RIL Aviation HL 7740 and HL 7741 Pty Ltd v Alliance & Leicester plc & Ors

RIL Aviation HL 7740 and HL 7741 Pty Ltd v Alliance & Leicester plc & Ors - [2010] NSWSC 1235 - NSWSC 2010 case summary — Zoe

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2010/143563 RIL AVIATION HL 7740 AND HL 7741 PTY LTD v ALLIANCE & LEICESTER PLC & ORS JUDGMENT INTRODUCTION 1 These proceedings relate to disputes arising out of the financing and leasing arrangements in respect of the purchase of two Airbus 330-300 commercial passenger aircraft, referred to in the proceedings as aircraft 7740 and aircraft 7741. These arrangements were structured and organised by Allco Finance Group Ltd (Allco) or subsidiaries and businesses owned and controlled by Allco that were placed into receivership in 2008 and restructured and/or sold in 2009/2010. 2 The plaintiff, RIL Aviation HL 7740 and HL 7741 Pty Ltd (RILA), is a special purpose company established on 23 June 2005 to facilitate the financing and leasing arrangements of the aircraft. The first defendant, Alliance & Leicester plc (A&L), and the second defendant, Allco JS Pty Limited (Allco JS) provided secured loans to RILA in connection with the financing and leasing arrangements. The third defendant, Ladbroke Management Pty Limited (Ladbroke), was appointed as RILA's Manager in the financing and leasing arrangements after the original Manager's appointment was terminated. 3 The main issue between the parties is whether RILA is obliged to pay Ladbroke the monthly fee that was payable to the previous Manager. This issue is to be determined by construing the rather complex suite of commercial agreements and deeds between the parties (and others). The need to determine the other issues between the parties referred to later in this judgement depends upon the outcome of the determination of this central issue. THE SUITE OF AGREEMENTS 4 Although there are separate documents for each aircraft, they each contain substantially the same terms and the parties have agreed that the controversy between them can be resolved by reference to documentation in relation to aircraft 7740 (the Aircraft). Although the financing and leasing arrangements in respect of the Aircraft are complex the parties have distilled the effect of the deeds and agreements, describing the basic structure and the funding arrangements in short narrative form so that it will only be necessary to refer to the detail of the provisions of the deeds and agreements that affect the controversy between the parties.

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63 Clause 8.9 of the RILA Financing Deed refers to a "replacement Manager", an expression that is not defined in the Deed. The removal of a Manager under clause 8.7 of the Deed is not effective unless and until the replacement Manager has been identified and approved by A&L and each Facility Agent and the replacement Manager has executed documents to become the replacement Manager for the purposes of the Transaction Documents that are "reasonably satisfactory" to A&L. All of the steps necessary to give effect to the removal of AML and the appointment of Ladbroke occurred by 12 April 2010. On 13 April 2010 A&L wrote to AML confirming AML's removal and Ladbroke's appointment as replacement Manager on 12 April 2010. 64 RILA contends that the expression "Manager" in clause 8.10 does not include a "replacement Manager" and therefore RILA is not obliged to pay Ladbroke a Management Fee pursuant to that clause. However RILA accepts that it is obliged to pay Ladbroke a "reasonable" fee for its services as Manager. Ladbroke's status 65 Clause 26.2(k) of the RILA Financing Deed provides that a particular person, in this case the Manager, AML, includes a reference to the Manager's "executors, administrators, successors, substitutes (including persons taking by novation) and assigns". The only descriptions relevant to the determination of this issue are "successors" and "substitutes (including persons taking by novation)". Is Ladbroke a substitute? 66 The expression "replacement Manager" is not defined in the RILA Financing Deed. However "Substitute Financier" is defined as a person defined as such in a "Substitution Agreement" which in turn is defined as an "agreement substantially in the form of Schedule 3 ("Form of Substitution Agreement (clause 24)"), completed as stated in that schedule and executed by each person expressed to be a party to it, or another document approved by the Security Trustee for the purpose of clause 24 ("Assignment and substitution")". 67 Clause 24 of the RILA Financing Deed, extracted earlier in this judgment, deals with assignments by RILA and the Financiers and substitution of a new financier in circumstances where a present financier "wants to effect a novation of some or all of its obligations or an assignment of some or all of its rights under the Transaction Documents". Clause 24.3 of the RILA Financing Deed specifically refers to the "Substitute Financier" and the "Substitute Agreement". The Substitute Agreement is to effect the retirement of the Financier and appointment of the Substitute Financier as a party to the Loan Agreement and the other Transaction Documents. 68 The expression "substitutes" in clause 26.2(k) is not defined in the RILA Financing Deed. The question is whether that expression is limited to the "Substitute Financier" or whether it contemplates a wider variety of persons, in particular, a "replacement Manager". In circumstances where the flow of funds is pivotal to these commercial arrangements it is understandable that the parties defined the expression "Substitute Financier" and included a draft form of "Substitution Agreement" in the Deed. Clause 2.1 of the draft Agreement is headed "Novation" and provides for the retirement of the Financier and the assumption of obligations by the Substitute Financier. It specifically provides that a reference in the Transaction Documents to "Financier" includes a reference to the "Substitute Financier": cl 2.1(f). 69 RILA submitted that had the parties intended that the term "Manager" was to be understood to include a reference to "replacement Manager" they would have included such a provision. The expression "substitutes" in clause 26.2(k) includes the words "(including persons taking by novation)". Far from limiting the expression "substitutes" to the "Substitute Financier", who takes by novation under the Substitution Agreement, it expressly includes them by these words in parentheses. If the expression is limited to a Substitute Financier taking by novation then there would have been no need for the words in parentheses. The words in parentheses make it clear that it is intended that the expression "substitutes" includes a larger category of persons than merely the Substitute Financier. 70 The expression "substitutes", as the plural of "substitute", has a number of ordinary meanings including "replace (someone or something) with another": The New Oxford Dictionary of English; and "to put (one person or thing) in the place of another; to take the place of; replace": The Macquarie Dictionary Federation Edition. Clearly the parties to the RILA Financing Deed contemplated that the Manager would have a substitute or a replacement having regard to the regime set out in clause 8 of the Deed and, in particular, the use of the expression "replacement Manager". I see no material difference between the expression "replacement Manager" and "substitute" Manager in the context of the RILA Financing Deed as a whole. I am satisfied that a replacement Manager is a substitute. It follows that the expression "Manager" in clause 8.10 refers to Ladbroke from 12 April 2010 onwards. Even if that were wrong, I am satisfied that Ladbroke can reasonably be described as a "successor" to AML having regard to the ordinary meaning given to that expression: "one who or that which succeeds or follows; one who succeeds another in an office, position, or the like": The Macquarie Dictionary Federation Edition. 71 As I understand RILA's submissions it is also contended that because RILA and Allco Aviation terminated AML's appointment under the Management Agreement by letter dated 17 November 2009, that Agreement is at an end and therefore it is not possible for RILA to pay "the fee according to the terms of the Management Fee Letter" referred to in clause 8.10 of the RILA Financing Deed. The "Management Fee Letter" is defined in the RILA Financing Deed as "the fee letter dated on or about the date of this Deed between RILA and the Manager". There were competing submissions as to whether that expression means only the Schedule to the Management Agreement which is headed "Management Fee Letter Allco fees schedule " or whether it refers to the whole of the letter. The first page of the letter is headed "Management Letter". As can be seen from the extract earlier in this judgment, the body of the letter is headed "Management Agreement". If the whole of the letter, including the Schedule, is the "Management Fee Letter", the regime for payment of the Manager is found in clause 2 of the body of the letter which refers to the amount in Column 2 of the Schedule. 72 I do not agree with RILA's submission that it is not possible for RILA to pay the Management Fee stipulated in the Management Agreement because the Manager under the Management Agreement has been terminated. The parties intended that the Management Agreement would continue to operate after the termination of the Manager and the appointment of a "substitute Manager". This is clear from the provisions of clause 11 of the Management Agreement which impose the obligation on the Manager to execute such documents and instruments to transfer any rights or benefits and permit its obligations to be assumed by a substitute manager. In any event, the source of RILA's obligation to pay the Management Fee to the Manager is clause 8.10 of the RILA Financing Deed, not the Management Agreement. The Management Agreement provides the mechanism, the date and the amount, for the payments RILA is obliged to make pursuant to clause 8.10 of the RILA Financing Deed. That obligation persists notwithstanding the termination of the Manager's appointment under the Management Agreement. RILA is still obliged to pay the amounts in the Schedule headed "Management Fee Letter". 73 RILA is obliged to pay Ladbroke the management fee in accordance with clause 8.10 of the RILA Financing Deed. 74 In the circumstances of my findings it is only necessary to make declaration (3) in the Cross Summons, subject to any further submissions of the parties. EVENTS OF DEFAULT 75 It is now necessary to deal with the competing claims in respect of the Notice of Default. RILA seeks a declaration that the Notice of Default is of no force or effect and that, as at 28 May 2010, no Events of Default as claimed in the Notice of Default have occurred. The defendants seek declarations that such Events have occurred. There was a further claim in the Notice of Default in respect of an argument raised by RILA (referred to as the "Payment Default Defence"). It is unnecessary to deal with this matter having regard to my conclusions below.

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Negative Pledge 76 The first Event of Default upon which the defendants rely in the Notice of Default relates to alleged breaches of clause 4.1 and clause 4.2 of the RILA Security Deeds that, if proved, amount to an Event of Default pursuant to clause 15(f) of the RILA Financing Deed. The conduct relied upon is that outlined in paragraphs 4 to 11 of the Notice of Default. Put shortly it is RILA's conduct in requesting and pressing for payment of amounts otherwise due to AML into a bank account, ultimately identified as the bank account in the name of KV Management Pty Ltd (KVM). There is no issue that the amount in respect of which RILA was seeking payment was "Secured Property" within the meaning of that expression in clause 4 of the Security Deed. However there is an issue as to whether there was a fixed or floating charge over that Secured Property. 77 If the charge is fixed, clause 4.2 of the Security Deed applies to RILA's conduct. If the charge is floating, clause 4.3 of the Security Deed applies to RILA's conduct. Clause 4.2 prohibits RILA from attempting to take or taking any step to allow a set-off or a combination of accounts or deal in any other way with the Secured Property or any interest in it, or allow any interest in it to arise or be varied. If the charge is floating then clause 4.3 allows RILA to attempt or to take any step to do the things prohibited by clause 4.2 where "the thing done" is done in the ordinary course of RILA's business. Although the defendants contend that RILA's conduct amounted to attempting to deal with the Secured Property and/or attempting to allow an interest to arise in respect of the Secured Property, I intend to determine the matter by reference only to the attempt to deal with the Secured Property. 78 RILA submitted that the Notice dated 30 November 2009 in relation to the fixed charge (Fixed Charge Notice) did not cause the floating charge to be fixed at law. In support of this submission Mr Pritchard relied upon the following passage of the Chapter on Charges by JH Farrah and LGS Trotman in LexisNexis Australian Corporation Law Principles & Practice: The expression "fixed charge" is not defined in the Corporations Act. Under case law, the charge will be a fixed charge if the assets charged as security "are permanently appropriated to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the assets", and so assets can be released from the charge only with the active agreement of the chargee: Re Spectrum Plus Ltd (in liq) [2005] 2 AC 680; [2005] UKHL 41; [2005] 4 All ER 209; [2005] 3 WLR 58 at [138]. This involves the consideration of the intentions of the parties from the language used in the charge and the legal characterisation dictated by the rights and obligations established by the charge, and whether this leaves the chargor free to withdraw the charged assets from the security by dealing with them in the ordinary course of business. A charge that fails to constitute a fixed charge over an asset may be found to operate as a floating charge over that asset.

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84 In Pascoe v Boensch and Anor [2008] FCAFC 147; (2008) 250 ALR 24 the Full Court of the Federal Court (Finn, Dowsett and Edmonds JJ) said: [21] (ii) Though there is no required formula to be used to create a trust: Richards v Delbridge (1874) LR 18 Eq 11 at 14; the declarant must manifest an intention presently to create a relationship in respect to property which the law characterises as a trust: Re Armstrong (decd) [1960] VR 202. The intention must be one actually had: Commissioner of Stamp Duties (Q) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178; and it must be to create an immediately operative trust: Harpur v Levy [2007] VSCA 128; (2007) 16 VR 587 at [62]- [63]. An intention that the trust be constituted at a later date will be ineffective to create a trust either at the time of the declaration or at that later date. The ultimate onus of proving the intention to create a trust rests on the parties seeking to propound it: Hyhonie Holdings Pty Ltd v Leroy [2004] NSWCA 72 at [45]. 85 I should say something about the way in which the trial proceeded. RILA initially relied upon two affidavits of David Lloyd Veal sworn on 8 June 2010 and 9 July 2010. Mr Veal was not a director of RILA until April 2010. However I am satisfied that from time to time between November 2009 and April 2010 he was acting as agent for the director of RILA, Geoffrey Andrew Kinghorn. As a result of some evidentiary rulings, RILA decided there was a "gap" in its evidence and sought leave to call Mr Kinghorn who at that stage was overseas. On the second day of the trial Mr Bannon called for the "legal advice" referred to in correspondence between RILA and the ANZ Bank (the Bank), referred to below. Mr Pritchard then decided that it was important to call the lawyer, Mr Lennox, to give evidence. Accordingly RILA relied upon the evidence of Mr Veal, Mr Kinghorn and Mr Lennox. It will be necessary to analyse the communications surrounding the setting up of the RILA account, the KVM account and the evidence of the three witnesses. The Accounts 86 On 23 November 2009 Glenn Husking on behalf of KV Aviation Pty Limited, wrote to the Bank under a heading that included "New Bank accounts: RIL Aviation HL 7740 and HL 7741 Pty Limited" in terms that included the following: As discussed briefly with Jason when we last spoke we would like to arrange for the opening of two further Bank accounts with ANZ.

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Mr Veal 91 David Lloyd Veal who was the CEO of KV Aviation Holdings Pty Ltd at the time of these transactions with the Bank gave evidence that he instructed Mr Husking to open the RILA account because there was an expectation that funds would be received from the Security Trustee (A&L) that had previously been payable to AML under the Management Fee Letter. Mr Veal said that the Manager had been terminated and "so the moneys needed to be paid somewhere" (tr 22). In evidence-in-chief Mr Veal said that the reason he gave a direction for the moneys to be paid into the KVM account and not an account of RILA was because RILA did not have a bank account at the time and (tr 23): Secondly, the directors of RILA, the director of RILA at the time was also a director of KV Management. KV, RILA is owned by a company called KV Aviation Holdings. KV Aviation Holdings operates a business that has some 167 subsidiaries involved in transactions similar to the transaction that we are talking about here. As a practical matter for directors of RILA to perform their duties it is convenient to have one company, being a nominee company, to operate the accounts on behalf of the directors and on behalf of those companies. 92 Mr Veal accepted in cross-examination that the letter dated 15 April 2010 directing A&L to comply with the previous letter entitled "Payment Instruction" dated 20 November 2009 was a direction in respect of the amounts payable to the Asset Financier and to the Manager (tr 31). Mr Veal accepted that the corporate entity or legal entity which created the KVM account was KVM (tr 32). He gave the following evidence in cross-examination (tr 32): Q. And that was a deliberate decision on your part, wasn't it, that the name of the account holder not be identified? A. I take issue with the words "deliberate decision", it is not necessary for SWIFT transfers, in fact there is no facility in a SWIFT transfer for an account name. The SWIFT transfer system operates on a set of numbers, there is no reference to account names anywhere in that system.

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Q. See, what I want to suggest to you is that what you were intending to indicate was that only if monies were actually received into this account, would a step be taken to enter into a custodian arrangement, do you agree that's what you intended to convey? A. No. What is intended to convey is the monies are secured property, the monies that go into the account are the secured property, they are held as nominee for, by KV Management as nominee for RILA. 96 Mr Veal was reminded of the chronology of the events of the opening of the RILA account in late November 2009, the Fixed Charge Notice of 30 November 2009, the closure of the RILA account three days later and the opening of the KVM account four days later. He accepted that the RILA account was opened in anticipation that if the payment instruction was followed RILA would have a bank account that received intercreditor proceeds (tr 45). He accepted that the notification to the Bank relating to the closure of the account "following legal advice" made no reference to the matters he identified in his evidence relating to "convenience" (tr 47). He agreed that the legal advice referred to in the instruction to the Bank on 3 December 2009 was advice with which he was familiar (tr 47). He also accepted that in the "Account Authority" signed at the time of setting up the KVM account, the Bank requested the customer to indicate "if the foreign currency account is held in trust" and that no such indication was given. It is clear however that the account name was given as "KV Management Pty Limited - RIL Aviation HL 7740 and HL 7741 a/c". 97 After the conclusion of Mr Veal's cross-examination, leave was granted to ask further questions in chief which included the following (tr 53): Q. [why] Was the RILA account closed? A. A variety of reasons. The first one was that we made a decision in the company to move to having nominee accounts given, particularly given the difficulty of opening the account. Secondly, there were some concerns about having an account in the name or owned by RILA at that time and there was at least a potential argument that there may have been a breach of the documents. Thirdly--

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This should be sent to ANZ and as such the legal owner of the bank account will be KV. KV will however hold this as a custodian or nominee for RILA. 104 Mr Lennox was not aware that the RILA account had been opened until 1 December 2009. He recollected advising Mr Veal that there would be issues in relation to some of the provisions of the RILA Financing Deed. He also gave advice about other issues associated with the Fixed Charge Notice and whether there was a blocked account or a locked box type procedure in the documents. Mr Lennox was asked in cross-examination to explain his use of the expression "locked box" and said (tr 171): Post Spectrum, House of Lords decision which cast particular focus on the way in which you can take charges over book debts, there certainly has been a focus on the precise mechanics necessary to constitute a fixed charge, that is, provisions which say the chargor can only open an account in a particular way, can only put funds into a particular account, he cannot withdraw from the account unless there are authorities from the chargee. That is what I will call a locked box type procedure which there are no such covenants in this security deed or the financing deed. This is very relevant because, in order to avoid any breach, if there were such provisions, clearly that would be a different kettle of fish. 105 Mr Lennox advised Mr Veal that there were risks of a breach of the RILA Financing Deed associated with having a RILA bank account and suggested an alternative, which involved the creation of a custodian arrangement (tr 162). He also provided advice as to how it would be possible to structure a custodian arrangement and suggested consideration be given to entering into a custodian arrangement because the opening up of a bank account by a custodian was not an act of RILA and could therefore not be in breach of any covenant in the charge or the RILA Financing Deed. He gave advice that it had to be a custodian arrangement whereby the entire beneficial ownership resided with RILA so as to continue to comply with the charge requirements which restricted dealing with the Secured Property and disposing of the Secured Property. Mr Lennox gave the following evidence-in-chief (tr 163): I said, the way to deal with that was to have a custodian arrangement which would operate by way of deed poll from the custodian in favour of RILA by designing the custodian arrangement that way, again no agreement having been entered into by RILA, but RILA would have complete beneficial ownership. The fees that would normally be incurred by that custodian then entering into a bank account, it being the account holder vis-a-vis the bank and the exposure to bank fees that would result and exposure to a possible argument that was a disposal of property by the chargor could be met by the bank fees being accounted for by either the ordinary shareholding of RILA or some other party.

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So, in that way to navigate through what was (sic) significant restrictions but not restrictions of a type that there weren't some elements that RILA could conduct and the custodian arrangement was advised that I felt could navigate through those restrictions yet continue to comply with the charge which was probably a concluding aspect in the negative in the sense that the custodian arrangement was not one which bumped up against any covenants restrictions in the charge, there were no provisions in the charge for (sic) the financing deed which said words to the effect you can only open up accounts on those terms with the permission of Alliance & Leicester, there weren't, as I say, these locked box type procedures. 106 Mr Veal informed Mr Lennox that he would consider his advice and get back to him (tr 163). Mr Lennox said that Mr Veal asked him how serious the issue about RILA having a bank account was and how strong Mr Lennox was on the proposition that the custodian arrangement would remove any difficulties. Mr Lennox advised Mr Veal that while there were arguments both ways they were in the territory of a "fixing notice" having been given and a termination notice having been given to the Manager. He suggested to Mr Veal that it would be prudent to remove any possibility of breach by not allowing a RILA account to remain open. He also advised that the custodian account issue had possible problems but that he felt he could design the arrangements in a way which did not breach the charge or the RILA Financing Deed. He said he confirmed his earlier advice but that his judgment was there were "issues both ways". Mr Veal once again said he would consider the position (tr 168). 107 Mr Lennox spoke to Mr Veal on 3 December 2009 when he said he was "just wanting to confirm that you are proceeding with the custodian arrangement" and Mr Veal responded "yes" (tr 170). 108 Mr Lennox advised Mr Veal that it was important to understand the precise terms of the custodian arrangement. He did not draft such a document although he had "proformas" in his office. He gave the following evidence in cross-examination (tr 172-173): Q. You were never asked to draft a custodial arrangement for the purposes of this transaction, correct? A. That's correct.

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Q. You made it clear to him that if this arrangement was going to pass muster, this custodial account, it would be essential to draft an agreement and cover the matters which you have referred to? A. Yes. 109 Mr Lennox gave evidence that when Mr Veal contacted him on 2 December 2009 to check again with him the advice he had given about the issue of breach by having a RILA account he asked Mr Veal whether notice had been sent with RILA account details and "what had actually happened". It was at this time that he then began to identify "the issue" (tr 184). On 1 December 2009 he had no knowledge of an existing RILA bank account. He was anticipating that one would be opened in the name of RILA on that day but he had not focussed on the potential breach issue at that time (tr 187-188). Once he became "live to the issue" on 2 December 2009 it prompted him, on the morning of 3 December 2009, to enquire about the status of the account so he could understand where things were in terms of opening the account. Prior to that it was not a legal issue but became such an issue on 3 December 2009 (tr 189). He gave the following further evidence in cross-examination (tr 193-194): Q. Can you think of any reason why it is you would not advise your client that A&L should be told about the fact that the account was to be in the name of a company other than RILA? A. There was no - having reviewed the charge and the financing deed, there were no covenants in that document requiring RILA to hold accounts just in its name. There was no obligation on the chargor to provide information to Alliance & Leicester. Yes, it is true the secured property extended to all assets. Provided there was no disposition of property, there was no breach of the charge. So RILA was free to, subject to those SPV provisions being satisfied, it was free to acquire property as it wished. There were no, as I say, locked box restrictions and on the point that you are currently addressing, there was no covenant requiring information to be given to the bank prior to the opening of any account, or entering into any custodian agreement. When asked - and this was an issue that I focused on, on the 2nd - when asked by the chargee as to details concerning the secured property, yes RILA had an obligation to provide information at that point, but prior to that time, RILA was free to conduct its business as any other company could, subject to those SPV provisions. 110 The reference to "SPV provisions" in this part of Mr Lennox's evidence was to the special purpose provisions of the RILA Financing Deed. Mr Lennox also gave the following further evidence in cross-examination (tr 194): Q. But didn't you think A&L might form the impression, on receiving just that information, that the account which was referred to was an account opened in the name of RILA? A. A&L had no concern. They had an all assets charge. Any property of RILA would be subject to the charge. So whoever (sic) account name it was, provided RILA did not breach the charge, which was about disposing of property, A&L had no cause for concern. And if they had cause for concern, they would have had in their charge - again a material point, locked box procedure. 111 Mr Lennox was asked how he could advise his client in his email of 3 December 2009 without sorting out the terms of the custodial arrangement and gave the following evidence in cross-examination (tr 196-200): Q. The terms of the custodial arrangement and being satisfied that your client wouldn't be in breach of the transaction documents? A. I gave advice that I believed you could put in place a custodian agreement which, on the one hand did not breach the charge because it didn't cause any disposition of property and/or the other hand, did not cause RILA to breach the SPV provisions.

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113 The defendants submitted that contrary to the account in his affidavit, Mr Kinghorn did not have any actual recollection of being told about a custodian account and he had no intention of entering into any custodial account and no one ever raised that subject with him. There is no doubt that the only solution proposed by Mr Lennox to avoid any risk, of whatever proportion, was to enter into a custodian agreement. The defendants submitted that because RILA never pursued the establishment or execution of a custodian document it did not seek to implement the solution proposed by Mr Lennox. It was submitted that the opening of the KVM account could not be understood to be related to the avoidance of breaking the special purpose provisions for the simple reason that the essential element of that avoidance, namely a custodian agreement, was eschewed by Mr Veal. The defendants emphasised that not only did RILA fail to take Mr Lennox' advice to set up a custodian arrangement or agreement, but the Bank form in which the customer was requested to indicate whether the funds were in trust was also silent on that topic. The defendants also emphasised the fact that KVM was not a special purpose company but was actively involved in business on its own account and its ultimate shareholder was, and is, a corporation which, as trustee of a trust, had a receiver appointed to one of its assets. 114 The defendants also relied on the fact that Mr Veal signed the letter of 3 February 2010 and the Account Authority which made no mention that the funds in the account were to be held on trust for RILA. The defendants contend that the direction in the letter of 15 April 2010 is a direction by RILA that the Asset Financier amount and the Management Fee were to be paid into an account "not owned by RILA". It was submitted that the failure to advise or indicate to A&L the identity of the true owner of the account was misleading especially when the 15 April 2010 letter referred back to the 20 November 2009 letter which had referred to RILA's account. Notwithstanding that Mr Lennox had informed Mr Veal in December 2009 that a deed poll was required to bring about the custodian arrangement, no deed poll was entered into between RILA and KVM. In those circumstances the defendants contend that the 15 April 2010 direction was a deceptive request that money be transferred to the account of a third party. 115 The defendants also submitted that the request made of RILA on 16 April 2010 to provide the details of the name of the Bank account, the account branch, the signatory names and contact addresses and the date of the opening of account was a reasonable request. However RILA did not answer that request. Instead Mr Veal caused solicitors to write to A&L with threats to commence litigation unless there was a payment in accordance with the direction. 116 On 5 May 2010 A&L again requested the information about the Bank account referred to in the 15 April 2010 letter and pointed out that RILA was contractually required to provide that information. It was only on 6 May 2010 that RILA advised that it did not have any bank accounts and conceded that no custodian agreement had "in fact" been entered into at that stage. 117 The defendants submitted that Mr Veal's evidence that one of the reasons why the RILA account was closed was a decision to establish nominee accounts, particularly given the difficulty of opening the account, was misleading and unsatisfactory. When Mr Veal was asked about that evidence he gave the following answer (tr 134-135): Q That was a misleading impression you endeavoured to give to the Court in giving that answer, wasn't it? A. It was not a misleading impression. The difficulty with having these accounts owned in this fashion is a practical difficulty. 118 Mr Veal gave evidence that the reason for closing the RILA account and opening the KVM account was because "opening bank accounts in company names is quite an effort". The defendants submitted that RILA did not tender any document which suggests, let alone establishes, there was any difficulty in opening an account in RILA's name. Indeed the evidence establishes that the process of opening the RILA account was a simple one. The defendants also submitted that RILA did not tender any documents to establish the decision to move to nominee accounts as asserted by Mr Veal. It was submitted that the documents tendered by RILA in relation to five of the accounts (Ex E) do not establish the practice alleged. The documents in Exhibit E are entitled "Company/Formal Trust Account Authority". There is no reference in any of those documents to the account being held as "nominee" or "trustee" or "custodian". Each account refers to the holder "as Manager" of particular joint ventures. 119 The defendants also submitted that the email to the Bank dated 3 December 2009 referring to the "legal advice" as the reason for the closure of the RILA account does not refer to any decision to move to nominee accounts nor to any difficulties in opening accounts. It was submitted that Mr Veal's evidence in relation to a decision to move nominee accounts and the difficulties of opening accounts should be rejected. 120 The defendants also submitted that the suite of agreements in relation to these transactions was drawn up on the basis that RILA would receive payments and submitted there is nothing in the agreements that could possibly lead to a breach arising from RILA owning a bank account. By way of example the defendants pointed to clause 14.1(i)(i) of the RILA Financing Deed in which RILA undertook not to "engage in any business or other activity (whether of a commercial nature or otherwise) other than as contemplated in the Transaction Documents". It was submitted that this provision clearly contemplates RILA opening, owning and operating a bank account. It was also submitted that by clause 14.1(i)(iii) of the RILA Financing Deed, RILA undertook not to "have any assets other than those under or derived from the Transaction Documents and its share capital". It was submitted that RILA opening, owning and operating a bank account could not possibly have contravened this undertaking. 121 The defendants submitted that Mr Veal sought to qualify his answers in relation to the timing of the Fixed Charge Notice and the opening of the KVM account. It was submitted that the evidence of Mr Veal, Mr Lennox and Mr Kinghorn establishes that after receiving the Fixed Charge Notice RILA engaged in a deliberate course of conduct to hide the fact that KVM owned the account the subject of the payment direction in the letter of 15 April 2010. It was submitted that to the extent that it may be relevant, RILA's conduct was not in the ordinary course of RILA's business; it did not have any custodian arrangements with KVM and it attempted to put money into an account owned by KVM so that if a receiver was appointed KVM and RILA could argue that KVM owned the funds. Was there an attempt to deal with Secured Property? 122 For the purposes of the determination of this aspect of the matter I intend to assume that there is a fixed charge over RILA's assets. The question is whether RILA's conduct amounts to an attempt to deal with the Secured Property or an attempt to allow any interest in it to arise in breach of clause 4.2 of the Security Deed. The main matter for decision is whether I accept RILA's claims that it was always intended to have KVM hold the Secured Property on trust for RILA in the KVM account which was intended to be a nominee account, with KVM as RILA's nominee. 123 One of the problems in relation to the communications between RILA's director, Mr Kinghorn, and his lawyer Mr Lennox, was that Mr Veal was the person providing instructions to Mr Lennox and receiving advice from Mr Lennox. It was Mr Veal who then transmitted the advice to Mr Kinghorn. This was not an ideal situation and it is not surprising that there were some inconsistencies between what Mr Kinghorn understood the advice to be and the advice given by Mr Lennox. The defendants seized on these inconsistencies to submit that the evidence of Mr Veal and Mr Kinghorn in so far as they claim that the Secured Property was to be held by KVM on trust for RILA should be rejected. 124 The defendants relied upon the inconsistency between the evidence of Mr Veal and Mr Kinghorn on the one hand and the evidence of Mr Lennnox on the other as to the advice about the nature of the "risk" of RILA being in breach of the RILA Financing Deed by having the RILA bank account. There was also reliance upon some internal inconsistencies in Mr Kinghorn's evidence in this regard. Mr Veal's evidence was that Mr Lennox had given advice that there was a "small risk" of RILA being in breach of the RILA Financing Deed by having the RILA bank account (tr 54). He gave evidence that he informed Mr Kinghorn that Mr Lennox had given advice that there was a "low risk, small risk" of someone arguing that there was such a breach (tr 131). Mr Kinghorn's evidence in his affidavit was that Mr Veal had informed him that Mr Lennox had advised that there was a "very small risk" of such a breach (par 11). In cross-examination Mr Kinghorn said that the advice received was that there was a "small risk" of such a breach (tr 150). When Mr Kinghorn was reminded of his affidavit evidence he gave the following evidence (tr 155-156): Q. Do you remember in your affidavit you talk about very small risk? A. Risk, small risk is a small risk. Q. In your affidavit you said very small risk? A. A very small risk, yes. Q. Do you have a recollection of what was actually said about the risk? A. It was a small risk, yes. Q. Was it, do you recall now whether very small or is that something you are not sure about now? A. I can't recall it was a very small risk. Q. Could have been very small? A. Very small. Q. Could have been small? A. Small. Q. It might not have even been the word small used at all? A. No, I think it was used. 125 Mr Lennox gave evidence that he did not use the expression "small risk" and he did not believe that the expressions "small risk" or "very small risk" fairly characterised his advice (tr 197-198). However Mr Lennox gave evidence that he did advise Mr Veal that there were "risks" that RILA would be in breach of the RILA Financing Deed by having the RILA account (tr 162; 169).

[274]

Q. But your recollection now is that, is it not, it was Mr Veal's suggestion that the account should be opened? A. I had that conversation with Mr Veal, yes. 127 The defendants contend that RILA was not concerned about a breach of the RILA Financing Deed. It was submitted that Mr Kinghorn's evidence in this regard should be rejected because it is "bizarre" to suggest, as Mr Kinghorn did in his evidence, that he would act on advice that he did not understand, about which he asked no questions and which he thought was "odd" (tr 220). It was submitted that the fact that RILA closed its account at the time that it did was not mere coincidence but was directly related to the receipt of the Fixed Charge Notice with the intention to move the Secured Property out of the reach of the fixed charge into KVM's hands. 128 The closure of the RILA account occurred almost immediately after the receipt of the Fixed Charge Notice. However by the time that Mr Veal had concluded his initial cross-examination and before leave was granted to ask further questions in chief, he had given various reasons for the closure of the RILA account but no suggestion was made that the timing of the closure was related to the receipt of the Fixed Charge Notice. After leave was granted to ask further questions in chief, Mr Veal was asked why the RILA account was closed in early December 2009 (tr 53-54). In answering this question Mr Veal made no mention of the receipt of the Fixed Charge Notice (tr 53). In further cross-examination as set out earlier (par 98) Mr Veal agreed that it was "fair" to suggest that the closure of the RILA account and the opening of the KVM account was "prompted wholly and solely by the notification of the fixed charge" (tr 80-81). Mr Veal described the position differently when he was recalled later in the trial. On this occasion he said that the receipt of the Fixed Charge Notice was a "contributing factor" to the decision to close the RILA account (tr 132). I should say that this part of Mr Veal's evidence was given after further documents had been produced from the solicitor's file in which Mr Lennox gave advice about the closure of the RILA account and the opening of the KVM account. 129 The lack of mention in Mr Veal's original evidence of the receipt of the Fixed Charge Notice and the later adjustment of his evidence that the closure of the RILA account was prompted "wholly and solely" by its receipt to it being only a "contributing factor" provided a further basis for the submission that Mr Veal's evidence in relation to the nature of the KVM account should be rejected. It seems to me that it is not possible to assess this evidence without once again commenting on the manner in which the evidence developed in this trial. The matter was brought on fairly promptly and issues became clearer after the production of Mr Lennox' e-mails and there was further time for the consideration of the chronology of relevant events. Notwithstanding these matters it is necessary to be conscious of these different positions when considering whether I should accept the accuracy of Mr Veal's evidence.

[275]

130 I am of the view that Mr Lennox' evidence is of great importance in assessing whether the defendants are correct in their contention that RILA attempted to deal with the Secured Property in breach of clause 4.2 of the RILA Security Deed. It has to be remembered that RILA was in a litigious mode with AML in relation to its termination and Mr Lennox was very conscious of not only that fact but also of what he described as the "fixing notice". I have no doubt that he was concerned that RILA may be exposed to allegations of breach of the Financing Deed because it had opened the RILA bank account. On reflection Mr Lennox might feel that such a concern may have been unwarranted but there is no doubt in my mind that he was motivated to protect RILA from such an allegation. I am also satisfied that Mr Lennox' communications with Mr Veal were intended to convey to Mr Veal, and to Mr Kinghorn, the importance of the KVM account being either a nominee account or a custodian account. 131 Mr Lennox' unchallenged evidence was that on 3 December 2009 he confirmed with Mr Veal that RILA was "proceeding with the custodian arrangement" and Mr Veal responded "yes" (tr 170). When I say that this evidence was unchallenged I mean that it was not suggested to Mr Lennox that this conversation did not occur. There were certainly challenges as to whether such a custodian arrangement was ever entered into by RILA. There is no issue that there is no written custodian agreement in place. However it is necessary to decide whether that absence proves that RILA intended to deal with the Secured Property. 132 To establish a breach of clause 4.2 of the Security Deed it is necessary to show that RILA's intention was to deal with the Secured Property in the manner alleged, that is, to move it into KVM's account without any beneficial ownership remaining with RILA. 133 Mr Lennox was giving advice in early December 2009 as to how RILA should conduct itself to avoid allegations of breach of the RILA Financing Deed. He advised that it was important to open the KVM account in a particular style and manner in what he described as a "custodian arrangement" so that RILA maintained beneficial ownership and did not dispose of the Secured Property. His clear advice was to style the account as "RIL Aviation HL 7740 and HL 7741". That was done. Mr Lennox then advised as referred to earlier (par 103): This should be sent to ANZ and as such the legal owner of the bank account will be KV. KV will however hold this as a custodian or nominee for RILA. 134 That advice conveys that once the account was so styled KVM would hold the account as "custodian or nominee for RILA". When this advice is combined with the conversation Mr Lennox had with Mr Veal on 3 December 2009 the probability is that RILA's intention was not to part with beneficial ownership of the Secured Property. This is irrespective of whether Mr Lennox' advice in relation to the risk of breach was accurate. It is clear that Mr Kinghorn accepted Mr Lennox advice. I do not regard Mr Kinghorn's acceptance of the advice in the circumstances outlined above as "bizarre". Rather I am satisfied that he trusted Mr Lennox to have a more detailed knowledge of the workings of this complex suite of agreements in the light of the litigation or proposed litigation with AML and the receipt of the Fixed Charge Notice. This was a volatile situation and I have no doubt that it was left to Mr Lennox to guide RILA's conduct at this time.

[276]

135 It is not unreasonable for the defendants to have relied upon RILA's conduct in failing to disclose the name of the account and writing a letter that on any reasonable view would suggest that it was the RILA account into which the money was to be paid, to suggest that RILA intended to deal with the Secured Property. It seems to me that RILA's conduct in this regard was most unsatisfactory. Unfortunately Mr Lennox gave advice that RILA did not have to disclose the name of the account to A&L. It seems to me that RILA depended upon its solicitor to ensure that the process by which it sought direction for payment was consistent with its obligations. There is no doubt that RILA was entitled to receive the Secured Property and that it had obligations in respect of that Secured Property. I am satisfied that had Mr Lennox advised RILA to inform A&L that the account that was referred to in the letter of 20 November 2009 had been closed and the new account, a nominee or custodian account, in the name of KVM styled "KV Management Pty Ltd: RIL Aviation HL 7740 and HL 7741", was that into which it sought payment of the Secured Property, the suspicions reasonably raised in A&L's mind would have been avoided. I am not satisfied that the failure to make the appropriate disclosure to avoid misleading A&L is a matter that establishes either alone or together with RILA's other conduct that it intended to deal with the Secured Property. 136 Mr Lennox gave evidence that he gave advice to Mr Veal about the specific structure that could be put in place to establish a custodian arrangement. His evidence was that it would operate by way of "deed poll" (tr 163). He also gave evidence that he was not asked to prepare a custodian agreement. The letter from RILA to A&L dated 6 May 2010 advised that the KVM account was to be a special purpose custodian account and that the funds, that is the Secured Property, if deposited "would have been held by KVM as a custodian of RILA". That letter also included the statement that, "Given that no funds have been received no such custodian arrangement has been entered into". 137 I do not regard these statements as evidence of an intention to create a trust at a later date as referred to in Pascoe v Boensch at [21]. The intention to create the trust was formed when Mr Lennox gave his advice in December 2009 and Mr Veal agreed on 3 December 2009 that RILA had decided to proceed with the custodian arrangement. The subject matter of the trust was the Secured Property and clearly the objects of the trust were to hold the money for RILA to enable RILA to comply with its obligations under the Transaction Documents. The fact that there was a dispute over whether Ladbroke was entitled to the Management fee that had previously been paid to AML does not change these conclusions. 138 I am not satisfied that the absence of any written custodian agreement in the circumstances that I have described establishes that Mr Kinghorn decided not to take Mr Lennox advice so that the Secured Property could pass to KVM. I have no doubt that Mr Kinghorn intended to follow Mr Lennox' advice. I also have no doubt that it was Mr Kinghorn's intention that KVM hold the Secured Property on trust for RILA when A&L paid money into the KVM account. I am not satisfied that RILA intended to deal with the Secured Property as alleged. 139 I am satisfied that RILA has not breached the negative pledge and this Event of Default in the Notice of Default is not made out. Non-Payment 140 The defendants claim that Management fees were due and payable to Ladbroke on the April Payment Date, 13 April 2010, and on the May Payment Date, 13 May 2010, pursuant to clause 8.10 of the Financing Deeds and the Management Fee Letter and that RILA failed to make those payments or give a direction for payment. 141 There is a fairly simple answer to the first claim. RILA was not notified formally until 5 May 2010, after the April Payment Date, of Ladbroke's appointment. Even the informal notification by email on 15 April 2010 was after the April Payment Date. It is also apparent that the amount was held in an escrow account. Accordingly I am satisfied that there is no Event of Default in relation to the non-payment of the April payment. 142 As to the alleged Event of Default in respect of the non-payment or direction for payment in relation to the May Payment, A&L extended the date for the direction to pay to 18 May 2010 and RILA complied by giving such direction to pay into the KVM account. I am satisfied that there is no Event of Default in respect of the May Payment Date. CONCLUSION 143 RILA is obliged to pay Ladbroke the Monthly Management Fee in the Schedule in the Management Agreement headed "Management Fee Letter". The defendants are not entitled to rely on the Notice of Default. 144 The parties are to bring in Short Minutes of Order together with an agreed costs order. If the parties are unable to agree on a costs order I will hear argument when the matter is listed on 5 November 2010 at 10am (or such other suitable date to be arranged with my Associate) for the filing of the Short Minutes of Order.

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