New South Wales Supreme Court CITATION : RHG Mortgage Securities v BNY Trust Company [2009] NSWSC 1432 HEARING DATE(S) : 30/11/09, 01/12/09, 03/12/09 JUDGMENT DATE : 17 December 2009 JURISDICTION : Equity Division Commercial List JUDGMENT OF : McDougall J at 1 DECISION : See paragraphs [180] to [181] of the judgment. CATCHWORDS : EQUITY – relief against forfeiture – whether acceleration of obligation to pay principal amounts to forfeiture – whether appointment of receiver amounts to forfeiture – whether plaintiff entitled to relief. - CONTRACTS – breach – whether amortisation event occurred – whether an 'Event of Default' occurred – whether defendant actually aware of Event of Default – construction and interpretation – words and phrases – arrears – in arrears CATEGORY : Principal judgment Acron Pacific Limited v Offshore Oil NL (1985) 157 CLR 514 Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389 Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781 Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131 Forestry Commission of NSW v Stefanetto (1976) 133 CLR 507 Farah Constructions Pty Limited v Say-dee Pty Limited (2007) 230 CLR 89 G & AC Kreglinger v New Patagonia Meat and Cold Storage Limited [1914] AC 25 Jones v Dunkel (1959) 101 CLR 298 CASES CITED : King v Goussetis (1986) 5 NSWLR 89 Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311 Nguyen v Cosmopolitan Homes (NSW) Pty Limited [2008] NSWCA 246 O'Dea v Allstates Leasing System (WA) Pty Limited (1983) 152 CLR 359 On Demand plc v Gerson plc [2001] 1 WLR 155 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (the Scaptrade) [1983] 2 AC 694 Shiloh Spinners Ltd v Harding [1973] AC 691 Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315 The Protector Loan Co v Grice (1880) 5 QBD 592 TEXTS CITED : The Australian Oxford Dictionary (2nd edition, 2004) RHG Mortgage Securities Pty Ltd (First Plaintiff) RHG Home Loans Pty Limited (Second Plaintiff) PARTIES : RHG Treasury Services Pty Ltd (Third Plaintiff) Receivables Servicing Pty Ltd (Fourth Plaintiff) BNY Trust Company of Australia Limited (First Defendant) Elektra Purchase No. 19 Limited (Second Defendant) FILE NUMBER(S) : SC 50152/09 M A Pembroke SC / J K Taylor (Plaintiffs) COUNSEL : R M Smith SC / M A Jones (First Defendant) M R Speakman SC / S A Lawrance (Second Defendant) Mallesons Stephen Jaques (Plaintiffs) SOLICITORS : Corrs Chambers Westgarth (First Defendant) Allens Arthur Robinson (Second Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 17 December 2009 50152/09 RHG MORTGAGE SECURITIES PTY LIMITED & ORS v BNY TRUST COMPANY OF AUSTRALIA LIMITED & ANOR JUDGMENT 1 HIS HONOUR: The plaintiffs manage and securitise residential housing loans secured by mortgage. From time to time, the plaintiffs raise money on the security of discrete packages, or series, of such mortgages. One such series, known as the Series UniCredit (1), has been charged to the first defendant (BNY) as "Security Trustee" for a "Note Subscriber". The original Note Subscriber was a German bank which I shall call, as the parties did, HVB. HVB has assigned its rights to the second defendant (Elektra), which has thereby become the "Noteholder". There is no relevant distinction between HVB and Elektra. Indeed, in the disputes with which I am concerned, HVB in effect spoke for Elektra. 2 BNY and Elektra assert that there has been an "Event of Default". Accordingly, BNY says, it is required to call a meeting of Noteholders (i.e., Elektra) and, if so directed by Elektra, to take steps to enforce the security: including the appointment of receivers to the underlying pool of mortgages. BNY has notified the plaintiffs of the alleged default, and has taken steps to call a meeting. 3 The plaintiffs say that there has been no Event of Default. Alternatively, they say, if there has been an Event of Default they are entitled to relief against forfeiture. Factual background 4 The plaintiffs are part of the RAMS Group. The mortgages in question were "originated" by members of that group. The lender and mortgagee is another member of the group. The first plaintiff (RMS) has acquired an equitable interest in the loans in question. That equitable interest has been charged to BNY as Security Trustee pursuant to a deed made on 8 December 2004 (the Trust Deed). 5 By letter dated 18 December 2008, HVB notified BNY that an Event of Default might have occurred, because an Amortisation Event might have occurred. HVB relied on a report prepared by a firm of accountants, GJ McLuskey and Co (McLuskey). 6 The letter from HVB was passed on to the plaintiffs. The plaintiffs replied, stating that no Amortisation Event or Event of Default had occurred. That was followed up by a certificate under cl 25.2(e) of the Trust Deed to the same effect. By cl 31.7 of the Trust Deed, BNY was authorised (but not bound) to rely upon, and regard as conclusive and sufficient, any such certificate. 7 BNY decided that the dispute could not be resolved by reference to the certificate. Accordingly, it appointed an expert under cl 31.12 of the Trust Deed. The parties did not agree on the scope of the brief to the expert or the methodology to be used. Although BNY had said that it would approach the Court for directions, it did not do so. It delivered a brief to the expert, the accounting firm known as McGrathNicol. McGrathNicol determined its own methodology. 8 McGrathNicol produced a report and a supplementary report in which it concluded that there had been an Amortisation Event. It reached that conclusion on the basis of certain assumptions as to when a loan would be in arrears and how one would determine the time for which loans should be classified as having been in arrears. The plaintiffs challenge those assumptions. McGrathNicol has produced further reports seeking to respond to the plaintiffs' challenge. 9 BNY concluded that an Event of Default had occurred. Accordingly: (1) on 7 August 2009, it gave Elektra (as Noteholder) notice of that Event of Default; and (2) on 10 August 2009, it gave Elektra a notice calling a meeting of "Voting Secured Creditors". The contractual regime 10 The transactions in question were documented in a series of interlocking and complex agreements. Those agreements include the Trust Deed, a document known as a "Series Supplement" whereby the Series UniCredit (1) was established, a Subscription Agreement relating to the Series UniCredit (1) and a Deed of Charge whereby the mortgages in that series were charged to BNY. 11 At the heart of the dispute is the concept of "Amortisation Event". By cl 13.2 of the Series Supplement, an Amortisation Event occurs where, among other things: at any time, the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series which are in arrears for greater than 90 days is more than one (1) % of the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series. 12 Where an Amortisation Event has occurred, the order of payment of cash flows arising from the underlying pool of mortgages will vary. In substance, once an Amortisation Event has occurred, the whole of the excess income should pass to Elektra as Noteholder, to the exclusion of the plaintiffs. 13 There are a number of relevant provisions in the Trust Deed. Clause 25.2 includes "[s]pecific undertakings of RMS". Those undertakings include a number of reporting obligations. There is a general reporting obligation (para (j)), a daily reporting obligation (para (k)), a weekly reporting obligation (para (l)) and a monthly reporting obligation (para (m)). I set out the first and fourth of those obligations: (j) (reporting) provide to the Security Trustee in a form and on the date agreed between RMS and the Security Trustee, or if no date is agreed, on a date reasonably notified by the Security Trustee, such reports as may reasonably be required by the Security Trustee from time to time in relation to the settlement of Receivables in respect of each Series in relation to the settlement of Receivables in respect of each Series and the Cashflow Statements in respect of each Series; and … (m) (monthly reporting) with respect to each Series, provide to the Security Trustee and, in the case of a Rated Series the items referred to in paragraph (iii) to each Current Rating Agency, on a monthly basis on the date and in a form agreed by the Security Trustee: (i) a Cashflow Statement for the relevant month; and (ii) a Trial Balance for the relevant month; and (iii) a schedule showing the outstanding arrears in relation to each Receivable and, if requested by the Security Trustee, the action being taken or proposed to be taken by RMS in relation to such Receivable for the relevant month; and … 14 Other relevant obligations include cll 31.11, 35.1 and 46.2. To the extent that they are relevant, they provide as follows: 31.11 Receipt of instructions from Secured Creditors Without limiting its rights, powers and discretions, but subject to its express duties or obligations under this deed or any Transaction Document in respect of a Series, the Security Trustee will not be required to exercise any right, power or discretion (including to require anything to be done, form any opinion or give any notice, consent or approval) without the specific instructions of the Voting Secured Creditors in respect of a Series given by an Extraordinary Resolution. The Security Trustee may at any time convene a meeting of Secured Creditors (or a class thereof) in respect of a Series to consider resolutions as are put to the meeting by the Security Trustee including, without limitation, resolutions put for the purpose of seeking directions from Secured Creditors in respect of that Series as to the exercise of its powers and duties and performance of its obligations. Any such meeting shall be convened pursuant to the provisions set out in clause 46 ("Meetings") . If the only applicable Secured Creditors in respect of that Series are Holders of Offshore Notes, then a meeting of such Holders of Offshore Notes will be convened and held in accordance with the relevant Note Trust Deed (unless otherwise stated in the relevant Series Supplement). The Note Trustee (on behalf of such Holders of the Offshore Notes) will then direct the Security Trustee in accordance with the resolutions passed and the directions given at such meeting. The Secured Creditors in respect of a Series have no rights to direct the Security Trustee as to how to exercise its rights and powers other than as expressly set out in the Transaction Documents. 35.1 Convene meetings on the occurrence of an Event of Default Unless the Security Trustee has already exercised its discretion pursuant to clause 35.5 ("Security Trustee may waive breach and determine whether an Event of Default has occurred"), the Security Trustee must, upon becoming actually aware of the occurrence of an Event of Default in respect of a Series, take the following steps: (a) notify all Secured Creditors of the Security Trust relevant to that Series that the Charge granted in respect of that Series has taken effect as a fixed charge and provide to those Secured Creditors full details of: (i) the Event of Default as advised by RMS to the Security Trustee or otherwise known to the Security Trustee; and (ii) the actions and procedures which RMS has notified the Security Trustee are being taken or will be taken by RMS to remedy the relevant Event of Default; and (b) do all such things as are necessary or appropriate to promptly convene a meeting of the Voting Secured Creditors of that Security Trust in accordance with the provisions of clause 46 ("Meetings") or, if applicable, where the only Voting Secured Creditors are Holders of Offshore Notes, request the Note Trustee to convene a meeting of such Voting Secured Creditors in accordance with the relevant Note Trust Deed; and (c) convene a meeting of Voting Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) or a meeting of the Relevant Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) convened in accordance with paragraph (b) must consider and vote on a resolution to: (i) declare the Deed of Charge in respect of that Series to be enforced; (ii) direct the Security Trustee to exercise all of any of its powers under this deed, the Deed of Charge in respect of that Series and the Note Trust Deed (if any) in respect of that Series; and (iii) declare the Secured Moneys (including, in respect of the Debt Instruments, the Outstanding Principal of the Debt Instruments, all accrued interest and any other moneys owing to the Holders of the Debt Instruments under or in respect of the Debt Instruments) in respect of that Series to be immediately due and payable on demand. 46.2 Convening meetings RMS or the Security Trustee at any time may, and upon a request (by notice in writing to RMS) by Secured Creditors holding not less than 25% of the aggregate of the A$ Equivalent of the Amount Owing in respect of a Series must convene a meeting of the Secured Creditors in respect of that Series. Whenever RMS or the Security Trustee is about to convene any such meeting it must promptly give notice in writing to the Registered Note Registrar and the Note Trustee (if applicable) of the proposed day, time and place of the meeting and of the nature of the business to be transacted at the meeting. Every such meeting must be held at a place approved by the Registered Note Registrar and the Note Trustee (if applicable). 15 Clause 4(b) of the Series Supplement makes it an Event of Default if RMS fails to make a payment within three business days of its due date. However, that is qualified by a proviso. I set out cl 4(b): 4 Events of Default Each of the following is an Event of Default in respect of the Series: … (b) (Failure to Pay) RMS fails to make a payment in accordance with the Transaction Documents within 3 Business Days of its due date for payment (determined for these purposes without regard to whether or not there are sufficient funds for such payment in accordance with the Cashflow Allocation Methodology (if applicable)) provided that a failure by RMS to make a payment in full to Noteholders (or any amount which ranks below a payment to such Noteholders) will not be an Event of Default for these purposes until any Notes which rank senior to such payments have been redeemed in full; … The Manager must advise RMS, the Security Trustee, the Note Subscriber and each Current Rating Agency in respect of the Series upon becoming aware of the occurrence of an Event of Default or Amortisation Event. 16 The allocation of cash flow is governed by cl 8 of the Series Supplement. Clause 8.8 deals with distribution of "Total Available Income." The particular provisions to which the parties made reference were paras (e), (f) and (o). I set them out: 8.8 Distribution of Total Available Income On each Payment Date prior to the occurrence of an Event of Default and enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed, RMS will make payments from the Total Available Income calculated on the immediately preceding Determination Date in the following order of priority: … (e) fifth, pari passu and ratably to the Class A Noteholders, the Class A Interest Amount for the Payment Period ending on (but excluding) that Payment Date and any unpaid interest in respect of previous Payment Periods (but excluding any amounts payable under clause 3.13 ("Withholding tax") in respect of the Class A Notes); (f) sixth, to pay pari passu and ratably to the Class B Noteholders, the Class B Interest Amount for the Payment Period ending on (but excluding) that Payment Date and any unpaid interest in respect of previous Payment Periods (but excluding any amounts payable under clause 3.13 (" Withholding tax") in respect of the Class B Notes); … (o) fifteenth, if an Event of Default or an Amortisation Event in respect of the Series is subsisting and clause 8.13 ("Application of proceeds following an Event of Default") does not apply, up to an amount equal to the Aggregate Principal Outstanding will be applied to Total Available Principal in accordance with clause 8.9 ( "Total Available Principal") ; 17 Clause 8.9 specified what was "Total Available Principal". It included, by para (f), "any amount applied to Total Available Principle in accordance with cl 8.8(o)". 18 Clause 8.10 dealt with distribution of Total Available Principal. I set it out: 8.10 Distribution of Total Available Principal On each Payment Date prior to the occurrence of an Event of Default and enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed, RMS will make payments from the Total Available Principle in the following order of priority: (a) first, provided that an Event of Default or an Amortisation Event has not occurred (in which case this paragraph (a) does not apply and any Total Available Principle must be applied in accordance with paragraphs (b) and (c) (below) in that order) to retain as Principal Collections in the RMS Account, such amount as may be required for any anticipated Redraws or Further Advances (including in accordance with clause 3.9 ( "Future Receivables") of the Receivables Acquisition and Servicing Agreement) in future periods (such amount not to exceed 3% of the then Aggregate Class A Note Principal Outstanding); (b) second, pari passu and ratably to the Class A Noteholders (if any), until the Aggregate Principal Outstanding of all Class A Notes has been reduced to zero; (c) third, to pay ratably any remuneration, fees and any outgoings, liabilities, losses, costs, claims, expenses, actions, damages, demands, charges, stamp duties and other taxes due to: (i) the Custodian; (ii) the Standby Trustee; (iii) the Standby Manager; (iv) the Registered Note Registrar; (v) the Registered Note Paying Agent; (vi) the Standby Servicer; and (vii) the Receiver; RMS will only make a payment under any of paragraphs (a) to (c) (inclusive) to the extent to which Total Available Principal remains from which to make the payment after all amounts with priority to that payment have been paid in full. 19 The expression "Payment Date" is defined to mean, relevantly, "the 26th day of each month… or, if that date is not a Business Day, the next Business Day…". 20 I should note also cl 5.4 of the Series Supplement. That clause in effect requires RMS, on the direction of the second plaintiff (the Manager), to take particular loans out of the Series UniCredit (1) and allocate them to other pools, in exchange for payment of an amount at least equal to the Outstanding Loan Balance in respect of the loans so "redesignated". The obvious purpose of this clause is to enable RMS and the Manager to attempt to keep the percentage of 90 day arrears (compared to total loans) below 1%: 5.4 Disposal Subject to the terms of the Trust Deed and clause 5.5 (" Sale of Mortgage Loans") , RMS must from time to time, if so directed by the Manger, sell or Redesignate Receivables (and any Related Securities and Collections in relation to such Receivables) to any Other Series in exchange for payment of an amount which is at least equal to the Outstanding Loan Balance in respect of such Receivables. 21 I turn to the Deed of Charge. By that deed, RMS charged its interest in the underlying pool of mortgages to BNY as security for payment of the "Secured Money" as defined (cl 1.1). That charge is, as to the interest of RMS in the Receivables, a floating charge (cl 2.1(c)(i)). 22 By cl 6.1(a), if the charge has not otherwise taken effect as a fixed charge, "it takes effect as a fixed charge… automatically and immediately… if an Event of Default occurs in respect of the Series". 23 Clause 6.5 provides that, once an Event of Default occurs in respect of the Series, the charge becomes enforceable: 6.5 Charge enforceable If an Event of Default occurs in respect of the Series, the security constituted by the Charge with respect to the Secured Property in respect of the Series shall become enforceable and, subject to clause 31.11 ( "Receipt of instructions from Secured Creditors ") of the Trust Deed, the Security Trustee may then at its discretion and shall, if so directed by an Extraordinary Resolution of the Voting Secured Creditors, enforce its rights under the Charge in respect of the Secured Property but without any liability as to the consequence of such action (except as specifically contemplated under the Trust Deed) and without having regard to the effect of such action on any Secured Creditor, and provided that the Security Trustee shall not be required to take any action that would involve any personal liability or expense without first being indemnified to its satisfaction. If an Event of Default occurs in respect of the Series, the Secured Money is payable on demand by the Security Trustee. The Security Trustee may make such demand at its discretion and must make such demand if directed to do so by an Extraordinary Resolution of Voting Secured Creditors. 24 Clause 7 of the Deed of Charge authorises BNY to appoint a receiver in certain circumstances: 7.1 Appointment Where the Security Trustee has actual knowledge that an Event of Default has occurred in respect of the Series, or if directed to do so by an Extraordinary Resolution of Voting Secured Credtiors, the Security Trustee must appoint a person or persons as Receiver to the Secured Property. Notwithstanding anything to the contrary in any other Transaction Document, the Security Trustee must not exercise any right or discretion under clause 35.5 (" Security Trustee may waive breach and determine whether an Event of Default has occurred" ) of the Trust Deed without being directed to do so by an Extraordinary Resolution of Voting Secured Creditors. The issues 25 The substantial issues that the plaintiffs pose for decision are: (1) what is the proper construction of the term "Amortisation Event" in the Series Supplement? (2) As a matter of fact, has an Amortisation Event occurred? (3) Has an Event of Default occurred? (4) Was BNY "actually aware" of the occurrence of an Event of Default when it gave the Notice of Event of Default dated 7 August 2009 and the Notice of Meeting dated 10 August 2009? (5) Should RMS be granted relief against forfeiture? First issue: construction of "Amortisation Event" Background: the plaintiffs' methodology for calculation of arrears 26 There is some overlap between this issue and the second issue. That overlap arises because the plaintiffs' methodology for calculating arrears has the following features: (1) it is carried out at the end of each month; (2) it purports to determine the arrears position "as at" the end of the month, not "as at" the immediately preceding Payment Date; and (3) it makes a number of adjustments to the loan balance recorded in the plaintiffs' computer system at month's end. 27 The adjustments include: (1) reversal of capitalised interest; (2) reversal of accrued credit fees and charges; and (3) crediting, in reduction of the loan balance determined "as at" month's end, any payments received in the following seven business days. 28 The first of those adjustments is not controversial. The plaintiffs' computer system calculated and debited interest to a loan account on the last business day of a month, even though the interest did not accrue until the first business day of the following month. That was apparently some inherent quirk of (or flaw in) the system. As I understand it, the defendants accepted that the reversal of capitalised interest which had not accrued due and payable as at month's end was appropriate. 29 The second adjustment is controversial. The defendants submitted that, since credit fees and charges are payable (for example, on default) according to the terms of the underlying mortgage or loan agreement, they formed (once charged) part of the balance due. The plaintiffs submitted that the true purpose of calculating arrears was to measure a borrower's performance, or non-performance; and that this was best assessed by looking at the extent to which the borrower had met "scheduled" obligations under the mortgage or loan instrument. In any event, the plaintiffs submitted, this aspect of their methodology had been disclosed in public documents, including prospectuses issued for bonds such as the Series UniCredit (1), and in the annual report of the plaintiffs' public listed holding company. 30 The third adjustment too was controversial. The plaintiffs did not suggest that it had been disclosed, in terms, to the defendants. However, the plaintiffs submitted, HVB could have found out about it when carrying out its due diligence, and thus the defendants should be taken to have been aware of it. The defendants denied this, and submitted that, in any event, there was no basis, either as a matter of language or on the proper construction of the expression "Amortisation Event", for determining a loan balance "as at" a particular date by deducting payments made after that date. 31 Further, the plaintiffs' methodology did not in terms count, for each loan in arrears, the number of days for which it had been in arrears. It used a method known as the "adjusted quantum method" to determine whether, and if so for how long, a loan had been in arrears. In essence, the adjusted quantum method involves the following steps: (1) for all loans determined to be in arrears after the first two adjustments outlined at [27] above, are made, the amount of arrears at month's end is determined (excluding, in accordance with those first two steps, capitalised interest and credit fees and charges); (2) the amount of arrears, so determined, is divided by the amount of the contractual repayment obligation and multiplied by 30; and (3) if the result is greater than 90, the loan is determined to have been in arrears for more than 90 days. 32 That methodology is explained, in simple terms, by the following example given in BNY's submissions: 1. Make the following assumptions: a loan of $100.00; a monthly interest obligation of $5.00; interest payable on the 1 st of each month; assume a default in month 1 (January); assume that default continues in months 2, 3 and 4 (April). 2. To calculate the duration of arrears at the end of month 3 would be: 15 = extent of arrears 5 = schedule payment 15 x 30 = 90 days 5 33 In this example, at the end of month 3, the adjusted quantum method would determine the loan to have been in arrears for 90 days. It would not be until the end of month 4 that application of the adjusted quantum method would determine the loan to have been in default for more than 90 days (20/5*30 = 120). However, if the number of days of default were counted (the parties call this "the duration method") the loan would be determined to have been in default when, no repayment having been made, the 90 days elapsed: on the above example, 2 April. 34 I note that, if credit fees and charges were not taken out of the calculation of arrears, there would be some impact on a determination of the duration of arrears by use of the adjusted quantum method. If one adds, to BNY's example set out at [32] above, the further assumption that a default charge was lawfully levied for each of the months in default at the rate of $2.50 per month, the arrears at the end of month 3 would be not $15.00 but $20.00, and the calculation of arrears would lead to the somewhat surprising conclusion that the loan had been in arrears for 120 days (that is to say, a period substantially longer than the actual period of default). In fact (see at [70] below), the impact does not seem to have been significant. The parties' submissions 35 This issue focuses on the phrase "loans… in arrears for greater than 90 days". The plaintiffs submitted that the phrase is ambiguous, because there is more than one way of calculating arrears. Thus, the plaintiffs submitted, the Court is entitled to have regard to the objective framework of facts within which the Series Supplement came into existence, insofar as those facts were known to the parties. That objective framework of facts is said to have included the following matters (I quote from the plaintiffs' written outline): (2) The ascertainment of the intended meaning of the expression "which are in arrears for greater than 90 days" is assisted by the objective framework of facts within which the Series Supplement came into existence. They included the following: (a) First, the plaintiffs, assisted by their contractor Unisys Credit Services ( UCS ), employed computer and other systems together with an arrears calculation methodology and reporting format which they had employed for some time in the management of their mortgage portfolios and series; (b) Secondly, in respect of all of their Series as at the time the Series Supplement was executed, the plaintiffs produced monthly reports which addressed various matters including arrears levels. Reports were produced around 10 days after the end of the month, to indicate the position calculated according to RHG's established methodology as at month end. It was clear that the plaintiffs proposed to continue to produce monthly reports to address levels of arrears within the UniCredit (1) pool, including data pertaining to whether an Amortisation Event had occurred. Further, it was clear that the plaintiffs intended to continue to produce reports in connection with the UniCredit (1) Series at the end of each month according to this procedure; (c) Thirdly, the plaintiffs undertook the collation and recording of the data necessary to provide monthly reports (including in respect of arrears levels) using a computer system which incorporated a particular methodology adopted to calculate the scheduled balance of loans at a particular date. The plaintiffs calculated the arrears levels and ageing for each loan using this methodology. In order to monitor and report on arrears, they used a " scheduled loan balance basis ", which was a method for calculating arrears widely used in the securitisation industry. The scheduled loan balance basis provided an estimation of arrears levels, rather than precisely counting the amount of arrears and the length of time a loan had been in arrears; (d) Fourthly, in fulfilling obligations incurred in respect of the UniCredit (1) Series, it was clear that the plaintiffs would continue to use the same systems that they had been using for several years, and were using at the time the Series Supplement was negotiated and executed, when monitoring arrears levels and providing reports with respect to arrears. (3) Taken as a whole, it was evident from the surrounding circumstances known to the parties that the plaintiffs would continue to monitor and report upon arrears in the way that they had been doing for many years. No other system was proposed by any of the parties to the transaction. Despite conducting due diligence, the original Note Subscriber did not suggest or require that the system be altered in any material respect. Nor is there any evidence to suggest that the Security Trustee ever indicated any difficulty with the systems that the plaintiffs used. (4) Further, at the time of entry into the Series Supplement, neither the original Note Subscriber nor the Security Trustee had any reason to doubt the bona fides of the plaintiffs' methodology in relation to monitoring and reporting arrears. Nothing was held back from the defendants. Whether or not the original Note Subscriber ascertained during its due diligence that post period adjustments formed part of the plaintiffs' methodology, the opportunity to do so was provided to it. 36 The plaintiffs submitted further that: (1) the original Note Subscriber, HVB, had conducted due diligence, and had had an opportunity to investigate the methodology used by the plaintiffs to calculate and report on arrears; (2) HVB had not required or suggested any material change to that methodology; (3) when the parties entered into the Series Supplement, neither BNY nor HVB expressed, or had any reason to express, doubts as to the good faith of the plaintiffs' methodology; and (4) accordingly, the Court could conclude that none of the parties to the Series Supplement intended or expected that the plaintiffs would design and implement some new methodology to monitor and report on arrears in respect of the Series UniCredit (1). 37 Thus, the plaintiffs submitted, the phrase "loans… in arrears for greater than 90 days" should be construed to mean arrears calculated according to the plaintiffs' methodology in use at the time the parties entered into the Series Supplement. 38 The defendants submitted that there was no ambiguity in the relevant phrase. They submitted that the word "arrears", and equally the phrase "in arrears", had a well established meaning, and that there was no reason to deny them that meaning in the context of the Series Supplement. 39 Further, the defendants submitted, the crucial feature of the plaintiffs' methodology had not been disclosed at any material time. That crucial feature is the step referred to at [27(3)] above. The parties referred to this step as the making "of post period adjustments". I shall adopt that usage. 40 Finally, the defendants submitted, the effect of the plaintiffs' submissions was that instead of there being an objective standard by which loans in arrears for more than 90 days could be ascertained, the standard would be whatever the plaintiffs might choose to adopt from time to time. They noted, correctly, that the plaintiffs' methodology had not been applied consistently over the time period relevant to the Series Unicredit (1). The defendants submitted, in essence, that the plaintiffs' approach was commercially unreasonable. Decision 41 In substance, the plaintiffs' submission is that the phrase "in arrears" should have, not its ordinary English meaning, but the meaning that the plaintiffs, through their methodology, attribute to it: an approach reminiscent of that of Humpty Dumpty in Through the Looking Glass (Lewis Carroll, 1872). On the plaintiffs' approach: (1) the calculation of arrears excludes certain overdue payments that, on the ordinary English meaning of the word "arrears", are in arrears; and (2) gives credit for amounts paid, in reduction of arrears, after the date as at which arrears are calculated. 42 For the reasons that follow, I do not think that the plaintiffs' approach to construction should be accepted. 43 The plaintiffs submitted that there was no definition, in the Series Supplement, or elsewhere, of the noun "arrears" or the phrase "in arrears". That is correct. It follows that the noun and the phrase should be given their ordinary English meaning unless, construed in context and against what it is convenient to call the factual matrix, some other meaning should be given. 44 The Australian Oxford Dictionary (2nd edition, 2004) defines the noun "arrears" to mean "an amount still outstanding or uncompleted, especially… a debt unpaid". The same source defines the phrase "in arrears" to mean "behindhand, especially in payment". Those definitions are readily capable to application both to the noun "arrears" and to the phrase "in arrears" in the definition of Amortisation Event. Applying them, a loan would be in arrears if an amount due and payable is not paid; and would be in arrears for greater than (ie, more than) 90 days if that default in payment continues (ie, if the amount is not paid) for more than 90 days from the due date. 45 There is nothing in the Series Supplement, or for that matter in the other documents, to indicate that the phrase "in arrears" should be given anything other than its ordinary English meaning. On the contrary, I think, the contractual context is consistent with its having that meaning. An Amortisation Event can occur at any time. It will occur if the relevant percentage exceeds 1%. That percentage is ascertained by comparing the aggregate of the "Outstanding Loan Balance" of loans in arrears for more than 90 days with the aggregate of all Outstanding Loan Balances. The expression "Outstanding Loan Balance" is defined (not in the Series Supplement but in a "Master Definitions Schedule" dated 8 December 2004) to mean "on any day and in respect of a Loan which has been acquired or sold by RMS, the outstanding balance of the Loan taking into account all interest, fees and other charges which have accrued or have been debited to the relevant Borrower's accounts in respect of that Loan at the end of the previous day". Thus, the concept of a loan being "in arrears" is linked, as on its ordinary English meaning it should be, to amounts "which have accrued or which have been debited to" the loan account. Once a loan is in arrears for more than 90 days then its Outstanding Loan Balance is added to the numerator of the fraction by which the relevant percentage is to be calculated. 46 It follows, both from the fact that an Amortisation Event may occur "at any time" and from the fact that the Outstanding Loan Balance can be ascertained "on any day", that the calculation, for the purpose of seeing whether an Amortisation Event has occurred, is to be carried out having regard to debits and credits up until the day as at which the calculation is carried out. 47 In any event, I think, there is a logical flaw in the plaintiffs' submissions. The premise of their submission is that, because there is more than one means of calculating arrears, there is an ambiguity in the phrase "in arrears for greater than 90 days". The submission that there is more than one method for calculating arrears depends upon the proposition that both the duration method (which the plaintiffs do not use) and the adjusted quantum method (which they do use) are valid ways of calculating the time for which a loan has been in arrears. Accepting, for the sake of argument, that proposition, it does not follow that there is ambiguity either in the noun "arrears" or in the phrase "in arrears for greater than 90 days". There is, no doubt, more than one way of ascertaining the height of a building. It does not follow that there is ambiguity in the phrase "height of a building". At most, assuming that there is more than one appropriate way of calculating the length of time for which a loan has been in arrears, it might follow that a calculation properly performed according to one method could be relied upon even though the answer given conflicts with the result of a calculation properly performed according to another method. 48 The real issue, it seems to me, is not one of the proper construction of the phrase "in arrears for greater than 90 days". It is whether, in determining the amount of "arrears" at any time, post period adjustments should be made. I accept that the first category of adjustments made by the plaintiffs – reversing capitalised interest – is appropriate. As a matter of language, interest that has been debited to a loan account may form part of the Outstanding Loan Balance (as defined) on the day when it is debited, even though it is not payable until the following day. That is because the definition refers disjunctively to amounts that have accrued or amounts that have been debited to the account. But it does not follow that interest debited in advance to the account should be regarded as being in arrears on the day it is debited. There is no obligation to pay an amount that is not due and owing. A failure to pay an amount that is not due and owing cannot create an arrear in respect of that amount. 49 The second category of adjustments is more problematic. It does not follow, from what I have just said, that credit fees and charges that have become due and payable should be disregarded for the purpose of calculating arrears. Such credit fees and charges form part of the Outstanding Loan Balance. That is so both because they have accrued and (assuming it to be the case) because they have been debited to the account. It is very difficult to understand why amounts that have become contractually due and payable, but have not been paid, should be regarded as anything but "in arrears". Whatever the commercial justification for excluding accrued credit fees and charges from the calculation of arrears may be, those commercial reasons afford no real basis for concluding that an amount due and payable, but not paid, is anything other than "in arrears". In this context, it may be noted that the plaintiffs asserted no case of estoppel, conventional or otherwise. They said only that the meaning to be given to the phrase "in arrears" should be informed by their practice, said to have been known to the defendants, of excluding certain overdue payments from the calculation of arrears. 50 It follows that overdue credit fees and charges should be taken into account in assessing whether a loan has been in arrears for more than 90 days. It is unlikely to matter (unless one calculates the duration of arrears by using the adjusted quantum method). That is because, in the ordinary way, a default charge (which is really the kind of credit fee or charge with which I am presently concerned) would not normally be levied until some period of time following delay in payment of another monetary obligation. A default charge would be relevant, to the calculation of the duration of arrears, only if the default in payment for which it was levied were rectified, but the credit charge itself were not paid. In any event, having regard to the evidence summarised at [70] below, nothing of practical significance flows from this aspect of the plaintiffs' methodology. 51 Whatever may be the commercial or other justification for excluding overdue credit fees and charges from the calculation of arrears, it does not extend to post period adjustments. The essence of the calculation is that it may be carried out "at any time". Those words suggest that the calculation is to be carried out on, as at, or effective for, a particular day. A calculation carried out accordingly should not take account of payments received (or, for that matter, amounts debited) after that day. A calculation that does take account of post period adjustments is not a calculation of arrears at a date prior to the post period receipts. Thus, even if the end of the month should be taken as a proxy for the preceding Payment Date (and putting aside the question of credit fees and charges), a calculation that includes post period adjustments is not a true calculation of arrears: at the Payment Date or otherwise. 52 It might be thought that, if an Amortisation Event occurs, the plaintiffs could act under cl 5.4 of the Series Supplement. The availability of that theoretical course of action has limited practical significance. It is not until about the middle of a month that the plaintiffs, through UCS, are able to produce a report showing the position of the Series as at the end of the preceding month. Thus, even if it is assumed that such a report is capable of demonstrating the position not only at month's end but also at the immediately preceding Payment Date, by the time the plaintiffs become aware (through the report) of the occurrence of an Amortisation Event, the time for action under cl 5.4 would have passed. That is because, if the Amortisation Event were subsisting at the Payment Date, the payments required to be made by cl 8.8(o) of the Series Supplement must be made within three business days thereafter: well before the time when the plaintiffs would receive the report. 53 I note however that the evidence of Mr Warren Gareth Williams, who is the treasurer (and earlier was the deputy treasurer) of the third plaintiff, and who is a director of the Manager, is that from time to time the Manager has directed RMS to redesignate loans in arrears, thus in effect removing the redesignated loans from the pool of non-performing loans. Mr Williams said that this was part of the process of management of the pool of loans comprised in the Series UniCredit (1). 54 Another reason for rejecting the plaintiffs' methodology as the definition of "in arrears" is that, although the phrase is an essential element of the definition of an Amortisation Event which may occur "at any time", the plaintiffs' methodology includes, as an element, the calculation of arrears on a monthly basis at the end of each month. 55 Paragraph 12 of the plaintiffs' Further Amended List Statement asserts that there was no Amortisation Event subsisting at any relevant Payment Date. The particulars to that paragraph assert that "the meaning and content of the term "90 day arrears" in the definition of "Amortisation Event"… should be construed by reference to the plaintiffs' practice in calculating arrears… in existence at the time of entry into the Series Supplement". That methodology is defined as the "RHG Methodology". Thus, the plaintiffs say, the term "arrears" means the amount calculated by RMS as arrears in accordance with the RHG Methodology. 56 The particulars assert that the RHG Methodology is described in paras 21 to 29 of Mr Williams' affidavit affirmed 4 November 2009. The methodology described in those paragraphs (particularly, in para 25) is one performed after the end of each calendar month, that produces, among other things, a calculation of the Outstanding Loan Balances of all loans in default for more than 90 days as at the end of the month, and of all loans in the Series as at the end of the month. 57 A methodology that includes, as an element, calculation of relevant balances only as at the end of each calendar month is not of itself capable of being used to determine if an Amortisation Event has occurred at some other time. (And, for the reasons given at [51] above, that is so a fortiori if the methodology takes into account post period adjustments.) This is a significant defect. RMS is obliged to make payments of Total Available Income in accordance with the "waterfall" described in cl 8.8 of the Series Supplement. If an Amortisation Event subsists at any relevant Payment Date then, from subpara (o) onwards, whatever remains in that waterfall is diverted to Total Available Principal. It is RMS's obligation to make payments in accordance with the Series Supplement. Its methodology does not enable it to do so, because it does not calculate the position of the Series at a Payment Date. (Indeed, because it makes post period adjustments, it does not truly calculate arrears at all). It is unlikely, looking at the matter objectively, that the parties – in particular, the defendants – would have agreed that the phrase "in arrears" should be determined by reference to a methodology the use of which would mean that RMS could not monitor, and therefore could not perform, its obligation as at each Payment Date. There was no case of conventional or other estoppel, to the effect that the parties had agreed to use the end of the month as a substitute, or proxy, for the immediately preceding Payment Date. 58 There are other defects with the plaintiffs' methodology (and, as foreshadowed, this is relevant also to the second issue): (1) it accepts, for the purposes of one element of the calculations required to be carried out (the calculation of Outstanding Loan Balances), that overdue credit fees and charges are to be included, but does not accept that they should be included for the purposes of another element of that calculation (the calculation of loans in arrears for more than 90 days); (2) more fundamentally, it does not actually measure, but rather produces an estimate of, the number of loans actually in arrears for more than 90 days at any point in time; and (3) because it is carried out at the end of each calendar month, it does not enable an assessment to be made at any point in time after the end of one month and before the end of the next. 59 The first point is self explanatory. The second follows from the fact that the adjusted quantum method does not involve a process of counting loans in arrears for more than 90 days, but, instead, uses loan data to simulate the outcome of such a count. The third point follows from the fact that the calculations are carried out monthly. It is of particular significance where (as here) the Payment Date for a series is not the last day of the month but an earlier date. 60 One would require compelling circumstances to support a conclusion that arrears should be defined not in the ordinary English meaning of that word, but as meaning arrears determined in accordance with a system that is both conceptually and methodologically flawed. 61 I set out at [13] above some of the provisions of the Trust Deed relating to RMS's reporting obligations. There was no pleaded case that the reports from time to time given by RMS to BNY should be regarded as in a form agreed by BNY so that, regardless of the proper construction of the phrase "in arrears for greater than 90 days", the reports should somehow be taken as providing exclusively the content, or meaning, of that phrase. Although there were from time to time suggestions, in the course of submissions, that the form of the reports had been agreed, those submissions were not developed. There was no pleaded case of conventional or other estoppel on this point. Conclusion on the first issue 62 I conclude that the phrase "in arrears for greater than 90 days" should be given its ordinary English meaning, and should not be construed to mean, or refer to, arrears as determined by the plaintiffs' methodology (or, in the language of the pleadings, the RHG Methodology). Second issue: has an Amortisation Event occurred? The parties' submissions 63 The plaintiffs accepted that, if I rejected their submissions on the proper construction of "Amortisation Event", and in particular if I rejected the proposition that the calculation of arrears should take into account post period adjustments, then an Amortisation Event had occurred, and subsisted, at the Payment Dates in each of the months of October and December 2008 and January 2009. 64 Elektra submitted that an Amortisation Event had occurred in the months of September and November 2008, and subsisted as at the Payment Dates in each of those months (and, as well, in the months the subject of the plaintiffs' conditional concession). 65 Elektra based its submission on the evidence of Mr Christopher John Honey of McGrathNicol. In essence, Mr Honey's evidence was that the most appropriate method for measuring the duration of default was one known as the duration method. 66 The plaintiffs accepted that, if the duration method were the appropriate way to measure the length of default, then an Amortisation Event had occurred in each of the months for which Elektra contended. The evidence 67 Mr Honey was responsible for production of the reports referred to at [8] above. He prepared a further report, for the purposes of these proceedings, in which in effect he summarised his findings in the earlier reports and provided further reasons for concluding that Amortisation Events had occurred in the relevant months. Mr Honey was not required for cross-examination. Indeed, the plaintiffs embraced his evidence. 68 Mr Honey applied two versions of the quantum methodology and two versions of the duration methodology. They were, respectively: (1) the adjusted quantum method, whereby fees and charges were deducted from the current loan balance; (2) the quantum method, in which no such deduction was made; (3) the adjusted duration method, whereby once again fees and charges were deducted from the loan balance; and (4) the duration method, in which no such deduction was made. 69 There are three other features of Mr Honey's methods that require mention: (1) where payments were made prior to the end of the month by a direct debit which was subsequently dishonoured after the end of the month, the amount of the payment was excluded from the loan balance. Mr Honey justified this by saying that the rejection was processed (whether by the bank in question, by the plaintiffs or by both is not clear) to be effective from the day when the dishonoured payment was originally credited to the loan account; (2) he did not perform any post period adjustments of the kind undertaken by the plaintiffs; and (3) he carried out calculations, using each of his four methods, at the Payment Dates in the three months in question as well as at the ends of both months. (Mr Honey also carried out calculations as at a third date – "the Determination Date" – but it is not necessary to refer to this aspect of his evidence.) 70 Mr Honey's findings are, in summary, that as at each relevant Payment Date and each relevant month's end, and for each of the four different methods of calculation used by him, the relevant percentage exceeded 1%. Further, Mr Honey said, the discrepancy between his calculations and the plaintiffs' calculations was referable to the plaintiffs' practice of carrying out post period adjustments. 71 Mr Honey said, in one of his earlier reports, that use of the duration method to determine the age of arrears did indeed lead to the conclusion that, for the months of September and November 2008, the relevant percentage exceeded 1%. However, in that report (as, I think, in all his reports) Mr Honey accepted that there was more than one way of determining the length of time for which a loan had been in arrears. Further, whilst Mr Honey did not agree with the practice of making post period adjustments, and appears not to have accepted the practice of excluding credit fees and charges, he did not say that the quantum method was in principle inappropriate. On the contrary, he said that "we do not express an opinion as to the validity or relative merit of any methodology employed". 72 One possible concern with the duration method relates to the allocation of payments after a loan has gone into arrears. Take the example at [32] above. Assume default in month 1, but payments of the required amounts in months 2, 3 and 4. If the amounts paid in months 2, 3 and 4 are applied to the interest obligation due on the first of each of those months, the default for month 1 would continue unrectified. On the duration method, that default would be treated as having subsisted for more than 90 days at around the beginning of month 4. If, however, the payments made in months 2, 3 and 4 are applied to amounts in arrears, rather than to the current month's obligation, no default would subsist beyond one month (leaving aside any question of "penalty" interest, and credit fees and charges). In the usual way, one would expect the loan documents to make provision for the application of payments; and if they did not, then presumably the rule in Clayton's case (Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781 might have some application. In the absence of a clear guideline as to the application of payments, the duration method might overstate the length of time for which an amount has been in arrears. 73 Further, it seems, McLuskey used a different methodology again, in its original report prepared on the instruction of HVB for Elektra. 74 It is not necessary to express a conclusion as to whether there were, as Elektra submitted, Amortisation Events in September and November 2008. If there were, there would have been (subject to the operation of the proviso to para (b) of the definition of Event of Default) Events of Default in each of those months. The only possible significance of the occurrence of additional Amortisation Events and Events of Default might be in considering the plaintiffs' alternative case seeking relief against forfeiture. Since no one suggested that the answer to that case turned on the number of Amortisation Events or Events of Default, it is not necessary to express a concluded view on this aspect of Elektra's submissions. 75 I note that BNY, through its relevant officer Ms Marelize Coetzee, was not prepared to conclude that it was actually aware of, nor did it purport to act on, any Event of Default other than the one which, the defendants say, occurred in January 2009. This is another reason rendering it unnecessary to decide whether there were (as Elektra submitted) further Events of Default. Conclusion on second issue 76 I find that an Amortisation Event subsisted as at the end of each of the months of October and December 2008 and January 2009, and as at the Payment Date immediately before the end of each of those months. Third issue: has an Event of Default occurred? 77 It is common ground that: (1) RMS did not, on those Payment Dates or at all, apply Total Available Income to Total Available Principal in accordance with cl 8.8(o) of the Series Supplement; (2) in each month from October 2008 to January 2009 (inclusive) there was Total Available Income available to be applied in accordance with 8.8(o) if that clause had effect; and (3) in each month from October 2008 to July 2009 (inclusive), RMS retained an amount out of Total Available Principal, either for anticipated Redraws or Further Advances purportedly in accordance with cl 8.10(a) of the Series Supplement, or otherwise, and did not apply those amounts in accordance with cl 8.10(b). The parties' submissions 78 The plaintiffs submitted that no Event of Default had occurred. First, they submitted, their methodology showed that for the months in question (October and December 2008, and January 2009) the relevant percentage had not risen above 1%. Secondly, they submitted, the proviso to the relevant definition of Event of Default) operated. For convenience, I repeat that the proviso states that a failure to make a payment in full to Noteholders within three business days of its due date does not amount to an Event of Default "until any Notes which rate senior to such payments have been redeemed in full". 79 The defendants submitted that, once post period adjustments were disregarded (as the defendants submitted they should be), there was an Amortisation Event in each of the months in question. (As I have noted, Elektra submitted also that Amortisation Events had occurred as well in September and November 2008.) Secondly, they submitted, the proviso to the definition of Event of Default was irrelevant because the failure relied upon was a failure to make a payment to Class A Noteholders, but there were no Notes ranking above the Class A Notes. 80 The Events of Default arose, on the defendants' submissions, in two ways: (1) where an Amortisation Event subsisted on a Payment Date, cl 8.8(o) of the Series Supplement was activated. In those circumstances, surplus income was to be applied to Total Available Principal and distributed in accordance with cl 8.10. (2) Secondly, once an Amortisation Event had occurred then (even though the Amortisation Event was no longer subsisting at any Payment Date) the condition in cl 8.10(a) of the Series Supplement ceased to have any effect. In those circumstances, RMS ceased to be entitled to retain principal (for Redraws or Further Advances) and was bound, instead, to apply it to the principal amount owing to Elektra as the Class A Noteholder. It is unnecessary to deal with this submission, because it is moot: there was a subsisting Amortisation Event in each of the three months in question. 81 The plaintiffs accepted that, assuming that there had been an Amortisation Event in any of the months in question, and assuming that the proviso to para (b) of the definition of Event of Default did not have the effect to which they contended, then, in each of the months in question (October and December 2008, and January 2009) there had been an Event of Default. Decision 82 There are only two classes of notes on issue in the Series UniCredit (1): Class A Notes and Class B Notes. The total value of the notes issued was $750 million. Of that total, the Class A Notes constituted about 97.7%, or about $733 million, of the total and the Class B Notes constituted the balance. It appears that the notes were issued in two classes to enables the Class A Notes to achieve a AAA ranking. Nothing of present moment turns on this, since it is common ground that HVB was, and Elektra now is, the holder of all the Class A Notes and all the Class B Notes. 83 The starting point is cl 8.8(o). It is activated, on my findings, for each of the months in question because there was an Amortisation Event subsisting on the Payment Date in each of those months. There has been no "enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed", so that cl 8.13 does not apply (no one submitted that it did). It follows that in each of the months in question RMS was obliged to apply Total Available Income to Total Available Principal in accordance with cl 8.9. Since RMS did not do so within three business days after each Payment Date, there was an Event of Default in each month, unless the proviso to cl 4(b) averted that consequence. 84 Equally, at least for each month in which an Amortisation Event had occurred, RMS ceased to be entitled to retain Total Available Principal on account of Anticipated Redraws or Further Advances, in accordance with cl 8.10(a), and was bound to apply the whole of the Total Available Principal to the Class A Noteholder in accordance with cl 8.10(b). Its failure to do so within three business days constitutes another Event of Default, again unless that consequence is adverted by the operation of the proviso to cl 4(b). I have proceeded on the basis that principal was retained on account of Anticipated Redraws or Further Advances. There is some suggestion in the evidence that RMS simply retained an amount each month. Mr Williams said that this was done for rounding purposes, and that the amount retained was included in the total available for payments made the following month. Nothing turns on this. Whether the retention was pursuant to some express (but inoperative) contractual power, or for some other contractually unauthorised reason, does not matter. 85 For each of the months in question, there was Total Available Income available to be applied to the Total Available Principal. Further, for every month from October 2008 until July 2009, there was principal retained (either purportedly in reliance upon cl 8.10(a) or for no authorised reason) that should have been applied under cl 8.10(b). 86 I do not think that the proviso to cl 4(b) has any relevance. Each of the failures relied upon is a failure to make a payment to Elektra in its capacity as a Class A Noteholder. There are no Notes ranking senior to those notes, and thus no Noteholders who ought be paid ahead of Elektra. 87 In essence, the plaintiffs' submission was that payments to Elektra as Class A Noteholder and Class B Noteholder, in accordance with paras (e) and (f) of cl 8.8 of the Series Supplement, ranked in priority to payments under cl 8.8(o) once it was activated. Since the Notes have not been redeemed in full, the plaintiffs submitted, the proviso had effect. 88 The defendants submitted that there was no relevant "failure". The purpose of the proviso, they submitted, was clear: to avoid a situation where a failure to make a payment to a junior Noteholder would trigger an Event of Default affecting a senior Noteholder. In this case, they submitted, there was money available to be paid, and accordingly there was no "failure". 89 There is an unreal air to this aspect of the case given that: (1) there is only one Noteholder – Elektra; (2) Elektra holds all the Class A and all the Class B Notes; and (3) given my findings on the occurrence of Amortisation Events, there are in any event (conditionally) conceded Events of Default in relation to cl 8.10(b). 90 I think that the construction of the proviso for which the defendants contend is correct. That is to say, if the proviso is to be activated, the "failure" must result from insufficiency from funds. If it were otherwise, RMS could simply choose not to make a payment, even though it had funds to do so, and rely on the proviso to avoid the consequence that the failure to pay gave rise to an Event of Default. Construing the proviso purposively, as the defendants do, avoids that consequence. 91 In any event, the failure of RMS to make payments as directed by cl 8.8(o) was, in essence, a failure in relation to the Class A Notes. There are no Notes ranking senior to the Class A Notes. A failure to make a payment, in accordance with cl 8.8(o), to Elektra as Class A Noteholder is an Event of Default regardless of the proviso to cl 4(b), because there are no senior Notes which should be, but have not been, redeemed in full. Conclusion on the third issue 92 I find that there were Events of Default in each of the months of October and December 2008 and January 2009. Those events of default arose both under cl 8.8(o) and under cl 8.10(b). Fourth issue: actual awareness 93 BNY was in a difficult position. As Security Trustee, it stood between a creditor insisting that there had been an Amortisation Event and an Event of Default, and a debtor insisting that there had not. Each put its case with vigor. It is appropriate to record that, in my view, BNY acted properly, and with due regard to its independence, in taking the steps that it did. It is appropriate to record further that, in my view, BNY, through Ms Coetzee, gave proper consideration both to the material put before it by Elektra and the plaintiffs and to the views of the independent expert, Mr Honey of McGrathNicol, appointed by it. The evidence 94 It will be recalled that, by cl 35.1 of the Trust Deed, BNY as security trustee "must, upon becoming actually aware of the occurrence of an Event of Default in respect of a Series, take" a number of steps. Those steps include (para (c)) convening a meeting of Noteholders to consider and vote on resolutions in effect to enforce the security. Further, by cl 46.2, BNY is authorised at any time to convene a meeting of Noteholders in a particular Series. 95 Ms Coetzee was one of those involved in considering whether there had been an Amortisation Event or an Event of Default. It was not suggested that someone else from BNY should have given evidence of the process that led to the decision to give the notice of default on 7 August 2009 and the notice of meeting on 10 August 2009. Ms Cotezee affirmed two affidavits. They were read substantially without objection. She was not required to attend for cross-examination. 96 Ms Cotezee's evidence, read in conjunction with the documents to which she referred, was extremely detailed. I do not propose to give more than a brief summary of it. What follows is, in my view, sufficient to support Ms Cotezee's evidence that she was actually aware of an Event of Default for January 2009. The evidence to which I do not refer does not detract from – on the contrary, it strengthens – that conclusion. 97 In substance, Ms Coetzee (who holds both legal and accounting qualifications) was one of a group of employees of BNY known as the "Default Administration Group". She received and considered communications from HVB (for Elektra) and RMS, in the period up to about April 2009, in which HVB contended that an Amortisation Event had occurred, and RMS contended that it had not. Ms Coetzee participated in the decision to engage Mr Honey of McGrathNicol, and received and considered correspondence from RMS relating to the terms of his engagement. 98 Mr Honey prepared a draft report dated 18 June 2009, which Ms Coetzee read. That draft was provided to RMS for comment. It commented on 25 June 2009. McGrathNicol replied to the comments on 30 June 2009. Through that exchange, Ms Coetzee became aware of an issue as to whether credit fees and charges should be excluded from the calculation of arrears. 99 McGrathNicol carried out further testing, excluding credit fees and charges from its calculations. It provided a draft supplementary report on 23 July 2009, and a further report on 29 July 2009. Ms Coetzee considered those reports and RMS' comments on them. 100 On 4 August 2009, Ms Coetzee received and read McGrathNicol's final report. 101 Ms Coetzee by then had become aware of another issue: whether the analysis by McGrathNicol established that there had been an Amortisation Event at a relevant Payment Date, as distinct from the end of the month in which that Payment Date occurred. McGrathNicol commented on that issue in a letter of 3 August 2009. Ms Coetzee understood (correctly) that, in McGrathNicol's view, an Amortisation Event subsisted on the Payment Date in January 2009. 102 Ms Coetzee took those and many other matters into consideration. She concluded, in particular from the opinions expressed by Mr Honey, "that there was an Amortisation Event on a Payment Date for January 2009" (affidavit affirmed 24 November 2009, para 58 c). She was aware that no payment had been made under cl 8.8(o) of the Series Supplement following that Amortisation Event. Accordingly she concluded that an Event of Default had occurred in January 2009. She said, in the same subparagraph of her affidavit, that she "was actually aware of an Event of Default on that basis". 103 Further, Ms Coetzee said, she thought that "McGrathNicol had satisfactorily answered each of the criticisms made by RMS of their report", and that other criticisms made were answered by legal advice that she had received (same affidavit, para 58 i). 104 Ms Coetzee noted that the notice of meeting was expressly given pursuant to cl 35.1(b) of the Trust Deed. She says that she gave consideration to the draft of that notice and approved it, on the basis that BNY "as Security Trustee, was actually aware of an occurrence of an Event of Default and had to act in accordance with that clause of the Master Trust Deed" (same affidavit, para 65). 105 In her supplementary affidavit, Ms Coetzee dealt with criticisms made by RMS of the decision to issue the notice of meeting. After she received and considered those criticisms, she had further discussions with Mr Honey. From those discussions, she thought that there might be a doubt as to whether the arrears percentage for January 2009 (1.03%) applied as at the Payment Date in that month, or at its end. (To the extent that it matters, the material considered by Ms Coetzee probably suggests that the figure is referable to the Payment Date.) In those circumstances, Ms Coetzee gave consideration to withdrawal of the notice of meeting (and antecedent notice of default). 106 Ms Coetzee took legal advice. The effect of that advice (which in my view is substantially correct) was that BNY could be "actually aware" of the occurrence of an Event of Default if the evidence suggested that it was more likely than not that an Event of Default had occurred. Ms Coetzee apparently concluded that it was more likely than not that the relevant percentage exceeded 1% at the Payment Date and, accordingly, that BNY should not withdraw the notice of meeting. 107 I am not sure that the matters covered by Ms Coetzee in her supplementary affidavit can bear upon the question of whether, on 10 August 2009, it was open to her (and through her BNY) to be "actually aware" of the occurrence of an Event of Default in January 2009. But if those subsequent events could bear upon her state of awareness at the earlier date, it is nonetheless my view that she applied the correct test ("more likely than not") and that there was material before her to enable (and through her BNY) to be satisfied that it was more likely than not that an event of default had occurred in January 2009. The parties' submissions 108 The plaintiffs submitted that the test required by "actually aware" was a high one. They pointed to the serious consequences of a determination, by BNY, that an Event of Default had occurred. In those circumstances, they submitted, the test could not be satisfied simply by a belief that it was more likely than not that there had been an Event of Default. 109 The plaintiffs relied on a number of matters, known to or understood by Ms Coetzee, to suggest that she did not have the requisite level of awareness. Those matters included: (1) her understanding of the differing views as to the appropriate methodology to determine the duration of arrears, there being no industry or accepted method; (2) that the differing views of the plaintiffs and McGrathNicol were based on differences of methodology, not on errors in the application by one or the other of its preferred methodology; (3) that, as McGrathNicol had reported, the margins for error were extremely slim; (4) her doubts, in the period following the issue of the notice of default and the notice of meeting. Those doubts were said to call into question whether she had the requisite degree of satisfaction before those notices were given; and (5) in particular, her reliance on a "more likely than not" standard was in error because that standard is something different to, and lesser than, the standard of actual awareness. 110 The defendants submitted that the validity of the notice of meeting did not depend on BNY's having achieved a state of actual awareness of the occurrence of an Event of Default. Further, I think, BNY at least submitted that, notwithstanding the express statement of the ground on which the notice of meeting had been given, it was open to it to rely on the general powers set out in cl 46.2 of the Trust Deed. It is not necessary to express a concluded view on those submissions. 111 In any event, the defendants submitted, there was ample material to support the existence of the relevant state of awareness, and Ms Coetzee's unchallenged evidence that, based on that material, she had achieved the state of awareness should be accepted. Further, the defendants submitted, subsequent doubts could not affect, retrospectively, the conclusion reached by Ms Coetzee. Decision 112 There is no contractual definition of "actually aware". Turning to the dictionary cited above, the adverb "actually" could be taken to mean "as a fact, really" or "as a matter of fact"; and the adjective "aware" could be taken to mean "conscious… having knowledge". In combination, the phrase would indicate that the requisite knowledge or consciousness should exist as a matter of fact. On that basis, perhaps, the parties intended to contrast actual awareness with some lesser state of deemed or imputed awareness. I proceed on the basis that BNY was required to know, or be satisfied, as a matter of fact, that an Event of Default had occurred. In the ordinary way, that state of mind could not be achieved unless an Event of Default had occurred. Since I have found that the Event of Default on which BNY relied had occurred, the focus of attention should be on the extent of BNY's awareness and the reasons for it. 113 It is convenient to start with the trite observation that, in these proceedings, the Court finds that events have occurred by application of the civil standard of proof: balance of probabilities. No doubt, in doing so, the Court should do more than mechanically weigh the competing evidence; it should feel a sense of actual persuasion leading it to the conclusion that it reaches (Nguyen v Cosmopolitan Homes (NSW) Pty Limited [2008] NSWCA 246 at [44] to [52]). It would be extraordinary if BNY were required to be satisfied to some higher standard, before deciding to act under cl 35.1 of the Trust Deed. 114 Thus, in substance, I accept that what was required was that BNY, through its relevant officers, should conclude that it was more likely than not that there had been an Event of Default. I qualify that by stating that it was incumbent on BNY, before reaching such a conclusion, to investigate the matter thoroughly, to consider such submissions or other material as the parties chose to put before it, and to achieve a state of actual satisfaction, on the balance of probabilities, that an Event of Default had occurred. 115 In substance, that is precisely what Ms Coetzee did. I see no reason to doubt her unchallenged evidence on the point. It is sufficient to say that there was more than enough material before her to enable her to reach the conclusion that she did, and that she appears to have applied herself carefully and conscientiously to all material that was suggested to be relevant to the issue. 116 As I have noted, Ms Coetzee was not cross-examined on her evidence. The matters that were said to impugn her evidence, that she was actually aware of an Event of Default, were not put to her. I did not have the opportunity of hearing her explain (if she could) why those matters, individually or collectively, did not impugn that evidence. 117 The debate as to the level of satisfaction required before someone may be said to be "actually aware" of an occurrence tended towards the metaphysical. I have found that an Event of Default occurred for (among other months) January 2009. Ms Coetzee came to the same conclusion, on essentially similar material to that considered by me. (There is one exception. As indicated at [70] above, I had the benefit of the further report from Mr Honey, in which he dealt explicitly with the position at each Payment Date in question. Ms Coetzee did not; but as I have said at [101] above, Mr Honey had covered this point, at least for the month of January 2009, in his letter of 3 August 2009.) Ms Coetzee said that, on the basis of the material considered by her, she was actually aware of the existence of an Event of Default for that month. As I have said, the material that she considered was capable of inducing in her (as it induced in me) a state of actual satisfaction as to the occurrence of an Event of Default. It did so. That is sufficient. 118 That Ms Coetzee may have had later doubts is irrelevant. The question is not what she thought, or what her state of awareness was, at some time after the relevant notice was given, but what she, and through her BNY, understood at the time the notices were given. It is important to bear in mind that the material that caused her to have doubts, after the notices had been given, was not available to her before they were given. 119 Of course, if what were under consideration were the examination of a trustee's exercise of a discretion, it would not be necessary to go to the level of analysis that I have undertaken to conclude that what was done is immune from challenge. But no one submitted that this, rather than a fuller inquiry of the kind that I have undertaken, was the appropriate way to approach this issue. Conclusion on the fourth issue 120 I conclude that: (1) there were Events of Default in October and December 2008 and January 2009, in relation to cl 8.8(o) of the Series Supplement; (2) there were Events of Default in each month from October 2008 to July 2009, in relation to cl 8.10(b) of the Series Supplement; (3) Ms Coetzee (and through her BNY) was actually aware of the Event of Default, in relation to cl 8.9(o) that occurred in January 2009; (4) Ms Coetzee (and through her BNY) relied on that Event of Default in deciding to issue the notice of meeting on 10 August 2009; and (5) it was open to Ms Coetzee (and through her BNY) so to act. Fifth issue: relief against forfeiture 121 The questions argued in relation to the claim for relief against forfeiture were: (1) was relief against forfeiture available as a matter of principle? (2) If relief against forfeiture was available in principle, had RMS made out a case in fact? (3) If, otherwise, a case for relief against forfeiture had been made out, should it be refused on discretionary grounds? First question: availability in principle 122 It was, I think, common ground that RMS had a sufficient interest in the assets that were the subject of the Deed of Charge to give it a proprietary interest that could be the subject of forfeiture and, hence, of a claim for relief against forfeiture. If that were not common ground, I would make a finding to that effect. The lender and mortgagee is a company known as RHG Mortgage Corporation Limited (RMC). RMC and RMS are parties to a "Receivables Agreement". Under that agreement, RMC could offer to sell "Receivables" to RMS, and RMS could accept that offer. By cl 3.6, the effect of acceptance was to constitute an assignment by RMC to RMS of RMC's "right, beneficial ownership and interest in each Receivable". By cl 3.7, any such assignment was, unless otherwise specified, "equitable only". There was no suggestion that anything other than an assessment in equity was effected. 123 It follows that a sale of receivables pursuant to the Receivables Agreement gave RMS, as Buyer, an equitable proprietary interest in each Receivable that it bought. Those Receivables were the subject of the charge given by RMS to BNY pursuant to the Deed of Charge. The parties' submissions 124 The debate, on the first question, focused on the nature of the rights given to BNY on default, and in particular on the question of whether the exercise of those rights would effect any forfeiture. 125 Under the various Transaction Documents, the steps identified are: (1) BNY, being actually aware of the occurrence of an Event of Default in respect of the Series Unicredit (1), must notify Elektra that the charge in respect of that Series has taken effect as a fixed charge (cl 35.1(a) of the Trust Deed); (2) BNY must convene a meeting of "Voting Secured Creditors" (i.e,. Elektra) to consider and vote on resolutions to enforce the Deed of Charge, to direct BNY to exercise its powers, and to declare the "Secured Monies" to be immediately due and payable on demand (cl 35.1(c) of the Trust Deed); (3) the meeting so convened must be held, and the resolutions considered; (4) BNY must (if the resolutions are passed) declare the Secured Monies to be immediately due and payable on demand; (5) appointment of a receiver (cl 7.1 of the Deed of Charge); and (6) the exercise by the receiver of his or her powers under cl 8 of the Deed of Charge. 126 The hearing proceeded on the basis that if a meeting were held in accordance with cl 35.1(c) of the Trust Deed, the resolutions required to be considered would be passed. It is obvious, in particular from Elektra's approach to these proceedings, that this assumption is well founded. If necessary, I would make a finding to that effect. 127 The defendants submitted in essence that none of the steps up to and including the appointment of a receiver, considered individually or together, could amount to a forfeiture. In particular, they submitted that: (1) the acceleration of the obligation to pay the principal sum did not involve any forfeiture. They relied on the decision of the Queensland Court of Appeal in Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311; and (2) the appointment of a receiver could not amount to a forfeiture, because (the receiver holding the charged property and acting in respect of it as the agent of RMS) the appointment would not interfere with any proprietary right of RMS. 128 RMS submitted that: (1) the decision in Kostopoulos could be distinguished; (2) in any event, it was incorrectly decided (RMS did not submit that it was "plainly wrong", and that accordingly I should feel myself at liberty to depart from what was there held); (3) the appointment of a receiver in itself would amount to a forfeiture, because it would disturb RMS's possessory rights in respect of the secured property (RMS relied on what was said by Mason J in Forestry Commission of NSW v Stefanetto (1976) 133 CLR 507 at 519, 521); and (4) in any event, considering the question as one of substance rather than form, since the inevitable end result of the process would be the sale of the charged property, which on any view would deprive RHG of its proprietary interest, there was (or would be) a forfeiture. The decision in Kostopoulos 129 The appellant (mortgagor) breached warranties given by him in the mortgage document to the respondent (mortgagee by assignment), and breached other terms of the mortgage. On breach, and by the terms of the mortgage, the outstanding balance of principal became payable forthwith. The respondent demanded repayment of the principal, and sought possession. The appellant sought an injunction to restrain the respondent from so acting, and relief against forfeiture. 130 Keane JA (with whom McMurdo P and Dutney J agreed) concluded at [50] that relief against forfeiture, as it had been expounded by Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] AC 691 at 722 – 723, was "irrelevant in the circumstances of the present case for several reasons". Those reasons included that: (1) in the case of a mortgage, the essential principle was that failure to redeem on the due date did not destroy the equity of redemption, unless there were the due exercise of a power of sale or a decree for foreclosure; (2) acceleration of the principal would not destroy the appellant's right to redeem; (3) the appellant's inability to redeem flowed not from destruction of the equitable right to do so, but from his inability to repay the debt; (4) one of the principal objects of the transaction was repayment of the debt; and (5) because the appellant could not repay the debt, the court could not, by its orders, achieve that object as a condition of the grant of relief. 131 Further, his Honour said at [51], there was no ground for equitable intervention based on the heads of fraud, accident, mistake or surprise. 132 His Honour then gave further reasons for concluding that the appellant was not entitled to equitable relief. It is those further reasons, at [52] to [54], upon which the defendants rely. Keane JA said that there was no forfeiture involved in the triggering of the respondent's right immediately to recover the principal sum. That sum was owing, but the obligation to repay it in full was deferred so long as there was no default. A provision in the mortgage making it repayable on default was neither a forfeiture nor a penalty; enforcement of the entitlement to the principal sum did not forfeit any estate or interest of the appellant. Nor was the acceleration of the principal sum a penalty. I set out (without footnotes and thus without citations) those paragraphs of his Honour's reasons: [52] There are, in my view, further answers to the appellant's attempt to invoke this equitable doctrine. The first is that it cannot sensibly be said that there is any "forfeiture" involved in the triggering of the respondent's rights immediately to recover the principal sum. The principal sum was owed to the respondent by the appellant, but it was not repayable while the appellant was not in default in respect of the facility. That the debt became repayable on the occurrence of default by the appellant is neither a forfeiture nor a penalty. [53] In this regard, there is no estate or interest which the appellant forfeits by reason of the respondent's entitlement to payment of the principal debt. The appellant's complaint is that he has lost the benefit of the contract of loan remaining on foot for the balance of the five years of the facility. Such a benefit is dependent upon the terms on which it depends for its existence. That sort of benefit does not attract the protection of the equitable doctrine of relief against forfeiture. [54] As to penalty, there is strong authority for the proposition the mere fact that a principal sum becomes payable "upon a failure by a borrower to comply with the conditions on which credit was extended cannot constitute a penalty There is no authority which supports the appellant's submission to the contrary. It was argued on the appellant's behalf that the reasons of Gaudron J in Stern v McArt hur provided support for the appellant's contention; but it is apparent that her Honour was prepared to regard a contractual provision for the payment of money as being a penalty or "in the nature of a penalty" only where the provision for the payment is "security for a stated result". In this mortgage, the obligation of the appellant to repay the principal to the respondent was not "security" for some other result. It was, in truth, the substantial entitlement of the respondent, the postponement of which depended upon the appellant's compliance with the terms of the mortgage Relief against forfeiture: the applicable principles 133 It is convenient to set out the general principles relating to relief against forfeiture before returning to the decision in Kostopoulos. 134 I have referred above to the speech of Lord Wilberforce in Shiloh Spinners. In that case, his Lordship at 723 described relief against forfeiture as: the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be obtained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. 135 In the same case, his Lordship referred at 723 to other bases on which equity might intervene: "the heads of fraud, accident, mistake or surprise". 136 The reference by Lord Wilberforce to "appropriate and limited cases" in which equity might intervene should not be taken to suggest that it is only in an exceptional case that intervention is available. As the decision of the plurality (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ) in Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315 at 335 [59] makes clear, the relevant principle is that the court should be reluctant to interfere with deliberately negotiated contractual rights. Further, as their Honours said at 328 [37], the jurisdiction to relieve against forfeiture does not authorise the court to remake the parties' contract into a form that the court thinks is more reasonable or fair. In particular, as their Honours pointed out at 337 [66], the court would not intervene where some supervening event operates more to the advantage of one party than the other, and the event was one for which the parties might have made, but did not make, express provision. The court would not relieve against the consequences of some foreseeable event where to do so would deprive one party of an essential right. 137 The essential question identified by the plurality in Tanwar at 320 [5] and 324 [19] is whether the use of legal rights is, in all the circumstances, unconscientious; and whether that unconscientious use of legal rights, if unchecked, would forfeit an interest of the claimant for relief. What is involved is, therefore: (1) identification of the right or rights that would be forfeited; (2) identification of the legal rights, exercise of which would effect the forfeiture; and (3) identification of the reasons why the exercise of those legal rights would be unconscientious. 138 The circumstances in which the exercise of a legal right will be unconscientious are various, and the analysis leading to the formation of the necessary value judgment requires close attention to the facts of the particular case. Where the party against whom relief is claimed has caused or contributed to the circumstances rendering it unconscientious for that party to rely on its legal rights then it is usually easy to see why relief might be granted. But it is not necessary that the party against whom relief is claimed should have caused or contributed to the relevant circumstances. As the plurality pointed out in Tanwar at 328 – 329 [39], "cases falling within the heads of mistake or accident will not necessarily be the result of activity by" that party. Further, as their Honours had said at 325 [25], "legal rights may be acquired by conduct which pricks no conscience at the time"; what is important is whether "at the time of attempted enforcement, it… may be unconscientious to rely upon the legal rights so acquired". Decision 139 One suggested ground of distinction of the decision in Kostopoulos is that, on the facts in that case, acceleration of the principal sum was automatic, whereas in this case it occurs only if BNY (acting on a resolution of Elektra as Noteholder) so directs. That is not a relevant point of distinction. The reasoning of Keane JA is based on the proposition that the principal sum (or the balance from time to time outstanding) remains owing during the term of the mortgage; all that is deferred is the obligation to repay it in full and forthwith. Whether the balance of the principal sum outstanding becomes payable automatically on default, or as a result of a decision by the mortgagee (in this case, BNY) matters not. No proprietary interest of RMS is infringed by a decision to declare immediately due and owing the outstanding balance of principal. I return to this at [147] below. 140 RMS submitted that the reasoning in Kostopoulos could be distinguished on four other bases: (1) Kostopoulos concerned acceleration; this case concerned the appointment of a receiver; (2) in Kostopoulos , the relevant obligation secured by the mortgage was repayment of the principal. In this case, it is the obligation to apply principal under cls 8.8(o) and 8.10(b) of the Series Supplement. The plaintiffs were in a position to secure the stated result: unlike the mortgagor Mr Kostopoulos; (3) the underlying defaults in Kostopoulos were not failures to pay money but breaches of warranty. They could not be rectified; and (4) Kostopoulos was not a case of mistake or accident; on the contrary, as Keane JA noted at [51], the appellant had no arguable ground for seeking equitable relief based on mistake or accident. 141 Those points of distinction do not bear on the fundamental issue, which is whether an acceleration clause (be the acceleration automatic, or at the discretion of the creditor) amounts to a forfeiture against which equity can in an appropriate case relieve. 142 I accept that the suggested grounds of distinction indicate that the reasoning in Kostopoulos is not directly in point. I am prepared to accept, also, that what Keane JA said as to acceleration may be obiter dicta (because what his Honour had earlier said was sufficient to dispose of the appeal). Nonetheless, his Honour's reasoning represents a considered statement of the relevant principles by an intermediate appellate court. In circumstances where it was not submitted (nor do I conclude) that the reasoning was plainly wrong, I should follow it: Farah Constructions Pty Limited v Say-dee Pty Limited (2007) 230 CLR 89 at 151 – 152 [135]. The essential point is that acceleration of the obligation to repay the outstanding balance of principal does not forfeit any proprietary right of RMS, and does not operate to destroy RMS's equity of redemption. 143 Nor does the appointment of a receiver destroy the equity of redemption. If a receiver were appointed, it would remain open to RMS to pay out all money owing under the Deed of Charge, and thereby secure both the removal of the receiver and the discharge of the Deed of Charge. 144 I accept also that the doctrine of relief against forfeiture in principle may be capable of application not only where what is sought to be forfeited is a proprietary interest, but also where what is sought to be forfeited is a possessory interest. Brennan J suggested that this might be so in Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131 at 151. See, too, Lord Diplock in Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (the Scaptrade) [1983] 2 AC 694 at 702. Thus, in On Demand plc v Gerson plc [2001] 1 WLR 155, the English Court of Appeal recognised that a lessee under a finance lease (who obtained no full proprietary interest in the leased chattel) might obtain relief against forfeiture. An appeal to the House of Lords succeeded, but without calling into question this aspect of the reasoning of the Court of Appeal. See [2003] 1AC 368. 145 The jurisdiction of equity to relieve against forfeiture has been seen as "a special application of a more general power to relieve against penalties and to mould them into mere securities": see Viscount Haldane LC in G & AC Kreglinger v New Patagonia Meat and Cold Storage Limited [1914] AC 25 at 35. Thus, I think, RMS is correct to submit that the principles to be derived from penalty cases are relevant. The statement by Mason J in Stefanetto at 521, that "it can make no difference that the contractor is deprived not of property but of possession", was said to be relevant to the present case. The uncompensated loss of possessory rights is something to be taken into account in assessing whether, overall, a contractual provision is a penalty. If it is, then the contractual power is unenforceable, and the party not in default is left to recover whatever is the proper measure of its loss for the breach in question. However, in relation to relief against forfeiture, the question is whether the act alleged to constitute a forfeiture destroys the equity of redemption. If the right of forfeiture is given to secure achievement of a contractual promise, and if the effective benefit of the promise can be assured to the promisee without forfeiture, then equity may intervene. But it is not required to do so. 146 In this case, a receiver (if appointed) would take possession of the charged property as agent for RMS. RMS would not be deprived of its equitable interest in the charged property. It would be deprived of the fruits of that property – the right to receive any surplus income. However, there would only be surplus income to the extent that there were no amounts payable to Elektra as Noteholder. On the assumption that the outstanding balance of principal has been made due and payable, all the income of the charged Receivables, and the proceeds of sale of those Receivables upon realisation by the receiver, would be paid, to the extent required, towards satisfaction of the amount owing to Elektra. 147 Returning for a moment to penalties: it is often said that mere acceleration of a debt presently due but payable by instalments, or destruction of the right to pay by instalments, is not of itself a penalty. See The Protector Loan Co v Grice (1880) 5 QBD 592, referred to with apparent approval by Gibbs CJ, Wilson J and Brennan J in O'Dea v Allstates Leasing System (WA) Pty Limited (1983) 152 CLR 359 at, respectively, 369, 380 and 386. A similar view was expressed by the plurality (Mason ACJ, Wilson, Brennan and Dawson JJ) in Acron Pacific Limited v Offshore Oil NL (1985) 157 CLR 514 at 518. 148 In this case, a decision to call up the outstanding balance of principal does no more than make due and payable forthwith that which, otherwise, was payable over time. It is not, of itself, penal. Thus, it seems to me, action to enforce the right enlivened (including by appointment of a receiver) should not be characterised as a forfeiture. It follows that once BNY exercises its contractual power to make due and payable forthwith the outstanding principal balance, it would no longer be correct to say (as RMS submitted) that the powers on default exist only to secure enforcement of the obligations under cls 8.8(o) and 8.10(b) of the Series Supplement. 149 I accept that if the charged Receivables are sold, there will be a forfeiture. However, that sale would be in aid of the right (which for the reasons that I have given should not be characterised as penal) to receive payment of the outstanding balance of principal. Further, to the extent that there is any surplus, it will be held for the benefit of RMS. There is no extra-curial foreclosure. Conclusion on the first question 150 Accordingly, I conclude that there can be no forfeiture until (if it happens) any receiver appointed by BNY sells the charged Receivables. Until that time, RMS's equity of redemption will not be barred. Thus, relief against forfeiture is not available in relation to the steps leading up to sale: specifically, the holding of the meeting, the passing of the resolutions, the calling up of the outstanding balance of principal and the appointment of a receiver. Second question: has RMS made out a case in fact for relief against forfeiture? 151 In case I am wrong in what I have said, I will deal with the second question. The pleaded case 152 The pleaded case for RMS is that if it failed to make payments in accordance with cls 8.8(o) and 8.10(b) of the Series Supplement: (1) it did so by mistake or accident; or (2) in circumstances where an object of the agreement was to secure a stated result, namely that if an Amortisation Event subsisted as at a Payment Date, payments should be made in accordance with those clauses and the plaintiffs were and are ready and willing to do so; so that in either case (3) if an Event of Default has occurred, it would be unconscionable or inequitable for the defendants to rely on their legal rights to: (a) convene a meeting; (b) vote on the resolutions; and (c) exercise their powers on default. The parties' submissions 153 RMS submitted that there was an honest mistake made in good faith. In essence, it submitted, Mr Williams believed that all parties expected RMS to comply with its reporting obligations in accordance with the plaintiffs' methodology. Reports produced by that methodology showed arrears below the 1% level. Mr Williams, in reliance on those reports, held the view that the situation was as they demonstrated, and accordingly caused payments to be made on the basis that there was no Amortisation Event subsisting at any relevant time. 154 RMS submitted further that, in circumstances where the relevant object of the agreement was to secure payment of the amounts that should have been, but were not, paid under cls 8.8(o) and 8.10(b), it was relevantly unconscientious for the defendants to insist on their full legal rights on default. 155 RMS submitted that the mistake was neither wilful nor reckless. There was a reasonable basis for its position, including after disputes arose between it and Elektra in late 2008. RMS relied, among other things, on the fact that HVB had performed some due diligence before it subscribed for the Notes, and learned thereby of elements of the plaintiffs' methodology. RMS did not submit that HVB was actually aware of all details of the methodology – in particular, of the practice of making post period adjustments. However, RMS submitted: (1) HVB could have asked, and if asked would have been told; and (2) RMS, through Mr Williams believed that HVB was aware of the practice of making post period adjustments because a former employee of the plaintiffs, Mr Leo Tyndall, who did know of that practice, had been employed by HVB in a position where his knowledge should be attributed to HVB. 156 The defendants submitted that there was no mistake. BNY submitted that RMS, through Mr Williams, was aware of a risk that the plaintiffs' methodology might not be an appropriate means of determining the arrears position, and deliberately courted that risk. 157 Elektra went further, and submitted that, for the purpose of assessing whether there was any mistaken belief, Mr Williams was not the (or the only) relevant mind of RMS. In particular, BNY submitted that Mr Williams' superior, Mr Glenn Goddard, was another relevant "mind". There was no evidence from Mr Goddard, although it is clear that he gave "directions and advice" to Mr Williams in relation to the dispute with BNY and Elektra (see, generally, T107-108). Elektra referred to other employees, whose roles were subordinate to Mr Williams. They, too, were not called. 158 In those circumstances, Elektra submitted, the Court could and should draw a "Jones v Dunkel" inference (Jones v Dunkel (1959) 101 CLR 298; see also Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389). 159 Further, the defendants submitted, they had done nothing to cause or induce RMS to hold whatever belief it did in fact hold as to the efficacy of the plaintiffs' methodology, and there was no other reason to conclude that insistence on their legal rights, in the events that have happened, would be unconscientious. Finally, the defendants submitted, in the events that will happen if the meeting is held, the whole principal balance will become owing. In those circumstances, the object of the transaction will be to secure repayment not merely of the monies that should have been, but were not, paid pursuant to cls 8.8(o) and 8.10(b), but of all monies owing under the Deed of Charge. Decision 160 The starting–point for relief against forfeiture, in the circumstances of this case, must be a mistaken belief that, as at the Payment Date in January 2009 (I refer to this Payment Date because it is the one on which BNY relied on its Notice of Event of Default and Notice of Meeting), there was no subsisting Amortisation Event that required RMS to make payments in accordance with cl 8.8(o) and 8.10(b). However, the simple fact is that, for the reasons given at [54] to [57] above, the plaintiffs' methodology did not enable RMS to know, one way or another, whether an Amortisation Event was subsisting at any given Payment Date. 161 In this case, the belief on which RMS insisted is somewhat different: a belief that RMS would be justified in reporting in accordance with the plaintiffs' methodology, and that the results produced by the application of that methodology were capable of inducing, and did induce, a further belief that the relevant threshold of arrears was not exceeded. 162 The difficulty with this aspect of the case, from the perspective of RMS, is that its methodology was simply not directed to, or capable of, determining the arrears position at any Payment Date; nor was there any objective basis on which RMS could have thought that it did. Even if the delay in producing the reports is to be put to one side, what the reports showed was no more than the position at the end of (in fact, because of the post period adjustments, at some time after the end of) each month. They did not show (because they could not show) the position at any antecedent Payment Date. Mr Williams accepted this. See for example his evidence at T25.34-.40: Q. There was no, to your knowledge, accounting report which could be got from the system which described the arrears as at a payment date, correct? A. I accept that, yes. Q. But there was one which described arrears as at the end of the month, correct? A. Yes, after we'd employed the manual process to-- It is clear that, if not interrupted, Mr Williams would have referred to the adjustments summarised at [27] above. 163 Mr Williams accepted that he had no reliable means for determining whether or not an Amortisation Event existed on a particular date (T35.20). At no stage did Mr Williams, or RMS, seek legal advice as to whether the plaintiff's methodology for calculating arrears was correct (T40.13). Mr Williams accepted that by mid December 2008 (when the dispute flared), his system and the reports that it generated did not enable him to say reliably whether or not an Amortisation Event existed on any Payment Date. 164 The end result of Mr Williams' evidence was that he had such doubt that he did not know one way or the other whether the month end figure for arrears was accurate as at the Payment Date (T41.39-42.15): Q. You just didn't know one way or the other whether or not the month end arrears levels as disclosed by the would represent the arrears levels four days before, did you? A. No, we didn't know. Q. No. So any belief that you could rely upon the month end reporting as indicating whether or not an amortisation event existed on the prior date, the payment date, was, would you agree, one which you cannot justify? A. We were unsure of the position as of that date. Q. And you were aware at the time that there was a doubt as to whether these reports enabled you to say whether or not an amortisation event existed on the payment date, didn't you? A. There was a doubt, yes. Q. Yes. And you couldn't reliably form the view that the month ends reports enabled you to say there was no amortisation event at the earlier date, the payment date, correct? A. Correct. Q. Because of that doubt? A. Correct. Q. And the doubt was such that you didn't know one way or the other as to whether the month end figure of arrears was the accurate figure on the payment date, correct? A. Correct. 165 In those circumstances, Mr Williams accepted that he took a "calculated commercial risk" as to the reliability of the position demonstrated by the month end reports (T61.2). 166 In this context, Mr Williams was cross-examined on a letter that he wrote in response to a draft report by McGrathNicol. In that letter, dated 29 July 2009, Mr Williams criticized the McGrathNicol methodology because, among other things, it illustrated the position at the end of each month rather than at the preceding Payment Date. He gave the following evidence (T59.15-.34): Q. Mr Williams, if it were correct to criticise the McGrathNicol report for the reasons set out in paragraph 2 of page 9 of the letter at Tab 19, it would be equally valid to criticise your certificates that there was no event of default based on the use of the same method; wouldn't there? A. Yes. SMITH Q. And that was present to your mind at the time you gave those certificates; wasn't it? A. I don't think it was present of mind. What was present of mind was the advice and instruction we were being given by our solicitors. Q. May we take it that it is clear from what you wrote at page 9 of this letter of 29 July 2009 under the heading "Amortisation Event" that for the reasons there recorded that you never believed that compliance by RMS with the covenants in the series supplement agreement as to whether there was an amortisation event subsisting on the payment date could be determined by reference to the standard monthly reports of arrears that were issued? A. Correct. 167 RMS submitted that Mr Williams did not mean, thereby, to give up his position (as stated in his affidavit) to the contrary of the last proposition put to him. I do not accept that submission. The relevant passage of evidence is clear (although it is likely that the word "present" in the second question and answer should read "front"). Mr Williams did not impress me as a man who would answer a question without giving it careful consideration. He answered "correct" on a number of occasions. Although I have no recollection of this particular occasion, my general impression is that, before so answering, he would pause to reflect on the question. In my view, this passage can be taken (as the defendants submitted it should) to support the proposition that there was no actual belief in the efficacy, for the purpose of determining whether or not an Amortisation Event subsisted at any Payment Date, of the plaintiffs' methodology. 168 It follows that there was no relevant mistake. I note that, although the pleaded case relied alternatively on accident, no submissions were put as to why the course of action taken by RMS should be regarded as accidental. 169 That is sufficient to dispose of the case for relief against forfeiture on the facts. However, I should note that there is no evidence to support the proposition that, even if RMS did hold some mistaken belief that in principle is capable of supporting a claim for relief against forfeiture, the defendants played any part in inducing that belief. At most, HVB conducted some "due diligence" in relation to the system. No doubt, thereby, it understood that the system reported at the end of each month. I am prepared to assume that it understood also that the system used the quantum method with adjustments made for credit fees and charges. It is not the plaintiffs' case that HVB knew of the post period adjustments. More importantly, there is no evidence of any interaction (apart from the due diligence process) between HVB and the plaintiffs in relation to the system, or more generally the plaintiffs' methodology. 170 Nor is there any other basis for concluding that it would be unconscientious for the defendants to rely on their legal rights. In circumstances where there has been an Event of Default, it is open to BNY to make payable forthwith the outstanding balance of principal. Assuming that, unless restrained, BNY will so act (and as I have said, I think that the assumption is well founded), the relevant powers exist not only to secure enforcement of the payments due under cls 8.8(o) and 8.10(b) of the Series Supplement, but also of the accelerated principal balance. The plaintiffs' submissions to the contrary seem to me to conflate all the steps that are to be taken, without identifying, as to any individual step, why (if at all) it would involve some forfeiture; and to be based on an incorrect assumption as to what, in the events that are likely to happen, would be the relevant "object" of the powers. 171 Before leaving the second question, I should note that the plaintiffs submitted that they were ready and willing to pay the amounts not paid in respect of cls 8.8(o) and 8.10(b) of the Series Supplement. Indeed, the plaintiffs said, they had offered to pay those sums to the defendants more than once. (It does not appear that the plaintiffs actually tendered payment.) This submission was directed to their proposition that the relevant powers under the deed of charge were, in the circumstances of the case, directed to no more than securing the benefit of those clauses. 172 The reality is that BNY will act to declare the entire unpaid balance of principal due and payable forthwith; and I have concluded that this involves no forfeiture. In those circumstances, the relevant powers (including, ultimately, the appointment of a receiver and the exercise by the receiver of his or her powers under cl 8 of the Deed of Charge) would be directed to enforcement of the obligation to repay that outstanding balance. The plaintiffs did not submit that they were ready and willing to do so. Nor was there any evidence to that effect. 173 It follows that, if a receiver is appointed and does sell the charged Receivables, the forfeiture involved will result from the plaintiffs' inability to satisfy the enlivened obligation to pay the outstanding balance of principal. As Keane JA pointed in Kostopoulos at [50], the plaintiffs' inability to repay the outstanding balance of principal means that the Court could not achieve that object by imposing an appropriate condition on the grant of relief against forfeiture. Conclusion on the second question 174 Were it necessary to do so, I would conclude that RMS has not made out in fact a case for relief against forfeiture. Third question: discretion 175 I do not think that there is any utility in considering this question. That is so for two reasons: (1) any analysis of relevant discretionary factors must start from the point that, absent those factors, the discretion will be exercised in favour of the claimant for relief. Any analysis of alleged disentitling conduct must be related to the demonstrated grounds for relief. Here, because in my view no grounds for relief have been made out, the analysis of disentitling conduct could only be undertaken in a vacuum; and (2) in any event, a hypothetical (or in this case doubly hypothetical) indication of refusal of relief on discretionary grounds is not binding on, and unlikely to be of much interest to, an appellate court: see McHugh JA (with whom Kirby P and Hope JA agreed) in King v Goussetis (1986) 5 NSWLR 89 at 94 – 95. 176 In this case, the parties' competing positions are recorded in their written and oral submissions, and the evidence to which each party refers is within a relatively short compass. I will however say that, to the extent that any submission depends on accepting (or not accepting) the evidence of Mr Williams, my view of him is that, in general, he sought to tell the truth, and his evidence is generally reliable – at least, in cross-examination. Whatever may be said of his affidavit evidence, my impression of him in cross-examination was that he was careful to think about questions, and that he made concessions where it was appropriate to do so. I have referred already to some of the concessions that he made. Conclusion on the fifth issue 177 RMS is not entitled to relief against forfeiture. Elektra's cross-claim 178 Elektra filed a cross-claim. By its Amended Cross-Claim Summons, it sough the following relief: 1. A declaration that an Amortisation Event (as defined in the Series Supplement dated 10 January 2008): (a) occurred on a date between 1 September 2008 and 26 September 2008; (b) alternatively, occurred on a date between 27 September 2008 and 27 October 2008; and (c) subsisted on each Payment Date (as defined in the Series Supplement) between September 2008 and January 2009. 2. A declaration that an Event of Default has occurred under the Series Supplement dated 10 January 2008 on every Payment Date from September 2008 until July 2009. 3. A declaration that, for the purposes of the definition of "Amortisation Event" in the Series Supplement, a loan is "in arrears for greater than 90 days "if, [sic] for greater than 90 consecutive days, that loan has been in arrears. 4. A declaration that, when determining if a loan is in arrears on a certain date, for the purposes of the definition of "Amortisation Event", payments made after that date must not be taken into consideration. 5. A declaration that, when determining whether a loan is "in arrears for greater than 90 days" for the purpose of the definition of "Amortisation Event", amounts owed in respect of fees and charges are to be included. 6. A declaration that, if the plaintiffs are entitled to recover amounts paid to the cross-claimant purportedly under or by reference to (or paid into the controlled moneys account established in connection with proceeding 50207 of 2008) and January 2009, then the plaintiffs are liable to distribute those recovered amounts as Total Available Principal. 179 In substance (although not precisely) the first five declarations sought reflect the opposite of the position for which the plaintiffs contended. It is appropriate to make some, but not all, of the declarations sought although, in relation to the first two, limited to the findings that I have made in these reasons. However, I do not think that it is appropriate to make the sixth declaration sought, which is essentially conditional or hypothetical in nature. Conclusion and orders 180 The plaintiffs' claims for relief fail, and the proceedings must be dismissed. Elektra is entitled to some relief on its amended cross-claim. 181 I make the following orders: (1) Order that the proceedings be dismissed. (2) Order that the injunction granted on 15 September 2009 be dissolved. (3) Stay order 2 up until and including 5:00pm on 23 December 2009. (4) Reserve liberty to apply on 24 hours' notice in respect of any conditions to be attached to, or the discharge or variation of, order 3. (5) Declare that: (a) an Amortisation Event (as defined in the Series Supplement dated 10 January 2008) subsisted on the Payment Date (as defined in the said Series Supplement) in each of the months of October and December 2008 and January 2009; (b) an Event of Default (as defined in the said Series Supplement) occurred on, or alternatively three business days after, every such Payment Date; (c) for the purposes of the definition of "Amortisation Event" in the said Series Supplement, a loan is in arrears for greater than 90 days if, for more than 90 consecutive days, an amount due and payable in respect of that loan has been in arrears; (d) when determining if a loan is in arrears on a certain date for the purposes of the definition of "Amortisation Event", payments made after that date must not be taken into consideration; and (e) when determining whether a loan is in arrears for greater than 90 days for the purpose of the definition of "Amortisation Event", amounts owed in respect of credit fees and charges are to be included. (6) Order that the amended cross-claim cross-summons otherwise be dismissed. (7) Subject to order (8), order: (a) the plaintiffs to pay the defendants' costs of the proceedings; and (b) the cross-defendants to pay the cross-claimant's costs of the cross-summons. (8) Reserve liberty to any party to apply to discharge or vary order (7); any such application to be made by notice in writing to the party or parties affected, with a copy for my Associate; any such notice to specify both the orders sought and, in brief, the reasons why those orders are sought. (9) Reserve liberty to apply in respect of the plaintiffs' undertaking as to damages. (10) Order that the exhibits be dealt with in accordance with r 31.16A. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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