ABN Amro Clearing Sydney Pty Ltd (formerly Fortis Clearing Sydney Pty Ltd) v Primebrokers Securities Limited (recs & mgrs apptd) (in liq)

SUPREME COURT OF VICTORIA
COURT OF APPEAL

S APCI 2011 0102

ABN AMRO CLEARING SYDNEY PTY LTD (FORMERLY KNOWN AS FORTIS CLEARING SYDNEY PTY LTD) (ACN 081 279 889)	Appellant
	v
PRIMEBROKER SECURITIES LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 081 178 645)	Respondent

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JUDGES	WARREN CJ, HARPER JA and DAVIES AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	26 and 27 July 2012
DATE OF JUDGMENT	27 November 2012
MEDIUM NEUTRAL CITATION	[2012] VSCA 287
JUDGMENTS APPEALED FROM	Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479 (Judd J) and Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (No 3) [2011] VSC 182 (Judd J)

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CONTRACT —Australian Master Securities Lending Agreement (‘AMSLA’) – Appellant ‘borrowed’ securities from respondent and lent funds to respondent — Appellant obliged to re-deliver equivalent securities to respondent subject to certain conditions — Respondent defaulted under contracts with appellant —Appellant sold borrowed securities to discharge respondent’s debt and expenses with surplus going to respondent — Securities sold at less than market value — Whether borrowing transaction created security interest or transferred beneficial ownership of securities — Effect of custom clause inserted into AMSLA limiting obligation to re-deliver equivalent securities — Whether AMSLA netting clause operated — Calculation of market value of securities — Appeal dismissed.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr A J Myers QC with Mr P Whitford SC and Dr T J McEvoy	Corrs Chambers Westgarth
For the Respondent	Mr N J O’Bryan SC with Mr H N Austin	Blake Dawson

WARREN CJ:

Table of contents

Table of contents
Introduction
The original contracts between the parties
The amendment deed
Primebroker’s default and the sale of borrowed securities by Fortis
The proceedings at trial
The issues and parties’ positions in relation to the sale of the securities
Fortis is not entitled to deny beneficial ownership of the borrowed securities
Fortis was the beneficial owner of the borrowed securities
Title is governed by the intended legal effect of the transaction
Parties intended Fortis to acquire beneficial title

The netting clause was applicable
Fortis could not choose to deal with securities under other default provisions
It is unnecessary to consider general applicability of other default provisions
Fortis must account to Primebroker for the value of the securities on 7 July 2008
The trial judge did not err in valuing the Octaviar notes
Disposition of the appeal
Introduction

The appellant, formerly known as Fortis Clearing Sydney Pty Ltd (‘Fortis’), is a specialist securities broker. The respondent, Primebroker Securities Ltd (‘Primebroker’), now in liquidation, was a securities trader and a client of Fortis. Fortis ‘borrowed’ certain securities from Primebroker and was required to redeliver ‘equivalent securities’ subject to certain conditions. Primebroker defaulted under its contracts with Fortis. Fortis then sold some of the securities for less than their market value at the time of default and applied the proceeds against Primebroker’s debt to Fortis. The central question in this appeal is whether Fortis is required to account to Primebroker for the borrowed securities at market value or at sale value.

The learned trial judge held[1] that the contracts between the parties made Fortis the beneficial owner of the ‘borrowed’ securities. When Primebroker defaulted on 4 July 2008, a ‘netting’ clause in one of the contracts automatically converted Fortis’ redelivery obligation into a dollar amount owed by Fortis to Primebroker, calculated by reference to the value of the securities on the first business day after the date of default. His Honour therefore held that Fortis was required to account to Primebroker for the value of the securities on 7 July 2008, the first business day after 4 July 2008, rather than the amount that Fortis actually realised from the sale of the securities. The appellant contends that his Honour erred in so holding.
[1]Primebrokers Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479 (‘Main Trial Judgment’).

The parties are also in dispute about the market value of one of the securities — notes in Octaviar Ltd (‘Octaviar’) — on 7 July 2008. There were no trades in Octaviar notes on that day. In valuing the notes, the learned trial judge relied on the price at which the notes were last sold before 7 July 2008. His Honour also relied on Octaviar’s offer to note holders made after 7 July 2008.[2] The appellant contends that his Honour erred in relying on these two matters.
[2]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (No 3) [2011] VSC 182 (‘Valuation Judgment’).

For reasons that follow, I consider that the learned trial judge did not err in either respect. I would therefore dismiss the appeal.

The original contracts between the parties

The contracts between the parties consisted of Fortis’ Standard Client Agreement (‘SCA’), executed on 19 December 2006, and additional service agreements included as schedules to the SCA. The SCA was the overall ‘umbrella’ agreement[3] while the service agreements dealt with specific services that Fortis offered to its clients. The clients could choose which services they subscribed to.[4] Primebroker subscribed to all of the services offered by Fortis but only two of the service agreements are presently relevant. The first is the ‘Dealing Loan Facility’ contained in sch 3 of the SCA. The second is the ‘Australian Master Securities Lending Agreement’ (‘AMSLA’). It is contained in sch 11 of the SCA but was separately executed by the parties on the same day as the SCA.
[3]Appeal Transcript 15–16, 75–76.
[4]See SCA Instruction Sheet.

The Dealing Loan Facility dealt with the provision of credit by Fortis to its clients. Under that agreement, Fortis provided to Primebroker a line of credit for up to $50m.[5]
[5]Agreed Summary (24 February 2012) [7].

The AMSLA is a standard form contract for securities lending developed by the Australian Securities Lending Association Ltd. The AMSLA creates a procedure whereby by one party (the ‘lender’) transfers securities to the other party (the ‘borrower’) pursuant to a ‘borrowing request’. In return, the borrower transfers to the lender cash or other securities or financial instruments described as the ‘collateral’.

The borrower has an obligation to redeliver ‘equivalent securities’ back to the lender upon the expiry of the term specified in the borrowing request or at call.[6] The lender in turn has to redeliver to the borrower equivalent collateral (or repay the cash collateral) at the same time as the lender is required to redeliver equivalent securities.[7] Equivalent securities are defined as securities that are equivalent in number and type to the borrowed securities, with provisions for circumstances like splits and redemptions.[8] Equivalent collateral has a similar definition.[9]
[6]Clauses 7.1, 7.2, and 11(e).
[7]Clause 8.
[8]Clause 26.
[9]Ibid.

The AMSLA expressly provides that the borrower receives beneficial title to the ‘borrowed’ securities:

Notwithstanding the use of expressions such as ‘borrow’, ‘lend’, ‘Collateral’, ‘Margin’, ‘redeliver’, etc., which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right title and interest in and to Securities ‘borrowed’ or ‘lent’ and ‘Collateral’ which one Party transfers to the other in accordance with this Agreement (‘title’) shall pass from one Party to the other free and clear of any liens, claims, charges or encumbrances or any other interest of the Transferring Party or of any third party (other than a lien routinely imposed on all securities in a relevant clearance system), the Party obtaining such title being obliged to redeliver Equivalent Securities or Equivalent Collateral, as the case may be. Each Transfer under this Agreement will be made so as to constitute or result in a valid and legally effective transfer of the Transferring Party’s legal and beneficial title to the recipient.[10]

[10]Clause 1.4(b).

The AMSLA also provides for the lender to pay the borrower a fee for transactions where the collateral is cash. If the collateral is something other than cash, it is the borrower that has to pay a fee to the lender.

The purpose of this type of arrangement was considered by Finkelstein J in Beconwood Securities Pty Ltd v ANZ Banking Group Ltd,[11] in the context of a securities lending agreement derived from the standard AMSLA. His Honour observed that securities lending transactions fell into two categories. First, there were transactions where the borrower pays a fee to obtain specific securities; secondly, there were transactions where the lenders pays a fee to obtain access to cash:

[5]The modern securities lending market can, broadly speaking, be divided into two markets, one that is defined by the motive of the borrower (the ‘securities driven’ market) and the other by the motive of the lender (the ‘cash driven’ market). In the first category, which is the more common type of transaction, a borrower seeks access to specific securities, usually to cover exposure to a short position. In the second category, a lender of securities seeks access to cash, often for purposes of equity financing at interest rates which are better than the uncollateralised borrowing rate.
[6]… In a securities loan transaction in the securities driven market the lender transfers specific securities to the borrower who must return ‘equivalent securities’ to the lender either on demand, on the occurrence of a defined event or at the end of an agreed term. The borrower: (1) obtains an outright transfer of title to the securities, which may then be sold or on-lent; (2) pays a fee for the use of the securities, calculated by reference to the value of the lent securities; and (3) provides collateral to the lender in the form of cash, other securities or other assets (eg government bonds, certificates of deposit, bank letters of credit), title to which passes to the lender. The value of the collateral exceeds the value of the borrowed securities, the difference in percentage terms being referred to as the ‘margin’. At the conclusion of the transaction there is an exchange of ‘equivalent securities’ for ‘equivalent collateral’. In the event of default provision is made for placing a money value on each party’s obligations, setting one off against the other, and, if there is a net balance, for payment of the balance. A securities loan in the cash driven market follows the same structure but with important differences. First, the collateral is always provided in the form of cash. Secondly, the amount of cash collateral is less than the value of the lent securities. And thirdly, the lender pays a fee, much like interest, calculated by using a discounted interest rate. By reason of these differences commentators and securities lending participants colloquially refer to the securities rather than the cash as the collateral.

[11](2008) 246 ALR 361 (‘Beconwood’).

The AMSLA was designed to accommodate both kinds of transactions, which is why it provided for the fee to be payable by either the borrower (securities driven transaction) or the lender (cash driven transaction) depending on the nature of the collateral.

In this case, the ordinary operation of the standard AMSLA was, from the beginning, modified in two ways. First, sch 3 to the AMLSA provided that there was to be no collateral:

The parties acknowledge and agree that No Collateral will be delivered or deposited under this Agreement.

Secondly, cl 8 of the SCA, entitled ‘Securities Lending’, provided that Fortis did not receive a beneficial interest in the securities:

(a)The Client [ie Primebroker] acknowledges and agrees that any borrowing and lending of Securities from or to:
(i)any other clients of Fortis; and
(ii)any other entity that Fortis deal with for Securities borrowing and lending (SB&L Entity)

may be arranged by Fortis, in both cases where the other party has signed an agreement in the same or similar terms as [the AMSLA].

…
(c)The Client acknowledges that Fortis is its agent to procure arrangements for Securities lending and borrowing as set out in this clause on the terms of [the AMSLA].
(d)The Client acknowledges that Fortis might be the legal owner and counterparty to the Transaction but has no beneficial interest in the Securities borrowed or lent under this clause or [the AMSLA].

Counsel for Fortis explained that these modifications ‘contemplated … a state of affairs where many clients of Fortis sign an agreement in the form of [the AMSLA] and Fortis, then acting as a middle man or broker, arranges securities lending transactions between those parties’.[12] It is unnecessary to consider the effect of these modifications because the parties amended the AMSLA and the SCA by an amendment deed dated 16 April 2008.
[12]Appeal Transcript 17.

The amendment deed

On 19 April 2007 Primebroker started funding its trades using money borrowed from Fortis under the Dealing Loan Facility.[13] About a year later, the parties executed an amendment deed that amended both the SCA and the AMSLA. The amendments were exclusive to Primebroker and Chimaera Capital Pty Ltd, an entity related to Primebroker; Fortis did not enter into similar amendment deeds with any other clients.[14] It appears that Fortis was concerned about the ability of Primebroker to repay the money it had borrowed under the Dealing Loan Facility and that the purpose, or one of the purposes, of the amendment deed was to protect Fortis against the risk of insolvency by Primebroker.[15]
[13]Affidavit of Barry Neil Parker (30 March 2009) [20].
[14]Ibid.
[15]The trial judgement notes that Primebroker did not provide any reason for the amendment while Fortis only provided an incomplete explanation: at [42]. But in my view, one can infer the purpose from the deed itself. The deed recites that the amendments are effected ‘[i]n consideration of Fortis continuing to provide financial accommodation and other services under the terms of the SCA’. The deed then inserts into the AMSLA a new provision (cl 7B) that, on its terms, protects Fortis in the event of insolvency or default by Primebroker. I discuss cl 7B later in my reasons. During the hearing of the appeal, senior counsel for Fortis suggested that the obvious explanation for the amendment was that Fortis wanted to obtain as much security as possible for its loans to Primebroker because it thought that it needed the security: Appeal Transcript 39-40, 147. Primebroker’s counsel appeared to agree with this explanation: Appeal Transcript 95–96. See also Trial Transcript 33.

The amendment deed appears to have been hastily drafted and is therefore not as refined as the AMSLA.[16] In any event, the amendment deed deleted cl 8 of the SCA, which provided, inter alia, that Fortis does not have a beneficial interest in securities borrowed under the AMSLA.[17] The amendment deed substituted a new cl 8 that relevantly provides:

(d)The parties confirm that Fortis, as either Borrower from or Lender to, the Client under [the AMSLA], does so in its capacity as a principal to the Securities loan…

[16]See [89]–[91] of these reasons.

[17]See the extract at [14].

The amendment deed also inserted a new cl 7B into the AMSLA. That clause provides that the borrower’s obligation to redeliver equivalent securities or to make a payment ‘does not arise’ if ‘at the relevant time’ certain conditions exist. These conditions include insolvency or default on the part of the lender.[18]
[18]See [81] et seq.

I will continue use the acronym ‘AMSLA’ to refer to the AMSLA after it was modified by the amending deed.

All securities transferred to Fortis by its clients in connection with ‘third party clearing and settlement services’ were held by Fortis in a dedicated ‘Holder Identification Number’ (‘HIN’) in the name of Fortis Clearing Sydney Nominees Pty Ltd. The parties referred to that HIN as the ‘Settlement HIN’.[19] Under the ASX rules, Fortis was only permitted to use the Settlement HIH to hold securities held on trust for clients. Fortis was required to transfer any securities which it beneficially owned out of the Settlement HIN within three days.[20]
[19]Affidavit of Barry Neil Parker (30 March 2009) [8]; Agreed Summary (24 February 2012) [40].
[20]Affidavit of Barry Neil Parker (30 March 2009) [9]; Agreed Summary (24 February 2012) [42].

At the time the amendment deed was executed, Fortis held securities on behalf of Primebroker in the Settlement HIH. On the day the amendment deed was executed, Fortis sent a borrowing request to Primebroker, under the amended AMSLA. The request sought to borrow ‘[a]ll securities held in Primebroker’s Portfolio held with Fortis’, that is, all of the securities held in the Settlement HIN on behalf of Primebroker.[21] On the same day, Fortis transferred Primebroker’s securities from the Settlement HIN to a separate HIN in Fortis’ own name (the ‘Fortis HIN’). Subsequently, Fortis made two further borrowing requests and, having received the sought securities from Primebroker, transferred them into the Fortis HIN.[22]
[21]Affidavit of Barry Neil Parker (30 March 2009) [23] and exhibit BNP2.
[22]Affidavit of Barry Neil Parker (30 March 2009) [27].

Fortis did not provide any collateral for any of the borrowing requests.[23] When Fortis sent its first borrowing request, a Chimaera Financial Group Ltd representative replied asking why Fortis put ‘not applicable’ in the ‘Type of Collateral’ field on the borrowing request. A Fortis representative responded saying:[24]

I confirm that this is correct.
Chimaera and PB agreed to lend the securities on the basis that Fortis continues to provide financial accommodation and services to both Chimaera and PB.
[23]Affidavit of Barry Neil Parker (30 March 2009)
[24]Affidavit of Barry Neil Parker (30 March 2009) [46] and Exhibit PNB5.

Primebroker’s default and the sale of borrowed securities by Fortis

On 4 July 2008 a creditor appointed receivers and managers to Primebroker. The parties agree that this constituted a default under the SCA, the Dealing Loan Facility and the AMSLA.[25]
[25]Agreed Summary (24 February 2012) [51].

There is, however, some ambiguity about what is meant by an event of default under the AMSLA. The agreed summary of facts states that the appointment of receivers constituted an event of default under ‘clause 12 of the AMSLA’.[26] The chapeau of cl 12 provides that each of the nine items that follow is an event of default ‘for the purposes of clause 8’.[27] But it appears that the amendment deed inserted a new, tenth, item into that list. The new item states that ‘[f]or the purposes of clause 7B, Event of Default shall have the same meaning as in the [SCA]’.[28] So the expression ‘event of default for the purposes of cl 12’ is ambiguous because cl 12 appears to define an event of default differently for the purposes of cl 8 and cl 7B.
[26]Ibid. During the hearing of the appeal Primebroker’s counsel referred to a what he considered to be a suggestion by Fortis’ counsel that there had not been a ‘default under the AMSLA’. The Court informed him that, as far the Court understood, there had been no such suggestion and that the Court’s understanding was that this issue was not in dispute: Appeal Transcript [137]. When the time came for Fortis’ reply, Fortis’ counsel said nothing about this issue. Presumably he accepted that there was no issue about default.
[27]Emphasis added.
[28]Emphasis added. See [81], [90]–[91] of these reasons.

However, the ambiguity is resolved by the manner in which Fortis conducted its case. Primebroker’s entire case depended on cl 8.2 of the AMSLA. If that clause was not triggered, Primebroker had no case. Yet Fortis did not, at any point during the appeal, suggest there had been no event of default for the purposes of cl 8.2 or that the event of default had occurred on some date other than 4 July 2008. It is apparent that Fortis accepts that the appointment of receivers constituted an event of default for the purposes of both cl 8.2 and cl 7B. It may be that this acquiescence or concession was wrongly made.[29] However, both parties conducted the trial and the appeal on that basis. Thus, I will proceed on the same basis.[30]
[29]The appointment of receivers was an ‘act of insolvency’ under the AMSLA. Clause 12 provides that an act of insolvency is an event of default for the purposes of cl 12 if ‘the Non-Defaulting Party serves written notice on the Default Party’, ‘except in the case of an Act of Insolvency which is the presentation of a petition for winding up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Default Party in which case no such notice shall be required’.
In Beconwood (2008) 246 ALR 361, in the context of a relevantly identical clause, Finkelstein J held that receivers are not officers analogous to a liquidator: at [60]. If that is correct, it follows that the appointment of receivers and managers is an act of default for the purposes of cl 8.2 only if and when Fortis gives written notice. While Fortis did give Primebroker a written default notice on 4 July 2008, the notice stated that Primebroker was in default under the SCA and made no reference to the AMSLA: Affidavit of Paul Kirk (3 February 2009) [14] and exhibit PK5. It there seems arguable that this notice did not satisfy the requirements of cl 12 of the AMSLA.
[30]Cf Whisprun Pty Ltd v Dixon (2003) 200 ALR 447.

On 4 July 2008 Primebroker owed Fortis about $20.8m under the Dealing Loan Facility.[31] After being notified of the appointment of receivers to Primebroker, Fortis commenced selling securities that it had borrowed from Primebroker. It then credited Primebroker with the proceeds of the sale. In doing so, Fortis proceeded on the basis that it could fully discharge its obligations to Primebroker with respect to the borrowed securities by crediting Primebroker with the proceeds of their sale. By 17 July 2008, Fortis had generated about $21m from the sale of securities. This was sufficient to discharge Primebroker’s outstanding debt together with Fortis’ expenses leaving a small surplus of about $100,000.[32]
[31]Agreed Summary (24 February 2012) [49].
[32]Ibid [52], [57].

The proceedings at trial

In February 2009 Primebroker commenced a proceeding against Fortis under s 424 of the Corporations Act 2001 (Cth) seeking directions concerning the construction of the contracts between the parties. There were no pleadings.[33] Primebroker claimed that Fortis was entitled to account to it for the market value of the borrowed securities on the day of the default rather than the amount Fortis actually realised from their sale. It was common ground that the former substantially exceeded the later.[34]
[33]Main Trial Judgment [71].
[34]Main Trial Judgment [12].

The learned trial judge found for Primebroker. Fortis now appeals that decision.

The issues and parties’ positions in relation to the sale of the securities

Fortis does not dispute any of the learned trial judge’s findings of fact. Rather, Fortis challenges his Honour’s construction of the suite of agreements and the substance of the relationship between the parties.

Fortis relies on default provisions of the SCA and the Dealing Loan Facility, which entitled Fortis to sell Primebroker’s assets, apply the proceeds to discharge Primebroker’s obligations to Fortis and pay the balance, if any, to Primebroker. Fortis contends that the borrowed securities were an asset of Primebroker that Fortis could liquidate under these provisions.

Primebroker, on the other hand, contends that the borrowed securities fell to be dealt with under cl 8.2 of the AMSLA, the ‘netting clause’. That clause provides that, in the event of default, the parties’ obligations to each other are accelerated so as to be due on the day of default. Each party’s obligations are then valued and converted into a dollar amount due from that party to the other party. The obligation to redeliver equivalent securities is valued as, effectively, the market value of the securities on the first business day after the date of default. Finally, the amounts due from one party to the other are offset against each other to produce a single net amount owed by one party to the other. Primebroker submits that the netting clause operated to convert Fortis’ obligation to redeliver equivalent securities into a money sum calculated by reference to the market value of the securities on 7 July 2008. Fortis is required to credit Primebroker with that amount.

Primebroker contends that the default provisions of the SCA and the Dealing Loan Facility were not applicable to the securities because the securities were not an asset of Primebroker. Fortis was the beneficial owner of the borrowed securities and they were therefore an asset of Fortis. While Fortis, as the beneficial owner, was entitled to sell its securities, this could not affect Fortis’ obligations to Primebroker. Fortis is not entitled to credit Primebroker with the proceeds of sale of its own assets.[35]
[35]Respondent’s Outline of Submissions (31 October 2011) [13]–[14], [26].

Fortis’ response to Primebroker’s position is threefold. First, Fortis disputes that it was the beneficial owner of the borrowed securities. It contends that that the transfer of securities was in the nature of a security for Fortis’ loan to Primebroker and that Primebroker retained a beneficial interest in the securities.[36] Alternatively, Fortis submits that even if it was the beneficial owner of the securities, as a matter of construction, the securities were still an asset of Primebroker within the meaning of the default provisions of the SCA and Dealing Loan Facility. Fortis could therefore liquidate them on default by Primebroker.[37] Secondly, Fortis contends that the netting clause was not applicable due to cl 7B of the AMSLA inserted by the amending deed. Thirdly, Fortis contends that even if the netting clause were applicable, Fortis was entitled to deal with the securities under the default provisions of the SCA and the Dealing Loan Facility rather than under the netting clause.
[36]Appeal Transcript 63
[37]Appeal Transcript 8.

Primebroker does not contend that if, contrary to its submission, it retained a beneficial interest in the borrowed securities, the netting clause could effectively convert Primebroker’s proprietary rights to the securities into a money sum owed by Fortis to Primebroker.[38] Primebroker appears to accept that its case will fail if Fortis is correct about the beneficial ownership of the securities.
[38]Cf Beconwood [2008] FCA 594 [50].

The first part of the appeal therefore gives rise to three questions. First, were the default provisions of the SCA and the Dealing Loan Facility applicable with respect to the borrowed securities? Secondly, was the netting clause of the AMSLA applicable? Thirdly, if the answer to both questions is ‘yes’, could Fortis choose to deal with the borrowed securities under the default provisions of the SCA and the Dealing Loan Facility rather than under the netting clause?

The answers to the first and second questions in turn depend on another question — was Fortis the beneficial owner of the borrowed securities?

For reasons that follow, I would answer these questions as follows. Fortis was the beneficial owner of the securities. The netting clause of the AMSLA was applicable. That clause had operated to require Fortis to account to Primebroker for the value of borrowed securities on 7 July 2008. Even if the default provisions of the SCA and the Dealing Loan Facility were otherwise applicable, the netting clause having already operated, Fortis could not choose to deal with the borrowed securities under these other provisions. It is therefore unnecessary to decide whether these provisions would have otherwise been applicable.

Fortis is not entitled to deny beneficial ownership of the borrowed securities

While Fortis now denies that it was the beneficial owner of the securities that it had borrowed from Primebroker under the AMSLA, this is a departure from its previous position. An examination of the trial materials[39] before the Court makes it clear that Fortis’ position at trial was that it was the beneficial owner of the borrowed securities.
[39]There were no pleadings at the trial.

First, there is the affidavit of Mr Barry Neil Parker, managing director of Fortis sworn on 30 March 2009. Mr Parker deposes that from 16 April 2008

as the holder of both the legal and beneficial interest in the securities which had been transferred to it by Primebroker under the AMSLA as amended by the Amendment Deed, Fortis lodged regular notices of substantial holding with ASIC in accordance with section 671B of the Corporations Act 2001 (Cth).[40]

[40]At [25] (emphasis added).

Secondly, Fortis’ counsel at trial made the following submissions during the trial:

… when you look at the amending deed, … its apparent purpose was … to give additional protection to Fortis … by providing, contrary to the situation that obtained previously, the securities were to be held absolutely by Fortis.[41]
…
[Clause 8(e) of the SCA provided] that Fortis takes no beneficial interest in the securities that it borrowed under [the AMSLA]. When Your Honour looks at the amending deed Your Honour will see that clause 8 is amended so as to reverse that position and to ensure that Fortis takes absolutely on the borrowing of the securities. … So the amending deed it apparently sought to further protect its position … by taking the securities absolutely … [42]
…
… [Fortis power under cl 6 of the Dealing Loan Facility is] strengthened by the amending deed to the extent that shares become Fortis’s’ absolutely.[43]
…
[Fortis] can sell [the securities]; it can apply the proceeds of sale to Primebroker’s indebtedness to it (Fortis) and then if there’s anything left over after that indebtedness is satisfied then plainly there is going to be an obligation at least in equity to account for whatever is left over, be it unsold stock or the proceeds of the sale of stock because the common assumption or the conventional basis on which the parties dealt was that those stocks, although legally held absolutely by Fortis, were for the purposes of the arrangements between the parties part of the client portfolio or part of the net liquidation value and to that extent at least might be considered an asset of Primebroker for the purposes of reconciling the positions between the parties [on] determination of their relationship.[44]
…
The absolute ownership of the shares gave [Fortis] entitlement to sell quite apart from anything else.[45]

[41]Trial Transcript 33.

[42]Trial Transcript 34.

[43]Trial Transcript 43.

[44]Ibid. It seems clear from the context that the reference in this passage to the securities being ‘legally held absolutely by Fortis’ (emphasis added) was not drawing a distinction between the position at law and in equity but rather between the actual property rights with respect to the securities and the way in which the securities were treated by the parties and the contract.

[45]Trial Transcript 43–44. (Emphasis added)

Thirdly, the trial judgment states that ‘[i]t was common ground that Fortis was entitled to deal with the securities it held as if its own, to sell or otherwise dispose of them at any time and in any manner it saw fit’.[46] The judgment also refers to ‘a submission by Fortis that until 16 April 2008, when the AMSLA was amended, Primebroker retained the beneficial interest in the securities’.[47] There is no reference to any submission by Fortis to the effect that it was not the beneficial owner of the securities.
[46]Main Trial Judgment [60]. During the hearing of the appeal, senior counsel for Fortis, who did not appear at the trial, expressed uncertainty about whether that was indeed the common position: Appeal Transcript 66. In response, Primebroker’s counsel provided the court with the transcript of the first day of the trial. The extracted passages from that transcript show that this was indeed the common position.
[47]Main Trial Judgment [35] (emphasis added).

On appeal, Fortis did not attempt to depart from the proposition that it was the beneficial owner of the securities in any of the written materials filed before the hearing. Its notice of appeal and its written submissions do not make any suggestion that the trial judged erred by holding that Fortis was the beneficial owner of the securities. Indeed, the agreed summary of facts expressly adopts passages from Mr Parker’s affidavit,[48] including:

From [the time that the borrowed securities were transferred to the Fortis NIH], as the holder of both the legal and beneficial interest in the Borrowed Securities, Fortis lodged regular notices of substantial holding with ASIC in accordance with section 671B of the Corporations Act 2001 (Cth).[49]

[48]See [39] above.

[49]Emphasis added.

It seems that the suggestion that Primebroker retained an interest in the borrowed securities was made for the first time in the course of oral submissions at the hearing of the appeal. Primebroker’s counsel did not, at the time, object to Fortis raising this issue, although he confirmed that it was common ground at trial that Primebroker was entitled, at any time, to sell, lend or otherwise deal with the securities in any way it saw fit. After the hearing, Primebroker’s counsel provided to the Court, at the Court’s request made during the hearing, a tagged copy of the transcript of the first day of the trial. Highlighted on the tagged page were the last two transcript excerpts just extracted, where Fortis’ counsel expressly submits that Fortis had acquired absolute title to the securities.

In my view, even though Primebroker’s counsel did not expressly raise an objection, Fortis is not entitled to raise for the first time, on appeal, a contention that is directly contrary to its position at the trial. I observe that neither of Primebroker’s appeal counsel appeared at trial. Further, the issue of beneficial ownership was not flagged in the notice of appeal or the written submissions. In my view, Fortis should not be permitted to raise this issue now.[50]
[50]Multicon Engineering Pty Ltd v Federal Airports Corp (1997) 47 NSWLR 631, 645, cited with approval in Whisprun Pty Ltd v Dixon (2003) 200 ALR 447 [51] (Gleeson CJ, McHugh and Gummow JJ). See also University of Wollongong v Metwally (No 2) (1985) 60 ALR 6, 71; Coulton v Holcombe (1986) 162 CLR 1, 7 (Gibbs CJ, Wilson, Brennan and Dawson JJ).

This is sufficient to dispose of the matter. However, for the sake of completeness, I will deal with the merits of Fortis’ submissions on the substantive issue.

Fortis was the beneficial owner of the borrowed securities
Title is governed by the intended legal effect of the transaction

Fortis submits that the AMSLA did not give it a beneficial interest in the borrowed securities but merely a security interest. Fortis’ appeal counsel was somewhat schematic in describing the precise nature of this interest:

… a legal mortgage will probably not be recognised; it will be, instead, some sort of equitable charge that general equitable property will remain in the transferor, the debtor, subject to an equitable charge in favour of the security holder.[51]
…
[It was not] a legal mortgage but it was a charge, an equitable charge at the very least, and the chargeor retained the equivalent of an equity of redemption.[52]

[51]Appeal Transcript 64.

[52]Appeal Transcript 152.

The starting point for determining the issue of beneficial ownership are the express terms of the AMSLA. The AMSLA expressly provides, in two places, in clear and unambiguous terms, that the borrower of securities, here Fortis, acquires, absolute title to the borrowed securities. Clause 1.4(b) provides that ‘all right title and interest in and to’ the borrowed securities ‘free and clear of any liens, claims, charges or encumbrances or any other interest’ of the lender so that the transfer results in a ‘valid and legally effective transfer of the [lender’s] legal and beneficial title to the [borrower]’. Clause 10 provides that the lender warrants that ‘it is absolutely entitled to pass full legal and beneficial ownership of all Securities provided by it under this Agreement to the Borrower free from all liens, charges, equities and encumbrances’.

Fortis submits that these express provisions are not determinative of the true nature of the parties’ rights and interests in the borrowed securities. Fortis submits that ‘if the parties truly intend a transaction to be by way of security, the court will treat it thus, whatever the express terms of the agreement’.[53] Applying this proposition to the facts of this case, Fortis submits that the transfer of securities, although disguised in the form of a securities lending transaction, was in truth a security transaction.[54] In substance, the borrowed securities were a security for the moneys that Primebroker had borrowed from Fortis under the Dealing Facility Loan. But ‘for whatever reason’, the parties did not ‘intend to fully record [that] substance’ in the written contract.[55] (Fortis does not, however, rely on rectification.)
[53]Appeal Transcript 60; see also Appeal Transcript 14.
[54]Appeal Transcript 14.
[55]Appeal Transcript 65.

I accept this submission up to a point. First, I accept that the express contractual provisions dealing with title to the securities are not necessarily determinative of the true position. I also accept that the borrowed securities were, in a commercial sense, an effective security for Fortis’ loans to Primebroker. Primebroker itself appears to accept this proposition.[56] But it does not follow that Fortis acquired a mere security interest in the borrowed securities. As Finkelstein J observed in Beconwood, ‘the character of a transaction is to be determined by reference to its legal nature, not to its economic effect’.[57] The effect of the transfer must, in my view, be determined by reference to what the parties intended its legal effect to be, not by reference to what commercial effect they sought to achieve. There are many mechanisms that parties can use to achieve the commercial object of obtaining a ‘security’ for a loan. A security interest is just one such mechanism. The law of equity does not preclude the parties from using other mechanisms.
[56]Appeal Transcript 126.
[57]Beconwood 246 ALR 361 [49].

This view is consistent with the three authorities on which Fortis relies. The first of these is The Law of Securities by Professor Sykes. Fortis relies on the following passage:

The right to redeem after default is so fundamental that when equity is once of the opinion that the transaction is in substance a loan upon security, it will imply a right to redeem always. It follows that the parties will not effectively exclude this right merely by disguising the transaction, by ‘dressing it up’ to look like something else. The operative maxim, for equity is annoying fond of maxims that rarely express the full truth, is ‘once a mortgage, always a mortgage’. [58]

[58]Edward I Sykes, The Law of Securities (4^th ed, 1986) 58.

However, immediately after this passage Professor Sykes writes:

The court will inquire into the real substance of the transaction to determine whether the agreement is bona fide and genuine or whether it is a mere cloak or screen for a mortgage transaction. To this it will be behind the document but such an extension should be so pursued as to ignore the legal effect of the documents. … [A] genuine transaction which is not a mortgage will not be regarded as such.[59]

[59]Emphasis added.

Next, Fortis relies on a decision of the House of Lords in Salt v Marquess of Northampton.[60] Lord Compton, the son of the Marquess of Northampton, was the heir of entail, next entitled after the death of his father to certain land in Scotland. To fund himself until his father’s death, when he would get possession of the land, Lord Compton borrowed £10,000. Of course, Lord Compton could only obtain his interest in the land if he was still alive at the time of his father’s death. To protect the lenders against the risk that Lord Compton might predecease his father, in which case his estate may not be able to repay the loan, the loan contracts required Lord Compton to take out a £34,500 life insurance policy and to pay the insurance premiums. The insurance was payable only if Lord Compton died during his father’s lifetime. The contract dealing with the initial advance on the loan provided that if Lord Compton predeceased his father, the lender could use the insurance payout to discharge Lord Compton’s liabilities to the lender and must then pay any excess to Lord Compton’s estate. But the parties executed a further contract which purported to alter the position with respect to the benefits of the insurance policy. The new contract recited that the original provision with respect to the policy ‘does not accurately state’ the terms on which the loan advance was made. Instead, the new contract provided that if Lord Compton predeceased his father while the loan remained outstanding, the insurance policy ‘should belong absolutely’ to the lenders. As it happened, Lord Compton predeceased his father, having made no repayments. The Marquess, as administrator of his son’s estate, brought proceedings against the lenders. The Marquess claimed that the lenders were entitled to the policy only as security for the loan and sought the payment of the balance of the policy payout (after subtracting the amount due to the lenders under the loan contracts). The House of Lords, by majority, upheld the claim.
[60][1892] AC 1 (‘Marquess of Northampton’).

Earl Selbourne, with whom Lord Morris agreed, noted in his speech that ‘the policy … was certainly effected for the purpose of being made (in some sense) a security’.[61] But his Lordship did not consider this fact, which was not disputed, to be determinative of the issue before the House. Rather, the issue was whether the parties intended that ‘the policy should be effected for the creditor’s protection only, and for his sole benefit, subject to an option for the debtor to make it his own’ by paying off the debt or whether they intended that the policy ‘should belong to the debtor, subject to the security for the purpose which it was effected’.[62] The question, in other words, was about the intended legal effect of the transaction, not its commercial effect.
[61]Marquess of Northampton [1892] AC 1, 15. (Emphasis added)
[62]Ibid 14.

Finally, Fortis relies on the decision of the High Court in Gurfinkel v Bentley Pty Ltd.[63] Gurfinkel owned land which was mortgaged. He had defaulted under the mortgages and the mortgagees were proceeding to sell the land by public auction. Shortly before the auction, Gurfinkel sold the land to Bentley. The sale price was approximately equal to the amount required to discharge Gurfinkel’s mortgages. The contract provided that, in return for a modest fee, Gurfinkel had the option of re-purchasing the land for a price that was significantly higher than the sale price. The option was exercisable within 12 months. The contract also required Bentley to carry on with the construction of a partially completed building on the land. Gurfinkel did not exercise the option within 12 months but later brought a proceeding against Bentley claiming that the sale transaction was in truth a loan and a mortgage. He alleged that the re-purchase price was made up of the purchase price, the cost of the building works and interest. The High Court held, by majority, that the arrangement was not a mortgage but a sale with an option to repurchase.
[63](1966) 116 CLR 98 (‘Gurfinkel’).

Fortis relies[64] on the following passages from the dissenting judgment of Barwick CJ:

The lands having been found to have been conveyed so as to form a security for money lent, the transfers, though absolute in form and though expressed to be executed for a price paid as distinct from money lent, will be regarded in equity as but mortgages of the land. Thus, though there be no contractual right to redeem at all, the borrower will have in equity a right of redemption. If in such a case there be a contractual right of repurchase, equity will none the less decree redemption, though the borrower has not met the contractual terms for repurchase.[65]
…
The critical question in the case [is] ‘with what mutual intention did the parties execute the transfer’ bearing in mind in deciding that question that the transferee will not be allowed to hold the transfer as absolute, if at the time of taking it he knows that the transferor intends it to be by way of security only and he allows him to execute with that understanding on his part ...[66]

[64]Appeal Transcript 61.

[65]Gurfinkel (1966) 116 CLR 98, 107.

[66]Ibid 110.

Fortis submits that while Barwick CJ was in dissent, his Honour’s statements of principle represent good law. Fortis submits that the difference between the majority and the minority was on the issue of whether the transaction was, in substance, a loan. It submits that in this case there is an undisputed loan so the difference of views between and the majority and the minority is not presently relevant.[67]
[67]Appeal Transcript 62.

In my view Gurfinkel, including the extracted passages from the dissenting judgment of Barwick CJ, supports the proposition that the effect of the transaction is to be determined by reference to the parties’ intentions as to its legal rather than commercial effect. In my view, when Barwick CJ referred to the transferor intending the transfer ‘to be by way of security only’ (emphasis added), he was not referring to security in a commercial sense. Rather, the Chief Justice meant that the transferor did not intend the transferee to obtain beneficial title. Consistently with this view, Windeyer J, who was in the majority, held:

Of course if it can be shewn by parol evidence that both parties to a document adopted the form they did as a disguise, then their true intent and not the form will prevail. Thus agreements that were in form sales have sometimes been held to be mortgages when the form of a sale had been adopted as a disguise …[68]
Parties intended Fortis to acquire beneficial title

[68]Gurfinkel (1966) 116 CLR 98, 114. See also Radio Frequency Systems Pty Ltd v Noel Guthrie as the Liquidator of Ult Ltd (Receiver Appointed) (In Liq) [2001] WASCA 195 [13] (Steytler J, Miller J and Pidgeon AUJ agreeing).

What then was the intended legal effect of the transfer of securities under the AMSLA and the SCA? Did the parties intend the AMSLA to operate according to its terms and give Fortis beneficial ownership of the securities? Or were the contracts adopted by the parties as a ‘disguise’ to hide the true intent of effecting a security transaction?

In my view, for the following five reasons, the parties intended the provisions governing title to securities to operate according to their terms.

First, as the starting position, parties to a commercial contract can ordinarily be taken to intend the contract to operate according to its terms rather than contrary to them.[69] If a party asserts that the contract is a disguise for the parties’ true intentions, the onus is on that party to establish that this is so. Discharging this onus will be more difficult when, as in this case, the contract contains an entire agreement clause,[70] was drafted by lawyers and when both parties to the contract are large commercial entities that have access to quality legal advice.
[69]Cf Gurfinkel (1966) 116 CLR 98 where Windeyer held, 114, that ‘[a] court will now ordinarily take at their word persons who execute agreements for sale at a price with an option of repurchase within a stipulated time’.
[70]SCA cl 27.3; AMSLA cl 25.

Secondly, the distinctions which Fortis sought to draw between the transaction in this case and ordinary securities lending transactions are misconceived. Fortis submits that in an ordinary securities lending transaction, the lender provides collateral for the borrowed securities and one side has to pay the other a fee. Here, Fortis provided no collateral and there was no fee. Instead, Primebroker lent the securities in consideration for Fortis continuing to provide Primebroker with a line of credit. These differences show, Fortis submits, that the borrowed securities were, in truth, security for the money that Fortis had lent to Primebroker.[71]
[71]Appeal Transcript 43–46.

I reject that submission. Even in an ordinary securities lending transaction, the lent securities effectively act as ‘security’, in a commercial sense, for the exchanged collateral and vice versa. As Finkelstein J explained in Beconwood, ‘[i]n the cash-driven market, securities lending is a means of obtaining finance and for that reason has features similar to a mortgage’.[72] Hence, in the cash-driven securities lending market, where the cash collateral is effectively a low interest loan,[73] ‘commentators and securities lending participants colloquially refer to the securities rather than the cash as the collateral’.[74] Yet his Honour held that a securities lending transaction under the standard AMSLA gives the borrower absolute title to the borrowed securities.
[72]Beconwood 246 ALR 361 [53].
[73]Ibid [5].
[74]Ibid [6].

So the fact that the purpose of borrowing the securities in this case was to provide a ‘security’ for Fortis’ loan to Primebroker, far from bring a matter that distinguishes this transaction from the ordinary securities lending transaction, is in fact entirely consistent with a securities lending transaction in the cash-driven market. Once that is appreciated, the fact that in this case there was no collateral and no fee becomes a distinction of no significance. Ordinarily, the borrowed securities secure the exchanged cash collateral, which is effectively a loan, and the lender pays a fee, which is effectively interest on the loan. Here, there was no collateral or fee because the parties already had an actual loan on foot under the Credit Loan Facility. This deviation from the ordinary securities lending transaction does not in any way suggest that the parties intended the transfer of the securities to have a different effect.

Thirdly, contrary to Fortis’ submission, the daily reports that Fortis provided for Primebroker under the SCA do not assist Fortis’ case. The SCA required Primebroker to maintain a minimum ‘Net Liquidation Value’. The Net Liquidation Value is defined as ‘the difference between the total assets of the Client and the total liabilities of the Client to Fortis, held in any account or otherwise under this Agreement’. The definition further provides that this value includes, inter alia, ‘the balance of the Client’s rights and obligations with respect to Securities lent under [the AMSLA]’. Fortis sent Primebroker daily reports stating the Net Liquidation Value for that day and explaining a breakdown of how that amount was calculated. Both before and after the amendment deed, these reports counted the current value of securities borrowed from Primebroker as a credit to Primebroker for the purposes of calculating the Net Liquidation Value.

Fortis submits that Primebroker accepted these reports without objection and acted on them. This shows, Fortis submits, that both parties conducted their relationship on the basis that the securities remained assets of Primebroker.[75] It appears that Fortis puts its submission in two ways. First, that the parties’ conduct shows that Primebroker had retained beneficial interest in the securities. Secondly and alternatively, that the conduct shows that the securities, even if beneficially owned by Fortis, were ‘assets of the Client’ within the meaning of the SCA.
[75]Appeal transcript 73-75.

The submission is not persuasive. The reports produced before the amendment do not shed light on the effect sought to be achieved by the amendment. Thus, the relevant reports are really the reports produced after the amendment. These reports represent post-contractual conduct vis-à-vis the amended contract. At trial, Fortis claimed an estoppel by convention but it was unsuccessful and it did not revive the issue on appeal. There being no estoppel claim on foot, to use the reports to construe the contract ‘would be at odds with the general principle that “it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made”’.[76]
[76]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 [35] (Gummow, Hayne and Kiefel JJ).

In any event, the reports are perfectly consistent with the parties treating the securities as assets of Fortis rather than Primebroker. Supposing that, contrary to Fortis’ submission, the parties regarded Fortis as the beneficial owner of the securities and did not regard the securities as an asset of Primebroker for the purposes of the Net Liquidation Value. Even so, Fortis still owed Primebroker an obligation to redeliver equivalent securities. As a matter of logic, one would expect the value of that obligation to be accounted for when calculating the Net Liquidation Value. Indeed the redelivery obligation appears to fall squarely within the expression ‘balance of the Client’s rights and obligations with respect to Securities lent under [the AMSLA]’, which is expressly defined to be part of the Net Liquidation Value. The current market value of the securities is a reasonable way of calculating the value of the obligation to redeliver equivalent securities. That is so even if the redelivery obligation does not arise until some point in the future because it is not possible to predict the future value of the securities on the day of redelivery, which is itself uncertain. It follows that, irrespective of whether the parties treated the borrowed securities as an asset of Primebroker or Fortis, the daily report could be expected to put the market value of the market value of the securities as a credit to Primebroker.[77] The fact that they do so is completely ambivalent as between the competing positions of the parties.
[77]Had Fortis sold some of the securities before default, the daily reports would have been able to shed light on whether the parties treated the securities as an asset of Primebroker. If they did, one would expect the reports to credit Primebroker with the amount for which the securities were actually sold rather than the market value of the securities for that day. But Fortis submits that there was no evidence that it had sold any of the borrowed securities: Appeal Transcript 64.

This raises the issue of whether the right to redelivery of equivalent securities (as distinct from the borrowed securities themselves) should be regarded an asset of Primebroker capable of being liquidated by Fortis. I will return to that issue later.[78]
[78]See [110] of these reasons.

Fourthly, the whole scheme of the AMSLA excludes any intention to create a security transaction.

The AMSLA sets up a scheme whereby the borrower of securities has the right to sell, lend or otherwise dispose of securities at any time. The existence of this right was a common ground at trial.[79] In any event, the right is essential to the operation of the AMSLA. The AMSLA requires the lender to redeliver to the borrower ‘equivalent securities’ — securities equivalent in number and type to the borrowed securities. The notion of equivalent securities is central to AMSLA and the expression is referred to scores of times. The fact that the borrower is obliged to redeliver ‘equivalent securities’ demonstrates that the borrower is not required to deliver back the exact same securities that were borrowed.
[79]See excerpts extracted, [40].

Of course, securities are fungibles. If a borrower borrows securities of the same kind from multiple lenders and ‘mixes’ them by holding them under the same HIH, it may be impossible to identify which securities where borrowed from which client. However, cl 4 of the AMSLA shows that the proposition that the borrower is required to redeliver equivalent securities, rather than the securities actually borrowed, is not merely a device designed to permit the borrower to ‘mix’ securities. Clause 4 sets up a contractual mechanism whereby ‘the economic benefits of ownership are “manufactured” back to the lender’.[80] Clause 4.2 requires the borrower to pay the lender any dividends or distributions paid by the issuer of securities. The borrower is required to do so ‘irrespective of whether the Borrower receive the same’. This clearly contemplates the possibility that the borrower may not actually receive the dividends or distributions on the borrowed securities because it has disposed of and is no longer holding the borrowed securities at the time the dividend or distribution is paid. Similarly, cl 4.3[81] requires the borrower to arrange for any voting rights attached to borrowed securities to be exercised according to the lender’s instructions if ‘it holds Securities of the same description as [the borrowed securities] at a time when [sic] right to vote arises’.[82]
[80]Beconwood 246 ALR 361 [14].
[81]Clause 4.3 provides that it may be excluded by paragraph 4 of sch 1 to the AMSLA, which states ‘Clause 4.3 does/does not* apply’. A note at the bottom of the page reads ‘* DELETE ONE ALTERNATIVE’. But no alternative is actually crossed out. This apparent error in filling out sch 1 is not presently significant. What matters is that, whether or not this provision is excluded by sch 1, it contemplates that the borrower may dispose of the borrowed securities.
[82]Emphasis added.

These provisions reveal that not only is the borrower entitled to dispose of the borrowed securities at any time, but it is not even required to hold equivalent securities. The borrower is perfectly entitled to, for example, immediately dispose of all borrowed securities and later meet its redelivery obligations by buying equivalent securities on the market on the day of redelivery. The fact that the borrower has this right is, in my view, inconsistent with the proposition that the lender retains a beneficial interest in (or even a fixed charge over) the borrowed securities or that the borrower has a mere security interest in the securities.

One provision that may, at first blush, suggest an intention that the lender retain beneficial title is cl 7B inserted by the amendment deed. Clause 7B provides that ‘an obligation on the Borrower to redeliver Equivalent Securities or to make a payment does not arise if, at the relevant time … an Act of Insolvency has occurred or is continuing with respect to the Lender’. On a literal reading, this clause appears to provide that if the lender becomes insolvent, the borrower is not obligated to either redeliver equivalent securities or to account for the borrowed securities by making a payment. This would, of course, result in a very anomalous windfall to the borrower. Both parties agreed that this could not be the correct result and that there must be some mechanism to account for the borrowed securities.[83] Yet if the obligation to account when the lender is insolvent does not arise from the contract, the only way to explain that obligation is to find that the borrower retains equitable proprietary rights to the securities. Whilst Fortis’ counsel hinted at this argument a number of times during the hearing of the appeal,[84] he did not make it in express terms.
[83]Appeal Transcript 8, 47, 69, 106.
[84]Appeal Transcript 63, 151.

In my view, this ‘cl 7B argument’ is only superficially attractive. While I accept that there must be some way to account for the borrowed securities even where the lender is insolvent, the most obvious way to do so would to read down cl 7B itself. It is unnecessary to consider precisely how cl 7B should be read down. It is sufficient to observe, that reading down cl 7B, even by doing violence to its words, would involve a lesser departure from the words of the AMSLA than reading down scores of other provisions to accommodate the lender retaining a beneficial interest in the securities.

Further, to accept the cl 7B argument would be to give the amendment deed a very unnatural construction. The amendment deed not only inserted cl 7B but also dealt expressly with the issue of title to the borrowed securities. It did so my removing cl 8(e) of the SCA, that provided that the borrower has no beneficial interest in the borrowed securities. Given that AMSLA has always provided to the contrary, the amendment deed on its face appears to reverse the position that previously existed under the SCA in favour of the position stated in the AMSLA. Clause 7B, on the other hand, does not expressly deal with the question of title. If the cl 7B argument was accepted, cl 7B would be impliedly undoing, through a complex and unobvious means, what would otherwise appear on the face of the amendment deed to be the obvious effect of removing cl 8(e) of the SCA. Further, it would mean that cl 7B which on its face appears to be restricting the borrower’s rights would have the opposite effect of enlarging them. This would be a highly counter-intuitive, and therefore unlikely, construction of the amending deed. It is made even more unlikely by the fact that cl 7B is clearly a scrappily drafted provision and it seems implausible that the parties intended it to operate in a deep and complicated way.[85]
[85]See [89]–[91] of these reasons.

Finally, I reject Fortis’ submission that if the AMSLA gives the borrower beneficial title to the securities this would lead to potential anomalies if the lender defaults. Fortis posits the following hypothetical. Suppose that, contrary to its submissions, the borrower is the beneficial owner of securities. Suppose also that, again contrary to Fortis’ submissions, in the event of default cl 8 operates to convert the borrower’s obligation to redeliver the securities into a money sum equal to the market value of the securities on the first business day after default. Suppose further that, as in this case, the value of the securities on that day exceeds the value of the lender’s liabilities to the borrower. If the lender defaults, the parties’ liabilities are offset against one another under cl 8 and the borrower has to pay the difference to the lender. The borrower’s obligations to the lender are now fully discharged but the borrower still has the securities. If the securities subsequently go up in price, the borrower can sell the securities at the higher price and keep the profit. Fortis submits this result is anomalous: ‘the notion that someone who has taken the securities to secure a pecuniary obligation can get paid more on realisation upon default than the obligation that is secured, more than the amount of the loans, is repugnant’.[86]
[86]Appeal Transcript 49. See also Appeal Transcript 145.

I reject this submission. The fact that the borrower can make and keep this profit only seems anomalous if one assumes that the borrower has a mere security interest in the securities. But if the borrower has beneficial title, there is nothing anomalous about the borrower being able to make a profit in this way. Fortis’ submission pre-supposes that the borrower had some rights to the borrowed securities before default. But, ex hypothesi, it did not. All that the borrower had was a conditional right to get back equivalent securities on a particular day. These equivalent securities can come from any source, they need not be the borrowed securities. The borrowed securities simply become part of the borrower’s portfolio upon receipt. They are no different from any other securities of the same kind that the borrower may happen to hold. The borrower can do whatever it likes with its own securities. It can trade them for profit at any time, even if there is no default. If the lender defaults at a time when the borrower still happens to hold some of the borrowed securities, the default has no effect on the borrower’s rights to the securities. They belonged to the borrower all along, from the time of transfer. In Fortis’ scenario, the borrower is simply making a profit by holding on to its own securities that it could have sold at any time, both before and after default. There is nothing surprising or anomalous about a person being able to make a profit by trading their own securities. [87]
[87]See also [99]–[100].

For these reasons, I consider that the parties intended the provisions of the AMSLA dealing with title to operate according to their terms and that they did so operate. Fortis was the beneficial owner of the borrowed securities.

The netting clause was applicable

As I have explained, cl 8.2 of the AMSLA sets up a mechanism whereby in the event of default the parties’ obligations to each other are reduced to a single dollar amount due from one party to the other:

8.2 [Netting following occurrence of Event of Default]
If an Event of Default occurs in relation to either Party, the Parties’ delivery and payment obligations (and any other obligations they have under this Agreement) shall be accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the ‘Performance Date’ for the purposes of this clause), and in such event:
(a)the Relevant Value of the Securities to be delivered (or payment to be made, as the case may be) by each Party shall be established in accordance with clause 8.3; and
(b)on the basis of the Relevant Values so established, an account shall be taken (as at the Performance Date) of what is due from each Party to the other and (on the basis that each Party’s claim against the other in respect of delivery of Equivalent Securities or Equivalent Collateral or any cash payment equals the Relevant Value thereof) the sums due from one Party shall be set-off against the sums due from the other and only the balance of the account shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be payable on the Performance Date.

Clauses 8.3 and 8.3 set up a mechanism for calculating the ‘Relevant Value’ of the securities by reference to trading activity on the first business day after the ‘Performance Date’.

Fortis submits that cl 8.2 did not operate in this case because of cl 7B inserted by the amendment deed:

7B. Redelivery and Payment Obligations are Conditional
The Borrower’s obligation to redeliver Equivalent Securities in accordance with clause 7 and to make any other payment required under this Agreement is conditional. Notwithstanding clause 7 or any other provision of this Agreement an obligation on the Borrower to redeliver Equivalent Securities or to make a payment does not arise if, at the relevant time, any of the following exist:
(a)an Act of Insolvency has occurred or is continuing with respect to the Lender;
(b)where the Lender is Primebroker Securities Limited, any Client Liabilities under the [SCA] are outstanding and have not been paid to the borrower and satisfied in full;
(c)where the Lender is Primebroker Securities Limited, less than 7 months has elapsed since the final payment made by the Lender to the borrower in satisfaction of all Client Liabilities;
(d)where the Lender is Primebroker Securities Limited, any Event of Default in relation to the Lender has occurred or is continuing under the [SCA]; and
(e)where the Lender is Primebroker Securities Limited, any breach by the Lender of the terms set out in paragraphs 2 and 3 of Annexure ‘A’ of this Deed, and this breach is not remedied within a period of 3 Business Days from the date on which the breach occurred.

There is no dispute that paragraphs (a) and (d) of cl 7B were satisfied on the 4 July 2012, the day of the default.

Fortis submits that cl 7B extinguished the payment and redelivery obligations, at least in the event of insolvency. There being no redelivery obligations, cl 8.2 had nothing to work on. It simply did not apply.[88]
[88]Appellant’s Outline of Submissions (24 February 2012) [8], [19], [20]; Appeal Transcript 30–31.

I reject this submission. Clause 7B does not extinguish redelivery obligations but prevents them from arising if ‘at the relevant time’ certain conditions exist. The language of the chapeau of the clause suggests that that the clause is intended to suspend obligations while the specified conditions exist rather than to extinguish the obligations altogether. The language seems to contemplate that the obligations will revive once the conditions cease to exist.

True it is that many of the listed conditions are expressed in terms that, if read literally, would mean that once the condition is triggered it will remain triggered forever. Paragraph (a) is an example. If the words ‘an Act of Insolvency has occurred’ are read literally, the condition in paragraph (a) will remain triggered forever once an act of insolvency has occurred. Clearly, this cannot be the correct construction of paragraph (a), if only because it renders the words ‘or is continuing’ superfluous. To give the words ‘or is continuing’ work to do, the expression ‘has occurred’ probably has to be read as meaning occurred on the relevant date. But this does not solve all of the problems with paragraph (a). If paragraph (a) remains triggered as long as an act of insolvency is continuing on the part of the lender, the borrower would receive a windfall if a lender becomes (and remains) insolvent. The borrower would be relieved of the obligation to redeliver equivalent securities or make any cash payments. The lender would not be required to account for the borrowed securities in any way. This result is clearly absurd. It could not have been the intended effect of cl 7B. If it was, there would be a serious question as to whether cl 7B is unenforceable as a penalty. Clearly, cl 7B must be read down to require the borrower to account for the borrowed securities at some point even if the lender is insolvent.

But it is not necessary to consider how cl 7B should be read down. It is sufficient to observe that, on any view, cl 7B does not fully extinguish the lender’s obligations. Even if the obligations do not arise at a particular date, they remain extant and therefore available to be operated on by cl 8.2.

Fortis also makes an alternative submission. It submits that even if cl 7B did not extinguish the redelivery obligations, no securities actually fell to be valued under cl 8.2(a). The chapeau of cl 8.2 accelerates the redelivery obligations so to be due on the date of the default. Clause 8.2(a) then provides that the ‘Securities to be delivered’ are valued. Fortis submits that, in this case, after the chapeau of cl 8.2 accelerated the redelivery obligations to the day of the default, cl 7B intervened to prevent the obligations from arising. There were therefore no ‘Securities to be delivered’ within the meaning of cl 8.2(a).[89]
[89]Appeal Transcript 34, 148–149.

I reject this submission. In my view, it seeks to give cll 8 and 7B an unrealistically technical construction. Plainly, the purpose of cl 8.2 is to reduce the parties’ obligations to each other to a single dollar amount due from one party to the other. The acceleration of the obligations under cl 8.2 is entirely notional. There is no intention that the accelerated obligations be actually carried out on the day of default. Rather, the acceleration is merely a drafting device, a piece of machinery designed to convert the obligations into a dollar figure calculated as if the obligations were due on the day of default. To read cl 7B is interleaving itself in the middle of the operation of cl 8.2 and effectively wrecking the internal machinery of the clause would be to give the provisions a very formalistic, technical and unbusinesslike construction.

Such a complicated effect is particularly unlikely to have been intended given that the amendment deed is clearly a very sloppy piece of drafting. I have already referred to the fact that cl 7B needs to be read down because if read literally it would lead to an absurd windfall for Fortis. Another example of the sloppy drafting the amendment deed is the clear error in cl 3(c)(ii) of the deed. Clause 3(c) provides that cl 26 of the AMSLA — the clause defining the various defined terms used in the AMLSA — is to be amended. Sub-paragraph (ii) then provides:

the definition of Event of Default is amended by inserting the following words at the end of paragraph (i):
(j)For the purposes of clause 7B, Event of Default shall have the same meaning as in the [SCA].

Yet the existing definition of ‘Event of Default’ in cl 26 has no paragraph (i) or indeed any paragraphs at all. It simply says that ‘Event of Default has the meaning given in clause 12’. Clause 12 does have paragraphs that go up to paragraph (i). Thus, cl 3(c)(ii) must have been intended to amend cl 12, not cl 26. But this is not the end of the matter because paragraph (j) does not fit in cl 12 either. The chapeau of cl 12 provides that each of the paragraphs that follow ‘shall be an Event of Default for the purposes of clause 18’. The new paragraph (j) does not fit into that list because it defines what constitutes an Event of Default ‘[f]or the purposes of clause 7B’.

In the end, it is clear enough that what cl 3(c)(ii) of the amendment deed was trying to do was to amend the definition of Event of Default to provide that for the purposes of cl 7B an Event of Default has the same meaning as in the SCA rather than the meaning given by cl 12. Yet the error is significant because it illustrates the fact that the amendment deed is not a careful piece of craftsmanship. Rather, it is a very loosely drafted document that bears the hallmarks of being hastily put together and not properly thought through or proof-read. This character of the amendment deed makes it particularly unlikely that is was intended to have the kind of sophisticated, technical effect on cl 8.2 that Fortis’ alternative submission seeks to ascribe to it.

In my view, cl 8.2 should be given a commercial construction. The effect of that clause is simply to value all extant obligations under the AMSLA as if they were on the day of the default and then offset the values against each other to produce a single amount due from one party to the other. Clause 7B, does not, in my view, interfere with this operation. It follows that cl 8.2 was applicable in this case.

Importantly, my construction does not render cl 7B(d) otiose. Where the lender is Primebroker, cl 7B(d) is triggered if ‘any Event of Default in relation to the Lender has occurred or is continuing under the [SCA]’. In contrast, cl 8.2 is triggered by an event of default under the AMSLA. Most circumstances constituting an Event of Default under the SCA would also constitute an Event of Default under the AMSLA but only after Fortis gives a written notice under cl 12 of the AMSLA. Therefore, where there is an Event of Default under the SCA, cl 7B(d) would be immediately triggered to prevent Fortis from being required to redeliver equivalent securities. But in most cases, cl 8.2 would only be triggered later, if and when Fortis gives written notice under cl 12 of the AMSLA. Clause 7B(d) provides protection to Fortis in the intervening period.

On a literal reading, cl 7B provides that Fortis has no obligation to make any payments under the AMSLA if ‘at the relevant time’ ‘an Act of Insolvency has occurred or is continuing with respect to the Lender’. This may suggest that even though cl 8.2 applied, the obligation to make a payment of the net amount produced by cl 8.2 ‘does not arise’ because of cl 7B. I have already explained that cl 7B needs to be read down to avoid absurd results. However, I do not need consider how it should be read down because Fortis does not submit that cl 7B operates in the way I have just described to prevent Fortis from being required to pay Primebroker the amount produced by cl 8.2. Fortis accepts that that any amount produced by cl 8.2 is payable.

Fortis could not choose to deal with securities under other default provisions

Fortis submits that the suite of agreements between the parties contains multiple provisions for set-off and adjustment. The agreements give Fortis a variety of remedies on default. Clause 8.2 of the AMLSA is just one such remedy. Fortis was not required to use that clause. It could choose to use the default provisions of the SCA and Dealing Loan Facility instead.[90]
[90]Appeal Transcript 20, 56, 147; Appellant’s Outline of Submissions (24 February 2012) [2]-[3], [20]–[21], [23].

I reject this submission. Once cl 8.2 is triggered, it operates to convert the parties’ respective obligations to a single dollar amount. There is no room for any choice. The clause operates automatically.

Clause 8.2 is triggered by an event of default under cl 12 of the AMSLA. All but one of the circumstances capable of constituting an event of default under cl 12 require Fortis to give written notice before they amount to a default. Therefore, in most circumstances Fortis seems to have a choice whether to give the notice and trigger the default. It is unnecessary to consider to consider whether that choice is subject to some implied limitations or obligations. What is clear is that once a default is triggered, there is no more choice left. Clause 8.2 operates and that is the end of the matter.

In this case, Fortis concedes that 4 July 2008 there was an event of default under cl 12.[91] It follows that cl 8.2 operated on that day. I accept that once cl 8.2 had operated, the net amount due under that clause became available to be set off under the default provisions of the SCA.[92] However, the amount was already fixed by cl 8.2 on 7 July 2008, the first business day after default. Fortis could not change that amount by subsequently selling the borrowed securities that it still happened to hold on 7 July 2008.
[91]See [23]–[25] of these reasons.
[92]I note that the parties proceeded on the basis that if cl 8.2 had operated, the net amount produced by that clause was the difference between the value of the securities the amounts Primebroker owed to Fortis: Primebroker Securities Ltd (recs & mgrs apptd) (in liq) v Fortis Clearing Sydney Pty Ltd (No 2) [2010] VSC 358 (a decision not appealed by Fortis). This does not seem to me to be the correct construction of cl 8.2. On its terms, the operation of cl 8.2 is confined to obligations arising under the AMSLA. Primebroker’s debt to Fortis arises under the Dealing Loan Facility, not the AMSLA. The better view therefore seems to be that the amount due from Fortis to Primebroker under cl 8.2 is simply the value of the securities, Primebroker seemingly having no outstanding obligations to Fortis under the AMSLA. That amount then stands to be set-off against Primebroker’s debt to Fortis under the default provisions of the SCA. But in any event, this does not seem to make a difference to the final figure.

Fortis submits that if the borrower is the beneficial owner of securities and can sell the securities at any time, then it could have sold them before default. It would then have to account to Primebroker for the proceeds. Fortis submits that it was therefore entitled to do what it did even without having to rely on any default provisions. If it could sell the securities before default and account to Primebroker for the proceeds, it would be anomalous if it could not do so in the event default.[93]
[93]Appeal Transcript 6, 8, 46, 48–49, 51.

Upon PSL accepting the borrowing requests, Fortis transferred the relevant shares out of the Settlement HIN to an account called the ‘Fortis HIN’, used only to hold those shares. The evidence was that Fortis, from that time, regarded itself as the holder of both the legal and beneficial interest in the securities transferred to it by PSL under the AMSLA and that the transfer was necessary because Australian Stock Exchange Rules did not permit Fortis to hold its own securities in the Settlement HIN.

Receivers were appointed to PSL’s property on 4 July 2008. The appointment of the receivers was an Event of Default by PSL under both the SCA and the AMSLA and Fortis gave PSL notice in writing of the default and terminated the SCA. Fortis then proceeded to realise the securities that it held in the Fortis HIN until it had sold sufficient shares to set-off the proceeds against an amount of $20,811,364.62 that PSL had drawn down under the facility. Fortis relied on its rights of set-off under cl 17 of the SCA and cl 7 of the facility to apply those proceeds in discharge of PSL’s liability to it and claimed that it was only required to account to PSL for the surplus proceeds of approximately $100,000 and the remaining unsold securities in discharge of its obligations to PSL under the SCA.

PSL disputed that Fortis had the right to apply the proceeds from the sale of the securities in discharge of PSL’s indebtedness. PSL claimed that the event of default triggered cl 8.2 of the AMSLA and that cl 8.2 automatically operated to require Fortis to bring to account, against PSL’s debt, the monetary value of Fortis’ conditional obligation to redeliver equivalent securities to PSL. On PSL’s calculations, the value of Fortis’ conditional obligation to redeliver equivalent securities to PSL exceeded PSL’s debt to Fortis under the facility so that Fortis was required to account to PSL for approximately $4 million more than the value that Fortis had realised for the securities sold down. Fortis’ position was that cl 8.2 of the AMSLA had no operation because of cl 7B and, in any event, that it was entitled to exercise its rights under cl 17 of the SCA and cl 7 of the facility independently of cl 8.2 of the AMSLA.

PSL applied to the Court under s 424 of the Corporations Act 2001 (Cth) for directions on the proper construction of the agreements. The application was heard by Judd J who found in PSL’s favour. Fortis has appealed that decision (‘the primary appeal’) and has also appealed a related decision of Judd J (‘the related appeal’) on the value to be attributed under cl 8.2 to securities in Octaviar Ltd (‘Octaviar’) that Fortis ‘borrowed’ from PSL but which were suspended from quotation by the Australian Stock Exchange at the time that PSL went into receivership.[128]
[128]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (No 3) [2011] VSC 182.

The primary appeal

Issue

This appeal does not turn on the correctness of the decision in Beconwood Securities Pty Ltd & Anor v Australia and New Zealand Banking Group Ltd & Ors[129] in which Finkelstein J analysed the contractual terms of the standard form AMSLA, as the parties were not in dispute about the legal nature of securities lending under the AMSLA as a stand alone agreement. This appeal turns on the legal nature of the securities loan transactions under the particular contractual arrangements entered into, about which the parties were in dispute.
[129](2008) 246 ALR 361.

It was uncontroversial both below and on appeal that on transfer of the securities, ownership in the securities passed from PSL to Fortis by and under the terms of cl 4 of the AMSLA. Clause 4 of the AMSLA contained the standard AMSLA contractual term that all right, title and interest in any securities ‘lent’ passed absolutely from one party to the other, free from all liens, charges, equities and encumbrances, on delivery.[130] The transfer of title is an ordinary feature of securities lending. In Beconwood Securities Pty Ltd & Anor v Australia and New Zealand Banking Group Ltd & Ors[131] Finkelstein J observed that the term ‘securities lending’ is factually incorrect as the ‘lending’ is an outright disposal of the securities.[132] His Honour explained:

The transaction that is referred to as ‘lending’ is in terms an outright disposal of the securities lent, linked to a subsequent acquisition of equivalent securities. In other words the agreements provide that title to the securities on loan, as well as to any collateral that is received by the lender, passes from one party to the other. On the other hand, the economic benefits of ownership are ‘manufactured’ back to the lender by the terms of the securities loan agreements.[133]

The securities loan transactions thus took the legal form of an absolute transfer of ownership.

[130]See also Australian Master Securities Lending Agreement, cl 1.4.

[131](2008) 246 ALR 361.

[132](2008) 246 ALR 361, [14].

[133](2008) 246 ALR 361, [14].

Fortis nonetheless argued that the securities loan transactions were effected by way of security for the discharge of PSL’s indebtedness to it and that Fortis only took a security interest in the securities that were transferred to it, not the interest of an outright owner free to deal with those securities as its own assets. PSL argued, on the other hand, that Fortis merely converted its own assets into money and that nothing in the terms of the SCA authorised Fortis to mitigate its risk on an event of default by PSL under the SCA by selling its own assets to eliminate PSL’s debt to it. PSL argued that the trial judge correctly held that the legal nature of the securities loan transactions was governed by the AMSLA[134] and that by and under the express terms of the AMSLA, there had been an outright transfer of the securities to Fortis for Fortis to deal with as its own.[135]
[134]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [59].
[135]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [60]-[62].

Approach to characterisation

It is settled law that the legal nature of the securities loans transactions must be determined by the legal rights and obligations of the parties governing the transactions.[136] It is also settled law that those legal rights and obligations must be ascertained from an analysis of the particular legal context in which the transactions occurred, requiring consideration of the complete and overall contractual relations between the parties.[137] In the present case, the contractual context includes the Amendment Deed executed by the parties on 16 April 2008, as that deed amended both the SCA and the AMSLA and so an understanding and analysis of the amendments effected by that deed is required.
[136]St George Bank Ltd v Commissioner of Taxation [2008] FCA 453; The Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645, 659-660 and 662; CityLink Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69, [40]-[45] and Australia & New Zealand Savings Bank v Commissioner of Taxation (1993) 42 FCR 535, 560.
[137]Beconwood Securities Pty Ltd & Anor v Australia and New Zealand Banking Group Ltd & Ors (2008) 246 ALR 361, 371; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350-352; Byrnes v Kendle [2011] 243 CLR 253; [2011] HCA 26, 34-35; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-462; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors [2004] 219 CLR 165; [2004] HCA 52, 179.

Amendment Deed

The reasons for amendments to the SCA and AMSLA can be discerned from

the Recitals to the Amendment Deed.[138] Recital C provided that the deed recorded the basis on which the parties had agreed ‘to co-operate for the mutual advantage of each other and to manage the[ir] exposure … to each other under the SCA and the AMSLA’. Recital D contained an acknowledgment that Fortis continued to provide financial accommodation to PSL under the SCA ‘on the basis of the terms set out in [the] Deed’ and Recital E provided that the parties had agreed to enter into the Deed in good faith ‘to amend the SCA and the AMSLA in the manner set out in [the] Deed’ ‘in consideration of Fortis continuing to provide financial accommodation and services to PSL under the SCA on the basis of the terms of the SCA’. Those Recitals can be taken as statements of fact and statements of the parties’ mutual intention in entering into the Deed.[139] As the evidence showed, these amendments were exclusive to PSL and a related company.

[138]Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407, [29], [379]–[390].

[139]Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407, [29], [379]– [390]; Inland Revenue Commissioners v Raphael [1935] AC 96, 143; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114, [77]-[78]; Greer v Kettle [1938] AC 156, 170-171; Ansett Transport Industries Pty Ltd v Commonwealth (1977) 139 CLR 54, 72.

The actual amendments were as earlier stated but should be set out in greater detail.

Clause 8 of the SCA

Clause 8 of the SCA was amended by deleting cl 8(c) to (f) which had contained ‘acknowledgments’ by PSL that:

· Fortis was its agent to procure arrangements for security lending on the terms of the AMSLA;

· in signing the AMSLA Fortis did so as agent for all its other clients that had entered into an AMSLA in the same or similar terms; and

· that ‘Fortis might be the legal owner and counterparty to the [securities lending] Transaction but has no beneficial interest in the Securities borrowed or lent under [clause 8] or Schedule 11 [of the AMSLA]’.

In the place of cll 8(c) to (f), a new cl 8(d) was inserted to provide that the parties confirmed that Fortis, either as borrower from, or lender to PSL under the AMSLA, did so in its capacity as principal to the securities loan and a new cl 8(c) declared that cl 14 of the AMSLA did not apply. Clause 14 had made provision for a lender to enter into loans of securities in its capacity as agent for a third party principal.

The trial judge held that the effect of the amendment was to eliminate ‘pre existing inconsistencies or irregularities in the documents in relation to the capacity in which Fortis held and might deal with the securities,’[140] on the basis that that the notion of Fortis acting as agent for PSL was inconsistent with its absolute title to the securities and that ‘very likely … one purpose of the Amendment Deed was to remedy that anomaly’.[141] The trial judge’s attention appears not to have been drawn to the Recitals, as no reference was made to them in the judgment. In my view, the Recitals evidence a very different complexion on the purpose of the amendment. The purpose appears and is reflected in the clear, unambiguous expression of the parties’ intention in entering into the deed, which was to give effect to the basis on which Fortis had agreed to continue to provide financial accommodation and services to PSL under the SCA. Relevantly, the change in status from agent to principal was made in the context of the parties’ mutual agreement to manage their exposure to each other. The parties, in that context, entered into the deed to amend the AMSLA and the SCA in the manner set out in the Amendment Deed. They entered into the deed in consideration of Fortis continuing to provide financial accommodation and services to PSL under the terms of the SCA. In that context of a creditor and debtor relationship, the change in the contractual relationship converted the legal rights of Fortis in respect of securities lending with PSL from that of agent for the beneficial owners of the securities lent to, or borrowed from, PSL (according to the terms of cl 8(e) of the SCA before amendment) to that of principal, holding both the legal and beneficial title to securities that it borrowed from PSL.
[140]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [60].
[141]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [61].

The materiality of the change in status to the present question of characterisation must be considered in conjunction with the insertion of cl 7B into the AMSLA.

Clause 7B of the AMSLA

Clause 7B was inserted into the AMSLA as a new provision modifying cl 7 of the AMSLA. Clause 7 of the AMSLA contained the standard counterparty undertaking on the part of the borrower in a securities lending transaction to redeliver equivalent securities to the lender. Clause 7B provided that the borrower’s obligation to redeliver equivalent securities to the lender was conditional and that:

[n]otwithstanding clause 7 or any other provision [in the AMSLA] an obligation on the Borrower to redeliver Equivalent Securities or to make a payment [did] not arise if, at the relevant time, any of the following exist …

The ‘following’ specified circumstances, apart from one, were all expressed as ‘where [PSL was] the lender’, namely:

·     if any ‘client liabilities’ (as defined) under the SCA were outstanding and not paid to Fortis and satisfied in full;
·     if less than 7 months had elapsed since the final payment made by PSL to Fortis in satisfaction of all client liabilities;[142]
·     if any Event of Default in relation to PSL had occurred or was continuing under the SCA; and
·     if (amongst other things) PSL breached a requirement to reduce its credit line utilisation in illiquid securities to a total value of $18 million by 31 July 2008 and the breach was not remedied within three business days.

The other specified circumstance was an ‘Act of Insolvency’ (as defined in the AMSLA) with respect to the Lender.

[142]It may be inferred that this was to do with the preference provisions under the Corporations Act 2001 (Cth).

The trial judge held that the purpose of cl 7B was to make the act of performance conditional should any of the relevant circumstances exist. His Honour reasoned:

64Clause 7B of the Amendment Deed was directed primarily to the obligation to deliver Equivalent Securities on request under cl 7 of the AMSLA. The conditional nature of the obligation extended to ‘any other provision of this Agreement’. Those extending words are capable of applying to the agreed outer limit delivery obligation found in each Borrowing Request. In my view, however, cl 7B was only intended to relieve Fortis from the obligation to actually deliver Equivalent Securities at the ‘relevant time’. The ‘relevant time’ is the time for performance of the act of delivery or payment. Upon a request under cl 7, the relevant time is the date for delivery specified in cl 7.2. Under the outer limit obligations in each of the Borrowing Requests, the relevant time is 11 months and 20 days after delivery under the requests.
65Clause 7B did not purport to limit the right to make a request under cl 7 of the AMSLA, nor did it entirely eliminate the delivery or payment obligation. It made the act of performance conditional. Thus, Fortis was not required to actually deliver securities or to actually make a payment should any of the circumstances described in paragraph (a) to (e) exist.

I disagree that cl 7B only made actual performance conditional as distinct from the existence of the obligation itself.

First, the obligation to redeliver equivalent securities provided for in cl 7 was not only an obligation to redeliver at call but also an obligation to redeliver equivalent securities ‘in accordance with … the terms of a borrowing request’. The distinction that the trial judge appears to have drawn between the obligation to deliver equivalent securities on request and the obligation to deliver equivalent securities provided for in a borrowing request is not warranted by the language of cl 7B. Secondly, cl 7B on its terms made the obligation to deliver equivalent securities conditional, not the act of performance. This appears from the express language of cl 7B, which provided that ‘the obligation’ did not arise ‘notwithstanding clause 7’ if the provision was triggered. There is no warrant for not giving cl 7B a construction that accords with the syntax and plain and ordinary meaning of the language used.

The standard legal requirement in any securities lending transaction is for the borrower to return equivalent securities to the lender either at call at the end of the loan (if a loan period is specified) and this standard legal requirement appeared in cl 7.1 of the AMSLA. It is therefore readily apparent that the insertion of cl 7B into the AMSLA was intended to alter the standard terms applicable to securities lending. It is also readily apparent that the alteration was not intended by the parties as a stand alone amendment to the AMSLA confined to the performance of PSL’s obligations under that agreement. Fortis had the legal right to borrow securities from PSL under the AMSLA against a conditional obligation to return equivalent securities to PSL. The parties’ intention, as a matter of construction of cl 7B, was that Fortis would not be subject to the obligation to redeliver equivalent securities, if PSL was then in default under the SCA or any amount was then owed by PSL to Fortis under the facility (being a ‘client liability’ as defined in the SCA).[143] The obligation to redeliver such securities would only arise absent those events. This was the ‘basis’ on which Fortis agreed to continue to provide financial accommodation to PSL and the basis on which Fortis made the borrowing request to PSL and PSL lent the securities in question.

SCA and AMSLA a ‘single integrated document’

[143]Definition of ‘Client Liabilities’ and ‘Principal Outstanding’ cl 2.2 Schedule 1 Standard Client Agreement; see also cl 3 of the Amendment Deed which amended cl 26 of the AMSLA to incorporate a definition of ‘client liabilities’ to have the same meaning as in the SCA ‘where the Client is [PSL]’: ie to include the advances outstanding under the facility.

The Amendment Deed also included a cl 7 which provided that:

Except as specifically amended by this Deed, all terms and conditions of the SCA and the [AMSLA] remain in full force and effect. With effect from the Effective Date [16 April 2008], the SCA and the AMSLA as amended by this Deed is to be read as a single integrated document incorporating the amendments effected by this Deed.

Clause 7 puts beyond any doubt that the SCA and AMSLA after amendment must be read as a single integrated document.

Nature of transactions under the AMSLA after the Amendment Deed

In my view, these amendments secured a significant change to the nature of the commercial and legal arrangements between the parties. First, the facility was continued on the basis of the terms set out in the Amendment Deed. Secondly, the parties intended the securities loan transactions to be the means by which Fortis managed its exposure to PSL, as confirmed by the express terms of cl 7 of the Amendment Deed. The determination of the legal nature of the securities loan transactions cannot be made without regard to the change in the nature of the commercial and legal arrangements between the parties and the interconnected legal rights and obligations of the parties flowing from the SCA and the AMSLA as amended and read as a single integrated document.

Characterisation of the transactions

The legal form of the transactions as absolute transfers of ownership is not determinative of their character as the authorities show that an absolute transfer of ownership can be characterised as security if, on the proper construction of the contract documents, that was the mutual intention of the parties.[144] The question is the intention of the parties in effecting that transfer.[145]
[144]Salt v Marquess of Northampton [1892] AC 1; Gurfinkel v Bentley Pty Ltd [1966] 116 CLR 98; Douglas v Culverwell (1862) 4 De GF & J 20; Re Duke of Marlborough; Davis v Whitehead [1894] 2 CH 133; Grangeside Properties Ltd v Collingwood Securities Ltd [1964] 1 All ER 143; Commissioner of Taxation v R & D Holdings Pty Ltd (2007) 160 FCR 248; (2007) 240 ALR 653, and Commissioner of Taxation v Clark (2011) 190 FCR 206. See also Sykes and Walker, The Law of Securities (5^th ed, 1993); Ramsbotham, Coote on Mortgages (9^th ed, 1927) and Tyler, Young and Croft, Fisher & Lightwood’s Law of Mortgage (2^nd ed, 2005).
[145]Gurfinkel v Bentley Pty Ltd [1966] 116 CLR 98.

Here, the amendments were made in consideration of Fortis continuing the provision of financial accommodation and other services under the SCA against the background that PSL was accruing a significant debt to Fortis under the facility. Furthermore, the securities were ‘lent’ on the basis of a conditional counter party obligation to redeliver equivalent securities, where the obligation did not arise if PSL had outstanding liabilities to Fortis under the facility. In my view, the legal nature of the securities loan transactions, viewed in the context of the SCA, the AMSLA and the Amendment Deed, construed as an integrated suite of contract documents, is properly characterised as a form of security for PSL’s liabilities under the SCA. To put it another way, the ‘loan’ of the securities was intended by the parties to secure the repayment of the moneys that Fortis had advanced to PSL under the facility. This construction gives effect to the mutual intention of the parties ‘to manage the exposure of PSL … to [Fortis]’ against a continuing debtor/creditor relationship and gives the SCA and AMSLA after amendment a sensible commercial operation.[146] I agree with Fortis’ submissions that the true nature of the securities loan transactions was as security for PSL’s liabilities under the SCA.

Rights of Fortis consequent on characterisation

[146]Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114

If, as I have concluded, the securities loan transactions were, in substance, security transactions, Fortis had the right to realise the securities in discharge of PSL’s liabilities, and the commensurate obligation to account to PSL for the balance of proceeds after discharge of PSL’s liabilities. The relevant general law principles were summarised by Stone J in FCT v R&D Holdings Pty Ltd:[147]
[147](2007) 160 FCR 248; (2007) 240 ALR 653.

The fundamental character of a mortgage is that it provides security for the moneys advanced by the mortgagee. It has been long accepted that whether the mortgage takes the form of ownership, possession or charge, its substance as a security provides the context in which the rights of the parties are determined: Salt & Tyler v Marquess of Northampton [1892] AC 1 (Salt & Tyler); compare Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98. The mortgagee is entitled to the benefit of the security and, subject to the specific terms of the agreement between the parties, it is entitled to give primacy to this interest in exercising its rights under the mortgage whether in relation to possession or sale. Nevertheless, the ambit of these rights is circumscribed by the fact that the mortgagee’s rights are limited to the vindication of its security. Consistent with this principle it is well established that the mortgagee is not a trustee for the mortgagor: Kennedy v De Trafford;[148] Deputy Commissioner of Taxation (Vic) v General Credits Ltd.[149] Nevertheless, it is also well established that the mortgagee is not entitled to ignore the mortgagor’s interest where protection of that interest is compatible with its right to protect or realise its security. The principle has been vindicated in a wide variety of cases including those dealing with the mortgagee’s right to possession (Quennell v Maltby),[150] the mortgagee’s exercise of the power of sale (Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)),[151] Forsyth v Blundell,[152] and the mortgagor’s right to redeem (Salt & Tyler,[153] Stern v McArthur).[154]
[148][1897] AC 180.
[149](1988) 82 ALR 101; [1988] VR 571.
[150][1979] 1 WLR 318).
[151](1965) 113 CLR 265.
[152](1973) 129 CLR 477.
[153](1988) 165 CLR 489.
[154](2007) 160 FCR 248; (2007) 240 ALR 653, 670-671, [96].

It follows that Fortis was justified in selling the securities and applying the proceeds against PSL’s debt in discharge of PSL’s liability, both as a matter of general law and also as a matter of contract, having regard to the terms of cl 17 of the SCA and cl 7 of the facility. It follows also that as a matter of general law and as a matter of contract that PSL is entitled to get back the unsold securities and the surplus of the sale proceeds.

Clause 8.2 of the AMSLA

The next issue is whether the trial judge was correct to hold that the value of the equivalent securities that Fortis was conditionally obliged to redeliver under cl 7B had to be offset against PSL’s liabilities under the SCA. The determination of this issue requires a consideration of cl 8.2 of the AMSLA. Clause 8.2 provided:

8.2[Netting following occurrence of Event of Default] If an Event of Default occurs in relation to either Party, the Parties’ delivery and payment obligations (and any other obligations they have under this Agreement) shall be accelerated so as to require performance thereof at the time such Event of Default occurs (the date of which shall be the ‘Performance Date’ for the purposes of this clause), and in such event:
(a)the Relevant Value of the Securities to be delivered (or payment to be made, as the case may be) by each Party shall be established in accordance with clause 8.3; and
(b) on the basis of the Relevant Values so established, an account shall be taken (as at the Performance Date) of what is due from each Party to the other and (on the basis that each Party’s claim against the other in respect of delivery of Equivalent Securities or Equivalent Collateral or any cash payment equals the Relevant Value thereof) the sums due from one Party shall be set-off against the sums due from the other and only the balance of the account shall be payable (by the Party having the claim valued at the lower amount pursuant to the foregoing) and such balance shall be payable on the Performance Date.

The application of cl 8.2 was not made to depend on action taken by the non-defaulting party, as in the case of cl 17 of the SCA. Clause 8.2 was triggered automatically on the appointment of the receivers because an event of default had occurred. The clause operated on its terms to close out the security lending transactions between the parties by accelerating the performance of the parties’ counter-party obligations under the loan transactions to 4 July 2008. But instead of requiring actual performance as at that date, the clause required those obligations to be valued at current market value and for the values then to be set-off to produce a single net balance owed by the party with the lower valued obligations.[155]
[155]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [50].

Accordingly, contrary to Fortis’ submissions, Fortis could not avoid the operation of cl 8.2 of the AMSLA by exercising its set-off rights under the SCA. However that does not answer the question whether Fortis had a re-delivery obligation, the value of which was required to be brought to account under cl 8.2. Fortis argued that cl 7B, in any event, entirely eliminated any redelivery obligations on its part once the event of default had occurred, so that Fortis had no counter-party obligation to deliver equivalent securities that fell to be valued under cl 8.2 of the AMSLA.

The trial judge held that cl 7B, properly construed, only relieved Fortis from actual performance of the obligation to deliver equivalent securities at the relevant time[156] and that actual delivery of securities was not required for the purposes of the calculation under cl 8.2, which still required a value to be attributed to the conditional obligation on Fortis to redeliver equivalent securities.[157] I disagree.
[156]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [64].
[157]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [78].

By cl 8.2, the Event of Default had the consequence of accelerating Fortis’ delivery obligations under cl 7.1 ‘so as to require performance thereof at the time {that the] Event of Default occurs’, namely 4 July 2008. But Fortis’ delivery obligations under cl 7.1 were conditional and, by the express terms of cl 7B, did not arise ‘if, at the relevant time’ any ‘Client Liabilities’ under the SCA were outstanding or ‘any Event of Default in relation to [PSL] has occurred’. The ‘relevant time’ for these purposes was the date on which the parties were required to perform their respective obligations under the ASMLA. In this case, the performance date was accelerated to 4 July 2008 in consequence of the Event of Default and cl 8.2 coming into effect. As at 4 July 2008, moneys were owed by PSL to Fortis under the facility. Clause 7B(b) and (d) applied and hence, no delivery obligation on the part of Fortis arose.

The trial judge reasoned that cl 8.2 was the only mechanism under which the value of the conditional right to receive equivalent securities can be reflected in a netting or set-off against advances. His Honour was of the view that to adopt the interpretation of cl 7B advanced by Fortis would leave PSL without opportunity to receive credit for the value of the Fortis obligation to deliver equivalent securities and that for the purpose of adjusting rights in the Event of Default the conditional obligation to deliver equivalent securities would be worthless.[158] However, it is not the conditional obligation to deliver securities that is required to be valued under cl 8.2. Clause 8.2 requires ‘the Securities to be delivered’ to be valued in accordance with cl 8.3 and 8.4.[159] If no securities are required to be delivered there is nothing to value. As I have found, the contractual arrangements between the parties were such that no obligation arose on the part of Fortis to return Equivalent Securities to PSL at the end of the loans, if PSL owed any money under the facility or was then in default under the SCA or an Act of Insolvency in relation to PSL had occurred.
[158]Primebroker Securities Ltd v Fortis Clearing Sydney Pty Ltd (2009) 28 VR 479, [67].
[159]Standard Client Agreement (19 December 2006), cl 8.2 and 8.3.

Clause 7B, properly construed, was not about not requiring actual performance. If that was its intended purpose there was no need for cl 7B as cl 8.2 on its own terms did not require actual performance. The language of cl 7B should be given its plain meaning.

Conclusion

Accordingly, I have concluded that the primary appeal should be allowed.

The related appeal

The issue in the related appeal is premised on the correctness of the trial judge’s finding that a value must be attributed under cl 8.2 to the conditional obligation on Fortis to redeliver equivalent securities.

The securities that PSL lent to Fortis included securities held in Octaviar. Those shares were suspended from trading as at 4 July 2008. Clause 7A.1 of the AMSLA provided a mechanism for the determination of value in that instance. Under cl 7A.3, the parties were obliged to negotiate in good faith with a view to agreeing the market value of the shares and the agreed market value then applied to the securities. The parties attempted to reach agreement on market value but were unable to do so and approached the Court for a determination on market value, if the market value was ascertainable. The trial judge, after a consideration of the evidence and the authorities[160] on the approach of the Court to the question of valuation concluded:

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

[160]Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 514 [49]; Spencer v The Commonwealth of Australia (1907) 5 CLR 418, 432 and 440-441; MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451, [55]-[57].

Fortis has appealed that finding contending that in the circumstance where there was no on-market lending in the Octaviar securities from January 2008, and comparisons could not be made between recorded offers and bids, the only evidence which could reliably have informed an estimate of the ‘market value’ of the securities as at 4 July 2008 was the first sale thereafter which was at a price of $13.26 per security, alternatively, the difference between the last sale before 4 July 2012 and the first sale thereafter, calculated at $19.88 per share. It was argued that the finding that the security had a value of $24.50 was inconsistent with the weight of the evidence and failed to reflect what the trial judge correctly referred to as a distressed product in substantial decline. It was further argued that the trial judge, in reaching his valuation, wrongly took into account a conditional offer of $22.50 per note made by Octaviar to its note-holders on 17 July 2012 that some note-holders by 28 August 2012 had accepted but which never became unconditional. The trial judge had reasoned:

17On 25 July 2008, Deutsche Bank acquired a parcel of 28,500 Notes at $13.26. There was evidence that by 28 August 2008 some Noteholders had accepted the cash offer of $22.50 per Note, while some had rejected the offer. That evidence, together with the transaction that took place on 25 July ($13.26), and offers to sell Notes on 14 August 2008 at $55 per Note, points to some volatility in the market for the Notes in July and August 2008. Fortis submitted that the only piece of evidence which, on a rational commercial basis, informed an estimate of the market value of the Notes as at 4 July 2008, in a declining market, was the price at which they were first sold after that date - $13.26 on 25 July 2008.
18The offer by Octavia[r] to acquire large holdings of the Notes at $22.50 is not evidence of a market value, although it assisted in arriving at a market value. Evidence of what Octavia[r] was willing to pay in mid-July 2008, in a falling market, established a floor price at that time. Noteholders were not obliged to accept less than the offer of $22.50, assuming the offer conditions were satisfied, but might hold out for more. The fact that the proposal failed to achieve a sufficient response would tend to suggest that a significant number of Noteholders considered that the Notes were worth more than what was on offer.

The argument was that this was not a market transaction and did not proceed.

In my view the trial judge correctly stated and applied the applicable principles. The trial judge was not bound to conclude on the evidence before him that the best evidence of market value as at 4 July 2008 was the transaction that took place on 25 July 2008. Furthermore, it was open to the trial judge on the evidence to take into account the conditional offer of $22.50 per note that some note-holders had accepted, not as evidence of market value but as evidence that assisted in arriving at a market value as His Honour so found. No legal error in His Honour’s reasoning has been shown.

Accordingly I would dismiss the related appeal.

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[2012] VSCA 287

27 November 2012