Victor Ong v The Trust Company (Australia) Limited

[2010] NSWSC 1501

CITATION:	Victor Ong v The Trust Company (Australia) Limited [2010] NSWSC 1501
HEARING DATE(S):	20 December 2010
JURISDICTION:	Equity
JUDGMENT OF:	Pembroke J
EX TEMPORE JUDGMENT DATE:	20 December 2010
DECISION:	See judgment at [31]
CATCHWORDS:	CONSTRUCTION - trust deed - whether note holders adversely affected by constitutional amendment - relevance of plaintiff's self induced change of residence
CATEGORY:	Principal judgment
CASES CITED:	Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
PARTIES:	Plaintiff: Victor Wei Tak Ong First Defendant: The Trust Company (Australia) Limited as trustee of the unsecured deposit notes issued by Terrey hills Golf & Country Club Holdings Limited Second defendant: Terrey Hills Golf & Country Club Holdings Limited
FILE NUMBER(S):	SC 2010/386187
COUNSEL:	C R C Newlinds SC with N Bender - for the plaintiff J A Watson - for the first defendant D A Smallbone - for the second defendant
SOLICITORS:	Middletons - for the plaintiff Freehills - for the first defendant Yukio Hayashi & Associates - for the second defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

PEMBROKE J

MONDAY 20 DECEMBER 2010

2010/386187 - VICTOR WEI TAK ONG v THE TRUST COMPANY (AUSTRALIA) LIMITED AS TRUSTEE OF THE UNSECURED DEPOSIT NOTES ISSUED BY TERREY HILLS GOLF & COUNTRY CLUB HOLDINGS LIMITED

EX TEMPORE JUDGMENT

Introduction

1 This proceeding arises out of a dispute concerning the proper construction of a trust deed between the second defendant (the Terrey Hills Golf & Country Club, which I will call the company) and Guardian Trust Australia Limited dated 20 November 2000. The first defendant replaced Guardian Trust Australia Limited as the trustee administering the trust deed.

2 The company is the owner of land known as the Terrey Hills Golf Course. The dispute concerns debt instruments styled unsecured deposit notes issued by the company pursuant to the trust deed to persons wishing to invest in the company and to play at the golf course. The notes are a debt obligation on the company to pay each holder of the notes the face value of the note on the maturity date. That date is 30 January 2011. They also confer upon each holder a right to use the golf course and its facilities. The trustee holds the holders' rights to enforce the provisions of the trust deed for the benefit of the holders.

3 The trust deed consists of clauses in the body of the document and conditions in its schedules. Both take effect as obligations on the company and/or the trustee depending on the provision in question. Where they are obligations of the company, they are enforceable by the trustee on the holders’ behalf.

4 There are two classes of notes on issue pursuant to the trust deed:

“A” class Notes (A Notes) may be held by natural persons ordinarily resident in Australia and conferred certain playing rights on them; and
“B” class Notes (B Notes) may be held by corporations which could then nominate a natural person as an alternate having certain playing rights.

5 The plaintiff holds an A class note carrying a face value of $54,000. There are approximately 756 holders. The total face value of the A and B class notes on issue is approximately $41 million. The plaintiff was ordinarily resident in Australia at the time that the note was issued to him in March 2001 but he has since ceased to be ordinarily resident in Australia. There are at least eight holders in the same position who are not ordinarily resident in Australia.

6 Each unsecured deposit note constitutes a separate, direct, unconditional debt obligation of the company to the holder ranking equally without preference with all other unsecured deposit notes and having the benefit of the trust deed and the security documents. The security documents are a mortgage, a charge and any collateral security held by the trustee from time to time. They secure the note holders’ rights to repayment. For the reasons that I will explain, those rights are conditional. In fact, they are somewhat problematic.

7 The trustee entered into the trust deed and the security documents as trustee for the holders. It holds the right to enforce the repayment of the notes and the security documents in trust for the holders.

8 The notes are unusual debt instruments. Significantly, and among other things, the trust deed gives an election to convert the notes to the company rather than to holders. The rights, entitlements and benefits of the holders reflect the particular nature of the legal arrangements that formed the basis on which the golf club was established.

Conversion of the Notes

9 The reason why the right to repayment of the notes, and therefore the benefit of the security documents, is and always was, problematic is that those rights were always subject to the company's election under condition 4.2(a)(1) of the trust deed and the mandatory obligation under condition 4.2(a)(2). Thus, at any time during the six month period before the maturity date of the notes, the company could elect to convert all of the notes into Membership Preference Shares.

10 Additionally, regardless of its particular subjective wishes, the company had a mandatory obligation to convert the notes into Membership Preference Shares unless it procured an auditor's certificate on or before 30 November 2010. An auditor's certificate is defined to mean simply a certificate from an auditor that the company will, on the maturity date, have sufficient funds to enable it to redeem all of the notes.

11 In truth, given the company's financial position, it must have been apparent for some time that the rights of holders to the repayment of the notes and the benefit of the security, were, in a practical sense, illusory.

12 In this case, the obligation to convert the notes was forced upon the company and the holders by the operation of condition 4.2(a)(2). This was always a foreseeable consequence. It is an aspect of the regime to which the plaintiff became subject when he subscribed for his notes. The intention behind that regime is that, absent an auditor’s certificate by 30 November 2010, all notes including the plaintiff's notes will be compulsory converted into Membership Preference Shares on the maturity date. Membership Preference Shares are defined to mean either A, B or C class Membership Preference Shares.

13 As I have observed, A class Membership Preference Shares can only be issued to natural persons ordinarily resident in Australia. On the other hand C class Membership Preference Shares can be issued to natural persons not ordinarily resident in Australia. However they confer lesser rights than those conferred on A class membership preference shareholders.

The Constitutional Amendment

14 It was no doubt with these considerations in mind that on 14 September 2010 the ordinary shareholders of the company passed a resolution to permit A class Membership Preference Shares to be issued to natural persons not ordinarily resident in Australia. The effect of the resolution is to reinstate to the plaintiff the rights, entitlements and benefits of A class Membership Preference Shares to which he would have been entitled upon compulsory conversion, if he had not chosen to cease to maintain his ordinary residence in Australia. For all intents and purposes, his change of ordinary residence meant that he effectively forfeited those conditional rights.

15 As to his rights to redemption of his note and repayment of its issue price, the plaintiff has lost those rights, as have all other holders. This follows whether the company chose to make an election pursuant to condition 4.2(a)(1) or became subject to a mandatory obligation pursuant to condition 4.2(a)(2). This is the effect of condition 4.2(b), particularly condition 4.2(b)(3). It represents an outcome that was always part of the original bargain.

16 What has changed is that, as a consequence of his decision to change his residence, the plaintiff has also become ineligible to receive A class Membership Preference Shares in return for his notes. He can only receive C class Membership Preference Shares, if at all. However the constitutional amendment cures this problem. Remarkably, its validity is attacked by the plaintiff.

17 Condition 4.1 of the trust deed prohibits an amendment of the company's constitution that adversely affects the interests of holders unless the holders first approve the amendment by extraordinary resolution in a meeting convened under the trust deed. There was no such meeting before or after the amendment and the holders' approval has not been sought or obtained.

The Plaintiff’s Contentions

18 The plaintiff advances the following submissions in support of its contention that the constitutional amendment adversely affected the interests of holders and was therefore a contravention by the company of condition 4.1 of the trust deed:

The Company was unable to elect under condition 4.1 of the Trust Deed to convert all of the Notes to Membership Preference Share unless the Amendment was first passed.
The Conversion itself is adverse to the interests of Holders because, as secured creditors enjoying the benefit of a mortgage and charge over the entirety of the Company’s undertaking, they would be able to take control of the Company’s assets, including the golf course which has a book value of $54 million, on 30 January 2011 should they wish to do so. This is a far better position than that they would be in as holders of Membership Preference Shares, which confer limited voting rights (and none in relation to the election of the board of the Company), no entitlement to dividends and no ability to force a members’ voluntary liquidation of the Company without the Ordinary Shareholders’ agreement.

19 I do not think that the first proposition is necessarily correct. But even if it is, it is not determinative of the ultimate question whether the amendment adversely affects the interests of holders. It assumes that the conversion of the plaintiff's notes must be to A class Membership Preference Shares. This does not follow from the actual language of condition 4.2(a) which only requires conversion into Membership Preference Shares without stipulating that they must be A, B or C class shares. There are indications in condition 4.2(g) that conversion from one class of note to an equivalent class of membership preference share was anticipated but I regard the principal obligation in 4.2(a)(2) as the primary obligation and the more important one.

20 In a sense this submission reveals a fundamental aspect of the plaintiff's approach. His submissions assume that the purpose of the constitutional amendment was to overcome a problem with which the company was confronted. In fact the amendment at least equally overcame a problem that confronted the plaintiff; one that was self induced. The amendment alleviated the consequences of his change of residence and restored him to the position in which he would otherwise have been. It enabled him to have the benefit of the receipt of A class Membership Preference Shares.

21 The second proposition involves the construction of the words "adversely affect" in condition 4.1 of the trust deed. It is well established that, “if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, even though the construction adopted is not the most obvious or the most grammatically accurate": Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 146.

22 I do not think that this is a case where the company’s construction is one which is not the most obvious or the most grammatically accurate. However, even if the company’s construction were not the most obvious, the consequences that would follow from the plaintiff’s construction, and principle and authority, dictate that I should favour the company’s construction over that for which the plaintiff contends. In fact, I regard the company’s construction as the more natural one.

23 The principal difficulty with the plaintiff's contention that holders are adversely affected by the constitutional amendment is that it is predicated on the proposition that holders are secured creditors who enjoy the benefits of a mortgage and charge over the entirety of the company's undertaking. It is said that because of their status as secured creditors, they would be able to take control of the company's assets on 30 January 2011, including the golf course should they wish to do so. The supposed attraction of this course is that the book value of the property is $54 million.

24 However, I have already explained how illusory the holders' status as secured creditors really is. In fact, given that no auditor's certificate was provided to the trustee by 30 November 2010, the notional rights of holders to take control of the company's assets have all but vanished. Since 30 November 2010 the company has become bound to convert the notes and the holders have lost their entitlement to have their notes redeemed and the issue price repaid: Condition 4.2(b)(3). The mortgage and charge have effectively ceased to secure those monetary rights.

25 Further, the plaintiff's approach to the meaning and operation of the words "adversely effect" is at a level of generality that I do not think is contemplated by condition 4.1. In my view, the operation of condition 4.1 requires a comparison of legal rights and obligations having regard to the limitations and restrictions imposed on those rights in the events which have occurred. It is not an invitation to compare in a broad and general sense the respective rights of the holders of Membership Preference Shares with those of the holders of unsecured deposit notes. Such a comparison serves no useful purpose.

26 The plaintiff in particular, and holders in general, have no choice over whether or not they will become Membership Preference shareholders. The underlying compact between holders, shareholders, the company and the trustee which is recorded and reflected in the constituent documents, gives holders no say in the matter. The intention is that, absent an auditor’s certificate, holders will become Membership Preference Shareholders at the maturity date. The correlative consequence is that once the company elects, or is required to convert because of the absence of an auditor’s certificate, it is no longer obliged to redeem the notes or repay the issue price. The supposed strategic and practical advantages of a holder as a secured creditor that underpin the plaintiff's case are beside the point. In fact, they are illusory.

27 The ineluctable progress towards conversion of the notes into Membership Preference Shares, and the loss of the right to repayment of the notes, commenced on 30 November 2010. The holders, including the plaintiff, cannot escape that consequence. It is therefore a false comparison to consider the supposed practical advantages of holders with the limited voting rights and other incidents of the ownership of Membership Preference Shares.

Other Considerations

28 I should mention one other matter. It will by now be clear that the factual origin of the dispute was the plaintiff’s unilateral choice to change his residence. There is no doubt that the case which he advances is unmeritorious and opportunistic - in a non-legal sense. His counsel conceded as much. That however is a distraction. The question for my determination is the effect of the documents properly construed, having regard to the scheme of operation which they reveal.

29 There are echoes in this case of the principle explained by the Court of Appeal in TCN 9 v Hayden Enterprises (supra) at 147. A party should not be entitled to exercise a power or obtain a benefit under a contract which flows directly from, and depends upon, his own default. The plaintiff's change of residence in this case was not a default in the ordinary sense but it was a self induced act of which he now seeks to take advantage. Although there are similarities, there are also differences. I do not decide the case on this basis and I have not done so.

Conclusion

30 For the reasons that I have explained, I have reached the view that the amendment to the constitution does not adversely affect the plaintiff in particular and holders in general. It enables the plaintiff to be placed in the same position he would have been in before he changed his residence, by ensuring that he receives A class Membership Preference Shares. It puts him in a better position than if there were no amendment and he only received C class Membership Preference Shares or was otherwise left in the position that he would be in. It accords with the underlying scheme and intention that underpins the constituent documents.

31 For those reasons I dismiss the statement of claim. The plaintiff should pay the costs of the first and second defendants.

oOo