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

2 The position in relation to the securities held by Fortis in Octavia Ltd was not so straightforward. The securities in Octavia had been issued by Octavia Investment Notes Ltd. The Notes were unsecured, although carried a guarantee of repayment by Octavia. Each Note had a face value of $100. It was common ground that because there was no evidence of a Bid Price as at the close of business on 7 July 2008 the mechanism in cl 8 of AMSLA failed to provide a basis to value the Notes for the purpose of arriving at the 'balance of the account' between Primebroker and Fortis.

3 As at 4 July 2008 trading in notes 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. In Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (No 2) I conclude,

1. 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.
2. 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.[3]

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.

5 On 2 September 2010, Primebroker wrote to Fortis giving notice under cl 7A.2 that the Notes had been suspended from trading on the ASX on 23 January 2008 and were delisted on 31 August 2009. Fortis accepted that the parties were obliged to negotiate in good faith 'with a view to promptly agreeing the market value' of the Notes as at 4 July 2008. The parties failed to agree on the market value.

6 The AMSLA and other related agreements between the parties provided no clear mechanism to resolve their failure to reach agreement. Nevertheless, the parties agreed that the court should make a determination of the market value, if such a value was ascertainable. It was common ground that the date for the valuation was 4 July 2008.

7 The primary contention advanced on behalf of Fortis was that it was impossible to discern any market value for the Notes on 4 July 2008, because there had been no on-market dealing in the Notes since their suspension from trading. Suspension from trading was, however, a pre-condition to the operation of cl 7A.

8 Fortis next submitted that, in any event, there was no evidence of off-market trading on 4 July 2008. It submitted that if the Notes were to be attributed any value other than nil, the court must do the best it can on the available evidence to estimate the market value on 4 July 2008.

9 Primebroker assumed the burden of establishing a market value for the Notes. It submitted that there was evidence which clearly established that the Notes had an ascertainable market value at the relevant time by reference to off-market activities. It argued that the market value could be demonstrated by reference to matters occurring before and after 4 July 2008. Primebroker adduced three categories of evidence from which it argued for a market value of $27 per Note. The evidence consisted of offers, bids and trades prior to 4 July 2008, a Proposal to Noteholders, dated 17 July 2008, by Octavia Investment Notes Ltd; and evidence of offers, bids and trades after 4 July 2008.

10 Primebroker submitted that 'market value' had a well understood meaning, recently expressed in a joint judgment of the High Court in Marks v GIO Australia Holdings Ltd.[4] It submitted that the absence of a trading history was no impediment to a court making a determination of market value. In MMAL Rentals Pty Ltd v Bruning[5] Spigelman CJ (with whom Mason P and Hodgson JA agreed) said,

1. A test of a "market value", whether in a statutory or contractual context, usually invokes the test long established and frequently applied in Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 esp at 432 and 440-441 of a willing but not anxious purchaser and vendor, bargaining with each other. This approach was most recently expressed in a joint judgment of three judges of the High Court in Marks v GIO Australia Holdings Ltd [1998] HCA 69, (1998) 196 CLR 494 at 514:

" ... The value ... is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it."

1. It is convenient to refer to the Spencer's case formulation as the exchange value test (Spencer supra at 431.5 per Griffith CJ, as did Gleeson CJ in Boland v Yates Property Corporation Pty Ltd [1999] HCA 64, (1999) 74 ALJR 209 at [79].)
2. Where the focus of the valuation process is on a "market value", even in a context, as so often occurs, where there is no or little trading history in the relevant property, the approach will usually be quite different to that which arises where a "fair value" is required to be determined. The range of relevant circumstances to be taken into account is not as wide and regard is not had to the particular history of the commercial or personal relationships between the prospective vendor and purchaser of the property to be valued.

11 The court in MMAL Rentals was concerned with the notion of 'fair market value'. In that regard, Spigelman CJ said,

1. In the present contractual context, the intrusion of the word "market" between "fair" and "value" points away from a process of determining what is just or equitable between the parties, towards an objective standard. That that is so in the present case is strongly suggested by the decision-maker nominated in cl 11.2.3. The decision is to be made jointly by the company's auditor and a chartered accounted nominated by the vendor and, failing agreement, by a nominee of the President of the Institute of Chartered Accountants. Persons with such a background are not generally suited to determining what is just or equitable in all the circumstances. Their expertise is appropriate for determining exchange value.
2. Nevertheless, the word "fair" has, in my opinion, work to do. In a contractual context, this additional word suggests that the valuation should proceed on the assumption, which may be contrary to the facts of a particular contractual relationship, that there is no impediment to the process of bargaining, whether in terms of availability of information or restraints arising from the characteristics of a particular vendor or purchaser or otherwise. Issues will arise, however, when determining what aspects of the particular relationship are of a character which inhere in the item of property itself, as distinct from those which should be treated as excluded by the concept of a "fair market value".
3. It is not possible to set out in abstract terms how a fair market value should be computed. It is necessary to focus on the particular issues which arise in order to determine what the formulation requires in a particular case.

12 In the absence of the word 'fair', the court is directed back to the test enunciated in Spencer v Commonwealth, which adopts a more objective and reality based assessment of the impact of market conditions on the bargaining process, and assumes fully informed parties.

13 For a suspended security there was a remarkable amount of evidence pointing to values attributed to the Notes by someone, although the task of discerning a 'market value' on the relevant day was by no means straightforward. Putting to one side for the moment the Proposal to Noteholders, Primebroker focussed on Deutsche Bank AG, as the only active participant in the market for the Notes. Deutsche Bank produced material under subpoena. There was no objection to the admissibility of the Deutsche Bank material as evidence. But, accepting the authenticity of the various transaction documents, and the accuracy of the information contained in numerous emails, the material suffered from real limitations as evidence of a market value on the relevant day.

14 The first transaction of Deutsche Bank was the purchase of a parcel of 21,540 Notes at $30 per Note on about 18 June 2008. The size of that transaction must be put into perspective. At the time Fortis held 87,346 Notes out of a total number of 3,486,210 on issue. It was plain that the fortunes of Octavia were in substantial decline. It did not recover. Fortis accurately described the Notes as a 'distressed product'. In support of the Proposal to Noteholders, discussed below, the chairman of Octavia had recommended to Noteholders that they accept a proposal to receive a cash consideration of $22.50 per Note. The mere fact, however, that the value of the product was in decline did not mean that there was no market for the Notes on 4 July 2008 and no market value on that day. On the other hand, the declining value made the price of earlier transactions less reliable as a guide. Fortunately, the evidence was not confined to prior transactions.

15 On 23 June 2008, the Deutsche Bank 'Distressed Products Group' acquired Notes at $26.50 per note. It is not clear how many Notes were acquired on that occasion. Evidence of that price was revealed in the context of internal correspondence dealing with the valuation of Deutsche Bank's holding of the Notes. From other internal correspondence it would appear that Deutsche Bank also paid $27 per Note sometime in June. Again, the volume traded was uncertain.

16 The Proposal to Noteholders, dated 17 July 2008, was supported by the unanimous recommendation of its directors, who proposed that amendments to the terms of issue of the Notes be approved to facilitate a cash payment or participation in a restructure of the Octavia group. In the proposal, and by their recommendation, the directors ascribed a value of $22.50 per Note for parcels greater than 500. Octavia offered that sum to all Noteholders. Holdings smaller than 500 were offered increased amounts on a sliding scale. That proposal did not proceed, presumably due to the failure of one or more conditions. But the directors might seem well-placed to form an opinion as to a value that would be attractive to Noteholders. Their opinion was, of course, expressed about two weeks after the relevant date.

17 On 25 July 2008, Deutsche Bank acquired a parcel of 28,500 Notes at $13.26. There was evidence that by 28 August 2008 some Noteholders had accepted the cash offer of $22.50 per Note, while some had rejected the offer. That evidence, together with the transaction that took place on 25 July ($13.26), and offers to sell Notes on 14 August 2008 at $55 per Note, points to some volatility in the market for the Notes in July and August 2008. Fortis submitted that the only piece of evidence which, on a rational commercial basis, informed an estimate of the market value of the Notes as at 4 July 2008, in a declining market, was the price at which they were first sold after that date - $13.26 on 25 July 2008.

18 The offer by Octavia to acquire large holdings of the Notes at $22.50 is not evidence of a market value, although it assisted in arriving at a market value. Evidence of what Octavia was willing to pay in mid-July 2008, in a falling market, established a floor price at that time. Noteholders were not obliged to accept less than the offer of $22.50, assuming the offer conditions were satisfied, but might hold out for more. The fact that the proposal failed to achieve a sufficient response would tend to suggest that a significant number of Noteholders considered that the Notes were worth more than what was on offer.

19 While the absence of transactions on 4 July 2008 makes it difficult to arrive at a market value for the Notes on that day, a significant transaction in the Notes about a week earlier, and the offer to pay $22.50 about two weeks later, provided useful outer limits to an assessment. Doing the best I can, with the evidence that is available, I have approached the assessment on the basis that there was a falling market, so that the high point on 4 July 2008 was the price of the last substantial sale - $26.50; and the low point was the offer by Octavia in mid-July to pay $22.50. While the process is imprecise, the best assessment of the market value on 4 July 2008 is the mid-point between $26.50 and $22.50, namely $24.50. I so find that to be the market value on that day.

20 Primebroker has claimed interest on the sum payable by Fortis from 4 July 2008. Fortis argued that interest on any amount payable by it for the Notes held on 4 July 2008 should be calculated on and after 2 September 2010, being the date on which Primebrokers' solicitors invoked cl 7A of the AMSLA. Fortis submitted that it could not be said that there was any obligation to remit that sum any earlier than the time the procedure under cl 7A had been invoked.

21 While the amount payable under cl 7A had not been agreed, the obligation to pay 'the balance of the account' arose on and from 4 July 2008. The market value attributed to the Notes has the effect of adjusting 'the balance of the account' by increasing the amount due and payable to Primebroker. Clause 7A, once invoked, does not create a liability. It merely provides a mechanism for the calculation of an amount in the event a security has been suspended. Accordingly, the balance of the account as at 4 July 2008 should be adjusted by increasing the amount payable to Primebroker by $2,139,977. Interest should be calculated on the total outstanding balance from 4 July 2008.

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

[2] Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (No 2) [2010] VSC 358.

[3] [2010] VSC 358 at [31]- [32].

[4] [1998] HCA 69; (1998) 196 CLR 494, 514 [49].

[5] [2004] NSWCA 451 at [55]- [57].