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Goodridge v Macquarie Bank Limited [2010] FCA 67 (12 February 2010)
Last Updated: 12 February 2010
FEDERAL COURT OF AUSTRALIA
Goodridge v Macquarie Bank
Limited
[2010] FCA 67
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Citation:
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Goodridge v Macquarie Bank Limited (ABN 46 008 583 542) and Leveraged
Equities Limited
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Parties:
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ROSS IAN GOODRIDGE v MACQUARIE BANK LIMITED
(ABN 46 008 583 542) and LEVERAGED EQUITIES LIMITED
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File number:
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NSD 282 of 2009
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Judge:
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RARES J
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Catchwords:
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ASSIGNMENT – statutory assignment
under s 12 of the Conveyancing Act 1919 (NSW) –assignment of debt
or chose in action to third party under s 12 not effective until debtor or
obligor has actual notice –constructive notice and service of notice under
s 170 of the Conveyancing Act insufficient unless debtor or obligor
actually receives it – proof of non-receipt of notice admissible to show
no actual notice
ASSIGNMENT – whether margin loans assignable where the
obligations and benefits under the loan agreement are not severable –
margin loan
capable of being increased after assignment – not a static or
unchanging liability – the power to exercise an existing
legal right to
claim payment of a debt that is inseverable from the power conditioning the
obligation of assignor to lend further
money on the terms of its loan agreement
is not assignable – margin loan and loan agreement incapable of assignment
because
of the interconnection of the lender’s obligations and rights
under it
ASSIGNMENT – assignor remaining liable to make further
advances to debtor after assignment – contractual criteria for further
advances
– assignor remaining liable to make future advances to debtor
after assigning existing loan – contract providing that
lender’s
obligation to lend and right to make margin call or enforce loan dependent on
lender’s power to apply same criteria
for each – whether each of
assignor and assignee can apply some criteria differently to affect rights and
liabilities of debtor
– powers in respect of such criteria incapable of
passing to assignee while also remaining with assignor – assignment
of
loan not possible where lender remains liable to make further advances and
criteria to be applied inseverable
EQUITY – equitable assignments – absence of notice does
not affect validity of the equitable assignment – equitable assignment
is
complete upon the expression by the assignor of an intention to make over to the
assignee then and there the assignor’s
equitable interest in the property
or right concerned
BANKING AND FINANCIAL INSTITUTIONS – banker/customer
relationship – right of banker to make margin call – right of banker
to sell securities after default
of customer in making margin call – sale
of customer’s securities supporting margin loan – sale of margin
loans
by one bank to another
CONTRACT – privity – novation – construction of
contracts – clause providing borrower agrees to banker assigning or
novating
contract –clause not identifying terms or new party as the
subject of the novation – whether agreement to agree –
whether
effective consent to banker entering any agreement novating banker/customer
contract without customer being a party - ability
to novate any part of
agreement to third party
TRADE AND COMMERCE - whether unconscionable conduct within the
meaning of s 12CA or s 12CB of the Australian Securities and Investments
Commission Act 2001 (Cth) – relationship of banker and customer
involved misuse of power of sale by banker by requiring customer to comply with
conditions not reasonably necessary to protect interests – banker used
power of sale unconscientiously without any right to
do so – relationship
of mortgagor and mortgagee not ordinarily capable of being characterised as
fiduciary
DAMAGES – mitigation – banker making invalid demand and
selling securities in falling market – whether customer unreasonable
in
failing to buy back some or all securities as market rises with third party loan
– banker continuing to claim customer in
default and not providing access
to loan facility while asserted default continues – customer not
unreasonable – no failure
to mitigate
DAMAGES – ASSESSMENT - date for assessment of damages
– breach by banker of loan agreement by not providing finance and selling
security –
assessment of damage not confined to difference in sale price
and market value of securities sold – no inflexible rule for
date of
assessment of damages where loan also not available – damages or
restitution ordered at time of judgment to provide
customer with property
wrongly sold and loss of benefit of that property – alternative remedy
also available under s 12GM(2)(d) of the Australian Securities and
Investments Commission Act 2001 (Cth)
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Legislation:
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Cases cited:
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Corbin on Contracts Ch 48 in Vol 9 at § 866,39
Contract
Law in Australia JW Carter, EP Eden and GJ Todhurst
(5th ed; 2007)
McGregor on Damages
17th Ed
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14, 15, 23, 24 September 2009; 21, 22 October
2009 |
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Date of last submissions:
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29 October 2009
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Date of judgment:
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12 February 2010
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Place:
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Sydney
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Division:
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General
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Category:
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Catchwords
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Number of paragraphs:
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Counsel for the Applicant: |
Mr. B W Rayment QC with Mr G R Kennett and Mr A
Neal |
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Solicitor for the Applicant:
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Firths
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Counsel for the First Respondent:
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Mr J Sheahan SC with Ms J Muir
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Solicitor for the First Respondent
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Allens Arthur Robinson
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Counsel for the Second Respondent
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Mr V Kerr
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Solicitor for the Second Respondent
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Piper Alderman
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IN THE FEDERAL COURT OF AUSTRALIA
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NEW SOUTH WALES DISTRICT REGISTRY
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GENERAL DIVISION
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ROSS IAN GOODRIDGEApplicant
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AND:
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MACQUARIE BANK LIMITED (ABN 46 008 583
542)First Respondent
LEVERAGED EQUITIES LIMITED
Second Respondent
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DATE OF ORDER:
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WHERE MADE:
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THE COURT ORDERS THAT:
- The
parties bring in short minutes of order to give effect to these reasons at
9.30am on 16 February 2010.
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
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NEW SOUTH WALES DISTRICT REGISTRY
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GENERAL DIVISION
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NSD 282 of 2009
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BETWEEN:
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ROSS IAN GOODRIDGE
Applicant
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AND:
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MACQUARIE BANK LIMITED (ABN 46 008 583 542)
First
Respondent
LEVERAGED EQUITIES LIMITED
Second Respondent
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JUDGE:
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RARES J
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DATE:
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12 FEBRUARY 2010
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PLACE:
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SYDNEY
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TABLE OF CONTENTS
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[2]
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MR GOODRIDGE’S MARGIN LENDING
RELATIONSHIP WITH THE BANK
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[7]
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THE LOAN AND SECURITY
AGREEMENT
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[10]
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EVENTS LEADING TO 23 FEBRUARY
2009
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[25]
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THE 5 FEBRUARY 2009 MARGIN
CALL
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[30]
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WAS MR GOODRIDGE IN DEFAULT IN
MEETING THE MARGIN CALL MADE ON 5 FEBRUARY 2009?
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[40]
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THE SUBSEQUENT DEMANDS MADE BY
LEVERAGED EQUITIES AND ITS CONDUCT ON 23 FEBRUARY AND THEREAFTER
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[44]
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CLAUSE 5.2 – TIME FOR
COMPLIANCE WITH A MARGIN CALL
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[64]
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CLAUSE 5.7
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[73]
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NOVATION OR
ASSIGNMENT
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[87]
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THE BANK’S DEALINGS WITH BNY
IN RELATION TO MR GOODRIDGE’S LOAN
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[89]
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WAS THERE A
NOVATION?
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[100]
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WAS THERE A BREACH OF THE MASTER
TRUST DEED AND OTHER NOTICE PROVISIONS?
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[126]
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LEVERAGED EQUITIES’
POSITION
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[132]
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DID MR GOODRIDGE RECEIVE THE
BANK’S LETTER OF 19 JANUARY 2009?
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[139]
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ASSIGNMENT – WHAT NOTICE IS
SUFFICIENT?
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[150]
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SUFFICIENCY OF THE 19 JANUARY
LETTER
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[159]
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THE NATURE OF THE
ASSIGNMENT
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[168]
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THE ASIC ACT CLAIMS
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[201]
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RELIEF
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[212]
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CONCLUSION
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[237]
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REASONS FOR JUDGMENT
- Ross
Goodridge, a barrister, signed a margin lending application with Macquarie Bank
Limited, the first respondent, on 12 May 2003.
As a consequence, he and the
Bank entered into the then Macquarie margin lending standard terms and
conditions in a loan and security
agreement dated April 2002. The loan and
security agreement gave the Bank power from time to time to vary its
terms.
ISSUES
- Two
significant powers the Bank had under the loan and security agreement were:
- the right under
cl 5 to make a margin call when the value of the security it held fell below the
level the Bank had set as sufficient
for its loan;
- the right under
cl 21 to assign, transfer and novate the loan and security
agreement.
- In
a complicated series of transactions in early January 2009 the Bank
“sold” about 18,500 margin loans for nearly $1.5
billion. Mr
Goodridge’s loan was one of the loans “sold”. The ultimate
“purchaser” of these loans
was Leveraged Equities Ltd, the second
respondent. In an intermediate transaction, BNY Trust Company of Australia
Limited purchased
the legal title to the assets sold by the Bank and then sold
those to Leveraged Equities. The transaction documents are very complex.
They
contain some recognition of the significant fact that the whole relationship
between the Bank and its margin loan customers,
like Mr Goodridge, may not
necessarily be capable of being bought or sold, although aspects such as
securities and secured debts
could be. It was common ground that contractual
obligations are generally incapable of assignment and that these can only be
transferred
by a novation of the original contract.
- On
23 and 24 February 2009, Leveraged Equities made one or more margin calls on Mr
Goodridge which he claims were invalid. On his
asserted failure to comply with
one or more of those calls, Leveraged Equities peremptorily sold the security he
had provided to
support his margin loan for their then market value. Those
sales occurred at the market nadir for the units. They have since risen
substantially in price but Mr Goodridge did not buy back in after the forced
sales. The validity of what Leveraged Equities did
depends on a number of
contentious matters. The substantial issues are:
- the
proper construction of the loan and security agreement in respect
of:
(a) the Bank’s ability to novate or assign all,
or any part of that agreement, in favour of a third party;
(b) the Bank’s right to make a margin call payable at any particular
time;
(c) whether Mr Goodridge complied with any obligation on him to meet a
margin call.
- whether
the agreements between the Bank and BNY:
(a) were completely
invalid because BNY had entered into them as a trustee without complying with
fundamental provisions in cl 13
of the trust deed;
(b) were legally effective to novate or assign in favour of BNY all or some
parts of Mr Goodridge’s relationship with the Bank
to BNY.
- whether
the agreements between BNY and Leveraged Equities:
(a) were legally
effective to novate or assign in favour of Leveraged Equities some or all parts
of whatever BNY had obtained in
the transactions with the Bank in respect of Mr
Goodridge’s relationship with the latter;
(b) gave Leveraged Equities the contractual power to act as it did in making
margin calls on Mr Goodridge and then selling his security.
- whether,
before it made margin calls on Mr Goodridge or sold his securities, any notice
to him of any assignment in favour of Leveraged
Equities:
(a) was
necessary;
(b) was received by Mr Goodridge.
5. whether either respondent engaged in conduct that was unconscionable
within the meaning of s 12CA or s 12CB of the Australian Securities and
Investments Commission Act 2001 (Cth) (“the ASIC
Act”);
6. whether Mr Goodridge is entitled to have restored to him his units or
their current value or is only entitled to, effectively,
brokerage fees on the
forced sales.
- There
is no dispute that if Mr Goodridge’s claim fails, he is liable to
Leveraged Equities for the outstanding balance of his
margin loan account,
including accrued interest.
- It
was common ground that many of the arguments raised by the parties involved
aspects of the law relating to contract, assignment
and novation that had not
been decided previously. The contracts and the legal issues were
complex.
MR GOODRIDGE’S MARGIN LENDING RELATIONSHIP WITH THE BANK
- In
May 2003, Mr Goodridge applied to the Bank on its margin lending application for
finance form. He appointed Martin Lakos of the
Bank as his advisor. He sought
a facility limit of $3 million. The application form required Mr Goodridge to
authorise and request
the Bank to make direct debits on his nominated bank
account of any amounts, including margin calls, due under the loan and security
agreement. He nominated, as the account for such direct debiting by the Bank,
his Macquarie cash management trust account, which
was conducted by an entity
related to the Bank.
- The
Bank agreed that Mr Goodridge would become its customer. It established a
margin lending facility for him. He had also a cash
management trust account on
which an entity related to the Bank accepted his deposits and paid him interest.
The relationship between
him and the Bank was one of banker and customer
although it ranged more broadly and operated through the loan and security
agreement.
- In
Joachimson (a firm) v Swiss Bank Corporation [1921] 3 KB 110 at 127,
Atkin LJ said that there was only one contract between a bank and its customer.
The terms of the contract involve obligations
on both sides and required careful
statement. They included the following provisions: the bank undertakes to
receive money and to
collect bills for its customer’s account; the
proceeds so received are not held in trust for the customer, but the bank
borrows
the proceeds and undertakes to repay them; the bank promises to repay
at the branch of the bank where the account is kept during
banking hours,
including any part of the amount due, against the written order of the customer
addressed to the branch at the bank.
THE LOAN AND SECURITY AGREEMENT
- The
loan and security agreement relevantly contained the following provisions, among
others. Mr Goodridge, as borrower, was entitled
to draw up to the amount of the
credit limit on the terms of that agreement. The Bank was authorised by Mr
Goodridge to apply the
loan from time to time to purchase securities nominated
by Mr Goodridge together with related expenses (cl 1.2). Mr Goodridge
had to repay the loan together with all interest, fees and other moneys that
accrued due under the agreement up to the date of such
payment (whether or not
that was payable) immediately upon the Bank making a declaration, following an
event of default, that the
loan was due and payable or terminating the facility
(cl 4.1(a) and 13.2(a) and (b)) or within seven days of the Bank issuing
a
demand requiring that repayment. If the bank gave that notice, its obligations
to provide the facility would cease (cl 4.1(b)).
- The
facility (being the revolving margin loan facility made available under the
agreement (as defined in cl 25.1) was subject
to annual review on each
anniversary of the first drawing under it. At that time the Bank could
terminate the facility and require
immediate repayment of the loan and other
moneys owing under it under the agreement if, in its opinion, there was a
material adverse
change (as defined) (cl 4.4). Importantly, margin calls
were dealt with in cl 5 and included (in the version current in
early
2009):
“5.1 If at any time the Total Loan Balance exceeds or, in the Bank’s
opinion, is likely to exceed, the aggregate of the
Market Based Limit and the
Buffer, then the Bank may in its discretion require the Borrower
to pay to the Bank a sum of up to the amount (“the Margin Call”) by
which the Total Loan Balance exceeds,
or in the Bank’s opinion is likely
to exceed, the Market Based Limit (together with any costs incurred by the Bank
in respect
of such a payment).
5.2 The Borrower shall comply with any Margin Call by 2pm on three (3) Business
Days following the Margin Call, unless otherwise notified by Macquarie Bank
Limited in its absolute discretion.” (emphasis added)
- The
terms of cl 5.2 set out above had been amended previously under the
variation provision of the loan and securities agreement
(cl 24.4). In
about April 2004, the Bank notified Mr Goodridge, and presumably other
borrowers, on his quarterly statement
for the period ended 31 March 2004, that
the margin call satisfaction period had been extended from one day to three
days. The statement
went on to explain:
“[t]his means you now have more time to decide what action you would
like to take. It also gives the market more time to recover, which may take
you back out of your margin call.” (emphasis
added)
- In
the statements for the quarter ended 30 September 2007, the Bank advised
borrowers that, “[p]ursuant to cl 25.4”
of the loan and
security agreement (scil cl 24.4), the original cl 5.2 had been replaced
with the wording set out above. That
change was notified to take effect from 15
December 2007 and, the statement went on to inform Mr Goodridge that, the Bank
“...
will confirm with you the date you need to satisfy a Margin
Call at the time of issuing the Margin Call”. (emphasis added)
- The
loan and security agreement gave the borrower a number of options as to the way
in which a margin call could be satisfied, such
as the provision of additional
securities (cl 5.3 and 5.4) or cash (cl 5.5). If the borrower elected
to provide further
securities, cl 5.4 provided that “[s]uch lodgement must
occur by 2 pm on the Business Day following the Margin Call”.
And where
the borrower elected to provide cash, it had to be “... provided to the
Bank in cleared funds by the time specified
in clause 5.2”. In addition,
cl 5.7 and 5.8 provided:
“5.7 Without limiting the Bank’s rights following a Margin Call, if
at any time the Total Loan Balance exceeds the aggregate
of the Market Based
Limit and the Buffer, the Borrower and the Securities Owner irrevocably
authorise the Bank (and its officers
and agents), as their respective several
attorney, to sell or redeem (at the Bank’s discretion) all or any part of
the Secured
Property as would produce sufficient funds to enable the Borrower to
satisfy a Margin Call. If it becomes necessary to sell Securities
which are
listed for quotation on the ASX, such Securities may be sold through any broker
nominated by the Bank at the broker’s
prevailing private client brokerage
rates.
5.8 The Borrower is responsible for monitoring the Total Loan Balance and the
Market Based Limit and is liable for payment of any
Margin Call at the time at
which the relevant Margin Call arises, irrespective of when or whether or not
any notice to pay a Margin
Call is given by the
Bank.”
- The
loan and securities agreement defined “Bank” as meaning Macquarie
Bank or any of its subsidiaries which might provide
the loan. The
“Buffer” meant a percentage as determined and modified by Macquarie
from time to time, “Market Based
Limit” meant the value of the
eligible securities (being securities approved by the bank from time to time to
which it allocated
a lending ratio) determined by multiplying the “Market
Value” of those securities by the lending ratio applying at the
relevant
time. Significantly, “Market Value” was defined as meaning
“... on any day, the value of the relevant
property as determined by the
Bank from time to time in its absolute discretion”. The total loan
balance was the aggregate
of the loan and the value, as determined by the Bank,
of any transactions which had been commenced but not settled (such as sales
or
purchases and the like but not money that was in the process of being
transferred or arranged to satisfy a margin call). (cl 25.1)
- The
borrower was required to pay any amounts payable in full, without any set-off or
counterclaim or deduction. In addition, cl
7.1 also provided
that:
“The Bank is entitled to require the Borrower to effect payments
under this Agreement in any manner determined by the Bank, including by way of a
direct debit authority.” (emphasis added)
- As
I have found above, this authority was effected from inception of the
relationship in Mr Goodridge’s application form.
And, cl 7.2
provided:
“If any amount would otherwise become due for payment on a day which is
not a Business Day [being defined in cl 25.1, as a
day on which banks and the
ASX were open for business in Melbourne and Sydney], that amount shall become
due on the next following
Business Day or, if that Business Day is in another
calendar month, on the immediately preceding Business
Day.”
- Under
cl 12 any securities purchased using the facility were mortgaged to the
Bank by Mr Goodridge (cl 12.1(a)) as security
for the performance of the
loan. The Bank was given power to approve, and revoke its approval of,
particular securities as being
eligible to be used by it as security for the
loan (cl 12.4).
- An
event of default occurred if the borrower failed to make any payment “...
when due in accordance with this Agreement”
as well as in a variety of
other instances. (cl 13.1(a)). If an event of default occurred, the Bank
was authorised, without
being obliged to do so, to declare the loan and interest
and other money accrued due to be immediately due and payable without any
further demand, or other legal formality of any kind (cl 13.2(a)) or to
declare the facility terminated, at which time its obligations
would immediately
cease (cl 13.2(b)). In addition, when an event of default occurred, the
Bank was authorised to sell any of
the security on such terms as it thought fit
in its absolute discretion without notice to the borrower
(cl 13.2(c)(iii)).
- Under
cl 20, notices and other communications required to be in writing by the
loan and security agreement had to be sent to
the recipient by hand, prepaid
post, facsimile or electronically. Notices or other communications would be
deemed to be duly received,
relevantly, if sent by prepaid post, three days
after the date of posting and, if sent electronically, simultaneously with the
sender
causing the message to be sent unless the sender received a report
indicating that the notice had not been delivered (cl 20.1
and 20.2(b) and
(d)). The proper law of the loan and security agreement was Victorian
(cl 24.13).
- Also,
significantly, cl 21 relevantly provided:
“21.2 The Bank may assign, transfer, novate ... and can otherwise deal in
any manner [scil: with] all or any part of the benefit
of this Agreement and
any of its rights, remedies, powers, duties and obligations under this Agreement
to any person, without the consent of the Borrower
....
21.4 Without limiting the previous provisions of this Clause 21, the Bank
and/or its assignee or transferee is entitled to assign its rights and novate
its obligations under this Agreement, or any part of this Agreement, to any
trustee or manager of any securitisation programme.” (emphasis
added)
- In
March 2004 the Bank sent a brochure to, among others, its current borrowers,
including Mr Goodridge, entitled “Margin Calls
and how to avoid
them”. The brochure noted that the full terms and conditions were set out
in the relevant loan contract,
but said that when the borrower got a margin
call, it required prompt action, usually by 2pm on the third business day after
the
margin call was issued. It noted that in order to satisfy the margin call
the borrower had a number of options and
stated:
“The following must be completed prior to 2pm on the day your Margin Call
is due:
· if selling shares, your stockbroker must fax or email the contract notes
to us;
· if redeeming managed funds, you must complete the Managed Fund Redemption
Form and fax it to us.”
- The
borrower was told that alternatively, he or she could provide cash by 2pm on the
day the margin call was due. The brochure also
said under the heading
“Market Rally”:
“Your Margin Call can be satisfied by a ‘market
rally’.
This means that if your Current Gearing Level is sufficiently reduced by a rally
in the prices of shares in your portfolio, within
the satisfaction timeframe,
your Margin Call will be satisfied.
If you do not initiate one of these actions, the lender will act on your behalf
– usually selling shares to reduce your
loan.”
- The
last method simply meant that if, in the period before the margin call was due,
the share market increased the price sufficiently
for the securities held by the
borrower as collateral for the Bank’s margin loan, then the borrower did
not need to do anything.
EVENTS LEADING TO 23 FEBRUARY 2009
- Mr
Goodridge had had a good relationship with the Bank from both his own and the
Bank’s view points. As his account manager,
Jason Norval, informed his
new superiors at Leveraged Equities on 10 February 2009, Mr Goodridge had always
been very reliable when
dealing with his margin loan. Mr Goodridge had always
satisfied the few margin calls he had up to that time and had always been
more
than willing to assist the Bank.
- Mr
Goodridge had used his loan and security agreement facility to acquire various
share market listed investments. However, by late
2008 he had consolidated all
his holdings financed with the loan and security agreement facility into units
in the Macquarie CountryWide
Trust (“the MCW Trust”), an
entity that had a relationship to the Bank. He also still had a cash management
account with the Bank. Mr Lakos of
the Bank was still his financial advisor
although Mr Goodridge did not seek his advice actively at this time. Mr Lakos
sent Mr Goodridge
an email on 11 November 2008 informing him that the market
price of the units in the Trust was 31 cents, but the discounted cashflow
valuation that Macquarie Equities Limited had placed on it was $1.15. He
recommended that the investment was outperforming its market
value and that the
underlying asset backing had increased to $1.88. Subsequently, sometime after
late January 2009, the MCW Trust
issued a report for the half year ended
30 December 2008 identifying that its net tangible assets per unit,
including deferred
tax liabilities, were $1.48.
- In
early January 2009, the Bank “sold” its margin lending business,
together with a substantial number of its customer
base, including Mr
Goodridge’s accounts to BNY. The next day BNY “sold” the same
assets, including Mr Goodridge’s
accounts to Bendigo and Adelaide
Bank’s subsidiary, Leveraged Equities. I will consider the legal effect
of these complex
transactions later in these reasons.
- On
19 January 2009, the Bank took steps to inform its customers in a letter that
their accounts had been transferred first to BNY
and then to Leveraged Equities.
There is a dispute whether Mr Goodridge received this letter at any relevant
time. The letter commenced
by referring to an announcement to the Australian
Securities Exchange on 8 January 2009 that the Bank
had:
“... sold the majority of its margin lending portfolio to Leveraged
Equities.
...
Effective 8 January 2009:
- Your loan
facility was sold to BNY Trust Company of Australia Limited (as trustee of the
Series 2008-1 PANTHER Trust); and
- BNY Trust
Company of Australia Limited was replaced by Leveraged Equities as trustee of
the Series 2008-1 PANTHER Trust; and
- The Series
2008-1 PANTHER Trust was renamed Leveraged Equities 2009 Trust.
This means that Leveraged Equities is now the Lender for Macquarie Margin Loans
... . Your Loan and Service [sic; Security] Agreement
will remain unchanged at
this time other than to enable Leveraged Equities to become and operate as the
Lender. Please note that
if you have an adviser they will also be notified of
this change.”
- Mr
Goodridge said that he never received this letter, or one in similar terms
addressed to his superannuation trustee company, Redroad
Pty Ltd. Mr
Goodridge’s partner, Ms Margaret Clay, with whom he lived, gave evidence
that she did his filing at home using
a system that would have caused such a
letter to be filed if Mr Goodridge had left it for filing. She did not open or
read his mail
but she and he had subsequently, thoroughly, searched all his and
Redroad’s relevant files without locating the Bank’s
letter of 19
January 2009. I will deal with the detail of these issues later in these
reasons.
THE 5 FEBRUARY 2009 MARGIN CALL
- By
early February 2009, Mr Goodridge owned 5,603,562 units in the MCW Trust.
He had made a considerable number of purchases
of about 1,110,000 MCW Trust
units in January 2009 using his margin loan account. He considered MCW Trust to
be the best stock (or
units) to hold in light of the then impact of the global
financial crisis. His strategy had been to sell his other shares and units
and
reinvest the proceeds in MCW Trust units. His current loan balance on 5
February 2009 was $865,152.21. At their then current
price of 18 cents a unit,
his units were worth about $1,008,640.00. The lending manager with whom Mr
Goodridge had dealt at the
Bank, Mr Norval, was transferred to and became an
employee of Leveraged Equities on 2 February 2009. At the foot of his emails
in February and March 2009, Mr Norval was named as “Account Manager
– Leveraged Equities”.
- On
5 February 2009, Mr Norval sent an email to Mr Lakos, as Mr Goodridge’s
advisor, making a margin call for $159,076.40 and
required it to be satisfied by
2pm the following Tuesday, 10 February 2009. This email set out a number of
options by which the
margin call might be satisfied. Mr Lakos advised Mr Norval
that although he was notionally an advisor to Mr Goodridge, Mr Lakos
had not
given him advice for years. Mr Norval then caused Mr Lakos’ advisor
status to be removed, without informing Mr Goodridge.
- Mr
Lakos passed the email on to Mr Goodridge. He responded to Mr Lakos on 5
February saying that he did not have the money to meet
the margin call at that
time but was expecting about $200,000 in a dividend from the MCW Trust on 20
February 2009 which could be
made available to meet the call and asked whether
that was acceptable. On 10 February 2009 Mr Norval sent Mr Goodridge an email
asking him to telephone. Later that day they had at least two telephone
conversations. A recording of one is in evidence in which
Mr Norval agreed to
Mr Goodridge’s proposal that the dividend be used to meet the margin call.
Mr Norval asked Mr Goodridge
to confirm that he had instructed the MCW Trust to
credit the dividend to meet his margin call. Mr Norval gave him an account
number
to which the dividend should be credited. Mr Goodridge filled in a form
addressed to MCW Trust changing his instruction for crediting
the dividend to
his cash management trust account and nominating instead the account number that
Mr Norval had given him. Mr Norval
told Mr Goodridge that he had done his part
and that that was “perfect”. Mr Norval said that he would call Mr
Goodridge
if he needed anything further. Mr Goodridge faxed to MCW Trust a
request for direct credit of the dividend to the nominated account
number and
soon after faxed a copy to Mr Norval at the latter’s request.
- I
find that Mr Goodridge did fax the instruction form to the MCW Trust on 10
February 2009 and that by following the instructions
given by Mr Norval he
satisfied the Bank’s requirements as to the manner in which payment of the
margin call would be expected
in accordance with cl 7.1 of the loan and security
agreement.
- During
this conversation, Mr Norval also told Mr Goodridge that he had “moved
across as part of Leveraged Equities” and
that there was now a new
“chain of command”. He said that he had prepared a comprehensive
explanatory email. But, in
the event, no such email was sent to Mr
Goodridge.
- Mr
Norval sought approval internally for Mr Gooodridge’s proposal. He then
described the relationship between Mr Goodridge
and the Bank in the glowing
terms I have noted above. In addition, Mr Norval informed his new superiors,
Paul Edwards and Lily Elliott
that because Mr Goodridge was a barrister he
understood the implications of having a default against his name and that his
custom,
if managed correctly, had the potential to contribute to the future
growth of Leveraged Equities’ loan book. Mr Edwards responded
saying
“[a]s discussed given the ‘relationship’ and the high level of
assurance of receiving the dividend, I will
extend the [margin] call till 20/2
subject to immediate review if the stock falls to 0.15 cents or lower”.
He said that from
a risk perspective Mr Goodridge’s account was “at
the top of the curve” and that Leveraged Equities’ model
assigned
“... a zero LVR [loan to valuation ratio] to this stock owing to high
volatility and high leverage held by this company”.
Mr Edwards told Mr
Norval to inform Mr Goodridge that “... ongoing finance of a single stock
position in this security has
no appeal”. He required Mr Norval to
provide a proposal to reduce or clear or secure Leveraged Equities’
exposure to
Mr Goodridge by 20 February 2009.
- This
instruction demonstrated how significant the change of relationship between a
borrower, such as Mr Goodridge, and his banker
could be, assuming the
“sale” of his margin loan by the Bank to Leveraged Equities was
effective. There is no evidence
that the Bank or its affiliates ever took the
derisory view of MCW Trust as a security in February 2009 that Mr Edwards
expressed.
Indeed, as recently as the previous November, Macquarie Equities had
valued MCW Trust units at about four times their then market
price of 31
cents.
- Ms
Elliott instructed Mr Norval to confirm to both Mr Goodridge and Mr Lakos in
writing Mr Edwards’ instructions as to Leveraged
Equities requirements.
Mr Norval did not do this in writing. And, despite Mr Edwards’
instruction, Mr Norval did not give
Mr Goodridge advice that the ongoing finance
of his single holding MCW Trust units had no appeal to Leveraged Equities.
Instead,
Mr Norval phoned Mr Goodridge on 12 February and told him that
“... one of the senior risk guys at LE” had approved
his proposal to
meet the margin call with the dividend payment on 20 February provided that MCW
Trust’s unit price did not
fall below 15 cents. Mr Goodridge acknowledged
that the fall in MCW Trust’s unit price the previous day added an extra
risk
factor. Mr Norval said that:
“... a different team ... are looking after LVR’s and all that sort
of stuff at the moment ... because your facility
is under a single stock
exposure ... this will be something that’s ... looked at over the next ...
you know, coming months
..., weeks and months, because ... there’s
different criteria ...”
The conversation
continued:
“Mr Goodridge - yeah the risk portfolio changes I
understand
Mr Norval - exactly so they ... just to keep you aware there is a potential for
things to happen like the LVR to be reduced depending
on what the stock
does
Mr Goodridge - yep
Mr Norval - um, obviously there’d be a bit of, ah a bit of notice for that
I would hope but um it ... yeah it maybe ... well
... I mean obviously its
entirely up to you but
Mr Goodridge - nothing you’ve said would surprise
me
Mr Norval - yeah so um I just giving you a heads up cause it might come to a
stage where you get a big margin call just because the
LVR’s been reduced
... so
Mr Goodridge - yeah
Mr Norval - and if you had any opportunity it might be good
to
Mr Goodridge - to reduce my um LVR
Mr Norval - exactly ... I don’t know if you have any other stock elsewhere
or anything ...”
- On
21 February 2009, Leveraged Equities issued an updated approved shares LVR list
that continued the 70% LVR assigned to units in
the MCW Trust.
- As
events transpired, the dividend of $174,142.48 paid by MCW Trust was credited,
contrary to his instructions, to Mr Goodridge’s
cash management account on
20 February 2009. The unit price for the MCW Trust had continued to fall and
early on 23 February it
was 14.5 cents. Mr Norval telephoned Mr Goodridge at
about 11a.m. on Monday 23 February. Mr Goodridge was at his holiday home
away from Sydney. He had been to a neighbour’s house to access the
internet and view his bank account details and emails.
He told Mr Norval that
he had noticed the payment had been made to his cash management trust account.
He referred to the processing
problem and said he would transfer the money. Mr
Goodridge agreed to Mr Norval’s offer to effect the drawing electronically
while they were talking. Mr Norval then transferred $165,000 from the cash
management trust account into Mr Goodridge’s margin
loan account. Mr
Goodridge also acknowledged that he expected another margin call that day saying
“... I’ll scratch
the money together and sort it out and sort out
what to be sold later on”. Mr Norval said that he would send an email
later.
WAS MR GOODRIDGE IN DEFAULT IN MEETING THE MARGIN CALL MADE ON 5 FEBRUARY
2009?
- The
respondents argued that by 23 February 2009 an event of default had occurred
under the loan and security agreement. This was,
they argued, because the
dividend had not been paid on 20 February as agreed and Mr Goodridge had not
otherwise met the margin call
by then. As will appear below, Leveraged Equities
argued on 24 February 2009 that it could act as it did on the basis of this
default.
I reject this argument.
- Mr
Goodridge had done all that he had been required to do by Mr Norval for the
purpose of meeting the margin call of 5 February.
The fact that later the MCW
Trust credited the dividend to Mr Goodridge’s cash management account on
20 February 2009 did
not constitute a default by him. First, under cl 7.1 of
the loan and security agreement, the Bank was entitled to require the borrower
to effect payments under it, including all margin calls, “in any manner
determined by the Bank”. Mr Norval had told
him what he required Mr
Goodridge to do to assign the dividend in order to satisfy the margin call. On
10 February 2009, Mr Goodridge
had complied with the manner determined by Mr
Norval and nothing remained for him to do. Mr Norval had said to Mr Goodridge
that
what he had done was “perfect”. Secondly, part of the contract
for the margin loan account included a request to and
the authority of the Bank
to make direct debits on Mr Goodridge’s cash management account. So,
again, the Bank had stipulated
for a means of it being paid any margin call.
The first means was not effective in light of the failure of the MCW Trust to
implement
the faxed instruction when the dividend was deposited into the cash
management account on 20 February 2009. It then became amenable
to a direct
debit, had the Bank made one.
- Under
cl 5.1 of the loan and security agreement, the Bank had a discretion to require
the borrower to pay to it a sum up to the amount
of any margin call. And cl 7.1
gave the bank power to require such a payment to be made as it directed,
including by direct debit.
Mr Norval gave such a direction on 10 February 2009
and told Mr Goodridge that what he had done in compliance with the direction
was
“perfect”. Having exercised its power under cl 7.1 twice (both by
Mr Norval’s instruction and by the standing
request and authority of the
Bank to make a direct debit on his cash management trust account, which on 20
February 2009 had the
funds to meet the margin call in full), Mr Goodridge was
not in default when neither exercise of power resulted in actual payment
of the
margin call on 20 February 2009, through no fault on his part.
- For
these reasons, I find that Mr Goodridge had not failed to make payment of the
margin call at any time prior to Mr Norval’s
completion of the payment of
$165,000 from the cash management account into the margin lending account on 23
February 2009. In other
words, no event of default by Mr Goodridge had occurred
by that time and he had complied with all of his obligations to the Bank
under
the loan and security agreement.
THE SUBSEQUENT DEMANDS MADE BY LEVERAGED EQUITIES AND ITS CONDUCT ON 23 FEBRUARY
AND THEREAFTER
- During
23 February, the market price of units in MCW Trust dropped to 13 cents each.
Leveraged Equities pleaded that during the
course of the afternoon of 23
February it made two margin calls on Mr Goodridge. These were in the first and
third of the three
following emails Mr Norval sent to Mr Goodridge that
afternoon, namely:
(1) email sent at 2.05pm (the 2.05pm
email)
“Further to our discussion this morning, and following the transfer in of
$165k, your facility is in margin call for
$131,363.67.”
Can you please advise how this will be satisfied by 2pm
tomorrow.”
(2) email sent at 3.57pm
“MCW has dropped to 13 cents now and I have been contacted by our Risk
department. Can you please advise what your preferred
method is to satisfy the
margin call. (currently $190,201.07).”
I am sorry to hassle you but I have to give an update to Risk.” (emphasis
added)
(3) email sent at 6.29pm (the 6.29pm email)
“I have been unable to reach you this
afternoon.
I have been informed by our Senior Risk Manager that MCW is likely to have its
LVR removed over the next few days. This will leave
you with a loan of
$700,125.21, which will effectively be a margin
call.
Currently, with the LVR at 70%, you are in margin call for $190,201.07. This
must be satisfied by COB tomorrow. Please advise what you [sic] chosen
satisfaction method will be ASAP. If you have any stock, either in your name or
a third party
name, I can arrange to transfer this in for
you.
Please let me know your thoughts and I will do my best to assist.”
(emphasis added)
- As
I will explain, after considering the factual aspects of the parties’
dealings, I have concluded that none of these was
a margin call within the
meaning of cl 5 of the loan and security agreement because it failed to allow Mr
Goodridge no less than
until 2pm on the third business day after the call was
made to comply with it. However, this non-compliance with the loan security
agreement did not constrain the actions of Leveraged Equities. By late in the
afternoon of 23 February 2009, Mr Edwards told Mr
Norval that at 13 cents a
unit, the MCW Trust was “a penny dreadful” and that if Mr Goodridge
did not provide acceptable
alternate security by the next day he would face
almost certainly a LVR reduction or removal and a forced sell down.
- Mr
Goodridge said that he returned to Sydney later on 23 February 2009 and read
these emails painting a bleak picture of the day’s
trade on the market.
He understood from the 6.29pm email that the reference to “COB
tomorrow” effectively gave him until
just before the market opened on 25
February to satisfy the call. By then, he was shaken and upset by what was
happening. He was
appearing in court on the next day, 24 February and did not
receive Mr Norval’s next email sent at 10.05am or his earlier phone
calls.
Mr Norval’s email represented another shift in Leveraged Equities’
position stating:
“Based on the share price of MCW, with this opening at 12c today, we
will be force selling 5,603,562 units at 12pm today if the margin call is
not satisfied at this time.
Please respond ASAP and/or call me ...”
- Mr
Edwards had instructed Mr Norval at 8.16am that morning that based on the price
of 13¢ and the outstanding demand for $190,201.07
“... we should
commence forced selling today to ensure FULL clearance of margin call by
close of business today, unless margin call is met in full from other sources by
Midday today”.
Mr Norval checked to see that $13,373.34 was available in
Mr Goodridge’s cash management trust account and informed Mr Edwards
and
Ms Elliott of this. She replied that notice of a new margin call had to be
given as per the terms and conditions. That advice
went unheeded. She again
reminded Mr Edwards and Mr Norval at 2.18pm of the need for notice but said that
because he held only one
stock he should get 24 hours notice rather than 3
days.
- The
email chain above shows that despite working for Leveraged Equities, Mr Norval
and his employer had direct access to Mr Goodridge’s
Macquarie cash
management trust account and could draw what they wanted out of it to satisfy a
margin call without needing to seek
Mr Goodridge’s consent.
- In
the meantime, at about 2pm Mr Norval was able to speak to Mr Goodridge who had
just come out of court. He had seen the emails
sent to him and asked if any
forced sale had occurred. Mr Norval by then had been instructed by Ms Elliott
to halt the forced sale
instruction and had done so. He told Mr Goodridge that
he was “in luck” because no sales had occurred. Mr Goodridge
asked
if he could have 10 or 15 minutes to see what he could “scratch ...
together”. Mr Goodridge rang back 10 minutes
later and told Mr Norval
that he had put 1.6 million units onto the market at 12 cents each and he
thought he could obtain the balance
required by Mr Norval. Mr Norval reported
back at 2.28pm to Mr Edwards and Ms Elliott about Mr Goodridge’s position.
He proposed
giving Mr Goodridge “... until 3pm, and if not satisfied, we
force sell him”.
- Then,
at 2.37pm Mr Norval phoned Mr Goodridge again pressuring him to sort things out.
Mr Goodridge reiterated that he had put 1.6
million units on the market at near
market price and reminded Mr Norval that he had dealt with him before. Mr
Norval told him that
it had been taken out of his hands. He said that they had
to sort things out by close of business and Mr Goodridge said that this
was also
his intention. He accepted Mr Norval’s offer to give a discount on
brokerage and instructed him to sell all his 5.6
million odd units at 12 cents.
He said he was not asking for sympathy, but was doing his best. Mr Norval
said:
“I just want to try ... and resolve it, your way, rather than have to sell
out at 3:50 [pm], which is looking like what is
going to happen ... I’m
basically going to have to give them something by then otherwise that’s
what they’re gonna
do.”
Mr Goodridge said that he would do his best.
- Before
4pm that afternoon, Mr Norval attempted to sell all of the 5.6 million odd units
and succeeded in selling 1 million at 10.5
cents each. At 4.43pm Mr Gooridge
sent an email to Mr Norval and Mr Lakos informing them that he had offered to
sell three beachfront
properties to two friends who had yet to respond and had
made an appointment to see a third friend the next day to see if he could
obtain
a loan “or similar” from him. Although Mr Norval did not refer to
this email in his evidence, I am satisfied
that it was received by its
addressees. Mr Lakos did not give evidence. The third friend was a solicitor,
Mr Firth. Ultimately
the other two friends were unable to help but Mr Firth
was, as I will explain shortly.
- Next,
at 5.14pm Mr Norval emailed Mr Goodridge
saying:
“I was forced to sell 1,000,000 units, which went through at 10.5 cents.
The remainder will be sold tomorrow.”
He also asked how Mr Goodridge’s sale attempt for the 1.6 million units
had gone.
- By
now Mr Goodridge was emotionally overwrought. He felt under great pressure and
was bursting into tears. He had difficulty sleeping.
I am satisfied that he
was not able to think clearly and felt devastated by the turn of events and
pressure which the peremptory
demands for large payments had placed on him.
These feelings were compounded by his learning of the forced sale of the 1
million
units in the investment he had spent much effort to accumulate. His
emotional fragility caused him subsequently to make a number
of inaccurate
assertions, but I am satisfied that he did not do this dishonestly, or conscious
of these errors. This has, of course,
affected his reliability as a witness in
some respects. Overall, I formed the view that he was an honest man although he
was not
always accurate because his recollection had been affected by his
emotional reaction to what he regarded as a personal disaster.
As he said:
“All I know is that I was destroyed.” That reaction, I must say,
was understandable.
- Mark
Hawker, the wealth financing risk and compliance manager of Leveraged Equities
gave unchallenged evidence that throughout February
and March 2009 Mr
Goodridge’s access to the margin loan account through the Gear Up website
was not blocked. But since it
recorded, and still does, that he was in default
of paying a margin call, as a practical matter he could not trade on that
facility
until he regularised the account. Sun Lui, an information technology
employee of a company associated with the Bank, gave evidence
that Mr Goodridge
had logged onto Gear Up a considerable number of times in the first quarter of
2009, including five times on 25
February 2009. He said that if someone in the
bank had removed a customer’s shares from his loan portfolio, the customer
would
see a zero for the amount of his holdings. I am satisfied that on 24
February 2009 Leveraged Equities caused all of Mr Goodridge’s
5.6 million
units to be removed from his having any access or ability to deal with them
through the internet. Mr Goodridge said
that when he tried to access his share
and unit trading account on the internet (which is separate from the Gear Up
website after
the market closed on 24 February he could not use the
“buy” or “sale” functions and his CHESS (Clearing House
Electronic Subregister System) portfolio showed no units in it at all. He said,
and I accept, that he was not able to use the sale
function after this time on
the DirecTrade website.
- Nonetheless
I find that Mr Goodridge at some point, then or soon after could still see some
units recorded as being in his name in
both his internet portfolio summary and
portfolio CHESS holdings webpages. So much is clear from his email to Mr Norval
late on
26 February 2009. There he complained that Mr Norval had sold some
units contrary to his instructions and that the two webpages
gave inconsistent
reporting of his then holdings. He said that the portfolio summary page showed
1,351,781 MCW Trust units in his
name whereas the portfolio CHESS holdings page
showed only 248,219 units in his name. It is possible that he may have
misinterpreted
what he saw because 248,219 units were sold that day leaving a
balance of 1,351,781 units in his name that Leveraged Equities was
force
selling.
- Later
on 24 February 2009, at 6.24pm Mr Goodridge emailed Mr Norval protesting about
the sale of the 1 million units. The email
contained a number of inaccurate
assertions about the past, but said that the sale had occurred despite his
having tried to find
a solution. Early the next morning he sent another email,
with similar inaccuracies.
- At
8.30 on 25 February Mr Goodridge kept his arranged appointment with his friend,
Mr Firth. He explained what had happened, crying
during the meeting. Mr Firth
told him that he would have lent $400,000 to Mr Goodridge immediately that day.
Mr Goodridge had both
a friendship and a substantial professional relationship
with Mr Firth and understood that Mr Firth would be good for his word.
But, he
also understood on the morning of 25 February that all his units had been sold
and there was no longer a margin call to satisfy.
For that reason, he said that
he did not take up Mr Firth’s offer or pay the $190,000 demanded in Mr
Norval’s emails
of 23 and 24 February. I accept Mr Goodridge’s
evidence concerning his dealing with Mr Firth.
- I
accept that Mr Firth would have lent Mr Goodridge up to $400,000. I find that
had he been given a margin call on 23 February 2009
that required compliance by
2 pm on the third business day thereafter (i.e. 26 February) Mr Goodridge would
have been able to comply,
and would have complied, with it because Mr Firth
would have lent him the money to do so.
- On
and after 25 February, Leveraged Equities progressively sold the whole of Mr
Goodridge’s MCW Trust portfolio. After applying
the whole of the net
proceeds of sale to the margin loan account, it remained in debit by over
$58,000. All the sale transactions
are summarised in the following
table:
-
Leveraged Equities argued that if Mr Goodridge had exercised prudent financial
management of his position over the period leading
up to the demands it made on
23 and 24 February he would have been able to meet them. It contended that he
was too highly geared
so that he was dangerously exposed to small adverse
movements in the unit prices for the MCW Trust. It disclaimed responsibility
for his predicament.
- I
reject this argument. While Leveraged Equities was correct to point to Mr
Goodridge having responsibility for his investment decisions,
there was no
reason for him to contemplate that his lender would shorten the time for
compliance with a margin call in the unjustified
way that Leveraged Equities did
on 23 and 24 February.
- And,
I have found that had he been given the minimum time allowed in cl 5.2 of the
loan and security agreement Mr Goodridge would
have raised funds from Mr Firth
to cover any margin calls that could have been made on him. In Banco de
Portugal v Waterlow & Sons Ltd [1932] UKHL 1; [1932] AC 452 at 506 Lord Macmillan said
of an argument similar to that of Leveraged
Equities:
“Where the sufferer from a breach of contract finds himself in consequence
of that breach placed in a position of embarrassment
the measures which he may
be driven to adopt in order to extricate himself ought not to be weighed in nice
scales at the instance
of the party whose breach of contract has occasioned the
difficulty. It is often easy after an emergency has passed to criticize the
steps which have been taken to meet it, but such criticism does not
come well
from those who have themselves created the emergency. The law is satisfied
if the party placed in a difficult situation by reason of the breach of a duty
owed to him has acted reasonably
in the adoption of remedial measures, and he
will not be held disentitled to recover the cost of such measures merely because
the
party in breach can suggest that other measures less burdensome to him might
have been taken.” (emphasis added)
see too Wilson v United Counties Bank Ltd [1920] AC 102 at 125 per
Lord Atkinson.
- Leveraged
Equities also argued that Mr Goodridge’s authorisation of Mr Norval on 24
February 2009 to put all the units on the
market at 12 cents was an instruction
that it was entitled to act on, at least in respect of sales that it later made
on and after
26 February 2009. But, by the time Mr Goodridge had sent his email
of 6.24 pm on 24 February to Mr Norval, it was clear that he
had withdrawn any
such authority. He told Mr Norval that the sale of 1 million units at 10.5
cents was not what was discussed and
that it was “very
disappointing”. Leveraged Equities’ reliance on the earlier
conversation to justify its forced
sale was without substance and I reject
it.
CLAUSE 5.2 – TIME FOR COMPLIANCE WITH A MARGIN CALL
- I
am of opinion that the Bank, and Leveraged Equities, to the extent either may
have been able to exercise any rights of the Bank
against him, could not make a
margin call giving Mr Goodridge less than the period of notice in which he could
comply in accordance
with cl 5.2 of the loan and security agreement.
- The
Bank and Leveraged Equities argued that cl 5.2 permitted the time for compliance
with a margin call to be reduced by the Bank.
Leveraged Equities argued that
the final clause in cl 5.2 was unambiguous and gave the Bank power to specify
any time at all. It
contended that the expressions “unless otherwise
notified” and “in its absolute discretion” were of the widest
import. It argued that cl 5.2 allowed the Bank to shorten the period for
compliance to payment of the margin call on demand. The
Bank and Leveraged
Equities argued that, in effect, a margin call could be made payable at any
time, notwithstanding the three business
days referred to in cl 5.2,
relying on the concluding qualification to that clause. In effect they
contended that when Mr Norval
accelerated the time at which payment was
demanded, first to 2pm on 24 February 2009 and secondly, to close of business
that day,
he was giving a notification on behalf of Macquarie Bank or Leveraged
Equities that was a notification “in its absolute discretion”.
I
reject the respondents’ argument.
- First,
the ordinary and natural meaning of the exception in the last clause in cl 5.2
excuses a borrower from compliance if the Bank,
in its absolute discretion,
notifies the borrower. The clause is directed to the borrower’s
compliance within the specified
time unless the Bank notifies the borrower that
he or she or it need not comply within that time. For instance, the time could
not
be shortened in the Bank’s “absolute discretion” to
require compliance on a non-business day, since cl 7.2 operates
to make it fall
due on a business day.
- Secondly,
the respondents’ construction does not sit at all well with the balance of
the loan and security agreement. It gives
the Bank a discretion to require a
margin call to be paid under cl 5.1. That discretion can only be exercised
by the Bank making
a determination of the market value of the securities for the
purposes of calculating the market based limit. This is no idle matter.
If the
Bank uses the market value at any particular time on a business day, and the
market then rallies or falls, the obligation
to meet the margin call will be
affected. A rally will reduce the amount of money necessary to be paid or
perhaps eliminate it,
if it rises sufficiently to reduce the total loan balance
to below the aggregate of the market base limit and the buffer. Alternatively,
if the market falls further, then the borrower is entitled to know, with
certainty, whether the earlier determination of market value
stands or another
has been substituted.
- Thirdly,
cl 5.2 does not expressly give the Bank power to fix a shorter period for
compliance. The principal obligation created
by cl 5.2 is that the borrower
comply by the time specified in the clause itself of 2 pm on the third business
day following a margin
call. The discretion given to the Bank by cl 5.2 allows
it to extend the period for compliance or to waive the margin call. This
meaning is consistent with the explanations given by the Bank to Mr Goodridge
and other borrowers in about April 2004 and late 2007
when it informed him and
them of changes to cl 5.2. The clause does not expressly allow the Bank to make
a margin call payable on
demand. Yet, that is the necessary consequence if the
respondents’ construction were correct. The right of a banker to require
a customer to pay a debt on demand is significantly different to its right to
require the customer to pay the debt after giving a
particular period of
notice.
- The
period of notice allows the customer time to organise his, her or its affairs in
order to comply with the demand. Here, at the
time of entering into the loan
and security agreement and of each variation to cl 5.2, the parties (the Bank
and Mr Goodridge) knew
that margin calls would be made in volatile market
conditions that may or may not continue for any particular period of time. They
were aware that the market may rally and so enable compliance with the margin
call without the customer ultimately needing to do
anything. And, the
respondents’ construction of cl 5.2 is directly inconsistent with the
right of a borrower to provide further
security to satisfy a margin call by 2 pm
on the next business day under cl 5.4.
- A
margin call payable on demand made after 2 pm could not be satisfied in
accordance with the borrower’s right under cl 5.4
by providing further
securities by 2 pm on the next business day. The language of cl 5.4 does not
give the Bank a discretion to
reduce the time that it gives the borrower. Thus,
the respondents’ argument that cl 5.2 allows the Bank to specify any
shorter
time than 2 pm on the third business day following the call, including
payment on demand, for compliance with a margin call contradicts
another express
term in cl 5.4 that offers a borrower a substantial contractual right.
- It
follows that I am of opinion that none of what Leveraged Equities purported to
do in making “margin calls” on 23 and
24 February 2009 or selling Mr
Goodridge’s MCW Trust units was authorised by the loan and security
agreement. He had not committed
any breach of that agreement. No valid margin
call had been made on him. And, he was not in breach of any obligation
thereafter
because no later margin call was ever made.
- Mr
Goodridge also argued that the express words “notified by Macquarie Bank
Limited in its absolute discretion” in cl
5.2 required the Bank, and not
Leveraged Equities, to exercise its discretionary power. I am of opinion that
if Leveraged Equities
were able to exercise any rights of the Bank against Mr
Goodridge, then the fact that the Bank’s full name appears in cl 5.2
would
not prevent Leveraged Equities from exercising its discretion in cl 5.2.
The defined words “the Bank” in
the loan and security agreement were
a shorthand expression for Macquarie Bank Limited. The use of the full
expression in the clause
at a time when the Bank actually was the other
contracting party does not signify that the discretion in clause 5.2 was a
personal
discretion of the Bank that could not be novated in favour of or
assigned to a third party. Acceptance of this argument of Mr Goodridge
would
lead to an uncommercial and unreasonable result. I reject
it.
CLAUSE 5.7
- Leveraged
Equities also argued that cl 5.7 created an independent right of the Bank to
sell any of Mr Goodridge’s securities
once a margin call had been made,
regardless of whether the time had arrived for compliance with it. Thus, it
argued the borrower
could find that all his or her securities had been sold
under cl 5.7 to meet a margin call before it was due to be satisfied. This
result flowed, so Leveraged Equities contended, because of, first, the
introductory words of cl 5.7, namely “without limiting
the Bank’s
rights following a Margin Call, if at any time” the total loan balance
exceeded the market based limit and
the buffer amount and, secondly, the later
words of that clause, namely:
“the Borrower ... irrevocably authorise(s) the Bank ... to sell or redeem
... any part of the secured property.”
- I
reject this argument. It produces a very unreasonable and uncommercial result.
As Lord Reid sagely observed in F.L. Schuler AG v Wickwan Machine Tool Soles
Ltd [1973] UKHL 2; [1974] AC 235 at 251E, the more unreasonable the result of a suggested
construction of a contract, the more unlikely it is that the parties can
have
intended it, and if they do intend it, the more necessary it is that they make
that intention abundantly clear.
- If
the Bank exercised its discretion to make a margin call, then cl 5.2 required
the borrower to comply with it. It would be inconsistent
to construe cl 5.7 as
allowing the Bank to sell the borrower’s security before the time that cl
5.2 gave the borrower to comply
with the margin call. The words “if at
any time” in cl 5.7 must be read with the preceding words “following
a
Margin Call”. I am of opinion that the commercial intention behind the
parties’ use of those expressions is plain.
The event which the parties
had in mind, giving the Bank the power to sell, was a failure to comply with a
margin call. In addition,
the words introducing the last sentence of cl 5.7:
“If it becomes necessary to sell ...” suggest that the necessity
has
arisen because of a default by the borrower in compliance with a margin call.
It would not be “necessary to sell”
the borrower’s securities
merely because the Bank had the free standing right to do so for which the
respondents contend.
The rights of the Bank “following a Margin
Call” arose only if it had not received payment or the margin call were
not
otherwise satisfied (e.g. by a market rally) by the due time.
- The
various contractual rights given to the borrower to satisfy a margin call
elsewhere in cl 5 would be negated, if the Bank could
act independently of
anything the borrower had done to comply within the time fixed by cl 5.2. The
parties were aware that the market
could move favourably or unfavourably to the
borrower during that period. When cl 5.8 provided that the borrower “is
liable
for payment of any Margin Call at the time at which the relevant Margin
Call arises”, the margin call must have been intended
to have arisen
at the time fixed for compliance in cl 5.2. The precise quantification of
any liability to pay can only be ascertained at the moment
the margin call is
due because of fluctuations in the value of the security that may occur in the
market. And, at that moment there
may be nothing owing, and hence no liability.
The liability to meet a margin call remains a contingent one up to the time for
compliance
and only matures into an actual liability if at that time the
application of the formula in cl 5.1 to the loan balance and the valuation
of
the securities produces that result.
- I
am of opinion that cl 5.7 relates to a borrower’s failure to pay or
provide security to satisfy an actual liability to pay
a sum certain at 2:00
p.m. on the day that the margin call is due. The Bank’s power was to
demand that the margin loan account
and the value of the security be in a
particular position at 2:00 p.m. on the day the margin call was due. This is a
well understood
and ordinary incident of the relation of banker and customer:
cp National Bank of Australasia Ltd v Mason [1975] HCA 56; (1975) 133 CLR 191 at 199 per
Barwick CJ, 205 per Stephen J who said:
“... it is, I think, a contradiction in terms to speak of
“moneys now owing” and at the same time to seek to include therein
moneys only owing
on a contingency; yet this I regard as the effect of the
first reference to "whether contingently or otherwise" in cl. 1 (i) if it be
given the meaning
which the bank must contend for. In Community Development
Pty. Ltd. v. Engwirda Construction Co. ((1969) [1969] HCA 47; 120 CLR 455), Owen J.
examined the authorities concerned with the meaning of a “contingent
creditor” and “contingent liability”;
these authorities,
together with his Honour's own judgment and that of Kitto J. in that case, do, I
think, support the view that
the contradiction to which I refer is a real
one.” (emphasis
added)
- And,
in Morgan v BNP Paribas Equities (Australia) Ltd [2006] NSWCA 197 at
[62-[67] Santow JA, with whom Giles and McColl JJA agreed, discussed a similar,
but not identical, contract to the loan and security agreement
providing for
margin calls. He concluded that a margin call could not be made “sub
silentio” by a provision similar
to cl 5.6 because that would be a
commercially nonsensical and inconvenient result: Morgan [2006] NSWCA
197 at [62]- [63] and at [66]-[67] he said:
“All of this strongly indicates that when cl 7.1(c) states that “BNP
may notify you of the margin call and of details
of the actions which can be
taken to satisfy the margin call”, “may” in effect means
“shall”
when it comes to making a margin call in terms of the loan
agreement. Otherwise, the client would simply not know what were the actions
which should be taken to satisfy the margin call. Nor would the
client know, in
the absence of knowing a margin call existed, that actions were required to be
taken in the first place.
That then leads to the proper interpretation of cl 7.1(d) with its concluding
sentence, “You must do so [that is satisfy each
such margin call] even if
BNP does not give you a notice requiring you do so”. The words are
ambiguous and are capable of meaning,
read literally, that no notice of the
margin call is required before the obligation to satisfy arises. But the more
plausible meaning,
and one which avoids a commercially unreasonable result, is
that what is excused of BNP is the necessity to give notice that the
margin call
must be satisfied; it is enough to give notice of the call itself. Here it
could not be said that even a person of Mr Morgan’s expertise was obliged
to act upon a margin call when he was not
aware that there had been one, nor
of circumstances that would allow him to conclude that the trigger event in cl
7.1(a) had occurred. This was because he was
not made aware at the critical time
of the reversal.” (emphasis added)
- Of
course, the language of the loan and security agreement is different to the
contract construed by Santow JA. But, similar considerations
inform the
construction of cl 5 of the loan and security agreement: Zhu v Treasurer of
NSW [2004] HCA 56; (2006) 218 CLR 530 at 559 [82]. It is only at the moment that a margin
call is due under cl 5.2 that a borrower in Mr Goodridge’s position can
know whether
he has any liability at all to pay something to the Bank, and, if
he does, how much that liability is. Prior to that time, the margin
call was
only due to be satisfied at 2 pm on the third day after the making of the call
but it was neither immediately payable nor
anything more than a contingent
liability. The existence and amount, if any, of any actual liability of the
borrower would only
be known when the time for performance arrived at 2 pm on
the third day.
- Leveraged
Equities argued that Morgan [2006] NSWCA 197 was distinguishable on two
bases; first, in that case there was no equivalent to cl 5.8 which imposed an
obligation on Mr Goodridge
to monitor his margin position; secondly, Mr
Goodridge in fact had done so. Prior to late on 24 February 2009, Mr Goodridge
monitored
his margin position using his access to the GearUp website. He was
acutely aware, on 23 and 24 February 2009, of the increasing
shortfall between
his margin loan and the value of his security as the market price of MCW Trust
units continued to fall. Through
Mr Norval’s telephone conversations and
emails, Leveraged Equities reinforced to Mr Goodridge the deterioration of his
margin
position over that period.
- However,
cl 5.1 of the loan and security agreement gave the Bank a discretion to require
the borrower to pay a sum up to the amount
of the difference between the total
loan balance and the market based limit. The sum that the Bank actually
requires to be paid,
which, of course, could be less than that difference, is
defined as the margin call. Thus, while cl 5.8 imposes a duty on the borrower
to monitor the total loan balance and the market based limit, it does not
override the substantive creation of a liability to meet
a margin call under
cl 5.1. In cl 5.8 the words “... irrespective of when or whether or
not any notice to pay a Margin
Call is given by the Bank”, can only be
referring to the borrower’s obligation to monitor created earlier in the
clause.
Those words cannot qualify the independent obligation created by cl
5.1; rather cl 5.8 confirms that in order to avoid being surprised
if the Bank
makes a margin call, the borrower must monitor his or her exposure, whether or
not he or she is given any notice to pay.
But, cl 5.8 provides that the
borrower is liable to pay a margin call at the time at which it arises in any
event. The part of
cl 5.8 that I have just quoted makes no sense if read with
the restatement, or explicit statement, of the borrower’s liability
to pay
a margin call at the time it arises. This is because a margin call is defined
as a sum actually determined by the Bank that
it requires the borrower to pay
– a margin call is not automatic or in a sum that is capable of
calculation in advance of the
Bank actually requiring the borrower to pay the
sum specified by it which cannot exceed the difference in the amounts the
borrower must monitor under cl 5.8.
- Here,
the loan and security agreement is a carefully drawn document that, in general,
offers broad rights and powers to the Bank,
which drafted it. If that drafting
failed to achieve the more extreme constructions that it and Leveraged Equities
seek to draw
from it, they will be in a position to protect their interests by
redrafting its terms. The Court should not strain to give even
greater powers
to the Bank, than the ordinary and natural meaning of the loan and security
agreement gave it.
- And,
the agreement being construed in Morgan [2006] NSWCA 197 created a margin
call automatically if Mr Morgan’s loan balance and certain other sums
exceeded a particular amount. The clause
creating that liability operated
differently to cl 5.1 of the loan and security agreement here. In Morgan
[2006] NSWCA 197, BNP had reversed an entry on the relevant account that had the
automatic effect of triggering a margin call. But, BNP did that
without giving
any notice to Mr Morgan. Hence, Santow JA’s finding that, in those
circumstances, BNP had to give notice of
the margin call but did not need to
give notice that it had to be satisfied.
- Here,
it is nonsensical to read cl 5.8 as ignoring the provisions of cl 5.1 that
provide for the creation of a margin call only if
the Bank chooses to make one.
I am of opinion that cl 5.8 does not relieve the Bank from making an actual
requirement of the
borrower by communicating it to him or her if it chooses to
exercise its discretion to make a margin call.
- Moreover,
in my opinion, Mr Goodridge was not in default at 3.50pm on 24 February 2009
when the forced sale of his securities began.
The time by which he had to
satisfy the margin call had not arrived; that is, 3.50pm was not the close of
business, and Leveraged
Equities or Macquarie Bank were not authorised to sell
or offer for sale the securities at that time, whatever may have been the
position later in the day. No event of default could possibly have occurred
until after close of business, whenever that may have
been, on 24 February 2009
assuming that the Bank was entitled to make any margin call due on 24
February.
- The
sale by Leveraged Equities of the 1 million units on that day shortly after
3.50pm was a breach of the loan and security agreement,
a breach of trust, by
the misuse of the power of sale, and a significant deflator of the market value
of the securities. Mr Goodridge
gave unchallenged evidence that he would have
been able to pay the whole of the margin call through the offer from
Mr Firth.
The peremptory manner of the breach of the loan and security
agreement by Leveraged Equities, if it were a party to it, on 24 February
2009
put it in a position where it had demonstrated that it no longer was ready or
willing to perform that agreement according to
its terms. Its conduct was a
repudiatory breach that struck at the heart of the
relationship.
NOVATION OR ASSIGNMENT
- Both
the Bank and Leveraged Equities pleaded that the loan and security agreement had
been validly novated or assigned by the Bank
to BNY and then validly novated or
assigned by BNY to Leveraged Equities in about January 2009.
- Of
course, it is not possible to assign obligations under a contract. Only rights
can be assigned. Thus, it is necessary to examine
the transactions between the
parties to the transfer of the Bank’s margin loan portfolio that was
sought to be passed to BNY
and then by BNY to Leveraged Equities. The first
series of transactions in creating Leveraged Equities’ asserted rights
against
Mr Goodridge involved dealings to which Leveraged Equities was not a
party. I will consider these, first, and then the dealings
between BNY and
Leveraged Equities.
THE BANK’S DEALINGS WITH BNY IN RELATION TO MR GOODRIDGE’S
LOAN
- A
master trust deed (“the master trust deed”) was made on 16
November 2007 between Macquarie Securities Limited (“MSL”),
as manager, and BNY as trustee. The master trust deed recited that it was
intended to provide for the establishment of
“series trusts” to be
known as the “PANTHER Trusts” and that each series trust would be
established for the
purpose of funding the acquisition of “approved
financial assets”, or funding the acquisition by BNY, as trustee of one
series trust, of approved financial assets held by it, as trustee of another
series trust (Recitals A, B). Such a dealing would
be effected by MSL and BNY
entering into a form of trust deed called a “series supplement” to
effect the particular transaction.
Importantly, assets could be transferred
from one series trust to another by MSL issuing to BNY a transfer proposal in
accordance
with cl 13 of the master trust deed.
- The
Bank contended that before January 2009 it held the legal interest in Mr
Goodridge’s loan and that BNY, as trustee of the
Series 2007-1 PANTHER
Trust (“the 2007 trust”), held the beneficial interest. The
2007 trust was established as a “series trust” by a “series
supplement”
also made on 16 November 2007 between MSL, as manager and BNY,
as trustee. The Bank was not a party to this document.
- While
the 2007 trust deed appears to be in a form contemplated in the master trust
deed it does not, on its face, contain any evidence
that the Bank, which,
significantly, was not a party to it, had parted with any legal or equitable
interest in or in respect of its
loan to Mr Goodridge. However, the transfer
proposal of 7 January 2009 between the Bank, MSL and BNY first, in its capacity
as the
disposing trustee and, secondly, in its capacity as acquiring trustee
included Mr Goodridge’s margin loan debt of $640,603.75
and his then
holding of 4,503,562 units in the MCW Trust as part of the “Assigned
Assets”. I will consider the effect
of this transfer proposal below, but
it appears to treat Mr Goodridge’s loan and his units as being an asset
and security in
which BNY as trustee of the 2007 trust had some interest.
- Under
the structure contemplated in the master trust deed, BNY was appointed as
trustee of the series supplements (cl 2) and MSL,
the manager, for both the 2007
trust and another one called the series 2008-1 PANTHER trust (“the 2008
trust”). BNY Trust Australia (Registry) Ltd (“BNY
Registry”) also was a party to, and was appointed as security trustee
for, the 2008 trust. BNY declared that as trustee of any series
trust it would
hold the assets of each such trust on trust for its unit holders on the term of
the transaction documents for that
trust (cl 3). The transaction documents were
defined as meaning the master trust deed, any series supplement, sale agreement
and
servicing agreement relating to the series trust, any note subscription
agreement and certain other documents relating to the particular
series trust
(cl 1.1).
- Mr
Goodridge contended that the transfer proposal, on which the Bank and Leveraged
Equities relied to create the rights and powers
Leveraged Equities asserted
against him, was not one made in accordance with cl 13 and thus was
ineffective.
- Under
cl 13.1 of the master trust deed MSL could issue a transfer proposal not less
than five business days (or such other period
as agreed by BNY) “prior to
the Assignment Date” (i.e. the date specified in the transfer proposal for
this purpose)
in relation to the transfer proposal. The transfer proposal for
the acquisition by BNY as trustee of the 2008 trust of various assets
including
Mr Goodridge’s loan, actually specified 8 January 2009 as the assignment
date. The requirement of five business
days notice was varied for the 2008
trust deed by cl 1.17 which provided that MSL “... may give a
Transfer Proposal under
cl 13.1 of the Master Trust Deed not less than 1
Business Day before the Assignment Date”.
- The
significance, here, of this specific variation of the time by which a transfer
proposal could be given by MSL, is that the actual
proposal was still given less
than one business day before the assignment date. I will explain the factual
context shortly. But,
Mr Goodridge argued that this departure from the terms of
the trust instruments had the consequence that nothing was acquired by
the 2008
trust and Leveraged Equities had no rights at all in respect of his loan. This
was because cl 13.3 of the master trust
deed had a precondition to any transfer
of assets in cl 13.3(a) that the trustee, BNY, had to receive a transfer
proposal “in accordance with cl 13.1”, which, of course, was
amended by cl 1.17 of the 2008 trust.
- Clause
13.3 of the master trust deed provided,
relevantly:
“Transfer of Assigned Assets
If the Trustee has received:
(a) (Transfer Proposal): a Transfer Proposal in accordance with clause
13.1; and
(b) (Transfer Amount): on the Assignment Date in relation to that Transfer
Proposal for the account of the Trustee as trustee of
the Disposing Trust in
relation to that Transfer Proposal, an amount equal to the Transfer Amount in
relation to that Transfer Proposal
(which may occur by ledger entry in the
Trustee’s books),
then, subject to the other requirements of this Deed and the Transaction
Documents for the Disposing Trust in relation to that Transfer Proposal and
Transaction Documents for the Acquiring Trust in relation to that Transfer
Proposal being satisfied in relation to matters which
must be done on or prior
to that Assignment Date relating to the Assigned Assets in relation to that
Transfer Proposal, the Trustee will, with effect from the commencement of
business on the Cut-Off Date specified in that Transfer Proposal, without any
further act or thing, and without any instrument being brought into existence,
hold the benefit of those Assigned Assets
as trustee of the Acquiring Trust,
subject to clauses 13.7 and 13.8 and the terms of the Transaction Documents
relating to the Acquiring Trust.” (emphasis
added)
- The
2008 trust deed was a “Transaction Document” in accordance with par
(c) of the definition of that term in the master
trust deed. Mr Goodridge
argued that because cl 1.17 of the 2008 trust deed required any transfer
proposal to be given not
less than one business day before the assignment date,
a failure to comply with this resulted in the non-satisfaction of a requirement
of a “Transaction Document” so that the automatic deeming operation
to vest the “Assigned Assets” in BNY
as trustee of the 2008 trust of
cl 13.3 never occurred.
- The
transfer proposal was dated 7 January 2009 (the 7 January Transfer
Proposal) and, so, the assignment date of 8 January that it nominated was
less than one business day prior to the assignment date required
by cl 1.17 of
the 2008 trust deed. Under cl 5 of the transfer proposal, on and with effect
from BNY, as acquiring trustee:
“... coming to hold the benefit of the “Assigned Assets” in
accordance with cl 13.3 of the Master Trust Deed, [the Bank] as holder of
the legal interest in the Assigned Assets, will thereupon, and without any
further act by any person ... assign all of [the Bank’s] legal
right, title and interest in the Assigned Assets to “[BNY”].”
(emphasis added)
- Importantly,
cl 6 of the 7 January Transfer Proposal
provided:
“The parties agree that on and with effect from the Assignment Date, the
Acquiring Trustee will assume the duties, obligations and liabilities of MBL
under or in respect of each Assigned Asset which arise or accrue on and from
the Assignment Date and undertakes to discharge those obligations and
liabilities as and when required
under each Assigned Asset. Nothing in this
clause limits clause 2.13 of the Sale and Servicing Deed or releases MBL from
any of
its duties, obligations or liabilities under or in respect of any
Assigned Asset which arose or accrued prior to the Assignment Date.”
(emphasis added)
WAS THERE A NOVATION?
- The
respondents argued that read together cll 5 and 6 of the 7 January Transfer
Proposal constituted a novation of Mr Goodridge’s
loan and security
agreement so that BNY stood in the Bank’s shoes under it. They relied on
the prospective grant of consent,
or the waiver of any need for consent, to any
novation of the loan and security agreement in cll 21.2 and 21.4. The
respondents
conceded that they had not found any case in the common law world to
support this remarkable argument. But they relied on two observations
in
footnotes in Corbin on Contracts Ch 48 in Vol 9 at § 866,39 (the
passage was repeated in the interim edition published in 2002) and in JW Carter,
E Peden and
GJ Todhurst: Contract Law in Australia
(5th ed; 2007) at [17-07], n 17.
- The
learned author of Corbin asserted that assent to a novation could be
expressed by a contracting party at the time the contract was made, empowering
the obligor
to substitute another for himself. The footnote relied on two
cases, neither of which, on examination, support the author’s
assertion:
viz. Baun v National Finance 114 P. 2d 560; 135 ALR 949 (1941), a
decision of the Colorado Supreme Court and Alexander v Theatre Realty 253
Ky 674, a decision of the Court of Appeals of Kentucky.
- The
Australian text had a footnote merely stating that it is possible for the
parties to agree in advance at the time of the original
contract’s
formation, to the novation of the contract at some time in the future. This
reflects no more than the outcome of
the authorities that I examine below,
namely that the parties can agree, for example, that a substitute purchaser will
be introduced
who can enter into a new contract that has the effect of novating
the original one. However, the statement in the Australian text
does not
suggest support for the respondents’ argument that a party can consent in
advance to an unspecified means of novation
that will subsequently be binding at
election of another party.
- I
reject the argument that either cll 21.2 or 21.4 of the loan and security
agreement gave the Bank authority to novate to any person
without Mr
Goodridge’s consent, and that this had in fact been done. There is no
doubt that the loan and security agreement
was made in circumstances where both
the Bank and Mr Goodridge provided consideration to the other. Each had
obligations imposed
on him and it that were owed to the other. The question is
whether one party to a contract can prospectively authorise a novation
to be
made by another party unilaterally and without any further involvement or
knowledge of the first party. If this could be done
then the consenting party
(here, the borrower) could be placed into a new contractual relationship with a
third party, without notice
to it and without any involvement beforehand.
- It
is of the essence of contract, regarded as a class of obligations, that there is
a voluntary assumption by each party to it of
a legally enforceable duty to the
other: Australian Woollen Mills Pty Limited v Commonwealth [1954] HCA 20; (1954) 92 CLR
424 at 457 per Dixon CJ, Williams, Webb, Fullagar and Kitto JJ; cited with
approval by Gaudron, McHugh, Hayne and Callinan JJ in Ermogenous v Greek
Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at 105 [24]- [25].
- While
cl 21.2 recorded Mr Goodridge’s agreement that a novation could occur
without his consent, it is difficult to conceive
of the content of that consent.
Did he agree to assume any obligations the Bank chose to create for him owed to
a new lender in a
transaction of which he knew nothing and in respect of a new
party against whom he had no immediately enforceable contractual right
(he not
being a party to any such dealing with, in this case, BNY or Leveraged
Equities)? Novation involves the creation of a new
contract that extinguishes
and replaces an earlier one. But it is not necessarily and, generally, will not
be the same as the earlier
contract, since if it were, there would not usually
be a need to novate at all. Here, Mr Goodridge knew nothing about the party
or
parties (BNY in two capacities and then Leveraged Equities) with whom he
supposedly contracted and he never entered into a new
contractual document.
- It
is one thing for the Bank to seek to deal with its rights, that are assignable
rights, without its borrower’s involvement.
It is another for the Bank to
create and impose a new contract between its borrower and a third party in
circumstances where the
borrower has no participation in or knowledge of the
formation of that “agreement”. The concept of such an
“agreement”
is somewhat oxymoronic. Mr Goodridge asserted that it
was impossible to effect a novation in such circumstances. I agree. In
Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at 388-391 Windeyer J explained the
principles applicable to novation of a contract in contrast with those for an
assignment. He
said (120 CLR at 388):
“Novation is the making of a new contract between a creditor and his
debtor in consideration of the extinguishment of the obligations of the old
contract: if the new contract is to be fully effective to give
enforceable rights or obligations to a third person he, the third person,
must be a party to the novated contract. The assignment of a debt, on the
other hand, is not a transaction between the creditor and the debtor. It is a
transaction between
the creditor and the assignee to which the assent of the
debtor is not needed. The debtor is given notice of it; for notice is necessary
to complete an assignment pursuant to the statute or in the case of an equitable
assignment to preserve priorities. But the debtor's
assent is not required. He
is not a party to the transaction.” (emphasis
added)
- His
Honour pointed to a serious theoretical difficulty in every case of novation
when the only consideration for the debtor’s
assumption of an obligation
to a new party was the extinguishment of his obligation to the original
creditor. But he observed that
the requirements of Australian law were
satisfied by a tacit agreement to extinguish the former obligation which could
be inferred
when an inconsistent obligation “is by agreement
substituted”: Olsson 120 CLR at 390.
- A
novation, or some similar result, can be achieved without following a set
formula. It is possible to provide in separate clauses,
or indeed in separate
contracts or deeds between the same parties, for an assignment of property in
one and an assumption of liabilities
and obligations in another: Federal
Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty
Ltd (2000) 201 CLR 520 at 532-533 [16]-[18]. Gleeson CJ, Gaudron, McHugh
and Hayne JJ said in Sara Lee 201 CLR at 533 [22] (see too Concut Pty
Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693 at 698 [18]- [19] per Gleeson CJ, Gaudron
and Gummow JJ):
“When the parties to an existing contract enter into a further contract by
which they vary the original contract, then, by
hypothesis, they have made two
contracts. For one reason or another, it may be material to determine whether
the effect of the second
contract is to bring an end to the first contract and
replace it with the second, or whether the effect is to leave the first contract
standing, subject to the alteration.”
- The
Bank and Leveraged Equities also contended that a novation may occur by a new
party being substituted for an original contracting
party because the terms of
the contract authorise this and do not require a further tripartite agreement.
They referred to what
Finn and Sundberg JJ had said in Pacific Brands Sport
& Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395 at 405 [32],
namely:
“Seventh, a third party may become a "substituted contracting
party" by novation of the original contract. Novation will, ordinarily, require
the agreement of the original and the substituted party although the original
contract itself may, on its proper construction, authorise
a party to substitute
a contracting party in its place without need for a further tri-partite
agreement: see Harry v Fidelity Nominees Pty Ltd (1985) 41 SASR 458 at
460. On novation, though, there is no assignment of rights and obligations, but
rather the creation of new rights and obligations
in a new contract: Olsson v
Dyson [1969] HCA 3; (1969) 120 CLR 365 at 388; Cheshire & Fifoot's Law of
Contract, [8.45] ff.”
- However,
what their Honours said was not necessary for their decision and I do not think
that what King CJ said in Harry v Fidelity Nominees Pty Ltd (1985) 41
SASR 458 at 460 supports the proposition. There, the contract for sale of land
named the purchaser “and or nominee” as a party.
King CJ said
(Harry 41 SASR at 460):
“The notion of a vendor binding himself to accept an unknown nominee in
place of the named purchaser as the party to whom he
must look exclusively for
performance of the contact is unusual. It is not a transaction into which one
would expect a sensible vendor
to enter. Indeed it is by no means clear that
such a provision could be made legally effective. The substitution could only
occur if the nominee
subsequently agreed, for fresh consideration or under seal,
to perform the respondent's obligations under the contract. For the
respondent to be released not by reason of a subsequent novation agreement but
by the effect of the words "and or nominee"
in the original agreement, a great
deal would have to be implied into those words. I would be most unwilling to
construe a contract as containing a provision of such unusual character and
dubious validity unless the
language of the contract was quite clear.”
(emphasis added)
- Here,
if a novation occurred it would result in the substitution of BNY and Leveraged
Equities successively in place of the Bank
in the loan and security agreement.
But under that agreement the Bank had unlimited liability for breach of its
obligations to Mr
Goodridge. The terms of cl 16.11 of the master trust deed
(and cl 14.1 of the 2007 trust deed and cl 15.1 of the 2008 trust deed
limited
the liability of each of BNY and Leveraged Equities to that of a trustee of the
relevant 2007 or 2008 trusts and provided
several further limitations of that
liability. These included confining the trustee’s liability (absent
fraud, gross negligence
or wilful misconduct) to what was available from the
assets of the relevant trust to satisfy the liability (cl 16.11(c), and see
too
cl 14.1(c) of the 2007 trust deed and cl 15.1(c) of the 2008 trust deed). While
there is no evidence of what practical difference
this made, the substantive
difference of a novation in these circumstances is that the Bank’s
previous unlimited liability
would no longer apply to events occurring after any
novation and Mr Goodridge never agreed, in advance or otherwise, to such a
change.
- Novation
is a transaction by which all parties to a contract agree that a new contract is
substituted for one that has already been
made; it involves the extinguishment
of one obligation and the creation of a substituted obligation in its place:
Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473 at 491-492 [78] per
Sheller, Stein and Giles JJA. They held that intention is crucial to show a
novation, although intention may be express or implied
from the circumstances.
And Sheller, Stein and Giles JJA also said, applying what Barwick CJ had
said in Upper Hunter County District Council v Australian Chilling and
Freezing Co Pty Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437, that in searching for an
intention to novate, just as to contract in the first place, the Court does not
take a narrow or
pedantic approach, particularly in the case of commercial
arrangements: Fightvision 47 NSWLR at 493 [86].
- The
significance of the introduction of a new contracting party into an existing
contractual relationship is illustrated by the simple
factual situation that was
considered in Dudley Buildings Pty Ltd v Rose [1933] HCA 14; (1933) 49 CLR 84. There, a
vendor of land entered into a contract to sell the land to purchasers. The
contract provided that the purchasers were
acting as trustees and agents of a
company yet to be formed and that the parties intended that the company would
become the purchaser.
The contract provided that that the vendor would
recognise the company, when incorporated, as purchaser and if the vendor were
paid
a specified part of the purchase price, the original purchasers would be
exonerated from all liability. The company was formed and
the purchasers
assigned their interest under the contract to it. Each of Rich J, Starke J and
Dixon J held that the contract did
not bind the company because it was not a
party to it. They held that the company had not acted to bring itself into a
contractual
relationship with the vendor: Dudley Buildings 49 CLR at
92-93 per Rich J, 94-95 per Starke J, 97 per Dixon J. There, the contract could
not be construed as operating to relieve
the original purchasers from liability,
because the company neither incurred, nor offered, to incur to the vendor the
liabilities
of the purchaser: Dudley Buildings 49 CLR at 97 per Dixon
J.
- Later
Dixon J explained in Vickery v Woods [1952] HCA 7; (1952) 85 CLR 336 at 345 that the
court will not impute that a party, subsequently introduced into an existing
contractual setting intended to contract
with one of the present
parties:
“... in order to give a legal basis or rationale to a transaction carried
through upon an assumption, however incorrect, that
no further contract was
required and nothing more was necessary than to complete the transaction as
initially provided in the contract.
Rescission and novation ultimately depend on intention, and here none existed in
fact and nothing was done from which such an intention
must necessarily be
implied.”
See too Christianos v Rohrlach (1981) 55 ALJR 681 at 682E-G per Mason,
Murphy, Aickin, Wilson and Brennan JJ.
- The
Bank and Leveraged Equities argued that cl 21.2 was a consent or agreement by Mr
Goodridge to their assumption of novated obligations
to him, first, by BNY and
then by Leveraged Equities. In my opinion that argument cannot be correct. Mr
Goodridge simply knew nothing
of the arrangements.
- Although
he had given his prospective “consent”, there was no identified new
contract to which he could have “consented”
to become a party. In
particular the Bank also relied on cl 21.4. That expressly extended both its
and its assignee’s or
transferee’s entitlement to novate its or
their obligations under the loan and security agreement or any part of it to any
trustee or manager of any securitisation programme. BNY was in the position of
a trustee of a securitisation programme. Does it
matter that Mr Goodridge knew
nothing of the commercial transactions which occurred in respect of the
Bank’s sale of some of
its margin loan portfolio which ultimately is said
to have been acquired by Leveraged Equities? Could the novation have required
him to pay the new party more money, or sell his house just because he
“consented” to a novation? What changes could
be allowed?
- By
expressing his consent under cl 21 to Macquarie dealing with a third party so as
to novate its obligations to him as borrower
from that third party, Mr Goodridge
can be taken to have authorised the Bank to act on his behalf to bind him to a
novated contract
with the third party in much the same way as the technique of
agency has been used in a Himalaya clause context in the law of agency:
Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at
192-193 [79], [81] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.
- Here,
the changes that occurred, if the Bank were able to novate successfully, were
that its obligations in respect of Mr Goodridge
were assumed by BNY, and his
rights were then to be exercised against BNY. But, the nature and extent of the
novated obligations
were different because of the constraints on the liability
of the trustees under the master trust deed. Although Leveraged Equities
argued
that subsequently BNY novated to it, I have concluded (for the reasons given
later) that such a result is contrary to the
termination and appointment deed to
which it was a party.
- I
am not aware that any case has held that a cascading series of further agencies
or agreements may be made sequentially. But, as
a matter of fact, I have found
that no novation of the loan and security agreement occurred between BNY and
Leveraged Equities.
Thus, the odd position may have been reached that Macquarie
ceased to have a relationship with Mr Goodridge on 7 January 2009 and
BNY became
his margin lender. On the next day, BNY assigned Mr Goodridge’s debt to
Leveraged Equities but retained its novated
obligations to him, even though BNY
has played no part in any dealing with him and is not a party to the
proceedings. This Kafkaesque
scenario must now be disentangled.
- In
addition, as the Bank argued, some contracts can be made without one of the
parties knowing that the other has accepted it, such
as offers to all the world
of the kind made in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
Indeed, the postal acceptance rule also brought persons into contractual
relations without one of them having immediate knowledge
of that important fact.
But those situations are distinguishable because the offeror has made an
identified proposal that can be
matured into a contract by the other party
proffering the stipulated consideration. The nebulous words of cll 21.2 and
21.4 do not
identify any particular contractual relationship or consideration
for a novation. Those two clauses were merely agreements to agree
with no
contractual effect. Both cll 21.2 and 21.4, to the extent each dealt with
novation, referred to a non-existent future transaction
on uncertain and
unidentified terms: Booker Industries Pty Ltd v Wilson Parking (Qld) Pty
Ltd [1982] HCA 53; (1982) 149 CLR 600 at 604 per Gibbs CJ, Murphy and Wilson JJ. There was
no mechanism by which the terms of the novation that would bind Mr Goodridge
could be determined.
- The
Bank contended that cl 21.2 authorised “the Bank” to consent on Mr
Goodridge’s behalf to a novation of the
loan and securities agreement. I
reject this argument. First, it involves turning words dispensing with consent
into an authorisation.
Secondly, there is no evidence that the Bank, or BNY,
did consent to anything on behalf of Mr Goodridge. Thirdly, the deed of
termination
and appointment dated 8 January 2009 under which Leveraged Equities
took BNY’s place as a trustee did not effect any novation
of any of
BNY’s obligations in Leveraged Equities.
- The
Bank also argued that because Mr Goodridge continued to deal with Mr Norval
during February 2009, authorised the dividend to
be used to meet the margin call
on 10 February, and on 24 February authorised Mr Norval to sell his MCW Units at
not less than 12
cents each amounted to his consent to a novation. I reject
this argument. Mr Goodridge dealt with Mr Norval, as he had in the past
when he
had been an employee of the Bank. Mr Goodridge did not have notice of any
assignment. Nor did Mr Goodridge’s conduct
in arranging to meet what
appeared to be a valid margin call on 10 February and thereafter amount to a
consent to Leveraged Equities
being novated in place of the Bank under the loan
and securities agreement. All he did was comply with what appeared to be an
ordinary
event of meeting a margin call on his margin loan account.
- Later
on 23 and 24 February, Mr Goodridge had been placed in a very stressful position
by the conduct of Leveraged Equities that
I have found was, in any event, a
breach of the loan and securities agreement, or would have been such a breach if
Leveraged Equities
were a party to it. The fact that Mr Goodridge assumed that
Mr Norval was acting within his (Mr Goodridge’s) contractual relationship
with the Bank does not amount to consent. He relied on the indicia of the Bank
being involved at that time, given he had not received
the 19 January letter.
The Macquarie branded GearUp website worked; the same relationship personnel,
Mr Norval and Mr Lakos, continued
to communicate with him; he still had a
Macquarie branded margin loan account; and Mr Norval could gain instant access
to and transfer
funds from his Macquarie cash management account.
- I
am not satisfied that Mr Goodridge appreciated that his relationship with the
Bank had ceased and I find that he did not give his
consent to that occurring
during the events in February 2009.
- For
these reasons, I am of opinion that no novation of the loan and security
agreement, and any related agreements between the Bank
and Mr Goodridge,
occurred as a result of the 7 January transfer proposal and that the Bank
retained all its obligations to Mr Goodridge.
WAS THERE A BREACH OF THE MASTER TRUST DEED AND OTHER NOTICE PROVISIONS?
- There
was no express evidence of waiver or variation of the requirement in cl 13.1 of
the master trust deed that MSL to give BNY
“not less than 1 business
day[’s]” notice of the 7 January transfer proposal. However, the
Bank and Leveraged
Equities relied on the documents as demonstrating that the 7
January transfer proposal was made in accordance with cl 13.1 of the
master
trust deed, as amended by cl 1.17 of the 2008 trust deed, which itself was made
on 6 January 2009. They relied on the participation
of the parties to the
various documents and the payment of over $1.48 billion on 8 January 2009 to BNY
in its capacity as trustee
of the 2007 trust as evidencing the acceptance by the
parties of the achievement of legal efficacy for the 7 January transfer
proposal.
They argued that, despite the apparently deliberate drafting these
trust documents, a business-like approach should be taken to give
effect to the
obvious commercial intention that the steps taken by the participants
reflected.
- Mr
Goodridge argued that the “cut off” date of 1 January 2009 selected
in cl 4(b) of the 7 January transfer proposal
would mean that cl 13.3 of the
master trust deed and cl 5 of the transfer proposal would operate
retrospectively. Yet, he contended,
cl 5 of that transfer proposal, by
expressly referring to the need for accordance with cl 13.3, never operated
because of the failure
to give one business day’s notice under cl 1.17 of
the 2008 trust deed. Additionally, by force of cl 13.1 of the master trust
deed, BNY as the disposing trustee under the 2007 trust remained entitled to,
but did not receive, five clear days notice of the
7 January transfer
proposal.
- Often
in contracts and statutes, times are fixed for some act to occur “not less
than” or “not later than”
a day or days before an event. When
that mode of ascertaining the time for an event to take place is employed, the
usual construction
calculates the interval as consisting of whole days. This is
an application of the maxim that the law takes no account of parts
of a day as
Stephen J and Mason J (with whom McTiernan J agreed) explained in Forster v
Jododex Aust. Pty Ltd [1972] HCA 61; (1972) 127 CLR 421 at 449 and 452-453. That case
involved a statute but the majority applied the reasoning in relation to a
contract of the English
Court of Appeal in Caraponayoti & Co Ltd v
Comptori Commerciele Andre & Cie SA [1972] 1 Lloyds 139. There Lord
Denning MR (at 143) said that the general rule is that between the two events
there must be so many
clear days. It is a principle of construction of long
standing: cf Chambers v Smith [1843] EngR 1002; (1843) 12 M&W 2 at 5 per Parke B;
Young v Higgon (1840) 6 M&W 48 at 54 per Parke B.
- Of
course, these general principles cannot be determinative of the construction of
the words used by the parties in the commercial
and trust documents here. Those
documents must be construed as meaning what a reasonable person in the position
of the parties would
have understood them to convey having regard to the matrix
of mutually known facts or surrounding circumstances and the objective
aim and
genesis of the transaction: Toll (FGCT) [2004] HCA 52; 219 CLR 165 at 179 [40] per
Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ. Thus, the documents will be
construed so as to avoid them making commercial
nonsense or working commercial
inconvenience. And, their commercial purpose, being the purpose of a reasonable
person in the position
of the parties, is relevant: Zhu [2004] HCA 56; (2004) 218 CLR
530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ.
- The
lack of adherence by the parties to the forms and requirements of the
documentation they were using to deal with very large sums
of money and other
interests is significant. It is reflected in the very difficult questions of
whether any novations or assignments
occurred. Careful drafting and close
attention to the many requirements of that documentation may have exposed and
reduced the issues
considered in these reasons.
- The
difficulty with Mr Goodridge’s submission is that all of the parties to
the transactions between the Bank, MSL, BNY and
Leveraged Equities appear to
have proceeded on the basis that whatever notice was given by the 7 January
transfer proposal, the transactions
it contemplated could proceed to completion
for a very large sum of money on the next day, without waiting for a further one
or five
clear business day or days. The Bank contended that under cl 13.1 BNY,
the trustee, could agree to less notice. And, it argued
that BNY had agreed to
less notice because it participated fully to completion of a very large and
complex commercial transaction.
I accept the Bank’s argument that it was
evident that BNY, as the trustee, had exercised its right otherwise to agree to
proceed
on less than one or five day’s or days’ notice. I infer
that BNY, as trustee, either waived any right it had to such
notice of the 7
January transfer proposal or agreed to proceed with the transactions it
contemplated notwithstanding the lack of
full notice before completing the
arrangement. The entitlement to receive notice under cl 13.1 of the master
trust deed and cl 1.17
of the 2008 trust was for its benefit and BNY was capable
of waiving compliance with the requirement. I am satisfied that, as a
practical
matter, it must have done so.
LEVERAGED EQUITIES’ POSITION
- It
was common ground that Leveraged Equities’ rights, if any, to deal with Mr
Goodridge depended on the efficacy of the deed
of termination and appointment
dated 8 January 2009 between BNY, as “outgoing trustee”, AB
Management Pty Ltd (a
company associated with Leveraged Equities and its parent
Bendigo and Adelaide Bank) as manager, and Leveraged Equities as “incoming
trustee”. I will refer to this deed as the “LE appointment
deed”. Importantly, the LE appointment deed dealt with the operation
of “Transaction Documents” and the roles of BNY
and Leveraged
Equities under them. “Transaction Documents” were defined in the
master trust deed as meaning, relevantly,
documents going to the constitution of
each series trust and its financing. It is common ground that the defined term
“Transaction
Documents” did not include any loan and securities
agreement made by the Bank with margin loan borrowers and in particular,
did not
include Mr Goodridge’s loan agreement.
- The
LE appointment deed was intended to substitute Leveraged Equities as trustee of
the 2008 trust in place of BNY. The LE appointment
deed provided in cl 2
that with effect on and from 8 January 2009 (defined as “the Effective
Date”):
- BNY was
terminated as trustee of the 2008 trust and Leveraged Equities was appointed in
its stead (cl 2(a)(i) and (ii));
- BNY was released
from all obligations and liabilities imposed on it under each “Transaction
Document”, that arose on or
after 8 January 2009, together with all
present and future claims and liabilities from or in connection with the
released obligations
and liabilities (cl 2(a)(iv));
- Leveraged
Equities assumed all the obligations and liabilities imposed on the trustee of
the 2008 trust under each “Transaction
Document” in relation to the
2008 trust and all claims and liabilities arising on or after 8 January 2009
from or in connection
with those obligations and liabilities.
- The
critical provision in the LE appointment deed on which the Bank and Leveraged
Equities relied as either a novation of Mr Goodridge’s
(and other) loan
agreement with the Bank was cl 3(b). This was in the following
terms:
“3...(b) In consideration for [Leveraged Equities] assuming [BNY’s]
obligations and liabilities as contemplated in this
Deed, on the Effective
Date:
(i) all of the Assets of the [2008 trust] will vest in [Leveraged Equities];
and
(ii) [BNY] transfers and assigns all of its rights, title and interests in the
Assets of the [2008 trust] to [Leveraged
Equities].”
- Again,
it was common ground that the reference in cl 3(b) to “[BNY’s]
obligations and liabilities as contemplated
in this Deed” was to those
obligations and liabilities in the “Transaction Documents” referred
to in cl 2(a)(iv)
and (v) and that these did not include Mr
Goodridge’s loan and securities agreement.
- However,
while both the Bank and Leveraged Equities acknowledged that their argument was
not as clearly supported as in the case
of the 7 January transfer proposal, they
contended that cl 3(b) should be construed as a novation in Leveraged
Equities of all
of BNY’s rights, titles, interests and well as of
BNY’s obligations and liabilities that it had obtained from the Bank,
including a complete novation of Mr Goodridge’s loan and securities
agreement.
- I
reject this argument. First, the words of cl 3(b) make a clear distinction
between the consideration moving from Leveraged
Equities to BNY (namely the
assumption of other, distinct obligations and liabilities having no relation to
the loan and securities
agreement) and the vesting in or transfer to Leveraged
Equities of assets, rights, title and interests. It would fly in the face
of
the language of cl 3(b) to distort it so as to comprise a novation by
Leveraged Equities by which it also assumed obligations
and liabilities to about
18,500 borrowers under loan and security agreements they previously had with the
Bank. Secondly, obligations
and liabilities cannot be described as an asset or
property within the meaning of “Asset”, as defined in the master
trust
deed (that definition applied to the word “Asset” as used in
the LE appointment deed. Thirdly, the language of transfer
and assignment of
assets, rights, title and interests in cl 3(b)(ii), is the antithesis of a
novation involving Leveraged Equities
assuming, in addition, obligations and
liabilities. Fourthly, the words chosen by the parties themselves selected
assets, rights,
title and interest as one subject matter and obligations and
liabilities as a second, separate and distinct subject matter. There
is no
ambiguity or overlap apparent in the careful and discrete treatment of each of
the two subject matters throughout the LE appointment
deed. For whatever
reason, including Leveraged Equities’ lack of expression of its
willingness to assume the Bank’s
or, if it had any, BNY’s
obligations and liabilities to its customers under loan and securities
agreements, the LE appointment
deed did not involve Leveraged Equities assuming
those obligations and liabilities.
- It
follows that Leveraged Equities can only rely on any right, title or interest
in, or in respect of, Mr Goodridge’s loan
and securities agreement that it
may have acquired from BNY under cl 3(b) of the LE appointment deed as
passing to it by an
assignment.
DID MR GOODRIDGE RECEIVE THE BANK’S LETTER OF 19 JANUARY 2009?
- The
Bank led evidence of a system of postage of these and over 18,500 other
identical letters to the customers of the Bank whose
margin loans had been
“sold” to Leveraged Equities. The effect of the Bank’s
evidence was that its usual practices
for despatch of bulk mail had been
followed and that the letters addressed to both Mr Goodridge and Redroad at his
home address were
apparently despatched. The Bank’s system did not record
any difficulty with, or return of, the two envelopes addressed to
Mr Goodridge
and Redroad. Ms Rebecca Cole, a business administrator with Leveraged Equities,
who had previously worked in a similar
position with the Bank, gave evidence
about the system used to deal with returned mail. She said that she had no idea
of the percentage
of the over 18,500 of these letters that were returned and she
had not counted them.
- The
Bank and Leveraged Equities argued that the probabilities favoured a finding
that the letters of 19 January 2009 addressed to
Mr Goodridge and Redroad were
in fact received by him but read and discarded as not being important enough for
him to file. They
pointed to Mr Goodridge’s problems with his
recollection of the events surrounding his traumatic experience that culminated
with his bringing these proceedings. The respondents argued that Mr Goodridge
was not a reliable witness and that his denial of
the receipts of the letters of
19 January 2009 should be rejected.
- Neither
the Bank nor Leveraged Equities suggested that Mr Goodridge was dishonest.
However, they pointed to a number of matters
that they argued made it likely
that he was not sufficiently reliable for his assertion that he did not receive
the letter of 19
January 2009 from the Bank unlikely. Mr Goodridge accepted
that his recollection at the time of the events in February 2009 and
subsequently his recall of them were not reliable. He accepted that he had
jumbled and inaccurately repeated or recorded conversations
and events that had
occurred, when he subsequently spoke to Mr Norval and Ms Shephardson or
wrote emails to them in February 2009. He was emotional and obviously
distressed about what had happened when he gave evidence.
I carefully assessed
his demeanour, conscious that he had an obvious self-interest in advancing the
proposition that he never received
notice in writing of the assignments.
- Ordinarily,
there is a reasonable presumption that a letter, once posted if properly
addressed and stamped, will be delivered in
the ordinary course of the post.
And, in Australian Trade Commission v Solarex Pty Limited (1987) 78 ALR
439, Neaves, Beaumont and Wilcox JJ held that a fact finder could find on the
balance of probabilities that a letter was received by
its addressee in the
ordinary course of post but later mislaid by unknown means. Thus, the addressee
would be found to have received
the letter for the purposes of service or having
notice of it, even though it had later been mislaid and was unavailable.
- I
accept the evidence led by the Bank and Leveraged Equities of a detailed and
generally reliable system for despatching important
documents to the
Bank’s former customers, including Mr Goodridge and Redroad at his
residential address. There is no evidence
that any of the correspondence
directed to Mr Goodridge or Redroad had been returned to the Bank’s agents
for despatch of such
correspondence. On the other hand, that system, like any
system, was not necessarily perfect. Letters do, from time to time, get
lost in
the ordinary course of the post, sometimes they are returned to their sender
(here the Bank) but not recorded. Mr Goodridge
and Ms Clay gave evidence that
they did not see any letter of 19 January addressed to either Mr Goodridge or
Redroad. The parties
agreed that Ms Clay’s evidence assisted only to the
extent that, had she seen such a letter, she would have filed it and that
there
was no evidence that she had in fact filed it or remembered seeing it.
- Thus,
the question whether Mr Goodridge received notice of the assignment in the
letter of 19 January 2009 depends on my accepting
his evidence that he did not,
rather than accepting that he did because of the ordinary reliability of the
Bank’s system.
The Bank and Leveraged Equities suggested that Mr
Goodridge may have regarded the letter as of no particular importance and could
have discarded it in accordance with his ordinary practice for such
correspondence.
- I
believe Mr Goodridge when he said that he did not receive the letter, either in
his own capacity or through his company, Redroad,
prior to March 2009. I have
anxiously weighed up that finding against all of the evidence including the
discussions that he had
with Mr Norval prior to and on 24 February 2009 in which
reference was made to Leveraged Equities, its role, and the new team to
which Mr
Norval reported. I have arrived at this finding conscious of the new footer to
emails that Mr Goodridge received in February
2009 from Mr Norval that
identified him as an “Accounts Manager Leveraged Equities”.
- Moreover,
there is an obvious difficulty in any judge making demeanour based findings when
there is other reliable evidence that
supports a contrary view. But ordinary
human experience is that sometimes systems fail, and people tell the truth that
the system
did not operate as expected. I am comfortably satisfied that Mr
Goodridge was telling the truth when he said that he did not receive
the letter
of 19 January 2000 and that if he had received it he would have caused it to
have been filed both in his own files and
for those of Redroad. I accept that
his own files were not always in perfect order. But I find that if he received
such a document
it would have been a matter of importance to him. He would have
appreciated its significance because it changed the identity of
the person who
was his banker and margin loan lender. I reject the respondents’
arguments that he regarded that document as
of no importance. I am very
comfortably satisfied that if he had received it, he would have regarded the
Bank’s letter of
19 January 2009 as of considerable importance because it
would have identified to him exactly when his relationship had changed and
the
identity of the person with whom he was dealing.
- I
accept Mr Goodridge’s evidence that he had read about the transaction in
the newspaper and engaged in these discussions with
Mr Norval with that
background in mind. That is different to, and those discussions are not the
same as, the requirement in s 12 of the Conveyancing Act 1919 (NSW) of
its analogues (including s 134 of the Property Law Act 1958 (Vic)) that
notice in writing had to be given to Mr Goodridge for the purposes of a legal
assignment of his debt or chose in action.
- Likewise,
a generalised message was on the Bank’s GearUp website from 8 January 2009
to 2 March 2009 informing persons, including
Mr Goodridge, who logged on that
the Bank “... has sold the majority of its margin lending portfolio
to Leveraged Equities ... effective 8 January 2009. For more information,
please click on the banner
in the left hand side navigation bar”. Mr
Goodridge would have seen this when he logged on, but he denied clicking on the
link. I accept his evidence. In the event, the vague information on the GearUp
website about the majority of the loans being assigned
was not pressed as notice
of an assignment. This concession was correct. The webpages did not state that
Mr Goodridge’s margin
loan had been assigned.
- Therefore,
I am of opinion that the webpages could not be notice to him of any assignment
of his loan at law, by statute or in equity.
At most they invited speculation.
But, they conveyed no relevant notice to him of any assignment of his
obligations. As Griffith
CJ said in Anning v Anning [1907] HCA 13; (1907) 4 CLR 1049 at
1060: “... written notice means a document addressed to, and intended to
be retained by, the debtor.” He said that
the object of a written notice
was “... to inform the debtor that the debt is to be paid to B instead of
A”.
ASSIGNMENT – WHAT NOTICE IS SUFFICIENT?
- The
parties did not suggest that anything turned on identifying a proper law for the
assignment and adopted the New South Wales legislation
as the applicable law.
The question of the application of choice of law rules to assignments if of
great uncertainty: Pacific Brands Sport & Leisure Pty Ltd v Underworks
Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395 at 403-404 [30]. I will proceed on the position
adopted by the parties.
- Both
the Bank and Leveraged Equities argued that effective notice of an assignment
made under s 12 of the Conveyancing Act (i.e. a statutory assignment)
could be given using any means provided in s 170 of the Act, even if the debtor
did not in fact receive
the notice. Relevantly, s 12 and s 170(1)(b) of
the Conveyancing Act provided:
“12 ASSIGNMENTS OF DEBTS AND CHOSES IN
ACTION
Any absolute assignment by writing under the hand of the assignor (not
purporting to be by way of charge only) of any debt or other
legal chose in
action, of which express notice in writing has been given to the debtor,
trustee, or other person from whom the assignor
would have been entitled to
receive or claim such debt or chose in action, shall be, and be deemed to have
been effectual in law
(subject to all equities which would have been entitled to
priority over the right of the assignee if this Act had not passed) to
pass and
transfer the legal right to such debt or chose in action from the date of such
notice, and all legal and other remedies
for the same, and the power to give a
good discharge for the same without the concurrence of the assignor: Provided
always that if
the debtor, trustee, or other person liable in respect of such
debt or chose in action has had notice that such assignment is disputed
by the
assignor or anyone claiming under the assignor, or of any other opposing or
conflicting claims to such debt or chose in action,
the debtor, trustee or other
person liable shall be entitled, if he or she thinks fit, to call upon the
several persons making claim
thereto to interplead concerning the same, or he or
she may, if he or she thinks fit, pay the same into court under and in
conformity
with the provisions of the Acts for the relief of trustees.
...
170(1) Any notice required or authorised by this Act to be served shall be in
writing, and shall be sufficiently served:
....
(b) if left at or sent by post to the last known residential or business
address in or out of New South Wales of the person to be
served.”
- Thus,
the respondents contended that by proving that the 19 January letter had been
sent by post to Mr Goodridge at his home address,
they had proven service on
him, even if he never received the letter. First, they relied on a decision of
Cooper J in respect of
the New Zealand analogues of ss 12 and 170 in Smith v
Corry & Co (1909) 28 NZLR 672 at 673. He held, in an obiter dictum,
that when the analogue of s 12 required “express notice in writing to be
given to the debtor ...” it prescribed a criterion that required
the notice to be served for the purposes of the analogue of s 170.
However, as the letter in that case was not registered, Cooper J found that
service under the equivalent of s 170 (which then required the use of registered
post) had not been established: Corry & Co 28 NZLR at 675. Secondly,
the respondents relied on a decision of O’Keefe J in the Supreme Court of
New South Wales to the
same effect: Tristan Head v Credit Corp [2000]
NSWSC 488 at [11]- [14].
- However,
in Consolidated Trust Co Ltd v Naylor [1936] HCA 33; (1936) 55 CLR 423 at 438-439 the
majority, Dixon and Evatt JJ, held that the object of the requirement imposed by
the words in s 12 “... of which express notice in writing shall have
been given ...” was that the debtor have actual notice of an assignment.
They rejected the argument that notice by implication, or by operation of law,
or by the equitable doctrine of constructive notice,
was sufficient, saying
(Naylor 55 CLR at 439):
“The purpose is to make essential actual notice that the debt has been
assigned. "One of the objects of the giving of notice to the debtor is that
he shall `know with certainty' in whom the legal right to sue
him is vested"
(McIntosh v. Shashoua [1931] HCA 56; (1931) 46 CLR 494 at p. 515, per Evatt J.). The
purpose does not extend to giving the debtor particulars of the assignment. The
assignment must be
by writing, but, if it is in writing, then notice to the
debtor is necessary only to acquaint him with the fact that the debt is
payable
to the assignee and the statute requires that he shall be expressly
notified.” (emphasis added)
- Although
Evatt J had dissented in McIntosh v Shashoua [1931] HCA 56; (1931) 46 CLR 494,
immediately before the passage from his judgment quoted above by Dixon and Evatt
JJ in Naylor 55 CLR at 439, Evatt J had held that s 170 did not
relieve the assignee from establishing actual service of the notice of
assignment on the debtor: McIntosh 46 CLR at 514-515. (The other
members of the Court expressly refrained from deciding that question: see at
503-504 per Gavan Duffy CJ
and Dixon J, at 507 per Starke J, and at 518 per
McTiernan J.)
- I
am of opinion that I should follow the construction arrived at by Dixon and
Evatt JJ in Naylor 55 CLR at 438-439. O’Keefe J did not refer to
either of the two cases in the High Court on the interaction of ss 12 and 170.
In any event, I am satisfied for the reasons given by Evatt J in McIntosh
46 CLR at 514-515 and by Dixon and Evatt JJ in Naylor 55 CLR at 438-439
that on its proper construction s 12 requires the debtor, or other obligor, to
be given actual notice of an assignment under it. A notice served merely in
accordance
with s 170 is insufficient unless the debtor or the obligor actually
receives it.
- The
parties did not rely on the provisions of any Victorian statute dealing with
service of any notice of assignment. As noted above,
cl 24.13 made Victorian
law the proper law of the loan and security agreement. And cl 20.2(b) provided
that a notice or other communication
if sent by prepaid post would be deemed to
be duly received three days after posting. Provisions such as cl 20.2(b) are of
obvious
commercial utility in both statutes and contracts. In the absence of a
contrary intention, proof of the use of a prescribed or agreed
method of
delivery is usually sufficient to prove delivery for the purpose of the statute
or contract concerned: Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR
87 at 95-96 per Mason, Murphy, Wilson, Deane and Dawson JJ. However, the
deeming effected by cl 20.2(b) was not made conclusive and
did not exclude proof
to the contrary. And so, proof of non-receipt is in my opinion admissible, and
if accepted, is proof that
no notice was given: Fancourt 154 CLR at
96-97.
- In
any event, cl 20.2(b) did not expressly provide for service of notice of an
equitable assignment. And, I do not consider that
cl 20.2(b) can deem that an
obligor has notice of an equitable assignment any more than s 170(1) of the
Conveyancing Act can in the context of a statutory assignment. As I will
explain the absence of notice does not affect the validity of the equitable
assignment.
- A
number of other matters were fully argued on the basis that Mr Goodridge had
received notice of the assignment to Leveraged Equities
in late January 2009 and
I should briefly express the views and the reasons I have formed on them. The
primary of these issues in
relation to Mr Goodridge were:
(a) did
the letter of 19 January give sufficient information, assuming it were received
by Mr Goodridge, to amount to a notice of
assignment at law, under s 12 of
the Conveyancing Act, or in equity?
(b) what was assigned first, by the Bank to BNY, and, secondly, by BNY to
Leveraged Equities?
SUFFICIENCY OF THE 19 JANUARY LETTER
- Mr
Goodridge argued that he had to receive notice of the assignment between the
Bank and BNY before any subsequent assignment (such
as that by BNY to Leveraged
Equities) could be effective under s 12. I reject that argument. It eschews
the fundamental nature of an assignment of a debt or obligation as being a
transaction that
is independent of a direct dealing in which the debtor or
obligor is personally involved. Rather, an assignment of a debt or obligation
treats what the debtor or obligor is bound to do as the subject matter of the
disposition by the assignor to the assignee without
the need for the debtor or
obligor to be a party to, or aware of, it.
- Ordinarily
an equitable assignment of an equitable interest entitles the assignee to all
equitable remedies applicable to the subject
matter of the assignment and to
give a good discharge. The assignment itself produces the immediate result that
the assignee stands
in the assignor’s shoes and it is not necessary to
regard the assignor as a trustee for the assignee: Federal Commissioner of
Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440 at 447 and 452 per Barwick CJ,
Stephen, Mason and Wilson JJ.
- Notice
of an assignment given either under s 12, or in equity, first, will, bind the
debtor or obligor and, secondly, for s 12, will pass the legal right to the debt
or legal chose in action to the assignee. There is no reason, in principle, or
in the words
of the statute, why a cognate notice or successive notices cannot
be given under s 12. The fact that this may result in an intermediate assignee
having a statutory or legal title (under s 12) to the debt or other legal chose
in action for only an instant in time does not prevent that legal title existing
or passing. All
the section requires for the legal title to pass is that
express notice of the assignment in writing be given to the debtor or obligor
as
Collins MR, Stirling and Mathew JJ held in Bateman v Hunt [1904] 2
KB 530 at 538. The English Court of Appeal held there that one cognate notice
giving details of two earlier assignments of a mortgage more
than three years
after they had been made was effective to pass the legal title to the mortgage
debt to the latest assignee. Giving
the judgment of the Court, Stirling LJ said
that the analogue of s 12 did not prescribe any time by which notice had to be
given or the person who had to give it: Bateman [1904] 2 KB at 538.
- No
period for giving notice is mentioned in s 12 of the Conveyancing Act and
its analogues, nor does the section provide by whom notice must be given. AL
Smith and Williams JJ held in Walker v Bradford Old Bank Ltd (1884) 12
QBD 511 at 517 that the effect of not giving notice was to let in all equities
which may exist or be created prior to giving notice. Until
notice is given the
action had to be brought in the name of the assignor.
- It
is not necessary to give the date of the assignment in the notice informing the
debtor of it: Grey v Australian Motorists & General Insurance Co Ltd
[1976] 1 NSWLR 669 at 681D-F per Samuels JA; Van Lynn Developments
Limited v Pelis Construction Co Limited [1969] 1 QB 607 at 612G-613C per
Lord Denning MR applying Atkin J in Denny, Gasquet & Metcalf v
Conklin [1913] 3 KB 177 at 180. In Hughes v Pump House Hotel Company
[1902] 2 KB 190 the assignor builder assigned to his bank all monies
currently due or to become due from the building proprietor under a building
contract. The assignment included the entitlement to receive extras and
empowered the bank on behalf of the assignor to adjust all
accounts, give
effectual receipts, sue and to compromise or settle any proceedings (see [1902]
2 KB at 191). Matthew LJ held that
the intention was to pass to the assignee
complete control of all monies payable under the building contract and to put
the assignee
bank, for all purposes, in the position of the assignor as regards
to those monies: Hughes [1902] 2 KB at 194.
- A
notice of an assignment under s 12 must enable the debtor or obligor to know
with certainty in whom the legal right to sue him is vested: Naylor 55
CLR at 439. However, as Dixon and Evatt JJ explained it is not necessary to
give particulars of the assignment in the notice.
The notice must directly and
definitely state that the obligation to pay the debt has been assigned. It need
not give details of
the mechanism of the assignment provided that, as Dixon and
Evatt JJ said, it acquaints the debtor or obligor with the fact
that the
debt is payable to the assignee: Naylor 55 CLR at 439. Atkin J in
Denney, Gosquet and Metcalfe [1913] 3 KB at 181 held that even though the
trustees of a deed of arrangement had not been named in a letter notifying the
deed to
a debtor of the assignor, because the letter gave an express and
accurate reference to the deed to which the trustees were parties
and notified
the assignment to them, the requirements of s 12 were satisfied: see too
Naylor 55 CLR at 437-438.
- In
addition, s 12 operates to pass and transfer the legal right to a debt or legal
chose in action to the assignee by the debtor or obligor being given
actual
notice of the assignment. The section contemplates that the assignment can be
effective in equity before such notice is given.
The assignments here were
transactions for value between assignors and assignees intended to dispose then
and there of whatever
rights the former had to any debt or legal chose in action
against Mr Goodridge. And, if effective, the assignees would be entitled
to
enforce, and to use the assignors’ names to enforce, the rights assigned
as soon as the transactions between them occurred,
whether or not Mr Goodridge
knew anything about them. What s 12 does is to give a further means of
enforcement to assignees of debts or legal choses in action; it does not deal
with the transaction
of assignment itself. This is because s 12 operates
on a pre-existing equitable assignment and recognises that the mere giving of
notice of the assignment to the debtor or
obligor does not overcome equities
that would have bound the conscience of the assignee in the enforcement of its
rights.
- I
am of opinion that the letter of 19 January would have been effective had Mr
Goodridge received it at the critical time to give
him proper notice for the
purposes of s 12 and also of informing him of Leveraged Equities’
equitable assignment. The letter informed the addressee of first, the chain
of
assignments and, secondly, whom he or she had to pay to get a good
discharge.
- I
have found that Mr Goodridge did not receive notice of any assignment to
Leveraged Equities because I have believed his evidence
that, prior to late
March 2009, he did not receive the Bank’s letter of 19 January 2009.
Leveraged Equities had no statutory
rights under s 12 of the Conveyancing
Act that it could have exercised directly against Mr Goodridge when it made
its demands on him, and later sold his MCW Trust units in
February and March
2009.
THE NATURE OF THE ASSIGNMENT
- It
is important not to confuse the nature of an assignment, with the consequence of
giving notice of the assignment to the debtor
or obligor. An assignment is an
immediate disposition of a legal or equitable right, title or interest. Its
efficacy depends on,
first, the ascertainment of the fact that there has been a
disposition of that right, title or interest and, secondly, the formalities
under s 12 of the Conveyancing Act or in equity which must be satisfied
to effect such a disposition. Different rules apply to differing types of
property and to voluntary
assignments, as opposed to assignments made for
value.
- Here,
there is no dispute that the transactions relied on as assignments by the Bank
to BNY, and then by BNY to Leveraged Equities
were for value. But that is not
the end of the inquiry. Before s 12 of the Conveyancing Act could be
relied on by it against Mr Goodridge, Leveraged Equities must establish that the
right it seeks to enforce is a “...
debt or other legal chose in
action”. If it is not, then s 12 has no bearing and Leveraged Equities
must establish that that right is property that was effectively assigned to it
in equity.
- An
assignment for value will be enforceable in equity by the assignee. And, the
benefit of a contract is in general assignable in
equity and may be enforced by
the assignee: Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd
[1903] AC 414 at 420 per Lord Macnaghten. He said that the assignor was not
a necessary party although it ought ordinarily be joined: Tolhurst
[1903] AC at 420-421; and see too per Lord Lindley at 424 in William
Brandt’s Sons & Co v Dunlop Rubber Company Ltd [1905] AC 454 at
462. Lord Macnaghten said that an equitable assignment need not take any
particular form and continued:
“It may be addressed to the
debtor. It may be couched in the language of command. It may be a courteous
request. It may
assume the form of mere permission. The language is immaterial
if the meaning is plain. All that is necessary is that the debtor should be
given to understand that the debt has been made over by the creditor to some
third
person. If the debtor ignores such a notice, he does so at his peril.
If the assignment be for valuable consideration and communicated
to the third
person, it cannot be revoked by the creditor or safely disregarded by the
debtor.”
- He
held that the insolvent assignor’s trustee in bankruptcy had no interest
in the proceedings and was not therefore a necessary
party: William
Brandt’s [1905] AC at 462. At common law, an assignee of a chose in
action can bring proceedings in the assignor’s name to enforce
the
obligation, even though the assignor refuses to consent, because the assignment
is sufficient authority to do so: MacDonald v Robins [1954] HCA 5; (1954) 90 CLR 515
at 524 per Dixon CJ, Webb J agreeing.
- An
equitable assignment is complete upon the expression by the assignor of an
intention to make over to the assignee then and there
the assignor’s
equitable interest in the property or right concerned. It is not necessary to
give notice of the assignment
to the obligor in order to perfect the disposition
in equity of the property or right under the dealing between the assignor and
assignee. Notice, however, is important at a practical level, because until
notice is given first, the obligor can pay the assignor
and obtain a good
discharge and, secondly, the assignee may lose, or be postponed in its priorty.
Notice will bind the obligor:
Comptroller of Stamps (Vic) v
Howard-Smith [1936] HCA 12; (1936) 54 CLR 614 at 622 per Dixon J; Norman v Federal
Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9 at 26 per Windeyer J; see too
Thomas v National Australia Bank Ltd [1999] QCA 525; [2000] 2 Qd R 448 at 453 [18] per
Pincus JA.
- In
an equitable assignment, the assignee takes no better title than his assignor
had and takes subject to all equitable interests
and defects affecting the
assignor’s title: Southern British National Trust Ltd (in liq) v
Pither [1937] HCA 28; (1937) 57 CLR 89 at 105 per Rich J. No debtor or obligor can relieve
himself of the debt or obligation owed to another by making an agreement with
a
third party. Liabilities to pay debts and obligations are not assignable:
Federal Commissioner of Taxation v Orica Ltd [1998] HCA 33; (1998) 194 CLR 500 at 513
[19] per Brennan CJ and see at 530 [67] and [68] per Gaudron, McHugh, Kirby and
Hayne JJ.
- The
nature of the dealings between the Bank, BNY and Leveraged Equities had
similarities to the transfer of book debts and the contractual
rights of the
assignor to enforce the obligations of the debtor: cp Australian Guarantee
Corporation Ltd v Balding [1930] HCA 10; (1930) 43 CLR 140 at 160-162 per Dixon J.
- But,
the margin loan was not a static or unchanging liability due by Mr Goodridge to
the Bank. Whileever he was not in default,
he could draw down further on the
margin loan up to his limit of $4.8 million if he provided sufficient security.
And he could repay
some or all of it and regain possession of some or all of the
security he had provided when, on 7 January 2009, the Bank purported
to assign
the balance of Mr Goodridge’s margin loan and his, then, units in the MCW
Trust as at 1 January 2009 to BNY and BNY
assigned that sum the next day to
Leveraged Equities. The purported assignment also included such of the
Bank’s contractual
rights against Mr Goodridge that could be assigned.
These dealings raised the question whether, if he incurred further debts on
the
margin loan account and provided further security, the Bank’s rights to
these would pass immediately initially to BNY
and then to Leveraged Equities?
This would occur if the dealings were assignments because the two transfer
proposals operated as
assignments of future property for value that passed the
property, as soon as it came into existence, to the assignee: Balding 43
CLR at 154-155 per Isaacs, 157 per Starke J, 160-162 per Dixon J;
Tailby v Official Receiver (1888) 13 App Cas 523; Everett 144 CLR
at 450.
- However,
because its obligation to provide the loan or further advances to Mr Goodridge
had not been transferred, the Bank remained
bound to him under the loan and
security agreement. So, if the Bank lent more of its money and obtained
security for it the questions
arise how or why would the new debt and associated
rights pass to Leveraged Equities? After all, the Bank had made a new advance
of its, not Leveraged Equities’, funds because the Bank was contractually
obliged to Mr Goodridge to do so.
- The
complexity of this tripartite putative relationship in which there were one
lender, the Bank, and a different assignee creditor,
Leveraged Equities, was
byzantine to say the least. Somehow, at the moment Mr Goodridge drew down on
the facility, the Bank would
have to provide him with funds and, on the
respondents’ argument, the right to enforce his liability to repay the new
advance
by the Bank would then pass to Leveraged Equities even though it had not
made the advance. While there was a transitional services
agreement
(“the transitional services agreement”) in place to cater for
their internal relationships and adjustments, the Bank’s former customers
had no idea of what
lay behind the transfer arrangements. BNY was not a party
to that agreement.
- As
noted above, under cl 3(b) of the LE appointment deed, BNY transferred to and
Leveraged Equities had vested in it, all BNY’s
rights, title and interests
“in the Assets of the [2008 trust]”. The expressions
“Assets” and “Assigned
Assets” were defined in cl 1.1 of
the master trust deed. “Assigned Assets” were defined specifically
in relation
to transfer proposals. The expressions meant the disposing
trustee’s entire right, title and interest in all present and future
assets, real and personal property, including choses in action and other rights
as well as the benefit of all covenants and agreements
and other choses in
action in favour of or held by the disposing trustee under the transaction
documents in relation to the disposing
trust. In essence, the defined term
“Assigned Assets” was intended to capture all the rights, titles and
interests that
the disposing trustee held under the transaction documents for
the disposing trust. Also under the LE appointment deed, BNY was
released from
and Leveraged Equities assumed all obligations and liabilities imposed on BNY
under each “Transaction Document”.
It is common ground that Mr
Goodridge’s loan and security agreement was not a “Transaction
Document”.
- Next,
the Bank argued that the transitional services agreement made on 8 January 2009
between the Bank, Margin Lending Nominees Pty
Ltd, Macquarie Equities Ltd and
Leveraged Equities operated if there were an assignment, rather than novation,
in favour of Leveraged
Equities. It contemplated that Leveraged Equities would
get the benefit of the borrower’s promise to pay in cl 4 and obtain
the
security held by the Bank for that promise. Importantly, the Bank would still
be obliged to make advances in discharge of its
obligations to Mr Goodridge and
other borrowers, but somehow Leveraged Equities would receive the benefit of the
borrower’s
promise to repay the composite borrowing. Thus, the Bank would
lend money and create a debt due to it by its borrower, and Leveraged
Equities
would have the right to claim repayment of that debt through some internal
accounting between the two of them. In such
circumstances a borrower might have
a real interest in the identity of his lender, which suggests that the rights
sought to be dealt
with in this way were personal rather than proprietary and
were not capable of assignment. The Bank argued that despite this, cl
21 of the
loan and security agreement contemplated that there could be such a dealing and
authorised it in advance.
- Under
cl 9 of the transitional services agreement the Bank would act as settlement
agent in relation to the processing of margin
loans, making advances and
receiving repayments (including advances made or collections made after
completion of the transactions
on which Leveraged Equities relies as giving it
rights against Mr Goodridge) under loan and security agreements and a daily
settlement
of accounts between the Bank and Leveraged Equities. The Bank would
undertake these activities in accordance with what cl 9 referred
to as a
“transition plan”. The parties to that agreement undertook to
negotiate a transition plan for this purpose (cl
14), but no actual plan was in
evidence, only the contemplation that it might be made. And cl 12.3 provided
that the Bank performed
its services under that agreement as an independent
contractor and not as an agent or fiduciary.
- The
respondents argued that Leveraged Equities took an assignment of the
Bank’s margin loan rights to, among others, Mr Goodridge’s
margin
loan and MCW Trust units as at 1 January 2009 under the provisions of a sale and
servicing deed dated 6 January 2009 between
the Bank, MSL, BNY, Leveraged
Equities and Bendigo and Adelaide Bank (“the sale and servicing
deed”). Clause 2.4 of that deed
provided:
“Sale Notice constitutes an offer to sell
A Sale Notice constitutes an offer by the [Bank] to assign to [BNY] with
effect from the commencement of business on the relevant Cut-Off Date on the
terms of this Deed the [Bank’s] entire right,
title and interest in, to
and under the following:
(a) (Margin Loans) each Margin Loan identified in the schedule accompanying the
Sale Notice;
(b) (Securities) all Securities in existence from time to time in relation to
the above Margin Loans;
(c) (Margin Loan Receivables) all Margin Loan Receivables in existence from time
to time in relation to the above Margin Loans;
and
(d) (Margin Loan Documents) all Margin Loan Documents in existence from time to
time in relation to the above Margin Loans.”
(emphasis
added)
- Under
the 2008 trust deed, both the loan and security agreements and the securities
relating to each margin loan were part of the
defined term “Margin Loan
Documents”. Pursuant to cl 2.4 of the sale and servicing deed margin loan
rights the Bank
offered to assign to BNY those documents together with
each margin loan held by the trustee, and all present and future money owing at
any time in
respect of the margin loan, including advances or financial
accommodation made by the Bank before or after the commencement of business
on
the cut off date.
- Thus,
the nature of what passed, if that offer were accepted, included an
“assignment” of Mr Goodridge’s loan and security
agreement and the securities he had provided under it. That did not make sense.
His agreement was incapable of assignment since it contained not only rights but
also obligations of the Bank owed to Mr Goodridge.
The respondents did not
suggest that only the pieces of paper comprising the loan and security
agreements were assigned. That could
hardly be so since the securities given
under those agreements were also assigned. However, as Lord Browne-Wilkinson
said in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4; [1994] 1
AC 85 at 103E (see too Orica 194 CLR at 513
[19]):
“Although it is true that the phrase "assign this contract" is not
strictly accurate, lawyers frequently use those words inaccurately
to describe
an assignment of the benefit of a contract since every lawyer knows that the
burden of a contract cannot be assigned:
see, for example, Nokes v Doncaster
Amalgamated Collieries Ltd [1940] A.C. 1014,
1019-1020.”
- Thus,
giving the benefit of Lord Browne-Wilkinson’s doubt to those who drafted
these documents, I will assume that the Bank
must have offered to assign only
the benefit of the loan and security agreements in the sale and servicing deed.
But once again
that produces an unworkable tripartite relationship in which Mr
Goodridge would have two “the Bank” entities from whom
he was
borrowing, each of which could exercise independently the rights given to
“the Bank” under the loan and security
agreement in respect of the
margin loans and margin loan receivables in cl 2.44(a) and (d).
- The
Bank and Leveraged Equities relied on the transitional services agreement as
providing a means by which the Bank could perform
its obligations to its
borrower under the loan and securities agreement harmoniously with the
tripartite relationship it contemplated
with the borrower. They contended that
this ensured that while the Bank performed its residual obligations to
borrowers, it did
so at the ultimate expense of Leveraged Equities. And, they
contended that the transitional services agreement allowed Leveraged
Equities to
set the policies that the Bank would apply in carrying out its obligations to
its borrowers, so that even if Leveraged
Equities were only an assignee of the
Bank’s rights, it had control effectively over all aspects of the
Bank’s margin
lending relationship with its customer. And, Leveraged
Equities said that it had had assigned to it the right to repayment of the
balance of the margin loan under cll 4.1 and 4.4 of the loan and security
agreement.
- The
respondents jointly submitted that a very considerable number of rights of
“the Bank” under the loan and security
agreement were assigned to
Leveraged Equities. These included the rights:
- to be paid
interest and to determine the interest rate (cl 3);
- to be repaid
the loan after an event of default or other circumstance in which it became
repayable (cll 4, 13);
- to make and be
paid margin calls (cl 5);
- to request
financial or other information from the borrower (cl 9);
- to accept or
withdraw particular securities as being eligible securities for the purposes of
the loan and security agreement (cl
12);
- to disclose
information to an adviser of the borrower, and act as an attorney of the
borrower (cl 24.3, 24.6);
- to vary the
terms of the loan and security agreement (cl 24.4);
- to vary the
credit time, and determine both the lending ratio and market value (cl
25.1).
- The
respondents’ joint submission accepted that the Bank retained the
obligation to the borrower to advance further funds and
to apply the loan to the
purchase of securities nominated by the borrower under cl 1.2.
- The
unworkable situation so created can be illustrated by considering the obligation
of “the Bank” under cl 1.2 of the
loan and security agreement to
allow Mr Goodridge to draw up to the amount of his credit limit. That was
defined in cl 25.1 as the
lesser of $4.8 million and “the market based
limit”. The latter expression involved the Bank determining the market
value of Mr Goodridge’s securities based on its assessment of their value
arrived at using its absolute discretion. However,
if the respondents’
argument were correct, Leveraged Equities had had that right of assessing market
based value assigned to
it so that, simultaneously, it could value the same
property differently and exercise a power to make a margin call. So, if the
right to exercise the discretion had been assigned, the Bank could not perform
its obligation, and if it were not assigned, Leveraged
Equities could not
exercise its right to assess value in order to protect its position and to make
margin calls. This suggests that
the drafting of these documents proceeded on
the basis of the mistake Lord Browne-Wilkinson disclaimed, and that, indeed, the
parties
intended to “assign” the whole of the loan and security
agreements, including obligations.
- The
existence of this wide discretion to make valuations affecting the availability
of finance in a person’s banker, suggests
that the identity of the banker
would be important to the customer. Indeed, there was a pronounced change of
attitude towards Mr
Goodridge once the Bank ceased, and Leveraged Equities
began, to manage his loan. I am not satisfied that the Bank would have
classified
MCW Trust units, that bore its brand name, as a “penny
dreadful”, even in the market conditions of 23 and 24 February
2009. It
is likely that the Bank would have taken the view of Mr Norval on 10 February
when he recommended to Mr Edwards extending
the margin call, as I have described
above.
- These
considerations are relevant to understanding the nature of the loan and security
agreement and the rights of the Bank under
it that might be capable of
assignment in the sense explained by Northrop, Gummow and Hill JJ in Devefi
Pty Ltd v Mateffy Pearl Nagy Pty Ltd (1993) 113 ALR 225 at 237-239. They
said (at 238) that provisions of the agreement in that case “... are to be
construed, prima facie, from the
position that assignment of the benefit of the
agreement is to be permitted only to the extent to which express provision is
made”: see CB Peacocke Land Co Ltd v Hamilton Milk Producers Co
Ltd [1963] NZLR 576 at 582-583 (emphasis added); Devefi 113 ALR at
238.
- Here,
of course, cll 21.2 and 21.4 expressly provide for assignment: CB
Peacocke [1963] NZLR at 582-583 per North, Turner and McCarthy JJ. The
importance of cll 21.2 and 21.4 is that the parties to a contract
can provide
that rights or benefits under it, not otherwise assignable, can be assigned:
Devfi 113 ALR at 235; Pacific Brands 149 FCR at 404 [32] (third
proposition); CB Peacocke [1963] NZLR at 581-583. The respondents
argued that these considerations supported the efficacy of what they had sought
to achieve
in the documents.
- I
reject that argument. What the documents fail to achieve is a coherence in the
rights or benefits with which they purport to deal.
It is impossible, in my
opinion, to bifurcate the lending obligations and rights by the mechanism
employed here. There cannot be
two persons who meet the description “the
Bank” capable of exercising the same rights and powers to determine,
independently,
the available credit for Mr Goodridge, the value of his
securities and whether or not he is in default.
- In
my opinion, this raises a situation analogous to that discussed in Hutchens v
Deauville Investments Pty Ltd [1986] HCA 85; (1986) 68 ALR 367 at 372-373 by Gibbs CJ,
Mason, Wilson, Brennan and Deane JJ who said (Hutchens 68 ALR at
373):
“... it would seem to be simply impossible, as a matter of basic
principle, to assign the benefit of a guarantee or the security
for it (as
distinct from the property secured) while retaining the benefit of the
guaranteed debt and thereby to convert the one
debt owing by both principal
debtor and guarantor to the one creditor into two debts, one owing by the
principal debtor to the creditor
and the other owing by the guarantor to the
assignee. If it were otherwise, the position would seem to be that, by assigning
the
benefit of a guarantee and the guarantor's security and retaining the
benefit of a principal debtor's indebtedness and the principal
debtor's
security, a creditor could effectively divorce the guarantor's liability from
that of the principal debtor and effectively
deprive the guarantor of the rights
which flowed from his position as such including (where available) his rights of
subrogation.”
- And
in Queensland Premier Mines Pty Limited v French [2007] HCA 53; (2007) 235 CLR 81 at 96
[38] Kiefel J (with whom the other members of the Court agreed) explained that
Naylor [1936] HCA 33; 55 CLR 423 held that the transfer of a mortgage did not give the
transferee the right to sue a surety on a guarantee contained within the
mortgage.
Her Honour went on to say that this did not prevent the parties to
the transfer from agreeing to effect a transfer of a debt arising
from a
separate loan agreement: see French 235 CLR at 101 [57].
- No
doubt the overall commercial result which the various parties to the master
trust deed and other related dealings sought, could
be achieved by novation of
the loan and security agreement, as cll 21.2 and 21.4 recognised. But, this was
not done, again, no doubt,
because it would have required over 18,500 borrowers
to agree: cf Devefi 113 ALR at 238. Instead, the mechanism of
assignment was employed to achieve a result that was beyond its reach.
- Obviously,
the courts should strive to give effect to commercial dealings and contracts.
But, the law relating to assignments is
an area that is bedevilled by technical
rules, some of which have purposes that protect the rights of persons such as
debtors or
persons to whom the identity of the other party is important, who
would otherwise be involuntarily made subject to a relationship
with a
stranger.
- The
reliance of the Bank and Leveraged Equities on commercial and administrative
arrangements arrived at between them in order to
make workable the practical
side of their overall transaction distracts from the critical issue. That issue
is the assignability
of the chose in action, namely Mr Goodridge’s margin
loan at its value on January 2009 and his then supporting security. If
the
rights were assignable as a matter of law, then Leveraged Equities could assign
them in turn, to X without any of those accompanying
arrangements. The legal
efficacy of the assignment of a right cannot depend on the practical steps any
particular assignor and assignee
may agree in order to make the assignment
workable. The validity of the dealings here must be capable of being tested by
examining
the position if Mr Goodridge’s loan were the only loan assigned.
Could it be assigned by Leveraged Equities to X, as subsequent
assignee? And
when that was done, what rights would X obtain on such an assignment?
- If
the respondents were correct, X would obtain all of the rights referred to at
[186], including the right of the Bank to determine
market value of Mr
Goodridge’s securities and their LVRs, while the Bank itself remained
obliged to lend to him and assist
him to acquire more securities on its own
determinations of market value and LVR. The Bank had an obligation to make the
loan using
its power to determine those factors. How could X have that
power to the exclusion of the Bank? Suppose Leveraged Equities made an
equitable
assignment to X of this posited chose in action consisting of Mr
Goodridge’s margin loan and securities but did not give the
Bank notice of
it. How would the Bank be able to discharge its contractual obligations to Mr
Goodridge to decide whether or not
it would hand him more money? He had a legal
right to have the Bank make determinations in accordance with the loan and
security
agreement as and when he applied for further advances.
- I
am of opinion that the Bank cannot have disposed, once for all, of its rights
and power to determine, independently of Leveraged
Equities or X, whether or not
it was obliged to lend Mr Goodridge more money. First, no express provision of
any document relied
on by the Bank and Leveraged Equities provided for the
assignment of those rights: Devefi 113 ALR at 238. Secondly, such
“rights” or, rather powers and duties, are not capable of assignment
because they were
inherent and necessary to both the Bank’s rights and its
obligations under the whole loan and security agreement, i.e. the
“rights” or powers and duties not just in the enforcement of the
borrower’s debt, but in the creation of further
debts.
- In
my opinion there cannot be a separation of the Bank’s existing legal right
to a debt and supporting security owed by Mr
Goodridge from its continuing
obligation to lend to him and to assist his acquisition of further securities on
the same terms and
conditions. This was not simply an assignment of a debt free
standing from an ongoing relationship between the assignor and debtor.
The Bank
and Leveraged Equities were seeking to assign pieces of the relationship to give
effect to a commercial objective. But
the mechanism that they chose could not
assign what the Bank and Mr Goodridge had agreed would be the criteria and use
of powers
on which the Bank would be bound to lend him more money. That part of
the loan and security agreement was inseverable from the obligation
of the Bank
to lend on the terms of that agreement.
THE ASIC ACT CLAIMS
- Mr
Goodridge’s purpose in acquiring, through his margin loan, and holding the
MCW Trust units was to provide a source of income
for his retirement which he
considered would have tax advantages. He thought that they were the best stock
to hold in the circumstances
of the global financial crisis for this long term
personal objective.
- He
claimed that whatever rights the respondents had in respect of their equitable
entitlement to realise the value of the units if
he defaulted under the loan and
security agreement they were fiduciary in nature. This was because the exercise
of power or discretion
to sell could adversely affect his interests and he was
at the mercy of the relevant respondent in that respect. By wrongly exercising
that power or discretion, when no right to sell had arisen, he claimed that the
respondents, or one of them, had acted unconscionably
within the meaning of s
12CA of the ASIC Act: i.e. in a way that equity would regard as
unconscientious. Alternatively, he argued that the conduct was unconscionable
within
the wider statutory meaning of s 12CB.
- The
Bank argued that Mr Goodridge’s case on unconscionability failed to
distinguish between the conduct of the respondents.
It contended that at worst,
all the Bank did was to put Leveraged Equities into the position in which it
could exercise the power
or discretion to sell. It, the Bank, had not taken any
active role and they could not be found to have engaged in the conduct
unconscionably.
This submission was made despite the Bank’s pleading, in
the alternative to it denying having sold, that it had authorised
and consented
to what Leveraged Equities had done under cl 6.2(d) of the transitional services
agreement. In opening, senior counsel
for the Bank described this as
ratification if Mr Goodridge had been misled that he was still dealing with the
Bank.
- Leveraged
Equities argued that Mr Goodridge was not at some special disadvantage of which
it had taken advantage and so he could
not establish that he was entitled to
invoke s 12CA (e.g. Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983)
151 CLR 447). And, relying on what Spigelman CJ said in Attorney-General
(NSW) v World Best Holdings Ltd [2005] NSWCA 261; (2005) 63 NSWLR 557 at 583 [120]- [121], it
contended that no high level of moral obloquy had been established against it.
It contended that a bank was not normally a fiduciary
in relation to its
customer. And, Leveraged Equities also argued that s 12CB did not apply here
because of the limitation imposed
in s 12CB(5) that the section applied only to
financial services ordinarily acquired for personal, household or domestic use.
It
argued that Mr Goodridge was a professional earning income that he invested
into his business enterprise, including the use of the
margin loan facility to
acquire the units. It argued that his purpose in investing was to derive income
and that was not within
the classes of activity in s 12CB(5).
- I
am of opinion that it is not necessary to decide whether s 12CA avails Mr
Goodridge. It has been interpreted as, in effect, creating
a statutory analogue
of the equitable doctrine to relieve persons, including mortgagors, who are
under a special disadvantage evident
to the other party so as to make the
latter’s conduct in exploiting the disadvantage unconscientious:
Amadio 151 CLR 449; Australian Competition and Consumer Commission v
CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at 74 [46] per Gummow and
Hayne JJ. I discussed the authorities in Australian Performing Rights
Association v Monster Communications Pty Ltd (2006) 71 IPR 212 at 243-244
[140]-[145].
- However,
the norm of conduct imposed by s 12CB is different from and of wider scope than
that imposed by equity and repeated in s
12CA. One circumstance relevant here
is that Leveraged Equities had and exercised power to control the disposition of
Mr Goodridge’s
property that he had offered to the Bank as security. He
was vulnerable to abuse of that power. I do not consider that the relationship
between a mortgagor and mortgagee is ordinarily capable of characterisation as
fiduciary, for the mortgagee does not undertake or
agree to act in the
mortgagor’s interests: Hospital Products Ltd v United States Surgical
Corp [1984] HCA 64; (1984) 156 CLR 41 at 96-97 per Mason J. Rather, the mortgagee acts in
its own interests which often will be transparently different to and in conflict
with the mortgagor’s. Here, the mortgage relationship was created within
an ordinary relationship of banker and customer:
cf Golby v Commonwealth
Bank of Australia (1996) 72 FCR 134 at 136D-F per Hill J.
- What
creates the distinction here from this usual position is the misuse of the power
of sale, in the circumstances that I have found.
Equity would have enjoined the
sale had all the facts been established. Mr Goodridge, of course, did not seek
relief then. But,
by acting as it did with his property, Leveraged Equities
required him to comply with conditions that were not reasonably necessary
to
protect its legitimate interests (see s 12CB(2)(b)); namely first, it required
him to pay money in accordance with a timetable
and series of demands that were
not valid and, secondly, it threatened, and then proceeded, to sell his property
without a legitimate
interest (on my findings above) that it was then entitled
to protect. Leveraged Equities thus misused its power of sale unconscientiously
without any right to do so. Indeed, Ms Elliott vainly, and as I have found
still wrongly, suggested to Mr Edwards at 2.18pm on 24
February
2009:
“If the client is in day 1 we should at least provide him with 24 hour
notice, I wouldn’t give him 3 days because he
is single
stock.”
- This
was, in all the circumstances, unconscientious insistence by Leveraged Equities
on any rights it may have had as an assignee:
cf Tanwar Enterprises Pty Ltd
v Cauchi [2003] HCA 57; (2003) 217 CLR 315 at 325 [25], 335 [58] per Gleeson CJ, McHugh,
Gummow, Hayne and Heydon JJ.
- There
is no evidence, other than Mr Goodridge’s evidence of his purpose, for
which margin loans of the kind here are ordinarily
acquired within the meaning
of s 12CB(5). In Begbie v State Bank of New South Wales (1994) ATPR
¶41-288 at 41,898 Drummond J said:
“... it is in my view necessary to have regard not just to the activity,
here the provision of loan funds, but also to the
purpose that activity is
intended, in the particular case, to serve. Only then can the true nature of the
services in connection
with which it is said the respondent has acted
unconscionably be identified and a proper answer given to the question posed by
s.
52A(5).”
- Ordinarily,
individuals seek to make provision for their later life and retirement while
they are in the workforce in whatever capacity
they engage. A person who saves
in a bank account for his or her retirement, or for a fund for Christmas
presents, or for a “rainy
day”, puts that money aside for a personal
use. Depending on their purpose, so too may a person who invests the money in
an
interest bearing bank account or some other property, such as a
superannuation fund, annuity, real property or shares. Here, Mr
Goodridge
invested in the MCW Trust units for his retirement. I am satisfied that this
purpose was the purpose for which he acquired
from the Bank the financial
services consisting of the loan and security agreement, the margin loan and the
ability operate those
facilities.
- Accordingly,
I am of opinion that such services are of a kind ordinarily acquired for
personal use and that that was the use for
which Mr Goodridge acquired them:
Begbie (1994) ATPR ¶41-288 at 41,898.
RELIEF
- Mr
Goodridge sought an order that his 5,603,562 units in the MCW Trust be restored
to him by one or other of the Bank or Leveraged
Equities. Alternatively, he
sought damages. The respondents argued that all he is entitled to is the value
of the units sold, measured
as at the time of their sales, in late February and
early March 2009. Since they were sold on market, they contended that his only
loss was the amount of the transaction costs of the sales and, possibly, of any
purchases to restore his holding. They also contended
that what Mr Goodridge
should have done when they cut off his margin loan and sold his units without
any basis (on the assumption
they were in breach of this rights) was to have
used the $400,000 loan offered by Mr Firth and gone into the market to replace
the
units as they were being sold off.
- I
reject the respondents’ argument. Having put him in the position they
did, I am of opinion that they ought completely to
restore Mr Goodridge to the
position he would have been in had they not wrongly exercised power of sale.
This includes compensating
Mr Goodridge for any cost dividend payments. He must
bring to account any interest he would have had to pay on the margin loan had
it
continued at the level it was at on 24 February 2009. However, since no margin
call was validly made, he need not give credit
for a call he was never asked to
meet. I have had regard to the submissions of the parties that the value of the
units has increased
substantially since the unauthorised sale – hence
their dispute as to the date for assessment of damages and the form of relief.
Indeed, Leveraged Equities accepted that it had sold the units at the bottom of
the market.
- Mr
Goodridge had a contract that was breached by the unauthorised sale of his
property. That property was made available to the
Bank as security for his
margin loan and credit limit. As Gibbs J said in Wenham v Ella [1972] HCA 43; (1972)
127 CLR 454 at 473 a plaintiff can receive compensation by way of damages for
breach of contract by being allowed:
“... to recover the value of a lasting asset to which he was entitled
under a contract and for which he had paid in full and
in addition the loss of
profits sustained during the period from the date of the breach until
judgment.”
- Here,
Mr Goodridge paid for the units in full when he acquired them, and met all of
his obligations to the bank to maintain them.
I am of opinion that it is
specious of the respondents to argue that having created the difficulty for Mr
Goodridge, he then had
to get them out of the loss he had suffered while they
have persisted in insisting that he could simply have gone back into the market
either while they sold up all his units, or soon after.
- From
the evening of 24 February 2009 he believed that none of his units was available
to him because of them being force sold for
his alleged failure to meet the
margin calls on 23 and 24 February. Mr Goodridge gave unchallenged evidence
that when he tried to
open a new margin loan account that allowed him to trade
in shares, to replace the margin loan account with the Bank, the process
took
him about eight weeks. He had found that opening a similar account for his son
and daughter-in-law had taken about five weeks.
He was then asked whether, with
access to the loan of $400,000 he could have bought units in the MCW Trust for
that sum through
a stockbroker. He said that he had never used a stockbroker,
although he did not question that that transaction could have been
effected. I
accept Mr Goodridge’s evidence.
- Leveraged
Equities argued that Mr Goodridge should have mitigated his loss by borrowing
from Mr Firth and, presumably others, to
buy back his lost units
contemporaneously with its wrongful forced sales. He said that he would not
borrow to pay money to one or
both of the respondents when he understood that he
had been the victim of a breach of contract. Leveraged Equities argued that
this
was a failure by him to mitigate his loss. I reject this argument. It is
over simplistic and ignores the effect of what Leveraged
Equities had done, and
was persisting in doing, in force selling his units: Banco de Portugal
[1932] AC at 506. Mr Goodridge had accumulated the units and paid for them over
a considerable period. He could not buy back all
the units being sold because
Mr Firth’s offer of $400,000 was insufficient to both meet Leveraged
Equities’ unjustified
demands for about $190,000 and then to recoup the
sold units. Moreover, as the forced sales seemed to be leading the market down,
he would face the real risk of further unjustified, peremptory demands from
Leveraged Equities for margin calls, and that would absorb
more of the money
from Mr Firth’s loan offer.
- Next,
Leveraged Equities said that Mr Goodridge should only receive damages for the
difference of about $2,600 between his authorisation
or instruction to Mr Norval
on 24 February to sell at 12 cents a unit and what 4 million units were sold
for. I reject that argument.
First, Leveraged Equities never acted on that
authority. Secondly, as I have found, it was withdrawn later that day.
Thirdly,
Mr Goodridge only gave the instruction because of the wrongful conduct
of Leveraged Equities peremptorily demanding payment by 3.50pm
that
afternoon.
- The
principle applicable for the assessment of compensatory damages at common law
was stated by Mason CJ, Dawson, Toohey and Gaudron
JJ in Haines v Bendall
[1991] HCA 15; (1991) 172 CLR 60 at 63 (and applied by the Court in Manser v Spry [1994] HCA 50; (1994)
181 CLR 428 at 434-435, 437):
“The settled principle governing the assessment of compensatory damages,
whether in actions of tort or contract, is that the
injured party should receive
compensation in a sum which, so far as money can do, will put that party in the
same position as he
or she would have been in if the contract had been performed
or the tort had not been committed: Butler v Egg and Egg Pulp Marketing
Board ((1966) [1966] HCA 38; 114 CLR 185 at 191);
Todorovic v Waller ((1981) [1981] HCA 72; 150 CLR
402 at 412); Redding v Lee ((1983)
[1983] HCA 16; 151 CLR 117 at 133); Johnson v
Perez ((1988) [1988] HCA 64; 166 CLR 351 at 355, 386);
MBP (SA) Pty Ltd v
Gogic ((1991) [1991] HCA 3; 171 CLR 657);
Livingstone v Rawyards Coal Co
((1880) 5 App Cas 25 at 39); British Transport Commission v
Gourley ([1956] AC 185 at 197, 212).
Compensation is the cardinal concept. It is the "one principle that is
absolutely firm, and which must
control all else": Skelton v
Collins ((1966) [1966] HCA 14; 115 CLR 94 at 128), per
Windeyer J. Cognate with this concept is the rule, described by Lord Reid in
Parry v Cleaver ([1970] AC 1 at 13,
as universal, that a plaintiff cannot recover more than he or she has
lost.”
- The
question is on what date should damages be assessed. The respondents point to
the prima facie rule at common law that this should
be the date at which the
injured party could reasonably be expected to mitigate damages by seeking an
alternative to contractual
performance. They called in aid what Mason CJ said
in Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 at 357. He cited the decision of
the Supreme Court of Canada in Asamera Oil Corp v Sea and Oil General
Corp (1978) 89 DLR (3d) 1 at 31 where Estey J said that a plaintiff seeking
damages for a failure to return shares lent to the
defendant:
“... ought to have crystallized these damages by the acquisition of
replacement shares so as to minimize the avoidable losses
flowing from the
deprivation by [the defendant] of [the plaintiff's] opportunity to market the
... shares. Such share purchases should
have taken place within a reasonable
time after the date of breach.”
- The
law was not always so. In Shepherd v Johnson (1802) 2 East 211 at 212
the Court of King’s Bench held that the time to value stock lent but not
returned or replaced was
at the time of trial. Lawrence J observed that had a
bill for specific performance been filed in equity, the defendant would be
compelled to replace at the then market price. This view was followed by
A’Beckett J in Amoretty v City of Melbourne Bank (1887) 13 VLR 431
at 433 in a claim in tort for conversion. McGregor on Damages
(17th ed) at [24-012]-[24-014] criticises this approach
as inconsistent with general principles of mitigation.
- In
my opinion, there is no inflexible rule of law that fixes the date of such an
assessment. As Gleeson CJ, McHugh, Gummow, Kirby
and Heydon JJ said in HTW
Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at
656-657 [35]:
“The approach of subtracting value from price is commonly employed
where the acquisition of land, chattels, businesses or shares is induced by
deceit. It has also been commonly employed under s 82
of the [1986] HCA 3; Act
(Gates v City Mutual Life Assurance
Society Ltd (1986) 160 CLR 1 at 6-7, per Gibbs CJ: at 12, per Mason, Wilson
and Dawson JJ; Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281
at 291, per Brennan, Deane, Dawson, Gaudron and McHugh JJ). It is sometimes
described as the rule in Potts v Miller ((1940) [1940] HCA 43; 64 CLR 282). Even in the
areas in which that approach is often applied, and even apart from cases in
which consequential losses have been recovered,
the "rule" is not universal or
inflexible or rigid. This perception is not novel (cf
Smith New Court Securities Ltd v
Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254). It has existed at
least since the judgment of Dixon J in Potts v Miller and has been quite
plain since that of Gibbs CJ in Gould v Vaggelas ((1985) 157 CLR 215 at
220-221). Even Jordan CJ, who called the rule "well settled", acknowledged that
it was only a "rule of practice"
(McAllister
v Richmond Brewing Co (NSW) Pty Ltd (1942) SR (NSW) 187 at 192). The
flexibility of the rule can be seen by reference to a number of its
characteristics.” (emphasis added)
They were, of course, dealing with a case involving an assessment of value
and observed (HTW 217 CLR at 658 [37]):
“There are other reasons why the law does not limit recovery by reference
to market value –– the amount for which
the plaintiff might have
sold the assets acquired. One is that, subject to mitigation issues, the
plaintiff is "not bound to sell
them
(Peek v Derry (1887) 37 Ch D 541 at
594 per Sir James Hannen).”
- Mr
Goodridge was not in a position fully to recoup his lost investment immediately.
It would have taken him some time to do so by
establishing a new margin loan
account. He had been hit hard, emotionally and financially, by the wrongful
conduct of Leveraged
Equities. He began these proceedings promptly on 6 April
2009 seeking relief, albeit different from its current formulation. The
respondents could have remedied his position then and there. They did not do so
in April 2009 or later.
- I
do not consider that Mr Goodridge acted unreasonably in failing to buy units in
the short time before he began the proceedings,
or thereafter. Once the forced
sales ceased, the market for MCW Trust units began to rise. It would have been
commercially unreal
for him to consider returning to use the margin loan
facility with whomever his lender was given the hostile conduct he had
experienced.
Nor did the respondents prove that there was any likelihood that
the margin loan would have been available to him with a 70% LVR
so that he could
have reacquired the units, with some degree of reasonable assurance that he
would not have had a large margin call,
if Leveraged Equities decided that the
LVR should be reduced. As Mr Norval had told him on 24 February, Leveraged
Equities would
sell all the units at 3.50 pm. It was reasonable for Mr
Goodridge not to have used the margin loan facility offered by such a lender
to
buy back his investment. Leveraged Equities had demonstrated to him that it was
not going to assist him in restoring his position.
And, Mr Norval had warned
him on 12 February that “... it might come to the stage where you get a
big margin call just because
the LVR’s been reduced”.
- That
prospect had not yet been fulfilled, but a reasonable person in Mr
Goodridge’s position would be justified in not using
the margin loan when
such a threat was hanging over him or her, especially after the events of 23 and
24 February. And, had he,
or such a reasonable person, known of Mr
Edwards’ LVR model assigning a zero LVR to MCW Trust units as at 11
February, no-one
reasonably would risk financing a reacquisition with Leveraged
Equities through Mr Goodridge’s margin loan facility.
- Nor
is it appropriate to approach the assessment of Mr Goodridge’s damages
merely as if the Bank or Leveraged Equities had
converted his MCW Trust units
when they were sold. The breach of contract did not merely involve wrongful
sale of securities. It
was bound up with a refusal to provide Mr Goodridge with
his margin loan facility in accordance with its terms. By demanding payment
when none was due, the respondents denied him the right to use his loan to hold
his securities. The cognate effect was that Mr Goodridge
was denied his present
entitlement to maintain his borrowings and to hold his securities, in the form
of his MCW Trust units.
- His
damage was not just the loss of the securities, when they were wrongly sold, but
the deprivation of his legal entitlement to
be provided with a margin loan to
hold those securities. He lost both and is entitled to be put in the position
he would have had
if the breach had not occurred.
- Any
damage which results from a breach of contract and was reasonably in the
contemplation of the parties when the contract was made
is recoverable even
though the claimant’s impecuniosity contributed to it: Burns v MAN
Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 658-659 per Gibbs CJ. The
Chief Justice held that a wrongdoer is liable for the consequences flowing from
his wrongful act notwithstanding
that the victim was unable, because of lack of
funds, to take the steps to mitigate his loss: Burns 161 CLR at 659, see
too at 674-675 per Brennan J.
- The
respondents bore the onus of proving a failure by Mr Goodridge to mitigate. The
market evidence established that at no time
after 26 February 2009 did the price
of MCW Trust units fall below 12 cents. I am satisfied that had a margin call
been given to
Mr Goodridge on 23 or 24 February 2009 allowing him three business
days to raise $190,000 in accordance with cl 5.2 of the loan and
security
agreement, he would have done so and that, by 11 March 2009 the market had
recovered sufficiently that he had no further
immediate likelihood of receiving
a fresh margin call. MCW Trust units were then trading at 15¢ and by 24
March had risen to
23¢.
- The
respondents did not prove that the Mr Goodridge could have restored his
position. It is one thing for him to have saved his
existing position were he
given the three business days he was entitled to have in order to meet a valid
margin call. I am satisfied
that he would have done so using Mr Firth’s
loan. It is another where the mindset of Leveraged Equities was to force sell
his large parcel of units in a falling market and to deny him time, even the
time his contract allowed, to raise funds to preserve
his position. The
respondents have not satisfied me that Mr Goodridge could have found alternative
finance on any terms at all,
let alone on the terms he had with the Bank, to buy
back his 5.6 million odd units at any particular price.
- A
banker that breaches its existing contractual obligation to provide finance to
its customer, force selling his property and then
alleges that the customer
failed to mitigate his loss by not buying that property back then and there must
show that this highly
unlikely scenario has an air of reality. Without finance,
Mr Goodridge could not buy back. Nor is it sufficient that he had some
finance.
Mr Firth’s offer was not equivalent to, and fell far short of, a contract
with a banker to provide a margin loan facility
of $4.8 million allowing him to
purchase MCW Trust units with a loan valuation ratio of 70% (albeit that this
ratio could be varied).
Moreover, as the market for the MCW Trust units began to
rise during March 2009, the cost of recouping Mr Goodridge’s previous
holdings also increased. After the breakdown in his relationship with his
financier on 24 February, Mr Goodridge could not reasonably
be expected to have
confidence in borrowing from it and committing Mr Firth’s loan in an
effort to recoup his loss.
- In
those circumstances, I reject the respondents’ arguments: Banco de
Portugal [1932] AC at 506. Mr Goodridge was not prepared on and after 24
February 2009 to use the margin loan to buy back his units. I am
unpersuaded
that his inaction was unreasonable. If as a result of their treatment of Mr
Goodridge, the damages the respondents must
pay, or the sum that they must now
outlay, has increased, they have only themselves to blame, not him.
- In
addition, I consider that in the exercise of my discretion under s 12GM of the
ASIC Act, I should make an order under s 12GM(2)(d) that the respondents
restore the units sold to Mr Goodridge with the adjustments I have
mentioned.
That order would compensate him appropriately for the contravention of s 12CB
that I have found: cf Ingot Capital Investments Pty Ltd v Macquarie Equity
Capital Markets Ltd (2008) 73 NSWLR 653 at 682-688 [160]-[191] esp at
685-686 [177]-180] per Ipp JA with whom Giles JA at 657 [1] and Hodgson JA at
667 [52] agreed, on the
approach to assessing damages under sections such as s
12GM.
- Leveraged
Equities also argued that damages should be assessed against it in tort on the
basis that it had converted Mr Goodridge’s
units. It argued that on this
basis it was liable only for about $4,700 in brokerage, since the sales were at
market value. Mr
Goodridge did not claim exemplary damages for conversion:
Healing (Sales) Pty Ltd v Inglis Electrix Pty Ltd [1968] HCA 60; (1968) 121 CLR
584.
- In
my opinion, the damages in conversion can be assessed on the same basis as in
contract in the circumstances of this case.
- The
Bank is as liable as Leveraged Equities because I have found that the attempted
novation and assignment failed. The Bank appointed
or authorised Leveraged
Equities to act as its agent in dealing with Mr Goodridge’s position as
its customer.
CONCLUSION
- Mr
Goodridge’s claim should be upheld. In short I have found
that:
(a) Mr Goodridge had complied with and satisfied the 5
February 2009 margin call in accordance with the Bank’s requirements
by 23
February 2009. He was never in default in respect of that margin call;
(b) the peremptory demands on Mr Goodridge for payments that were made on 23
and 24 February 2009 were not margin calls or otherwise
authorised under the
loan and security agreement;
(c) no power to sell Mr Goodridge’s MCW Trust units was ever
enlivened;
(d) the sales of those units and the respondents’ denial of his
entitlement to be provided with finance in accordance with
his margin loan
facility were actions in breach of the contract between Mr Goodridge and the
Bank;
(e) Mr Goodridge is entitled to have his property restored to him and to be
compensated for any loss he suffered subject to his giving
credit for any
obligation or liabilities he would have incurred had the breach of contract not
occurred.
- Although
it is not necessary to my decision, as these matters were fully argued, I have
also concluded that:
(a) the transactions on which the Bank and
Leveraged Equities relied as novations of Mr Goodridge’s margin loan and
loan and
security agreement did not novate those agreements. He remains in a
contractual relationship with the Bank on the terms of the pre-existing
contracts;
(b) no valid assignment of the Bank’s rights to Mr Goodridge’s
margin loan, MCW Trust units or the loan and security
agreement occurred because
the nature of the Bank’s obligations to Mr Goodridge were so
interconnected to its rights that they
could not be separated in the manner on
which the respondents relied;
(c) Mr Goodridge did not receive notice of any assignment of the
bank’s rights under s 12 of the Conveyancing Act or in equity
before his MCW Trust units were sold; alternatively,
(d) Leveraged Equities acted unconscionably in the exercise of whatever
powers it had against Mr Goodridge in contravention of s
12CB of the ASIC
Act.
- The
parties should bring in short minutes of order to give effect to these
reasons.
I certify that the preceding two hundred and
thirty-nine (239) numbered paragraphs are a true copy of the Reasons for
Judgment herein
of the Honourable Justice Rares. |
Associate:
Dated: 12 February 2010
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