SIF Holdings Pty Ltd v CRC Gosford Pty Ltd

1. [1]

   PAYNE JA: These proceedings arise out of a dispute between two groups of unitholders in a trust known as the Gosford Ownership Trust (“GOT”). The dispute concerns entitlement to the balance of funds held by the Trust.

Overview

1. [2]

   GOT owns all of the units in another trust known as the Gosford Landholding Trust (“GLT”). GLT invested in a commercial property at 92-100 Donnison Road, Gosford (“the Property”) from 2002 to 2016.

2. [3]

   GOT originally had three categories of units. The first class was known as Cashflow Return A Units (“A Units”) and the second class as Residual Return Units (“Residual Units”). The third class was known as the Class C Units (“C Units”) and were issued to RR Funding Pty Ltd. The C Units were redeemed at an early stage and are of no significance in this case.

3. [4]

   When GOT was established the first respondent, CRC Gosford Pty Limited (“CRC”), owned all the A Units and no Residual Units. There was a restructuring in 2007 whereby all of the A Units (which were all held by CRC) were redeemed and a new class of units called Cashflow Return B Units (“B Units”) was created, all of which were issued to CRC. At the same time an additional number of Residual Units were issued.

4. [5]

   The appellant, SIF Holdings Pty Limited (“SIF”), currently owns a significant portion of the Residual Units and it represents the interests of several other Residual Unitholders.

5. [6]

   The trustee of both GLT and GOT is the third respondent, Columbus Investment Services Limited (“CIS”) (formerly known as Record Funds Management Limited). CIS, as trustee of GOT, holds all of the units in GLT. The terms of GLT and GOT are set out in Constitutions, last amended on 29 October 2002 and 9 January 2008 respectively. CIS as trustee of GLT held a Lease over the Property from October 2002 until November 2016 when the Property was sold. CIS entered a submitting appearance before the primary judge and in this Court.

6. [7]

   The debt financing for the scheme was initially provided by Australia and New Zealand Banking Group Limited (“ANZ”), which lent the funds to CRC. CRC used all the proceeds of the loan from ANZ to subscribe for the A Units in GOT and pay related borrowing costs. The second respondent, Max Realty Pty Limited (“Max”), refinanced the ANZ loan in December 2007. As part of the refinance, Max lent money to CRC in 2008 to fund the purchase of the B Units (CRC having redeemed the A Units as part of the refinancing).

7. [8]

   By virtue of the ANZ security arrangements and subsequently the Max security arrangements, CRC’s debt was secured against the assets of GLT and GOT. Through a combination of guarantees and indemnities, each of those trusts was ultimately liable for CRC’s debt. The security arrangements prescribed that all lease cashflows from the Property were to be paid directly by the lessee to bank accounts secured in favour of the lenders.

8. [9]

   The entities within the structure were subject to various iterations of receiverships from 2009 and, from that date, the various receivers collected all net lease cashflows and applied them towards accelerating the repayment of CRC’s secured loan obligations.

9. [10]

   CIS, as trustee for GLT, sold its interest in the Property on 15 November 2016 for a total purchase price of $37,500,000. From the settlement sum:

   1. (1)

      $23,878,235.43 was paid to BNY Trust Company of Australia Limited as security trustee for Max; and

   2. (2)

      $9,482,988.98 was paid to CIS as trustee for GLT. The deposit of $3,750,000 was also released to CIS as trustee for GLT.

10. [11]

    It was common ground that under the GOT Constitution CRC was entitled to receive $34,210,002 for the redemption of its B Units. However, CIS asserted that it was not required to pay to CRC the difference between that $34.21 million and the $23.87 million already paid to BNY Trust Company of Australia to discharge CRC’s liability to Max (an amount of approximately $11.2 million).

11. [12]

    The reason the transaction underlying the trust scheme proved successful, notwithstanding the financial crisis of CRC that precipitated the appointment of receivers in 2009, is that all monies obtained from GLT (and in turn received by GLT from the tenants) were applied to the accelerated repayment of CRC’s loan obligations. This led to a reduced level of interest payable by CRC to Max, because principal was being repaid earlier than expected. In addition, the market interest rate was dropping dramatically from that forecast at the time of the refinancing, while rents received on the Property were steady or improving.

12. [13]

    As at 30 April 2020, the amount held by CIS was $12,266,603. The former receiver of GLT, Mr Timothy Heesh, also held a sum of approximately $2,382,074 which was derived from lease payments made directly to him by the tenant of the Property. Mr Heesh held that sum pending the outcome of these proceedings. If CRC is not entitled to these funds, they will be available for distribution by CIS, as trustee of GOT and in accordance with the terms of the Trust, to SIF and the other Residual Unitholders.

13. [14]

    On 7 December 2017, CIS notified CRC and SIF that it proposed to make various determinations about the entitlements of the unitholders if neither commenced proceedings in the Court within 14 days to dispute those proposed determinations. The trustee’s position as expressed was that:

    1. (1)

       CRC was not entitled to the funds held by the trustee because “accumulated liabilities of CRC to GOT” equalled the total amount due to CRC as Taxable Income and the Withdrawal Amount; and

    2. (2)

       CRC was not entitled to funds held by Mr Heesh.

14. [15]

    On 21 December 2017, CRC commenced proceedings in the Equity Division contesting the trustee’s proposed determinations.

Relevant facts

1. [16]

   Before the primary judge, the only lay witness called was Mr Veal, a director of CRC since 15 August 2016. Mr Veal’s ability to give probative evidence about CRC’s affairs in the relevant period was limited. CRC also called expert evidence from Mr Allan Blaikie, an experienced tax solicitor and accountant. SIF called no lay or expert evidence. There was also a Statement of Agreed Facts dated 27 May 2020.

2. [17]

   On 4 June 2002, Allco Holdings Pty Ltd (“Allco”) established GOT with CIS as the trustee. GOT was registered as a managed investment scheme under the Corporations Act 2001 (Cth) on 12 September 2002. The terms of GOT were set out in the GOT Constitution, which has been amended on a number of occasions. The most recent version of the GOT Constitution is dated 9 January 2008.

3. [18]

   On 28 June 2002, AFG Pty Ltd (a related company of Allco) established GLT with CIS as trustee. The terms of GLT were set out in the GLT Constitution, which was last amended on 29 October 2002. In around June 2002, CIS as trustee of GLT issued units in GLT to CIS as trustee of GOT. CIS, as trustee of GOT, was and is the only holder of units in GLT.

4. [19]

   Between October to December 2002, CIS, as trustee of GOT, issued:

   1. (1)

      the A Units in GOT to CRC;

   2. (2)

      the Residual Units to CIS, in its capacity as trustee and responsible entity for the Record Realty Trust ("RRT”); and

   3. (3)

      the C Units to RR Funding Pty Ltd. On 17 December 2002, the C Units were redeemed.

5. [20]

   On 29 October 2002, CIS, as trustee of GLT, acquired an interest in the Property. The Property was owned by McRoss Developments Pty Ltd (later Walker Corporation Ltd) (“McRoss Developments”) and was, at that time, subject to a 10 year lease (with two five year options) in favour of the Crown. CIS, as trustee of GLT, acquired a concurrent 99 year lease over the Property (with an option to renew for 99 years) for a rental premium of $38.5 million.

6. [21]

   The funding to acquire the interest in the Property came from the issue of units in GLT to CIS, as trustee of GOT. CIS, as trustee of GOT, in turn sourced the funds to buy its units in GLT from the issue of A Units in GOT to CRC and the issue of Residual Units. CRC borrowed the money required to acquire the A Units from ANZ under the Gosford Syndicated Facility Agreement dated 28 October 2002 (“SFA”).

7. [22]

   On the same day, by Security Trust Deed, ANZ established the Gosford Security Trust under which ANZ, as security trustee, was to hold the securities granted to it on trust. CRC entered into a “CRC Security Deed” with ANZ, as security trustee, under which CRC gave security (in various forms) over all of its assets to secure the money owing, or which would become owing, by CRC under the transaction documents, which included the SFA. The security given included an equitable mortgage over all of CRC’s present and future rights in GOT, and an equitable mortgage over the “Deposit Account”.

8. [23]

   The “Deposit Account” was defined in cl 24.2 of the CRC Security Deed to mean “the account so described in the Details” and was an account over which CRC granted an equitable mortgage to ANZ.

9. [24]

   Under cl 18.2 of the SFA, CIS (as trustee for GOT) gave a guarantee to ANZ of CRC’s liability to pay money under the relevant transaction documents. On 28 October 2002, to secure this guarantee, CIS entered into the “GOT Security Deed” whereby CIS gave security (in various forms) over all of its assets to ANZ. In addition, on 28 October 2002 CIS (as trustee for GLT) and CRC entered into a deed titled “GLT Indemnity” under which, among other things, CIS agreed to “indemnify” CRC for certain amounts. This “indemnity” was secured by, among other things, a charge in favour of CRC over all of the assets of GLT granted under the “GLT Security Deed”.

10. [25]

    By separate instrument of mortgage (“CIS Mortgage of Lease”), CIS as trustee for GLT granted CRC a mortgage over all of CIS’s interest in the Property and the concurrent lease over the Property. This mortgage was to secure money payable by CIS as trustee for GLT to CRC under, relevantly, the GLT Indemnity. In turn, CRC then granted a mortgage of all of its interest in the CIS Mortgage of Lease to ANZ under the “CRC Mortgage of Lease”.

11. [26]

    On 28 October 2002, McRoss Developments, as owner of the Property, gave notice to the Crown tenant (WorkCover NSW) to pay rent directly into the Deposit Account.

12. [27]

    On 11 November 2002, CRC gave a notice to CIS, as trustee of GLT, irrevocably authorising and directing CIS to pay into the Deposit Account “all amounts which are or at any time become due” to CRC under the GLT Indemnity, GLT Security Deed or CIS Mortgage of Lease.

13. [28]

    Both parties accept that between October 2002 and May 2009:

    1. (1)

       the tenant of the Property made regular payments of rent into the Deposit Account;

    2. (2)

       expenses related to the Property were paid from the Deposit Account; and

    3. (3)

       regular loan repayments were made from the Deposit Account to satisfy CRC’s obligations under the SFA.

14. [29]

    In late 2007, the loan provided by ANZ to CRC was refinanced by Max. Max obtained the finance to pay ANZ out by issuing “Gosford Series” notes to the “Max Noteholders”. Max’s obligations under the notes were secured by a charge given over its assets in favour of BNY Trust Company of Australia Limited (formerly JP Morgan Trust Australia Limited) as security trustee of the Max Realty Security Trust.

15. [30]

    As part of the refinancing, minor amendments were made to the various security and transaction documents, as set out in the “Global Amending Deed No 1” dated 18 December 2007. By cl 14.14(b) of the SFA (as amended by the Global Amending Deed No 1), CRC undertook that as at 31 December 2008, the ratio of the loan balance to its assets (“LVR”) would be no less than 77%. Failure to remedy a breach of the undertaking within 30 days was an “Event of Default”: see cll 15.1(b) and 15.2(b) of the SFA.

16. [31]

    On 18 December 2007, as part of the refinancing, CRC’s A Units were redeemed for $31,762,788. This was the amount owing under CRC’s loan from ANZ and was paid by CRC to ANZ to discharge that remaining debt. At about the same time, an amount of approximately $5 million was paid by GOT to the Residual Unitholders, and $1.6 million approximately was lent by GLT to RRT.

17. [32]

    By the Fifth Supplemental Deed to the GOT Constitution dated, stamped and lodged with ASIC on 30 June 2004, amendments were made to Schedule 2 of the GOT Constitution concerning the amount due to CRC under the redemption provisions (“Withdrawal Price”) which was payable at redemption. At the time of redemption in December 2007, CRC held 34,374,696 A Units. According to the Fifth Supplemental Deed, the specified amount per unit at the time of redemption in December 2007 was $0.91481. As a result, the Withdrawal Price payable was 34,374,696 x $0.91481 = $31,446,315.60. Thus, as part of the refinancing CRC received approximately $300,000 more than it was entitled to receive from GOT for redemption of the A Units.

18. [33]

    In summary, the relevant overall effect of the refinancing was that:

    1. (1)

       ANZ was replaced as the security trustee of the Gosford Security Trust by BNY Trust (Australia) Registry Ltd (“BNY”);

    2. (2)

       ANZ was replaced as the Agent and Financier by Max; and

    3. (3)

       the Max Noteholders obtained all of the rights previously held by ANZ to enforce the loan and securities.

19. [34]

    In early 2009, CRC breached the LVR covenant and was given until 26 February 2009 to remedy the breach. In order to remedy the breach, it was necessary for an additional amount of $912,935 in principal to be paid to Max. CIS paid the additional amount of $912,935 to Max on 25 February 2009. Entries in the Gosford cashbooks record the payment of $912,935 as being a partial repayment of the loan from RRT to GLT made during the refinancing. The same amount was in turn loaned by GLT to GOT, which loaned the money to CRC. It is not clear how this further loan by GOT to CRC was repaid but neither party submitted it was relevant in either the primary proceedings or this appeal.

20. [35]

    On 20 and 23 March 2009, there was a change in shareholding in CRC’s ultimate holding company, Allco Australian Holdings Ltd. This triggered an Event of Default under the security arrangements.

21. [36]

    On 20 April 2009, Max wrote to CRC notifying it that in Max’s view the change in control had led to an Event of Default and that Max intended to instruct BNY, as security trustee, to appoint a receiver. CRC disputed that there had been an Event of Default. On 27 April 2009, Max demanded payment from CRC of the total amount owing under the SFA (at that time being $35,781,050.02).

22. [37]

    On 29 April 2009, Mr Peter Hedge was appointed receiver and manager of CRC pursuant to the CRC Security Deed. Mr Hedge remained receiver and manager of CRC until 23 May 2012. On 24 May 2012, Mr Heesh replaced Mr Hedge as receiver and manager of CRC and remained in that position until 11 August 2017.

23. [38]

    On 14 May 2009, Mr Hedge was also appointed receiver and manager of the secured property under the GLT Security Deed. Mr Hedge remained receiver and manager of the GLT secured property until 1 June 2012, when he was replaced by Mr Heesh. Mr Heesh ceased to be receiver of the GLT secured property on 5 March 2013.

24. [39]

    The appointment of the receivers led to changes in the account into which the tenant of the Property made rental payments. Section 421 of the Corporations Act 2001 (Cth) required the receiver to open a receivership bank account and for the rent received by the receiver to be deposited into that account. Mr Hedge, as receiver appointed over the Property, established a GLT receivership account with BankWest (BSB 302-100, Account Number 1502122; Account Name “PJ Hedge as Receiver & Manager of 92 Donnison Street”) and from at least August 2009 until June 2012 rent was paid into this account. It appears that the receivership account was changed when Mr Hedge was replaced by Mr Heesh as receiver of the GLT secured property in June 2012.

25. [40]

    In January 2011, the Residual Units were purchased from CIS, in its capacity as trustee of the RRT. The only units on issue in GOT are the B Units, held by CRC, and the Residual Units. Apart from a single Residual Unit held by CIS, the Residual Units are currently held by four entities:

    1. (1)

       SIF;

    2. (2)

       Stark Gosford Ltd;

    3. (3)

       Credit Suisse (Singapore) Limited; and

    4. (4)

       Makira SP6 Limited.

26. [41]

    In late February 2013, the account into which the tenant of the Property paid rent was altered again. The tenant was directed to make payments into a CRC receivership account with Macquarie Bank (BSB 184-446, Account Number 255157141). That account was closed in November 2013, after which time rental payments were made into a separate Macquarie Bank receivership account for CRC (BSB 182-222, Account Number 285421434). Monthly rental payments were made into this account until November 2016 when the Property was sold.

27. [42]

    CIS, as trustee for GLT, sold its interest in the Property on 15 November 2016 for a total purchase price of $37,500,000. From the settlement sum, as set out at [10] above, $23.8 million was paid to BNY Trust Company of Australia Limited, as security trustee for Max, in discharge of CRC’s indebtedness to Max. The remaining part of the purchase price along with the deposit was remitted to CIS as trustee for GLT.

28. [43]

    In addition, at settlement CRC and BNY gave a release of some of the securities previously given by CIS.

29. [44]

    Clauses 11.1 to 11.3 of the GOT Constitution are in the following terms:

30. [45]

    “Distributable Income” for a Financial Year is defined as “the amount determined by the Trustee under clause 11.2”. “Taxable Income” for a Financial Year is defined as “the amount the Trustee determines to be the ‘net income’ of the Trust under section 95(1) of the Tax Act for the Financial Year”. “Financial Year” means the year ending 30 June. “Capital Gains” is also a defined term.

31. [46]

    Clauses 11.1 to 11.3 of the GLT Constitution are in identical terms.

32. [47]

    I have referred to the GLT Indemnity. The following terms are relevant:

33. [48]

    The GOT Constitution provides the framework for distributions to both Cashflow Return Units (being the A Units and later the B Units) and also the Residual Units. Recital C of the GOT Constitution refers to the “Residual Return Units in the Trust” issued to “the Residual Return Member” and “Cashflow Return Units in the Trust” issued to CRC who together with the Residual Return Member are “the Members”. Clause 4.4 provides that the Cashflow Return Units, the Residual Units (and the other class of units known as the C Units) are each a separate class for the purposes of cl 4.3.

34. [49]

    The Withdrawal Price for both Cashflow Return Units and Residual Units are as set out in the relevant schedule for these classes of units: see Schedule 3 for Residual Units and Schedule 4 for B Units.

35. [50]

    Residual Units have “the rights, obligations and restrictions as set out in schedule 3”. Schedule 3 provides, relevantly:

36. [51]

    Clause 11.5(a) provides relevantly that:

37. [52]

    The parties are agreed that “Taxable Capital Gains” were not included in the “Taxable Income”. A distribution of Distributable Income to Residual Unitholders can be made only when the Cashflow Return Unitholders (in the present case, CRC) hold these Units. Clause 11.5(c) provides:

38. [53]

    Schedule 3 also provides:

39. [54]

    Schedule 4 sets out the entitlement for B Units in the event that, inter alia, the trustee of GLT sells the Property. The Withdrawal Price is defined in Schedule 4 as the aggregate of:

40. [55]

    In Schedule 4 there then follows a table detailing specified amounts of the Withdrawal Price per B Unit at particular dates.

41. [56]

    It is agreed between the parties that:

    1. (1)

       under the redemption provision of the GOT Constitution CRC was entitled to receive an amount of approximately $34 million, as the Withdrawal Price for its B Units. This sum was also referred to as the “Withdrawal Amount”;

    2. (2)

       only approximately $23.8 million of the Withdrawal Amount has been paid for CRC’s benefit, when that amount was applied from the proceeds of the sale of the Property to partly discharge CRC’s indebtedness to Max, leaving a shortfall of approximately $10.33 million claimed by CRC. This was referred to by the primary judge as the “the balance of the Withdrawal Amount”. It was common ground that the balance of the Withdrawal Amount was correctly identified as being $10,331,766.57.

Decision of the primary judge

1. [57]

   Clause 11 of the GOT Constitution is set out above at [44]. The principal issues before the primary judge were whether that clause imported a discretion on the part of the trustee and, if so, whether that discretion had in fact been exercised.

2. [58]

   The parties agreed that the determinations required of the trustee in cll 11.1 and 11.2(a), (b) and (c) were not discretionary, however SIF asserted that cl 11.2(d) imported a discretion. SIF also argued that there was no evidence that CIS, as trustee of GOT, exercised that discretion.

3. [59]

   CRC contended that cl 11.2(d) was not in a different category to cll 11.2(a), (b) and (c). In the alternative, CRC contended that if a discretion was required by cl 11.2(d), then the inference should be drawn that it was exercised by CIS as trustee of GOT in favour of the distributions made, from:

   1. (1)

      the fact that it is agreed that CIS as trustee of GLT distributed all of GLT’s income to GOT and that distribution did not involve any overpayment by GLT to GOT;

   2. (2)

      the fact that CIS was also the trustee of GOT in making distributions to CRC;

   3. (3)

      the absence of any notification by CIS to CRC that it was making payments to CRC beyond the amount it was required to make pursuant to the GOT Constitution, in a context where by agreement all of the income distributed by GLT to GOT was deposited to the nominated Deposit Account to which the financier had access;

   4. (4)

      the absence of any claim by CIS as trustee of GOT to entitlement to recover the alleged excess payment until 2016 when the Property was sold, even where the A Units were redeemed in December 2007;

   5. (5)

      the fact that none of the accounts of GOT as exist record that amounts beyond Taxable Income were paid to CRC as a loan or “excess” payment;

   6. (6)

      the absence of any evidence from any officer or employee of CIS that a determination was not made that the amount paid to CRC should be distributed to CRC pursuant to the GOT Constitution, and that amounts were paid to CRC in excess of its entitlement; and

   7. (7)

      Note 5 in the accounts of GOT, which states:

4. [60]

   The primary judge concluded that cl 11.2(d) imported a discretion:

5. [61]

   The primary judge found that CIS had exercised the discretion under cl 11.2(d). His Honour gave nine reasons at [81] for this conclusion (references omitted):

6. [62]

   Beyond the matter of the trustee’s discretion under cl 11, there were a few additional issues raised in the primary proceedings. On the assumption that SIF was unsuccessful on its claim that “excess” monies (in the sense that they exceeded what was required to be distributed in the period from 1 July 2007 onward) were paid to CRC, SIF argued that in the financial year ending 30 June 2007, CIS, as trustee of GOT, made a loan of $3.6 million to CRC. The primary judge rejected SIF’s claim and no issue was taken with that decision on the appeal. Before the primary judge CRC also advanced a claim of estoppel in answer to the whole of the appellant’s case. That claim was rejected by the primary judge and is also not an issue on the appeal.

7. [63]

   Finally, there was an issue concerning subrogation. CRC maintained that if, contrary to its primary position, some monies that were paid to it were not distributions made pursuant to cl 11 of the GOT Constitution, then those monies were due to it as payments required from GLT pursuant to the GLT Indemnity. The primary judge dealt with this issue on the contingent basis that he was wrong in finding that CIS had exercised a discretion under cl 11(2)(d) to distribute all of the income from the Property, excluding expenses of the Property, as GOT’s Distributable Income to the B Unit holder, CRC. His Honour summarised the appellant’s argument this way (references omitted):

8. [64]

   The primary judge rejected SIF’s subrogation claim. His Honour expressed considerable doubt about whether cl 2.2 of the GLT Indemnity is an indemnity against “loss” in the sense of “actual ascertainable loss”: Perry v Anthony [2016] NSWCA 56 at [40]. The primary judge did not, however, think it was necessary to form a concluded view about that question.

9. [65]

   That was because, in his Honour’s view, the clear answer to SIF’s claim was that, assuming in SIF’s favour that the shortfall between distributions from GOT to CRC and what CRC owed Max constituted a “loss” for which GLT agreed to indemnify CRC, the amount to which CRC was entitled as the Withdrawal Price following the sale of the Property and redemption of B Units was discrete and separate from the right to receive distributions of income from GOT, which derived ultimately from what the tenant paid GLT.

10. [66]

    His Honour found that the payment of the Withdrawal Amount for redemption of the units did not diminish or reduce the shortfall on distributions to CRC. There was also no double indemnity because CRC was entitled to both the shortfall on the distributions promised to be met by GLT and the balance of the Withdrawal Amount payable by GOT. The obligation to pay any shortfall on distributions and the obligation to pay the Withdrawal Amount were separate obligations imposed on different entities. The primary judge could see no basis to conclude that it would be unconscionable or unjust for CRC to receive both the shortfall on distributions from GLT and the Withdrawal Amount from GOT.

11. [67]

    The fact that CRC would (or might) have had to use part of the Withdrawal Amount to repay monies to Max if GLT had not met its obligations under the GLT Indemnity could not support a right of subrogation in GLT any more than in a hypothetical scenario where A, the insured in a car insurance claim, would have had to access loan monies to be repaid to him by B to repair his vehicle if the insurer, C, did not indemnify him under the policy.

12. [68]

    If GOT, in breach of its obligations, had not paid an amount due to CRC as a distribution and GLT had paid that difference, then GLT might well be entitled to pursue GOT in CRC’s name for the shortfall which it had met. However, the primary judge found that that was not the present situation because:

    1. (1)

       the foundation for the present subrogation claim was the assumption that GOT had paid everything required of it to CRC; and

    2. (2)

       GLT was not asserting a right against GOT to recover from GOT what GLT paid to CRC.

13. [69]

    The primary judge also found that cl 7 of the GLT Indemnity excluded the subrogation claim since it expressly provided that the indemnity is not to be adversely affected by “any other right or remedy to which CRC is entitled”. The clause was found to be inconsistent with the right of subrogation claimed, and the effect of SIF’s claimed right would be to render the GLT Indemnity of extremely limited value. His Honour did not accept SIF’s contention that the right to indemnity was unaffected because CIS will have already paid what is due under the indemnity before the right of subrogation accrues and observed that in any event this contention did not address the impact of the indemnity (on SIF’s case) on CRC’s right to receive the full Withdrawal Amount. His Honour rejected the submission that cl 7 is ambiguous and should be read down.

14. [70]

    SIF also put its case a second way, namely that SIF was entitled to be subrogated to the rights of Max. This alternative argument was also rejected by the primary judge and not pressed on appeal.

15. [71]

    The primary judge made the following orders:

Issues on appeal

1. [72]

   The issues on the appeal based on the Notice of Appeal filed by CIS and the Notice of Contention filed by CRC are:

   1. (1)

      First, did the primary judge err in his construction of cl 11.2(d) in concluding that cl 11.2(d) of the GOT Constitution confers a discretion on CIS, as trustee of GOT. CRC’s position was that the reference to “any further amount … which the Trustee considers appropriate for inclusion in Distributable Income” does not give the trustee a discretion to exclude from Distributable Income any income that is properly “distributable income” (meaning “income that is capable of distribution”). Rather, it allows the trustee to form a judgement that an amount that it holds, whether income or capital, is not properly “capable of distribution” and is not therefore “appropriate for inclusion in Distributable Income”: Ground 1 of the Notice of Contention.

   2. (2)

      Secondly, if cl 11.2(d) does confer a discretion on the trustee, did the primary judge err in concluding that CIS as trustee of GOT exercised its discretion under cl 11.2(d) of the GOT Constitution to distribute to CRC more than GOT’s Taxable Income: Grounds 1 and 2 of the Notice of Appeal.

   3. (3)

      Thirdly, was the GLT Indemnity an indemnity against loss. The primary judge considered it unnecessary to determine this issue: Ground 2 of the Notice of Contention.

   4. (4)

      Fourthly, did the primary judge err in concluding that CIS was not entitled to be subrogated to CRC’s right to be paid the balance of the Withdrawal Price to the extent of $7,080,409: Ground 3 of the Notice of Appeal.

Consideration

1. [73]

   There was no dispute between the parties about the principles of construction to be applied. An inter vivos trust such as GOT is construed according to the same principles that apply to the interpretation of contracts: Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431; [2015] NSWCA 156 at [83] (Meagher JA, Gleeson and Leeming JJA agreeing); Lewski v Commissioner of Taxation (2017) 254 FCR 14; [2017] FCAFC 145 at [119] (the Court). As a commercial trust, the relevant principles are those that apply to commercial contracts. A clause of the GOT Constitution must be construed having regard to its text, context and purpose: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46] (French CJ, Nettle and Gordon JJ), approved in Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]. The Court should approach the task of construction on the assumption that the parties intended to produce a commercial result, and should avoid a construction which gives rise to commercial nonsense or works a commercial inconvenience: Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ).

2. [74]

   The first issue on the appeal relates to CRC’s entitlement to distributions under the GOT Constitution, and was framed in the Statement of Issues in Dispute before the primary judge as follows:

3. [75]

   This issue is to be determined upon the proper construction of cl 11 of the GOT Constitution which I have set out at [44] above. By Ground 1 of its Notice of Contention, the respondents challenged the primary judge’s finding that the clause conferred a discretion on the trustee, who then exercised that discretion so as to distribute the whole Net Cash Flow received in respect of the Property to CRC. Instead, the respondents contended that a determination under cl 11 did not involve a discretion to determine what income was distributable, but rather required the trustee to determine the amount of distributable income in accordance with proper trust accounting principles, on the basis that it would include at least the taxable income of the trust but may include other appropriate amounts.

4. [76]

   The appellant supported the conclusion of the primary judge on this issue and submitted that:

5. [77]

   I have concluded that Ground 1 of the Notice of Contention should be upheld. GLT and GOT were established as part of detailed financing arrangements in relation to the Property, and in which the rights and obligations of the unitholders and financiers were fully and carefully set out. Clause 11.1 is identical across both the GLT Constitution and the GOT Constitution. In each Constitution, cl 11.1 provides that for each “Financial Year” the trustee “must determine” the “Distributable Income”, the “Taxable Income” and the “Capital Gains” of the relevant trust. The parties agree that in context “determine” means “calculate”. Therefore, under cl 11.1, every Financial Year the trustee must calculate the amount of each of these three components.

6. [78]

   Clause 11.2 of the GLT Constitution and cl 11.2 of the GOT Constitution are also identical. Each provides that “Distributable Income … will be the amount the Trustee determines to be the distributable income”. Here, “determines” has the same meaning of “calculates” as it does in cl 11.1. The reference to “Distributable Income” should be read as “income that is capable of distribution” which is then comprised of the four components set out in cll 11.2(a) to (d).

7. [79]

   The critical question is the operation and effect of cl 11.2(d). The reference to “any further amount … which the Trustee considers appropriate for inclusion in Distributable Income” does not give the trustee a discretion to exclude from Distributable Income any income that is properly “Distributable Income”. Rather, it allows the trustee to form a judgement that an amount that it holds, whether income or capital, is not properly “capable of distribution” and is not therefore “appropriate for inclusion in Distributable Income”.

8. [80]

   The use of the word “appropriate”, and the absence of any reference to “discretion” which is usually present where it is intended that a trustee have a discretion in respect of distributing income, are both significant.

9. [81]

   This construction is supported by cl 11.3, which allows the trustee to decide the classification of any item as income or capital and “the extent to which reserves or provisions need to be made”. If a reserve or provision is required for an anticipated outgoing, that would provide a basis for concluding that the amount of presently available income equivalent to that reserve or provision is not appropriate for inclusion in Distributable Income.

10. [82]

    The commercial structure and purpose of the GOT and the GLT also tends against the conclusion that cl 11.2(d) confers a discretion on the trustee. That commercial structure and purpose was clearly to ensure that the Cashflow Return Unitholders (holders of A Units and B Units) would be entitled to all income other than capital gains.

11. [83]

    Clauses 11.5 and 11.6 of the GOT Constitution set out the entitlements of the different classes of unitholders. As I have said, cl 11.5 applies while “Cashflow Return Units carrying an income entitlement” are on issue. That is, that clause applies while the A Units or B Units are on issue, which each have income entitlements as identified (in cl 6 of Schedule 2 for the A Units and cl 4 of Schedule 4 for the B Units). Clause 11.6 applies if there are no “Cashflow Return Units carrying an income entitlement” on issue.

12. [84]

    Clause 11.5(a) provides that if there are no Taxable Capital Gains included in the Taxable Income, then the holders of Cashflow Return Units (i.e. either the A Units or the B Units) “will be entitled to the Distributable Income”. If, however, the Taxable Income includes Taxable Capital Gains, then the distribution between the holders of Cashflow Return Units and the holders of Residual Units is determined by formulas set out in cll 11.5(b)(i) and (ii). It was common ground that there were no Taxable Capital Gains in this case, so cl 11.5(b) was never engaged.

13. [85]

    The artificiality of the appellant’s submissions in support of the existence of a discretion in cl 11.2(d) is highlighted by its own observation that exercise of that discretion could prejudicially benefit one class of unitholders at the expense of another and cause the trustee of the GOT to breach its duty to afford fair treatment to each of the different classes of unitholders. The GOT Constitution does not give the trustee any discretion as to the allocation between the two classes of unitholders, exercise of which could constitute such a breach. That allocation is driven by the existence or otherwise of Taxable Capital Gains and the operation of a specified formula. The phrase “will be determined” in the chapeau to cll 11.5 and 11.6 simply means “will be calculated”. Clause 11.9 provides that any share of Distributable Income that a unitholder becomes entitled to under cll 11.5 and 11.6 is “absolutely vested” in the unitholder who “cannot be defeased of that interest”.

14. [86]

    In context, the income entitlement attaching to the B Units is not limited to the Taxable Income and no more. The integers “Taxable Income”, “Capital Gains” and “Taxable Capital Gains” are used in a formula to determine the income that is “capable of distribution” for the relevant period. The trustee was not required to exercise a discretion, but to calculate what was the proper Distributable Income in accordance with trust accounting principles. In practice, this meant that the net cash flow, not merely the Taxable Income of GOT, comprised the Distributable Income.

15. [87]

    I am not persuaded that the fact the Distributable Income turned out to exceed the sum owing by CRC to Max gives rise to any different conclusion. If the distributions under cl 11 of the GOT Constitution and the amount received as the Withdrawal Price following sale yield more than what CRC was required to repay to ANZ, and later Max, there is nothing in the detailed suite of transaction documents to indicate that CRC was not entitled or expected to retain that difference.

16. [88]

    The contemporaneous legal advice of Mallesons Stephen Jaques, who acted for Allco in the establishment of the trusts and advised on the taxation implications, supports the construction I prefer. The advice contains a statement that:

17. [89]

    Counsel for the appellant conceded that should Ground 1 of the Notice of Contention be upheld, the appeal must fail, as it was not suggested that CRC had received anything which was not “Distributable Income” understood in the way I have described. Since I have concluded that cl 11.2(d) does not confer any discretion on the trustee, the remaining issues on the appeal do not strictly arise.

18. [90]

    If, however, the construction of cl 11.2(d) I prefer is incorrect, and cl 11.2(d) did involve a discretion, the primary judge was correct to hold that the trustee had exercised that discretion to distribute to CRC all amounts which were paid to it or for its benefit. The factors to which the primary judge referred support that conclusion. Without repeating each of the matters referred to by his Honour which I have set out at [ 61 ], I conclude in particular that:

    1. (1)

       it was common ground that all of the monies in dispute were paid by GLT to the various deposit accounts and that those payments constituted distributions to GOT in accordance with the GLT Constitution. GOT acquiesced in the payment of all distributions due to it from GLT into an account that effectively operated as a payment to CRC or its lenders. If CIS, as trustee of GOT, did not intend the payment to be distributed to CRC in accordance with the GOT Constitution then it would be expected that CIS would have advised CRC of that fact. CIS did not;

    2. (2)

       if CIS as trustee of GOT had not made a determination pursuant to cl 11 that all of the funds deposited were distributions to CRC, then CIS would have recorded any amount additional to the “true” distribution as an overpayment in its books. There was nothing in the audited accounts of GOT in evidence which reflected any loan by GOT to CRC or liability to GOT by CRC. In a context where it was entirely clear that all of the net income due to GOT from GLT was being paid to an account over which CRC’s financiers had control, the absence of any written record or notation supports the inference that CIS had determined that all of the net income of GOT was to be distributed in accordance with cl 11 of the GOT Constitution;

    3. (3)

       CIS as trustee of GLT in fact determined, pursuant to an identical clause, that all of the net income received from the tenants was to be distributed to GOT. That conclusion is not based on any particular information or evidence that is present in the case of GLT, but rather absent in the case of GOT. I agree with the primary judge that it seems inherently unlikely that, having exercised a discretion as trustee of GLT, CIS failed to consider and exercise its discretion as trustee of GOT;

    4. (4)

       when CRC became entitled to payment on redemption of its A Units in 2007, CIS as trustee of GOT paid CRC the Withdrawal Amount and did not seek then to reduce by any amount what was paid on redemption of those Units by asserting a right to deduct “excess” payments; and

    5. (5)

       in a context where all of the income from the Property was entirely passed over to CRC’s financiers, the absence of any recording by CIS as trustee of GOT that only a portion of it was a distribution strongly supports the inference that a determination was made by CIS as trustee of GOT to distribute all of the net income to CRC.

19. [91]

    The conclusion I prefer is reconcilable with the accounts which were in evidence, as explained by Mr Blaikie:

20. [92]

    That evidence was not contradicted or qualified by any other expert evidence. As Mr Blaikie explained, the available GOT accounts are consistent with “the true underlying legal nature of what occurred, that the CRC units are entitled to all of the cash flows”. SIF relied heavily upon statements of cashflows in the 2006 accounts. SIF submitted that these statements of cashflows, and certain notes to those accounts, were consistent with GOT treating payments made on behalf of CRC to the financiers as entitlements of GOT. Mr Blaikie explained, however, that the accounts were in fact prepared on a basis consistent with CRC’s case being that CRC, not wishing to write down its investment in GOT, would treat what SIF submitted was a “surplus” as a deferred amount:

21. [93]

    It is not correct, as the appellant submitted, that Mr Blaikie “could offer no explanation for why CRC Gosford could defer the recognition of trust income”. Mr Blaikie’s explanation was detailed and based on the decision of the High Court in Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314; [1965] HCA 58. Mr Blaikie said in relation to that case:

22. [94]

    Again, despite the best efforts of counsel, Mr Blaikie’s expert evidence was not contradicted or qualified by any other expert evidence. No error has been shown in the way the primary judge addressed that evidence. Mr Blaikie’s evidence supports the conclusion about the exercise of cl 11.2(d) which I prefer. The only alternative would have involved creating a loan by GOT to CRC, and no such loan appears in the accounts of GOT or CRC. Further, as Mr Blaikie explained, the creation of a loan would have resulted in significant adverse taxation consequences:

23. [95]

    The appellant’s submission that no amounts were ever paid by the trustee of GOT to the Deposit Account rather missed the point. It is true that prior to 2009, the payments to or for the benefit of CRC were in fact made by the tenant of the Property directly to the Deposit Account, pursuant to directions to pay given under the security agreement which was one of the suite of transaction documents. It is also true that there is no evidence of any resolution of GLT or GOT to determine the amount of distributable income. However, in this Court the appellant accepted that GLT had made distributions to GOT which included the whole Net Cash Flow and not merely Taxable Income for the period until 2009, and also that GOT had made distributions at least of Taxable Income to CRC. These were notional distributions in the sense that they were payments made pursuant to the directions, but which were treated as payments made between GLT, GOT and CRC. Essentially, while made under the security documents, they were treated as trust distributions. It is implicit in accepting those propositions that CIS, as trustee of both GLT and GOT, made determinations of what the Distributable Income was. That there had been determinations made by CIS in each capacity is to be inferred from the facts, not unlike the circumstances in which the existence of a contract may be inferred from the conduct of parties notwithstanding the absence of any specific evidence of offer and acceptance.

24. [96]

    On the basis, which was common ground, that GLT had made distributions to GOT which included the whole Net Cash Flow and not merely Taxable Income for the period until 2009, the inference that CIS, as trustee for GOT, would make the same determination it made as trustee for GLT is a strong one, especially given the commercial purpose and context.

25. [97]

    So too is the inference that the same practice continued after 2009. The demand under the GLT Indemnity did not change the flow of cash in any relevant way. It provided an additional basis on which the payments were made as they were, but it did not remove the pre-existing basis (the directions to pay). There was no reason for GLT, GOT and CRC to treat them differently and there is no evidence that they did.

26. [98]

    There was some suggestion in SIF’s submissions to the effect that CRC was merely a vehicle for the project by which the financier was to make money by virtue of lending, and CRC itself was not intended to make any profit. I reject such a suggestion. Whilst it is clear that CRC was established for the purpose of the scheme involving the acquisition and use of the Property and had no assets other than units in the GOT, given that the scheme originally had ANZ as the lender, the appellant’s suggestion cannot be sustained. In any event, even if CRC was characterised as “a vehicle for the project by which the financier was to make money” there is nothing in the GOT Constitution that precludes CRC from making a profit out of the purchase of A Units and later, B Units.

27. [99]

    For these reasons I have concluded that there were no “excess payments” to CRC. The issue of recovering those payments, whether by way of subrogation or otherwise, simply does not arise. Grounds 1 and 2 of the appeal should be rejected.

28. [100]

    On the contingency that I am wrong about Ground 1 of the Notice of Contention and Grounds 1 and 2 of the Notice of Appeal, I will consider the alternative argument based on subrogation: Kuru v New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12] (Gleeson CJ, Gummow, Kirby and Hayne JJ).

29. [101]

    The foundation of the subrogation claim was the appellant’s contention that during the life of the trusts CRC received substantially more than it was entitled to receive by way of trust distribution. That is, the total payments made by the tenant of the Property into the Deposit Account (and later into the receivership accounts) exceeded GOT’s Taxable Income and were to that extent paid to CRC not as Distributable Income under the GOT Constitution but as “excess payments”. The basis upon which the “excess payments” were said to be recoverable was by way of subrogation. The appellant’s case on subrogation had two sperate limbs. The first, in respect of the pre-receivership period from 1 July 2002 to May 2009 (Ground 3(a)) and the second, in respect of the period from May 2009 onwards (Ground 3(b)). The appellant abandoned Ground 3(a) at the hearing of the appeal.

30. [102]

    As for Ground 3(b), in respect of the period from May 2009 onwards, the appellant submitted that the “excess payments” were made by GLT to CRC under the GLT Indemnity to make up any shortfall between CRC’s repayments to Max and the distribution CRC received from GOT. Having indemnified CRC for that “loss”, CIS as trustee of GLT is then subrogated to CRC’s rights against GOT, whose failure to provide sufficient distributions caused that shortfall or “loss”. The primary judge rejected the appellant’s argument on other grounds and did not determine whether the GLT Indemnity was an indemnity against loss in respect of which the principles of subrogation could arise. The respondents contended, by Notice of Contention Ground 2, that cl 2.2 of the GLT Indemnity was not an indemnity against loss, but a promise to pay upon a contingency. I have concluded that the respondents are correct.

31. [103]

    Subrogation is unavailable in this case as the GLT Indemnity is not an indemnity against loss. Subrogation is available in a number of distinct categories, with different considerations for each: JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis) at [9-040] (footnotes omitted):

32. [104]

    The category relied upon by the appellant in this case is where a person indemnifies another for a loss. For subrogation to be available in that category, the existence of a loss on the part of the putative subrogor is both the precondition to, and the measure of, the availability of subrogation: Burnand v Rodocanachi Sons & Co (1882) 7 App Cas 333 at 339, 341, 342; State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228; [1969] HCA 59 at 242-3.

33. [105]

    In Transport Accident Commission v CMT Construction of Metropolitan (1988) 165 CLR 436; [1988] HCA 46, Wilson, Dawson, Toohey and Gaudron JJ stated at 442 (footnotes omitted):

34. [106]

    In the authority referred to by the plurality, Burnand v Rodocanachi Sons & Co (1882) 7 App Cas 333, Lord Blackburn said at 339:

35. [107]

    Whether cl 2.2 of the GLT Indemnity is a true indemnity against loss, or merely a contingent promise to provide CRC with funds to the extent of any shortfall from GOT, is a question of substance. The use of the terms “indemnity” and “indemnifies” is not determinative. Subrogation is unavailable where the promise is properly characterised as a promise to make a defined payment upon a contingency, rather than a true indemnity. In Insurance Commission (WA) v Kightly (2005) 30 WAR 380; [2005] WASCA 154, Steytler P said at [29]:

36. [108]

    I have already set out the terms of cl 2.2 of the GLT Indemnity at [47] above.

37. [109]

    A number of matters lead me to conclude that cl 2.2 is not a true indemnity against loss. The first matter is that cl 2.2 does not use the word “loss”. The clause does not describe the obligations of GLT by reference to any loss suffered by CRC. In context, the phrase “GLT indemnifies CRC” means “GLT promises to pay CRC”. The qualification, “if and to the extent that” makes that clear. Those words speak of a fixed amount. The remainder of the clause identifies that fixed amount as the difference between what CRC has received from GOT and what is due from CRC to Max. So characterised, that obligation is not an obligation to indemnify against a loss.

38. [110]

    The second matter that leads me to conclude that cl 2.2 of the GLT Indemnity is not a true indemnity against loss is the commercial purpose of the clause. The clause ensures that, whatever determination of Distributable Income is made by the GOT trustee from time to time, CRC will always have recourse to the full amount of the net rental income in order to meet its payment obligations to Max. The clause is drafted not so as to indemnify CRC against a loss suffered, but so as to prevent that loss from arising in the first place. This may be contrasted with cl 18.4 of the SFA which contains an indemnity against identified losses that might arise from non-payment under the guarantee:

39. [111]

    The decision of the contracting parties to the GLT Indemnity not to identify particular losses in cl 2.2 is a strong indicator that cl 2.2 is not concerned with indemnifying against losses at all. The GLT Indemnity is a gateway to CRC having recourse to GLT’s secured assets. This is reflected in cl 4(b) of the GLT Indemnity, which recognises that payment to CRC under the Indemnity can occur by way of “amounts realised by CRC by the exercise of any of its rights under the GLT Security [Deed]”. This is in turn reflected in cll 1.3 and 24.2 of the GLT Security Deed, which read together with the GLT Indemnity, enable CRC to exercise all its rights in connection with the Secured Property once it has made a demand under the GLT Indemnity.

40. [112]

    The third matter that leads me to conclude that cl 2.2 is not a true indemnity against loss is the context supplied by the terms of cl 2.3 which provides:

41. [113]

    Clause 2.3, whilst similarly styled as an “Indemnity”, is not a true indemnity. That clause requires GLT to pay CRC an amount sufficient to reimburse it for any tax incurred by it in respect of a Redemption Amount, if and to the extent it does not receive that amount by way of distribution from GOT. In calculating the amount to be so paid, GLT may deduct any amounts held in the Sinking Fund and the value of any other Authorised Investments. The ability to make deductions shows that the amount paid to CRC to “indemnify” it for its notional “loss” (in the case of cl 2.3, its obligation to pay tax) may be less than the measure of that loss. That is a top-up payment, consistent with the construction I prefer of cl 2.2.

42. [114]

    The fourth matter that leads me to conclude that cl 2.2 is not a true indemnity against loss is that the obligation in cl 2.2 is absolute once a valid demand is made. GLT is not relieved of its obligation to pay CRC on demand under cl 2.2 even if, after the demand is made, GOT subsequently makes a distribution to CRC so that the payment from GLT is no longer required to make up any shortfall in CRC’s obligation to Max. Rather, the Indemnity Amount is calculated as at the due date, and GLT’s obligation to pay that amount becomes unconditional from the date that CRC makes a demand for that sum. The clause fixes the amount payable by GLT at the time that a demand is made; it does not enable GLT to pay a lesser amount (or recoup an amount paid) by reference to subsequent events.

43. [115]

    The fifth matter that leads me to conclude that cl 2.2 is not a true indemnity against loss is that the clause appears in an interlocking suite of agreements comprising hundreds of pages, in which little is left to chance. If the parties intended that GLT, upon making a payment under the GLT Indemnity, should have an immediate right to recover that payment from GOT, one might expect such a right to be referred to. It is not.

44. [116]

    There was no amount which CRC was entitled to receive, the non-receipt of which was the subject of indemnity. Rather, GLT promised to “top up” any deficiency between amounts received from GOT and amounts payable to Max. The acceleration of the principal debt was not the subject of the indemnity and was not the loss or liability indemnified. Clause 2.2 of the GLT Indemnity was not an indemnity against loss; it was a promise to pay upon a contingency. It does not attract the doctrine of subrogation.

45. [117]

    It follows that on the contingent hypothesis that the appellant’s subrogation claim is being addressed, I would reject it.

46. [118]

    I have also concluded on the same contingent basis that even if cl 2.2 of the GLT Indemnity was an indemnity against loss, the primary judge was right to hold that:

    1. (1)

       subrogation was excluded by cl 7;

    2. (2)

       the right to which GLT claimed to be subrogated (CRC’s right to receive the Withdrawal Price) was separate and discrete from the indemnity.

47. [119]

    Clause 7 of the GLT Indemnity is set out at [47] above. The relevant words are that the “indemnity does not ... adversely affect ... any ... other right or remedy to which CRC is entitled”. To permit GLT to step “into CRC’s shoes” as the appellant submitted is plainly an adverse effect on a “right or remedy to which CRC is entitled” since, in doing so, GLT would appropriate CRC’s right to its own benefit.

48. [120]

    I reject the appellant’s submission that cl 7 has “nothing to do with subrogation”, on the basis that it is directed to situations such as CRC taking a higher and better security. Clause 7 should not be read through the lens of an assumption about its characterisation and effect. The actual terms of the clause must be applied, and those terms operate to exclude any right of subrogation.

49. [121]

    If I am wrong in my characterisation of the legal effect of cl 2.2, and the GLT Indemnity is a true indemnity against loss giving rise to rights of subrogation, it remains to consider the question: to which rights is GLT entitled to be subrogated? The answer to this question is that the right must be one that diminishes the loss against which the indemnity has been provided. The primary judge correctly held that while CRC’s right to be paid Distributable Income by GOT is such a right, CRC’s right to receive the Withdrawal Price from GOT is not.

50. [122]

    On the assumption that subrogation is available, the conclusion that the right to be paid Distributable Income is a relevantly subrogable right is reached by reference to cl 2.2. The quantum of the Indemnity Amount is expressly defined as “the extent that CRC does not receive from the GOT Trustee by way of distribution in respect of the CRC Units any amount due by CRC to [Max]”. Clause 2.2 itself thus defines the “loss” in a way that sets up a direct inverse relationship between the amount of the “loss” indemnified against, and the Distributable Income that CRC receives from GOT in respect of its units.

51. [123]

    By submitting that GLT can also be subrogated to CRC’s right to receive other amounts such as the Withdrawal Price from GOT, the appellant impermissibly looks beyond Distributable Income for other sources of funds that are practically capable of being applied by CRC to pay its debt to Max. The mere fact that other funds might be so applied, or even have historically been so applied, does not mean that the right to those funds are subrogable. GLT can only be subrogated to those funds if they are capable of diminishing CRC’s loss. This requires a clear understanding of what the “loss” is. Clause 2.2 defines the loss, relevantly, as a shortfall in distributions from GOT. A shortfall in the Distributable Income received by CRC is not a loss which can be made good by taking an equivalent sum from the Withdrawal Price.

52. [124]

    For the reasons set out above, I would reject Ground 3(b) of the Notice of Appeal, relating to subrogation in the period from May 2009.

Conclusion and Orders

1. [125]

   For the foregoing reasons I propose the following orders:

   1. (1)

      Appeal dismissed;

   2. (2)

      Appellant to pay the costs of the first and second respondents.

2. [126]

   WHITE JA: I agree with Payne JA.

3. [127]

   BRERETON JA: I agree with Payne JA.