RHG Mortgage Securities Pty Limited & Ors v Elektra Purchase No. 19 Limited

Australian Securities and Investments Commission (ASIC) v Rich (2006) 235 ALR 587 Australasian Meat Industry Employees' Union (WA Branch); ex parte Ferguson (1986) 67 ALR 491 Autodesk Inc v Dyason (No. 2) (1993) 176 CLR 300 Barker v Furlong [1891] 2 Ch 172 Betts v Whittingslowe (No 1) [1944] SASR 163 Granitgard Pty Ltd v Termicide Pest Control Pty Ltd (No 3) [2009] FCA 82 Hawthorn Glen Pty Ltd v Aconex Pty Limited (No 1) [2007] FCA 2010 Hughes v Hill [1937] SASR 285 CASES CITED : Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 122 ALR 717 Multicon Engineering Pty Ltd v Federal Airports Corporation (Supreme Court of New South Wales, Cole J, 10 December 1993, unreported) Murray v Figge (1974) 4 ALR 612 Smith v New South Wales Bar Association (1992) 176 CLR 256 Telecom Vanuatu Ltd v Optus Networks Pty Ltd (No 2) [2009] NSWSC 33 The Movie Network Channels v Optus Vision [2009] NSWSC 132 Urban Transport Authority of New South Wales v Nweiser (1992) 28 NSWLR 471 Watson v Metropolitan (Perth) Passenger Transport Trust [1965] WAR 88 Woolworths Ltd v Olson [2004] NSWSC 871

RHG Mortgage Securities Pty Limited (First Plaintiff) RHG Home Loans Pty Limited (Second Plaintiff) PARTIES : RHG Treasury Services Pty Limited (Third Plaintiff) Receivables Servicing Pty Limited (Fourth Plaintiff) Elektra Purchase No. 19 Limited

COUNSEL : Mr I Jackman SC, Ms J Taylor (Plaintiffs) Mr M Speakman SC, Mr M Lawrance (Defendant)

SOLICITORS : Mallesons Stephen Jaques (Plaintiffs) Allens Arthur Robinson (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50207/08 RHG Mortgage Securities Pty Limited & Ors v Elektra Purchase No. 19 Limited JUDGMENT The plaintiffs' application to reopen 1 The plaintiffs have sought leave to re open their case in order to file and serve a fourth amended statement of claim. The application is opposed save for the defendant having no objection to the making of the proposed amendment to paragraphs 10 or 11. The defendant does deny the content of those paragraphs. The principles which inform the exercise of the discretion 2 These principles as recently outlined in The Movie Network Channels v Optus Vision [2009] NSWSC 132 [at 4 and following]:

In every case the overriding principle to be applied is whether the interests of justice are better served by allowing or rejecting the application to re-open [ Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 at [24]; Urban Transport Authority of NSW v Nweiser (1992) 28 NSWLR 471 at 478]. An application to re-open is subject to various degrees of scrutiny depending on the stage of the proceedings when the application is made. The test of what is 'just' at this stage of the proceedings is akin to the considerations applicable where leave to rely on fresh evidence is sought on appeal. That is, the evidence must be credible, highly probative and not previously obtainable by reasonable diligence [ Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 122 ALR 717 at 719 per Young J; Ritchies at [51.51.50]; Australasian Meat Industry Employees' Union (WA Branch); ex parte Ferguson (1986) 67 ALR 491 at 493 - 494 per Toohey J; Murray v Figge (1974) 4 ALR 612; Betts v Whittingslowe (No 1) [1944] SASR 163; Hughes v Hill [1937] SASR 285; Watson v Metropolitan (Perth) Passenger Transport Trust [1965] WAR 88].

Naturally the principles which inform the exercise of the discretion to re-open are to be read against the general background of the obvious public interest in the finality of litigation: cf Autodesk Inc v Dyason (No. 2) (1993) 176 CLR 300 per Mason CJ at 302-303.

In Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 Kenny J identified at [24] certain recognised classes of cases in which a court may grant leave to re-open as including where:

(a) Fresh evidence becomes available [ Granitgard Pty Ltd v Termicide Pest Control Pty Ltd (No 3) [2009] FCA 82 (evidence from a 'whistle blower' became available after the conclusion of the hearing)];

(b) There is inadvertent error; [ Telecom Vanuatu Ltd v Optus Networks Pty Ltd (No 2) [2009] NSWSC 33];

(c) There is a mistaken apprehension of the facts [ Urban Transport Authority of NSW v Nweiser (1992) 28 NSWLR 471; Autodesk Inc ]; or

(d) There is a mistaken apprehension of the law [ Urban Transport Authority of NSW v Nweiser (1992) 28 NSWLR 471].

In Smith v NSW Bar Association (1992) 176 CLR 256 at 266 a majority of the High Court found that: "If an application is made to re-open on the basis that new or additional evidence is available, it will be relevant, at that stage, to inquire why the evidence was not called at the hearing. If there was a deliberate decision not to call it, ordinarily that will tell decisively against the application." [See also: Barker v Furlong [1891] 2 Ch 172 at 184; Hughes v Hill [1937] SASR 285 at 287; Multicon Engineering Pty Ltd v Federal Airports Corporation (NSWSC, Cole J, 10 December 1993, unreported)].

In ASIC v Rich (2006) 235 ALR 587 at [18] per Austin J listed the factors that he agreed were relevant to the exercise of the discretion as follows:

i. The nature of the proceeding [See also Woolworths Ltd v Olson [2004] NSWSC 871];

ii. Whether the occasion for calling the further evidence ought reasonably to have been foreseen;

iii. The consideration of fairness that the defendant is entitled to know all of the evidence he has to meet in taking forensic decisions as to cross-examination and the nature and extent of the evidence he will himself adduce on the matters in question;

iv. The extent to which the plaintiff has embarked upon calling evidence on the issue in question in its case in chief;

v. The importance of the issue on which the further evidence is sought to be adduced to the pleaded issues in the case;

vi. The degree of relevance and the probative value of the further evidence sought to be adduced and its potential to involve an undue waste of time;

vii. The prejudice to the defendant in terms of delay in the completion of the proceeding and the consequential costs;

viii. The public interest in the conclusion of litigation [See also Hawthorn Glen Pty Ltd v Aconex Pty Limited (No 1) [2007] FCA 2010 at [48]]; and ix. What explanation is offered by the plaintiff for not having called the evidence in chief. The current application 3 The plaintiffs contend that the leave sought should be granted essentially taking their stance on the proposition that the proposed amendments raise pure issues of law and that there is no prejudice caused to the defendant. The plaintiffs further contend that the parties have at all times prepared for and conducted the hearing consistently with the contentions sought to be articulated in the amended paragraphs and that it is consistent with the principles laid down in sections 58, 64 and 65 of the Civil Procedure Act to allow the proposed amendments. 4 For their part the defendants contend that they would suffer real prejudice if the plaintiffs were committed to amend in the fashion sought. 5 I have reached the conclusion that consistently with the principles earlier set out, the application for leave to amend should be dismissed. In that regard the defendants submissions serve to explain the grounds which underpin the courts decision not to permit the amendments. 6 As the defendants have contended it is necessary to look at least the following matters:

i. the factual matrix that is relevant on the current pleadings concerning the meaning of "holds";

ii. the different factual matrix that would need to be considered if further amendment were permitted; and

iii. why the defendant might be prejudiced if the amendment were allowed. Factual matrix relevant to current pleading concerning the meaning of the phrase "holds" 7 On the current pleadings there are 2 issues for the court to determine:

i. whether the word "holds" in clause 14.30(b) should be interpreted: (A) consistently with the definition of "Holder"; or

(B) as referring to the holding of a beneficial interest; and, ii. if the latter, whether or not HVB had a beneficial interest in the Notes at the time of the second transfer to Elektra. Interpreting holds consistently with Holder 8 In relation to the first issue, the plaintiffs seek to support their interpretation by referring, as part of the factual matrix, to the parties' alleged knowledge that Austraclear would be the Holder. 9 The defendant asserts, for the reasons given in paragraphs 3.13 and 3.14 of its submissions on construction and rectification, that there was no such knowledge. 10 The plaintiffs however allege, in paragraphs 25 and 26 of their closing submissions, that the parties knew that Austraclear would be the Holder. They seek to rely on 2 matters as part of the factual matrix said to support this allegation.

i. An email from Mr Tyndall to Mr Williams dated 28 December 2007. The plaintiffs did not put this email to Mr Tyndall, but now ask the court to make an assumption as to what he meant to say and ask the court to draw a further inference that this represented his state of mind as at 10 January 2008. [The defendant contends that the court should neither make such an assumption nor draw such an inference. The defendant contends that they are directly contradicted by the reply from Mr Williams, also dated 28 December 2008 (TB 3/911). This reply is said to indicate that, although the parties knew that the Notes would be lodged in Austraclear, the parties may have intended that HVB would be the Holder. The defendant was attention to the second last paragraph states (emphasis added: note that BNY is the Security Trustee): To register HVB as the initial note holder , BNY will prepare the appropriate documentation which I sure [sic] they will need your Austraclear or Clearstream details].

ii. Clause 2.4 of the Series Supplement. The defendant's proposition is that this clause in fact contradicts the plaintiffs' case. Clause 2.4(a) is said to refer to " Holders registered with Austraclear ". The defendant contends that it therefore assumes, consistently with the email from Warren Williams referred to above, that even if the Notes were to be lodged in Austraclear, the Holder would be a different entity (presumably HVB). 11 The defendant then contends, and I accept, that the paragraph above illustrates the need for a detailed consideration of the factual matrix in order properly to interpret the Transaction Documents. This is relevant to the question of prejudice caused by the proposed Fourth Amended Commercial List Statement. Whether Elektra have a beneficial interest? 12 In relation to the second issue, the defendant contends that the question whether Elektra had a beneficial interest in the notes requires to be determined by reference to the proper characterisation of the relationship between Clearstream and HVB. The defendant's contention is that this will in turn be resolved by applying legal principles to the terms of the agreement between Clearstream and HVB. The stance taken by the defendant is that the resolution of this issue does not require an analysis of the background circumstances known to the parties. In particular the Defendant contends that the parties understanding of the proper characterisation of HVB's interest in the Notes would not be relevant. 13 However as is seen from what follows below, this understanding is relevant to the proposed Fourth Amended Commercial List Statement. Factual matrix relevant to the proposed Fourth Amended Commercial List Statement 14 I accept that the proposed Fourth Amended Commercial List Statement raises, for the first time, a further issue for the court: if the word "holds" in clause 14.30(b) is not interpreted consistently with "Holder", then it could refer to either:

i. the holding of a beneficial interest in the Notes (as currently pleaded); or

ii. the holding of rights in respect of the Notes (under the proposed Fourth Amended Commercial List Statement). 15 I further accept that this pleading, if permitted, would require consideration of a different factual matrix from that relevant to the current pleading. In particular, the resolution of this issue would require consideration of what, at the time the parties entered into the Subscription Agreement, was their understanding of:

i. how HVB would hold its interest in the Notes; and

ii. the legal characterisation of that interest. 16 The plaintiffs' case is that the word "holds" must refer to whatever interest HVB held in the Notes, and contends that the Court would not infer that the parties drafted a clause which would have no operation. 17 The defendant's contention is that there is a missing link in this chain of reasoning. It is said to overlook the existence of a number of alternative scenarios.

i. One scenario is that the parties were conscious of the contractual relationship between Clearstream and HVB and that HVB did not have a beneficial interest in the Notes. In this scenario, it would certainly be open to the plaintiffs to argue that the non-proprietary character of this relationship was part of the matrix of surrounding circumstances known to both parties. A court might further infer, by reason of this common knowledge, that the parties intended "holds" in clause 14.30(b) to refer to a non-proprietary interest in the Notes.

ii. An alternative scenario is that the parties were not both aware of the contractual relationship between Clearstream and HVB and /or operated under the mistaken belief that HVB would hold a beneficial interest in the Notes. On this scenario, the matrix of surrounding circumstances may not support an inference that "holds" was being used to refer to a holding of contractual rights. On the contrary, the surrounding circumstances might suggest that the word "holds" was intended by the parties to refer to the holding of a beneficial interest in the Notes. 18 It is true that the parties have not adduced evidence or cross-examined on the above issue. On the current state of the pleadings, and on the basis of how the plaintiffs opened their case, evidence of the parties' understanding of the character of the interest which HVB would have in the Notes would not have been relevant. [Being a quite distinct question from evidence as to which entity would be entered on the Register as the Holder] Prejudice 19 I accept that the defendant would potentially suffer a prejudice if the plaintiffs were permitted to amend their pleadings in the manner proposed. That potential prejudice inheres in the inability to lead evidence or cross-examine on the parties understanding of the interest which HVB would have in the Notes. 20 For example, the defendant could have led evidence that the relevant individuals were not aware of the Clearstream General Terms and Conditions and that those terms were not notorious in the Australian market. This understanding would be part of the factual matrix from which the court would decide whether, if "holds" were not read consistently with 'Holder", "holds" was intended to refer to the holding of a beneficial interest in the Notes or whether it extended to a party having an underlying contractual interest in the Notes. 21 The defendant would also suffer a more general prejudice if the amendment were admitted. The meaning of the word "holds" in clauses 14.30(b) and 10.7 of the Subscription Agreement, together with associated rectification cases, involve a large number of inter-connected issues. The defendant has prepared statements, drafted submissions and conducted the hearing in order to meet the case as pleaded. It would be unjust if the defendant were forced into a position where, on one of the 2 central issues in the proceedings, it was faced with a fundamental change in the case put by the plaintiffs after the completion of evidence. 22 In the result the only leave granted is for the making of the proposed amendment to paragraphs 10 and 11 of the proposed fourth amended commercial list statement.

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.