Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 34)

[1996] FCA 340

LIMITED DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA    )
NEW SOUTH WALES DISTRICT REGISTRY    )
GENERAL DIVISION  )
  No NG 381 of 1994

BETWEEN:

ALLSTATE LIFE INSURANCE CO and the parties listed in Annexure A to the third further amended statement of claim.
  Applicants

AND:

AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 and the parties listed in Annexure B to the third further amended statement of claim.
  Respondents

No NG 523 of 1991

BETWEEN:

ALLSTATE LIFE INSURANCE CO and the parties listed in Annexure A to the third further amended statement of claim.
  Applicants

AND:

AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 and the parties listed in Annexure B to the third further amended statement of claim.
  Respondents

No NG 622 of 1991
          BETWEEN:

ALLSTATE LIFE INSURANCE CO and the parties listed in Annexure A to the third further amended statement of claim.
  Applicants

AND:

AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 and the parties listed in Annexure B to the third further amended statement of claim.
  Respondents

No NG 635 of 1991

BETWEEN:

ALLSTATE LIFE INSURANCE CO and the parties listed in Annexure A to the third further amended statement of claim.
  Applicants

AND:

AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 and the parties listed in Annexure B to the third further amended statement of claim.
  Respondents

CORAM:Lindgren J

PLACE:Sydney

DATE:1 May 1996

REASONS FOR JUDGMENT (No 34)
     (Motion by Citibank Ltd and Citibank NA against ABN Amro
              Australia Ltd and Amro Australia Ltd)

NATURE OF PROCEEDINGS
There is before the court a motion brought by notice of motion filed 26 April 1996 by Citibank Limited and Citibank NA ("Citibanks") which are the 24th and 25th cross‑respondents to cross-claims of what I will refer to as "the Subsequent Banks". The notice of motion is directed to two of the Subsequent Banks, namely the 12th respondent/2nd cross claimant (ABN Amro Australia Ltd - "ABN Amro") and the 13th respondent/3rd cross claimant (Amro Australia Ltd - "Amro"). 

The order sought in the notice of motion is, relevantly, that ABN Amro discover, on or before 8 May 1996, the documents requested in two letters both dated 22 April 1996 from Mallesons Stephen
Jaques ("Mallesons"), the solicitors for Citibanks, to Arthur Robinson and Hedderwicks ("ARH"), the solicitors for (relevantly) ABN Amro.  Those two letters are exhibits JTW1 and JTW2 to the affidavit of John Thomas Waters sworn 24 April 1996 filed in support of the motion.  As well, Citibanks seek an order that ABN Amro pay their costs of the motion.

BACKGROUND
The documents sought
It is necessary, of course, to go to Exhibits JTW1 and JTW2.  They refer to many documents.  It was agreed that at this stage I should hear and determine only the issue between the parties in relation to one class of document referred to in those letters, namely that referred to in para 2.1 in the first letter dated 22 April 1996 from Mallesons which is Exhibit JTW1.  that paragraph is as follows:

"2.1ABN Australia [ABN Amro] was a member of a $20 million Syndicated Facility with Lloyd's Bank Limited, Bank of Singapore (Australia) Ltd and State Bank of South Australia ('SBSA').  The witness statement of Alistair Turnbull (paragraph 5) filed on behalf of SBSA refers to the receipt of the following correspondence in the context of the Syndicated Facility:

(a)a letter from Lloyd's Bank dated 16 September 1988 with attachments, including a document entitled 'Proposed Temporary Security Arrangements' and a document entitled 'Description of Securities';

(b)a facsimile from Lloyd's Bank dated 26 September 1988 attaching an information memorandum prepared by the Linter Group in relation to the restructure of its security arrangements with its bank creditors; and

(c)a facsimile from Lloyd's Bank dated 30 September 1988 attaching redrafted letters of undertaking of LTCL and LGL and a draft deed of release and discharge.

Since ABN Australia was a member of the Syndicate, please produce these documents and any other documents concerning the release and reinstatement arrangement."

Thus, there was a syndicate, to which I will refer as the "Lloyd's Bank syndicate", in which ABN Amro was one of four members, the others being Bank of Singapore (Australia) Limited ("Bank of Singapore"), State Bank of South Australia ("SBSA") and, of course, Lloyd's Bank Limited ("Lloyd's Bank") as the lead bank.

Evidence on which Citibanks relied and the two grounds of relevance
The argument on the motion concerned the issue of relevance of the documents to any issue pleaded, but before I come to that issue, it is appropriate to say a little more about the evidence on which Citibanks relied.  That evidence was found in correspondence annexed to the affidavit of John Thomas Waters, sworn 24 April 1996.  Mr Waters is a member of Mallesons.

In a letter dated 24 April 1996 from Mallesons to ARH, Mallesons set out the grounds on which they contended that the documents referred to in para 2.1 of Exhibit JTW1 were relevant.

Before I set out those grounds, I digress to note that shortly, it will be seen that Mallesons became aware of the documents
sought in para 2.1 by means of a witness statement of Alistair Turnbull, filed on behalf of another member of the Lloyd's Bank syndicate, namely, SBSA.  Shortly too, I will note that it was said that because that witness statement made it clear that SBSA, as a member of the Lloyd's Bank syndicate, had received the documents, it was a fair inference that ABN Amro, as another member of that syndicate, had also received the documents.  In passing, I note that receipt of copies of the documents by ABN Amro has not been in issue and that the argument on the motion has focused only on their relevance.

I return to Mallesons' letter of 24 April 1996.  In that letter Mallesons expressed the opinion that the documents were relevant, notwithstanding the comparative "narrowness" of the claims made by ABN Amro in its cross‑claim, for at least the following reasons:

1. ABN alleges that it relied upon the indenture.  As stated above, the question of its reliance upon the indenture is to be tested against the background of facts as to its knowledge of the indebtedness of Linter Group, Linter Textiles and the Subsidiaries and its knowledge of the level of senior indebtedness.

1. In paragraph 324 of the ABN cross claim, it is alleged that the Initial Banks owed a duty of good faith to your client.  In paragraph 328 it is alleged that the Initial Banks breached that implied obligation of good faith to ABN, inter alia, on the grounds of the execution of the Substituted Textiles Guarantees and Substituted Subsidiaries Guarantees.  Clearly, ABN's knowledge of the release and reinstatement arrangement is relevant to the issues of whether (i) any such obligation could be breached if ABN knew of the conduct said to constitute the breach prior to giving financial
   accommodation to Linter Group, and (ii) such breach caused any loss to ABN given its knowledge of the release and reinstatement arrangement."

I will refer to these paragraphs respectively as "the first ground of relevance" and "the second ground of relevance" and I will refer to them collectively as "the two grounds of relevance".

The two grounds of relevance will not be meaningful to a person not familiar with the general background facts of this litigation, but I do not intend, yet again, to give an account of those facts.  It perhaps suffices to make a brief comment in relation to the first ground of relevance.  The Indenture referred to was one associated with a prospectus related to the issue by Linter Textiles Corporation Limited ("Linter Textiles") of US$200m subordinated debentures in October 1988.  The contention of the applicants in these proceedings is that an arrangement was entered into between Linter Textiles and certain of banks which are some of the respondents targeted by them and which are called the "Initial Banks", that certain guarantees held by the Initial Banks would be released in order that Linter Textiles could be presented in the prospectus to the investing public as a "clean company", yet after the debentures were issued, "reinstated" to the benefit of the Initial Banks and to the disadvantage of those persons who had been induced to subscribe for the debentures.  The alleged arrangement just described has been referred to as the "release and reinstatement
arrangement".  In relation to the second ground of relevance, I will need to say more later when I deal with the pleadings.

The last matter to refer to at this stage is the witness statement of Alistair Turnbull, Vice President, Corporate Banking, of SBSA.  His witness statement is to the effect that on or about 16 September 1988 he received a letter from Lloyd's Bank.  A copy of the letter is annexed to his witness statement and it refers to certain enclosures.  These included documents which, the description of them in the letter would suggest, had the effect of making recipients of them such as SBSA and, inferentially, ABN Amro, aware of the release and reinstatement arrangement.  In his witness statement, Mr Turnbull stated that ABN Amro, as one of the members of the Lloyd's Bank syndicate, supported "the proposed restructure of the security arrangements".  Thus, it is said that ABN Amro was aware at that time (16 September 1988 or thereabouts) of the proposal for the release and reinstatement arrangement.

In his witness statement, Mr Turnbull states that on or about 4 October 1988, he was advised by Lloyd's Bank that Linter Group Limited would repay the whole of the syndicated facility prior to the issue of the debentures and that he received a letter from Lloyd's Bank dated 4 October 1988 attaching a cheque by way of part repayment of SBSA's entitlement. 

In paragraph 15 of his statement Mr Turnbull states that on or about 11 October 1988, just a day or two prior to the actual
subscription for the debentures, SBSA received a letter of that date from Lloyd's Bank attaching a bank cheque in full repayment of SBSA's participation in the syndicated facility.  The inference which I am asked to draw is that ABN Amro was similarly paid out its share of the syndicated facility just prior to the issue of the debentures.  For the purpose of the present application, I do draw that inference.

What I have said is really by way of background and it is necessary to go to the pleadings to see whether the issue of knowledge by ABN Amro of the release and reinstatement arrangement is a matter relevant to any issue raised.  Before I consider the pleadings, however, there are two matters to which I would draw attention.  The first is that the documents sought in paragraph 2.1 of Mallesons' first letter dated 22 April 1996 are within comparatively narrow compass and that, in any event, no objection has been taken to the description of them in that paragraph.  The second matter to which I would refer is that the relevance test in relation to discovery is, of course, a different relevance test from that applicable to determine the admissibility of a document into evidence on a final hearing.  Shortly, the test on discovery is whether the documents in question would advance the case of a party or injure the case of that party's opponent or would open up a train of inquiry which might lead to evidence which would advance the case of a party or injure the case of the opposing party.  Thus, the test might be regarded as "favourable" to a party seeking discovery.

Pleading: the first ground of relevance
The cross‑claim by ABN Amro refers in para 42 to the Indenture and, in particular, to article 10 of it.  Article 10 made a continuing offer of subordination of the debenture holders to the holders of "Senior Indebtedness" as defined.  I do not think it necessary to give a detailed account of the earlier paragraphs of the pleading.  Shortly, the holders of the debentures were to be subordinated to the holders of Senior Indebtedness and, at the risk of generalisation and therefore of some inaccuracy, by virtue of article 10 entities providing funds to Linter Textiles in reliance on article 10 were to rank as the holders of Senior Indebtedness.  Section 10.01 includes the following:

"This Article 10 shall constitute a continuing offer to all persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Indebtedness [as defined], and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and any one or more of them may enforce such provisions."

Paragraph 47 of the pleading is to the effect that, by the Indenture, Linter Textiles and the debenture holders offered to all persons who lent to Linter Textiles or obtained a guarantee from Linter Textiles constituting Senior Indebtedness in reliance on article 10, that they would become the holders of Senior Indebtedness, be able to enforce the provisions of the Indenture, or alternatively article 10, and that they would become a party to the Indenture.

Paragraph 48 pleads that each of the Initial Banks claims that
it accepted that offer, that it lodged a proof of debt with the liquidator of Linter Textiles and that, in so far as it accepted the offer, it became a party to the Indenture.

Paragraph 49 pleads that ABN Amro accepted the offer by entering into the "ABN Facility" and "Money Market Facility" (as defined later in the pleading) on 20 January 1989 and on or about 9 January 1989 respectively and by advancing funds thereunder to Linter Group upon the provision of a guarantee by Linter Textiles.  Thus, in summary, what is alleged is that the Initial Banks claimed that they had become the holders of Senior Indebtedness and that in any event ABN Amro in fact became the holder of Senior Indebtedness.  ABN Amro pleads that it became such a holder pursuant to a facility agreement made on 9 January 1989 and another one made on or about 20 January 1989, that is to say, a relatively short time after ABN Amro had been paid out its share of the Lloyd's Bank syndicated facility (in October 1988) and, likewise of course, a relatively short time after the issue of the debentures and the implementation of the release and reinstatement arrangement (also in October 1988).

At this point, I can deal with the reliance argument.  Mr Hayes QC for ABN Amro has correctly pointed out that the only issue of reliance by ABN Amro is an issue of its reliance on article 10.  In particular, he points out that ABN Amro does not say that it relied upon any other part of the Indenture such as a representation in or arising from the Indenture that Linter Textiles was not subject to contingent guarantor liabilities of itself or of its subsidiaries.  He submits that knowledge by ABN Amro of the release and reinstatement arrangement is not a matter probative in relation to the question whether ABN Amro relied upon article 10.

Mr Anastassiou for Citibanks has made a submission which can be taken from the transcript in these terms:

" ... it is useful to bear in mind the timing of these things.  The ABN facility that is now the subject of their complaint was advanced in two tranches, one of $5 million and one of $10 million on 9 January 1989 and 20 January 1989 respectively.  It was only a few months earlier, namely, 11 October that their involvement in the Lloyd's syndicate was brought to an end.  But, of course, prior to repayment they were told of the release and reinstatement arrangement in very similar terms as we know, the Initial Banks were asked to agree to." (at 30)

Conclusion on the first ground of relevance
Notwithstanding the persuasive submission put by Mr Hayes, and the fact that on a final hearing it may be concluded that the documents sought are not admissible on grounds of relevance, I think that on the present evidence they satisfy the relevance test in relation to discovery.  I think this because at least a line of argument may be opened up that a company in ABN Amro's position, aware of the release and reinstatement arrangement, in January 1989 when it entered into the two agreements to which I have referred, would not have relied upon article 10.  I do not have to determine relevance on a final basis, but it does seem to me a little artificial to divide up the Indenture in the way that is put on behalf of ABN Amro.  On the issue of reliance on article 10, at the very least it seems to me that the documents referred to in paragraph 2.1 of Mallesons' letter are capable of opening up a train of inquiry which may assist Citibanks and may damage ABN Amro on the question whether ABN Amro relied upon article 10 specifically, in entering into the two agreements in January 1989. 

Assume that in January 1989 ABN Amro knew that Linter Textiles had entered into the release and reinstatement arrangement with the Initial Banks in the preceding September/October and that they had conspired to deceive the investing public: would ABN Amro have lent substantial money to such a company in January 1989 in reliance on article 10?  Of course, it may have been content to do so.  But at least the rhetorical question which I have posed suggests that discovery of the documents sought would open up a line of inquiry which might be beneficial to Citibanks and damaging to ABN Amro on that particular issue of reliance.

For these reasons, I think that discovery of the documents sought should be given.

Pleading: the second ground of relevance
The conclusion which I reached above on the first ground of relevance relieves me of the necessity of considering the second ground of relevance, but I will deal with it.  I will do so briefly, although it is somewhat intricate.  Paragraph 289 of the cross‑claim pleads that ABN Amro became the holder of Senior Indebtedness in Linter Textiles in reliance upon the
subordination provisions of the Indenture, that is to say, article 10.

Paragraph 296 pleads again that each of the Initial Banks claims that it also became the holder of Senior Indebtedness in reliance on article 10, and so is entitled to enforce the subordination provisions against the debenture holders.  Paragraph 297 pleads that it was an implied term of the Indenture that the holders of Senior Indebtedness from time to time would be precluded from enforcing the subordination provisions of article 10 if, to do so, would be to act in bad faith towards any other party to the Indenture or towards persons having the benefit of the Indenture.

Shortly, what ABN Amro says is that it would be to act in bad faith if Citibanks were to be permitted to enforce the subordination provisions of article 10.   This is because Citibanks were, as Initial Banks, parties to release and reinstatement arrangements with Linter Textiles and implemented those arrangements by taking the replacement guarantees.   Again, shortly, and no doubt at the risk of inaccuracy due to simplification, it is said that additional funds becoming available by reason of the Initial Banks' having disentitled themselves to enforce the subordination provisions, should go to the Subsequent Banks such as ABN Amro.

To return to the pleading, paragraph 320 pleads that in "breach" of the implied term referred to in paragraph 297 each Initial Bank seeks to enforce what I will refer to as the "Replacement
Guarantees" (in fact para 297 does not plead a promise capable of breach, but a disentitling provision).  Paragraph 321 pleads that, in the circumstances, the Initial Banks are not entitled to enforce the subordination provisions of the Indenture in respect of the Replacement Guarantees. 

Paragraph 322 pleads that under New York law, which at all material times applied, an obligation or promise to act in good faith towards all other parties is implied into every contract.  Paragraph 323 sets out the content of that obligation and promise, upon which I need not elaborate.  Paragraph 324 asserts that in the circumstances, the promise or obligation to act in good faith was made or owed by the Initial Banks to all parties to, or all parties having the benefit of, the Indenture.  Thus, it is pleaded, in effect, that the Initial Banks owed an obligation of good faith, that is to say an implied contractual obligation of good faith, to ABN Amro.

Paragraph 327 pleads that even if the promise or obligation of the Initial Banks to act in good faith was made or owed only to the holders of the subordinated debentures and to Linter Textiles, ABN Amro is entitled to enforce that obligation or promise.

Paragraph 328 pleads that the Initial Banks (such as Citibanks) subsequently breached their implied obligation to act in good faith and sets out the basis of the breach to ABN Amro (it is not necessary to set out the breach here).  Finally, paragraph 329
pleads that, by reason of the breach of promise, ABN Amro has suffered, or is likely to suffer, loss or damage.  In summary, the loss or damage is that, although it has submitted proofs of debt to the liquidators of Linter Group Ltd (the parent company of Linter Textiles), Linter Textiles and the subsidiaries of Linter Textiles, the proofs have not yet been accepted or rejected and, in short, ABN Amro may not be paid.

Conclusion on the second ground of relevance
Mr Hayes QC for the ABN Amro has submitted that even if ABN Amro was aware prior to entering into the two facility agreements in January 1989 of the release and reinstatement arrangement, that knowledge could not be relevant to the existence or enforcement of the disentitling provision pleaded in para 297 or the existence or enforcement of the promise pleaded in paras 322 and 323.

The submission does raise a very interesting question of law which has been the subject of discussion in the authorities, but this is not the appropriate time to deal with it or to refer to them.  If A and B enter into a contract when A knows that B has engaged in disentitling conduct or that B will breach the contract, does A's knowledge somehow prevent him from enforcing the disentitling provision or from enforcing a remedy for the breach?  A literal but perhaps superficial understanding of that question might suggest that the answer is "No".

Mr Hayes has pointed out in the present case that there is no
pleading in the defence of Citibanks which in any way suggests that the knowledge of ABN Amro of the release and reinstatement arrangement somehow defeats its claims.  It is true that the defence is relevantly only one of denials.  However, I think that the documents which the Citibanks seek are potentially relevant (for discovery purposes) at least to the issue of causation pleaded in paragraph 329, although it is perhaps surprising, in view of the nature of their submissions, that their defence does not plead ABN Amro's alleged awareness by way of avoidance in some way.  The documents may, however, open up a train of inquiry which would lead to cross examination or the location of admissible evidence assisting Citibanks or damaging ABN Amro on the issue of causation to which I have referred.

As well, the answer to the question of law to which I have referred is far from obvious and it would not be appropriate in the context of the present motion to decide that the (supposed) knowledge of ABN Amro could not lead to a chain of inquiry which would prevent it from proving either of its "good faith causes of action" to which I have referred.

GENERAL CONCLUSION
I emphasise that in determining the motion in the way in which I propose, that is, favourably to Citibanks, I do not determine as on a final hearing the relevance of any of the documents of which discovery is sought to the issues between the parties. 

[Subsequently orders were made in a form agreed upon by the
parties to the motion including an order reserving the costs of the motion to a date pending the resolution of outstanding issues on the motion.]

I certify that this and the preceding 16 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated:9 May 1996

Heard:           26 April 1996

Place:           Sydney

Decision:        1 May 1996

Appearances:     Mr P Anastassiou of counsel instructed by Mallesons Stephen Jaques appeared for the 24th and 25th cross-respondents (Citibank Ltd and Citibank NA).

Mr P Hayes QC with Mr D Robinson of counsel instructed by Arthur Robinson & Hedderwicks appeared for the 12th respondent/2nd cross claimant (ABN Amro Australia Ltd) and 13th respondent/3rd cross claimant (Amro Australia Ltd).