Perpetual Trustee Company Limited in its capacity as trustee of the HIH NZ Converting Notes 1998 Trust
[2011] NSWSC 1091
•07 September 2011
Supreme Court
New South Wales
Medium Neutral Citation: Perpetual Trustee Company Limited in its capacity as trustee of the HIH NZ Converting Notes 1998 Trust [2011] NSWSC 1091 Hearing dates: Tuesday, 6 September 2011 Decision date: 07 September 2011 Jurisdiction: Equity Division - Duty List Before: Brereton J Decision: Perpetual Trustee Company Pty Limited would be justified in bringing the proposed New South Wales proceedings and continuing to prosecute the New Zealand proceedings and doing all things necessary or reasonably incidental to conducting each of those proceedings.
Perpetual Trustee Company Pty Limited would be justified in accepting funding for the New Zealand proceedings and proposed New South Wales proceedings upon the terms of the funding agreement.
Perpetual Trustee Company Pty Limited would not be justified, in the absence of further advice from the Court, in continuing the proposed New South Wales proceedings in the event that the New Zealand Court declines to stay the New Zealand proceedings.
Costs of the application are paid out of the trust of the estate.
Catchwords: TRUSTS - Trustees - Application for judicial advice - trustee seeks advice as to institution and continuation of proceedings and obtaining litigation funding - reasonable grounds for thinking proceedings have prospects of success - proceedings if successful would bring commercial benefits to beneficiaries - trustee acting reasonably and prudently in bringing proceedings - without litigation funding from a beneficiary, trustee will not bring proceedings - not unreasonable that beneficiary funding litigation receives financial reward - trustee wishes to institute parallel proceedings in New South Wales because of exclusive jurisdiction clause and cost savings - New Zealand courts not unfamiliar with Australian law - institution of proceedings in New South Wales not unreasonable or imprudent in context of pursuing the interests of the trust as a whole. Legislation Cited: (NZ) Companies Act 1993, s 248, s 284, s 304
(CTH) Corporations Act 2001, s 479, s 1321
(NSW) Trustee Act 1925, s 63Cases Cited: Bloom and Harms Offshore AHT "Taurus" KG (2010) 2 WLR 349
Commissioner of Inland Revenue v Compudigm International Ltd (in receivership and in liquidation) (High Court of New Zealand, Gendall AJ, 21 September 2010, unreported)
HIH Insurance Ltd (in liq), Re; McGrath v Perpetual Trustee Co Ltd (2008) 66 ACSR 210
In re Beddoe [1893] 1 Ch 547
Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand and Another (2008) 237 CLR 66
Poynter v Commerce Division [2010] 3 NZLR 300
Re Vocalion v Foreign Limited [1932] 2 Ch 196Category: Principal judgment Parties: Perpetual Trustee Company Limited in its capacity as trustee of the HIH NZ Converting Notes 1998 Trust Representation: Counsel:
J.A.C. Potts
Solicitors:
Corrs Chambers Westgarth
File Number(s): 2011/288207
Judgment (ex tempore)
HIS HONOUR: By summons filed on 6 September 2011, Perpetual Trustee Company Pty Limited ('Perpetual') seeks the Court's opinion, advice and direction pursuant to (NSW) Trustee Act 1925, s 63, or in the Court's inherent jurisdiction, on the following questions set out in the statement of facts dated 6 September 2011:
(a) whether Perpetual would be justified in bringing the proposed New South Wales proceedings and, in the case of the New Zealand proceedings, continuing to prosecute those proceedings, and in doing all things necessary or reasonably incidental to conducting each of those proceedings;
(b) if Perpetual would not be justified in bringing both the proposed New South Wales proceedings and the New Zealand proceedings, whether Perpetual would be justified in continuing to prosecute the New Zealand proceedings alone, and doing all things necessary or reasonably incidental to conducting those proceedings;
(c) whether Perpetual was justified in entering into the funding agreement; and
(d) if Perpetual was justified in entering into the funding agreement, whether Perpetual would be justified in not pursuing the proposed New South Wales proceedings and the New Zealand proceedings.
Background to the present application
The following summary is taken from the Statement of Facts.
By a prospectus dated 26 October 1998 issued by HIH Holdings (N.Z.) Ltd ('HIH NZ'), HIH NZ sought to raise up to AUD$155 million by the issue of converting notes. On 26 October 1998, HIH Insurance Limited ('HIH'), HIH NZ and Perpetual entered into the HIH NZ Converting Notes 1998 Trust Deed ('Trust Deed'). Pursuant to the Trust Deed, Perpetual was appointed as the trustee of the "HIH NZ Converting Notes 1998 Trust" for the benefit of the holders of fully paid unsecured converting notes ('Notes') issued by HIH NZ under the provisions of the Trust Deed ('Noteholders').
Also on 26 October 1998, HIH executed a deed poll known as the "Terms of Conversion, Guarantee and Subordination of Guarantee and Converting Notes 1998" ('Deed of Guarantee') in favour of Perpetual (in its capacity as trustee) and the Noteholders. Pursuant to the Deed of Guarantee, HIH agreed to provide a guarantee and indemnity to the Noteholders in respect of the obligations of HIH NZ under the Trust Deed.
Pursuant to clause 2 of the Trust Deed, the directors of HIH NZ could create and issues Notes to persons nominated by the directors. Prospective noteholders subsequently, and pursuant to the prospectus referred to above, lodged application forms with HIH NZ for the issue of Notes. Upon subscription for and allotment of Notes, each of the Noteholders entered into a contract with HIH NZ ('Notes Contracts'), which incorporated the terms of the Trust Deed and the Deed of Guarantee.
On 15 March 2001, Anthony McGrath and Christopher Honey were appointed provisional liquidatoes of HIH. On 6 June 2001, Kerryn Downey and Alan Isaac were appointed provisional liquidatoes of HIH NZ. On 19 July 2001, Kerryn Downey and Alan Isaac were appointed liquidators of HIH NZ. As at 19 July 2001, being the date of the commencement of the liquidation of HIH NZ, and as at today's date, 42,620,000 Notes remained and remain outstanding (that is, such Notes had not and have not been converted into ordinary shares in HIH) which had been issued under the Trust Deed with a total face value of AUD$213.1 million.
On 7 August 2007, Anthony McGrath and Christopher Honey, as joint liquidators of HIH, commenced Federal Court Proceedings No. NSD 1546 of 2007 seeking declarations and a direction pursuant to (CTH) Corporations Act 2001, s 479 ('Federal Court Proceedings').
On 15 November 2007, Perpetual (in its own capacity and as trustee on behalf of the Noteholders) served a "Notice of Termination" on HIH NZ, terminating each of the Notes Contracts ('Notice of Termination').
On 8 May 2008, Graham J, delivered reasons for judgment in the Federal Court Proceedings [ HIH Insurance Ltd (in liq), Re; McGrath v Perpetual Trustee Co Ltd (2008) 66 ACSR 210]. In those reasons his Honour held that in general, and in the context of the definition of the contractual terms involved in the case, "redemption" of shares or debentures meant "paying them off", and where a debenture took the form of an unsecured note, redemption could be effected by the clearing of the debt by payment; it was not open to HIH NZ to discharge its conversion obligations otherwise than by applying the amount paid off in subscription for HIH ordinary shares on behalf of the Noteholders, the conditions of issue did not permit mere assignment of a promise to pay the face value of the notes from the Noteholders to HIH; and when HIH NZ failed to redeem and convert the Notes, Perpetual and the Notehodlers were entitled to regard that as repudiation by HIH NZ of the Notes Contracts, and were therefore entitled to validly terminate the Notes Contracts.
On 15 May 2008, Graham J made the following declarations in the Federal Court Proceedings:
1. Upon the proper construction of the HIH NZ Converting Notes 1998 Trust Deed made 26 October 1998 ("Trust Deed") by the Second Defendant/First Cross-Defendant ("NZ"), the Second Plaintiff/Second Cross-Defendant ("HIH Insurance") and the First Defendant/First Cross-Claimant ("Perpetual") the conversion of Notes issued thereunder invariably required NZ to engage in a two step process, the first step being the redemption of the Notes by paying them off, and the second step being the application of the principal amount of the relevant Notes in subscription for shares in HIH Insurance.
2. Upon the proper construction of the Trust deed and in the events which have happened, NZ failed to redeem and convert all Notes issued thereunder, outstanding and not converted as at 12 June 2003, within 20 business days of 12 June 2003.
3. By notice dated 15 November 2007, Perpetual on behalf of each holder of outstanding notes as at 12 June 2003, validly terminated each of the Notes contracts between those noteholders and NZ.
On 9 September 2009, Perpetual submitted a creditor's claim under (NZ) Companies Act 1993, s 304(1) in the amount of NZD$277,304,142.50 to the liquidators of HIH NZ on behalf of and as trustee for the Noteholders pursuant to the Trust Deed ('Creditor's Claim'), being a claim for the face value of the Notes, on the basis that HIH NZ remained indebted to Noteholders for the face value of the Notes. On 11 July 2011, the liquidators of HIH NZ issued a final notice rejecting, inter alia, the Creditor's Claim in full ('Liquidator's Decision').
On 5 August 2011, Perpetual filed an interlocutory application in the High Court of New Zealand in Proceedings No. CIV-2001-404-4096 seeking leave and an order pursuant to Companies Act, s 284(1)(b), reversing the Liquidator's Decision ('NZ Proceedings'). It was necessary for Perpetual to commence the NZ Proceedings under Companies Act, s 284, to preserve its position, because a creditor wishing to challenge a decision of the liquidators in relation to a creditor's claim must do so within 20 working days of the liquidator's decision under that Act. The nature of the application made in the NZ Proceedings is similar to the procedure in Australia upon a creditor's appeal from a liquidator's rejection of a proof of debt under Corporations Act, s 1321.
Perpetual also proposes to commence proceedings in the Supreme Court of New South Wales seeking declaratory relief ('Proposed NSW Proceedings').
Clause 15 of the Trust Deed and clause 13 of the Deed of Guarantee are each in identical terms and provide as follows:
This Deed is governed by and is to be construed in accordance with the laws of New South Wales. Each party irrevocably and unconditionally submits to the exclusive jurisdiction of the courts of New South Wales and the courts entitled to hear appeals from those courts.
Perpetual proposes to seek declaratory relief in the Proposed NSW Proceedings in substantially the following or similar terms:
A declaration that in the events which have happened, and upon a proper construction of the HIH (NZ) Converting Notes 1998 Trust Deed made on 26 October 1998; the Deed Poll entitled "Terms of Conversion Guarantee and Subordination of Guarantee of Converting Notes 1998" made on 26 October 1998; and the contracts between HIH Holdings (N.Z.) Limited ("HIH NZ") and the respective noteholders of the various HIH (NZ) Ltd Converting Notes ("Notes") on issue, HIH NZ is and remains indebted to Perpetual Trustee Company Ltd as trustee of the Notes, on behalf of the various noteholders, for the face value of the Notes.
Perpetual wishes to pursue the matter in New South Wales as it will, on Perpetual's view, relate only to issues of the proper construction of the Trust Deed, Deed of Guarantee and the Notes Contracts, all of which are governed by New South Wales law. Perpetual does not wish to deal with those issues as part of the NZ Proceedings, as to do so will require it to call expert evidence of New South Wales law in New Zealand, which Perpetual believes will be more costly and time consuming than seeking to have those issues determined in New South Wales.
On 18 August 2011, Perpetual filed an interlocutory application in the High Court of New Zealand in Proceedings No. CIV-2001-404-4096, seeking a stay of the NZ Proceedings until the conclusion of the Proposed NSW Proceedings. The NZ Proceedings were listed for directions on 19 August 2011. The following orders were made by Bell AsJ:
(a) Perpetual's expert evidence in support of the application to stay the NZ Proceedings to be filed and served by 2 September 2011.
(b) The Liquidator's Notice of Opposition and affidavits in respect of the application to stay the NZ Proceedings to be filed and served by 23 September 2011.
(c) Any affidavits in reply from Perpetual to be field and served by Perpetual by 7 October 2011.
(d) Perpetual's casebook, synopsis of submissions and bundle of authorities to be filed and served by 11 October 2011.
(e) The Liquidators' synopsis and submissions and bundle of authorities to be filed and served by 18 October 2011.
(f) The application to stay the NZ Proceedings is listed for hearing on 25 October 2011.
Perpetual expects the liquidators of HIH NZ to oppose the stay of the NZ Proceedings and to oppose Perpetual having the Proposed NSW Proceedings determined in New South Wales, notwithstanding the choice of law and exclusive jurisdiction clauses in the relevant instruments.
Perpetual has obtained three advices from Anthony Meagher SC (as his Honour then was) and Jason Potts of counsel dated 21 December 2006 (being an advice by Mr Meagher SC alone), 30 October 2007 and 21 April 2011 respectively regarding the matter generally. The liquidators of HIH NZ have obtained an advice from Dr Andrew Bell SC dated 31 January 2011, which has been provided to Perpetual and which is contrary to the advice received by Perpetual from its counsel referred to above.
Perpetual has also obtained advice from Greg Blanchard of the New Zealand bar, dated 28 March 2011.
Perpetual wishes to prosecute the Proposed NSW Proceedings and the NZ Proceedings. If Perpetual does nothing, given the Liquidator's Decision, Noteholders will receive nothing on account of the Notes. If Perpetual were to succeed in the Proposed NSW Proceedings or the NZ Proceedings, Noteholders would, on the current financial information available to Perpetual, receive a dividend on account of the Notes of approximately 22 cents in the dollar.
Perpetual's lawyers have estimated that the total costs of proceeding to seek to overturn the Liquidators' Decision will be less if questions of New South Wales law are decided in New South Wales in the Proposed NSW Proceedings than if they are determined in New Zealand as part of the NZ Proceedings, relying upon expert evidence of Australian law from Australian senior counsel. If the issue were to be decided in New Zealand, Perpetual expects that HIH NZ would call evidence from Dr Andrew Bell SC, and Perpetual would wish to call evidence from Dr Mark Leeming SC. This will probably necessitate both travelling to New Zealand to be cross-examined on New South Wales law.
Pursuant to clause 20 of the Trust Deed, Perpetual is entitled to be indemnified by HIH NZ in respect of all costs, losses, liabilities and expenses incurred by it in connection with the Trust Deed. As HIH NZ has been placed into liquidation, Perpetual cannot obtain funding by calling on this indemnity. Pursuant to clause 16 of the Trust Deed, Perpetual is not required to take any action under the Trust Deed unless it has been indemnified to its satisfaction against, inter alia, all proceedings, costs, charges and expenses which may be incurred by it in connection with such action.
Perpetual funded the Federal Court Proceedings and ongoing legal fees incurred in relation to the Creditor's Claim from Perpetual's own funds. Perpetual does not have any "trust funds" available to fund the NZ Proceedings or the Proposed NSW Proceedings, but if the NZ Proceedings were successful, Perpetual will be able to be reimbursed fully out of the potential distribution available to the Notehodlers.
In July 2011, Perpetual approached the top three Noteholders by value, Societe Generale Australia Limited ('Soc Gen'), AXA Limited ('AXA') and Deutsche Bank, in relation to funding the NZ Proceedings and the Proposed NSW Proceedings. AXA informed Perpetual that it did not wish to fund the NZ Proceedings or the Proposed NSW Proceedings. Deutsche Bank did not respond substantively to Perpetual.
Also in July 2011, Perpetual approached two litigation funders, Quantum Litigation Funding ('Quantum') and IMF Australia Ltd ('IMF'), in relation to funding the NZ Proceedings and the Proposed NSW Proceedings. Perpetual's negotiations with both Quantum and IMF were ultimately unsuccessful.
Between 1 August 2011 and 8 August 2011, Perpetual and Soc Gen negotiated the terms of a funding agreement in relation to the funding of the NZ Proceedings and the Proposed NSW Proceedings ('Funding Agreement').
In August 2011, a Noteholder, Peter Martin, Executive Director, Constellation Advisory Services, contacted Perpetual and expressed his interest in funding the NZ Proceedings and the Proposed NSW Proceedings. Perpetual's negotiations with Mr Martin were ultimately unsuccessful.
If Perpetual cannot obtain funding for the Proposed NSW Proceedings and the NZ Proceedings, it does not wish to fund those proceedings itself, and will not do so.
Advice as to the institution and continuation of proceedings\
The opinions of counsel - namely, Mr Meagher SC, as his Honour then was, and Mr Potts - placed in evidence before me sufficiently establish that there are reasonable grounds for thinking that the proposed proceedings, whether in New Zealand or in Australia (as the issues in each will be substantially identical) have prospects of success. The opinion obtained by the liquidators, which Perpetual has disclosed to the court, of Dr Bell SC shows clearly enough that there is an arguable contrary view. On an application of this kind, it is not for the Court to decide which of the competing contentions is correct: the question for determination is whether the trustee is acting reasonably and prudently in bringing the proceedings. It is clear enough that if successful, the proceedings may result in considerable benefits for the beneficiaries, of which they otherwise would be deprived. While it is clear that the minds of the above lawyers may differ as to whether or not the trustee will ultimately succeed, the commercial benefits of success, if it occurs, are such as to justify the assumption of some degree of risk in the institution of the proceedings. I am satisfied that, whether in New Zealand or in Australia - and to that question I shall come in a moment - the trustee would be justified in instituting or continuing the proceedings, or proposed proceedings, as the case may be.
The funding agreement
If the trustee does not obtain funding from one or more of the beneficiaries or a litigation funder, then the proceedings will not be prosecuted. The beneficiary who has agreed to fund the proceedings does so, not unnaturally, in return for an additional reward should the proceedings succeed. If the trustee does not secure funding of this kind, there will be no prospect of benefit to any of the beneficiaries. With this funding, although the funding beneficiary will obtain a greater benefit than the other beneficiaries, that is not an unreasonable outcome in circumstances where it is assuming the risk of funding the litigation.
I am therefore satisfied that the trustee would be justified in accepting funding on the terms of the funding agreement in order that the proceedings, or proposed proceedings, may continue or be instituted as the case may be.
Forum
As the statement of fact reveals, the trustee has already instituted proceedings in New Zealand by way of appeal from the liquidator's rejection of the trustee's proof of debt. The trustee wishes to bring proceedings in New South Wales in which it will claim substantially the same relief as in the New Zealand proceedings. It wishes to do so because it perceives that it will be less expensive to conduct the proceedings in New South Wales, and because the Trust Deed and Deed of Guarantee contain exclusive jurisdiction clauses nominating New South Wales as the exclusive jurisdiction.
I have been somewhat troubled by this aspect of the matter. First, in circumstances where a corporation is in liquidation, ordinarily the leave of the Court in which the winding up was ordered is required for the continuation of proceedings against the company in liquidation. That is so in this jurisdiction, and it is also the case in New Zealand, where the relevant provision is (NZ) Companies Act 1993, s 248 (1)(c), which provides as follows:
Unless the liquidator agrees or the court orders otherwise, a person must not -
(i) commence or continue legal proceedings against the company or in relation to its property; or
(ii) exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company...
However, it appears well-established that that provision does not have extraterritorial effect and thus does not apply to legal proceedings brought in a foreign Court, which for the purposes of the New Zealand winding up includes the Supreme Court of New South Wales [see Bloom v H arms Offshore AHT 'Taurus' GmbH & Co KG 2010 2 WLR 349; Poynter v Commerce Division [2010] 3 NZLR 300; Re Vocalion (Foreign) Ltd [1932] 2 Ch 196; Commissioner of Inland Revenue v Compudigm International Ltd (in receivership and in liquidation) (High Court of New Zealand, Gendall AJ, 21 September 2010, unreported)] .
Secondly, however, the institution of the proposed New South Wales proceedings would result in there being parallel proceedings in two jurisdictions, each of them instituted by Perpetual. Prima facie, that has the appearance of an abuse of process. However, because of the requirement that any appeal from the liquidator's decision be lodged within a limited time, Perpetual was compelled to commence the appeal proceedings in New Zealand as a matter of prudence. It has filed an application for a stay of those proceedings, pending the determination of the proposed New South Wales proceedings. The stay application is to be heard on 25 October of this year in the High Court of New Zealand. In those circumstances, in order to effectively enliven the question of the stay application in the New Zealand proceedings, I do not think it would be an abuse of process to institute the proposed New South Wales proceedings.
Thirdly, it may be said that Perpetual has, by filing a proof of debt in the New Zealand liquidation, effectively elected to proceed by way of proof of debt and appeal therefore in that jurisdiction, rather than to maintain an action outside the liquidation. I think there may be some force in this argument. However, ultimately it seems to me that that is an argument that can, if appropriate, be presented to the New Zealand Court on the stay application, and it may be a factor that that Court will take into account in deciding whether or not to grant the stay sought, and for either that Court or this Court subsequently to take into account on any application in New Zealand for an anti-suit injunction in respect of the proposed New South Wales proceedings, or in this Court on a stay application in respect of those proceedings.
It is important to bear in mind, in respect of the advice I am asked to give, that ultimately at the forefront of the Court's consideration is whether the proposed action of the trustee is reasonable and prudent having regard to the interests of the trust as a whole. The trustee has formed a view that proceedings in New South Wales will be less expensive than proceedings in New Zealand. I must confess to some reservations about the extent to which this is so, and indeed the extent to which expert evidence of senior counsel will be necessary in the New Zealand proceedings, given the close connections and similarities between the two legal systems: it is not as if a New Zealand Court will be required to apply the law of an unfamiliar system such as Azerbaijan or Kazakhstan, but that of a legal system very familiar to it, the laws of which are unlikely to differ in material respects from its own. But there is also force in the argument that the exclusive jurisdiction clause favours proceedings in New South Wales as opposed to New Zealand. Ultimately, it cannot be said that the trustee's position has such poor prospects of success as not to be a reasonable or prudent exercise having regard to the interests of the trust as a whole.
When giving advice to a trustee about the institution of proceedings - a course which has become increasingly common since Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand and Another (2008) 237 CLR 66 case, although it has always been an available course [see In re Beddoe [1893] 1 Ch 547] - it is ordinarily appropriate to bear in mind that what may appear reasonable and prudent at the outset may not remain reasonable and prudent as the case evolves and further evidence becomes available. For that reason, I prefer usually to couch advice in terms which either limit it to a point in the proceedings where it is appropriate to review the matter, or at least alert the trustee to the circumstance that the advice should not be regarded as extending to cover the situation if circumstances and evidence later emerge which cast a different light on the prospects of success. The appropriateness of such a course may be affected by the nature of the proceedings, and by the advice of counsel which has been given in connection with the application.
As it seems to me at present, the New Zealand proceedings and the proposed New South Wales proceedings are unlikely to be affected by the emergence of further evidence: they appear to turn on uncontroversial facts, the major issue being the legal consequences of those facts. Counsels' advice on both sides addresses those consequences and, in doing so, does not appear to be hedged by caveats to the effect that it may be affected by the emergence of further evidence.
In those circumstances, I do not think it necessary to limit the advice to a particular point in the proceedings - such as setting down for hearing as some other relevant step - but, as usual, the trustee should bear in mind that if circumstances change then it might be well advised to seek further advice from the Court for example, if the New Zealand Court were to decline a stay of the proceedings in that Court, then the trustee ought to seek further advice from the Court as to whether the proposed New South Wales proceedings should be further prosecuted.
By order, I give the trustee the following advice:
1. Perpetual Trustee Company Pty Limited would be justified in bringing the proposed New South Wales proceedings and continuing to prosecute the New Zealand proceedings and doing all things necessary or reasonably incidental to conducting each of those proceedings.
2. Perpetual Trustee Company Pty Limited would be justified in accepting funding for the New Zealand proceedings and proposed New South Wales proceedings upon the terms of the funding agreement.
3. Perpetual Trustee Company Pty Limited would not be justified, in the absence of further advice from the Court, in continuing the proposed New South Wales proceedings in the event that the New Zealand Court declines to stay the New Zealand proceedings.
I order that exhibits may be returned.
I order the costs of the application are paid out of the trust of the estate.
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Decision last updated: 22 September 2011
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