Supreme Court of WA|2004-04-06|Before: Owen J

The Bell Group Ltd (In Liquidation) & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93 (6 April 2004)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : THE BELL GROUP LTD (In Liquidation) & ORS -v- WESTPAC BANKING CORPORATION & ORS (3) [2004] WASC 93

HEARD : 16-20 OCTOBER & 23-27 OCTOBER 2000; 2 MARCH 2001; 28 FEBRUARY 2002; 25, 26 & 27 MARCH 2002; 31 OCTOBER 2002; 5 & 6 MAY 2003

BETWEEN : THE BELL GROUP LTD (In Liquidation) (ACN 008 666 993)

THE BELL GROUP LTD (In Liquidation) AS TRUSTEE FOR DOLFINNE PTY LTD (In Liquidation)

THE BELL GROUP LTD (In Liquidation) AS TRUSTEE FOR INDUSTRIAL SECURITIES PTY LTD (In Liquidation)

THE BELL GROUP LTD (In Liquidation) AS TRUSTEE FOR MARANOA TRANSPORT PTY LTD (In Liquidation)

THE BELL GROUP LTD (In Liquidation) AS TRUSTEE FOR NEOMA INVESTMENTS PTY LTD (In Liquidation)

BELL GROUP FINANCE PTY LTD (In Liquidation) (Receiver and Manager Appointed)

BELL GROUP (UK) HOLDINGS LTD (In Liquidation) (In Administrative Receivership)

AMBASSADOR NOMINEES PTY LTD (In Liquidation) and OTHER COMPANIES NAMED IN SCHEDULE 1, PART 1

GEOFFREY FRANK TOTTERDELL AS LIQUIDATOR OF FIRST PLAINTIFF AND OF THE COMPANIES NAMED IN SCHEDULE 1, PART 2

ANTONY LESLIE JOHN WOODINGS AS LIQUIDATOR OF THE THIRD PLAINTIFF, THE FIFTH PLAINTIFF AND OF THE COMPANIES NAMED IN SCHEDULE 1, PART 3

GARRY JOHN TREVOR AS LIQUIDATOR OF THE SIXTH PLAINTIFF

BANCO ESPIRITO SANTO SA (formerly BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA)

BfG BANK AG (formerly BANK FUR GEMEINWIRTSCHAFT AG)

BANK AUSTRIA AKTIENGESELLSCHAFT (formerly CREDITANSTALT-BANKVEREIN)

KBC BANK VERZENKERINGS HOLDINGS NV (formerly KREDIETBANK NV)

CREDIT AGRICOLE INDOSUEZ (formerly BANQUE INDOSUEZ)

BANCO ESPIRITO SANTO SA (formerly BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA)

BfG BANK AG (formerly BANK FUR GEMEINWIRTSCHAFT AG)

BANK AUSTRIA AKTIENGESELLSCHAFT (formerly CREDITANSTALT-BANKVEREIN)

KBC BANK VERZENKERINGS HOLDINGS NV (formerly KREDIETBANK NV)

CREDIT AGRICOLE INDOSUEZ (formerly BANQUE INDOSUEZ)

BELL GROUP FINANCE PTY LTD (In Liquidation) (Receiver and Manager Appointed)

AMBASSADOR NOMINEES PTY LTD (In Liquidation) and OTHER COMPANIES NAMED IN SCHEDULE 1, PART 1

GEOFFREY FRANK TOTTERDELL AS LIQUIDATOR OF FIRST PLAINTIFF AND OF THE COMPANIES NAMED IN SCHEDULE 1, PART 2

ANTONY LESLIE JOHN WOODINGS AS LIQUIDATOR OF THE THIRD PLAINTIFF, FIFTH PLAINTIFF AND OF THE COMPANIES NAMED IN SCHEDULE 1, PART 3

GARRY JOHN TREVOR AS LIQUIDATOR OF THE SIXTH PLAINTIFF

BETWEEN : COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

BANCO ESPIRITO SANTO SA (formerly BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA)

BfG BANK AG (formerly BANK FUR GEMEINWIRTSCHAFT AG)

BANK AUSTRIA AKTIENGESELLSCHAFT (formerly CREDITANSTALT-BANKVEREIN)

CREDIT AGRICOLE INDOSUEZ (formerly BANQUE INDOSUEZ)

KBC BANK VERZENKERINGS HOLDINGS NV (formerly KREDIETBANK NV

BELL GROUP FINANCE PTY LTD (In Liquidation) (RECEIVER AND MANAGER APPOINTED) (ACN 009 165 182)

THE INSURANCE COMMISSION OF WESTERN AUSTRALIA (formerly STATE GOVERNMENT INSURANCE COMMISSION OF WESTERN AUSTRALIA)

AUSTRALIAN CONSOLIDATED INVESTMENTS LTD (ACN 008 670 924)

BELL RESOURCES DEVELOPMENTS PTY LTD (ACN 009 152 569)

W A GLENDINNING & ASSOCIATES PTY LTD (ACN 008 762 721)

Practice and procedure - Pleadings - Amendments to defence and counterclaim - Further and better particulars - Programming orders - Turns on own facts

First Plaintiff by Counterclaim : Mr T M Jucovic QC,

Second Plaintiff by Counterclaim : Mr T M Jucovic QC,

Third Plaintiffs by Counterclaim : Mr T M Jucovic QC,

First Defendant by Counterclaim : Mr R M Robson QC,

Second Defendant by Counterclaim : Mr R M Robson QC,

Third Defendant by Counterclaim : Mr R M Robson QC,

Fourth Defendant by Counterclaim : Mr R M Robson QC,

Fifth Defendant by Counterclaim : Mr R M Robson QC,

Sixth Defendant by Counterclaim : Mr R M Robson QC,

Seventh Defendant by Counterclaim : Mr R M Robson QC,

Eighth Defendant by Counterclaim : Mr R M Robson QC,

Ninth Defendant by Counterclaim : Mr R M Robson QC,

Tenth Defendant by Counterclaim : Mr R M Robson QC,

First Defendant by Counterclaim : Blake Dawson Waldron

Second Defendant by Counterclaim : Blake Dawson Waldron

Third Defendant by Counterclaim : Blake Dawson Waldron

Fourth Defendant by Counterclaim : Blake Dawson Waldron

Fifth Defendant by Counterclaim : Blake Dawson Waldron

Sixth Defendant by Counterclaim : Blake Dawson Waldron

Seventh Defendant by Counterclaim : Blake Dawson Waldron

Eighth Defendant by Counterclaim : Blake Dawson Waldron

Ninth Defendant by Counterclaim : Blake Dawson Waldron

Tenth Defendant by Counterclaim : Blake Dawson Waldron

Plaintiffs by Counterclaim : Mr J A Chaney SC, Mr A R Beech & Ms A Hamersley

Fifth Defendant by Counterclaim : Mr T M Jucovic QC,

Third Defendants by Counterclaim : Williams & Hughes

Fourth Defendant by Counterclaim : Australian Government Solicitor

Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) WAR 425

Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337

Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589

The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors [2001] WASC 315

The Bell Group Ltd and Ors v Westpac Banking Corporation and Ors [2000] FCA 439; [2000] 104 FCR 305

1 OWEN J: There are two relevant actions: CIV 1464 of 2000 ("the Main Action") and CIV 2061 of 1996 ("the LDTC Action"). In the Main Action the plaintiffs have sued the defendants. For their part the defendants have commenced a separate action against some of the plaintiffs and others. The latter suit is the LDTC Action. These reasons cover a number of interlocutory applications that have been filed (and amended from time to time) in both actions. The exact applications to which the reasons relate will become apparent as the discussion proceeds. Essentially, these reasons cover what has become known in the litigation as "the overlap question", namely the extent to which issues with common features appear in each action and the way in which those issues should be resolved.

2 The background to the litigation appears from my reasons in The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors [2001] WASC 315 and I will not repeat all of what I said on that occasion, although it is necessary to set some of it out again. When it is necessary to refer to my earlier reasons I will call them "the 2001 judgment". Regard should also be had to The Bell Group Ltd and Ors v Westpac Banking Corporation and Ors [2000] FCA 439; [2000] 104 FCR 305 (to which I will refer as "Carr J's judgment").

3 The case involves a series of transactions in 1990 by which control of assets of the Bell group of companies was granted to certain banks that were unsecured creditors of three companies only in the group. Those companies were The Bell Group Ltd ("TBGL"), Bell Group Finance Pty Ltd ("BGF") and Bell Group (UK) Holdings Ltd ("BG(UK)"). Another company in the group was Bell Group NV ("BGNV"), which acted as a financier to other group members. The plaintiffs in the Main Action (at the time it was commenced) were numerous corporations within the Bell group of companies and the liquidators of some of those corporations. Since then another company, The Law Debenture Trust Corporation plc, ("LDTC") has been added as a plaintiff. I will refer to those entities and persons collectively as "the plaintiffs" even though it may cause some confusion as they (or some of them) are defendants in the LDTC Action. With one exception the defendants in the Main Action are banks that loaned moneys to some of the corporations in the Bell group. There are two groups of banks. One is a syndicate of Australian banks led by Westpac Banking Corporation. The other is a syndicate of overseas banks led by Lloyds Bank plc. I will call these defendants collectively "the banks". Another defendant is a corporation that was a director of one of the plaintiff corporations but it has taken no part in the litigation.

4 I should add that TBGL was placed in provisional liquidation on 18 April 1991 and in liquidation on 24 July 1991. BGF was placed in official liquidation on 3 March 1993. A liquidator was appointed to BGNV on 3 January 1995.

5 The plaintiffs say that the transactions were entered into when TBGL, BGF, BG(UK) and BGNV (among others) were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent and that the banks knew they were obtaining an advantage at the expense of other unsecured creditors. The plaintiffs also say that the directors effected the transaction in breach of their duties to companies within the group at the expense of the other unsecured creditors and in the interest of the ultimate shareholder of the group, Bond Corporation Holdings Ltd ("BCH"), and Alan Bond. It is alleged that the banks knowingly participated or assisted in the breaches of duties by the directors.

6 The critical transactions by which the banks took security over the assets of the various companies occurred in January 1990 and following. Paragraph 19A of the statement of claim in the Main Action describes the transactions and their effect in these terms:

"The Banks and [companies in the Bell group] were parties to a scheme (hereafter called the 'Scheme') constituted by a series of transactions (each, a 'Transaction') entered into during the period from about 8 January 1990 to about 31 July 1990 (the 'Scheme Period'), effected by or required by the instruments pleaded in [nominated paragraphs] whereby all significant and worthwhile assets of [companies in the Bell group] were made available to the Banks for repayment of the debts owed to the Banks by BGF and BG(UK) in priority to the claims of all other creditors and future creditors of [companies in the Bell group] (save for certain immaterial exceptions)."

7 The borrower companies defaulted in their obligations under the transaction documents. The banks exercised powers under the security documents and received proceeds amounting to approximately $280,000,000. In addition, the plaintiffs allege that during 1990 and 1991 the banks made gains from the arrangement of approximately $68,000,000.

8 The Main Action was commenced in the Federal Court in 1995 under the management of Carr J. It was cross-vested to this Court in 2000. The reasons that persuaded his Honour to transfer the action to this Court are reported in Carr J's judgment. The plaintiffs say the securities taken as a result of the transaction are invalid and seek recompense (under various heads) for the recoveries and gains. In essence, they contend that had the transaction not been entered into, the proceeds from the sale of the assets over which security was taken would have been available to satisfy inter-group indebtedness and would have flowed through to subsidiaries of BGF and TBGL. Those proceeds would therefore have been applied for the benefit of all unsecured creditors. On their case the amount in issue could be as high as $1.4 billion. The banks deny any wrongdoing and deny that the plaintiffs are entitled to recover anything.

9 At the time the action was cross-vested the plaintiffs' case was set out in a document called the 7th Amended Statement of Claim ("7ASC"). The defence and counterclaim had been amended on five or six occasions, presumably (at least in the main) to answer the various versions of the statement of claim. Initially the defence was essentially a joinder of issue on the entitlement of the plaintiffs to relief and the counterclaim was limited to declarations that the securities were valid. But from 1998 the defence raised substantive issues of breach of contract and estoppel and counterclaims alleging misleading and deceptive conduct under the Trade Practices Act 1974 (Cth). I will describe these issues in more detail shortly

10 After the litigation had been transferred to this Court I heard an application in which the plaintiffs sought leave to make further and quite major changes to the statement of claim. To a significant extent that application was successful (see the 2001 judgment) and it resulted in the filing of the 8th Amended Statement of Claim ("8ASC"). This is the formulation of the plaintiffs' case as it presently stands. In that application leave was also given to join LDTC as a plaintiff. The orders made on the grant of leave to amend the statement of claim required the banks "to file and serve their amended defence to 8ASC and counterclaim" by 14 February 2002. They did so, although the plaintiffs challenge some of the changes. Further amendments were made to the defence and counterclaim in accordance with a minute dated 30 April 2003. I do not understand those amendments to be controversial.

11 I will return to the status of the plaintiffs' claim and the banks' defence shortly. Before I do, I need to discuss the role of LDTC and some events in 1995 and 1996 that precipitated the institution of the LDTC Action as they are central to the overlap question.

12 The impugned events of 1995 and 1996 had their genesis in fund raising exercises entered into by the Bell group over a period between December 1985 and July 1987. In that period the Bell group raised finance by offerings of convertible bonds in five separate issues. I will deal with each in turn.

13 In December 1985 bearer bonds with a value of $75,000,000 were issued by BGNV to the public and listed on the Luxembourg Stock Exchange. The obligations of BGNV were guaranteed by TBGL. There was a term of 10 years with a final redemption date of 10 December 1995. The bonds carried interest at 11 per centum per annum payable annually on 10 December each year. The issue was the subject of a trust deed dated 20 December 1985 with LDTC as the trustee. The bonds could be converted to ordinary shares in TBGL at any time between 20 February 1986 and 1 December 1995. In fact some were converted leaving an amount outstanding as at 30 June 1989 and thereafter of $60.4 million. The proceeds from the bond issue were on-loaned by BGNV to TGBL. This is what is known as "the first BGNV issue".

14 Clause 6(A) of the trust deed for the first BGNV issue is of particular relevance. The effect of the provision is that on a winding up of BGNV the claims of bondholders and coupon holders (or of LDTC as trustee) against BGNV would be subordinated to the claims of all other creditors of BGNV who were not subordinated.

15 The "second BGNV bond issue" occurred in May 1987 to the value of $175,000,000. It was for subordinated convertible bearer bonds issued on almost identical terms to the first BGNV issue. Once again, TBGL was the guarantor and LDTC was the trustee. The trust deed is dated 7 May 1987 and the final redemption date was 7 May 1997. Interest at 10 per centum per annum was payable on 7 May in each year. None of these bonds were converted meaning the entire $175,000,000 remained owing.

16 In the "third BGNV bond issue" BGNV raised £75,000,000 by the issue of subordinated convertible bearer bonds subject to a trust deed dated 14 July 1987. The final redemption date was 14 July 1997 and the interest rate was 5 per centum per annum. Interest was payable on 14 July in each year. Again the terms of the issue were almost identical to those for the first BGNV bond issue except that bondholders had an early redemption option. None of these bonds were converted or redeemed and the face value of £75,000,000 remained owing during the relevant period. TBGL provided a guarantee and LDTC was the trustee.

17 BGNV on-loaned the proceeds of the second BGNV bond issue and of the third BGNV bond issue to BGF.

18 At the same time as the first BGNV bond issue TBGL issued convertible subordinated registered bonds to the value of $75,000,000 to Heytesbury Securities Pty Ltd, which was later to change its name to Group Financial Holdings Pty Ltd ("GFH"). This is known as "the TBGL bond issue". Initially the arrangement was documented by a simple agreement in which TBGL and GFH agreed that the bonds were to be issued on the same terms and conditions as the first BGNV bond issue. A trust deed covering this issue was not executed until 25 July 1988. LDTC became the trustee for the issue. Before July 1988 GFH had transferred the bonds to Drayton Capital Pty Ltd. Both GFH and Drayton Capital Pty Ltd were associated with TBGL. On or about 28 July 1988 the State Government Insurance Commission of Western Australia, which was later to change its name to the Insurance Commission of Western Australia ("ICWA"), became the sole holder of the bonds the subject of the TBGL bond issue.

19 This issue carried interest at 11 per centum per annum payable annually on 10 December in each year. It had a final redemption date of 10 December 1995. The terms of the trust deed were very similar to those in the trust deed for the BGNV bond issues. The provision relating to subordination of the claims of bondholders against TBGL were, for present purposes, the same. None of the bonds was converted and the whole amount of $75,000,000 remained owing at the time TBGL went into liquidation.

20 At the same time as the second BGNV bond issue BGF issued convertible subordinated registered bonds to the value of $75,000,000 to GFH (then called Heytesbury Securities Pty Ltd). This is known as "the BGF bond issue". Again, the arrangement was initially documented by a simple agreement between BGF, TBGL (as guarantor) and GFH which provided that the bonds were to be issued on terms which were standard for convertible bond issues in the Euromarket at the date of the agreement. A trust deed covering this issue was not executed until 25 July 1988 by which time GFH had transferred the bonds to Drayton Capital Pty Ltd. LDTC became the trustee of the issue. On or about 28 July 1988 ICWA became the sole holder of the bonds the subject of the BGF bond issue.

21 This issue carried interest at 10 per centum per annum payable annually on 7 May in each year. It had a final redemption date of 7 May 1997. The terms of the trust deed were very similar to those in the trust deed for the BGNV bond issues. The provision relating to subordination of the claims of bondholders against BGF were, for present purposes, the same. None of the bonds were converted and the whole amount of $75,000,000 remained owing at the time BGF went into liquidation.

22 The TBGL bond issue and the BGF bond issue are sometimes together referred to as "the domestic bond issues". The terms of the first BGNV bond issue, the TBGL bond issue and the BGF bond issue were each affected by a supplemental deed but the amendments brought about by those instruments are not relevant for present purposes.

Attempts to alter the subordination provisions

23 It is common ground in the litigation that the effect of cl 6(A) of the trust deed for the first BGNV bond issue (and the equivalent provisions in relation to the other bond issues) is that in a liquidation the claims of bondholders and coupon holders would be subordinated to the claims of other unsecured but unsubordinated creditors, including the banks. But the parties adopt markedly different positions on whether the on-loans from BGNV to TBGL and BGF respectively are similarly subordinated. There is a further dispute as to whether the claims of ICWA in relation to the TBGL bond issue and the BGF bond issue (there being no on-loans of the funds arising from those issues) should continue to be subordinated. These differences are at the heart of the overlap question.

24 That brings me to the events of 1995 and 1996 in which some of the plaintiffs took steps to alter the subordination provisions in the trust deeds for the TBGL bond issue and the BGF bond issue as part of funding arrangements for the Main Action. The way in which this arose is neatly summarised in Carr J's judgment in [192] to [196]:

"LDTC, as trustee, has lodged a proof of debt against TBGL for [$182.3 million and against BGF for [$96.1 million]. Each respective liquidator has admitted those proofs of debt.

It appears to be common ground that unless [the plaintiffs] are successful in [the Main Action] there will be no assets available to satisfy the debts of TBGL or BGF.

In 1995 an agreement was entered into for the funding of [the Main Action]. Funding creditors included ICWA. One condition of the funding agreement was that the liquidators of [the plaintiff corporations] (save for BGNV) would make an application under s 564 of the Corporations Law for a distribution in favour of the funding creditors including ICWA. The liquidators made such an application in 1996 but Templeman J refused it, considering it to be premature.

LDTC and ICWA have taken the position that if an order is eventually made under s 564 in ICWA's favour, any distribution of property made pursuant to such an order will not be a distribution subordinated to any other creditor of TBGL or BGF and will not be subject to the subordination provisions contained in [the trust deeds for the TBGL bond issue and the BGF bond issue].

Furthermore, as part of the financing arrangements referred to immediately above, at the request of ICWA, LDTC exercised its power contained in cl 20 of each of [the trust deeds for the TBGL bond issue and the BGF bond issue] to vary the terms of those trust deeds so as to 'unsubordinate' the bondholders. On 12 June 1995 ICWA executed two supplemental deeds to provide, in effect, that if an order is made by [this Court] under s 564 of the Corporations Law in favour of ICWA, any amount paid pursuant to such order is to be paid to ICWA and not to other unsecured creditors. The supplemental deeds will not be effective until the liquidators of TBGL and BGF execute them. The liquidators have applied to the Supreme Court for a direction under s 479 of the Corporations Law that they execute the supplemental deeds. Such a direction has not yet been given and the liquidators have not executed the supplemental deeds."

25 It should be noted that the relevant parties to the supplemental deeds are "The Bell Group Ltd (In Liquidation)" and "Bell Group Finance Pty Ltd (In Liquidation)". Obviously, the organs through whom the companies sought to act in 1995 are the liquidators but the parties to the deeds are the companies. A little later in these reasons I will explain why I think that factor is significant.

26 In relation to the three BGNV bond issues and the on-loans it is necessary to look at the pleadings in both the Main Action and the LDTC Action to understand the import of the overlap questions. I will return to those issues shortly.

27 In April 1996 the parties to the funding arrangement approached this Court for orders under s 564 as to the distribution of assets to indemnifying creditors. In May 1996 the liquidators also filed a summons for directions under s 479(3) seeking the Court's sanction to them executing the supplemental deeds referred to in par [196] of Carr J's judgment ("the supplemental deeds"). It was envisaged that the s 564 application and the summons for directions would be heard concurrently. In these reasons I will refer to the s 564 application and the summons for directions under s 479(3) as "the distribution proceedings".

28 When the banks became aware of the supplemental deeds they commenced the LDTC Action. Initially it was concerned only with the attempt to "unsubordinate" the bondholders in the TBGL bond issue and the BGF bond issue. The banks allege that before the TBGL bonds were issued they received a letter from TBGL, to which was attached a summary document, containing statements, among other things, that the bonds, when issued:

• Would be direct, unconditional, unsecured and subordinated obligations of TBGL which ranked pari passu without any preference among themselves and with all present and future unsecured and subordinated obligations of TBGL.

• Would be and remain subordinated in right of payment to the claims of all other unsubordinated creditors of TBGL.

• Should be regarded as equity by the banks for the purposes of considering balance sheet ratios for TBGL's banking covenants.

29 The banks say they relied on the letter and summary document and on the information memorandum that accompanied the issue. The banks further contend that this gave rise to an agreement that the bonds would be and remain a subordinated debt of TBGL and that the banks would regard the bonds as equity (rather than debt) in determining ratios. In the latter respect the banks say that thereafter that is the way they treated the bonds.

30 In the LDTC Action the banks made similar contentions about the BGF bond issue. They say they relied on a letter and an offering circular.

31 It is then alleged that after it became the holder of the bonds ICWA requested LDTC to amend the trust deeds so as to change the subordinated status of the bonds and to direct LDTC to hold certain distributions made to it by the liquidators of TBGL and BGF on trust for ICWA in priority to unsubordinated creditors. The banks contend that this is the effect of the supplemental deeds. The banks sought, among other things:

• Declarations that the supplemental deeds were in breach of the agreements referred to above and constituted breaches of trusts and a fraud on the power of amendment.

• Declarations that TBGL and BGF were estopped from executing the supplemental deeds.

• Injunctions preventing LDTC ICWA from giving effect to the supplemental deeds and TBGL, BGF and their respective liquidators from executing the deeds.

32 Although the first version of the statement of claim mentioned the first BGNV bond issue and the second BGNV bond issue there was no reference to the on-loans and no relief sought in respect of them. There is no mention of the third BGNV bond issue but that is not surprising as the proceedings are primarily about the two domestic issues that accompanied the first and second BGNV bond issues.

The Main Action in the Federal Court (1998 to 2000)

33 As I have already indicated the pleadings in the Main Action (and for that matter in the LDTC Action ) have been through a number of changes. What I am about to describe is the state of the pleadings at the time of Carr J's judgment. On 24 June 1998 Carr J gave leave to the plaintiffs to amend the statement of claim bringing into effect the 7ASC. There is reference in some of the papers to an order made on 12 March 1999 giving leave to the banks to amend the defence and, subject to leave to proceed with the cross-claim being granted, the cross-claim in accordance with a minute dated 11 March 1999. I have not been able to locate that order. The last form of the defence and cross-claim on the Federal Court file is dated 8 July 1998 and that is the one to which I have referred. I understand that by the time Carr J delivered judgment in the cross-vesting application (April 2000) both parties had evinced an intention to seek leave to further amend their respective pleadings but leave had not then been obtained. I will therefore describe the pleadings as they stood at the time.

34 In the early parts of the statement of claim the plaintiffs plead the financial position of some of the Bell corporations. In pars 11(a), (b) and (c) they set out the liabilities of TBGL, BGF and BGNV to bondholders under the several bond issues. The pleading specifically refers to these liabilities as "subordinated". In par 13(d) and (e) they plead liabilities of BGF and TBGL respectively to BGNV that are (or include) the on-loans. In par 13(g) they say that these liabilities were unsecured but do not canvass their status as subordinated or unsubordinated.

35 In answer to pars 13(d) and (e) the banks admit that BGNV was a creditor of BGF and TBGL respectively but say "the borrowing was at all material times a non-current subordinated liability". Paragraph 13A then deals in detail with the allegation in pars 13(d) and (e) of the statement of claim. In the preamble it says that the loans were or should be treated as having been at all material times subordinated to the debts of all other creditors of TBGL and BGF. It goes on in 77 numbered subparagraphs to set out why this is said to be so. In essence the banks say that the on-loans were, as a matter of contract, subordinated. If they were not, certain of the companies led the banks to believe the debts were subordinated and that this was misleading and deceptive conduct under the Trade Practices Act 1974 (Cth). Alternatively, it would be unjust and unconscionable for TBGL, BGF, BGNV and their respective liquidators to deny the fact that the on-loans were subordinated giving rise to an estoppel.

36 In relation to the TBGL bond issue and the BGF bond issue, the defence does not, in express terms raise issues concerning the supplemental deeds. But the cross-claim contains a prayer that TBGL be restrained from breaching the terms of the banking arrangements by which it agreed that it would not, and it would ensure that BGF would not, seek or consent to a variation to the subordinated status of the bonds. There are subparagraphs within par 13A that allege representations by TBGL to the banks that the terms of the TBGL bond issue and the BGF bond issue would be the same as those for the relevant BGNV bond issues and that the two issues would therefore be identical in terms of effective subordination.

The overlap question and the cross-vesting order

37 It is apparent that Carr J recognised the overlap question and that it was a significant factor in his decision to transfer the Main Action to this Court. This, of course, has little to say about the manner in which the two sets of proceedings should be heard and disposed of by me. But it is interesting to see the summary description of the overlap question that commended itself to his Honour. It appears in par [203] of Carr J's judgment:

"The overlap between the two sets of proceedings (and hence the close relationship between them) is usefully summarised by pars 60(p), (q) and (r) of the [plaintiffs'] submissions filed on 7 December 1999, which I accept, and which I reproduce below:

(p) in the statement of claim in [the LDTC Action] the banks allege that they relied upon the representations contained in the letter of 11 December 1985 and attached summary document (par 18), the information memorandum (pars 23I and N) and in the letter of 15 April 1987 and offering circular (par 31) 'from time to time':

(i) in determining the liability ratios for the purposes of the banking covenants entered into from time to time and did not treat the liabilities of TBGL or BGF (as the case may be) under the first BGNV issue, [the TBGL bond issue], the second BGNV issue or [the BGF bond issue] as liabilities (but as equity) for the purposes of the balance sheet ratios;

(ii) were induced thereby 'in the continued conduct of the banking business' of the banks 'with TBGL and other companies in the Bell Group' to treat such liabilities of TBGL or BGF 'not as a liability ranking pari passu' with such liabilities of TBGL or BGF to the banks 'and omitted in the continued conduct of that banking business to consider the possibility' of such liabilities of TBGL and BGF under such bond issues to be ranking upon a liquidation of TBGL and BGF 'wholly or partially in priority to or pari passu with the other unsecured liabilities of' TBGL and BGF;

(q) then in par 62 of the statement of claim in [the LDTC Action] (IRA-15), the banks allege that, by reason of all of the matters mentioned in the previous subparagraphs, 'it would be unconscionable for TBGL or BGF' to be able to unsubordinate the [bonds issued in the TBGL bond issue and the BGF bond issue] by a variation to their trust deeds 'so as to depart from the representations pleaded above and relied upon by' the banks and in their prayer for relief seek against TBGL, BGF and their respective liquidators declarations that TBGL and BGF are estopped from executing the supplemental deeds of trust seeking to unsubordinate the [bonds issued in the TBGL bond issue and the BGF bond issue]: prayer 2(2) and 3(2) of the relief sought (IRA-15);

(r) in pars 13A(70), (72), (73), (74), (75), (76) and (77) of the amended defence and cross-claim in this proceeding (IRA-3) the banks alleged that 'from late 1985 to late 1989' (this is obviously what is meant 'from time to time'):

(i) the banks believed and assumed that the bondholder debt was subordinated;

(ii) this belief and assumption was engendered, induced and fostered by the conduct, inter alia, of the representations in the letter of 11 December 1985 and attached a [sic] summary, the provision of the information memorandum and [sic] to LMBL and subsequent provision of that to Lloyds Syndicate Banks, the offer document of April 1987 and the letter of 15 April 1987 and the conduct of the banking relationship with the banks from 1985 until about late 1989;

(iii) from late 1985 to late 1989 the banks entered and conducted their banking relationship upon the false hypothesis and a serious misapprehension and but for the representations would have had the opportunity to reorder their banking affairs on a fundamentally different hypothesis (this is extremely similar if not the same as the allegation that they omitted in the conduct of the banking relationship to consider the possibility of unsubordination);

(iv) it would be unfair and unjust to permit Bell Group companies to resile from the state of affairs (what is said to be unconscionable);

(v) the [plaintiffs] are estopped from denying to the banks that the relevant bonds are not subordinated."

38 This brings me to the issues as they arise now. On 22 July 2003 the hearing of the Main Action commenced. I decided that it would be desirable if I were to allow the issues in the Main Action to unfold and to delay ruling on the overlap questions until I had a better understanding of the course the proceedings were likely to take. The plaintiffs have been opening their case and tendering documents since then. I think the time has arrived when I should, in fairness to the parties (including some who have not formally been joined), make known my views on the overlap question.

39 There are several reasons for this. I will soon be asked to rule on the admissibility of documents that the plaintiffs have tendered. The other parties should be afforded an opportunity to involve themselves in that process if they wish. Secondly, there are outstanding matters peculiar to the LDTC Action (the envisaged reconsideration of the 15 March 2001 orders to which I refer under the next heading being an example) and these should be disposed of. Thirdly, in the absence of a settlement (and despite the trials and tribulations of everyday life I retain an optimistic, if naïve, streak) these proceedings are likely to extend for a very long time and may involve taking evidence in overseas locations. It seems to me to be in the interests of all associated with the case that these matters be resolved so that plans can be made.

40 It seems to be common ground that there are issues that overlap. But the parties take different views as to the extent of the overlap, the effect of the amendments made to the statement of claim as a result of the 2001 judgment and the entitlement of the banks to raise (by way of amendment to the defence consequent on those amendments to the statement of claim) issues that affect the overlap question. The difficulties then come together in the question how best to conduct the trials of the Main Action and the LDTC Action so as to resolve the overlapping issues in a way that is fair and convenient.

The LDTC Action - the current state of the pleadings

41 On 15 March 2001 an order was made in the LDTC Action giving leave to the banks to join BGNV and the Commonwealth of Australia as defendants and to amend the statement of claim in certain respects as set out in a minute dated 14 February 2001. The minute contained additions and minor variations and wholesale excisions. Leave was limited to the additions and minor variations and not to the excisions. The order made it clear that the leave to join parties and to amend the statement of claim was to be reconsidered on a date to be fixed. What I am about to say reflects the pleading as dealt with by that order. The envisaged reconsideration is the subject of comment later in these reasons.

42 The excised portions take out all references to the First BGNV bond issue and the Second BGNV bond issue. The amended pleading leaves intact the allegations concerning the TBGL bond issue, the BGF bond issue and the supplemental deeds. It expands the range of complaints about the litigation funding arrangements by pleading and seeking relief in respect of two other agreements entered into in 1995 and 1996, namely the Inter-Creditor Agreement and the Western Interstate Pooling Agreement. Some or all of LDTC, ICWA, BGNV, the Commonwealth of Australia and the liquidators are parties to those agreements. I do not need, for present purposes, to explain further the import of those agreements except to say they are part of the overall funding arrangements entered into in relation to the Main Action. The banks say by entering into the agreements LDTC and ICWA breached duties owed to the banks (among others) as "senior creditors".

43 There was a third agreement, namely the Western Interstate Assignment Agreement, entered into in March 1996 as part of the litigation funding arrangements. This agreement was also the subject of the banks' amendment application. However, as a result of an application made by the plaintiffs in the Main Action to amend the particulars in relation to Western Interstate (and which was only partially successful) the banks do not now press the relevant amendments in the LDTC Action. Accordingly, I propose not to say anything further about that matter other than to rule formally under par 6 of the orders made 15 March 2001 disallowing the banks' application to amend the statement of claim in the LDTC Action by adding pars 45 to 47B of the minute.

44 I need to set out in a little more detail the way in which the banks have framed their case in relation to the supplemental deeds. In par 14 and 16 the banks set out certain of the terms of the trust deeds for the TBGL bond issue and the BGF bond issue (and the conditions of those bonds). They include:

• The bonds were direct, unconditional, unsecured and subordinated obligations ranking pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations.

• In the event of the winding up of the issuer the claims of bondholders would be postponed to the claims of unsubordinated non-bondholder creditors of the issuer and LDTC would hold any amounts paid to it in the winding up of the issuer on certain trusts being firstly the trustees' costs of executing the trusts, secondly for the benefit of the unsubordinated non-bondholder creditors and thirdly in or towards payment of the moneys due under the trust deed.

• LDTC, with the approval of the issuer, could make modifications to the trust deed but only if LDTC formed the opinion that the alteration was not materially prejudicial to the interests of the bondholders.

45 In pars 18 and 19 the banks plead certain covenants and promises said to be owed by bondholders (including ICWA) to LDTC, BGF and TBGL; by TBGL, BGF and LDTC to bondholders; by TBGL and BGF to LDTC; and by LDTC to BGF and TBGL; all of which covenants and promises were held on trust for the unsubordinated non-bondholder creditors. The class of unsubordinated non-bondholder creditors includes the banks. The covenants and promises include:

• The liabilities of the issuer pursuant to the trust deed and the conditions of the bonds constituted subordinated obligations of the issuer on a winding up of the issuer.

• In the event of a winding up of the issuer the claims of the bondholders would be postponed to the banks (among others).

• In the event of a winding up LDTC would hold any amounts paid to it in the liquidation inter alia for the benefit of the banks (among others).

46 The banks then pleaded that any amount paid to LDTC in the winding up would be insufficient to cover the costs of executing the trusts and the claims of the banks. They then set out the request by ICWA to LDTC to change the trust deeds that I have already described.

47 Paragraphs 26 to 40 deal with the banks' contentions as to the consequences of this conduct. They say that the request by ICWA for LDTC to amend the trust deeds and the execution of the supplemental deeds by ICWA was a breach of the trusts on which ICWA held covenants and promises for the benefit of the banks. Before executing the supplemental deeds LDTC had not formed the opinion that the alterations would not materially prejudice the interests of the bondholders or, if it had, it was not entitled to do so because the alterations were relevantly prejudicial. Neither could LDTC alter the trust deeds without the consent of the banks, which it had not obtained. Accordingly, the execution by LDTC of the supplemental deeds was in breach of trust, was a breach of covenants and promises which it made to BGF and TBGL and which LDTC held on trust for the benefit of the banks. It was also a fraud on the power of amendment. There were similar breaches by TBGL and BGF. Finally the liquidators of TBGL and BGF were not entitled to execute the supplemental deeds without the consent of the banks, which consent had not been obtained. If they did so without consent they would be participating knowingly in breaches of trust by the companies.

48 There is one aspect of the defence and counterclaim lodged by LDTC and ICWA in the LDTC Action that I should mention. In par 41 reference is made to an application to the Court under s 564 of the Corporations Law for a distribution to funding creditors, including ICWA. Paragraph 41A pleads that if an order is made under s 564 in favour of LDTC and ICWA any distribution to them will not be a distribution subordinated to any other creditor and will not be subject to the subordination provisions of the trust deeds for the TBGL bond issue and the BGF bond issue. They seek a declaration that this is in accord with the proper construction of s 564. Paragraph 42 contains an alternative plea, the effect of which is that if the Court is to make effective orders under s 564 the trust deeds should be amended and that cl 20 of the trust deeds is sufficient authority for the amendment. Not surprisingly the banks join issue on this construction question.

49 TBGL, BGF and their liquidators have also lodged a defence (but not a counterclaim) in the LDTC Action. The latest version of the defence is dated 31 July 1997. Paragraphs 43A to 43C of the statement of claim refer to ABFA and LSA2 and plead that it was a term of those agreements that TBGL and BGF would not seek to alter the subordinated status of the bonds. In par 26A of the defence the defendants plead that ABFA and LSA2 are not valid or are held on trust for TBGL and BGF. The alternative claim is that the banks cannot rely on them for the reasons pleaded in the Main Action. A copy of what was then the 5th Amended Statement of Claim is annexed to the defence.

The Main Action - the current state of the pleadings

50 This brings me to the 8ASC and the defence and counterclaim dated 30 April 2003. It has to be borne in mind that while the overlap question has been a factor in the proceedings for some time it arises now largely because of the amendments to the defence and counterclaim which the banks say they have made as of right but for which the plaintiffs contend leave is required. There are several parts of the 8ASC and the banks response to them in which the subordinated status of the several bond issues does or could reasonably be argued to arise. I propose now to go through some of them. The list that follows is not intended to be exhaustive.

51 I should also mention that in accordance with the orders made on 22 November 2001 and 19 December 2001 the plaintiffs filed a reply and defence to counterclaim. Although the order does not in express terms say so, I think it is common ground that it is an "anticipated" reply as, depending on the resolution of the overlap question, the form of the defence and counterclaim may change. I understand the anticipated reply to have been drafted so as to meet the defence and counterclaim in the form in which it was filed in February 2002. I will proceed on that basis.

The financial position of the Bell group companies

52 As with 7ASC the current version of the statement of claim sets out the financial position of some of the Bell corporations. In pars 11A to 11D and 11H to 11J the plaintiffs plead the three BGNV bond issues in a way that is relatively uncontroversial. Paragraphs 11E and 11F plead the on-loans. Paragraph 11K deals with the respective liabilities of BGNV, TBGL and BGF under the several bond issues and on-loans. In par 12(a) and (h) the liabilities of TBGL and BGF to bondholders under the TBGL bond issue and the BGF bond issue respectively are set out.

53 Nowhere in pars 11A to 11D, 11H to 11K, 12(a) or 12(h) (or in the particulars to those paragraphs) is there any reference to the bonds or liabilities arising under them being "subordinated". Nonetheless, I do not understand the plaintiffs to contend other than that the three BGNV bond issues (but not the on-loans) were subordinated or that the TBGL bond issue and the BGF bond issue was, is and will remain subordinated unless and until the supplemental deeds become effective. This cannot occur without court intervention. I note in passing that the Statements of Net Assets for TBGL and BGF respectively seem to have been constructed on the basis that the liabilities under the TBGL bond issue and the BGF bond issue respectively are subordinated: see MISP. 00026.014 tiff 28 line 75 and MISP.00026.003 tiff 97 lines 76 and 128 and tiff 98 line 160. The Statement of Net Assets for BGNV does not comment on the subordinated status of either the liability to the bondholders or in relation to the on-loans.

54 It is clear from the preceding paragraphs that the plaintiffs raise the liabilities under the bond issues as matters relevant to the financial position of the several relevant corporations. The financial position of the corporations is central to the case in ways that need not be elaborated. While it is true that "a debt is a debt is a debt" issues of when and in what circumstances a debt becomes recoverable may be relevant to a proper understanding and appreciation of the financial position.

55 The gravamen of what was par 13A of the defence as at 8 July 1998 is now to be found in an expanded form in pars 11E to 11ER, especially in par 11ED. Much of the portions of the statement of claim in the LDTC Action that have been excised in the minute of 14 February 2001 now find their way into these paragraphs of the defence in the Main Action. A summary of the banks' position concerning the BGNV on-loans is to be found in par 11EA of the defence:

"In further answer to the allegation in paragraph 11E of the statement of claim that BGNV on-lent the moneys raised under the Three BGNV Issues to TBGL and BGF, the [banks] say that:

(a) for the reasons, and to the extent set out, in paragraphs 11EB to 11ER below the said loans were, or should be treated as having been, at all material times, subordinated to the debts of all other creditors of TBGL and BGF for one or more of the following reasons:

(1) there were contracts or contractual terms between TBGL and BGNV, and BGF and BGNV to the effect that the loans were subordinated to the extent pleaded below;

(2) if there were no such contracts or contractual terms there was an estoppel between TBGL, BGF and BGNV to the same effect;

(3) there were contracts for the first two of such loans, between TBGL, BGNV and [others], on the one hand, and various of the banks, on the other hand, to the effect that the liabilities of TBGL and BGF respectively to BGNV pursuant to those loans would, on a liquidation of TBGL and BGF, be subordinated to the same effect;

(4) in any event, in respect of all three loans, the plaintiffs are estopped as against the banks from denying that the said loans were subordinated to the same effect."

56 In relation to each of the first BGNV bond issue the banks plead (par 11ED (17)) that TBGL wrote to the banks confirming previous advice that TBGL, through a foreign finance subsidiary (identified as BGNV), was to issue $75,000,000 in convertible subordinated bonds and that that interests associated with Robert Holmes à Court (then a principal of the group) would take a further $75,000,000 of convertible subordinated bonds to be issued by TBGL. The letter went on to state that the two issues, with certain exceptions (including the identity of the issuer, but not the nature or extent of subordination), would be identical. It is said that this constitutes a representation that it was the view of TBGL (and that it was the fact) that the two issues were, or would be, identical in terms of effective subordination. Paragraph 11ED (43) contains a plea in substantially similar terms in relation to the second BGNV bond issue. The third BGNV bond issue is dealt with in pars 11ED (49) to (58). The nexus between the terms of the BGNV bond issues and the terms of the TBGL and BGF bond issues (at least in so far as they reflect on the subordination question) are dealt with in further and better particulars to pars 11ED (22), 11ED (48) and a section within par 11E (71) headed "particulars of position of subordination arising from capital raising to interests associated with Mr Holmes à Court".

57 In pars 11ED (82) to (86) the banks plead their belief and conduct resulting from the representations and conduct they say was engaged in by the Bell companies. It is not much changed from the same allegations in par 13A of the previous version of the defence. It is to this effect. From late 1985 to late 1989 or early 1990 the banks entered and conducted their banking relationship with the group in the belief and on the assumption that all debt brought about by the bond issues was subordinated. If that were not the case then the banks had entered into, conducted and remained in that relationship on a false hypothesis and a serious misapprehension and but for the representations would have had the opportunity to reorder their banking affairs on a fundamentally different hypothesis consistent with the supposed non-subordination of the debts. In pars 92 to 96 of the reply the plaintiffs put these matters firmly in issue.

58 The legal consequences of the chain of events are set out in par 11EE in which it is said that, in relation to each of the on-loans from the three BNGV bond issues:

"(i) the claims of BGNV against TBGL [or BGF] in respect of [the relevant on-loan] would be postponed to claims of unsubordinated creditors of TBGL [or BGF]; and/or

(ii) if any amount was paid to BGNV in the liquidation of TBGL [or BGF] in respect of [the relevant on-loan] such money would be held on trust by BGNV for satisfaction of the claims of unsubordinated creditors of TBGL [or BGF] until those claims had been satisfied in full,

and accordingly such were terms of [the relevant on-loan]."

59 Paragraphs 11EF and 11EG put the contractual claim in different terms, namely that the subordination of the on-loans was an implied term of the on-loan arrangements. This is the contractual claim referred to in par 11EA (1).

60 In pars 11EK to 11EQ the banks plead that in consideration of their promise to treat the liabilities of TBGL (or BGF) "arising from the raising and deployment of funds" from the December 1985 and the May 1987 bond issues as equity when considering ratios, the relevant companies agreed that liabilities "arising from the raising and deployment of funds" would be subordinated in a liquidation. The banks say that if the on-loans were not subordinated it would be a breach of these agreements and the relevant plaintiffs are not entitled in these proceedings to set up and rely on such breaches. This is the contractual claim referred to in par 11EA (3) of the defence.

61 The estoppel claims referred to in pars 11EA (2) and (4) are described in pars 11EJ and 11ER. In pars 11EH and 11EI the banks plead that if the on-loans are not subordinated as a matter of contract then it arose as a consequence of an oversight or mistake such as to require BGNV to make restitution. In any event, BGNV would be obliged in equity to account to unsubordinated creditors of TBGL and BGF. The estoppel claims are said to arise from the fact that to treat the loans as unsubordinated would undermine the commercial intention of the parties in the fundraisings and it would be unfair and unjust. And it would be unfair and unjust for the plaintiffs to resile from representations made or common assumptions held and on which the banks relied.

62 In par 5 of the reply the plaintiffs join issue with the banks on the subordination issue. In answer to par 11EA of the defence the plaintiffs deny the allegations and say there were no contractual terms as alleged and nor were there any estoppels. Importantly, the effect of pars 12(h) and 49(f) of the reply is to deny that there was any representation that the TBGL bond issue and the BGF bond issue would be identical in terms of effective subordination to the relevant BGNV bond issues. The plaintiffs deny that there were contracts as alleged in pars 11EK to 11EQ of the defence, pointing out, among other things, that BGNV was not a party to the alleged contracts. I do not need to canvass the issues raised in answer to the estoppel claims in pars 11EJ and 11ER.

63 Similar issues arise in the counterclaim, where in par 144 and following the banks allege that TBGL, BGF and BGNV (among others) made statements and representations and engaged in conduct which represented to the banks "that all liabilities of TBGL [and BGF] arising from the raising and deployment of moneys from all issues of convertible subordinated bonds (whether as direct issuer or otherwise)" were subordinated. This, the banks allege, was conduct engaged in trade and commerce and if the liabilities were not subordinated, the conduct would be misleading and deceptive under the Trade Practices Act 1974 (Cth), s 52.

64 One of the points emerging from this is that the terms of the TBGL bond issue and the BGF bond issue are in issue between the parties and so too is the question whether, assuming the bondholders were subordinated, the "effective subordination" would extend to the on-loans. This is relevant both to the contract claim (in this aspect of the litigation), the estoppel claims and the Trade Practices Act claim. In this respect it is not a new issue. To the extent it hinges on pars 11ED (17) and (43), for example, it appears in pars 13A (12) and 13A (28) of the 8 July 1998 version of the defence and counterclaim. The Trade Practices Act claim appears in pars 100 and 101.

65 I need also to draw attention to par 11EE of the defence (which I have set out earlier) and the plaintiffs' reply to it. In the reply the plaintiffs put in issue the terms of the subordination contended for by the banks. The effect of par 97 of the reply (in answer generally to pars 11EA to 11ER of the defence) is a contention that even if (contrary to the plaintiffs' case) representations were made to the banks that the on-loans would initially be subordinated the relevant representations did not go so far as to say the loans would always remain subordinated.

66 There is another feature of the subordination argument that I need to mention. It arises from par 59D of 8ASC:

"Immediately before the commencement of, during and after the Scheme Period, the Banks believed or suspected that the BGNV On-loans were or might not be subordinated or, in any event, were or might not be treated as subordinated in a winding up of TBGL and BGF, or in any valid and effective restructuring of the financial position of the Bell Participants involving TBGL and BGF and their creditors, and, as such, BGNV would or might compete with the Banks as an unsecured creditor."

67 In the particulars the plaintiffs contend that this possibility was first raised in conversations between a director of TBGL and officers of one of the banks on 15 December 1989 and was the subject of legal advice to which many, if not all, of the banks were privy from 19 December 1989 and following. Although BGNV was a wholly-owned subsidiary of TBGL it acted through its sole director, a Netherlands Antilles corporation called Equity Trust (Curacao) NV. Clause 17.6(d) of each of ABFA and LSA2 is to the effect that TBGL would use reasonable endeavours to cause BGNV to enter into a subordination agreement by which its rights and claims as a creditor of BGF and TBGL would be subordinated to any claims by the banks. On 31 July 1990 Equity Trust executed a deed ("the BGNV Subordination Deed") by which it agreed that until the banks' debts had been repaid it would:

• subordinate its rights and claims as a creditor of (among others) TBGL and BGF to any rights and claims by the banks against those companies;

• not demand any moneys owing or seek to enforce their rights or claims against those companies without the consent of the banks until liquidation of that company; and

• hold on trust for the banks any payment received as creditor prior to such liquidation and distributions received in any such liquidation.

68 The BGNV Subordination Deed is one of the transaction documents pleaded in par 19 in relation to which the plaintiffs seek a declaration that it is liable to be set aside in equity: see par 71 and the particulars par 71(d)(i)(F). The belief or suspicion referred to in par 59D is called in aid by the plaintiffs in support of, among other things, the equitable fraud claim in par 65M and par 65MA.

69 The banks simply deny each and every allegation in par 59D.

The effect of the transaction documents on the subordination issue

70 Paragraph 16 of 8ASC identifies certain of the transaction documents that were entered into on 26 January 1990 which are critical to the case. One is the Australian Banks Facility Agreement ("ABFA") and another is the Lloyds Supplemental Agreement No 2 ("LSA2"). Clause 16.10 of the agreements contains an undertaking by TBGL to the effect that it would not, and would ensure that no member of the group would, seek or consent to a variation in or amendment to (among other things) the subordinated status of the bonds. This was, of course, subject to first obtaining the approval of the banks.

71 In par 71A of 8ASC the plaintiffs say that ABFA and LSA2 (among others) are void, or alternatively voidable at the option of the plaintiffs and have been avoided or rescinded. The banks deny any entitlement to the plaintiffs to set aside those agreements and seek a declaration that they are valid and effectual and capable of being enforced. In par 71AC the banks further plead that:

"(a) the promises contained in the instruments pleaded in paragraph 16 of the statement of claim are not void, have not been so avoided and the Court would not grant any relief sought in respect of such promises;

(b) only those parts of the instruments referred to in paragraphs 16 and 19 of the statement of claim which on the Court's findings were entered into by reason of the breaches alleged with the knowledge alleged or which constituted an equitable fraud or an inequitable and unconscientious bargain as alleged are void, have been avoided or would be subject to the Court granting the relief sought and such parts are severable from the instruments which otherwise remain valid and enforceable by the Banks."

72 I am assuming (although it does not appear clearly from the further and better particulars to par 71AC of the defence) that the banks will argue that cl 16.10 is one of the provisions covered by that plea. The banks then raise a positive case in the counterclaim (par 153 to par 155) that the execution of the supplemental deeds by TBGL and BGF would be a breach of cl 16.10 of ABFA and LSA2 and a breach of the contracts pleaded in pars 11EK to 11EP of the defence. They seek injunctive relief to prevent such a breach.

73 The plaintiffs deal with the severance issue in the reply to par 71AC and par 153 of the defence: see, for example par 159 (c) and par 172(a)(iv)(F) of the reply. The preamble to par 159(c) asserts that the promise contended for by the banks is not one that a court would, or as a matter of discretion, ought to sever or enforce at the behest of the banks "as the court would have regard to the possible effects of that promise at the time it was entered into and the effect that it now has". The elucidation of that plea makes it clear that the words "the effect that it now has" centre on the supplemental deeds: see, for example pars 159(c)(iii), (vi) and (viii) of the reply. I think those words are significant. I will explain why a little later in these reasons.

74 The plaintiffs' case has always been centred on an appeal to equity. For example, in pars 71A, 80 and 86 of 7ASC the plaintiffs contend that the banks received certain monies as constructive trustee for some of the plaintiffs and was liable to account to those parties for the funds so received. They also contend that the banks are liable to pay equitable compensation for losses relating to those receipts. This is now brought together in par 71 of 8ASC. But this pleading adds a significant additional limb to the case based in equity. It is the addition of the equitable fraud claim and that based on an unconscionable bargain.

75 I do not need to describe the equitable fraud and unconscionable bargain claims in detail as I have done so in the 2001 judgment. But there are two aspects of them that are of particular relevance. First, the general claim for equitable relief identified in par 71 of 8ASC includes the equitable fraud claim. Secondly, LDTC (which was added as a plaintiff as a consequence of the 2001 judgment) makes a separate claim based on equitable fraud: see par 125.

76 In par 19A the plaintiffs plead that the general effect of the transactions was to render all significant assets of the Bell group available to the banks "in priority to the claims of all other creditors and future creditors" of the group. In listing the creditors of the group in par 12 the plaintiffs have included the liabilities under the TBGL bond issue and the BGF bond issue. It seems therefore that the plaintiffs contend that one result of the transactions was to give to the banks priority over the holders of the TBGL bonds and the BGF bonds (namely LDTC as trustee for ICWA). In par 33C the plaintiffs contend that the effect of the transactions was to cause the corporations to lose access to their assets to meet indebtedness to creditors, which would include LDTC as trustee of the TBGL bond issue and the BGF bond issue. By way of answer, the banks, in par 33C(c)(3) of the defence call in aid the matters pleaded in pars 11EA to 11ER and par 153, which include the banks' case on the subordination of the on-loans and on the contractual provisions limiting the right to change the subordinated status of the bonds. In par 119 of the reply the plaintiffs put in issue the effect for which the banks contend in par 33C(c)(3).

77 Regard should also be had to the pleas relating to the conduct of the directors, their knowledge of the effects of the transactions and the breaches of their duties to act in the interests of creditors in pars 34, 37, 39 of 8ASC. The allegation that the banks knew of these matters (or believed or suspected them) is set out in pars 50 to 59A of 8ASC. Included in this is the allegation in par 59D that the banks believed or suspected that that the on-loans might not be treated as subordinated in a winding up of TBGL or BGF. All of this culminates in the pleas in pars 63A to 65K that the banks made the gains or received the proceeds from realisation of assets as knowing participants in the directors' breaches of duty and that such gains and proceeds are held as constructive trustee. This includes an allegation in par 65H that the banks obtained rights under, among other things, ABFA and LSA2, and held those rights as constructive trustee.

78 Everything pleaded in pars 1 to 65K of 8ASC is then called in aid of the equitable fraud claim. In par 65M the claim is put as an imposition or deceit on creditors (other than the banks) of the Bell companies. This would include LDTC as trustee for the BGNV bondholders and for the holders of bonds in the TBGL bond issue and the BGF bond issue. It is also put as an inequitable and unconscientious bargain: par 65MA. That plea is expanded upon in further and better particulars. In summary, it is said that the Bell companies that entered into the transactions did so without protecting the interests of all their creditors and acted to their disadvantage. They suffered from a special disability of which the banks knew or ought to have known. The banks took unconscientious advantage of the position of disadvantage in which the Bell companies were placed. The particulars refer back to, among other things, par 33C of 8ASC.

79 In par 125 LDTC, as trustee for each the three BGNV bond issues, advances an equitable fraud claim based on imposition or deceit. It calls in aid everything pleaded in pars 1 to 65G.

80 In the preamble to their prayer for relief the plaintiffs say they are ready, willing and able to do equity in respect of the relief granted to them. One of the more contentious elements of the defence is par 130. In it the banks allege that the plaintiffs are not ready, willing or able to do equity. Par 130(e) is in these terms:

"the plaintiffs do not offer or purport to offer to restore the Defendants to the position of the Banks prior to the entry into the Transactions and, in particular, the eighth and ninth plaintiffs now intend, unless restrained, to execute supplemental deeds amending the subordination terms of the trust deeds of the BGF Issue and the TBGL Issue notwithstanding the matters pleaded in paragraphs 11EA to 11ER and paragraphs 153 to 158 of the counter-claim which the Banks repeat herein."

81 I will consider par 130, and in particular par 130(e), in more detail a little later. It is sufficient at this stage to say that the plaintiffs deal with the issue comprehensively in par 172 and par 173 of the reply. In essence they say it does not disclose a reasonably arguable defence because the supplemental deeds can have no effect unless and until orders are made under s 564. In any event, even if the matters asserted by the banks were made out it would not establish that the plaintiffs were unable or unwilling to do equity.

82 I note that while there were claims for equitable relief in 7ASC there was no express plea that the plaintiffs were ready willing and able to do equity. This may explain why there was no equivalent to par 130 in the 8 July 1998 version of the defence and counterclaim.

83 The contentions made in par 130 are not the only ones in which the banks call equity in aid. For example, in par 11EJ (1) there is a plea that it would be "unfair and unjust" to permit BGNV to argue that the on-loans to TBGL and BGF in the event that either was wound up were unsubordinated. There is a broad plea to the same effect in par 11ER (1). The LDTC claim is defended on the basis that the enforcement of claim would be unconscionable: see par 125(b)(vi). In par 113(d)(8) the banks contend (in what is in some ways a reverse appeal to equity) that SCABL was estopped in equity from relying on the demands it issued in December 1989 (with the effect that there was no default under the SCABL facility at the time). The banks' estoppel case or cases that appear, for example at pars 11EA (4), 11EJ (2), 11ER (2), can be categorised largely as estoppels by representation, convention and conduct. But it seems that they rely on equitable principles.

The Bell Group Ltd (In Liquidation) & Ors v Westpac Banking Corporation & Ors

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (305 paragraphs)

The Bell Group Ltd (In Liquidation) & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93 (6 April 2004)

Attempts to alter the subordination provisions

The Main Action in the Federal Court (1998 to 2000)

The overlap question and the cross-vesting order

The financial position of the Bell group companies

The effect of the transaction documents on the subordination issue

Parties

Legislation Cited (3)

Cases Cited (3)