Convertible Notes Not Entitled to Liquidation Proof

The Court of Appeal confirmed that holders of convertible notes issued by a company are not entitled to prove in the liquidation of the company for the face value of the notes, unless the company elected to redeem them in cash.

Court of Appeal Supreme Court New South Wales Medium Neutral Citation: [COMPANY] v [COMPANY] (in liquidation) [2013] NSWCA 47 Hearing dates: 7 December 2012 Decision date: 08 March 2013 Before: Beazley P at [1] Macfarlan JA at [2] Sackville AJA at [33] Decision: Appeal dismissed with costs. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: BANKING AND FINANCE - instruments - convertible notes issued by [NAME] to be converted into ordinary shares in HIH unless [NAME] elected to redeem them in cash - no such election or conversion - whether [NAME] entitled to prove in [NAME] liquidation for face value of notes Cases Cited: Commissioner of Taxation v Firth [2002] FCAFC 95; 192 ALR 542 [NAME] v [COMPANY] of China (1992) 26 NSWLR 562 Matthew v Blackmore (1857) 1 H & N 762; 156 ER 1409 McDonald v Dennys Lascelles Ltd [1933] HCA 25; 48 CLR 457 McGrath v Perpetual Trustee Co Ltd [2008] FCA 623; 66 ACSR 210 [COMPANY] (in liq); McGrath v Perpetual Trustee Co Ltd [2008] FCA 623; 66 ACSR 210 R v New Queensland Copper Co Ltd [1917] HCA 34; 23 CLR 495 Wingecarribee Shire Council v [COMPANY] (in liq) [2012] FCA 1028 Category: Principal judgment Parties: [COMPANY] (First Appellant) [COMPANY] ([NAME] Appellant) [COMPANY] (in liquidation) (First Respondent) [COMPANY] (in liquidation) ([NAME] Respondent) Representation: Counsel: [redacted] A S Bell SC/[NAME] (First Respondent) [NAME] (Solicitor) ([NAME] Respondent) Solicitors: [redacted] [NAME] (First Respondent) [NAME] ([NAME] Respondent) File Number(s): 2012/226656 Decision under appeal Jurisdiction: 9111 Citation: [COMPANY] v [COMPANY] (in liquidation) [2012] NSWSC 611 Date of Decision: 2012-06-05 00:00:00 Before: Stevenson J File Number(s): 2011/305530

Judgment 1BEAZLEY P: I agree with the reasons and orders proposed by Macfarlan JA. 2MACFARLAN JA: The issue in this case is whether holders of 42,620,000 unsecured Converting Notes (the "Notes") issued by the first respondent ("[NAME]"), are owed debts or damages equivalent to the $A213.1m face value of the Notes, for which they can prove in the liquidation of [NAME]. The primary judge held that they are not and, for the reasons given below, I agree. As a result the appeal should be dismissed.

FACTUAL CIRCUMSTANCES 3For the purpose of funding a takeover by the [NAME] respondent ("HIH") of [COMPANY], HIH's wholly owned subsidiary [NAME] issued the Notes on the terms and conditions contained in a Trust Deed dated 26 October 1998 (the "Trust Deed") and a Deed Poll of the same date entitled "Terms of Conversion, Guarantee and Subordination of Guarantee of Converting Notes 1998" (the "Deed Poll"). In essence, the Notes were issued upon the basis that, unless [NAME] elected to redeem them in cash, they would be converted into ordinary shares in HIH. The first appellant ("[NAME]") was appointed under the Trust Deed as trustee for the [NAME]. 4HIH [NAME] did not elect to redeem the Notes in cash and lacked sufficient funds to procure HIH to issue shares in substitution for the Notes. [NAME] both went into liquidation in 2001, and in 2007 [NAME], acting on behalf of the [NAME], terminated the [NAME]' contracts with [NAME] on the ground that [NAME] had repudiated its obligation to convert the Notes into ordinary shares of HIH. 5In proceedings in 2008 in the Federal Court of Australia, to which HIH, [NAME] and [NAME] were parties, [NAME] found, inter alia, that conversion of the Notes to shares in HIH could not, and did not, occur in the absence of [NAME] paying the face value of the Notes to HIH to procure the issue of the shares. 6On 9 September 2009 [NAME], on behalf of the [NAME], submitted a creditor's claim to the [NAME] of [NAME] alleging that it was indebted to the [NAME] in an amount equivalent to the face value of the Notes. This claim was rejected by the [NAME] on 11 July 2011. [NAME] subsequently commenced proceedings in the High Court of New Zealand seeking an order reversing the [NAME]' decision but shortly thereafter filed an application for a stay of those proceedings and commenced the present proceedings in the Supreme Court of New South Wales for a declaration that [NAME] is indebted to [NAME] as trustee for the [NAME] in an amount equivalent to the face value of the Notes. In opposition, the [NAME] of [NAME] contend that the [NAME] only have a right against [NAME] for damages for breach of its obligation to convert the Notes to [NAME]. It is common ground that this right is worthless because shares in HIH are worthless. The [NAME] appellant ("[NAME]") joined as a plaintiff to act as a representative of the [NAME]. 7On 25 October 2011, Associate Judge Bell of the High Court of New Zealand stayed the proceedings in that Court, considering it preferable that the nature of the [NAME]' rights be determined in the proceedings in this Court.

THE RELEVANT CONTRACTUAL DOCUMENTS

The Trust Deed 8Clause 1.1 contained the following relevant definitions: "'Conditions of Issue' means in respect of the Notes, the conditions specified in Schedule 1 to this Deed; 'convert' in relation to a Note, means the redemption of that Note in conjunction with the Company [[NAME]] applying, at the irrevocable direction of the [NAME], the principal amount of that Note in subscription for Ordinary Shares (and, if applicable, X Class Convertible Notes) immediately in accordance with the Conditions of Issue, and 'conversion' will be construed accordingly; ... 'Moneys Owing' means the Principal Moneys and interest and all other moneys payable to the Trustee or to any [NAME] from time to time under this Deed; ... 'Ordinary Shares' means (subject to any reorganisation or reconstruction of capital) fully paid ordinary shares in the capital of HIH; ... 'Principal Moneys' means the total amount paid on issue of the Notes issued pursuant to this Deed; ... 'Trustee' means [COMPANY] or any successor as trustee for the [NAME] pursuant to this Deed". 9The following operative provisions are also relevant: "2A. COVENANT TO PAY AND DURATION OF TRUST 2A.1 Indebtedness of Company The Company: (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 the Company to convert the Notes into Ordinary Shares in accordance with the Conditions of Issue, pay to the Trustee in the Jurisdiction (or such other place as the Trustee and the Company may from time to time agree): (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, in the meantime and until the whole of the Notes have been redeemed or converted into Ordinary Shares in accordance with the Conditions of Issue, pay to the Trustee interest on the Principal Moneys in accordance with the Conditions of Issue. ...

14. DISCHARGE AND RELEASE By force of this clause, the Company will immediately be discharged and released from its liabilities, obligations and covenants under this Deed in respect of any Note on the first to occur of the date on which: (a) that Note and interest on that Note is redeemed or satisfied; and (b) that Note is converted". 10The Conditions of Issue contained in Schedule 1 to the Trust Deed included the following relevant provisions: "1. DEFINITIONS ... 1.2 ... in these Conditions of Issue, unless the context otherwise requires. 'Commencement of the Conversion Period' means 12 June 2001; 'Conversion Date' means, where a notice is given: (a) under Condition 4.1(a), 12 March, 12 June, 12 September and 12 December of each calendar year during the Conversion Period; (b) under Conditions 9 or 12, the twenty fifth (25th) Business Day after the day on which the relevant Conversion Event occurred; 'Conversion Event' has the meaning given in Condition 9.1; 'Conversion Period' means the period between the Commencement of the Conversion Period and the End of the Conversion Period (both dates inclusive); ... 'End of the Conversion Period' means 12 June 2003; ... GENERAL TERMS OF ISSUE 2.1 Each of the Notes will: (a) have a principal amount (Face Value) of $5.00, and be issued at the Issue Price; (b) be convertible in the manner and at the times provided by Condition 4 and, subject to Conditions 7 and 12 below, into the number of Ordinary Shares determined in accordance with Condition 6.5; and ... 2.2 Each of the Notes must be paid for in full on application. ...

4. GENERAL RIGHTS OF CONVERSION 4.1 Notes are convertible: (a) on a Conversion Date during the Conversion Period into the number of Ordinary Shares determined in accordance with Condition 6.5 by a [NAME] delivering to the Company not less than 5 Business Days before the Conversion Date on which the Notes are to be converted (except that the Company reserves the right, in its sole discretion (on a case by case basis) to accept delivery during that five Business Day period): (i) a Conversion Notice requiring the Company to convert the Notes specified in the Notice on the next Conversion Date; and (ii) the Note Certificate comprising or including the Notes to be converted; or (b) in the circumstances and in the manner provided for in Conditions 9 or 12. ...

6. ALLOTMENT OF SHARES ON CONVERSION ... 6.5 On conversion of a Note: (a) the Company must redeem that Note for an amount equal to its Face Value; and (b) the [NAME] of that Note, by operation of this clause, hereby directs the Company to apply the whole of the moneys payable to it on redemption in subscribing for that number of Ordinary Shares: (i) calculated by dividing the Face Value of the total number of Notes the subject of the Conversion Notice by 95% of the Weighted Average Market Price of Ordinary Shares (adjusted to the nearest whole cent) at the Conversion Date; (ii) subject to a minimum price of $0.25 per Ordinary Share. ...

9. CONVERSION EVENTS 9.1 A [NAME] may within 20 Business Days of any of the following events (each a 'Conversion Event') occurring (if any of these events occurs at any time prior to the end of the Conversion Period) serve a Conversion Notice on the Company not less than 5 Business Days before that twentieth Business Day (except that the Company reserves the right, in its sole discretion (on a case by case basis), to accept delivery of a Conversion Notice that is given within that five Business Day period) requiring the conversion of its Notes into the number of Ordinary Shares determined in accordance with Condition 6.5: (a) on an Announcement [as to non-payment of interest] (Condition 5); or (b) on an announcement that it is proposed to delist HIH from the Official List of the ASX; or (c) on an announcement by HIH that it proposes to make to the holders of Ordinary Shares an offer or invitation to subscribe for or purchase, on a pro rata basis, Marketable Securities of HIH (and whether by way of renounceable or non-renounceable rights or otherwise) or of a bonus issue of Marketable Securities (other than any Ordinary Shares or Marketable Securities issued under an HIH employee share scheme); or (d) on an announcement, within 18 months after 12 June 1998, by HIH that any entity in the HIH Group proposes to make an offer of or invitation to subscribe for or purchase its Marketable Securities that are convertible into Ordinary Shares which Marketable Securities will rank in priority to, or pari-passu with, the Notes; or (e) on a Takeover; or (f) on the occurrence of an Event of Default (with a clause 6(1) of the Deed Event of Default deemed to have occurred on the date of despatch of the Annual Report of HIH to its shareholders); or (g) on the Company serving notice in writing to the [NAME] under Condition 12.1 of its intention to redeem all Notes for cash as a result of a Change of Control. ...

12. MANDATORY CONVERSION AND REDEMPTION 12.1 If the Company decides within 60 Business Days after a Change of Control that it wishes to redeem all, but not some only, of the Notes, then the Company must give 20 Business Days notice in writing to the [NAME] of its intention to redeem all Notes for cash in accordance with this Condition 12.1. On the expiry of the 20 Business Day period, the Company must redeem all Notes that have not been the subject of a Conversion Notice under Condition 9.1(g) for cash at their Face Value plus 5% of such value by way of additional interest payable on those Notes. 12.2 If the Company decides that it wishes to redeem all, but not some only, of the Notes for cash, then the Company must give not less than 20 Business Days notice in writing to the [NAME] expiring no later than the End of the Conversion Period of its intention to redeem all Notes for cash in accordance with this Condition 12.2. At the End of the Conversion Period, the Company must redeem all Notes for cash at their Face Value plus 5% of such value by way of additional interest payable on those Notes. 12.3 If the Company 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".

The Deed Poll 11The following provisions in the Deed Poll are relevant: "1. DEFINITIONS AND INTERPRETATION 1.1 In this Deed, and all documents issued under or pursuant to this Deed, unless the context otherwise requires: ... 'convert' means in relation to a Note, the redemption of that Note in conjunction with the [NAME] applying the principal amount of that Note in subscription for Ordinary Shares (and, if applicable, X Class Convertible Notes) in the Company in accordance with the Conditions of Issue, and 'conversion' will be construed accordingly. ...

6. CONVERSION OF NOTES The Company agrees to issue Ordinary Shares and X Class Convertible Notes pursuant to, and as required under, the Conditions of Issue."

THE FEDERAL COURT

JUDGMENT 12The following parts of [NAME]'s judgment in McGrath v Perpetual Trustee Co Ltd [2008] FCA 623; 66 ACSR 210 are presently relevant: "[57] It seems clear to me from the artificial definitions of 'convert' and 'conversion' contained in the trust deed that conversion invariably required [NAME] to engage in a two step process even when 'automatic' conversion was mandated by condition 12.3 of the conditions of issue. So far as [NAME] was concerned step 1 required 'redemption' of the relevant notes and step 2 required [NAME] to apply the principal amount of the relevant notes (but not any attendant interest obligation that may have to be satisfied) in subscription for shares in [NAME]. When that occurred, conversion, within the artificial meaning of that word, was complete. ... [60] [NAME] may not have had the right to call for the redemption of their notes for cash, nevertheless, in the context of the present case, redemption of the notes, even as part of [NAME]'s implementation of a mandatory conversion, required the notes to be paid off. It was not open to [NAME] to discharge its conversion obligations otherwise than by applying the amount paid off, being an amount equal to the principal amount paid on the issue of the notes, in subscription for ordinary shares in [NAME] on behalf of the [NAME]. ... [63] The plaintiffs' submission that mandatory conversion 'telescoped' the two steps required for conversion of notes into one should be rejected. 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". 13On 15 May 2008 [NAME] made the following declarations to give effect to this judgment: "1 Upon the proper construction of the HIH Converting Notes 1998 Trust Deed made 26 October 1998 ("Trust Deed") by the [NAME] ("[NAME]"), the [NAME] ("[NAME]") and the [NAME] ("[NAME]") the conversion of Notes issued thereunder invariably required [NAME] to engage in a two step process, the first step being the redemption of the Notes by paying them off, and the [NAME] step being the application of the principal amount of the relevant Notes in subscription for shares in [NAME]. 2 Upon the proper construction of the Trust deed and in the events which have happened, [NAME] 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, [NAME] on behalf of each [NAME] of outstanding notes as at 12 June 2003, validly terminated each of the Notes contracts between those [NAME] and [NAME]".

THE

JUDGMENT AT FIRST INSTANCE 14The primary judge described the issue before him as whether the [NAME] were creditors of [NAME] for the face value of the Notes. His Honour noted that any rights of the [NAME] against [NAME] accruing prior to the termination of their contracts would not have been affected by that termination (see McDonald v Dennys Lascelles Ltd [1933] HCA 25; 48 CLR 457 per Dixon J at 476 - 7) (Judgment [33] - [36]). 15In resolving the proceedings against the [NAME], his Honour expressed the following views: "50 In Clause 2A.1, the parties made express, and detailed provision for the rights of the [NAME] concerning repayment. In those circumstances, I find it impossible to impute to the parties an intention that [NAME] would have any rights beyond those specified in the clause. ... 77 The use of [the words 'must be automatically converted' in Condition 12.3] 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. 78 That party could only be [NAME]: Condition 6. 79 Thus, the effect of Condition 12.3 was that, absent an election by [NAME] to redeem all of the Notes under Condition 12.2 (or, presumably, Condition 12.1, although it is not mentioned in Condition 12.3), [NAME] 'must' convert the Notes not yet converted as at 12 June 2003 to Ordinary Shares in HIH. ... 88 I agree [with [NAME]] 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 ([NAME]) 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 [NAME]'s observations as being inconsistent with that conclusion. ... 106 In my opinion, although the parties had used the word 'indebtedness' [in subclause 2A.1(a)] 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. ... 116 The only circumstance provided for by the Trust Deed whereby the amount paid by [NAME] to [NAME] on issue of the Notes (that is, the 'Principal Moneys' referred to in subclause 2A.1(b)(i))[would] become payable to [NAME], was if [NAME] elected to redeem the Notes for cash under Condition 12.1 or Condition 12.2. 117 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). 118 The Trust Deed made no other provision for any 'date due for repayment'. ... 127 The ordinary and natural meaning of [the words commencing 'Subject to any obligation ... '] is that if, for any reason, [NAME] came under an obligation to convert the Notes into Ordinary Shares in HIH, it would no longer have an obligation to pay to [NAME] the 'Principal Moneys'. ... 140 [NAME] acknowledged that it was 'indebted' to the [NAME], the true nature of the legal relationship between [NAME] and the [NAME] was not that of a conventional debtor and creditor. This was because the [NAME], as the notional 'creditors' were not entitled to call for repayment of the 'debt' (the moneys subscribed for the Notes). ... 143 In my opinion, the [NAME] were never entitled to assert that [NAME] was indebted to them for the face value of the Notes. 144 And even if that be wrong, once [NAME] 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 [NAME] to pay [NAME] the 'Principal Moneys', ceased".

THE APPELLANTS' SUBMISSIONS 16The appellants submitted that the primary judge did not pay adequate regard to the Federal Court's determination, binding on the parties to these proceedings because they were also parties to those proceedings, that conversion of the Notes to [NAME] was a two-step process involving, first, redemption of the Notes and, secondly, use by the [NAME], through their agent [NAME], of the redemption money to subscribe for [NAME]. The appellants submitted that when the [NAME]' contracts were terminated, the [NAME]' irrevocable direction (referred to in the definition of "convert" in the Trust Deed) to [NAME] to apply the money payable on redemption to subscribe for [NAME] was terminated as well. This, submitted the appellants, "left matters as they stood at the time of termination with [NAME] remaining indebted to [NAME] for the Face Value of their Notes" (Written Submissions dated 14 September 2012, [60]). 17The appellants contended that "[t]here is no reason to impute to the parties an intention other than to create a relationship of debtor and creditor when they used language pointing unambiguously to debt" and that [NAME] would obtain a windfall gain if the [NAME] had no right to prove their debts in [NAME]'s liquidation and had only a worthless damages claim against [NAME] for failing to procure "plainly worthless" [NAME] for the [NAME] (ibid [62] - [63]).

RESOLUTION OF THE APPEAL 18It should be noted at the outset that the existence of a debt does not necessarily mean that the person to whom it is owed has an unqualified right to payment of it in cash. It has long been recognised that parties to a loan contract are unrestricted in the provisions they may make concerning the circumstances enlivening an obligation to repay the whole or part of money lent. Thus, for example, "[i]t is well-established that it is possible to have a contract of loan in which the parties agree that the [NAME] is limited to recourse to particular funds or assets for repayment of the loan" (Commissioner of Taxation v Firth [2002] FCAFC 95; 192 ALR 542 per Sackville and Finn JJ, citing inter alia Matthew v Blackmore (1857) 1 H & N 762 at 771 - 2; 156 ER 1409 at 1417 and R v New Queensland Copper Co Ltd [1917] HCA 34; 23 CLR 495 at 501 - 2). As Rares J observed in Wingecarribee Shire Council v [COMPANY] (in liq) [2012] FCA 1028 at [1199], "[n]on-recourse loans are a commonplace". Consistent with these statements is the observation of Gleeson CJ in [NAME] v [COMPANY] of China (1992) 26 NSWLR 562 at 572 that the obligation to repay a debt may be conditional. 19In my view, the present case should be resolved by ascertaining whether, in the circumstances that occurred, the [NAME]' contracts provided for the face value of the Notes to be repaid to them in cash or provided for another, exclusive, means of discharge of the debt that HIH acknowledged in Clause 2A.1(a) of the Trust Deed. 20Condition 12 of the Conditions of Issue permitted [NAME] to elect to redeem the Notes for cash but it made no such election. Furthermore, under Conditions 4 and 9, [NAME] could, in certain circumstances, require conversion of their Notes to [NAME] prior to the Conversion Date but none required this. 21In these circumstances, Condition 12.3 required that the Notes be "automatically converted" into [NAME] on 12 June 2003. As the primary judge concluded, the word "automatically" simply indicated that no notice was needed to trigger the conversion process. When Condition 12.3 came into operation, [NAME] was required to effect conversions in accordance with Condition 6.5. This condition prescribed the two-step procedure for conversion referred to by [NAME], involving, first, [NAME] redeeming the Notes for an amount equal to their face value and, secondly, [NAME], on the direction of the [NAME], applying "the whole of the moneys payable to it on redemption in subscribing for [the relevant] number of Ordinary Shares". 22Perpetual argued that the obligation under Condition 6.5(a) to "redeem" the Notes constituted an obligation of [NAME] to pay the [NAME] the face value of the Notes and that the stipulation in Condition 6.5(b) that [NAME] apply the redemption money in subscription for [NAME] ended with the termination of the [NAME]' Contracts, leaving the obligation to redeem unqualified by any obligation to pay the redemption money to HIH rather than the [NAME]. 23I do not accept these submissions. [NAME]'s obligations to redeem the Notes and to pay the redemption money to HIH both accrued prior to termination of the [NAME]' contracts. Termination of the contracts relieved [NAME] of a duty to perform the obligations after termination but left it liable for its breach of contract in not performing them prior to termination (see [14] above). [NAME]'s submission that the obligation to subscribe for [NAME] came to an end on termination (because the [NAME]' direction to apply their money for that purpose was brought to an end by termination) whilst [NAME]'s redemption obligation remained on foot is incorrect. Both obligations existed until termination and both came to an end on termination, with [NAME] remaining liable for its breach in not having performed them prior to termination.

Accordingly, there was no point at which the obligation to redeem, but not the obligation to apply the moneys payable on redemption to subscribe for [NAME], was operative. 24The result is that [NAME] was at no time required to redeem the Notes by paying their face value in cash to the [NAME]. Whilst the obligation to redeem existed, it was always an obligation to redeem by one, exclusive, means, that is, by applying the redemption money in subscription for [NAME]. Contrary to [NAME]'s submission, this conclusion does not ignore the Federal Court's finding that conversion was a two-step process. The two steps were to occur, but always in tandem. [NAME] was never required to take the first step without taking the [NAME]. As [NAME] submitted, the first step was "intimately and inextricably bound up with a concomitant obligation under Condition 6.5(b) to apply the moneys redeemed to the subscription for [NAME]" (Written Submissions [34]). 25The [NAME] emphasised that it was they who were to apply for [NAME] and submitted that this could not occur unless they were entitled to be paid the redemption money by HIH to enable them to do it (Written Submissions [49]). However the redemption money was to be paid, not to the [NAME], but to HIH. Although that payment was to be made on their behalf, the [NAME] were contractually bound (until termination) by their irrevocable direction that that occur. They had no right to re-direct the payments to themselves and therefore had no right to receive them. 26These conclusions concerning the Conditions of Issue are consistent with Clause 2A.1 of the Trust Deed. Clause 2A.1(a) referred to the existence of a debt but, for the reasons given in [18] above, that did not of itself indicate that the [NAME] were entitled to payment of the Notes in cash. 27Clause 2A.1(b) of the Trust Deed obliged [NAME] to pay the face value of "the Notes or, as the case may be, that part of the Notes as are to be redeemed on the date due for repayment". This obligation was expressed to be "subject to any obligation of the Company to convert the Notes" into [NAME]. This qualification precluded Clause 2A.1(b) being the source of any presently relevant obligation of [NAME] to redeem the shares in cash. As [NAME] did not elect under Condition 12 to redeem the Notes in cash, it was obliged to convert them into [NAME]. The qualification to the payment obligation in Clause 2A.1(b) was thus enlivened and conversion was required in accordance with Conditions 6.5 and 12.3. The qualification in Clause 2A.1(b) applied when [NAME] came under "any obligation" to convert, not simply where conversion in fact occurred. 28Clause 2A.1(b)(i) would have applied if [NAME] had elected to redeem the Notes in cash but the provision does not indicate that there are or may be other circumstances (for example, when the first step of the conversion process is taken) in which the [NAME] are entitled to be paid the face value of their Notes in cash. 29In summary, my view is that the [NAME]' contracts gave rise to debts of [NAME] to the [NAME] (as represented by the Trustee) but provided that unless [NAME] elected in accordance with the contracts to redeem the Notes in cash, the debts would, and could, only be discharged by [NAME] subscribing on behalf of the [NAME] for [NAME]. For the reasons given in [18] above, it was open to the contracting parties to provide that the [NAME]' rights would be so limited. 30Neither an overview of the contractual documents nor a detailed examination of their provisions reveals any intent that the [NAME] would, in the absence of [NAME] electing to redeem the Notes, acquire a right to payment to them of the face value of the Notes. 31The basic premise of the transactions was that the [NAME] would provide funds in return for shares in HIH. This placed the [NAME] at risk because the value of their investments depended upon the value of HIH's shares but this was consistent with the statement in the Prospectus pursuant to which the Notes were issued that "[NAME] do not have a right to redeem the Notes for cash" (p 8).

ORDERS 32For the reasons that I have given, the appeal should be dismissed with costs. 33SACKVILLE AJA: I agree with the orders proposed by Macfarlan JA and with his Honour's reasons. 34I wish only to comment on a procedural matter. I adopt the same abbreviations as Macfarlan JA. 35In essence, the issue in the present proceedings is whether [NAME], on behalf of the [NAME], is entitled to prove in the liquidation of [NAME] for an amount equivalent to the face value of the Notes for which [NAME] subscribed. The resolution of this issue depends on the construction of the Trust Deed and the Deed Poll, in particular the provisions governing the entitlements of [NAME] against [NAME]. The question of construction is relatively straightforward. 36The Court was informed that although a decision on the construction of the Trust Deed and Deed Poll will not necessarily bind courts in New Zealand of its own force, the parties accept that, as a practical matter, the decision will have that effect. 37It is not entirely clear why determining the entitlement of the [NAME] to prove in the liquidation of [NAME] has required separate proceedings in this country in the Federal Court and in the Supreme Court (quite apart from the proceedings in the High Court of New Zealand, which have been stayed). I appreciate that the declaratory relief sought by [NAME]'s [NAME]-claim in the Federal Court related to the validity of its termination of the Notes Contract by reason of the default by [NAME]. I also appreciate that [NAME] agreed to be joined as a party to the Federal Court proceedings on the basis that any relief would be limited to the interpretation of documents governed by the law of New South Wales and that the proceedings would not determine the entitlement of any party to prove in the estate of [NAME] under New Zealand law: McGrath v Perpetual Trustee Co Ltd [2008] FCA 623; 66 ACSR 210 at [3]. The solicitor representing the [NAME] of [NAME] apparently did not seek to address the Court on the issues raised by the [NAME]-claim: [NAME] at [8]. 38Even so, there was much to be said for the parties to the Federal Court proceedings addressing the questions that have arisen for determination in this Court. [NAME]'s [NAME]-claim in the Federal Court concerned the construction of precisely the same provisions as have been debated in this appeal. Once it is accepted (as [NAME] did) that [NAME] validly terminated the Notes Contracts, the nature of the entitlements of the [NAME] against [NAME] must be resolved. This is demonstrated by [NAME]'s orders, which include a declaration in favour of [NAME] that [NAME] failed to redeem and convert the Notes as it was required to do under the Trust Deed and in the events which happened. 39It may be that the parties to the Federal Court proceedings took the view that the limited basis on which [NAME] agreed to be joined as a defendant constituted an impediment to [NAME] raising the issues it has identified in this Court. In particular, it may have been thought that orders made by the Federal Court as to the indebtedness (or otherwise) of [NAME] to the [NAME] would not bind the [NAME] of [NAME] and would not necessarily be treated at authoritative by the New Zealand courts. 40Nonetheless, there is no obvious reason why the issues of construction of the Trust Deed and the Deed Poll arising in the present appeal could not have been identified and addressed by the parties to the Federal Court proceedings. Those issues were clearly very closely related to the questions argued before [NAME]. A decision as to the question of [NAME]'s indebtedness to the [NAME] would have resolved that matter so far as Australian Courts are concerned. In practice, a decision by the Federal Court also very probably would have been accepted as authoritative by the New Zealand Courts. 41With the benefit of hindsight, had the parties to the Federal Court proceedings brought forward all disputed issues of construction of the Trust Deed and Deed Poll, there would have been no need for proceedings in the Supreme Court, thereby saving the parties both time and cost. I recognise that the wisdom of hindsight is a more abundant commodity than clear foresight. However, the procedural history of the case demonstrates the virtues of taking all reasonably available steps to avoid the risk of fragmentation of litigation.

********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 March 2013