Gosford City Council v Parbery (Liquidator)
[2016] FCA 353
•11 April 2016
FEDERAL COURT OF AUSTRALIA
Gosford City Council v Parbery (Liquidator); In the Matter of Lehman Brothers Australia Ltd (In Liq) (Scheme Administrators Appointed) [2016] FCA 353
File number: NSD 324 of 2015 Judge: FOSTER J Date of judgment: 11 April 2016 Catchwords: CONTRACT – whether, upon the true construction of a Court-approved claims resolution process which was subsequently incorporated into a deed between the claimant Municipal Council and the liquidators of Lehman Brothers Australia Limited, certain calculations in respect of the Council’s proof of debt effected by an independent adjudicator and accepted by those liquidators, were correctly made Legislation: Corporations Act 2001 (Cth), ss 411(4)(b), 477(2B), 479(3), 1321 Cases cited: City of Swan v Lehman Brothers Australia Ltd (2009) 179 FCR 243
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
Date of hearing: 20 July 2015 Date of last submissions: 21 July 2015 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 86 Counsel for the Plaintiff: Mr BW Walker SC and Ms F Ashworth Solicitor for the Plaintiff: Johnson Winter & Slattery Counsel for the Defendants: Mr R Beasley SC and Mr S Nixon Solicitor for the Defendants: Ashurst Australia ORDERS
NSD 324 of 2015 IN THE MATTER OF LEHMAN BROTHERS AUSTRALIA LTD (ACN 066 797 760) (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED)
BETWEEN: GOSFORD CITY COUNCIL
Plaintiff
AND: STEPHEN JAMES PARBERY AND MARCUS WILLIAM AYRES IN THEIR CAPACITY AS LIQUIDATORS FOR LEHMAN BROTHERS AUSTRALIA LTD (ACN 066 797 760) (IN LIQUIDATION) (SCHEME ADMINISTRATORS APPOINTED)
Defendants
JUDGE:
FOSTER J
DATE OF ORDER:
11 APRIL 2016
THE COURT ORDERS THAT:
1.The Application be dismissed.
2.The plaintiff pay the defendants’ costs of and incidental to the Application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
FOSTER J:
In this proceeding, the plaintiff (GCC) seeks an order pursuant to s 1321(1)(d) of the Corporations Act 2001 (Cth) (the Act) modifying in part a decision made by the defendants who are the official liquidators of Lehman Brothers Australia Limited (In Liquidation) (Scheme Administrators Appointed) (ACN 066 797 760) (LBA). The decision in question related to a proof of debt lodged by GCC with the defendants in the liquidation of LBA.
By letter dated 11 March 2015 from the defendants to GCC’s lawyers, the defendants notified GCC that they proposed to admit GCC for $3,699,141.28 (the admitted amount) in the liquidation of LBA. The admitted amount comprised:
Capital losses net of other income $4,984,692.50 Interest $76,526.69 Coupon component adjustment ($709,288.27) Subtotal $4,351,930.32 15% contributory negligence reduction ($652,789.64) TOTAL $3,699,141.28
GCC was and is dissatisfied with that decision. It contends that it should have been admitted for $6,001,697.78 in the liquidation of LBA.
The admitted amount was taken from the final determination made by the Independent Adjudicator (Mr P Brereton SC) (the Adjudicator) who was appointed under a Claims Resolution Process Deed dated 15 May 2014 (the CRP Deed) for the purpose of determining whether GCC should be admitted to proof in the liquidation of LBA and, if so, for what amount. The parties to the CRP Deed are GCC, LBA and the defendants.
When this proceeding was commenced, the dispute between the parties turned upon the proper construction and application of subcl 57(e) of the Rules for Independent Adjudicators which are found in Pt B of Sch 1 to the CRP Deed. Schedule 1 sets out in detail the Claims Resolution Process (CRP) established under the CRP Deed.
At the commencement of the hearing, I granted leave to GCC to amend its Originating Process so as to include therein a claim for an additional adjustment to the admitted amount in its favour in the sum of $1,541,623.50 based upon subcl 59(a) of the CRP rules. That claim depends upon the proper construction of that subclause.
The CRP Deed preserved the right of GCC to appeal the decision of the defendants in respect of the admitted amount pursuant to s 1321 of the Act. By that deed, GCC, LBA and the defendants agreed that they would be bound by the terms of the CRP Deed in any appeal under s 1321 of the Act. Such an appeal is not an appeal stricto sensu. The claim must be considered afresh.
THE RELEVANT FACTS
Prior to 3 December 2007, LBA was named Grange Securities Limited.
On 11 March 2008, before LBA was placed under external administration, GCC and LBA entered into a Deed of Release (Deed of Release). This deed is relied upon by the defendants as a complete answer to GCC’s claim pursuant to subcl 59(a) of the CRP rules.
On 26 September 2008, the first defendant (Mr Parbery) and Neil Geoffrey Singleton were appointed as voluntary administrators of LBA.
At the adjourned second meeting of the creditors of LBA held on 28 May 2009, the majority of creditors in number and value voted in favour of LBA executing a deed of company arrangement (DOCA). The DOCA was executed on 12 June 2009.
On 25 September 2009, in proceeding NSD 538 of 2009, the Full Court determined that the DOCA was void and of no effect (City of Swan v Lehman Brothers Australia Ltd (2009) 179 FCR 243).
On 2 October 2009, the Court ordered that LBA be wound up. Messrs Parbery and Singleton were appointed as the official liquidators of LBA.
On 14 April 2011, the second defendant (Mr Ayres) was appointed as one of the official liquidators of LBA in the place of Mr Singleton who ceased to be a liquidator of LBA on the same day.
On 31 October 2013, in proceeding NSD 622 of 2013, the Court approved a scheme of arrangement (scheme) between LBA and certain of its creditors (defined as “Scheme Creditors” in the scheme) pursuant to s 411(4)(b) of the Act.
The purpose of the scheme was, and is, to provide for or otherwise facilitate a compromise between Scheme Creditors, LBA and the insurers of LBA who had agreed to pay insurance moneys to LBA conditional upon the scheme being approved by the Court.
GCC is a Scheme Creditor within the meaning of cl 1.1 of the Scheme.
On 9 December 2013, in proceeding NSD 1795 of 2010, the Court made orders:
(a)Granting approval, pursuant to s 477(2B) of the Act, for the defendants to enter into deeds substantially in the form of the CRP Deed placed in evidence before the Court in respect of the defendants’ application with such of the client claimants of LBA as the defendants considered appropriate;
(b)Directing, pursuant to s 479(3) of the Act, that the defendants would be justified in entering into, and thereafter performing and acting in compliance with, Claims Resolution Process Deeds with such client claimants as the defendants considered appropriate for the purposes of the liquidation; and
(c)Granting approval, pursuant to s 477(2B) of the Act, for the entry by the defendants into as many deeds substantially in the form of the Deed of Appointment of Independent Adjudicator in the form tendered in evidence before the Court as the defendants considered appropriate.
The scheme was intended to be implemented in addition to, and not in replacement of, the liquidation of LBA.
On or about 15 May 2014, GCC and the defendants entered into the CRP Deed. The CRP established under that deed was the same claims resolution process which the Court had approved on 9 December 2013. That process was intended to govern the resolution of many client claims. It was not specifically tailored to govern the resolution of GCC’s claims against LBA but rather was intended to have general application and to constitute the basis upon which many, if not all, claims against LBA would be resolved.
On 19 May 2014, GCC lodged a formal proof of debt with the defendants as part of the information required to be provided under cl 1 of Pt A of the CRP. GCC’s claim in that proof (claim) was for $21,348,558.23 plus loss of interest income and interest. The claim related to three categories of transactions in certain collateralised debt obligations the subject of the CRP Deed (Claim CDOs), namely:
(a)Claim CDOs purchased and sold by GCC prior to its entry into an Individually Managed Portfolio Agreement on or about 31 October 2006 (IMP Agreement) (Pre-IMP CDOs);
(b)Claim CDOs purchased by GCC prior to its entry into the IMP Agreement and which were subsequently held as part of the investments managed by LBA pursuant to the IMP Agreement (IMP Managed CDOs); and
(c)Claim CDOs purchased by LBA on behalf of GCC during the term of the IMP Agreement (IMP Acquired CDOs).
The Adjudicator was subsequently nominated as Independent Adjudicator pursuant to cl 3 of Pt B of the CRP in respect of GCC’s claim.
The Adjudicator held that GCC should succeed in relation to the Pre-IMP CDOs and the IMP Managed CDOs but should fail in relation to the IMP Acquired CDOs.
GCC does not challenge the Adjudicator’s decision to reject its claim in respect of the IMP Acquired CDOs. However, GCC contends that the Adjudicator (and thus the defendants) erred in relation to three specific IMP Managed CDOs (that is, the CDOs referred to at [21(b)] above), namely:
(a)$4 million of the CDO known as Blue Gum AA-/Aa3 (Blue Gum), purchased in two parcels on 9 November 2005 and on 9 October 2006;
(b)$4 million of the CDO known as Scarborough AA (Scarborough) purchased on 25 May 2006; and
(c)$5 million of the CDO known as Torquay AA (Torquay), purchased in three parcels on 6 July 2006, on 9 October 2006 and on 27 October 2006.
By around the middle of 2006, LBA was actively managing approximately 40% of GCC’s investment portfolio.
On or about 31 October 2006, GCC and LBA (under the name Grange Securities Limited) entered into the IMP Agreement. This resulted in LBA managing GCC’s entire investment portfolio of over $100 million. Under the IMP Agreement, GCC’s portfolio of cash and financial products managed by LBA was called “the Portfolio”.
Under the IMP Agreement, LBA was obliged to provide its investment management services in accordance with agreed guidelines. Those guidelines were spelt out in Sch 2 to the IMP Agreement. Under the guidelines, CDOs and credit linked notes were approved instruments in which LBA could invest GCC’s funds.
Also, in about September 2006, GCC agreed with LBA to undertake a loan tender in the amount of $21.79 million to assist with capital works in respect of GCC’s water and sewerage developments.
Prior to the entry into the IMP Agreement, LBA did not have custody of any of GCC’s investments. On 31 October 2006, GCC and LBA entered into a Custody Agreement in the form of Sch 4 to the IMP Agreement. Pursuant to cl 3 of that Custody Agreement, GCC gave LBA the power to open and maintain custody accounts for holding its securities. Following the entry into the IMP Agreement, LBA established two such custodial accounts for GCC, one styled “Main Portfolio” (being account no 2064500349) and the other styled “Loan Portfolio” (being account no 2064500415).
On entry into the IMP Agreement the initial “Main Portfolio” comprised all of the investments held by GCC as at 31 October 2006, including its Pre-IMP holdings of Blue Gum, Scarborough and Torquay.
The “Loan Portfolio” was established in February 2007 and comprised investments, including Claim CDOs, which were acquired using the $21.79 million loan funds provided by LBA as described at [28] above.
Thus, from late 2006 onwards, LBA managed GCC’s funds in two separate portfolios, namely, the Main Portfolio and the Loan Portfolio.
In the case of the Blue Gum, Scarborough and Torquay CDOs, LBA entered into transactions on behalf of GCC in these products in both the Main Portfolio and the Loan Portfolio.
ANALYSIS AND DECISION
The CRP Deed
Recital D in the CRP Deed provided that GCC and the defendants had agreed to participate in a claims resolution process on the terms and conditions set out in the Deed.
Under cl 2.2 of the CRP Deed, GCC and the defendants agreed to be bound by, and to comply with, the CRP set out in Sch 1 to the Deed and to act in good faith at all times with respect to that party’s participation in the CRP.
Under cl 3.1, the Independent Adjudicator appointed to determine GCC’s claims was required to apply the terms of the CRP in making his or her determination including the rules set out in Pt B of the CRP.
Part A of Sch 1 to the CRP Deed described the process and specified various deadlines.
Part B of Sch 1 to the CRP Deed contained the rules for Independent Adjudicators.
Clause 1 of Pt B provided that Pt B set out the procedures and guidelines to be followed by persons appointed as Independent Adjudicators under the CRP.
Part B of Sch 1 was divided into six sections. These were:
·
Section 1
(Clauses 3 to 6)–
Appointment of Independent Adjudicator in respect of a Claimant’s claims
·
Section 2
(Clauses 7 and 8)–
Role of Independent Adjudicator in relation to a Claimant’s claims
·
Section 3
(Clauses 9 to 15)–
Procedures for the adjudication of a Claimant’s claims
·
Section 4
(Clauses 16 to 54)–
Matters to be assumed and guidelines to be followed by the Independent Adjudicator
·
Section 5
(Clauses 55 to 67–
Rules for assessing quantum of a Claimant’s claims
· Section 6
(Clauses 68 and 69)– Assessment of claim
Section 4 of the rules contained assumptions both as to fact and as to the law. That section included assumptions as to the features of the Claim CDOs, the risks in investing in such instruments and the rating of such instruments. It also addressed the various causes of action against LBA available to claimants.
Clauses 55 to 61 in Section 5 of the rules were in the following terms:
Section 5: Rules for assessing quantum of a Claimant’s claims
55.Where the Independent Adjudicator determines that the Claimant does not have an actionable claim against LBA in respect of any of the Claimant’s investments in Claim CDOs, then the Independent Adjudicator must assess the quantum of the Claimant’s claim against LBA as nil.
56.Where the Independent Adjudicator determines that the Claimant has an actionable claim for loss or damage against LBA in respect of the Claimant’s investment in one or more Claim CDOs, the Independent Adjudicator must assess the quantum of such loss or damage in accordance with the rules set out below.
Calculation of quantum for a particular Claim CDO, prior to any adjustment
For the purposes of this clause 57, “Date” means the date of the determination of a Claimant’s claim by the Independent Adjudicator in accordance with this part B.
57.Damages resulting from a Claimant’s investment in Claim CDOs are to be assessed on the following bases, subject to any appropriate adjustment in the case of a particular Claimant in accordance with clauses 59 to 66 below:
(a)for any Claim CDOs which the Claimant has, as at the Date, sold before maturity or redemption: if the sale was not unreasonable (which is a question for individual evidence), the loss or damage suffered (if any) is the amount (if any) by which the purchase price of each Claim CDO exceeds its capital value on its sale;
(b)subject to sub-clause (a) above, for any Claim CDOs which have been redeemed at nil value (being the Claim CDOs which are valued at $0 in Annexure C) as at the Date, the loss or damage suffered is the purchase price of the Claim CDOs;
(c)subject to sub-clause (a) above and sub-clause (f) below, for Claim CDOs which have, as at the Date:
(i) matured;
(ii)been unwound (in the sense that the underlying assets have been sold to pay out Noteholders); or
(iii)in respect of which there has been a settlement agreement pursuant to which Noteholders have been paid, or are entitled to be paid, a settlement amount,
the loss or damage suffered (if any) is the amount (if any) by which the purchase price of each Claim CDO exceeds its capital value on maturity or unwinding or the settlement amount (as applicable). Where a value greater than $0 is set out in the last column of Annexure C opposite to a Claim CDO, the value set out in that last column should be used to calculate the capital value of the Claim CDO under this sub-clause;
(d)for Claim CDOs to which none of sub-clauses (a), (b) or (c) apply, the loss or damage suffered (if any) is the amount (if any) by which the purchase price of the relevant Claim CDO exceeds its capital value. The value set out in the last column of Annexure D opposite to that Claim CDO should be used to calculate the capital value of the Claim CDO under this sub-clause;
(e)where a Claimant has engaged in multiple transactions in a particular Claim CDO, the loss or damage suffered (if any) is to be calculated on the assumption that the Claim CDOs purchased first were sold first (that is, a “first in first out” basis), except where the sale or purchase of the Claim CDOs was part of a “repo transaction”. A “repo transaction” means a dealing in Claim CDOs by LBA, where the contract note for the dealing by LBA stated that LBA would either:
(i)sell and later buy back the Claim CDOs from the purchaser on a specific date; or
(ii)buy and later resell the Claim CDOs to the vendor on a specific date.
Where the transaction by which Claim CDOs were sold by LBA was a “repo transaction”, the “first in first out” assumption shall not apply, and instead it must be assumed that the Claim CDOs which were sold by LBA pursuant to the repo transaction were the same as the Claim CDOs which were bought by LBA pursuant to the repo transaction;
(f)notwithstanding sub-clause (c) above, if at any time before the Date, a Claimant:
(i)is required to repay any amount received by it as a result of the unwinding of Federation AAA or Federation A; or
(ii)otherwise becomes liable to pay an amount of damages or compensation, or make restitution, or otherwise pay out a money sum in respect of any amounts received by it as a result of the unwinding of Federation AAA or Federation A;
and the requirement to repay or liability arises from:
(iii)a judgment or order of a court; or
(iv)a settlement agreement to which the Claimant is a party and in respect of which LBA has given approval to the Claimant to enter into,
the Claimant’s damages in respect of Federation AAA or Federation A are to be adjusted to take into account the amount required to be repaid or for which the Claimant is otherwise liable, subject to that adjustment:
(v)being no greater than $100 per $100 face value of the notes; and
(vi)not taking into account any amount in respect of interest which the Claimant is liable to pay.
…
Adjustment of loss by reference to income received from investing in CDOs, profits on sales of CDOs or from recoveries above the face value of CDOs
59.For each Claimant, the quantum of loss is to be increased or reduced (as the case may be) as follows:
(a)The total adjustment of loss for each Claimant is the sum of the adjustment for each Claim CDO sold to the Claimant by LBA (Total Adjustment), whether or not the Claimant claims loss or damage in respect of the Claim CDO, and may be a positive or negative amount or zero.
(b)The adjustment for each Claim CDO sold to the Claimant by LBA is to be calculated in accordance with the following formula:
Adjustment for each Claim CDO sold to the Claimant by LBA = “Total Coupon Component” + “Other Income” (c)The Other Income is any other income earned by the Claimant in respect of the Claim CDO, including (without limitation):
(i)where the Claim CDO has been sold, any profit earned by the Claimant from that sale (such profit being the amount by which the sale price exceeds the purchase price of the Claim CDO, and such profit being calculated, in cases where the Claimant has engaged in multiple transactions in a particular Claim CDO, on a “first in first out” basis as described in clause 57(e) above), except in the case of a “repo transaction” as described in clause 57(e) above;
(ii)where the Claimant held the Claim CDO until maturity of the Claim CDO, unwinding of the Claim CDO, or where the Claim CDO is subject to a settlement agreement pursuant to which Noteholders have been paid, or are entitled to be paid, a settlement amount, the amount (if any) by which the value of the Claim CDO, calculated using the value in the last column of Annexure C opposite to that Claim CDO, exceeds the purchase price of the Claim CDO.
The amount of Other Income must be either zero or a positive amount.
(d)The Total Coupon Component for each Claim CDO is the sum of the Coupon Components for each Coupon Period until the earlier of the sale of the Claim CDO, maturity of the Claim CDO, wipe-out of the Claim CDO, unwinding of the Claim CDO, or payout to Noteholder pursuant to a settlement agreement. The Total Coupon Component may be positive or negative.
(e)The Coupon Component for each Coupon Period may be positive or negative, and is to be calculated in accordance with the following formula:
Coupon Component for each Coupon Period = Floating Rate − 0.45% × Average Holdings where:
Average Holdings for a Coupon Period is the average of the face value of the Claim CDO held at the beginning of the Coupon Period and the face value of the Claim CDO held at the end of the Coupon Period.
Floating Rate for a Coupon Period in respect of a Claim CDO is the difference between the coupon rate received by the Claimant on the Claim CDO for that Coupon Period, and the 90-day BBSW, expressed as a positive or negative percentage figure.
Coupon Period means, in respect of a Claim CDO, each period between:
(i)the acquisition of the Claim CDO by the Claimant and the first date thereafter for payment of coupon under the transaction documents relating to that Claim CDO; and
(ii)after the period referred to in (i) above, the period from one coupon payment date until the next coupon payment date under the transaction documents relating to that Claim CDO.
60.If the Total Adjustment is positive, then the quantum of loss is to be reduced by the amount of the Total Adjustment.
61.If the Total Adjustment is negative, then the quantum of loss is to be increased by the amount of the Total Adjustment.
Clauses 62 to 67 are not presently relevant.
The subclauses particularly relied upon by GCC in the present proceeding are subcl 57(e) and subcl 59(a).
GCC’s Case Based upon Subclause 57(e)
Clause 56 is important. It obliges the Adjudicator to assess the quantum of the claimant’s loss or damage in accordance with the rules in Section 5. Clause 7(f) is to the same effect.
Each of the Blue Gum, Scarborough and Torquay CDOs is a Claim CDO which is valued at $0 in Annexure C to the CRP rules. Each is a Claim CDO which was redeemed at nil value. As submitted (correctly) on behalf of the defendants, it is therefore necessary, in accordance with subcl 57(a) and subcl 57(b) of the rules, to work out precisely what amount of GCC’s Pre-IMP holdings of Blue Gum, Scarborough and Torquay were subsequently sold by GCC, and for what price. This is because the loss relating to all of those CDOs which were sold before the date of the Adjudicator’s Final Determination (viz 23 February 2015) will be calculated in accordance with subcl 57(a) on the basis of the difference between the purchase price and the capital value on sale, while for those CDOs which were not sold prior to the date of the Adjudicator’s Final Determination, and were instead redeemed at nil value, the loss will be calculated in accordance with subcl 57(b) as the quantum of the purchase price.
There is no dispute that, after making its Pre-IMP purchases of $4 million of Blue Gum, $4 million of Scarborough and $5 million of Torquay, GCC engaged in multiple transactions (both purchases and sales) of those products during the period of the IMP Agreement. The existence of multiple transactions in these CDOs engaged subcl 57(e).
The critical words of subcl 57(e) for present purposes are:
Damages resulting from [GCCs] investment in Claim CDOs are to be assessed on the following bases, subject to any appropriate adjustment in the case of [GCC] in accordance with clauses 59 to 66 below:
…
(e)where a Claimant [GCC] has engaged in multiple transactions in a particular Claim CDO, the loss or damage suffered (if any) is to be calculated on the assumption that [my emphasis] the Claim CDOs purchased first were sold first (that is, a “first in first out” basis) ...
Clause 57(e) goes on to except from its operation “repo transactions”. None of the transactions with which I am concerned was a “repo transaction”.
The Adjudicator determined that, upon the true construction of subcl 57(e), where there are multiple transactions in a particular Claim CDO (as is the case here), all such transactions must be taken into account. He accepted the defendants’ submission that, once subcl 57(e) is engaged, it must be assumed that every sale in the temporal sequence established for each Claim CDO by the multiple transactions in that CDO is a sale of the particular parcel of that Claim CDO which was purchased first in time until the point in time is reached when that initial parcel is exhausted following which a similar assumption must be made and applied to the parcel purchased second in time and so on.
The defendants maintain that position. They argue that the Adjudicator correctly interpreted and applied subcl 57(e).
GCC contends that, for the purpose of the calculation required by subcl 57(e), only the transactions which occurred in the Main Portfolio should be taken into account and that those which occurred in the Loan Portfolio should be excluded altogether.
The approach for which GCC contends produces a greater capital loss for GCC in respect of each of the Blue Gum, Scarborough and Torquay Claim CDOs and thus a larger claim against LBA. At pars 27 to 30 of the defendants’ initial Written Submissions in Chief dated 6 July 2015, the defendants illustrated this point by setting out in tabular form the relevant transactions in each of the CDOs in question and explaining the impact of excluding transactions in the Loan Portfolio. For present purposes, I do not need to refer to those submissions in detail, although I have taken account of them.
The Parties’ Submissions
GCC submitted that:
(a)The only Claim CDOs with which its present claim based upon subcl 57(e) of the CRP rules is concerned are the IMP Managed CDOs, that is, Claim CDOs purchased by GCC prior to, but held on entry into, the IMP Agreement on 31 October 2006.
(b)All of the Loan Portfolio Claim CDOs are within the class of CDOs described as IMP Acquired CDOs which the Adjudicator determined were not actionable.
(c)The purpose of subcl 57(e) of the rules is to deem certain sales of Claim CDOs as being referable to certain purchases of such products in circumstances where there have been multiple purchases and sales and it is not otherwise possible to isolate the specific purchase to which a particular sale relates.
(d)Implicit in subcl 57(e) is the necessity to identify the thing “into” and “out of” which the Claim CDOs are moving. The thing into and out of which the Claim CDOs are moving must be the same. The only thing into which the IMP Managed CDOs moved was the Main Portfolio. Indeed, at the time of such movement, the Loan Portfolio did not even exist. Thus, it is the Main Portfolio, and the Main Portfolio alone, in relation to which any movement of the IMP Managed CDOs is relevant for the purposes of subcl 57(e) of the rules.
(e)The defendants’ argument that subcl 57(e) is directed to CDOs coming in and out of ownership by GCC should be rejected. So too should the proposition that, because the separate designation of the two portfolios did not exist before the entry into the IMP Agreement, claims in respect of CDOs purchased before the entry into the IMP Agreement could not be regarded as being made in respect of movements into and out of a portfolio which was not in existence by way of separate designation at the time. These arguments should be rejected because they fail to respect the important distinction between actionable and non-actionable claims as described in cl 55 and cl 56 of the rules. It is not permissible, for the purposes of the application of subcl 57(e), to bring into the calculation of loss under the CRP Deed CDOs which are not actionable.
(f)A different category of Claim CDO (such as IMP Acquired CDOs) in respect of which recovery has been denied should not be permitted to affect the quantification of loss in respect of a category of Claim CDO where recovery has been allowed, either by way of reduction or increase.
(g)The Loan Portfolio was held by GCC for an entirely different purpose from the purpose for which the Main Portfolio was held. It was also held with different investment objectives.
(h)As a fall-back argument, in the event that the Court should accept the defendants’ fundamental contentions concerning the interpretation and application of subcl 57(e), then a number of transactions must be ignored for the reason that they did not represent a movement into or out of GCC’s ownership. A number of sales occurred in one portfolio on the same day as an equivalent purchase of the same products occurred in the other portfolio. Such paired transactions (sales accompanied by contemporaneous purchases) constitute nothing more than a transfer between portfolios held by GCC and not a movement into and out of ownership by GCC. GCC made detailed submissions as to the financial consequences of the Court’s accepting this argument in its Submissions in Reply in respect of subcl 57(e) dated 20 July 2015.
The defendants made the following submissions:
(a)The general terms of Recital D of the CRP Deed are of little assistance in construing subcl 57(e) of the CRP rules. In any event, those general imperatives must give way to the specific requirements of the rules.
(b)The CRP rules must be applied stringently. An Independent Adjudicator has no discretion to vary the rules in individual cases.
(c)Subclause 57(e) requires the Independent Adjudicator to make an assumption in the terms of that clause for the purposes of calculating loss in the circumstances where subcl 57(e) is engaged. That assumption must be applied in all cases and cannot be displaced by reference to the facts of any particular case.
(d)The assumption to be made when subcl 57(e) is engaged is an irrebuttable presumption.
(e)Where the Independent Adjudicator is at liberty to, or required to, enquire into individual factual circumstances under the rules, this is expressly stated (see, for example, subcl 57(a), cl 53 and cl 54).
(f)Subclause 57(e) requires that the parcel of the particular Claim CDO which was “purchased first” be identified and that the assessment of the effect of multiple transactions in that Claim CDO proceed upon the basis that it was this particular parcel that was sold first: That is, every single transaction which is a sale transaction in that Claim CDO must be treated as a sale of some part of the initial parcel of the Claim CDO until that initial parcel is exhausted and then all sales thereafter are to be treated as sales of the second parcel of that Claim CDO. There is no scope in the language of the rule for excluding one sale in a sequence of multiple transactions as not being a sale of the initial parcel of that Claim CDO that was purchased by a claimant if that parcel has not yet been exhausted by previous sales in the sequence. In particular, there is no scope in the language of the rule for other circumstances (such as the source of the funds, the reasons for the purchase or sale, the subjective investment strategy being pursued by the transaction, or any instructions given in relation to the transaction) to be taken into account in determining when the initial parcel of Claim CDOs was sold.
(g)Under the IMP Agreement itself, there is no distinction made between a Main Portfolio and a Loan Portfolio. The portfolio is dealt with as one thing. It is only when regard is paid to the custody agreement that the idea of having these separate portfolios is discerned. Under the IMP Agreement, there is no difference in relation to the investment guidelines to be applied to the Main Portfolio and the Loan Portfolio.
(h)The prepositions “in” and “out” in subcl 57(e) are not directed at transactions involving products being moved in and out of the Main Portfolio but rather to products moving in and out of GCC’s ownership. The subclause is directed to purchases and sale, not allocations from one portfolio to another.
(i)In order correctly to apply subcl 57(e) of the rules, it is necessary to identify the parcels of Blue Gum, Scarborough and Torquay which were purchased before the IMP Agreement was entered into (those being the IMP Managed CDOs in respect of which GCC succeeded) and then to proceed on the basis that every sale from that point onwards, including any sale during the period of the IMP Agreement, was a sale of that parcel of IMP Managed CDOs in respect of which there was a claim until the point, which was never reached here, where those parcels were exhausted. The Adjudicator proceeded upon the basis of the assumption that he was required to make, namely, that all of the sales in the sequence of multiple transactions after the IMP Managed CDOs were purchased were sales of the IMP Managed CDOs.
(j)The evidence does not support the fundamental proposition underpinning GCC’s fall-back position. Each of the relevant transactions was in truth either a purchase or sale and not merely a swap between portfolios. There was a real change of ownership.
Decision
I think that the defendants’ submissions are correct and I accept them.
Subclause 57(e) of the rules is engaged when a claimant has undertaken multiple transactions in a particular Claim CDO. That occurred in the present case. Once the subclause is engaged, the loss or damage suffered is to be calculated upon the basis of an assumption that the Claim CDOs purchased first were sold first. That assumption may not accord with the facts in any individual case.
In the present case, the relevant Claim CDOs (Blue Gum, Scarborough and Torquay) were all purchased prior to the entry into the IMP Agreement.
The point was illustrated by the defendants at pars 27 to 30 of their Written Submissions in Chief. At pars 27 and 28 of those Submissions, the defendants set out in Table A the sales of Blue Gum CDOs effected by LBA on behalf of GCC after the entry into the IMP Agreement. That table is in the following form:
Table A: Sales of Blue Gum
Item Date Transaction Face Value Capital Price 1 09/11/05 Pre-IMP Purchase $2,000,000 100.000 2 09/10/06 Pre-IMP Purchase $2,000,000 100.540 31/10/06 [IMP entered] 3 16/02/07 Sale (Main Portfolio) ($1,000,000) 100.327 4 27/04/07 Sale (Main Portfolio) ($1,000,000) 100.486 5 06/06/07 Sale (Loan Portfolio) ($400,000) 100.461 6 21/06/07 Sale (Loan Portfolio) ($500,000) 100.454 7 28/06/07 Sale (Main Portfolio) ($500,000) 100.446 8 29/06/07 Sale (Loan Portfolio) ($300,000) 100.452 02/02/11 [Remaining holding redeemed at nil] 0.000
The defendants contend that all of the sales in Table A must be taken into account if subcl 57(e) is to be correctly applied and must be assumed to be sales of the $4 million of Blue Gum purchased prior to entry into the IMP Agreement. GCC argues that sales 5, 6 and 8 should have been excluded.
When the relevant Claim CDOs were purchased, there were no portfolios in existence. Further, the creation of two separate portfolios was the result of the entry into the custody arrangements with LBA and not mandated by the IMP Agreement itself. In any event, whatever the facts may have been, subcl 57(e) requires the calculation of loss to proceed upon the basis of an assumption. The clause does not permit the superimposition on its plain words of ideas and concepts drawn from the management and accounting treatment of GCC’s investment as matters of fact.
In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the plurality (French CJ, Hayne, Crennan and Kiefel JJ) said (at 656–657 [35]):
The construction issue
Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
(footnotes omitted)
In the present case, the language used in subcl 57(e) of the CRP rules is plain enough. There is no hint or indication in the language chosen that IMP Acquired CDOs were to be excluded from the calculations required by subcl 57(a) and subcl 57(b) of those rules.
Further, bearing in mind that the CRP was intended to provide a somewhat arbitrary set of rules designed to govern the resolution of all claims in respect of CDOs covered by the scheme, it is not surprising that those rules do not comprehensively cater for the individual circumstances of each and every claimant. They were not intended to do so. Rather, they were put in place in order to avoid the time and expense involved in fully litigating each and every claim of each and every claimant in order to operate as equitably as possible across all claims.
The CRP was approved by the Court in order to give effect to these objects.
GCC and the defendants agreed to resolve GCC’s claims covered by the CRP upon the terms of the CRP Deed which adopted and gave effect to the CRP itself. The orders of the Court made on 9 December 2013 were the genesis of the CRP Deed and set the parameters for the determination of GCC’s claims. The rules which governed that determination were not tailored specifically to the circumstances of GCC. Those rules were developed by the defendants, its insurers and its creditors for general application to all claims covered by the scheme. The rules of the CRP should be construed with these considerations in mind.
None of the considerations mentioned at [61]–[66] above justify a departure from the plain meaning of the language used in subcl 57(e). In particular, there is no reason to interpret that subclause as having application only to transactions in the Main Portfolio.
For the reasons advanced by the defendants and those set out at [56]–[66] above, I reject GCC’s contentions in respect of the true construction of subcl 57(e) of the CRP rules and its contentions in respect of the correct application of that subclause. I also find that, contrary to GCC’s fall-back case, the so-called “paired transactions” were real sales and purchases and not merely contra-entries from one portfolio to the other (see pp 17–28 of Exhibit AV-2).
GCC’s Case Based upon Clause 59
I have set out cl 59 in full at [42] above.
GCC argues that the Total Adjustment required to be made by applying cl 59 should be calculated by reference to all Claim CDOs sold to GCC by LBA and should not be confined to Pre-IMP CDOs and IMP Managed CDOs. If this contention is correct, the amount for which GCC will be entitled to prove will increase by $1,541,623.50.
Clauses 59 to 67 of the rules provide for adjustments to be made to the amount of loss or damage assessed pursuant to cl 57 of the rules. Clause 59 concerns income and profits.
The Parties’ Arguments
GCC submitted that:
(a)It is apparent from the plain and ordinary meaning of the express words used in subcl 59(a) that the Claim CDOs in respect of which the Total Adjustment is to be calculated are not limited to those in respect of which the claimant [GCC] claims loss or damage but rather extends to all Claim CDOs sold to GCC by LBA. The words “… whether or not the Claimant claims loss or damage in respect of the Claim CDO …” make this clear.
(b)For this reason, the IMP Acquired CDOs must be taken into account for the purposes of calculating the Total Adjustment.
(c)In the event that the Court determined that no part of GCC’s claim is actionable and therefore that the quantum of GCC’s claim is nil, the adjustments could not be invoked as a basis for recovery. It is therefore immaterial to the calculation of the Total Adjustment in accordance with cl 59 that certain of the Claim CDOs do not also form the basis of the loss or damage quantified in accordance with cl 57.
(d)The Deed of Release does not provide an answer to these arguments. The deed pre-dates the CRP. The CRP rules are general whereas the deed is particular. The claim under cl 59 is not “loss” within the meaning of that expression in the Deed of Release.
The defendants contended that:
(a)GCC’s arguments in relation to cl 59 ignore the circumstance that all of GCC’s claims in relation to IMP Acquired CDOs, including any claim for lost income in respect of GCC’s investment in those products, have been released by GCC.
(b)Clause 59 deals with the adjustment of “loss”. Clause 3 of the Deed of Release operates to deny GCC’s claim.
(c)Clause 4 of the Deed of Release requires GCC to indemnify LBA in respect of any loss in relation to the IMP Acquired CDOs. Even if, contrary to the defendants’ submissions, LBA was required to make an adjustment pursuant to cl 59 in relation to IMP Acquired CDOs, GCC would be obliged to indemnify LBA for such adjustments.
The Deed of Release
The Deed of Release is dated 11 March 2008.
In the Recitals in the Deed and in cl 2, particular attention is paid to three specific transactions.
Nonetheless, cl 3 and cl 4 are expressed in broad terms. Those clauses provide:
3.Gosford releases Lehman Brothers
Gosford releases and discharges Lehman Brothers and the Associated Parties from all actions, suits, claims, demands, causes of action, costs and expenses (including any existing unsatisfied costs orders), legal, equitable, under statute and otherwise, and all other liabilities of any nature (whether or not the parties were or could have been aware of them) which Gosford:
(a) now has;
(b) may have; or
(c) at any time had,
against one or more of Lehman Brothers and the Associated Parties that is in any way related to, arising out of, or connected to Beryl, Federation or Flinders; Lehman Brothers’ investments in Beryl, Federation or Flinders on Gosford’s behalf; Lehman Brothers’ management of the Main Portfolio; Lehman Brothers’ management of the Loan Portfolio; the IMP; or the circumstances recited in this deed.
4.Gosford indemnifies Lehman Brothers
(a)Subject to clause 4(b) Gosford shall indemnify and keep indemnified Lehman Brothers against any loss arising out of, relating to or in connection with the matters the subject of the release in clause 3 above.
(b)Gosford is not obliged to indemnify Lehman Brothers under this clause to the extent that any claim in respect of which an indemnity is sought under this clause arises by reason of fraud committed by Lehman Brothers.
(c)The indemnity provided by Gosford is a continuing obligation, separate and independent from the other obligations of this deed and survives termination, completion or expiration of this deed.
(d)It is not necessary for Lehman Brothers to incur expense or to make any payment before enforcing the right of indemnity conferred by this deed.
(e)Gosford shall pay to Lehman Brothers on demand by Lehman Brothers the amount of any indemnity under this clause.
“Associated parties” is defined in cl 1.1.
Clause 11 is in the following terms:
11. Acknowledgments
The parties acknowledge that they enter into this deed fully and voluntarily on their own information and investigation. Each party to this deed acknowledges that it is aware that it or its advisers, agents or lawyers may discover facts different from or in addition to the facts that they know or believe to be true with respect to the subject matter of this deed and that it is their intention to, and they do, fully, finally, absolutely and forever settle according to the provisions of this deed any and all actions, suits, liabilities, claims, disputes, and differences which now exist, or may exist or have ever existed between them relating in any way to the matters the subject of this deed.
Decision
Included within the claims released under the Deed of Release are:
… all actions (etc) … which [GCC] now has, may have or at any time had against LBA or the Associated Parties that is in any way related to, or arising out of, or connected to … [LBA’s] management of the Main Portfolio, [LBA’s] management of the Loan Portfolio, the IMP or the circumstances recited in this deed.
The subject matter of the release extended beyond the three specific transactions referred to in the deed and was apt to cover claims in respect of IMP Acquired CDOs. Clause 11 supports this interpretation. The indemnity provided for in cl 4 picks up the subject matter of the release effected by cl 3 and operates to require GCC to indemnify LBA in respect of that same subject matter.
Clause 59 of the CRP rules operates to adjust the quantum of a claimant’s loss in order to take into account interest income and profits. The clause operates on the quantum of loss. It proceeds upon the basis that there is some loss the quantum of which falls to be adjusted.
The words “… whether or not the Claimant claims loss or damage in respect of the Claim CDO …” require the adjudicating body to take into account all Claim CDOs in respect of which the Claimant suffered loss even though the Claimant may not have claimed such loss. But there must be some loss. The clause does not operate upon loss suffered as a result of transactions in Claim CDOs where all claims and actions to recover such loss have been released. That is the case here.
The defendants’ submissions are correct and I accept them.
I reject GCC’s claim under cl 59.
CONCLUSIONS
For the reasons which I have stated, I reject all of GCC’s claims for relief.
I propose to dismiss the proceeding with costs. There will be orders accordingly.
I certify that the preceding eighty-six (86) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster. Associate:
Dated: 11 April 2016
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