Perpetual Trustee Company Limited v HIH Holdings [2012] NSWSC 611 | Case summary

Perpetual Trustee Company Limited v HIH Holdings [2012] NSWSC 611 | Case summary | Zoe

[9]

The Federal Court Proceedings 22In the meantime, on 7 August 2007 the liquidators of HIH commenced Federal Court Proceedings No. NSD 1546 of 2007 seeking declarations and a direction pursuant to s 479 of the Corporations Act 2001 (Cth) regarding the Notes ("the Federal Court Proceedings"). 23On 8 May 2008, Graham J delivered reasons for judgment in the Federal Court Proceedings, which are reported as McGrath v Perpetual Trustee Co Ltd (2008) 66 ACSR 210 ("McGrath"). 24Graham J refused to make the declaration sought by the HIH liquidators. 25His Honour held (this from the headnote): - (a)in general and in the context of the definition of the contractual terms involved in the case, "redemption" of shares or debentures meant "paying them off", and where a debenture took the form of an unsecured note, redemption could be effected by the clearing of the debt by payment: at [24]-[26]; (b)it was not open to HIH NZ to discharge its conversion obligations otherwise than by applying the amount paid off in subscription for HIH ordinary shares on behalf of the Noteholders; the conditions of issue did not permit mere assignment of a promise to pay the face value of the Notes from the Noteholders to HIH: at [60]-[67]; (c)when HIH NZ failed to redeem and convert the Notes, Perpetual and the Noteholders were entitled to regard that as repudiation by HIH NZ of the Notes Contracts, and were therefore entitled to validly terminate the Notes Contracts: at [66]. 26On 15 May 2008, Graham J made the following declarations: - "1. Upon the proper construction of the [Trust Deed] the conversion of Notes issued thereunder invariably required [HIH NZ] to engage in a two step process, the first step being the redemption of the Notes by paying them off, and the second step being the application of the principal amount of the relevant Notes in subscription for shares in [HIH]; 2. Upon the proper construction of the Trust Deed and in the events which have happened, [HIH NZ] failed to redeem and convert all Notes issued thereunder, outstanding and not converted as at 12 June 2003, within 20 business days of 12 June 2003. 3. By notice dated 15 November 2007, Perpetual on behalf of each holder of outstanding notes as at 12 June 2003, validly terminated each of the Notes contracts between those noteholders and [HIH NZ]".

[11]

The issues 33It is common ground that, notwithstanding termination of the Notes Contracts, Noteholders were not divested of such rights as they had already "unconditionally acquired": per Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477. Such rights are often referred to as "accrued rights": e.g. Macquarie International Health Clinic Pty Ltd v Sydney Southwest Area Health Service [2010] NSWCA 268 at [217] per Hodgson JA (Allsop P and Macfarlan JA concurring at [1] and [389] respectively). 34The principle is that where one party to a contract terminates the contract for breach, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract; but accrued rights are preserved. 35The issue in this case is the nature of the rights "unconditionally acquired" by the Noteholders. To understand what accrued rights Noteholders have following termination of the Notes Contracts, it is necessary to examine what rights Noteholders had while the Notes Contracts were on foot. 36There is no dispute that the Noteholders have (or at least had, immediately before lodgement of the creditors claim in the winding up of HIH NZ) a right to damages. What is in dispute is whether the Noteholders are creditors of HIH NZ for the face value of the Notes. 37The answer to that question depends upon the proper construction of the Trust Deed. 38Perpetual contends that the accrued right of the Noteholders is as a creditor of HIH NZ for the face value of the Notes. 39HIH NZ contends that the Noteholders cannot be considered to have an accrued right as a creditor. Rather, the accrued right of the Noteholders is an action in damages against HIH NZ, and no more. 40Much turns on the difference. 41If, as Perpetual contends, HIH NZ is indebted to the Noteholders, the Noteholders can expect to receive a dividend of approximately 24 cents in the dollar in the winding up of HIH NZ. 42On the other hand, if the Noteholders have no more than an action in damages against HIH NZ, it is agreed that such action in damages is of no value and that the result would be that they will receive nothing. In that event HIH NZ would pay a dividend of approximately 100 cents in the dollar, the majority to HIH.

[14]

Are the Noteholders creditors of HIH NZ? Clause 2A.1 47Clause 2A.1 is of critical importance when considering Perpetual's submission that Noteholders have the status of a creditor of HIH NZ. 48The clause provides: - "[HIH NZ]: (a) acknowledges that it is indebted to the Trustee in respect of the Moneys Owing from time to time; and (b) must, subject to any obligation of [HIH NZ] to convert the Notes into Ordinary Shares in [HIH] ... pay to the Trustee ...: (i) the Principal Moneys represented by the Notes or as the case may be that part of the Notes as are to be redeemed on the date due for repayment; and (ii) will (sic), in the meantime and until the whole of the Notes have been redeemed or converted into Ordinary Shares in [HIH] ... pay to the Trustee interest on the Principal Moneys ..." 49Clause 2A.1 deals, in terms, with the question of the "indebtedness" of HIH NZ to Noteholders. The clause deals also with the related question of if, and when, HIH NZ was obliged to "pay" the "Principal Moneys represented by the Notes" to Perpetual, on behalf of the Noteholders. 50In Clause 2A.1, the parties made express, and detailed provision for the rights of the Noteholders concerning repayment. In those circumstances, I find it impossible to impute to the parties an intention that Noteholders would have any rights beyond those specified in the clause. 51In argument, reference was made to the maxim expressio unius est exclusion alterius. 52I prefer to adopt the words of McPherson JA in SCN Pty Limited v Smith [2006] QCA 360 at [7]: - "It is hardly necessary to clothe the thought in authority or Latin garb. If one alternative is expressly and specifically mentioned, it rationally tends to exclude the implication of another or of any other". 53The language used by the parties in Clause 2A.1 shows that they intended that clause to be determinative of these questions. Accordingly, Perpetual's submissions must stand or fall by reference to Clause 2A.1. 54If, at the time of HIH NZ's repudiation of its obligations under Condition 12.3, HIH NZ was obliged by Clause 2A.1 to "pay" Perpetual "the Principal Moneys represented by the Notes", it must follow that the Noteholders were creditors of HIH NZ for the amount of the "Principal Moneys". 55On the other hand, if HIH NZ was not then obliged by Clause 2A.1 to "pay" Perpetual "the Principal Moneys represented by the Notes", it must follow that the Noteholders were not creditors of HIH NZ.

[15]

The right to redeem 56Before further considering Clause 2A.1, I will examine the parties' right to redemption and conversion. 57There is no provision in the Trust Deed giving Noteholders a right to redeem the Notes for cash or otherwise to call for repayment of the amount subscribed for the Notes. 58This is consistent with the Prospectus, which stated, "noteholders do not have a right to redeem the Notes for cash". 59This was so even in an "Event of Default", defined to include the winding up of HIH or HIH NZ. In such an event, the Trust Deed gave Noteholders a right to accelerate the date on which the Notes converted to HIH shares, but did not give Noteholders a right to call for repayment (Condition 6). 60The only circumstance in which the Trust Deed provided for "Principal Moneys" (that is the "total amount paid on issue of the Notes") to be returned to the Noteholders was if HIH NZ exercised its rights to redeem the Notes for cash by giving a notice under either Condition 12.1 or Condition 12.2. 61Condition 12.1 gave HIH NZ the right, at its discretion, to redeem all (not some only) Notes "for cash" on notice in the event of a "Change of Control" (in effect an acquisition by an outsider of more than 50 per cent of the voting shares in HIH). 62Condition 12.2 also gave HIH NZ the same right, whether or not there was a "Change in Control", albeit one which could only be exercised by giving the requisite notice expiring before the "End of the Conversion Period" and calling for redemption at the "End of the Conversion Period". 63The "End of the Conversion Period" was 12 June 2003. 64No other provision was made in the Trust Deed for the setting of a date whereby money must be repaid to the Noteholders. 65Only in one of those events could there be a "date due for repayment" or "due date for payment" of the "Principal Moneys", for the purposes of subclause 2A.1(b)(i) of the Trust Deed. I will develop this further below. 66Reference was made in argument to s 1060(3) of the Corporations Law in force at the date of the Trust Deed. That subsection would have empowered Perpetual to give HIH NZ notice requiring repayment of the moneys subscribed by Noteholders if the purpose for which the moneys raised by the Notes had not been achieved (for example, if the HIH takeover of FAI had not proceeded). There was no suggestion Perpetual gave any such notice. I do not find anything in the subsection that assists me construe the nature of the entitlements of Noteholders under the Trust Deed.

[17]

Automatic conversion 74Condition 12.3 provided: - "If [HIH NZ] 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 determined in accordance with Condition 6.5". 75Condition 12.3 thus provided for the automatic conversion of Notes "outstanding and not converted" on 12 June 2003 (the "End of the Conversion Period"). 76The condition uses the words "must be automatically converted" rather than "are automatically converted". 77The use of those words suggests that the parties contemplated that some steps were to be taken by a party to bring about the result that the Notes were "automatically converted" into Ordinary Shares. 78That party could only be HIH NZ: Condition 6. 79Thus, the effect of Condition 12.3 was that, absent an election by HIH NZ to redeem all of the Notes under Condition 12.2 (or, presumably, Condition 12.1, although it is not mentioned in Condition 12.3), HIH NZ "must" convert the Notes not yet converted as at 12 June 2003 to Ordinary Shares in HIH. 80There are three further aspects of the process contemplated by Condition 12.3 to be considered. 81First, HIH NZ was obliged to effect the conversion within 20 business days of 12 June 2003. This is because Condition 6.2 required that when a Noteholder was entitled to Ordinary Shares in HIH by reason of conversion under Condition 4.1(a), Condition 9 or Condition 12, the shares must be allotted within that time. 82Second, Condition 12.3 mandated that the Notes "must be automatically" converted into shares. 83The conjunction of the words "must be" and "automatically" leads me to conclude that the parties intended that the word "automatically" have the effect that, although HIH NZ had the obligation to effect the conversion, it was to be done "automatically" in the sense of without the need for any notice from the Noteholders (whether pursuant to Condition 4 or Condition 9). 84Third, conversion was to be "into the number of Ordinary Shares in HIH" determined in accordance with Condition 6.5. 85Although Condition 12.3 does not say so in terms, any conversion required by Condition 12.3 would not only require conversion of outstanding Notes into "the number of" Ordinary Shares determined in accordance with Condition 6.5; the conversion would have to be in accordance with Condition 6.5 in all respects. 86In this respect, I agree with the observation of Graham J (at [63] of McGrath): - "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." 87That is, the conversion would have to follow what Graham J described as the "two step process" (see [26] above) called for by Condition 6.5, namely redemption of the Notes for face value, and application of the proceeds of the redemption in subscription for shares in HIH. 88I agree that Condition 6.5 required a "two step process". That is necessarily so, as what was required was the redemption of units in one company (HIH NZ) and the use of the proceeds of that redemption for subscription in the shares of another company (HIH). However, I see the process as being two steps in a larger process: conversion. I do not read Graham J's observations as being inconsistent with that conclusion. 89In the events that happened, the obligation of HIH NZ to "automatically convert" outstanding Notes was enlivened. 90It may well be that HIH NZ was not able to comply with that obligation. As at 12 June 2003 both HIH NZ and HIH had been in liquidation for almost two years. I have been informed that, assuming Noteholders are creditors of HIH NZ, they will receive a dividend of 24 cents in the dollar. That suggests that HIH NZ did not have sufficient funds to redeem all outstanding Notes for their face value. Further, it is by no means clear that HIH, or its liquidators, could have issued shares to Noteholders within 20 business days of 12 June 2003, or at all: see Graham J in McGrath at [39] and [40]. 91In my opinion, those matters do not affect the conclusion that HIH NZ was, by reason of Condition 12.3, obliged to convert all outstanding Notes. 92Indeed, breach of that obligation provided the basis upon which Perpetual terminated the Notes Contracts. 93The Notice of Termination (see [21] above) recited such obligation in subparagraph (a) and asserted, in subparagraph (c) that HIH NZ's "continuing failure" to comply with that obligation constituted a repudiation of the Notes Contracts giving rise to the entitlement to terminate asserted in subparagraph (e). 94Perpetual sought, and obtained, declarations to that effect from Graham J: see [26] above.

[18]

Subclause 2A.1(a) 95I return to consider Clause 2A.1 and the question of whether Noteholders are creditors of HIH NZ. 96In subclause 2A.1(a), HIH NZ acknowledged that it was "indebted" to Perpetual in respect of the "Moneys Owing from time to time". 97The latter expression is ambulatory in two senses. First, it refers to moneys owing "from time to time". Second, the definition of "Moneys Owing" itself refers to "Principal Moneys" and all other moneys payable to Perpetual or any Noteholder "from time to time". 98Subclause 2A.1(a) is thus not only an acknowledgement that, as at the date of the Trust Deed (26 October 1998) it was "indebted" to Perpetual. It also acknowledged that it was "indebted" to Perpetual for moneys owing "from time to time" thereafter. 99This acknowledgment was consistent with the "acknowledgment of indebtedness" in the Allotment Certificate (see [17] above). 100However, those acknowledgments of "indebtedness" must be seen in the context of the Trust Deed as a whole. If authority is needed for such an obvious proposition, it can be found in the cases gathered at [7.02] in Lewison and Hughes, The Interpretation of Contracts in Australia (2012). Indeed, the Allotment Certificate stated that the Notes were issued upon and subject to the terms of the Trust Deed. 101The "indebtedness" of HIH NZ to Noteholders was subject to the very significant qualification, referred to above, that Noteholders could not call for repayment to them of the "debt". 102Noteholders could not call for redemption of the Notes such that the moneys subscribed were returned to them. 103Only HIH NZ (the "debtor") could redeem the Notes "for cash" (under Condition 12.1 or Condition 12.2). In that event, as Graham J held in McGrath, HIH NZ was obliged to "pay off" the Noteholders (see [25] above). But the point is, HIH NZ alone had the choice as to whether it assumed this obligation. 104The Trust Deed provided for no other circumstance in which Noteholders would be repaid the amount they had subscribed for the Notes. 105The only entitlement given to the Noteholders by the Trust Deed (even in the "Event of Default" by HIH NZ - see [59] above) was to call for conversion of the Notes into Ordinary Shares in HIH. It is true that the first stage of such conversion was, by reason of Condition 6.5, the redemption of the Notes. But Noteholders were not entitled to the return of their money. The Noteholders were bound to apply the proceeds of any redemption to subscribe for shares in HIH. 106In my opinion, although the parties had used the word "indebtedness" to describe their relationship, it is clear from their agreement that the Trust Deed would govern their relationship, and from the terms of the Trust Deed, that they did not intend their relationship to be a debtor-creditor relationship in the conventional sense. 107They did not intend that Noteholders could call for repayment of the "debt". They intended that the amount subscribed by Noteholders would be "due", in the sense of repayable to them, only if the "debtor" so chose. 108Unless and until the "debtor" so chose, no debt in the conventional sense could arise. In the events that happened, the "debtor" did not so choose.

[20]

The first qualification 112The first was that the obligation is to pay the "Principal Moneys" "on the date due for repayment" (rather than, for example, "on the date of redemption"). 113I do not accept the submission of Perpetual that, as used in the Trust Deed, the word "repayment" is used as a synonym for "redemption". It is true that in Condition 3.1(c) and Condition 3.1(d) (which deal with payment of interest) reference is made to "repayment or redemption", but the distinction between the words is made clear in Condition 12.1 and Condition 12.1 which both speak of redemption "for cash"; making clear that "redemption" alone does not bespeak "repayment". 114The expression "on the date due for repayment" is not defined in the Trust Deed. The Trust Deed does not specify a term of the Notes or a period after the "Principal Moneys" must be repaid. 115In my opinion, on their proper construction, these words mean the date due for repayment to the Noteholder. 116The only circumstance provided for by the Trust Deed whereby the amount paid by Noteholders to HIH NZ on issue of the Notes (that is, the "Principal Moneys" referred to in subclause 2A.1(b)(i)) become payable to Noteholders, was if HIH NZ elected to redeem the Notes for cash under Condition 12.1 or Condition 12.2. 117In that event, the "date due for repayment" of the "Principal Moneys" was either 20 business days after notice is given (in the case of a redemption under Condition 12.1) or on 12 June 2003, the "End of the Conversion Period" (in the case of a redemption under Condition 12.2). 118The Trust Deed made no other provision for any "date due for repayment". 119Thus Clause 2A.1, and subclause 2A.1(b) in particular, were concerned only with the consequences of HIH NZ electing to redeem the Notes under either Condition 12.1 or Condition 12.2. 120What must be "paid" under subclause 2A.1(b) is the "Principal Moneys" represented by Notes "as are to be redeemed". Notes could only be "redeemed" - with the result of "repayment" to the Noteholder - on HIH NZ's election under Condition 12.1 or Condition 12.2. 121I accept HIH NZ's submission that: - "The evident purpose of the indebtedness acknowledged by clause 2A.1 is to accommodate the circumstance that HIH NZ elects to redeem the Notes for cash as it was entitled to do under Conditions 12.1 and 12.2". 122I do not accept Perpetual's submission that "any contention that HIH NZ was not indebted to Noteholders under the Notes leaves no work for Clause 2A.1(b)". 123I find nothing inconsistent with this conclusion in subclause 2A.1(b)(ii). That subclause provided that interest was payable on the Notes until redeemed or converted, and was consistent with Condition 3.1(d) which provided that interest on Notes would cease to accrue once the Notes were converted, repaid or redeemed. The subclause casts no light on whether Noteholders had the status of creditor. 124As HIH NZ did not elect to redeem the Notes under either Condition 12.1 or Condition 12.2, there was no "date due for repayment" to the Noteholder of the Principal Amount. 125For those reasons, in the events that have happened, subclause 2A.1(b)(i) was not enlivened.

[21]

The second qualification 126The second qualification to HIH NZ's obligation to pay the "Principal Moneys" to Perpetual is to be found in the words: - "Subject to any obligation of [HIH NZ] to convert the Notes to Ordinary Shares [in HIH] in accordance with the Conditions of Issue". 127The ordinary and natural meaning of these words is that if, for any reason, HIH NZ came under an obligation to convert the Notes into Ordinary Shares in HIH, it would no longer have an obligation to pay to Perpetual the "Principal Moneys". 128I read the words in question as having the same meaning as if they read: - "Unless HIH NZ becomes obliged to convert the Notes into Ordinary Shares." 129The "obligation" referred to in subclause 2A.1(b) could have arisen in a number of ways - hence the reference to "any" such "obligation. 130To use a hypothetical example raised in argument, had a Noteholder prior to 12 June 2003 called for conversion of its Notes (under Condition 4 or Condition 9), HIH NZ would have become "subject to [an] obligation" to convert. The result would be that the obligation on HIH NZ to "pay" the "Principal Moneys" would cease; notwithstanding the fact the first step of the required conversion would be redemption of the Notes. Were the Noteholder in this hypothetical example to terminate the relevant Notes Contract by reason of HIH NZ's failure to convert, the position would, in my opinion, be the same as in the events that have happened. 131As it happened, and for the reasons set out at [89] to [94], I am of the opinion that HIH NZ became obliged to convert the Notes to Ordinary Shares by operation of Condition 12.3. 132It follows, in my opinion, for those reasons, that even if, contrary to my findings, HIH NZ otherwise had an obligation to pay the "Principal Moneys" to Perpetual on behalf of the Noteholders, it ceased to have that obligation upon it becoming obliged to convert the Notes by operation of Condition 12.3. 133For those reasons, my opinion is that, at the time of repudiation, Clause 2A.1 imposed no obligation on HIH NZ to pay Perpetual "the Principal Moneys represented by the Notes" and that, accordingly, Noteholders are not creditors of HIH NZ.

[22]

Conclusion 134For these reasons, my conclusions are as follows. 135By reason of Condition 12.3, HIH NZ was obliged to convert the Notes in accordance with Condition 6.5 within 20 business days of 12 June 2003. 136It did not do so. That conclusion is unaffected by the fact that it could not do so. 137HIH NZ thereby repudiated its obligations under the Notes Contracts. Perpetual, on behalf of the Noteholders, has accepted that repudiation, and terminated the Notes Contracts. 138The Noteholders are (or were, immediately before lodgement of their creditors claims in the winding up of HIH NZ) entitled to damages to compensate for the loss they have suffered by reason of the Notes not being converted to Ordinary Shares in HIH. 139But they are not entitled to claim HIH NZ is indebted to them for the face value of the Notes. 140Although HIH NZ acknowledged that it was "indebted" to the Noteholders, the true nature of the legal relationship between HIH NZ and the Noteholders was not that of a conventional debtor and creditor. This was because the Noteholders, as the notional "creditors" were not entitled to call for repayment of the "debt" (the moneys subscribed for the Notes). 141They were not entitled to call for redemption of the Notes for cash. They were entitled to cause redemption to occur only as part of the process of conversion, which process could not result in their investment being returned to them. 142Redemption of the Notes, leading to repayment to Noteholders, was a matter entirely for HIH NZ's discretion. Noteholders could only recoup their investment if HIH NZ chose to return it to them. 143In my opinion, the Noteholders were never entitled to assert that HIH NZ was indebted to them for the face value of the Notes. 144And even if that be wrong, once HIH NZ became obliged to convert the Notes into Ordinary Shares (as happened by operation of Condition 12.3), such obligation, as might (contrary to my opinion) otherwise have arisen under subclause 2A.1(b) of the Trust Deed on HIH NZ to pay Perpetual the "Principal Moneys", ceased. 145In my opinion, the liquidators of HIH NZ correctly rejected Perpetual's proof. 146This conclusion gives effect to the purpose and object of the transaction represented by the Trust Deed. 147From the point of view of HIH NZ, the object of the transaction was to place HIH in funds so that it could meet its obligations arising from the takeover of FAI. 148From the Noteholders' point of view, the object of the transaction was the acquisition, in due course, but no later than 12 June 2003, of a shareholding in HIH (and, in the meantime, to enjoy a fixed rate of return on the investment). 149It was never the object of the transaction that the Noteholders would become, and remain, creditors of HIH NZ even after their entitlement to conversion for the Notes arose; and yet acceptance of Perpetual's submissions would lead to this result. 150I invite the parties to bring in short minutes to give effect to these reasons.

Perpetual Trustee Company Limited v HIH Holdings

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Judgment (23 paragraphs)

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Legislation Cited (2)

Cases Cited (9)

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