Tony Saad Pty Limited; Bacnet Pty Limited & Ors v Lift Capital Partners Pty Limited & Ors (In Liquidation)
[2010] HCATrans 199
[2010] HCATrans 199
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S131 of 2010
B e t w e e n -
TONY SAAD PTY LIMITED
Applicant
and
LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500
First Respondent
LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) ACN 112 913 532
Second Respondent
ANTHONY GREGORY McGRATH IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Third Respondent
JOSEPH DAVID HAYES IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Fourth Respondent
Office of the Registry
Sydney No S132 of 2010
B e t w e e n -
BACNET PTY LIMITED ACN 115 594 075
First Applicant
BANCTRADE PTY LIMITED ACN 116 742 520
Second Applicant
BIOVEST PTY LIMITED ACN 109 842 480
Third Applicant
COLUMCILLE TRADING PTY LIMITED ACN 089 712 452
Fourth Applicant
FAMBROS (AUST) PTY LIMITED ACN 062 907 868
Fifth Applicant
FAMGROUP PTY LIMITED ACN 080 698 406
Sixth Applicant
FAMTRUST PTY LIMITED ACN 073 114 520
Seventh Applicant
FICTRADE PTY LIMITED ACN 098 744 391
Eighth Applicant
HYPERTRADE PTY LIMITED ACN 082 085 578
Ninth Applicant
JAMASCO PTY LIMITED ACN 003 934 245
Tenth Applicant
JOSMAR PTY LIMITED ACN 003 934 245
Eleventh Applicant
MLT TRADE PTY LIMITED ACN 117 845 735
Twelfth Applicant
MUSGARD PTY LIMITED ACN 070 790 671
Thirteenth Applicant
PAYTO PTY LIMITED ACN 060 491 063
Fourteenth Applicant
PENNABROKER TRADING PTY LIMITED ACN 094 068 701
Fifteenth Applicant
RENTO PTY LIMITED ACN 070 953 865
Sixteenth Applicant
SHAREFUND PTY LIMITED ACN 081 342 869
Seventeenth Applicant
STOCKNET PTY LIMITED ACN 075 798 373
Eighteenth Applicant
TF TRADE PTY LIMITED ACN 100 880 939
Nineteenth Applicant
TOAUST PTY LIMITED ACN 071 131 532
Twentieth Applicant
TRADE 2 PTY LIMITED ACN 070 952 199
Twenty First Applicant
TRADESHARE (AUST) PTY LIMITED ACN 123 169 497
Twenty Second Applicant
TRADEX (AUST) PTY LIMITED ACN 131 379 173
Twenty Third Applicant
TRITRADE PTY LIMITED ACN 061 213 223
Twenty Fourth Applicant
VINANG PTY LIMITED ACN 082 546 549
Twenty Fifth Applicant
TONY SAAD PTY LIMITED (ACN 075 283 993)
Twenty Sixth Applicant
and
LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500
First Respondent
LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) ACN 112 913 532
Second Respondent
ANTHONY GREGORY McGRATH IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Third Respondent
JOSEPH DAVID HAYES IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Fourth Respondent
Office of the Registry
Sydney No S133 of 2010
B e t w e e n -
BACNET PTY LIMITED ACN 115 594 075
First Applicant
BANCTRADE PTY LIMITED ACN 116 742 520
Second Applicant
BIOVEST PTY LIMITED ACN 109 842 480
Third Applicant
COLUMCILLE TRADING PTY LIMITED ACN 089 712 452
Fourth Applicant
FAMBROS (AUST) PTY LIMITED ACN 062 907 868
Fifth Applicant
FAMGROUP PTY LIMITED ACN 080 698 406
Sixth Applicant
FAMTRUST PTY LIMITED ACN 073 114 520
Seventh Applicant
FICTRADE PTY LIMITED ACN 098 744 391
Eighth Applicant
HYPERTRADE PTY LIMITED ACN 082 085 578
Ninth Applicant
JAMASCO PTY LIMITED ACN 116 543 741
Tenth Applicant
JOSMAR PTY LIMITED ACN 003 934 245
Eleventh Applicant
MLT TRADE PTY LIMITED ACN 117 845 735
Twelfth Applicant
MUSGARD PTY LIMITED ACN 070 790 671
Thirteenth Applicant
PAYTO PTY LIMITED ACN 060 491 063
Fourteenth Applicant
PENNABROKER TRADING PTY LIMITED ACN 094 068 701
Fifteenth Applicant
RENTO PTY LIMITED ACN 070 953 865
Sixteenth Applicant
SHAREFUND PTY LIMITED ACN 081 342 869
Seventeenth Applicant
STOCKNET PTY LIMITED ACN 075 798 373
Eighteenth Applicant
TF TRADE PTY LIMITED ACN 100 880 939
Nineteenth Applicant
TOAUST PTY LIMITED ACN 071 131 532
Twentieth Applicant
TRADE 2 PTY LIMITED ACN 070 952 199
Twenty First Applicant
TRADESHARE (AUST) PTY LIMITED ACN 123 169 497
Twenty Second Applicant
TRADEX (AUST) PTY LIMITED ACN 131 379 173
Twenty Third Applicant
TRITRADE PTY LIMITED ACN 061 213 223
Twenty Fourth Applicant
VINANG PTY LIMITED ACN 082 546 549
Twenty Fifth Applicant
and
LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) ACN 111 015 500
First Respondent
LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) ACN 112 913 532
Second Respondent
ANTHONY GREGORY McGRATH IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Third Respondent
JOSEPH DAVID HAYES IN HIS CAPACITY AS LIQUIDATOR OF THE FIRST AND SECOND RESPONDENTS
Fourth Respondent
Applications for special leave to appeal
GUMMOW J
HEYDON J
TRANSCRIPT OF PROCEEDINGS
AT SYDNEY ON FRIDAY, 30 JULY 2010, AT 11.54 AM
Copyright in the High Court of Australia
__________________
MR R.M. SMITH, SC: If it please the Court, I appear in each of those applications with my learned friends, MR M.A. JONES and MR G.E.S. NG, for the applicants (instructed by Swaab Attorneys)
MR I.M. JACKMAN, SC: May it please the Court, I appear with my learned friend, MR M.R. TYSON, for the respondents. (instructed by Allens Arthur Robinson Lawyers)
GUMMOW J: Yes, Mr Smith.
MR SMITH: I will proceed on the basis that it is 20 minutes for the three of them?
GUMMOW J: Yes.
MR SMITH: Can I deal firstly with applications 131 and 133 which are in common form and in each of those application book page 187 identifies four questions for which special leave is sought. In each application I propose only to deal, subject to the Court’s views, with the first and fourth question. The first concerns the nature of an appeal under regulation 5.6.26(3) of the Corporations Regulations. Justice Finkelstein, at paragraphs 156 and 171 of his judgment in the Full Court, held that no case has directly considered that question.
The applicants’ case before the primary judge was that the appeal involved a de novo hearing on whatever evidence was admitted by the court. The respondents argued that the court must determine whether the applicants could establish error in the chairman’s approach at the voting, limited to the material available ‑ ‑ ‑
GUMMOW J: It is not an appeal, that is the first step to be said.
MR SMITH: Quite so.
GUMMOW J: It is the first exposure to the judicial power of the Commonwealth, so you do not get much help by working out what they do in England.
MR SMITH: Quite so.
GUMMOW J: But nevertheless, the question then is, what is the content of the matter that is before the Court in this way pursuant, it should be observed, to rules of the Federal Court? Your point has to be, I think, as to the statutory power conferred on the court to create these rules to provide this right, is that what it comes to, and then the question is, what is its content?
MR SMITH: That is right, and we adopt what Sir Owen Dixon said in Rae, that the first time the judicial power of the Commonwealth is applied to it, one is concerned with a fresh hearing, as it were, not constrained by material which was before the chairman who does not exercise the judicial power of the Commonwealth. Our proposition is that the cases the court directed the parties’ attention to involved the proposition that when a ‑ ‑ ‑
GUMMOW J: Why should we take this point at this stage when these amply resourced parties did not see fit to put the Federal Court on the right track, as it were?
MR SMITH: Because it is a question of importance as to ‑ ‑ ‑
GUMMOW J: Of course it is. It is one which would be assisted by the Federal Court’s view of its own jurisdiction in receipt of proper arguments before it.
MR SMITH: That is our proposition, that the hearing de novo point was taken, it played a significant adverse effect in the hearing of the application. We applied for an adjournment on the footing that we wanted to adduce evidence which would have been important to establish ‑ ‑ ‑
GUMMOW J: As against any construction you would want to put on the content of the matter, one would have to bear in mind that these questions have to be dealt with in a fairly summary manner, even the exigencies of these situations that arise in these disputes before a chairman at meetings.
MR SMITH: Yes, but that would not of itself be determinative as to the nature of the appeal. It would be a de novo hearing depending on the particular question at issue which the chairman relied upon to reject the voting proof of debt. In this case the question was a question purely of causation. The chairman had advice from his solicitors to the effect that there was a breach of trust or if there was a breach of trust, the breach would not have caused any loss. That is not a question of business judgment or a question dealt with on the run. It was advice given in advance of the vote and that was the basis on which the proofs were rejected.
That is a purely legal question and our point simply is that this was not a question dealt with on the run, it was a legal issue and the nature of the issue which might be raised is not necessarily determinative of the character of the hearing described by the regulations and appeal. Can we come to the practical effect of what occurred. Justice Emmett, on the first day of the trial, rejected an application for an adjournment on the ground that the proceeding before him did not involve a hearing de novo. The adjournment was sought to call expert and other evidence to support the applicants’ trading strategy which was put forward and the trial judge described as the linchpin of the applicants’ claims.
Ultimately, the primary judge rejected that evidence as hindsight and that was fundamental to his conclusion that the chairman’s decision that the applicants were not creditors was not incorrect. The Full Court agreed with that and once the strategy was rejected, the Full Court held that the applicants had failed to prove that the sale by Merrill Lynch, as it were, was undertaken in an unreasonable way. The substance of what happened, assuming we are right about the hearing should have been hearing de novo, was that we were denied the opportunity to call evidence to support the appropriateness of the strategy which was described as a central feature of the case in which the court has rejected as hindsight.
It is clear that we were refused a de novo hearing. The majority of the Full Court did not decide the nature of the appeal. Justice Finkelstein held that the appeal involved a de novo hearing based, as Justice Gummow has pointed out, on English authority. The Full Court then wrongly held that because the applicants led evidence of the trading strategy, they had a hearing de novo and failed on the evidence adduced. The Full Court overlooked the fact that the primary judge refused an adjournment to limit the applicants to have a hearing de novo and expressly did not undertake that hearing. We rely on, in addition to what Justice Finkelstein said, firstly, two propositions which emerge from the case which the court directed our attention to.
The first is that legislation such as the regulation commonly confers on the Federal Court a review of a another decision‑maker which is described by the legislation as an appeal and the original decision‑maker does not exercise a judicial power of the Commonwealth. The exercise of that power occurs when the appeal, so described, first comes before the court. That emerges from Ruhani. Second, Justice Dixon’s observations in Rae is that in such a case the court exercising the judicial power of the Commonwealth for the first time in an appeal so described does so on fresh evidence independently of the original decision‑maker and unconstrained ‑ ‑ ‑
GUMMOW J: It all depends on the nature of the statutory scheme as to what the content of the relevant matter is. It might be one thing if it is an appeal from the registrar of trade marks, it might be another thing if it is this sort of proceeding.
MR SMITH: The relevant matter is the challenge to the ground on which the chairman decided to reject the voting proof of debt. That can include, by definition, a whole range of matters, but it is given in circumstances where there may be matters which the chairman was not aware of. There is no reasons given. All of those matters were point in favour of a hearing de novo.
GUMMOW J: You have three applications.
MR SMITH: Yes.
GUMMOW J: Have you said all you wanted to say about the “appeal” point?
MR SMITH: Yes. Well, subject to this, if I can just put in summary way. The special leave should be granted because there is no authority on the point in this Court. Second, there are inconsistent views between members of the Federal Court, that is, Justice Emmett and Justice Finkelstein. Thirdly, the question is a matter of importance in the liquidation of companies and, finally, the Full Court wrongly assumed that we had a hearing de novo and we did not. That is all I want to put on that point.
The second point, which is item 4 at page 187 of the book, is this question of onus. The Full Court held that – and this is independent of the trading strategy – the case put that the applicants were creditors involved the idea that their shares and options were transferred to Merrill Lynch and that was a breach of trust. Now, that was no in issue before the trial judge. It is common ground that Merrill Lynch sold those shares and options at a loss of $27 million and prima facie the proposition is that the transfer and breach of trust by the Lift companies, more precisely Lift Nominees, to Merrill Lynch was not authorised by the applicants, was a breach of the trust arising under clause 11 of the facility agreement which required the shares to be held as a bare nominee and were sold at a loss of $27 million.
Our proposition was that demonstrated that loss was caused by the breach. The argument put against us was that the loss would have been caused in any event. That involved the proposition that because at the time when the shares were sold a valid notice had been given entitling the administrators of the Lift companies to sell as mortgagee, that they would have sold had there been no transfer of the securities and breach of trust in precisely the same way as Merrill Lynch did. Our proposition was that that was a matter for the Lift companies to demonstrate and the evidence given by the administrators was that he would have acted on expert advice as to the manner of sale.
Our point was this. Prima facie the transfer and sale by Merrill Lynch, who was not selling as mortgagee and was selling securities transferred in breach of trust, caused a loss of $27 million. That loss if it was accepted by the chairman, would have been enough to block the vote because we held more than 25 per cent of the value of the claim. As we pointed out in our written submissions, the Full Court held that the administrators accepted their evidence that it would have been a sale in the same way with the same loss. The problem with that is, as we pointed out in our written submissions, is that the administrators would have acted on expert advice and there was no evidence as to what the manner of sale would have been pursuant to that advice. Can I move to the question which arises in the application S132, which is the ‑ ‑ ‑
GUMMOW J: Yes, just before you do that, Mr Smith, what is the state of litigation in the Supreme Court of New South Wales between these parties?
MR SMITH: It is awaiting the result of today.
GUMMOW J: I see.
MR SMITH: We are sued for $33 million in the Supreme Court of New South Wales, being what is said to be the shortfall on the sale of the securities by Merrill Lynch which were debited to the Lift companies who seek to pass them onto the client. The obverse of that is a cross‑claim, but the claim for $33 million really is the other side of our case that we are a creditor for at least $33 million because that loss should not have arises. That is where we are up to. The practical effect of the scheme is that if the scheme is not set aside, that will have an effect on the conduct of that litigation.
Can we move to the application in 132 which involves two questions. One assumes that the order for approval of the scheme should not have been made because we were creditors in an amount which would have blocked the scheme had we been permitted to vote as creditors in the amount of $27 million. There is a second point taken as to whether section 411 authorises, in effect, a release of claims which the applicants have against Merrill Lynch. Can I approach the matter this way.
GUMMOW J: It is in that regard, is it, that you would wish to challenge Fowler v Lindholm?
MR SMITH: Correct, and we say, shortly, that they really involve the same points. We accept that section 411 operates in a different language, in a different statutory context than does section 444D, which was the subject of the case in Lehman. However, the point which we seek to make in our submissions is essentially the same point, that is to say, what claims may be released? May they be claims other than claims against the company?
This deed has one curious aspect to it, and can I seek to make good that ponit because the proposition put against us is that this is not an appropriate vehicle because we are not creditors. Now, if leave were to be refused on that ground but we were successful on the de novo point, then we would ask for, in effect, leave to be refused subject to a right to reapply if we could demonstrate that we were creditors. However, the point we want to make is this. If one goes to the book, the deed operates both in respect of creditors and persons that may be creditors. Can I seek to make that proposition good. The operative provisions is a release. It is a release in clause 3.1 ‑ ‑ ‑
GUMMOW J: What page, Mr Smith?
MR SMITH: Page 81. It is a release by Lift clients of claims against Merrill Lynch. There is also a deed which gives effect to that and that is at page 57. Sorry I have got it the wrong way around. I will start again. The
releases in the scheme are at page 57, that is clause 11.1 which is a general provision requiring a deed of release to be executed. Clause 11.2 is the operative release in relation to Merrill Lynch. The provisions I earlier directed the Court’s attention to were in the deed. The point that I am seeking to make is this. The release bites in relation to Lift clients. One then has to go to the definition of that concept at the book at page 38 and trace through the definitions. Subclauses (a) and (b) involve a party being a creditor, and one gets that from the definition of a “scheme creditor” which is at page 40, line 50:
Scheme Creditor means a creditor of a Lift Company with a Scheme Claim ‑ ‑ ‑
and a “scheme claim” basically is any claim which arises before a particular date. The point we are making is this. Whilst (a) and (b) of the definition of “Lift client” operates by reference to the concept of creditor, (c) does not, that is to say:
any person who entered into a facility agreement with Lift Capital and borrowed money from Lift Capital to purchase securities and who, arising out of the transfer by Lift Nominees of securities that it held on behalf of that person to Merrill Lynch, has a debt or claim admissible to proof –
against the proposition. It is an odd provision because, in our respectful submission, it operates in respect of persons who may or may not be creditors but who have claims of a particular character. If that limb has that construction, then we are bound by the deed whether or not we are a creditor, but we say we are, and we then wish to put the proposition that section 411 does not operate to authorise those releases for the reasons we have outlined in our written submissions.
GUMMOW J: Is this paragraph 11 of your reply?
MR SMITH: Yes. That is all I wish to put. I am out of time, I think.
GUMMOW J: Yes, Mr Jackman.
MR JACKMAN: Can I deal with the first point raised, the so‑called de novo hearing point, which of course is a misnomer. The controversy that was fought below did not concern any debate as to whether the hearing was properly characterised as a de novo hearing, it proceeded on the basis that this was indeed the first time that the original jurisdiction of the court had been engaged. The debate involves a debate as to whether the question was one as to the chairman’s just estimate of the claim. That was the case that we put, and my learned friend’s case was that the matter involved, in effect, a trial of his cross‑claim in the Supreme Court proceedings and not merely a question of whether the chairman made a just estimate.
To demonstrate that point, can I ask the Court to go to page 20 of the application book and particularly paragraph 52 where Justice Emmett refers to:
The basis for the adjournment was to adduce further evidence –
and that was expert evidence to prove the reasonableness of the hypothetical trading strategy –
on the assumption that the task of the Court in considering the two appeals involved a hearing de novo of the question of whether the Famularo Parties are creditors of Lift Partners and Lift Nominees. That would in effect entail the determination of issues effectively thrown up –
in the Supreme Court proceedings. Then his Honour referred to the question, as put forward by my clients, wether the chairman had made a just estimate which must necessarily be a question of a somewhat summary nature. Then moving ahead to paragraph 59, his Honour begins by saying that:
In considering an appeal under reg 5.6.26, the Court must have regard to the material available to the chairperson. However, there may be cases where it would be appropriate –
to go beyond that, and, indeed, this was such a case. Vast amounts of evidence were let in that were never before the chairman, and then differences are pointed out between proofs of debt for voting purposes and proofs of debt for distribution purposes. For voting purposes we have the regulation which has the just estimate provision, again, of a somewhat summary nature. Then in paragraph 61, Justice Emmett says:
It is a different question, however, to embark on a hearing de novo as to whether or not the Famularo Parties have a claim against Lift Partners, in effect trying the issues raised by the Response and Cross‑Claim in the Commercial List proceedings. I am not persuaded, either on the material before Mr McGrath as chairperson, or on the material before the Court, that Mr McGrath erred in concluding that the Famularo Parties are not creditors of Lift Capital and Lift Nominees.
In other words, the question which is put up as a special leave question is one that does not arise. The Famularo parties had a de novo hearing, if one wants to call it that. It was a hearing conducted on vast amounts of evidence that were never before the chairman. His Honour addressed the correct subject matter which was whether the chairman had made a just estimate or not, not a question as to the ultimate merits of Mr Famularo’s companies’ cross‑claim. The real controversy in this case does not involve the special leave question that is put forward. It involves a question as to what the matter involved, whether it was a just estimate case or whether it was a case on the ultimate merits of the cross‑claim.
The only practical difference between the parties is that my learned friend wanted an adjournment to call expert evidence to prove the reasonableness of the trading strategy and his Honour rejected that as being of no utility and his Honour must have been right. His Honour rejected the trading strategy as the product of hindsight and, what is more, the trading strategy broke down at a number of levels so that my learned friend could never have established, as a matter of primary fact, that this trading strategy would have put Mr Famularo in sufficient funds to meet the demand that was made therefore avoiding an event of default and it could never have demonstrated an opportunity to continue further trading so as to generate profits, which it was claimed by Mr Famularo were the loss that generated his cross‑claim.
The so‑called trading strategy was rejected. It was rejected as the product of hindsight. It was rejected because the trading strategy, even on its face, broke down at various levels and it was rejected, thirdly because it would have required the collaboration and co‑operation of the administrators who said unequivocally that they would not have been a party to it because it would have exposed the companies and them to further risks that they would not have been prepared to undertake.
The adjournment itself, in our submission, was properly granted. It is not a special leave question, but the adjournment was properly rejected. The further evidence that was outlined would never have been of any utility given that at the level of primary fact the trading strategy broke down and, in our respectful submission, the question put forward as a special leave question simply does not arise.
GUMMOW J: I should have asked you, Mr Jackman, which of this collection of respondents do you appear for?
MR JACKMAN: I appear for all of them, the companies and the liquidators.
GUMMOW J: You appear for all of them?
MR JACKMAN: Yes, and they all speak with the one voice.
GUMMOW J: Yes.
MR JACKMAN: The other point that is raised is a point of causation and it is said first, as a matter of law, that the onus is on the trustee in breach to prove a lack of causal effect and, secondly, it is said at the level of fact that that onus was not discharged. Can I deal with the factual proposition first of all. If there was an onus, it was discharged. If your Honours go to page 146 in the application book – can I introduce the point by saying that the breach of trust involved here was a breach by the Lift companies transferring securities that they were duty bound to retain in their own names to Merrill Lynch entities, so that the Lift companies ought to have retained the securities that they transferred away, but that breach did not have any causative impact for a number of reasons. Dealing specifically with the question of onus, on page 146, paragraph 121, the paragraph begins by pointing out in the Full Court that:
The Famularo Parties did not seek to exercise their equity of redemption in respect of the securities: Lift Partners’ breach of trust –
that is, they did not ask for the securities to be returned upon repayment of the debt –
was, therefore, quite irrelevant.
But towards the end of that paragraph there is reference to the evidence that was given by Mr McGrath and Mr Hayes, they were the administrators, now liquidators ‑
to the effect that, had Lift Nominees still held the securities, they would have been realised in substantially the same way as they were realised by Merrill Lynch.
That is picked up again at paragraph 130 where it is said that:
if Lift Partners was bound to establish the absence of any loss, that onus was discharged. The effect of the liquidators’ evidence was that if they had exercised the power of sale, they would have sold the shares and closed out the options in a similar manner to the process adopted by Merrill Lynch.
Paragraph 131 picks up my learned friend’s point that they said they would have acted on advice. Well, of course they would because they are not share traders, let alone option traders, so they would have relied upon exert advice and the court rightly held that:
that evidence was not in conflict with the overall thrust of their evidence that they would have adopted a similar approach to Merrill Lynch with much the same result.
It may readily be inferred that Merrill Lynch being experienced, competent operators in this field did something which would have corresponded to the likely advice of an independent expert had Mr McGrath and Mr Hayes actually been called upon to take undertake the sale rather than Merrill Lynch doing so. But it would have required a radically different strategy to be adopted by Mr McGrath and Mr Hayes to that adopted by Merrill Lynch to wipe out the debt of $33 million. They have got to get over the fact that the Famularo parties owe my clients $33 million. So something which was roughly in the order of what Merrill Lynch did, which is what the liquidators said they would have done, would have been required and it is in those circumstances that the onus was comfortably discharged.
In any event, there is a legal question involved. It is a matter which, in our respectful submission, was settled by Youyang which made it clear that there is no equitable bypass to the need to establish causation. So that whatever the position may be at the level of an evidential onus, the ultimate onus in a breach of trust case seeking equitable compensation is on the plaintiff and my learned friend would need to reopen Youyang to contend for a different outcome and he is making no attempt to do so. So both the factual and the legal levels ‑ ‑ ‑
GUMMOW J: What do you say about the Fowler v Lindholm point?
MR JACKMAN: The first point, if I can take your Honours to the definition of “Lift client” that my learned friend relies upon. He is quite wrong to suggest that Lift client involves people who are not creditors. Your Honours, it is in two places, but if you go to page 38. Lift client is defined in three ways; one is “scheme creditor”, they have to be creditors. (b) is scheme creditor of a particular kind:
(c)any person who entered into a facility agreement with Lift Capital and borrowed money from Lift Capital to purchase securities and who, arising out of the transfer by Lift Nominees of securities that it held on behalf of that person to Merrill Lynch, has a debt or claim admissible to proof –
Now, that picks up the formulation of Lord Justice Lindley in the Midland Coal Coke & Iron Company Case in 1895 as to who a creditor is for the purpose of a scheme. That definition has stood for 115 years, as far as I am aware, without a single criticism or doubt being expressed about it. It is conventionally picked up in creditors schemes to define who the creditors are. It is picked up here and there is no way, in our respectful submission, that paragraph (c) can be construed as straying beyond what for the last 115 years has been the definition of “creditor” for the purpose of a creditors scheme. That is reinforced by the fact that being a creditor scheme, the only people that it binds are creditors. Your Honours will see that in clause 5.2 on page 44:
(a)These Schemes apply to all Scheme claims.
(b)These Schemes bind all of the Scheme Creditors from time to time . . .
(c)Each Scheme Creditor’s entitlements under these Schemes are in lieu of their entitlements to prove in –
the winding-up.
GUMMOW J: In any event, whether you are right or wrong about that, it seems to be accepted that Mr Smith is appearing for people who were not true outsiders.
MR JACKMAN: Quite. We say they are debtors, they say they are creditors. If we are right and they are debtors, the scheme does not apply to them at all, so they have got no concern with it. If they are creditors, then the scheme does apply to them and it does effect a release of any claim that they have against Merrill Lynch. They had a go before Justice Emmett at trying to articulate that and Justice Emmett listened to that articulation and said, well, that is a claim of the most ephemeral and speculative kind. Be that as it may, the question does not actually arise unless this Court forms the view that the Full Court was wrong in refusing my learned friend a very late amendment to introduce the point as to the scope of section 411 on the appeal.
The point was not taken before Justice Emmett in circumstances where Justice Emmett at the first court hearing on the scheme, that is, to convene the scheme meetings, expressly dealt with an argument about it. Different counsel appeared at the first court hearing, but counsel for the Famularo parties indicated that they intended to take a point about the scope of section 411 a la Fowler v Lindholm. That point then was not raised at all the second court hearing. It is quite remarkable because this scheme is drafted so as to cling very closely to Fowler v Lindholm, understandable reasons.
It involved a very similar kind of insolvency circumstance and Fowler v Lindholm had recently been decided. So there was every reason in
the drafting of this scheme to cling very closely to it. It may well have been expected that if there was any desire to take the point at the second court hearing before Justice Emmett, then it would have been taken. That is why the Full Court says that, looking at this objectively, the point was simply abandoned. An intention to raise it had been articulated and there was absolutely no word concerning it at the second court hearing.
The Full Court then went on to say that there is a further reason why a late amendment of this kind should not be allowed and that is that the Full Court would have been benefited by hearing from ASIC on the matter, which had a right to address the court, and in the absence of the opportunity being given to ASIC to address the court on the matter, the amendment should not be allowed, no adjournment of the appeal should be granted, and there is no real attempt by my learned friend, in our respectful submission, to bring himself within the House v The King type of framework to show that the decision of the Full Court to refuse leave to amend was not properly made and without overcoming that hurdle the question does not even arise.
There is then the further question about whether this is a third party case at all and that involves the status of Merrill Lynch. Merrill Lynch is not an outsider. Merrill Lynch is a creditor. It is a contingent creditor because it the Lift clients sued Merrill Lynch, the first thing Merrill Lynch would do would be to claim contribution or indemnity against the Lift companies. So they are a creditor, they are not an outsider, and there is absolutely no reason to think, in our respectful submission, that this is not an arrangement between a company and its creditors when all of the parties to it, including Merrill Lynch, are creditors of the company. So it is not a vehicle for testing any question as to whether outsiders can be affected by a creditors scheme or whether creditors can be affected in their dealings with outsiders. That would be quite a different case because Merrill Lynch was itself a creditor.
GUMMOW J: Thank you.
MR JACKMAN: May it please the Court, those are our submissions.
GUMMOW J: Yes, Mr Smith.
MR SMITH: .....the question of hearing de novo, my learned friend put that the issue was as to the assessment of a just estimate. The evidence was that the chairman valued the claim at nil and rejected the proof. So the issue was whether or not the chairman was right in his ultimate conclusion that we were not creditors. We sought an adjournment to lead evidence to support the proposition that the trading strategy, which Justice Emmett held did not fall down as a matter of fact, but which may well have been feasible – and that is at paragraph 45, application book 18, of the judgment. He says:
While the strategy may have been feasible, it was never proposed to the Administrators of Lift Partners. It is hard to avoid the conclusion that much of the evidence summarised above was given with the benefit of hindsight.
The issue before the chairman was whether we were creditors. We sought an adjournment. That was refused on the express basis that the hearing was not a de novo hearing and it is, with respect to my learned friend, completely incorrect to say that we had a de novo hearing, likewise as it is incorrect to say that vast amounts of evidence were let in which were not before the chairman; they were not. All that was led was the evidence from Mr Famularo to negative the causal thesis on which the chairman acted, namely, that if there had been no breach, that the shares would have been sold in precisely the same way.
The Court should realise, if it does not, that there were three bodies of the securities, one was shares, one were put options. Both the shares and the put options had a market value when sold for $361 million against the debt of $345 million. So my clients were in credit at that level. What caused the $55 million loss was the closing out of the call options. Closing out of those options resulting in a loss, the trading strategy, in effect, said there was no need to close out those options, they could have been transferred to the Famularo companies that would have dealt with them. So there was no question, as my learned friend put, of the administrators having to, in effect, deal with open call positions.
Finally, my learned friend’s proposition based on paragraph 131 of the judgment that there is no reason to think that the administrators of exercising power of sales would have acted in a different way to Merrill Lynch is completely unsupported because (a) Merrill Lynch was a party and it was never called and, secondly, the Full Court’s finding at 131 that the administrators would have acted on the advice of experts is correct, but the conclusion they drew that there would have been a similar result in fact is completely without any evidentiary basis. That is the essential factual question on which the Full Court rejected the argument about causation. It has to be remembered that it was Merrill Lynch who sold, not the mortgagee.
In relation to section 411, the release question arises not in the context of Merrill Lynch not being an outsider, but what this deed does is impose upon my client an obligation to release its claims against Merrill Lynch, claims not against the company, in circumstances where it
was not allowed to vote on the approval of the scheme issue. That is all I wish to put.
GUMMOW J: Thank you Mr Smith. We will take a short adjournment.
AT 12.27 PM SHORT ADJOURMENT
UPON RESUMING AT 12.41 PM:
GUMMOW J: These three applications arise from the rejection of the Full Court of the Federal Court, Chief Justice Keane, Justices Finkelstein and Jacobson, reported (2010) 266 ALR 666, of an appeal against the approval by the primary judge, Justice Emmett, pursuant to Part 5.1 of Chapter 5 of the Corporations Act 2001 (Cth) of two schemes of arrangement and against his Honour’s dismissal of challenges to the rejection of certain proofs of debt by the chairman for the purpose of the voting at the scheme meetings.
Special leave is sought to make good the proposition that the claims, the subject of a compromise or arrangement under Part 5.1 of Chapter 5, must be claims against the company the subject of a relevant scheme. In the course of construing Part 5.3A, this Court emphasised in Lehman Brothers Holdings Inc v City of Swan (2010) 84 ALJR 275 at 285 and 290 that nothing there said touched the construction given by Part 5.1 by the Full Federal Court in Fowler v Lindholm (2009) 178 FCR 563. In the present case the Full Court followed Fowler v Lindholm.
Given the relationships between the relevant parties, including Merrill Lynch, it appears that there was no true “outsider” in the relevant sense. This, and the course of conduct of the present litigation, provides an inappropriate occasion to consider a challenge in this Court to Fowler v Lindholm.
Special leave also is sought to consider the nature of the “appeal” to the Federal Court under the Corporations Regulations 2001 (Cth) against the rejection of the proofs of debt by the chairman. This was a proceeding before Justice Emmett in the original jurisdiction of the Federal Court and the issue concerns the content of that “matter” – see Ruhani v Director of Police (2005) 222 CLR 489 at 499-500, 527-528, 543 and 569-570.
That, however, was not the basis upon which the subject was approached by the parties in the Federal Court. Further, in any event, and as the respondents explained in oral submissions today, there are insufficient prospects of success in displacing the ultimate decision of Justice Emmett to warrant a grant of special leave.
The applicants seek to raise questions about the onus the proof in relation to causation of loss by knowing assistance in a breach of trust. Even if that onus rests on the defendant, the Federal Court was correct in holding that there was no causation, in fact, here.
The other issues which the applicants seek to raise concern the construction and operation of the facility agreements in the events that happened. By themselves they are not such as to attract a grant of special leave. Each application is refused with costs.
AT 12.45 PM THE MATTERS WERE CONCLUDED
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