In brief

  • On 18 January 2011, the Full Court of the Federal Court allowed appeals brought by Leveraged Equities Limited (LE) and Macquarie Bank Limited (MBL): Leveraged Equities Limited v Goodridge [2011] FCAFC 3, reversing a decision by Rares J in first instance proceedings brought by Mr Ross Goodridge ([2010] FCA 67).1
  • The leading judgment was written by Jacobson J. Finkelstein and Stone JJ agreed with the reasons of his Honour, with Stone J making short additional observations.
  • Freehills acted for LE on appeal (but not at first instance).2  

The facts

Mr Goodridge and MBL had entered into a margin lending agreement called a Margin Lending Loan and Security Agreement (LSA).

In January 2009, MBL sold to LE its margin loan book comprising about 18,500 margin loans (including Mr Goodridge’s) to LE on which the total amount advanced was approximately $1.5 billion. The transaction documents under which the sale was made (the transaction documents) were complex, and provided for an intermediate sale of the assets to BNY Trust Company of Australia Ltd (BNY), and an on-sale to LE.

As part of the sale process, MBL notified each of its affected borrowers by letter of this transfer of their loans to LE. MBL led evidence at first instance to prove this letter was sent to Mr Goodridge on 19 January 2009. Mr Goodridge denied receiving it.

By the beginning of 2009, Mr Goodridge’s investment in listed securities financed through his margin loan consisted of a single stock—units in the Macquarie Country Wide Trust (MCW units). He had acquired these units at prices of up to $1.37.

By the morning of 23 February 2009, the price of MCW units had fallen to 14c. At 2.05pm, with the price at 14.5c, LE made a margin call which it required to be satisfied by 2.00pm the following day. By the close of trading that day, the price had fallen to 13c. At 6.29pm LE made a further margin call, which it required to be satisfied by close of business the following day.

In a telephone conversation with LE on 24 February 2009, Mr Goodridge informed LE that he had put on the maximum number of MCW units for sale that he was able to, and gave an instruction to LE to sell the balance at 12c.

At 3.40pm on 24 February 2009, LE commenced forced sales of Mr Goodridge’s MCW units. By 2 March 2009, LE had sold all of Mr Goodridge’s MCW units at prices ranging from 10.5c to 12.5c. Mr Goodridge was left with a shortfall on the balance outstanding on his loan.

Decision at first instance

The issues at first instance which were reconsidered on appeal can be conveniently split into two—a ‘margin call case’ and a ‘transaction case’.

Margin call case

Rares J held that the margin calls made by LE on 23 February 2009 were invalid because:

  • Clause 5.2 of the LSA, at the relevant time, required Mr Goodridge to comply with a margin call within three business days ‘unless otherwise notified by (the lender) in its absolute discretion’. Rares J held this clause did not permit LE to shorten the period of notice for a margin call to less than three business days.
  • Clause 5.7 of the LSA conferred on the lender a right to sell so much of the secured property as would produce sufficient funds to, in general terms, satisfy a shortfall between the amount of the loan and the value of securities. Rares J held that the particular clause did not confer upon the lender a freestanding right to sell securities without making and communicating a margin call to the borrower.
  • Rares J also made a finding of fact that Mr Goodridge’s instruction to sell on 24 February 2009 was revoked by a subsequent email communication from Mr Goodridge to LE later that day.  

Transaction case

Rares J held that the transaction documents under which MBL sold its margin loan book to LE were ineffective to novate or assign the LSA to LE, such that LE was not entitled to exercise any rights under the LSA, in particular to issue a margin call or sell Mr Goodridge’s securities.

In relation to novation, Rares J held that:

  • as a general principle, one party to a contract cannot authorise another party to novate the contracts without any further involvement by the first party
  • clauses 21.2 of the LSA and 21.4 of the LSA were ‘nebulous’ and amounted to no more than an agreement to agree:
    • clause 21.2 provided that MBL ‘may assign, transfer, novate and otherwise grant participations or sub-participations in ... all or any part of the benefit of this agreement ... without the consent of the Borrower’, and
    • clause 21.4 provided that ‘Without limiting the previous provisions of this Clause 21, the Bank ... is entitled to assign its rights and novate its obligations ... to any trustee or manager of any securitisation programme’.

In relation to assignment, Rares J held that:

  • MBL’s obligations to Mr Goodridge under the LSA were so interconnected with its rights against him that the rights were incapable of assignment
  • the tripartite arrangement that would result from the assignment of MBL’s rights, but not obligations, under the LSA would be an ‘unworkable solution’, and
  • there was no statutory assignment of MBL’s rights under the LSA because no notice in writing had been given to satisfy section 12 of the Conveyancing Act 1919 (NSW) (Conveyancing Act). Rares J found that Mr Goodridge did not in fact receive the 19 January 2009 letter from MBL, and he held that section 12 required actual notice to be given.  

Decision on appeal

Margin call case

On appeal, the Full Court held that LE’s margin calls were valid and that LE was entitled to sell Mr Goodridge’s securities.

Margin calls were valid under clause 5.2 of the LSA and LE could sell the units

The Full Court held that LE was entitled to shorten the time for compliance with a margin call in the manner that it did. The discretion conferred on the lender by clause 5.2 of the LSA authorised it to shorten the period within which Mr Goodridge was required to comply with the margin call to a period of less than three business days. Given the terms of clause 5.4 of the LSA (which permitted a borrower to satisfy a margin call by lodging additional securities by 2.00pm the following business day), the period could be shortened to 2.00pm on the next business day but no earlier.

In the circumstances, the two margin calls issued by LE on 23 February 2009 were valid and by the time that LE commenced the sale of MCW units, Mr Goodridge had failed to comply with the 2.05pm margin call. This was an event of default under the LSA such that LE was entitled to sell all of his securities.

Construction of clause 5.7 of the LSA

The Full Court also held that clause 5.7 provides a free-standing power to the lender to sell as many units as required to produce sufficient funds to satisfy a shortfall between the amount of the loan and the value of securities, which can be exercised without the need to make a margin call. However, clause 5.7 has no application if a margin call is in fact made and communicated to the borrower.

Instruction to sell was not revoked

In relation to Mr Goodridge’s instruction to sell on 24 February 2009, the Full Court held that Rares J was in error in concluding that Mr Goodridge had withdrawn his instruction to sell all of his MCW units. The Full Court found that there was nothing on the face of the subsequent email communication from Mr Goodridge suggesting a withdrawal of his express authorisation to sell. As a result, the court found that even if it was wrong on the construction of clause 5 of the LSA, all but three of the forced sales of Mr Goodridge’s units were made with his express authority.

Transaction case

The Full Court held that MBL had effectively transferred its margin loan book (including Mr Goodridge’s loan) to LE.

In relation to novation, the Full Court held:

  • Prospective consent to novation is possible — consistent with UK and US authorities, the law in Australia is such that a contracting party can prospectively authorise a novation to be made by another party unilaterally.
  • MBL was authorised to novate without Mr Goodridge’s further consent — on the proper construction of clauses 21.2 and 21.4 of the LSA, Mr Goodridge authorised MBL to novate its duties and obligations under the LSA to a third party without obtaining the further consent of Mr Goodridge. This included the introduction of a new lender on the same terms and conditions.
  • LE assumed MBL’s obligations — The novation was validly effected by the transaction documents.

In relation to assignment, the Full Court held:

  • Rights capable of assignment — the rights under the LSA were capable of assignment because:
    • the LSA specifically contemplated that this may occur
    • the primary judge’s approach to the question of whether MBL’s rights were capable of assignment was contrary to the principles stated in well-established authorities. There was nothing to suggest that Mr Goodridge stipulated for the LSA to be administered solely by MBL
    • the issue before the primary judge was not whether all of the rights granted to MBL were capable of assignment but whether the rights relied upon by LE (regarding margin calls and the consequences of failure to comply) were assigned, and
    • even if (contrary to the court’s conclusion) the transaction documents did not constitute an effective novation of the LSA, there is no real difficulty in the proposition that MBL retained the obligation to lend further funds under the LSA while LE held the right to give notice of a margin call and exercise the power of sale of default.
  • Assignment was effective — MBL assigned its rights to LE through a two step process effected by the transaction documents—an assignment to BNY, and an assignment from BNY to LE.
  • Actual notice of the assignment was given — the primary judge ought to have found that Mr Goodridge received written notice of the assignment for the purposes of section 12 of the Conveyancing Act.

Unconscionable conduct claims

Rares J had also held that LE’s conduct in requiring Mr Goodridge to meet the deadlines in its 23 February 2009 margin calls was an unconscientious insistence upon any rights it may have held, in contravention of section 12CB of the ASIC Act 2001 (Cth).

The Full Court overturned this decision on the following bases:

  • Section 12CB applies only to financial services of a kind ordinarily acquired for personal, domestic or household use: section 12CB(5). Mr Goodridge had acknowledged when entering the LSA that the funds raised would be applied wholly or predominantly for business or investment purposes.
  • Absent LE or MBL taking improper advantage of Mr Goodridge (which there was not), there is nothing unconscionable in a margin lender enforcing its legal rights to protect itself against a fall in the value of its security.