Re Perpetual Trustee Company Limited [2010] NSWSC 1403

New South Wales Supreme Court

CITATION : Re Perpetual Trustee Company Limited [2010] NSWSC 1403

HEARING DATE(S) : 24 November 2010

JUDGMENT DATE : 24 November 2010

JUDGMENT OF : Ball J

DECISION : Judicial advice.

CATCHWORDS : EQUITY – trusts – application for advice under s 63 of the Trustee Act

LEGISLATION CITED : Civil Procedure Act 2005 (NSW) Trustee Act 1925 (NSW)

CATEGORY : Procedural and other rulings

ex p Jay; In Re Harrison (1880) 14 ChD 19 CASES CITED : Macedonian Orthodox Community Church St Petka Inc v His Emminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; 237 CLR 66 Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited [2009] EWCA Civ 1160

PARTIES : Perpetual Trustee Company Limited (Plaintiff)

FILE NUMBER(S) : SC 10/392637

COUNSEL : Mr A Street SC (Plaintiff)

SOLICITORS : Henry Davis York (Plaintiff)

- 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BALL J

30 November 2010

2010/392637 RE PERPETUAL TRUSTEE COMPANY LIMITED JUDGMENT 1 These proceedings concern an application for judicial advice pursuant to s 63 of the Trustee Act 1925. The advice sought is that it is reasonable for the plaintiff, Perpetual, to be bound by and to perform two proposed settlement agreements described as a Termination and Settlement Deed and a Settlement Payment Deed. Those two agreements together settle a dispute between Perpetual and principally Lehman Brothers Special Financing Inc (LBSF) concerning rights to notes issued by Australia and New Zealand Banking Group Limited (ANZ) and Royal Bank of Scotland plc (RBS). I will refer to the deeds together as the "settlement agreement". 2 On 24 November 2010, I gave the advice sought by the plaintiff. I also made orders pursuant to s 71 of the Civil Procedure Act 2005 that the business of the court in relation to these proceedings be conducted in the absence of the public and all documents filed in the proceedings or produced by the court not be accessed by any person prior to 18 May 2011. This judgment sets out my reasons for making those orders. 3 The plaintiff, Perpetual, is the trustee in respect of two retail limited recourse note issues made by Mahogany Capital Limited (in liq), which is an Australian special purpose vehicle established by Lehman Brothers Australia Limited. The notes are known as "Mahogany Notes Series I" and "Mahogany Notes Series II". The terms on which Perpetual, as trustee for the noteholders, holds the notes issued by Mahogany are set out in a master trust deed dated 18 October 2004 entered into between Mahogany and Perpetual. 4 The proceeds raised from the note issues were used to invest in two separate series of limited recourse notes (Saphir Notes) issued by Saphir Finance Public Company Limited, which is a special purpose vehicle incorporated in Ireland. Those note issues were part of a note issuance program arranged by Lehman Brothers International (Europe) known as the "Dante programme". In all, notes worth in the order of $10 billion were issued under that programme. BNY Corporate Trustee Services Limited (BNY) is the English note trustee of the Saphir Notes. Saphir used the proceeds of the issue of the Saphir Notes to Mahogany to purchase floating rate notes – in the case of the notes referable to the Mahogany Notes Series I, notes issued by ANZ due in December 2011 and, in the case of the notes referable to the Mahogany Notes Series II, notes issued by RBS due in 2011 but extendable to March 2016. At the same time, Saphir entered into two separate credit default swap agreements with Lehman Brothers Special Financing Inc (LBSF). The terms of those swap agreements are not important to this application. What is important is that the notes issued by ANZ and RBS are security for Saphir's obligations under the Saphir Notes and Saphir's obligations under the swap agreements. Under the terms of the security, LBSF obtained priority in respect of that security but that priority is switched to the noteholders on an insolvency event. 5 LBSF filed for chapter 11 protection in the US Bankruptcy Court on 3 October 2008. Following that, Perpetual exercised security granted by Mahogany over the Saphir Notes and took possession of those notes. As holder, Perpetual became entitled to direct BNY to enforce the security over the notes issued by ANZ and RBS. BNY refused to comply with that direction. Consequently, in May 2009, Perpetual commenced proceedings in the High Court of England and Wales against BNY seeking orders requiring it to enforce the security. LBSF made a successful application to be joined as a defendant to those proceedings. At the same time, it commenced proceedings in the United States Bankruptcy Court against BNY for declaratory relief that it had priority in respect of the security. Perpetual made an application to be joined in those proceedings. That application was refused on the basis that BNY could adequately represent the interests of the noteholders. 6 The essential issue in both proceedings was whether the provisions which had the effect of switching priority in favour of the noteholders was unenforceable as contrary to what is known as the anti-deprivation rule. That rule was described by Cotton LJ in ex p Jay; In Re Harrison (1880) 14 Ch D 19 in these terms: "There cannot be a valid contract that a man's property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors." (at 26)