RHG Mortgage Securities v BNY Trust

Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 CASES CITED : Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315

RHG Mortgage Securities Pty Limited (First Plaintiff) RHG Home Loans Pty Limited (Second Plaintiff) RHG Treasury Services Pty Ltmited (Third Plaintiff) PARTIES : Receivables Servicing Pty Limited (Fourth Plaintiff) BNY Trust Company of Australia Limited (First Defendant) Elektra Purchase No.19 Limited (Second Defendant)

I M Jackman SC / J K Taylor (Plaintiffs) COUNSEL : S D Robb QC / M A Jones (First Defendant) M R Speakman SC / S A Lawrance (Second Defendant)

Mallesons Stephen Jaques (Plaintiffs) SOLICITORS : Corrs Chambers Westgarth (First Defendant) Allens Arthur Robinson (Second Defendant)

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

50152/09 RHG MORTGAGE SECURITIES PTY LTD v BNY TRUST COMPANY OF AUSTRALIA LIMITED AND ANOR JUDGMENT

1 HIS HONOUR: The plaintiffs manage and securitise residential housing loans secured by mortgage. From time to time, the plaintiffs raise money on the security of discrete packages, or series, of such mortgages. One such series, known as the Series UniCredit (1), has been charged to the first defendant (BNY) as "Security Trustee" for a "Note Subscriber". The original Note Subscriber was a German bank which I shall call, as the parties did, HVB. HVB has assigned its rights to the second defendant (Elektra). 2 BNY and Elektra assert that there has been an "Event of Default". Accordingly, BNY says, it is required to call a meeting of Noteholders (a term which for present purposes, can be taken to be effectively interchangeable with "Note Subscribers") and, if so directed by Elektra, to take steps to enforce the security: including the appointment of receivers to the underlying pool of mortgages. BNY has notified the plaintiffs of the alleged default, and has taken steps to call a meeting. 3 The plaintiffs say that there has been no Event of Default. Alternatively, they say, if there has been an Event of Default they are entitled to relief against forfeiture. 4 The question with which I am concerned today is whether interlocutory injunctive relief should be granted, which in substance would prevent BNY from acting on the alleged Event of Default until there can be a final hearing. For the reasons that follow I propose to grant that relief: The issues 5 The issues for my decision are:

(1) is there a serious question to be tried as to whether an Event of Default has occurred?

(2) Is there a serious question to be tried as to whether it is open to BNY to rely on powers to call a meeting other than the particular power specified in the notice?

(3) Alternatively, on the assumption that there has been an Event of Default, is there a serious question to be tried as to whether the plaintiffs would be entitled to relief against forfeiture?

(4) Are damages an adequate remedy for any harm that would be suffered if BNY exercises its powers and, upon a final hearing, it is held that there was no default?

(5) Are the defendants - in particular, Elektra - adequately protected by the plaintiffs' undertaking as to damages in the event that interlocutory relief is granted?

(6) does the balance of convenience otherwise lie for, or against, the grant of interlocutory relief? 6 The first issue involves three separate questions. The Event of Default is alleged to have occurred because an "Amortisation Event" occurred in January 2009. That is the event relied upon in the notice. In fact, the defendants say, there was also an Amortisation Event in December 2008. The defendants say that at the end of each of those months, the total of the principal balances outstanding on loans in arrears for more than 90 days exceeded 1% of the total of the principal balances outstanding on all loans. The plaintiffs say that:

(1) there is a serious question to be tried as to whether this was so; and

(2) accordingly, there is a serious question to be tried as to whether BNY was, or could have been, "actually aware" of the occurrence of the consequent alleged Event of Default. 7 The third question is this. If an Amortisation Event had occurred, the contractual order of application of payments changed. It is the failure to make payments in accordance with that changed order that, the defendants say, constitutes the Event of Default. The plaintiffs say that, on the proper construction of the relevant provisions, there is a serious question to be tried as to whether there was any relevant default in payment. The applicable principles 8 The principles by reference to which the courts grant interlocutory injunctive relief were examined, although in the somewhat different context of an application to restrain publication of defamatory material, in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57. Gummow and Hayne JJ discussed the principles from 81 [65]. Their Honours said that the first question was whether the plaintiff had made out a prima facie case "in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief". (The quotation comes from the earlier judgment of the Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622 - 623: a passage cited by Gummow and Hayne JJ.) 9 Gummow and Hayne JJ explained that the expression "prima facie case" did not mean that it was more probable than not that at trial the plaintiff would succeed. Their Honours said that "it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial". In these reasons, from both force of habit and a preference for English over Latin, I use the phrase "serious question to be tried". It should be understood as equivalent to the phrase "prima facie case" as that expression was explained by Gummow and Hayne JJ in O'Neill. 10 At 84 [72], Gummow and Hayne JJ referred to "the particular considerations which arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application". Their Honours took the principles from the judgment of McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533. In that case, McLelland J summarised the applicable principles as including the following:

(1) where the plaintiff's entitlement to final relief is uncertain, the court should consider what is best calculated to achieve justice between the parties in the circumstances of the particular case, until the uncertainty can be resolved at a final hearing;

(2) in doing so, the court should bear in mind the consequences to the parties of the granting or withholding of interlocutory relief;

(3) where the uncertainty depends on a contested question of fact, the court should not decide that question on the interlocutory application;

(4) where the uncertainty depends on a contested question of law, the court can decide (but is not bound to decide) that question on the interlocutory application; and

(5) whether the court should decide a contested question of law will depend on all of the circumstances of the case, including the novelty or difficulty of the question, whether it could be resolved on the state of the evidence, and whether the urgency of the matter meant that the court could not give proper consideration to the question. 11 In dealing with this application, I guide myself by those principles. In particular, in my view, this is not an appropriate case for the decision, on an interlocutory application, of the questions of construction that are involved. That is so because, in part, as the plaintiffs submitted (I think correctly) a resolution of those questions of construction should take place with full knowledge of the factual matrix, including, to the extent that it may be relevant, industry practice. The contractual regime 12 The transactions in question were documented in a series of interlocking and complex agreements. Those agreements include a trust deed, a document known as a "Series Supplement" whereby the Series UniCredit (1) was established, a subscription agreement relating to the Series UniCredit (1) and a deed of charge whereby the mortgages in that series were charged to BNY. 13 At the heart of the dispute is the concept of "Amortisation Event". By cl 13.2 of the Series Supplement, an Amortisation Event occurs where, among other things, "at any time, the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series which are in arrears for greater than 90 days is more than one (1) % of the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series". 14 Where an Amortisation Event has occurred, the order of payment of cash flows arising from the underlying pool of mortgages will vary. In substance, once an Amortisation Event, has occurred, the whole of the excess income should pass to the Noteholder (in this case, by assignment, Elektra) to the exclusion of the plaintiffs. 15 It is also necessary to bear in mind cll 31.11, 35.1 and 46.2 of the trust deed. To the extent that they are relevant, they provide as follows: 31.11 Receipt of instructions from Secured Creditors Without limiting its rights, powers and discretions, but subject to its express duties or obligations under this deed or any Transaction Document in respect of a Series, the Security Trustee will not be required to exercise any right, power or discretion (including to require anything to be done, form any opinion or give any notice, consent or approval) without the specific instructions of the Voting Secured Creditors in respect of a Series given by an Extraordinary Resolution. The Security Trustee may at any time convene a meeting of Secured Creditors (or a class thereof) in respect of a Series to consider resolutions as are put to the meeting by the Security Trustee including, without limitation, resolutions put for the purpose of seeking directions from Secured Creditors in respect of that Series as to the exercise of its powers and duties and performance of its obligations. Any such meeting shall be convened pursuant to the provisions set out in clause 46 ("Meetings") . If the only applicable Secured Creditors in respect of that Series are Holders of Offshore Notes, then a meeting of such Holders of Offshore Notes will be convened and held in accordance with the relevant Note Trust Deed (unless otherwise stated in the relevant Series Supplement). The Note Trustee (on behalf of such Holders of the Offshore Notes) will then direct the Security Trustee in accordance with the resolutions passed and the directions given at such meeting. The Secured Creditors in respect of a Series have no rights to direct the Security Trustee as to how to exercise its rights and powers other than as expressly set out in the Transaction Documents. 35.1 Convene meetings on the occurrence of an Event of Default Unless the Security Trustee has already exercised its discretion pursuant to clause 35.5 ("Security Trustee may waive breach and determine whether an Event of Default has occurred"), the Security Trustee must, upon becoming actually aware of the occurrence of an Event of Default in respect of a Series, take the following steps: (a) notify all Secured Creditors of the Security Trust relevant to that Series that the Charge granted in respect of that Series has taken effect as a fixed charge and provide to those Secured Creditors full details of: (i) the Event of Default as advised by RMS to the Security Trustee or otherwise known to the Security Trustee; and (ii) the actions and procedures which RMS has notified the Security Trustee are being taken or will be taken by RMS to remedy the relevant Event of Default; and (b) do all such things as are necessary or appropriate to promptly convene a meeting of the Voting Secured Creditors of that Security Trust in accordance with the provisions of clause 46 ("Meetings") or, if applicable, where the only Voting Secured Creditors are Holders of Offshore Notes, request the Note Trustee to convene a meeting of such Voting Secured Creditors in accordance with the relevant Note Trust Deed; and (c) convene a meeting of Voting Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) or a meeting of the Relevant Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) convened in accordance with paragraph (b) must consider and vote on a resolution to: (i) declare the Deed of Charge in respect of that Series to be enforced; (ii) direct the Security Trustee to exercise all of any of its powers under this deed, the Deed of Charge in respect of that Series and the Note Trust Deed (if any) in respect of that Series; and (iii) declare the Secured Moneys (including, in respect of the Debt Instruments, the Outstanding Principal of the Debt Instruments, all accrued interest and any other moneys owing to the Holders of the Debt Instruments under or in respect of the Debt Instruments) in respect of that Series to be immediately due and payable on demand. 46.2 Convening meetings RMS or the Security Trustee at any time may, and upon a request (by notice in writing to RMS) by Secured Creditors holding not less than 25% of the aggregate of the A$ Equivalent of the Amount Owing in respect of a Series must convene a meeting of the Secured Creditors in respect of that Series. Whenever RMS or the Security Trustee is about to convene any such meeting it must promptly give notice in writing to the Registered Note Registrar and the Note Trustee (if applicable) of the proposed day, time and place of the meeting and of the nature of the business to be transacted at the meeting. Every such meeting must be held at a place approved by the Registered Note Registrar and the Note Trustee (if applicable). 16 Clause 4(b) of the Series Supplement makes it an Event of Default if the first plaintiff (RMS) fails to make a payment within three business days of its due date. However, that is qualified by a proviso. The proviso is relevant to the issue of construction identified at [7] above. I set out cl 4(b): 4 Events of Default Each of the following is an Event of Default in respect of the Series:

… (b) (Failure to Pay) RMS fails to make a payment in accordance with the Transaction Documents within 3 Business Days of its due date for payment (determined for these purposes without regard to whether or not there are sufficient funds for such payment in accordance with the Cashflow Allocation Methodology (if applicable)) provided that a failure by RMS to make a payment in full to Noteholders (or any amount which ranks below a payment to such Noteholders) will not be an Event of Default for these purposes until any Notes which rank senior to such payments have been redeemed in full; … The Manager must advise RMS, the Security Trustee, the Note Subscriber and each Current Rating Agency in respect of the Series upon becoming aware of the occurrence of an Event of Default or Amortisation Event. 17 The allocation of cash flow is governed by cl 8 of the Series Supplement. Clause 8.8 deals with distribution of "Total Available Income." The particular provisions to which the parties made reference were paras (e), (f) and (o). I set them out: 8.8 Distribution of Total Available Income On each Payment Date prior to the occurrence of an Event of Default and enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed, RMS will make payments from the Total Available Income calculated on the immediately preceding Determination Date in the following order of priority: … (e) fifth, pari passu and ratably to the Class A Noteholders, the Class A Interest Amount for the Payment Period ending on (but excluding) that Payment Date and any unpaid interest in respect of previous Payment Periods (but excluding any amounts payable under clause 3.13 ("Withholding tax") in respect of the Class A Notes); (f) sixth, to pay pari passu and ratably to the Class B Noteholders, the Class B Interest Amount for the Payment Period ending on (but excluding) that Payment Date and any unpaid interest in respect of previous Payment Periods (but excluding any amounts payable under clause 3.13 (" Withholding tax") in respect of the Class B Notes); … (o) fifteenth, if an Event of Default or an Amortisation Event in respect of the Series is subsisting and clause 8.13 ("Application of proceeds following an Event of Default") does not apply, up to an amount equal to the Aggregate Principal Outstanding will be applied to Total Available Principal in accordance with clause 8.9 ( "Total Available Principal") ; 18 The obligation to make those (and other) payments was subject to a proviso stated at the end of cl 8.8: RMS will only make a payment under any of paragraphs 8.8(b) to 8.8(t) (inclusive) to the extent to which any amounts available for distribution under this clause 8.8 (" Distribution of Total Available Income" ) remain from which to make the payment after all amounts with priority to that payment have been paid in full. 19 Clause 8.9 specified what was "Total Available Principal". It included, by para (f), "any amount applied to Total Available Principle in accordance with cl 8.8(o)". 20 Clause 8.10 dealt with distribution of Total Available Principal. I set it out: 8.10 Distribution of Total Available Principal On each Payment Date prior to the occurrence of an Event of Default and enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed, RMS will make payments from the Total Available Principle in the following order of priority: (a) first, provided that an Event of Default or an Amortisation Event has not occurred (in which case this paragraph (a) does not apply and any Total Available Principle must be applied in accordance with paragraphs (b) and (c) (below) in that order) to retain as Principal Collections in the RMS Account, such amount as may be required for any anticipated Redraws or Further Advances (including in accordance with clause 3.9 ( "Future Receivables") of the Receivables Acquisition and Servicing Agreement) in future periods (such amount not to exceed 3% of the then Aggregate Class A Note Principal Outstanding); (b) second, pari passu and ratably to the Class A Noteholders (if any), until the Aggregate Principal Outstanding of all Class A Notes has been reduced to zero; (c) third, to pay ratably any remuneration, fees and any outgoings, liabilities, losses, costs, claims, expenses, actions, damages, demands, charges, stamp duties and other taxes due to:

(vii) the Receiver; RMS will only make a payment under any of paragraphs (a) to (c) (inclusive) to the extent to which Total Available Principal remains from which to make the payment after all amounts with priority to that payment have been paid in full. 21 The expression "Payment Date" is defined to mean, relevantly, "the 26th day of each month… or, if that date is not a Business Day, the next Business Day…". Factual background 22 The plaintiffs are part of the RAMS Group. The mortgages in question were "originated" by members of that group. The lender and mortgagee is another member of the group. By a series of agreements that does not require detailed attention, RMS has acquired an equitable interest in the loans in question. That equitable interest has been charged to BNY as security trustee. 23 On 18 December 2008, HVB notified BNY that an Event of Default might have occurred, because an Amortisation Event might have occurred. HVB relied on a report prepared by a firm of accountants. 24 The letter from HVB was passed on to the plaintiffs. The plaintiffs replied, stating that no Amortisation Event or Event of Default had occurred. That was followed up by a certificate under cl 25.2(e) of the trust deed to the same effect. By cl 31.7 of the trust deed, BNY was authorised (but not bound) to rely upon, and regard as conclusive and sufficient, any such certificate. 25 BNY decided that the dispute could not be resolved by reference to the certificate. Accordingly, it appointed an expert under cl 31.12 of the trust deed. The parties did not agree on the scope of the brief to the expert or the methodology to be used. Although BNY had said that it would approach the Court for directions, it did not do so. It delivered a brief to the expert, the accounting firm known as McGrathNicol. McGrathNicol determined its own methodology. 26 McGrath Nicol produced a report and a supplementary report in which it concluded that there had been an Amortisation Event. It reached that conclusion on the basis of certain assumptions as to when a loan would be in arrears and how one would determine the time for which loans should be classified as having been in arrears. The plaintiffs challenge those assumptions. First issue: has there been an Event of Default? 27 In relation to cl 35.1, the ultimate question is whether the McGrathNicol report and supplementary report were, in all of the circumstances and on the proper construction of the relevant provisions of the relevant agreements, capable of inducing in BNY a state of actual awareness of the occurrence of an Event of Default. Alternatively, as Mr Jackman of Senior Counsel (who appeared with Ms Taylor of counsel for the plaintiffs) put it, was BNY actually aware of the occurrence of an Event of Default having regard to the material in its possession and the proper construction of the relevant contractual provisions? 28 In considering whether there is a serious question to be tried, I bear in mind that this is assessed not in a vacuum but by reference, among other things, to the consequences of the grant or refusal of interlocutory relief. In this case, the grant of interlocutory relief would hold the present position until there can be a final hearing. It is likely that a final hearing can be held either this year or early in 2010. However, if interlocutory relief is refused, it is likely (I would have thought, almost inevitable) that BNY will be directed to appoint, and will appoint, receivers; and that the receivers will get in and sell the pool of mortgages, and apply the proceeds to the repayment of the amount owing to Elektra as Noteholder: see at [91] below. That is likely to happen (or, at least, to be well advanced) well before there is a final hearing and decision on the questions in dispute. 29 Thus, in a practical sense, the consequences of withholding interlocutory relief are more significant than the consequences of granting it. The plaintiffs' (or RMS's) proprietary rights in the underlying pool of mortgages would be converted to a claim for damages. I shall return to this in dealing with the balance of convenience, but the significance for present purposes is that, to quote from Gummow and Hayne JJ in O'Neill (at 83-84 [71]), "the requisite strength of the probability of ultimate success depends on the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought". On the other hand, if interlocutory relief is granted, Elektra will continue to receive its entitlements under the Series Supplement; and those entitlements will be augmented by reason of the further undertakings to which I refer at [95] below. Amortisation Event 30 The debate concerned in essence the sufficiency of the McGrathNicol report and supplementary report. The report was provided in draft for the parties to comment. They did so. It was then provided as a final report. To accommodate concerns raised by the plaintiffs, McGrathNicol issued the supplementary report. 31 The final report was dated 4 August 2009. In a letter sent the previous day to BNY, McGrathNicol described the work that had been undertaken. The letter made the following comments: As we have previously explained, we have tested the level of loan arrears greater that [sic] 90 days using the same reporting date that RHG uses to report the monthly status of the Series. We have, however, sought to contact David Hadlow of RHG to determine whether, in light of management systems, to enable us to re-test the arrears at any given specific date within the month. Despite frequent telephone calls and e:mails, we have yet to receive a response from David, or from Warren Williams of RHG. Based on the information available to us, we have undertaken a high level assessment of whether it is possible that testing the level of arrears at another date during January 2009, would have given a result that showed the 90 day arrears to have been less than 1%. Having undertaken this anaylsis, we consider it likely that the 90 days arrears position would have exceeded 1% in January, irrespective of the date at which the testing was carried out. Our view is based on the following observations: … 32 Mr Jackman relied on the reference to "a high level assessment" and on what he said was the tentative nature of the conclusion conveyed by the words "we consider it likely that" in the following paragraph. 33 The report itself made it clear that McGrathNicol had tested a sample of loans, and that it had used two methods. The methods were known as the quantum method and the duration method. McGrathNicol reported that, on each method, there had been an Amortisation Event at each month's end from September 2008 to January 2009. 34 McGrathNicol also noted that "the transaction documents contain no clear definition of "arrears" and do not clearly articulate a specific formula or basis upon which to calculate how long a loan is deemed to be in arrears". As a result, the report said, "the methodology used by [the plaintiffs] to report on the arrears position… is open to challenge". 35 The report made it clear that the opinion, as to the existence of Amortisation Events for the months in question, was derived solely from a review of a sample of loans. The report stated that "[t]here may be additional loans within the portfolio that are also in arrears for greater than 90 days". However, the report stated, "[e]ven based on the limited reporting sample …, we have identified a sufficient number of loans to exceed 1% of the total loan balance for the Series". 36 I refer to this since Mr Jackman submitted that, because only a sample of loans had been tested, it was possible that on a manual check of the entire portfolio a different position as to arrears would appear. However, as I understand the McGrathNicol report (and this is confirmed by the supplementary report), McGrathNicol concluded that even reviewing some part only of the portfolio, and not every loan within it, there were sufficient loans in default (purely within the sample reviewed) to demonstrate an Amortisation Event. In other words, McGrathNicol's opinion was that the total of the principal balances of the loans in arrears for more than 90 days in the sample reviewed was more than 1% of the total of the principal balances for the whole portfolio. It follows, if the McGrathNicol report is otherwise accepted as accurate (and as measuring "arrears" for the purposes of the definition of Amortisation Event), that a review of the loans that were not included in the sample considered by McGrathNicol could not reduce the relevant percentage below 1%. Common sense suggests that it would be likely to lead to an increase in the relevant percentage. 37 One of the questions in dispute between the plaintiffs and McGrathNicol was whether the amount of arrears should (as McGrathNicol considered) or should not (as the plaintiffs considered) include fees and charges. Mr Jackman submitted that it was industry practice to exclude fees and charges from the amount of "arrears"; or, at least, that there is a serious question to be tried as to whether this was so. Although McGrathNicol pointed out that it was aware of other cases in the industry where fees and charges were included rather than excluded, it did not say that this was universal. I accept that there is a serious question to be tried on this point. 38 McGrathNicol has carried out further work to see what would happen if fees and charges were excluded. The outcome of that work is to be found in the supplementary report (also dated 4 August 2009). In that report, McGrathNicol concluded that even if fees and charges were excluded, then on one method (which it called the adjusted quantum method - being the quantum method used earlier but adjusted by exclusion of fees and charges), there would still have been an amortisation event for each of the months of October and December 2008 and January 2009. 39 McGrathNicol said that the adjusted quantum method used by it was in essence the same method as that used by the plaintiffs to calculate arrears. It appeared to be common ground that this statement is substantially accurate. However, as I point out at [56] below, there is still a significant difference between what the plaintiffs do and what McGrath Nicol did. 40 McGrathNicol pointed out, among other things, that "[t]he margins for error are extremely slim. The difference between the November 2008 arrears level of 0.98% and a breach of the 1% threshold is as marginal as a single loan with $1,200.00 in fees and charges". Mr Jackman relied on this comment, read in conjunction with earlier comments as to the "high level assessment" and others that I have set out at [32] above, in support of a submission that the McGrathNicol report and supplementary report could not be taken as establishing the arrears position with a sufficient degree of certainty to be an acceptable foundation for a state of "actual awareness". 41 The defendants relied on an affidavit of Mr Christopher John Honey. He is a chartered accountant and a partner in McGrathNicol. He was involved in the preparation of the draft, final and supplementary reports. He also provided an affidavit in which he dealt with some of the criticisms of the reports made by the plaintiffs. In that affidavit Mr Honey said, among other things, that the adjusted quantum methodology to which I have referred above was consistent with the plaintiffs' methodology. 42 In an annexure to that affidavit, Mr Honey identified, for December 2008:

(1) some 17 loans in the sample reviewed by McGrathNicol that the plaintiffs acknowledged to have been in arrears for more than 90 days; and

(2) some 6 additional loans identified by McGrathNicol (by use of the quantum and adjusted quantum methods and the duration method) as having been in arrears for more than 90 days. 43 Mr Honey carried out a similar exercise for January 2009. The numbers of loans in those two categories were, respectively, 16 and 5. 44 However, as Mr Jackman pointed out, for the December loans three of the additional loans identified by McGrathNicol as having been in arrears for more than 90 days at the end of the month may not have been in arrears at the Payment Date. It was common ground that for December 2008 the Payment Date was 29 December: two days before the end of the month. The submission is correct (and it reflects another criticism made by Mr Jackman, namely that because McGrathNicol assessed arrears at month's end, its work could not necessarily be accepted as showing arrears at the Payment Date). 45 The principal outstanding on those three loans was $783,130.00. If one excludes them, then, in calculating whether there has been an Amortisation Event, the numerator will be decreased accordingly. However, Mr Honey said, the numerator would need to decrease by about $1.5 million if the relevant percentage figure were "to dip below 1% on 29 December 2008". Thus, whilst acknowledging Mr Jackman's submission, adjusting McGrath Nicol's work by excluding the three loans in question does not have the consequence that there was no Amortisation Event for December 2008. 46 For January 2009, the position is much closer. The percentage calculated by Mr Honey was 1.03%. That calculation took account of four loans said to have been in arrears (at month's end) for 95, 94, 93 and 93 days. It was common ground that in January 2009 the Payment Date was 27 January. Thus, the four loans that I have identified should have been excluded because they would not have been in arrears for more than 90 days (on Mr Honey's calculations using the adjusted quantum method) as at the Payment Date in January. The total outstanding on those loans was $721,424.00. 47 Mr Honey did not give the denominator for January 2009: that is to say, the total of the principal balances of all loans in the series. However, it can be calculated, from the figures that Mr Honey has given, as having been about $474,620,097.00. 48 If one adjusts the numerator for January 2009 - the total of the principal balances of all loans said by Mr Honey to have been in default - by deducting the principal balances outstanding on each of the four loans identified at [46] above, and calculates the percentage relationship between the figure so derived and the calculated denominator, one arrives at about 0.85%. 49 I note that Mr Honey's figures, that I have utilised in the preceding paragraphs, were prepared to take account of payments made by borrowers after the relevant Payment Date but before the end of the month. He did not give the amounts of those payments. It is therefore not possible to assess whether, if they were excluded, the percentage figure for January 2009 would rise back over 1%. Thus, my analysis of the figures cannot be viewed as conclusive one way or the other. 50 It follows, nonetheless, that the adjusted quantum method used by Mr Honey does not necessarily demonstrate that an Amortisation Event had occurred for the month of January 2009. Nor, for that matter, does his duration method: because the same four loans were shown, by that method, as having been in arrears for only 91 days; and thus should be excluded from the calculation. For completeness, I note that if one uses the figures shown for the quantum method, only one loan (said to have been outstanding for 94 days at the end of the month) would need to be removed from the pool; but doing this would reduce the percentage relationship slightly below 1%. That does not seem to me to be relevant, given that there is a serious question to be tried as to whether, in calculating arrears, fees or charges should be included or excluded; and the evidence of a calculation that excludes them demonstrates, when appropriate adjustments are made to it, that there may have been no Amortisation Event. 51 I have not lost sight of the fact that, if the population of loans selected for the calculation of the numerator is increased, then it is likely that the total of the principal balances of loans in arrears, and accordingly the numerator, will increase. But one may put that aside, because the real question seems to me to be whether the McGrathNicol report and supplementary report, demonstrate, to the point of providing a factual foundation for a state of actual awareness, that an Amortisation Event had occurred. For the reasons that I have given, I do not think that those reports necessarily demonstrate this for the month of January 2009.

52 Accordingly, it seems to me, there is a serious question to be tried as to whether there was an Amortisation Event in January 2009. The position is not so as at December 2008. There is a number of reasons for this. The first is that, as I have said, the McGrathNicol exercise was performed on a sample, but by comparing the total principal balances of loans in default for the requisite time in that sample to the total principal balances of all loans. Thus, looking at the entire population of loans, the numerator should not decrease, and indeed is likely to increase. It follows that an analysis of the entire population of loans is more likely rather than less likely to confirm that there was an Amortisation Event for that month. 53 Secondly, even acknowledging and giving effect to the criticisms made by Mr Jackman, the numerator is not reduced sufficiently to bring the percentage below 1%. 54 Thirdly, although Mr Jackman relied on the somewhat tentative language in the McGrathNicol letter of 3 August 2009 to which I have referred, the reality is that McGrathNicol undertook further work to accommodate his clients' concerns. In my view, the result of that further work was to strengthen rather than diminish the force of the conclusions expressed by McGrathNicol. 55 Fourthly, and dealing again with Mr Jackman's submission that it is necessary to look at the Payment Date rather than the end of the month to see whether there had been an Amortisation Event, the only adjustments that are required to take account of this are those to which I have referred above. Thus, whilst the theoretical accuracy of the submission may be accepted, it goes nowhere. 56 The real reason why the plaintiffs and McGrathNicol continue to disagree seems to be that the plaintiffs' methodology for reporting arrears at month's end includes a further feature that McGrathNicol was not prepared to adopt. The plaintiffs prepared their reports about ten days after the end of the month. They had a practice of excluding, from loans in arrears at the end of the month, all those where payments to eliminate the arrears (or more than 90 days of arrears) had been made after the end of the month (and, therefore, after the relevant Payment Date) but before the date of preparation of the report. McGrathNicol referred to these as "post-period adjustments". It expressed the view that they could not be justified. That seems to me to be correct. If that were the only argument left to the plaintiffs - and in my view it is, at least for the month of December 2008 - then it cannot be said that there is a serious question to be tried as to the occurrence of an Amortisation Event for that month. 57 There were other issues argued, including as to the sufficiency of the data provided by the plaintiffs in their reports. It is not necessary to deal with those issues. I should however point out that the plaintiffs' position, in relation to deduction of fees and charges, was clearly flagged in a prospectus issued for the float of the RAMS Group in July 2007. That material, and other material likewise confirming that the plaintiffs calculated arrears by excluding fees and charges, was (or should have been) apparent to HVB when it conducted due diligence. In my view, it is appropriate to approach this question on the basis that (as the plaintiffs say) there is a serious question to be tried as to whether the calculation of arrears should be carried out on the basis for which they contend. However, for the reasons that I have given, I do not think that acceptance of this position means that there is a serious question to be tried that there was no Amortisation Event in December 2008. 58 I add also that the plaintiffs' practice of making the post-period adjustments to which I have referred was not flagged in the prospectus. Mr Jackman did not submit that it too should have been apparent to HVB when it carried out due diligence. The proviso to clause 4(b) 59 If there were an Amortisation Event in December 2008, the effect was that the "waterfall" provisions of cl 8.8 of the Series Supplement varied. In particular, cl 8.8(o) was activated. It follows that in and from January 2009, RMS was obliged to make payments from Total Available Income, up to an amount equal to the Aggregate Principal Outstanding, to be applied to Total Available Principal. Its failure to do so would constitute an Event of Default unless the proviso to cl 4(b) means (as Mr Jackman submitted it did) that there was no Event of Default. 60 Mr Jackman submitted that once cl 8.8(o) applied, the cash flow in question became part of Total Available Principal, and thus was required to be distributed (in the events presently under consideration) in accordance with cl 8.10(b), (c). 61 Mr Jackman submitted that, even assuming that cl 8.8(o) were activated, payments pursuant to it still ranked in priority after other payments including pursuant to cl 8.8(e) and (f). In other words, payments on account of Total Available Principal under cl 8.8(o) were only required to be made to the extent that other prior payments, including payments of interest under paras (e) and (f), left any surplus.

62 For December 2008, there was a surplus of about $104,000.00. Had an Amortisation Event occurred, that surplus was available to be applied, and should have been applied, under cl 8.8(o).

63 However, for January 2009, there was no surplus, and thus no amount available to be applied under cl 8.8(o).

64 In essence, Mr Jackman submitted, the proviso to cl 4(b) meant that there could be no breach of cll 8.8(o) (assuming that it had been triggered) if payment of prior entitlements, including under cl 8.8(e) and (f), meant that there was no available cash on which cl 8.8(o) could fasten. I conclude that there is a serious question to be tried as to whether this is so for the month of January 2009, but not for the month of December 2008: because there was no surplus cash for January 2009, but there was for December 2008. The notice of default 65 My conclusions on the question of fact and the question of construction direct attention to the notice of default, and the basis on which BNY said that it was acting. 66 The notice of default was dated 7 August 2009. It relied on an Amortisation Event "subsisting on at least one Payment Date, being 27 January 2009". It did not in terms, or expressly, rely on the Amortisation Event which appears to have occurred the previous month. There are other relevant documents, all to the same effect. It is not necessary to look at their terms. 67 In submissions, Mr Robb of Queens Counsel (who appeared with Mr Jones of counsel for BNY) and Mr Speakman of Senior Counsel (who appeared with Mr Lawrance of counsel for Elektra) relied on the Amortisation Event for the month of December 2008. 68 If there is a serious question to be tried as to whether there was an Amortisation Event in January 2009, it seems to me to follow almost inevitably that there is a serious question to be tried as to whether BNY was (or could have been) actually aware of the occurrence of that event, and thus of the allegedly consequent Event of Default. It is difficult to understand how someone could be "actually aware" of something that had not occurred, or did not exist in fact. In this context, I rely not so much on metaphysical considerations of what is meant by "knowledge" or "awareness", but on what seems to me to be the obvious purpose of cl 35.1 of the trust deed. 69 The parties did not address in detail the consequences of a finding that there was no serious question to be tried as to the existence of an Amortisation Event for December 2008, in a context where that Amortisation Event had not been relied upon expressly for the purposes of cl 35.1. However, it seems to me, where the calling of the meeting is mandatory if the requisite state of actual awareness exists, the meeting can only be justified if there is a state of actual awareness as to the particular fact in question. Actual awareness as to a fact not relied upon would not seem to me to be sufficient, although it may well be that this could be dealt with by the calling of a further meeting relying on actual awareness of the earlier Amortisation Event. 70 In those circumstances, it seems to me that there is a serious question to be tried as to whether BNY had the requisite actual awareness of the existence or occurrence of the event on which it relied in acting under cl 35.1. If that is so, then the fact that there may well have been actual awareness of an earlier event that could also have justified action under cl 35.1 does not seem to me to have any bearing on the validity of what was actually done. In a slightly different context, Mr Jackman submitted that the law of trusts knows of no equivalent to the contractual doctrine demonstrated in cases such as Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359. I think that this is correct, not only in the context of discretionary decisions (which is the context in which Mr Jackman referred to it) but also in the context presently under consideration: namely, whether, in the events that have happened, a trustee was obliged to take action, as it did, for the reason that it gave. Conclusion on first issue 71 In my view, there is a serious question to be tried as to whether there was an Event of Default as expressly relied upon by BNY in acting under cl 35.1. Second issue: alternative sources of power 72 BNY submitted that in any event it was entitled to act under cll 31.11 or 46.2. 73 It will be observed that each of those clauses gives BNY a discretionary power to call a meeting of Noteholders. There is no suggestion, in the present case, that BNY purported to exercise, or thought that it was exercising, a discretion. The evidence is all one way, and to the contrary. It is clear that BNY thought that it was compelled to call a meeting, because of cl 35.1; and that it attempted or purported to comply with that perceived obligation. 74 In those circumstances, I conclude, there is a serious question to be tried as to whether the meeting in question can be justified under any other (discretionary) head of power in the trust deed. Third issue: relief against forfeiture 75 The plaintiffs submitted that if there had occurred an Amortisation Event and Event of Default, that was in substance because of their mistaken but honest belief that they were entitled to perform the post-period adjustments to which I have referred above. In those circumstances, they submitted, they would be entitled to relief against forfeiture on the grounds discussed in Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315, at 324 [20] and following of the majority judgment. 76 In this context (and in others) the plaintiffs relied also on cl 5.4 of the Series Supplement. They said that they would take action to remove sufficient non-performing loans from the Series UniCredit (1) to ensure that there could be no Amortisation Event. There were some colourful, but in my view misdirected, submissions as to whether, by the substance of this offer, the plaintiffs were seeking to buy their way out of a breach of contract. Since what is proposed involves the exercise of a contractual discretion, those submissions go nowhere relevant. 77 Returning to the question of relief against forfeiture: it is clear from Tanwar that relief against forfeiture may be granted if the forfeiture is unconscientious (see the "essential issue" stated by the majority at 324 [19]). Further, it is clear, as the majority said at 325 [25], that "legal rights may be acquired by conduct which pricks no conscience at the time". Nonetheless, it is clear, relief against forfeiture may be granted where the exercise of those legal rights is, at the time of exercise, unconscientious. 78 There was much debate as to whether this case fell within the accepted categories where equity could grant relief against forfeiture. Through the chain of documentation that is in evidence in this case, the plaintiffs have (or at least RMS has) an equitable proprietary interest in the mortgages in question. That proprietary interest would be lost if receivers were appointed and the pool of mortgages were sold. On that simple basis, it seems to me, there is a serious question to be tried as to whether relief against forfeiture is in principle available. 79 Whether relief against forfeiture is available in fact will depend upon a close examination of the entire relevant factual matrix, including the conduct (and perhaps understandings) of relevant actors in the RAMS Group. In my view, it cannot be said on some a priori basis that relief against forfeiture would not be available. 80 Thus, were it necessary to do so, I would conclude that there is a serious question to be tried as to whether the plaintiffs are entitled to relief against forfeiture. Further, and again were it necessary to do so (i.e., if I had concluded that there was no serious question to be tried on the first issue), I would conclude, taking into account what follows on the fourth to sixth issues, that the possible availability of relief against forfeiture was of itself sufficient to justify the grant of interlocutory relief. 81 I should note, in this context, that Mr Speakman submitted that relief against forfeiture would not be available to the plaintiffs because of what he submitted was disentitling conduct on their part. He referred to the practice of making post-period adjustments, which he characterised as "iniquitous" and as "ludicrous" or "bizarre". Mr Jackman submitted that the conduct in question could not amount to "unclean hands", both of its nature and because there was no relevant connection between it and the relief that would be sought.

82 Whether or not the plaintiffs' conduct should be regarded as disentitling them to relief against forfeiture is something that depends on an analysis of the relevant conduct in context. It is something that would require illumination through cross-examination. It is not something that can be determined, a priori, on an interlocutory application. Fourth issue: adequacy of damages 83 The plaintiffs pointed to a number of considerations which, they submitted, indicated that damages would not be an adequate remedy. Those considerations included reputational harm (should the meeting be called, and receivers appointed) and the possibility of cross-default, or triggered default, under other borrowing obligations undertaken by the RAMS Group. 84 The defendants submitted that it was the fact of default, and not the calling of a meeting or appointment of receivers, that would cause reputational damage. I am not sure that this is correct. But in any event, it is clear that if receivers were appointed, this could trigger defaults under other borrowing obligations undertaken by the RAMS Group. That might well lead to further severe consequences, including a requirement for immediate repayment of the facilities in question. That default would be triggered, and the possible consequences would follow, from the appointment of receivers, not from the subsequent finding of the Court that there had been an Event of Default sufficient to justify the appointment of receivers. It follows that if, on the contrary, the Court were to find that there had been no Event of Default, that would not undo the cross-default, or triggering of default, under other obligations. 85 In my view, damages would not be an adequate remedy for loss of the kind that would be likely to follow if other defaults were triggered, and the consequences of those defaults followed accordingly. Fifth issue: adequacy of undertaking as to damages 86 Elektra relied on a report of an expert, Mr Robert Camilleri. Mr Camilleri gave evidence of various problems that, in his view, could follow if receivers were not appointed. He said that changes in credit markets could mean that the value of the securities would drop, and he instanced a possible loss of about $22.5 million in some circumstances. 87 There is a number of problems with this aspect of Mr Camilleri's evidence. One is that he appears not to have taken into account the fact that the outstanding balance of principal is presently reducing by about $14 million per month. He appears to have assumed that it would remain constant over the time when the injunction would be in place. 88 Another problem is that Mr Camilleri assumed that it would take some 9 to 12 months for the proceedings to be heard. As I have indicated above, it is extremely likely that the proceedings will be given a hearing date in the near future, and that there will be a relatively swift final decision (of course, subject to appeal). I think that the time period is likely to be more of the order of 3 to 6 months. This would have a corresponding impact both on Mr Camilleri's quantification of damage and on the period of time for which Elektra will remain at risk. 89 Mr Camilleri's other principal concern was that if credit markets plunged again, as they have done in recent times, the securities might not be saleable at all. Thus, he said, Elektra might not get its money back by sale unless that sale could take place now. 90 Mr Jackman submitted that if this did happen, it would be in everyone's interest for the securities not to be sold. The great bulk of mortgagors would continue to make their repayments, and principal would continue to reduce (as it is reducing) by substantial amounts each month. There would be in effect an orderly amortisation program, rather than a forced sale with adverse consequences to everyone. 91 Finally, in this context, I note that the published (or soon to be published) accounts for the listed entity show that, as at 30 June 2009, it had total equity in excess of $232 million. Although the listed entity is not a plaintiff, it is clear that the bulk of the available equity comes from the plaintiffs. Thus, one could say, it is likely that there will be in excess of $200 million available to satisfy any shortfall that might occur on realisation of the mortgages in question if, on a final hearing, it is found that BNY was entitled to call the meeting and Elektra was entitled to vote for the appointment of receivers. (In case it should be thought that I have omitted considering whether this is likely, I should say that the hearing was conducted on the basis that if the meeting is to be held, it is extremely likely, if not certain, that Elektra will vote for the appointment of receivers. Its opposition to the grant of interlocutory relief could hardly be justified otherwise.) 92 Accordingly, I conclude, Elektra is adequately protected by the plaintiffs' undertaking as to damages. Sixth issue: balance of convenience 93 Essentially for the reasons that I have given in relation to the fourth and fifth issues, I think that the balance of convenience does justify the grant of interlocutory injunctive relief. 94 In addition, I note that the first plaintiff has offered further undertakings (over and above the usual undertaking as to damages) as follows: 1. The First Plaintiff undertakes to the Second Defendant and to the Court that until judgment following a final hearing of this proceeding or further order: (a) it will not retain any amount pursuant to clause 8.10(a) of the Series Supplement; and (b) it will on each Payment Date commencing on 26 September 2009 make payments from the Total Available Income under clause 8.8 (including under 8.8(o)) as if an Amortisation Event were subsisting on each such Payment Date. 95 In my view, those further undertakings support the conclusion that the balance of convenience favours the grant of interlocutory relief. 96 There were other issues argued in relation to balance of convenience. They included (and this is not exhaustive) potential prejudice to mortgagors who might wish to redraw under their loans if this facility were available, and the risk that receivers (if appointed) might use their powers to compromise certain other proceedings between the plaintiffs and Elektra which currently are to be heard by the Court of Appeal next month. It is not necessary to go to these matters in detail, because Elektra has offered undertakings which in my view would be adequate to deal with those concerns.

97 Also in this context, Mr Speakman referred to "the plaintiffs' continuing mismanagement of the pool" of mortgages. Although Mr Speakman cross-examined the plaintiffs' treasurer, Mr Williams, there was nothing put to (let alone said by) Mr Williams that would suggest mismanagement. Of course, on Mr Speakman's view of the world, there have been breaches of the reporting obligations; but it is a long way from there to mismanagement. Equally, it is a long way from an isolated mistake, to which Mr Speakman pointed in submissions, to mismanagement. Mr Williams offered what in my view was (at least prima facie) an adequate explanation of that mistake.

98 As I have indicated, I think that the balance of convenience does justify the grant of interlocutory injunctive relief.

Conclusion and orders 99 I note that the plaintiffs by counsel give to the Court the usual undertaking as to damages and that the first plaintiff by counsel gives to the Court the further undertakings set out at [94] above.

100 I make orders in accordance with prayers 4 and 5 of the summons filed on 19 August 2009 up until the hearing and determination of these proceedings or the further order of the Court. 101 I stand the proceedings over to the directions list on 18 September 2009. 102 I reserve the costs of the application for interlocutory relief. 103 I order that the exhibits on the application for interlocutory relief be retained until the further order of the Court.

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