New South Wales Supreme Court CITATION : In the matter of Lift Capital Partners Pty Ltd (admins apptd) [2008] NSWSC 446 HEARING DATE(S) : 6 May 2008 JUDGMENT DATE : 6 May 2008 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Orders made extending convening period to 9 July 2008 and permitting administrators to hold meeting of creditors at any time within the extended convening period and the 5 business days thereafter CATCHWORDS : CORPORATIONS - voluntary administration - extension of convening period under s 439A(6) - where time is needed to clarify complex facts and creditors' rights, so that creditors can be given useful information and expressions of opinion in the administrators' report and at the meeting - whether order should be made under s 447A(1) to permit administrators to hold creditors' meeting within the extended convening period and the 5 business days thereafter LEGISLATION CITED : Corporations Act 2001 (Cth), ss 439A, 447A Beconwood Securities Pty Ltd v ANZ Banking Group Ltd [2008] FCA 594 Mann v Abruzzi Sports Club Limited (1994) 12 ACLC 137 CASES CITED : Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446 Re Pan Pharmaceuticals Ltd (admins apptd) (2003) 46 ACSR 77 Re TPE Kintech Pty Ltd (admin apptd); ex parte Carter (as admin) (2004) 49 ACSR 106 Re Tracker Software (Aust) Pty Ltd (admin apptd) (1997) 24 ACSR 92 PARTIES : Lift Capital Partners Pty Ltd (admins apptd) (ACN 111 015 500) (First Plaintiff) Lift Capital Nominees No 1 Pty Ltd (admins apptd) (ACN 112 913 532) (Second Plaintiff) FILE NUMBER(S) : SC 2661/08 COUNSEL : J C Sheahan SC with M J Darke (First & Second Plaintiff) SOLICITORS : Allens Arthur Robinson (First & Second Plaintiff) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J TUESDAY 6 MAY 2008 2661/08 IN THE MATTER OF LIFT CAPITAL PARTNERS PTY LTD (ADMINS APPTD) & ANOR (ACN 111 015 500) JUDGMENT (Ex tempore; revised 7 May 2008) 1 HIS HONOUR: By an originating process filed in Court today and made returnable instanter, the plaintiffs, Lift Capital Partners Pty Ltd (admins apptd) and Lift Capital Nominees No 1 Pty Ltd (admins apptd) ("the Companies"), and the administrators of the Companies (Mr McGrath and Mr Hayes) seek relief under ss 439A(6) and 447A(1) of the Corporations Act 2001(Cth). They seek an order under s 439A(6) that the period within which the administrators of the Companies must convene meetings of the creditors of each of the Companies under s 439A be extended up to and including Wednesday 9 July 2008. They also seek an order under s 447A(1) that the meetings of the creditors of each of the Companies required by s 439A may be held at any time during the period comprising the convening period as extended under s 439A(6) and the period of five business days thereafter, notwithstanding the provisions of s 439A(2). They also seek an order that the costs of the application be costs in the administration of each of the Companies. Application under s439A(6) 2 Mr McGrath and Mr Hayes were appointed administrators of the Companies, jointly and severally, on 10 April 2008. Pursuant to s 439A(5)(b), the convening period for the second meetings of creditors of the Companies expires on 9 May 2008. The administrators wish to extend that convening period up to 9 July 2008. 3 The Court's approach to applications of this kind was considered by Young J (as the Chief Judge then was) in Mann v Abruzzi Sports Club Limited (1994) 12 ACLC 137. His Honour drew attention to "the problem with making all-embracing provisions to cover companies from the smallest to the greatest". He said that the power to extend the convening period should be exercised keeping firmly in view the object of maximising the chances of the company in administration continuing in existence or, alternatively, terminating its existence in the most appropriate way. These are the objectives of Pt 5.3A, as stated in s 435A. 4 More recently, in Re Pan Pharmaceuticals Ltd (admins apptd) (2003) 46 ACSR 77 at [41]-[42], Lindgren J held that s 439C and s 439A(4) show that an application by administrators for an extension of time under s 439A(6) is to be assessed by reference to whether the extension is necessary to enable the administrators to provide the report and statements that they are required to provide and, in particular, to arrive at the opinion they are required to reach as to whether the creditors should accept a deed of company arrangement or the company should go into liquidation or be returned to its directors. Lindgren J noted that inevitably there is a tension between this objective and the broad aim of speedy administration which underlies Pt 5.3A. He decided that in the case before him the preferable course was to grant the extension sought (an extension of 75 days) having regard to evidence which established that the extension was necessary so that creditors would have the benefit of useful information and expressions of opinion from the administrators (see also Re TPE Kintech Pty Ltd (admin apptd); ex parte Carter (as admin) (2004) 49 ACSR 106 at [8]-[10]; Re Tracker Software (Aust) Pty Ltd (admin apptd) (1997) 24 ACSR 92 at 93). 5 The application in the present case is supported by an affidavit by Mr Hayes. He explains that an extension of the convening period is sought principally because, due to the complexity of the administration, further time is required for preparation of a report to creditors that will assist them to assess any proposals that may be available. Some attention needs to be given to the complexity to which the affidavit refers. 6 The Companies operated what is usually called a margin lending business. Lift Capital held a financial services licence. It lent to money to Lift clients, typically to assist the clients to finance the acquisition of securities. Securities, when acquired, were held (at least initially) by Lift Nominees No.1 ("Nominees"). The loans were secured pursuant to terms and conditions set out in annexures to product disclosure statements. Over time there were several product disclosure statements: a Lift PDS in 2005, a Lift PDS in 2007 and a Super Lift PDS in 2006. I do not intend to deal with the Super Lift terms and conditions, which are materially different from the ones upon which I shall focus. It is enough for present purposes to explain some principal provisions in the two Lift PDSs, which are substantially in the same terms. 7 The terms and conditions make provision for a loan facility to be provided by Lift Capital to the client, drawings on the loan, interest and capital repayments, default, the making of margin calls and the sale of the securities. 8 There are guarantee and indemnity provisions, including a provision in clause 10 which is headed, "Mortgaged Property." That clause says that for the purposes of securing repayment of the Facility Amount Outstanding, the Mortgagor "as beneficial owner" agrees to mortgage to the Lender the Relevant Loan Security and all New Rights (capitalised words are defined terms). Amongst the provisions of clause 10 is the following: "10.15. The mortgage in this clause 10: ... (c) will not apply to the Relevant Loan Securities during any period in which they are lent in accordance with clause 17.2. Instead, the mortgage in respect of the Relevant Loan Securities is released and operates as a fixed and floating charge, over all present and future rights of Nominees under any lending agreement entered into pursuant to clause 17.2. Upon return of the Relevant Loan Securities to the Lender or Nominees, clause 10 will apply." 9 Senior counsel for the plaintiffs submitted that the mortgage interest of the client created by clause 10 is an equitable mortgage for two reasons: the clause contains an agreement to mortgage rather than a grant of mortgage; and under the terms of the agreement, the mortgagee is Lift Capital whereas the title to the mortgaged property is vested in Nominees. 10 In the circumstances of administration that currently obtain, clause 10 may raise an issue as to whether, if securities are returned to Lift Capital, some class or classes of investors can assert a prior-ranking proprietary claim against those returned securities on the ground that under clause 10.15(c) the return of the securities has caused their equity of redemption to resuscitate. 11 Clause 17 is headed "Hedging". Clause 17.1 contains an acknowledgment that the Lender may hedge any liability or risk the Lender has or might have under the terms of the agreement by entering into options, futures, stock loans or any other instrument or transaction over the Relevant Loan Securities in the client's portfolio. 12 Clauses 17.2 and 17.3 appear to be important: "17.2. The Lender or Nominees is authorised to transfer Relevant Loan Securities held by Nominees to any person under a custodial, financing, lending (on terms compliant with s26BC of the Income Tax Assessment Act 1936) or hedging agreement, without giving you notice or requesting your consent. You are not entitled to the benefit of any commission or benefit that arises from such an arrangement. 17.3. If the Lender or Nominees have any right, interest in or entitlement to any Relevant Loan Security or New Right as a result of clauses 17.1 or 17.2 above, the Lender or Nominees: (a) holds that right, interest or entitlement and any deposit derived from it on its own behalf, and not for you or on your behalf; (b) can deal with that right, interest or entitlement or any profits derived from it in accordance with the Lender's discretion (including without limitation by way of securities loan); and (c) is under no duty to account to you in relation to that right, interest or entitlement or any deposits derived from it." 13 Pausing there, there is at least a tension between clause 17 and clause 10, in that clause 10 seems to create a mortgage in which the client has the rights of the mortgagor and clause 17 (in the circumstances in which it applies) seems to deny those rights, at least to the extent that they are proprietary rights. As senior counsel for the plaintiffs pointed out, there may be an issue as to whether clause 17 operates as a clog on the equity of redemption created by clause 10, but that question is not an easy one to resolve and will depend in part on careful construction of the agreement as a whole. 14 The Companies obtained the funds that they lent to clients primarily from Merrill Lynch International ("MLI") and Merrill Lynch (Australia) Limited ("MLIA"). The evidence includes several agreements between Merrill Lynch companies and Lift Capital, namely: (a) an International Prime Brokerage Agreement dated 21 November 2007 with an Australian addendum ("the November IPBA"); (b) an International Prime Brokerage Agreement dated 12 March 2007 with an Australian addendum ("the March IPBA"); (c) Global Master Securities Lending Agreements date 13 February 2007 ("the GMSLA"), which are based on the standard securities loan documentation prepared by ISLA, the International Securities Lenders Association; (d) an Australian Master Security Lending Agreement dated 7 June 2005. 15 There are issues of fact, evidently quite complex, as to whether particular transactions were carried out under one or other of these agreements. 16 The November IPBA is an agreement whereby MLI undertakes to provide certain services, in its discretion, to Lift Capital. The services are clearance and settlement, the making of advances, the lending of securities and the holding of securities in safe custody. The provisions for making advances are in clause 3, and the securities lending facility is in clause 4. There are margin requirements in clause 5. 17 In clause 12 there are provisions for Lift Capital as customer to charge its right title and interest to assets from time to time held by it to the order of MLI or any of its affiliates, as continuing security for the due payment of liabilities. Clause 12.9 says that Lift Capital as Customer authorises MLI to utilise any Assets consisting of Securities for MLI's own purposes, and for its own benefit. Once again this creates a tension between what would otherwise perhaps appear to be proprietary rights and the apparent waiver of any such rights by that clause. The Australian addendum to the November IPBA adds clause 12.9A which provides: "For the purposes of clause 12.9.1, the instrument which shall be used to enable MLI to utilise Securities as described in clause 12.9 shall be the Global Securities Lending Agreement and any return or re-delivery of Securities by MLI to the Customer under clause 12.9.3 shall be effected under the Global Master Securities Lending Agreement". 18 That appears to have the consequence that if a transaction between Lift Capital and MLI is by way of the provision by Lift Capital to MLI of Securities for the purpose of satisfying its Securities obligations under clause 12.9 in respect of credit provided to it under clause 3, then to a degree the relationship between the parties is governed by the Global Master Securities Lending Agreement. The Global Masters Securities Lending Agreement contains provisions that permit either party to lend securities to the other upon the provision of "collateral" to support the "loan". There is a good description of securities lending in the judgment of Finkelstein J in Beconwood Securities Pty Ltd v ANZ Banking Group Ltd [2008] FCA 594 at [5]. It may not be easy to work out just how the provisions of the GMSLA, especially with respect to collateral, apply to what otherwise might be characterised as a credit and security arrangement rather than a securities lending arrangement. 19 In fact, under one or more of these various agreements the Merrill Lynch companies provided funds to Lift Capital amounting to some $621 million, which Lift Capital on-lent to its clients under the margin lending arrangements. The clients provided listed securities to the value of some $761 million to Nominees, as well as managed fund units of some $128 million. Nominees provided those listed securities to the value of approximately $761 million (at that time) to Merrill Lynch companies. The submissions of the plaintiffs treat the provision of those securities to the Merrill Lynch companies as securities loans. That may be because they were conducted directly under the GMSLA or because they were conducted under the November IPBA, having some characteristics of securities lending by virtue of the clauses to which I have referred. 20 On 10 April 2008, the day the administrators were appointed, MLI and MLIA purported to terminate the agreements under which they were providing funding to the Companies, for an event of default (presumably, the appointment of administrators). Their notification was purportedly given under the November IPBA. Some provisions of that agreement appear to be intended to operate as an overriding agreement applicable to permit termination of everything described in clause 14 of the November IPBA as a "Designated Principal Agreement". Merrill Lynch's notice declared that all Designated Principal Agreements were immediately terminated; that any obligation of Merrill Lynch to settle would immediately cease; that advances would become immediately due and payable; and all outstanding obligations of Merrill Lynch and Lift Capital to deliver or re-deliver Securities or equivalent Securities would be terminated and replaced by an obligation to pay the "Default Market Value in Base Currency" of those securities. 21 The last statement has some significance to the present application because if it is right, it suggests that the obligation of the Merrill Lynch companies is not, in any case, an obligation to re-deliver Securities or Equivalent Securities on the termination of lending arrangements, but is in each case an obligation to pay a cash amount reflecting a determination of value. There are provisions in the November IPBA dealing with the determination of the value of securities: see especially the definition of "Default Market Values". Once again, there is a question for careful consideration as to whether the correct position is that the Merrill Lynch companies are permitted and obliged to account to the Companies only in cash or partly or wholly in Securities. If the Merrill Lynch companies must or can account in cash, and they in fact account in cash, it may become more difficult for any class of investors to assert proprietary rights (such as a "resuscitated" equity of redemption) in priority to unsecured creditors. 22 After giving their notice dated 10 April 2008, the Merrill Lynch companies engaged in a sale process of the Securities provided to them by the Companies, and it now appears that the sale process is close to completion. Mr Hayes said in his affidavit that the expected result of the sale process is that there will be a surplus of "loaned" Securities, in excess of funding provided by the Merrill Lynch companies, of approximately $92 million. As I have said, there will be a question whether that is to be accounted for by cash or Securities or partly cash and partly Securities, and the answer to that question may well influence the entitlement of some classes of investors of the Companies to assert proprietary claims over any assets in the hands of the administrators. 23 In summary, the web of contractual relationships between the Companies and their clients on the one hand and the Companies and the Merrill Lynch companies, on the other hand, creates some very considerable and complex issues of fact and law. The resolution of these issues may substantially determine the respective positions of the various classes of investors who have claims in the administration of the Companies. 24 The administrators have some important decisions, and further investigations, to make before the entitlements of the various classes of investors and other creditors can be ascertained. 25 It is necessary for the administrators to decide whether the appropriate course is to accept the anticipated surplus from the Merrill Lynch companies in the form of securities or cash or partly securities and partly cash. This decision that may affect the ability of classes of investors to claim particular securities in specie or to assert proprietary rights over them. 26 It is necessary for the administrators to discover what, if any, funds will be available from the sale process once it is has been completed. 27 It is necessary for the administrators to ascertain the facts concerning, and then analyse, the rights of the various classes of investors under their agreements, and in respect of any surplus funds that the Companies acquire, so as to ascertain whether any classes of claims are proprietary claims to certain assets having priority over the claims of unsecured creditors. This may involve the allocation of "loaned" securities among different clients and the development of a strategy for realisation of any securities made available by Merrill Lynch. 28 It seems to me that until the position with respect to these matters is much clearer than it now is, it would be virtually impossible for the administrators to express coherent opinions on the matters that, under s 439A, they will be required to address in their report. 29 Mr Hayes, a person of considerable experience as an insolvency practitioner, has given an estimate that it will take a period of some six to eight weeks before the position becomes clear on these matters. It will then be necessary for the administrators to undertake financial analysis to establish the potential returns available to the Companies' creditors. He notes that on some issues, it may be necessary to seek directions of the Court under s. 447D. 30 Clarification of these various matters could have a considerable impact on the terms of any deed of company arrangement that might be proposed, and on the administrators' and creditors' assessment of the desirability of any such proposal. Therefore it would be premature to report to the creditors until substantial additional work has been undertaken to clarify these matters. 31 Those are the justifications for the application for extension of the intervening period for two months. 32 The proposal to make the present application was disclosed to the members of the committee of creditors, appointed by creditors at their first meeting. The majority of the members of the committee of creditors expressed the view that a delay for a period of two months was too long, and they urged that it would be preferable for the second meeting of creditors to be delayed for only one month. The administrators responded to the views of the committee of creditors by a circular which they distributed on 29 April 2008. They pointed out the complexity of the issues that needed to be addressed and the amount of work that was required to attend to them. 33 In my view, the response given by the administrators is convincing. One understands that creditors on the committee, approaching these problems from a commercial point of view, would wish to see them resolved as quickly as possible. One appreciates that they may find it difficult, until the issues are fully explained, to understand why a period as long as two months would be required before the creditors could be given the opportunity to hear the administrators' opinions and make their decisions. But once one enters into the complexities of the matters which the administrators must address (and I have merely skated over the surface of those complexities in the remarks that I have made), one sees the amount of work that will be involved to clarify the issues, to ascertain the true facts and then to analyse the position so as to make sensible recommendations for the creditors to consider. 34 The views of members of the committee of creditors are, of course, relevant to the Court's decision, but they are not a determinative consideration in matters of this nature (Re Pan Pharmaceuticals Ltd (admins apptd) (2003) 46 ACSR 77 at [43]) 35 In all the circumstances, I am persuaded that the case for an extension of the convening period to 9 July 2008 has been well and truly made. Application under s 447(A) 36 If the convening period were extended to 9 July without any further order, then s 439A(2) would have the effect that the second meeting of the creditors of each of the Companies would have to be "held" (as distinct from "convened") within five business days before, or five business days after, the end of the extended convening period. Meetings of creditors could not be held earlier than five business days before the end of the extended convening period, even if the administrators were in a position to call a meeting at some earlier stage. Therefore, an application is made under s 447A(1) inviting the Court to make an order that Pt 5.3A should operate so as to permit the administrators to hold the second creditors meeting at any time within the convening period or the period of five business days thereafter. Such an order was made by Lindgren J in Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446. 37 I am persuaded that the Court has the power under that section to make such an order, for the reasons given by his Honour, and that it is appropriate for such an order to be made in the present case. If the administrators are in a position to report to, convene and hold the second meeting of creditors at a time earlier than five business days before 9 July, there should be no artificial obstacle to their doing so. The efficient administration of these companies demands that the meetings be held at the earliest practicable time. Costs related to the application 38 The administrators also seek an order that the costs of the application be costs in the administration of each of the Companies. An order of this kind was made in Re Daisytek Australia and in my experience such orders are common. The order is appropriate, given the nature of the application and, in particular, the connection of the application with the conduct of the administration of the Companies. 39 For these reasons I have made the orders sought in the originating process. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.