Primebroker Securities Ltd (recs & mgrs apptd) (in liq) v Fortis Clearing Sydney Pty Ltd

2 The services to be provided included settlement, clearing and custody, a credit facility and securities borrowing and lending. Schedule 3 of the SCA contained the terms of the Dealing Loan Facility under which credit was provided. Schedule 11 of the SCA was a separately executed standard form contract entitled Australian Master Securities Lending Agreement (AMSLA).

3 Fortis had advanced funds to Primebroker under the Dealing Loan Facility and "borrowed" securities from Primebroker under the AMSLA. On 4 July 2008, Primebroker was indebted to Fortis in the sum of $20,811,364.62. On that day the Australia and New Zealand Banking Group Ltd appointed Stephen Longley and Paul William Kirk as joint and several receivers and managers of Primebroker.

4 On 14 July 2008, the directors of Primebroker resolved to place the company into voluntary administration, and Laurence Fitzgerald and Michael Humphries were appointed administrators. On 16 October 2008, the creditors of Primebroker voted to place the company into liquidation and the administrators became its liquidators.

5 The appointment of receivers and managers on 4 July 2008 was an Event of Default, as that expression was defined, under the SCA and the AMSLA. When notified of the appointment on 4 July 2008, Fortis immediately commenced to sell the borrowed securities, purporting to exercise a power of sale under cl 17.3 of the SCA. Selling by Fortis concluded on 17 July 2008, by which time the sale of securities had generated $20,986,312.72. Not all securities were sold.

6 Fortis had argued that the calculation of any adjustment to be made between the parties, to reflect the offset of the debt with proceeds of sale of securities, was to be made under cl 17.3 of the SCA, as if the securities loaned to Fortis were security for the advance. Fortis claimed that it was entitled to calculate the amount of any adjustment by reference to the net proceeds derived from the sale of securities, returning any unsold securities to Primebroker. Primebroker argued that any adjustment between the parties must be calculated by reference to netting provisions in cl 8.2 of the AMSLA. Primebroker submitted that upon an Event of Default cl 8.2 operated to accelerate the corresponding obligations of the parties to arrive at the "balance of the account", which was an adjustment made as at the date of default by applying the notional value of Equivalent Securities, defined in the AMSLA, calculated on 7 July 2008, against the amount of its indebtedness to Fortis.

7 Fortis submitted that the Amendment Deed had the effect of making cl 8 of the AMSLA inapplicable. It argued that the Event of Default relieved Fortis of any obligation to deliver Equivalent Securities. Thus, so it argued, there was no opportunity for the netting provisions to have application. Fortis submitted that cl 17 of the SCA authorised Liquidation Action in respect of the securities and prescribed the manner in which Primebroker's entitlement was to be determined. It submitted that the borrowed securities were an asset of Primebroker in the Client Portfolio, which it was entitled to sell. Fortis also relied on cl 7 of the Dealing Loan Facility (Schedule 3 of the SCA) as an alternative basis to support its sale of the securities and set-off the amount due under the advances.

8 Fortis submitted that the suite of documents must be read as one agreement. Clause 7 of the Amendment Deed required this to be done. It also submitted that the contract documents, including the AMSLA, the Amendment Deed and Borrowing Requests did not fully define the relationship between the parties that existed at the time of the Event of Default.

9 I concluded that the obligation of Fortis to Primebroker arose, in relation to the borrowing of securities, under the AMSLA. It was, therefore, appropriate to look first to that agreement for the consequence of an Event of Default before the more general provisions of cl 17 of the SCA or cl 7 of the Dealing Loan Facility. Clause 8.2 of the AMSLA defined the liability of Fortis and prescribed a process under which there was to be an adjustment between the parties. Once a "balance of the account" had been calculated under cl 8, it may then be possible to transport that balance for application under cl 17 of the SCA or cl 7 of the Dealing Loan Facility.

10 Following publication of the Reasons for Judgment,[2] the parties required time to undertake the necessary calculations to arrive at the "balance of the account" under cl 8.2 of the AMSLA. They have been largely successful in reaching agreement, but were unable to agree upon a value for securities in Blue Energy Ltd, Luminas Ltd and Octavia Ltd.

11 The calculation methodology advanced by Fortis was set out in a letter dated 30 November 2009 from its solicitors to Primebroker's solicitors. Having applied its methodology, Fortis concluded that no amount was payable to Primebroker under the AMSLA, whereas Primebroker was indebted to Fortis in the sum of $1,637,936.82. That sum was the difference between the total amount owed by Primebroker to Fortis on 4 July 2008 ($20,811,364.62) and the Relevant Value under cl 8.2 of AMSLA, as calculated by Fortis, in the sum of $19,173,427.80.

12 Primebroker, on the other hand, contended for a balance of account due to it from Fortis in the sum of $11,197,013.00. There were material differences in the calculation methodology adopted by each party and competing construction of the relevant provisions of the AMSLA. Central to the difference between the parties were the provisions of cll 8.3 and 8.4 of the AMSLA.

8.3 [Relevant Value] for the purposes of clause 8.2 the Relevant Value:

(a) of any cash payment obligation shall equal its par value (disregarding any amount taken into account under (b) or (c) below);

(b) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Offer Value thereof; and

(c) of any Securities to be delivered by the Defaulting Party shall, subject to clause 8.4(b) and (c) below, equal the Bid Value thereof.

8.4 [Bid Value/Offer Value]

(a) For the purposes of clause 8.3, but subject to (b) and (c) below, the Bid Value and Offer Value of any Securities shall be calculated as at the Close of Business in the most appropriate market for Securities of the relevant description (as determined by the Non-Defaulting Party) on the first Business Day following the Performance Date, or, if the relevant Event of Default occurs outside the normal business hours of such market, on the second Business Day following the Performance Date (the "Default Valuation Time").

13 As at 4 July 2008, Fortis held 23,269,242 Blue Energy shares that had been transferred to it by Primebroker. On that day there was a Bid Price as at the close of business of $0.285.

14 On 4 July 2008, trading in Blue Energy shares ceased as a result of a request by the company for a trading halt which was expected to last for one day. A media release issued by the ASX confirmed that the securities would remain "in pre-open until the earlier of the commencement of normal trading on Tuesday 8 July 2008 or when the announcement is released to the market". Trading in Blue Energy shares resumed on 8 July 2008, with an opening price of $0.27.

15 Fortis submitted that in order to bring to account the value of the Blue Energy shares under cll 8.3 and 8.4 it was necessary to arrive at a Bid Value as defined in cl 26 of the AMSLA. That clause defined Bid Price and Bid Value in the following terms,

Bid Price, in relation to Equivalent Securities or Equivalent Collateral, means the best available bid price thereof on the most appropriate market in a standard size.

Bid Value, subject to clause 8.5, means:

...

(b) in relation to Equivalent Securities at a particular time, the amount which would be received on a sale of such Equivalent Securities at the Bid Price thereof at such time less all costs, fees and expenses that would be incurred in connection therewith, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the transaction.

16 Fortis submitted that in order to arrive at a Bid Value it was necessary to calculate the amount that could be actually "received on a sale" at the Bid Price. Fortis submitted that cl 8.4 required the calculation to be made at the Close of Business in the most appropriate market for the relevant security as determined by Fortis on the first Business Day following the Performance Date. Close of Business is defined to mean, "the final time when a Business Day on which settlement of the transfer of those Securities can take place in order to constitute good delivery on that day".[3]

17 Fortis argued that these definitions emphasised the centrality of the notion of settlement and the capacity to actually receive the proceeds of sale on the transfer of securities. In other words, the importance of a real capacity, at the relevant time, to complete a sale of these securities. Because of the trading halt there could be no sale or settlement of the transfer on 7 July 2008, and therefore no opportunity for anything to be "received on a sale" of the Blue Energy shares. Thus, Fortis submitted, the Relevant Value as at the Close of Business on 7 July 2008 was nil.

18 Primebroker submitted that the proper approach did not require a potential actual settlement of a transaction. It submitted that the process of arriving at a balance involved a notional calculation by ascertaining a Bid Value which was the amount which would be received, if a sale were made, at the Bid Price. The Bid Price meant the best available price of the securities on the most appropriate market in a standard size. Thus, according to Primebroker, the relevant enquiry was to ascertain a Bid Price for the Blue Energy shares as at the close of business on 7 July 2008. The fact that transactions in relation to those shares could not be concluded on that day, because of the trading halt, did not mean that there was no Bid Price. Primebroker submitted that there was such a price, at the close of business on 7 July 2008, of $0.295 per share. There was evidence of a Bid Price on that day. Primebroker calculated that an amount of approximately $6.8 million was to be credited to "the balance of the account" in favour of Primebroker.

19 Insofar as it is relevant, Fortis sold the Blue Energy shares between 8 and 25 August 2008, receiving net proceeds of $5,283,530.51.

20 The circumstances surrounding the trading of Luminas shares on and shortly after 4 July 2008, and the competing approach of the parties, are very similar to the Blue Energy shares. As at 4 July 2008, Fortis held 101,047,630 Luminas shares. On 4 July 2008, there was a trading halt at the request of Luminas and a media release by the ASX in similar terms to the Blue Energy media release. Luminas shares resumed trading on 8 July 2008.

21 There was evidence of a Bid Price for Luminas shares as at the close of business on 7 July 2008 at $0.013 which, if accepted, would result in a credit to the "balance of the account" in favour of Primebroker in the sum of approximately $1.3 million. Insofar as it is relevant, Fortis sold 90,839,879 Luminas shares yielding net proceeds of $235,716,01. Fortis still holds the balance of the shares.

22 The issue between the parties in relation to the Blue Energy and Luminas shares turned upon the significance of the trading halts which Fortis submitted resulted in a nil "relevant value", because a transaction in relation to the shares was not able to be concluded by means of a settlement which would have the effect of yielding an amount which may be "received on a sale".

23 In my opinion, the approach to construction adopted by Fortis overlooked the notional nature of the process to be implemented under cll 8.3 and 8.4. The intention of the parties, manifest in cl 8, was to arrive at a notional "balance of the account". Actual sales, transfers and settlements were unnecessary, indeed irrelevant. Notwithstanding the trading halt, in the case of Blue Energy and Luminas, there was evidence of a Bid Price as at the close of business on 7 July 2008, making it possible to calculate the Relevant Value for the purpose of applying cl 8.2 in arriving at the balance of the account.

24 The position in relation to the Octavia Notes is not so straightforward. By 4 July 2008, trading in securities of Octavia Ltd (previously MFS Ltd) had been suspended by the ASX for around six months. On 31 July 2009, provisional liquidators were appointed to Octavia and, on 9 September 2009, liquidators were appointed by order of the Supreme Court of Queensland. The liquidators have since commenced to realise the assets of the company.

25 Although suspended from quotation by the ASX, securities in Octavia could still be traded in "over the counter" transactions. Primebroker relied upon an affidavit of Wayne Richard Lonergan, sworn 13 April 2010, as expert opinion to support the proposition that a secondary market existed for the Octavia securities. Primebroker also relied upon the affidavit of Andrew Stephen Dolliver, sworn 31 March 2010, to establish prices in the secondary market in August, September and November 2008. Fortis objected to this evidence on the ground that it was irrelevant to the calculation of Relevant Value under cl 8.2 of the AMSLA.

26 Primebroker conceded that, unlike the Blue Energy and Luminas shares, there was no evidence of a Bid Price as at the close of business on 7 July 2008. Accordingly, the mechanism prescribed in cll 8.3 and 8.4 of the AMSLA failed to provide a basis to value the Octavia Notes for the purpose of arriving at the "balance of the account" between Primebroker and Fortis.

27 Not surprisingly, Primebroker commenced with the proposition that it would be manifestly unfair if Fortis was not obliged to give some credit to Primebroker merely because the suspension of trading meant that there was no Bid Price at the relevant time. Primebroker submitted that the intention of the parties, manifest in the scheme under cl 8 of the AMSLA, was to arrive at a notional value to bring about an adjustment between the parties, and that in the absence of a Bid Price the securities should be sold or Equivalent Securities returned to Primebroker. Primebroker did not seek to rely upon an implied term or some form of equitable compensation. It argued instead that the set-off to arrive at the "balance of the account", to which reference is made in cl 8.2(b), is to be utilised only if capable of application. If cl 8.2(b) was incapable of application then the value of the security, for the purpose of the netting process, was a sale by Fortis with an accompanying credit to the account, or the return of Equivalent Securities, or by the operation of cl 7A which expressly deals with Suspended Securities.

28 While the primary submission of Fortis was that, for the purpose of cll 8.3 and 8.4 of the AMSLA, the Relevant Value was nil, it advanced alternative submissions. By the first, it relied upon cl 7A; and secondly, sought to invoke the exercise of the default power under the SCA to sell the securities and apply the balance to the account between the parties. Fortis acknowledged that, in view of the construction of the relationship, as found by the Court, the second alternative (resort to the default power under the SCA) was highly artificial.

29 The approach taken by the parties to cl 7A was quite different. For its part, Primebroker relied upon the clause as an aid in the formulation of a general overriding obligation on the part of Fortis to account to Primebroker for the value of the Octavia Notes.

7A.1 This clause 7A applies if:

(a) dealings in any borrowed Securities or Collateral Securities are suspended from trading by the stock exchange on which the Securities were listed at the time of delivery under this Agreement, whether by reason of the adverse position of the issuer or otherwise; or

(b) for any other reason concerning the issuer of those Securities (such as the liquidation, provisional liquidation, administration or receivership of the issuer, or the Securities ceasing to be listed for trading on the stock exchange on which they were listed at the time of delivery under this Agreement), or concerning the exchange or clearing house through which they are traded, one Party is unable to transfer title to those Securities or Equivalent Securities to the Other Party.

7A.2 At any time while a situation described in clause 7A.1 prevails in relation to particular borrowed or Collateral Securities (the "Suspended Securities"), either the Lender or the Borrower may give notice (a "Suspension Notice") to the other, in which event clauses 7A.3 and 7A.4 shall apply.

7A.3 If a Suspension Notice is given, the Borrower and the Lender shall promptly enter into negotiations in good faith with a view to promptly agreeing the market value of the Suspended Securities for the purposes of this clause 7A. Neither the Borrower nor the Lender may unreasonably withhold or delay its agreement to a market value reasonably proposed by the other party.

7A.4 Any market value agreed under clause 7A.3 applies to the Suspended Securities notwithstanding the definition of Value in clause 26.

31 In my opinion, cl 7A is designed to deal with the kind of situation confronting the parties in relation to the Octavia Notes. There is no reason why it cannot operate to arrive at a value for the purpose of netting off in the event of default. Instead of arriving at the Relevant Value by means of the Bid Price, the parties are driven back to negotiations in good faith with a view "to promptly agreeing the market value". Unfortunately, Primebroker has not invoked cl 7A, although there seems no reason why that clause cannot now be invoked.

32 If cl 7A is invoked by a party, a question arises concerning the time the value is to be ascertained. Submissions were not directed to that question. I am prepared to hear further from the parties on that issue. My preliminary conclusion, unassisted by argument, is that cl 7A enables a party to give notice following which the parties are to negotiate in good faith to agree upon the market value. The purpose for which the valuation is made is not prescribed. One such purpose might be the calculation of the "balance of the account" under cl 8. To arrive at "the balance of the account", values are attributed to the respective obligations as at the Performance Date. Thus, the time at which the market value is to be agreed appears to be the accelerated date for delivery, namely 4 July 2008, as the Performance Date of the accelerated obligations.

[1] Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd [2009] VSC 364.