduciary Services. 24 As far as New Cap Bermuda is concerned, the Collateral Agreement is in somewhat different terms and the issue of registration of the charge does not arise. Nonetheless, there are still basic questions with respect to the nature and effect of the charging clause and the definition of 'Collateral Account' which are broadly the same as, or are analogous to, the questions with respect to New Cap Australia which I have outlined. There are inconsistencies in the evidence about the designation of the account for USD107 million, some evidence indicating that it is an account of Chase and other evidence indicating (as the plaintiff contends) an account of Chase Fiduciary Services. On the present evidence the plaintiff's contention is not without substance. 25 No doubt, the defendants will have a great deal to say about the matters to which I have referred. I note that although the defendants were aware of the applications which were made to me under ss 479(3) and 447D, they chose to seek to be excused and did not appear at the hearing of the applications on 19 July 1999. The plaintiffs' evidence indicates that some of the issues which will be raised by the defendants include questions of rectification and set-off. 26 In all the circumstances, it appears to me the plaintiffs are correct when they say that important issues of law and construction reasonably arise out of the material presently before the Court, which could have the effect that substantial assets would be available to satisfy the claims of unsecured creditors of the two companies. The base issues outlined above may well lead to others. In his affidavits of 27 May and 21 June 1999 Mr Dobson, who is a solicitor with substantial experience in banking and finance law, sets out succinctly the issues which arise, in his opinion, out of the facts and circumstances which I have outlined. On the evidence before me, my opinion is that there is a reasonably arguable case for the plaintiffs on those issues. Mr Dobson's formulations of issues are: New Cap Australia Agreement '8.1.1 Is New Cap's interest in the cash held by Chase Fiduciary Services in the accounts … caught by a charge to or for the benefit of Chase? … 8.1.2 Does the Amending Agreement create a new charge? … 8.1.3 If the Amending Agreement creates a new charge, is that charge registrable under the Corporations Law? … 8.1.4 Assuming the Amending Agreement creates a new charge which was registrable under the Corporations Law but which was not registered within the time prescribed under the Corporations Law, can the failure to register the Amending Agreement be rectified? … 8.1.5 If the Amending Agreement was registrable as a charge under the Corporations Law and, as a result of a failure to register it, it is void as a security as against the Administrator, what effect (if any) does the Original Collateral Agreement have? In particular, does it operate as charge over any of the assets of the New Cap and if so, what assets does it cover? ... 8.1.6 What is the effect of the Second Amending Agreement and in particular, does it amount to a new charge and if so, is it registrable under the Corporations Law? ... 8.1.7 What right does Chase have (if any) to claim a current entitlement to the cash held in the accounts … under any right to set-off or under any similar right? … 8.1.8 Assuming Chase has no effective charge in respect of the cash held in the accounts … and assuming that it either has no present existing right of set-off in relation to that cash or, if it has a current right of set-off, that right only extends to part of the cash, can the administrator compel Chase to deliver up all of the cash which is not caught by a current right of set-off?' New Cap Bermuda Agreement '7.1 Is New Cap Bermuda's interest in the money held in the account … caught by a charge to, or for the benefit of, Chase Manhattan? To a large extent this will depend on whether that money is in a 'Collateral Account'. ... 7.2 Does the position regarding the way in which the money … is held represent a change to the position as it was on or about the date of the appointment of John McKenna as the provisional liquidator of New Cap Bermuda or a change to the position as it was on or about the date of the appointment of John Gibbons as provisional liquidator of the NSW and Victorian assets of New Cap Bermuda? Some of the information we have seen suggests that the position may have changed. If it did change, was that change proper and/or effective? ... 7.3 What right does Chase Manhattan have (if any) to claim a current entitlement to the money held in the account … under any right of set-off? ... 7.4 Assuming Chase Manhattan has no effective charge in respect of the money held in the account … and assuming that it either has no current right of set-off in relation to that money or, if it has a current right of set-off, that right only extends to part of the money, can Mr Gibbons as the provisional liquidator of the NSW and Victorian assets of New Cap Bermuda compel Chase Manhattan to deliver up all of the money which is not caught by a current right of set-off?'

Section 479(3) of the Corporations Law provides: 'The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.'

In the case of company administration s 447D(1) provides: 'The administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers.'

Section 479(3) confers a broad jurisdiction on the court to provide guidance to a liquidator (or provisional liquidator) regarding matters of law or principle : Re G B Nathan & Co Pty Limited (in liq) (1991) 24 NSWLR 674. The court is prepared to provide guidance in cases where directions are appropriate in order to protect the liquidator or provisional liquidator against accusations of acting unreasonably: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115. The same principles apply in the case of an application for directions by an administrator under s 447D(1): Editions Tom Thompson Pty Ltd v Pilley (1997) 24 ACSR 617. The court is unlikely to act in a case which involves substantial contested issues of fact or credit. However, as far as I can see this is not so in the present circumstances, which predominantly raise issues of law and construction in the context of narrow factual issues about the designation of bank accounts. The correct approach for the court to take in applications such as the present one is set out by Mansfield J in Re Addstone Pty Limited (in liq) (1997) 25 ACSR 357 at 371: 'The court's functions, in my view, are limited to being satisfied that the material before it is sufficient to determine whether the prospects of success lie in the general range of high, reasonable or minimal, and having regard to the potential benefits, and those prospects, and to the resources available to the liquidator either from the company's resources or from other funding options, whether it is appropriate to now bring the proceedings to an end.' 27 Applying that approach to the circumstances of the present case, I had no hesitation in making the directions which the plaintiffs sought. While it is not necessary or appropriate for me to enter into the substantial merits of the plaintiffs' case, I am persuaded by the evidence before me that their case is reasonably arguable and that considerations of balance of convenience justify giving of directions and the maintaining of the proceedings. By that I mean that in the present case it is appropriate to allow the plaintiffs to maintain proceedings which may ultimately give them access to assets of a very substantial amount, and may in the meantime preserve those assets within the jurisdiction by means of interlocutory relief. That, it seems to me, is an appropriate way of providing protection to the creditors of those companies to the extent that this Court is in a position to do so. 28 I have carefully considered the undertakings which the plaintiffs have given as to damages in order to obtain continuation of the interlocutory relief which is currently in place, and the acknowledgments sought by the defendants. It seems to me, having regard to the correspondence between the parties and especially the letters of the defendants' solicitors which I have described fully, that the defendants will not be unduly prejudiced provided that my directions authorise Mr Gibbons to cause the plaintiffs to give the acknowledgments which the defendants seek. In my view the plaintiffs' undertakings as to damages are reasonable and appropriate in the circumstances. The acknowledgments by the plaintiffs with respect to surplus collateral are an appropriate and probably necessary step for them to take in order to secure the continuation of interlocutory relief which is highly desirable from the viewpoint of unsecured creditors. The power to give the acknowledgments exists in the case of an administrator under s 437A and in the case of a provisional liquidator under s 477(2). This would be so, in the context of undertakings given to secure interim relief in the interests of unsecured creditors, even if the acknowledgments were regarded as creating or enhancing security interests. 29 In all the circumstances, it seems to me that this is a case where the overwhelming considerations of justice and fairness require that the Court provide some protection to Mr Gibbons as administrator and provisional liquidator by giving appropriate directions and I have therefore done so. 30 I shall hear any submissions which the parties wish to make concerning the costs of the applications to which these reasons relate. However, I will need substantial persuasion to do anything other than to order that the costs of the applications be costs of the proceedings.

Last Modified: 07/28/1999 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.