Perpetual Trustee Company Limited v HIH Holdings (N.Z.) Limited (in liquidation)
[2012] NSWSC 611
•05 June 2012
Supreme Court
New South Wales
Medium Neutral Citation: Perpetual Trustee Company Limited v HIH Holdings (N.Z.) Limited (in liquidation) [2012] NSWSC 611 Hearing dates: 10 May 2012 Decision date: 05 June 2012 Jurisdiction: Equity Division - Commercial List Before: Stevenson J Decision: Noteholders do not have an accrued right as creditors of the first defendant
Catchwords: CONTRACTS - construction - nature of accrued rights on termination - whether noteholders are creditors - convertible notes - redemption of notes Legislation Cited: Companies Act 1993 (NZ)
Corporations Law
Corporations Act 2001 (Cth)
Uniform Civil Procedure Rules 2005Cases Cited: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
GCU Insurance Ltd v Porthouse (2008) 235 CLR 103
International Air Transport Association v Ansett Australia Holdings (2008) 234 CLR 151
Macquarie International Health Clinic Pty Ltd v Sydney Southwest Area Health Service [2010] NSWCA 268
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
McGrath v Perpetual Trustee Co Ltd (2008) 66 ACSR 210Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
SCN Pty Limited v Smith [2006] QCA 360
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165Texts Cited: Lewison and Hughes, The Interpretation of Contracts in Australia (2012) Category: Principal judgment Parties: Perpetual Trustee Company Limited (first plaintiff)
Societe Generale Australia Limited (second plaintiff)
HIH Holdings (N.Z.) Limited (in liquidation) ARBN 084 759 866 (first defendant)
HIH Insurance Limited (in liquidation) (second defendant)Representation: Counsel:
M J Leeming SC and J A C Potts (first plaintiff)
A S Bell SC and M A Izzo (first defendant)
Solicitors:
Corrs Chambers Westgarth (first and second plaintiffs)
Gilbert & Tobin (first defendant)
Kemp Strang (second defendant)
File Number(s): SC 2011/305530 Publication restriction: Nil
Judgment
Introduction
This case concerns the nature of the accrued rights of holders of debentures called HIH Converting Notes ("Notes"). The debentures were issued by HIH Holdings (N.Z.) Limited (in liquidation) ("HIH NZ"), a wholly owned New Zealand based subsidiary of HIH Insurance Limited (in liquidation) ("HIH").
The question is whether, in the events that have happened, HIH NZ is indebted to the holders of the Notes ("Noteholders") or whether the Noteholders have no more than a cause of action in damages against HIH NZ.
The matter turns upon the proper construction of the Trust Deed pursuant to which the Notes were issued.
Background
The background is set out in the plaintiff's Outline of Submissions. As, for the most part, there is no dispute about what is said in that document, it provides the basis for what follows.
The proceedings arise out of the liquidation of the HIH group of companies. In particular, they arise out of the liquidation of the first defendant, HIH NZ.
The Prospectus
In 1998, during the takeover of FAI Insurances Limited ("FAI"), HIH issued a prospectus ("the Prospectus") to raise up to AUD$155 million by the issue of the Notes. By the Prospectus HIH invited investors to subscribe for the Notes with HIH NZ ("the Note Issue").
The purpose of the Note Issue was described in the Prospectus as follows:-
"[HIH NZ] wishes to raise up to A$155 million under the Note Issue. These funds will be used to place HIH Investment Holdings Limited (which is the wholly owned subsidiary company which HIH is using for the takeover offer) in funds to meet its obligations to make cash payments to the holders of shares and options in FAI. HIH and [HIH NZ] will cancel the Note Issue if the FAI Takeover does not become unconditional".
Included in the Prospectus was a letter from the Chairman of HIH. The letter referred to the announcement made by HIH on 23 September 1998 that it had acquired on market a 14.3 per cent stake in FAI and continued:-
"Although the HIH Group has available cash and investments to fund the acquisition of FAI out of its own resources, HIH will procure to the extent necessary that funds raised by the Note Issue will, directly or indirectly through one or more subsidiaries of HIH, place HIH Investment Holdings Limited (which is the bid vehicle for FAI) in funds to meet its obligations to make cash payments to the holders of shares and options in FAI."
The Trust Deed
The provisions relating to the issue of the Notes were embodied in: -
(a) a deed entered into between HIH NZ, HIH and the plaintiff, Perpetual Trustee Company Limited ("Perpetual") dated 26 October 1998. The deed was entitled "HIH NZ Converting Notes 1998 Trust Deed" ("Trust Deed"); and
(b) a deed poll entered into by HIH entitled "Terms of Conversion, Guarantee and Subordination of Guarantee of Converting Notes 1998" ("Deed Poll").
Pursuant to the Deed Poll, HIH guaranteed the obligations of HIH NZ under the Trust Deed.
The Trust Deed and the Deed Poll are both governed by and are required to be construed in accordance with the laws of New South Wales.
Perpetual is the trustee appointed under the Trust Deed in respect of certain rights held by the Noteholders. As convenient, I will refer to HIH NZ's obligations under the Trust Deed as being to Perpetual or the Noteholders interchangeably. Nothing turns on the distinction.
The second plaintiff, Societe Generale Australia Limited ("SocGen") has at all material times been a Noteholder. By orders made on 25 November 2011 pursuant to Uniform Civil Procedure Rules 2005 ("UCPR") r 7.6, SocGen has been appointed a representative of all the holders of fully paid Notes, and has been permitted to bring these proceedings as a representative of all Noteholders. There are currently over 1,000 Noteholders of which SocGen is the largest by value, holding approximately 23.9 per cent of the Notes.
The Conditions
It is common ground that upon subscription for Notes, each of the Noteholders entered into a contract with HIH NZ ("Notes Contracts"). The Notes Contracts incorporated the terms of the Trust Deed and the Deed Poll.
The Notes were issued subject to the conditions set out in Schedule 1 to the Trust Deed ("the Conditions").
According to the Conditions, the Notes: -
(a) each had a face value of $5.00 (Condition 2.1(a));
(b) were "convertible", that is to say redeemable "in conjunction with [HIH NZ] applying, at the irrevocable direction of the Noteholder, the principal amount of that Note in subscription for Ordinary Shares..." (definition of "convert" in clause 1.1 of the Trust Deed and Condition 6.5);
(c) entitled the holder to interest (Condition 3) at 7.535 per cent until conversion.
The Allotment Certificate
On issue of the Notes, HIH NZ issued an Allotment Certificate which certified that the Noteholder was registered as a holder of the relevant Notes and continued: -
"1. [The Noteholder] is registered as the holder of [X] 7.535% per annum unsecured converting notes ("Notes").
2. The Notes are issued by [HIH NZ] upon and subject to the terms and conditions contained in the [Trust Deed].
3. This certificate constitutes an acknowledgment of indebtedness of [HIH NZ] in respect of the Notes but it is not evidence of title or ownership of the Notes."
Numerous investors took up the offer contained in the Prospectus and subscribed for Notes. As at the date of liquidation of HIH NZ, there were some 42,620,000 Notes on issue with a face value of AUD$213.1 million. None of those Notes were converted into HIH shares. The same number of Notes remain on issue as at the present date.
HIH NZ and HIH placed into liquidation
HIH NZ was placed into liquidation on 19 July 2001 and remains in liquidation.
HIH was placed into liquidation on 27 August 2011 and remains in liquidation.
Notice of Termination
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"). The Notice of Termination was in the following terms: -
"1. [Perpetual] as trustee under the [Trust Deed] hereby gives notice that:
(a) Pursuant to the [Conditions] [HIH NZ] was obliged to redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH.
(b) HIH NZ is in liquidation and insolvent.
(c) HIH NZ did not, and cannot, redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH.
(d) By its continuing failure to redeem each note for an amount equal to its face value and then apply the redemption monies payable to the noteholder to subscribe for ordinary shares in HIH, HIH NZ has repudiated each of the [Notes Contracts].
(e) Perpetual and the noteholders are entitled to elect to terminate the [Notes Contracts].
2. Perpetual as a party to the Trust Deed and in its capacity as trustee on behalf of each of the noteholders under the Trust Deed, hereby terminates each of the [Notes Contracts]."
The Federal Court Proceedings
In the meantime, on 7 August 2007 the liquidators of HIH commenced Federal Court Proceedings No. NSD 1546 of 2007 seeking declarations and a direction pursuant to s 479 of the Corporations Act 2001 (Cth) regarding the Notes ("the Federal Court Proceedings").
On 8 May 2008, Graham J delivered reasons for judgment in the Federal Court Proceedings, which are reported as McGrath v Perpetual Trustee Co Ltd (2008) 66 ACSR 210 ("McGrath").
Graham J refused to make the declaration sought by the HIH liquidators.
His Honour held (this from the headnote): -
(a) 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: at [24]-[26];
(b) 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: at [60]-[67];
(c) when HIH NZ failed to redeem and convert the Notes, Perpetual and the Noteholders were entitled to regard that as repudiation by HIH NZ of the Notes Contracts, and were therefore entitled to validly terminate the Notes Contracts: at [66].
On 15 May 2008, Graham J made the following declarations: -
"1. Upon the proper construction of the [Trust Deed] the conversion of Notes issued thereunder invariably required [HIH 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];
2. Upon the proper construction of the Trust Deed and in the events which have happened, [HIH 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 [HIH NZ]".
The New Zealand proceedings
On 9 September 2009, Perpetual, on behalf of the Noteholders, submitted to the liquidators of HIH NZ, a creditor's claim under section 304(1) of the Companies Act 1993 (NZ) in the amount of NZD$277,304,142.50.
The amount claimed was the face value of the Notes. The basis of the claim was the contention that HIH NZ remained indebted to the Noteholders for the face value of the Notes.
On 11 July 2011, the liquidators of HIH NZ issued a final notice rejecting the creditor's claim in full ("Liquidators' Decision").
On 5 August 2011, Perpetual filed an interlocutory application in the High Court of New Zealand, Proceedings No. CIV-2001-404-4096, seeking an order pursuant to s 284(1)(b) of the Companies Act (NZ) reversing the Liquidators' Decision ("NZ Proceedings").
On 18 August 2011, Perpetual filed an application for a stay of the NZ Proceedings.
On 25 October 2011, RM Bell AJ of the High Court of New Zealand ordered the NZ Proceedings be stayed pending the resolution of these proceedings.
The issues
It is common ground that, notwithstanding termination of the Notes Contracts, Noteholders were not divested of such rights as they had already "unconditionally acquired": per Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477. Such rights are often referred to as "accrued rights": e.g. Macquarie International Health Clinic Pty Ltd v Sydney Southwest Area Health Service [2010] NSWCA 268 at [217] per Hodgson JA (Allsop P and Macfarlan JA concurring at [1] and [389] respectively).
The principle is that where one party to a contract terminates the contract for breach, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract; but accrued rights are preserved.
The issue in this case is the nature of the rights "unconditionally acquired" by the Noteholders. To understand what accrued rights Noteholders have following termination of the Notes Contracts, it is necessary to examine what rights Noteholders had while the Notes Contracts were on foot.
There is no dispute that the Noteholders have (or at least had, immediately before lodgement of the creditors claim in the winding up of HIH NZ) a right to damages. What is in dispute is whether the Noteholders are creditors of HIH NZ for the face value of the Notes.
The answer to that question depends upon the proper construction of the Trust Deed.
Perpetual contends that the accrued right of the Noteholders is as a creditor of HIH NZ for the face value of the Notes.
HIH NZ contends that the Noteholders cannot be considered to have an accrued right as a creditor. Rather, the accrued right of the Noteholders is an action in damages against HIH NZ, and no more.
Much turns on the difference.
If, as Perpetual contends, HIH NZ is indebted to the Noteholders, the Noteholders can expect to receive a dividend of approximately 24 cents in the dollar in the winding up of HIH NZ.
On the other hand, if the Noteholders have no more than an action in damages against HIH NZ, it is agreed that such action in damages is of no value and that the result would be that they will receive nothing. In that event HIH NZ would pay a dividend of approximately 100 cents in the dollar, the majority to HIH.
Issue for later determination - The Total Return Swap transaction
HIH NZ contends that even if it remains indebted to Perpetual on behalf of Noteholders for the face value of the Notes, Perpetual is not entitled to any declaration insofar as it extends to the face value of $7 million notes the subject of what is described as the "Total Return Swap" transaction.
On 4 May 2012 the Court ordered, pursuant to UCPR part 28 r 2, that the question of whether the declaratory relief sought by Perpetual extends to the Notes which were the subject of the Total Return Swap transaction should be determined separately, and after all other issues in the proceedings.
Principles as to contractual construction
There was no dispute before me as to the principles relevant to the construction of the Trust Deed.
Those principles were summarised in HIH NZ's written submissions as follows: -
"First, the proper construction of the conditions in the Trust Deed is to be considered by reference to not only the text of the Deed, but also the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings (2008) 234 CLR 151 at [53].
Secondly, a commercial contract such as the Notes Contracts should be given a businesslike interpretation, which requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22]; GCU Insurance Ltd v Porthouse (2008) 235 CLR 103 at [43].
Thirdly, a commercial contract should be interpreted in a way which avoids consequences which are capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110."
Are the Noteholders creditors of HIH NZ? Clause 2A.1
Clause 2A.1 is of critical importance when considering Perpetual's submission that Noteholders have the status of a creditor of HIH NZ.
The clause provides: -
"[HIH NZ]:
(a) acknowledges that it is indebted to the Trustee in respect of the Moneys Owing from time to time; and
(b) must, subject to any obligation of [HIH NZ] to convert the Notes into Ordinary Shares in [HIH] ... pay to the Trustee ...:
(i) the Principal Moneys represented by the Notes or as the case may be that part of the Notes as are to be redeemed on the date due for repayment; and
(ii) will (sic), in the meantime and until the whole of the Notes have been redeemed or converted into Ordinary Shares in [HIH] ... pay to the Trustee interest on the Principal Moneys ..."
Clause 2A.1 deals, in terms, with the question of the "indebtedness" of HIH NZ to Noteholders. The clause deals also with the related question of if, and when, HIH NZ was obliged to "pay" the "Principal Moneys represented by the Notes" to Perpetual, on behalf of the Noteholders.
In Clause 2A.1, the parties made express, and detailed provision for the rights of the Noteholders concerning repayment. In those circumstances, I find it impossible to impute to the parties an intention that Noteholders would have any rights beyond those specified in the clause.
In argument, reference was made to the maxim expressio unius est exclusion alterius.
I prefer to adopt the words of McPherson JA in SCN Pty Limited v Smith [2006] QCA 360 at [7]: -
"It is hardly necessary to clothe the thought in authority or Latin garb. If one alternative is expressly and specifically mentioned, it rationally tends to exclude the implication of another or of any other".
The language used by the parties in Clause 2A.1 shows that they intended that clause to be determinative of these questions. Accordingly, Perpetual's submissions must stand or fall by reference to Clause 2A.1.
If, at the time of HIH NZ's repudiation of its obligations under Condition 12.3, HIH NZ was obliged by Clause 2A.1 to "pay" Perpetual "the Principal Moneys represented by the Notes", it must follow that the Noteholders were creditors of HIH NZ for the amount of the "Principal Moneys".
On the other hand, if HIH NZ was not then obliged by Clause 2A.1 to "pay" Perpetual "the Principal Moneys represented by the Notes", it must follow that the Noteholders were not creditors of HIH NZ.
The right to redeem
Before further considering Clause 2A.1, I will examine the parties' right to redemption and conversion.
There is no provision in the Trust Deed giving Noteholders a right to redeem the Notes for cash or otherwise to call for repayment of the amount subscribed for the Notes.
This is consistent with the Prospectus, which stated, "noteholders do not have a right to redeem the Notes for cash".
This was so even in an "Event of Default", defined to include the winding up of HIH or HIH NZ. In such an event, the Trust Deed gave Noteholders a right to accelerate the date on which the Notes converted to HIH shares, but did not give Noteholders a right to call for repayment (Condition 6).
The only circumstance in which the Trust Deed provided for "Principal Moneys" (that is the "total amount paid on issue of the Notes") to be returned to the Noteholders was if HIH NZ exercised its rights to redeem the Notes for cash by giving a notice under either Condition 12.1 or Condition 12.2.
Condition 12.1 gave HIH NZ the right, at its discretion, to redeem all (not some only) Notes "for cash" on notice in the event of a "Change of Control" (in effect an acquisition by an outsider of more than 50 per cent of the voting shares in HIH).
Condition 12.2 also gave HIH NZ the same right, whether or not there was a "Change in Control", albeit one which could only be exercised by giving the requisite notice expiring before the "End of the Conversion Period" and calling for redemption at the "End of the Conversion Period".
The "End of the Conversion Period" was 12 June 2003.
No other provision was made in the Trust Deed for the setting of a date whereby money must be repaid to the Noteholders.
Only in one of those events could there be a "date due for repayment" or "due date for payment" of the "Principal Moneys", for the purposes of subclause 2A.1(b)(i) of the Trust Deed. I will develop this further below.
Reference was made in argument to s 1060(3) of the Corporations Law in force at the date of the Trust Deed. That subsection would have empowered Perpetual to give HIH NZ notice requiring repayment of the moneys subscribed by Noteholders if the purpose for which the moneys raised by the Notes had not been achieved (for example, if the HIH takeover of FAI had not proceeded). There was no suggestion Perpetual gave any such notice. I do not find anything in the subsection that assists me construe the nature of the entitlements of Noteholders under the Trust Deed.
Right to conversion
The Noteholders' right to conversion
Although the Noteholders had no right to redeem their Notes for cash, they had a right to call for conversion of the Notes into Ordinary Shares in HIH.
First, the Noteholders had the right under Condition 4 to convert their Notes on any "Conversion Date" (in effect quarterly) during the Conversion Period, that is, before 12 June 2003.
Second, the Noteholders had a right to convert their Notes to Ordinary Shares in HIH by serving a "Conversion Notice" within 20 business days of any "Conversion Event" within the meaning of Condition 9.
Conversion Events included any "Event of Default" and the service by HIH NZ of a redemption notice under Condition 12.1.
The process to be followed on conversion was specified in Condition 6.5: -
"On conversion of a Note:
(a) [HIH NZ] must redeem that Note for an amount equal to its Face Value; and
(b) the holder of that Note, by operation of this clause, hereby [irrevocably: per the definition of "convert" in clause 1.1 of the Trust Deed] directs [HIH NZ] to apply the whole of the moneys payable to it on redemption in subscribing for [a defined] number of Ordinary Shares [in HIH]".
Thus the exercise by a Noteholder of the right of conversion obliged HIH NZ to redeem the Notes, but not so as to entitle the Noteholder to recover the amount subscribed.
By subscribing for the Notes and agreeing thereby to be bound by the terms of the Trust Deed (including Condition 6.5(b)), a Noteholder irrevocably directed HIH NZ to pay the proceeds of the redemption to HIH by way of subscription for shares.
Automatic conversion
Condition 12.3 provided: -
"If [HIH NZ] elects not to redeem all the Notes for cash pursuant to Condition 12.2 all Notes outstanding and not converted at the End of the Conversion Period must be automatically converted into the number of Ordinary Shares in HIH determined in accordance with Condition 6.5".
Condition 12.3 thus provided for the automatic conversion of Notes "outstanding and not converted" on 12 June 2003 (the "End of the Conversion Period").
The condition uses the words "must be automatically converted" rather than "are automatically converted".
The use of those words suggests that the parties contemplated that some steps were to be taken by a party to bring about the result that the Notes were "automatically converted" into Ordinary Shares.
That party could only be HIH NZ: Condition 6.
Thus, the effect of Condition 12.3 was that, absent an election by HIH NZ to redeem all of the Notes under Condition 12.2 (or, presumably, Condition 12.1, although it is not mentioned in Condition 12.3), HIH NZ "must" convert the Notes not yet converted as at 12 June 2003 to Ordinary Shares in HIH.
There are three further aspects of the process contemplated by Condition 12.3 to be considered.
First, HIH NZ was obliged to effect the conversion within 20 business days of 12 June 2003. This is because Condition 6.2 required that when a Noteholder was entitled to Ordinary Shares in HIH by reason of conversion under Condition 4.1(a), Condition 9 or Condition 12, the shares must be allotted within that time.
Second, Condition 12.3 mandated that the Notes "must be automatically" converted into shares.
The conjunction of the words "must be" and "automatically" leads me to conclude that the parties intended that the word "automatically" have the effect that, although HIH NZ had the obligation to effect the conversion, it was to be done "automatically" in the sense of without the need for any notice from the Noteholders (whether pursuant to Condition 4 or Condition 9).
Third, conversion was to be "into the number of Ordinary Shares in HIH" determined in accordance with Condition 6.5.
Although Condition 12.3 does not say so in terms, any conversion required by Condition 12.3 would not only require conversion of outstanding Notes into "the number of" Ordinary Shares determined in accordance with Condition 6.5; the conversion would have to be in accordance with Condition 6.5 in all respects.
In this respect, I agree with the observation of Graham J (at [63] of McGrath): -
"The words 'must be automatically converted' as used in condition 12.3 of the conditions of issue of the notes did not warrant any departure from the requirements for a valid 'conversion' in accordance with the process indicated in condition 6.5 of the conditions of issue."
That is, the conversion would have to follow what Graham J described as the "two step process" (see [26] above) called for by Condition 6.5, namely redemption of the Notes for face value, and application of the proceeds of the redemption in subscription for shares in HIH.
I agree that Condition 6.5 required a "two step process". That is necessarily so, as what was required was the redemption of units in one company (HIH NZ) and the use of the proceeds of that redemption for subscription in the shares of another company (HIH). However, I see the process as being two steps in a larger process: conversion. I do not read Graham J's observations as being inconsistent with that conclusion.
In the events that happened, the obligation of HIH NZ to "automatically convert" outstanding Notes was enlivened.
It may well be that HIH NZ was not able to comply with that obligation. As at 12 June 2003 both HIH NZ and HIH had been in liquidation for almost two years. I have been informed that, assuming Noteholders are creditors of HIH NZ, they will receive a dividend of 24 cents in the dollar. That suggests that HIH NZ did not have sufficient funds to redeem all outstanding Notes for their face value. Further, it is by no means clear that HIH, or its liquidators, could have issued shares to Noteholders within 20 business days of 12 June 2003, or at all: see Graham J in McGrath at [39] and [40].
In my opinion, those matters do not affect the conclusion that HIH NZ was, by reason of Condition 12.3, obliged to convert all outstanding Notes.
Indeed, breach of that obligation provided the basis upon which Perpetual terminated the Notes Contracts.
The Notice of Termination (see [21] above) recited such obligation in subparagraph (a) and asserted, in subparagraph (c) that HIH NZ's "continuing failure" to comply with that obligation constituted a repudiation of the Notes Contracts giving rise to the entitlement to terminate asserted in subparagraph (e).
Perpetual sought, and obtained, declarations to that effect from Graham J: see [26] above.
Subclause 2A.1(a)
I return to consider Clause 2A.1 and the question of whether Noteholders are creditors of HIH NZ.
In subclause 2A.1(a), HIH NZ acknowledged that it was "indebted" to Perpetual in respect of the "Moneys Owing from time to time".
The latter expression is ambulatory in two senses. First, it refers to moneys owing "from time to time". Second, the definition of "Moneys Owing" itself refers to "Principal Moneys" and all other moneys payable to Perpetual or any Noteholder "from time to time".
Subclause 2A.1(a) is thus not only an acknowledgement that, as at the date of the Trust Deed (26 October 1998) it was "indebted" to Perpetual. It also acknowledged that it was "indebted" to Perpetual for moneys owing "from time to time" thereafter.
This acknowledgment was consistent with the "acknowledgment of indebtedness" in the Allotment Certificate (see [17] above).
However, those acknowledgments of "indebtedness" must be seen in the context of the Trust Deed as a whole. If authority is needed for such an obvious proposition, it can be found in the cases gathered at [7.02] in Lewison and Hughes, The Interpretation of Contracts in Australia (2012). Indeed, the Allotment Certificate stated that the Notes were issued upon and subject to the terms of the Trust Deed.
The "indebtedness" of HIH NZ to Noteholders was subject to the very significant qualification, referred to above, that Noteholders could not call for repayment to them of the "debt".
Noteholders could not call for redemption of the Notes such that the moneys subscribed were returned to them.
Only HIH NZ (the "debtor") could redeem the Notes "for cash" (under Condition 12.1 or Condition 12.2). In that event, as Graham J held in McGrath, HIH NZ was obliged to "pay off" the Noteholders (see [25] above). But the point is, HIH NZ alone had the choice as to whether it assumed this obligation.
The Trust Deed provided for no other circumstance in which Noteholders would be repaid the amount they had subscribed for the Notes.
The only entitlement given to the Noteholders by the Trust Deed (even in the "Event of Default" by HIH NZ - see [59] above) was to call for conversion of the Notes into Ordinary Shares in HIH. It is true that the first stage of such conversion was, by reason of Condition 6.5, the redemption of the Notes. But Noteholders were not entitled to the return of their money. The Noteholders were bound to apply the proceeds of any redemption to subscribe for shares in HIH.
In my opinion, although the parties had used the word "indebtedness" to describe their relationship, it is clear from their agreement that the Trust Deed would govern their relationship, and from the terms of the Trust Deed, that they did not intend their relationship to be a debtor-creditor relationship in the conventional sense.
They did not intend that Noteholders could call for repayment of the "debt". They intended that the amount subscribed by Noteholders would be "due", in the sense of repayable to them, only if the "debtor" so chose.
Unless and until the "debtor" so chose, no debt in the conventional sense could arise. In the events that happened, the "debtor" did not so choose.
Subclause 2A.1(b)
Subclause 2A.1(a) must be read in light of subclause 2A.1(b).
Subclause 2A.1(b) deals with the obligation of HIH NZ to pay to Perpetual the "Principal Moneys" represented by the Notes, and interest thereon.
In my opinion, on the proper construction of the subclause, the obligation of HIH NZ to pay "Principal Moneys" (represented by the words "must...pay to [Perpetual]") was subject to two qualifications.
The first qualification
The first was that the obligation is to pay the "Principal Moneys" "on the date due for repayment" (rather than, for example, "on the date of redemption").
I do not accept the submission of Perpetual that, as used in the Trust Deed, the word "repayment" is used as a synonym for "redemption". It is true that in Condition 3.1(c) and Condition 3.1(d) (which deal with payment of interest) reference is made to "repayment or redemption", but the distinction between the words is made clear in Condition 12.1 and Condition 12.1 which both speak of redemption "for cash"; making clear that "redemption" alone does not bespeak "repayment".
The expression "on the date due for repayment" is not defined in the Trust Deed. The Trust Deed does not specify a term of the Notes or a period after the "Principal Moneys" must be repaid.
In my opinion, on their proper construction, these words mean the date due for repayment to the Noteholder.
The only circumstance provided for by the Trust Deed whereby the amount paid by Noteholders to HIH NZ on issue of the Notes (that is, the "Principal Moneys" referred to in subclause 2A.1(b)(i)) become payable to Noteholders, was if HIH NZ elected to redeem the Notes for cash under Condition 12.1 or Condition 12.2.
In that event, the "date due for repayment" of the "Principal Moneys" was either 20 business days after notice is given (in the case of a redemption under Condition 12.1) or on 12 June 2003, the "End of the Conversion Period" (in the case of a redemption under Condition 12.2).
The Trust Deed made no other provision for any "date due for repayment".
Thus Clause 2A.1, and subclause 2A.1(b) in particular, were concerned only with the consequences of HIH NZ electing to redeem the Notes under either Condition 12.1 or Condition 12.2.
What must be "paid" under subclause 2A.1(b) is the "Principal Moneys" represented by Notes "as are to be redeemed". Notes could only be "redeemed" - with the result of "repayment" to the Noteholder - on HIH NZ's election under Condition 12.1 or Condition 12.2.
I accept HIH NZ's submission that: -
"The evident purpose of the indebtedness acknowledged by clause 2A.1 is to accommodate the circumstance that HIH NZ elects to redeem the Notes for cash as it was entitled to do under Conditions 12.1 and 12.2".
I do not accept Perpetual's submission that "any contention that HIH NZ was not indebted to Noteholders under the Notes leaves no work for Clause 2A.1(b)".
I find nothing inconsistent with this conclusion in subclause 2A.1(b)(ii). That subclause provided that interest was payable on the Notes until redeemed or converted, and was consistent with Condition 3.1(d) which provided that interest on Notes would cease to accrue once the Notes were converted, repaid or redeemed. The subclause casts no light on whether Noteholders had the status of creditor.
As HIH NZ did not elect to redeem the Notes under either Condition 12.1 or Condition 12.2, there was no "date due for repayment" to the Noteholder of the Principal Amount.
For those reasons, in the events that have happened, subclause 2A.1(b)(i) was not enlivened.
The second qualification
The second qualification to HIH NZ's obligation to pay the "Principal Moneys" to Perpetual is to be found in the words: -
"Subject to any obligation of [HIH NZ] to convert the Notes to Ordinary Shares [in HIH] in accordance with the Conditions of Issue".
The ordinary and natural meaning of these words is that if, for any reason, HIH NZ came under an obligation to convert the Notes into Ordinary Shares in HIH, it would no longer have an obligation to pay to Perpetual the "Principal Moneys".
I read the words in question as having the same meaning as if they read: -
"Unless HIH NZ becomes obliged to convert the Notes into Ordinary Shares."
The "obligation" referred to in subclause 2A.1(b) could have arisen in a number of ways - hence the reference to "any" such "obligation.
To use a hypothetical example raised in argument, had a Noteholder prior to 12 June 2003 called for conversion of its Notes (under Condition 4 or Condition 9), HIH NZ would have become "subject to [an] obligation" to convert. The result would be that the obligation on HIH NZ to "pay" the "Principal Moneys" would cease; notwithstanding the fact the first step of the required conversion would be redemption of the Notes. Were the Noteholder in this hypothetical example to terminate the relevant Notes Contract by reason of HIH NZ's failure to convert, the position would, in my opinion, be the same as in the events that have happened.
As it happened, and for the reasons set out at [89] to [94], I am of the opinion that HIH NZ became obliged to convert the Notes to Ordinary Shares by operation of Condition 12.3.
It follows, in my opinion, for those reasons, that even if, contrary to my findings, HIH NZ otherwise had an obligation to pay the "Principal Moneys" to Perpetual on behalf of the Noteholders, it ceased to have that obligation upon it becoming obliged to convert the Notes by operation of Condition 12.3.
For those reasons, my opinion is that, at the time of repudiation, Clause 2A.1 imposed no obligation on HIH NZ to pay Perpetual "the Principal Moneys represented by the Notes" and that, accordingly, Noteholders are not creditors of HIH NZ.
Conclusion
For these reasons, my conclusions are as follows.
By reason of Condition 12.3, HIH NZ was obliged to convert the Notes in accordance with Condition 6.5 within 20 business days of 12 June 2003.
It did not do so. That conclusion is unaffected by the fact that it could not do so.
HIH NZ thereby repudiated its obligations under the Notes Contracts. Perpetual, on behalf of the Noteholders, has accepted that repudiation, and terminated the Notes Contracts.
The Noteholders are (or were, immediately before lodgement of their creditors claims in the winding up of HIH NZ) entitled to damages to compensate for the loss they have suffered by reason of the Notes not being converted to Ordinary Shares in HIH.
But they are not entitled to claim HIH NZ is indebted to them for the face value of the Notes.
Although HIH NZ acknowledged that it was "indebted" to the Noteholders, the true nature of the legal relationship between HIH NZ and the Noteholders was not that of a conventional debtor and creditor. This was because the Noteholders, as the notional "creditors" were not entitled to call for repayment of the "debt" (the moneys subscribed for the Notes).
They were not entitled to call for redemption of the Notes for cash. They were entitled to cause redemption to occur only as part of the process of conversion, which process could not result in their investment being returned to them.
Redemption of the Notes, leading to repayment to Noteholders, was a matter entirely for HIH NZ's discretion. Noteholders could only recoup their investment if HIH NZ chose to return it to them.
In my opinion, the Noteholders were never entitled to assert that HIH NZ was indebted to them for the face value of the Notes.
And even if that be wrong, once HIH NZ became obliged to convert the Notes into Ordinary Shares (as happened by operation of Condition 12.3), such obligation, as might (contrary to my opinion) otherwise have arisen under subclause 2A.1(b) of the Trust Deed on HIH NZ to pay Perpetual the "Principal Moneys", ceased.
In my opinion, the liquidators of HIH NZ correctly rejected Perpetual's proof.
This conclusion gives effect to the purpose and object of the transaction represented by the Trust Deed.
From the point of view of HIH NZ, the object of the transaction was to place HIH in funds so that it could meet its obligations arising from the takeover of FAI.
From the Noteholders' point of view, the object of the transaction was the acquisition, in due course, but no later than 12 June 2003, of a shareholding in HIH (and, in the meantime, to enjoy a fixed rate of return on the investment).
It was never the object of the transaction that the Noteholders would become, and remain, creditors of HIH NZ even after their entitlement to conversion for the Notes arose; and yet acceptance of Perpetual's submissions would lead to this result.
I invite the parties to bring in short minutes to give effect to these reasons.
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Decision last updated: 05 June 2012
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