21 Jan 2011

Goodridge appeal provides commercial clarity for securitisation

The full Federal Court, in its clear and well-reasoned decision allowing the appeal in Leveraged Equities Limited v Goodridge [2011] FCAFC 3, has allayed concerns raised by the first instance decision in relation to assignment transactions, especially securitisations.

The margin loan facility, and transfer

A margin lending facility was made available by Macquarie Bank to Mr Goodridge in May 2003, the terms of which were set out in a margin loan contract (that was in the form of a loan and security agreement) between the parties.

In January 2009, Macquarie Bank sold its margin loan book to Leveraged Equities (including the margin loan made to Mr Goodridge). The sale involved the transfer of the margin loans to a securitisation trust in which the original trustee of that trust was replaced by Leveraged Equities immediately following the sale of the loans to the trust.

In late February 2009, Leveraged Equities made certain margin calls requiring Mr Goodridge to lodge additional collateral to satisfy the margin call. When Mr Goodridge failed to lodge the collateral, Leveraged Equities enforced the security for the margin loan.

Why the trial judge thought there was no effective novation or assignment

On 12 February 2010, Justice Rares in the Federal Court found that the enforcement action taken under a margin loan by the purported purchaser of the loan was not properly exercised. While the judgment could have ended at this point, he went on to consider the legal principles of novation and assignment in connection with the sale of the margin loan.

Justice Rares held that:

  • in the specific circumstances of the transaction, and despite the terms of the margin loan documentation, the active participation of Mr Goodridge (either directly or through someone else who was authorised to act on his behalf) was required for an effective novation, and this participation was not obtained; and
  • the margin lending contract was incapable of assignment because the rights of Macquarie Bank under that agreement were inseparable from its corresponding obligations. In Justice Rares' view, an assignment of the rights without a novation of the obligations would create an "unworkable tripartite relationship" where Mr Goodridge would be borrowing from two entities, each capable of exercising the same rights and powers to determine the available credit. That is, Macquarie Bank's right to determine whether to lend Mr Goodridge additional funds, or to enforce an outstanding debt, was inextricably linked to its obligation to provide further credit on the terms of the margin lending contract. As a result the rights in respect of the outstanding debt were not assignable.

Justice Rares also stated that, in the circumstances, "a borrower might have a real interest in the identity of his lender, which suggests that the rights sought to be dealt with in this way were personal rather than proprietary and were not capable of assignment", and that it was "impossible to bifurcate the lending obligations and rights by the mechanism employed here".

One other aspect of Justice Rares' judgment that caused concern was his statement that to perfect at law an equitable assignment by giving notice under section 12 of the Conveyancing Act, actual notice to the relevant obligor was required – it was not sufficient to rely on deemed notice provisions under the margin loan documents and the Evidence Act.

The Full Federal Court confirms the market's understanding of novation and assignment

Justice Jacobson (with whom the other two judges agreed) divided his judgment between what he called the "margin call case" and the "transaction case". The appellants were successful in both sections of his judgment. The "margin call case" related primarily to the exercise of rights under the margin loan documents, and turned mostly on questions of fact and contractual interpretation.

In relation to the novation, Justice Jacobson held that it is possible for a contracting party to prospectively authorise a novation to be made by another party unilaterally. This is consistent with the usual procedures for novation of lenders in a syndicated loan, and indeed one of the cases he referred to arose in the context of such an arrangement.

However, unlike the detailed provisions which are usual in a syndicated loan, the relevant provision in the margin loan documentation was very general and referred merely to the right of the lender to "novate" "its obligations" "without the consent of the Borrower". Notwithstanding this generality, Justice Jacobson found that the better view is that the clause constituted prospective consent by the borrower of all the elements required to give effect to a novation.

More importantly, on the question of assignment, the Full Federal Court found that the rights in question were capable of assignment. Justice Jacobson considered the assignment documents in some detail (an analysis that seemed to be missing from the primary judgment) and determined that:

  • the margin loan documents permitted assignment without consent;
  • as such, the rights were assignable unless the character of the obligation was such that any purported assignment would have no effect at law or equity (such as the personal relationship of an employer and employee);
  • the character of the obligation on which the primary judge apparently relied (ie. the borrower's margin call obligation) was not analogous to the "personal obligations";
  • even if some rights had not been assignable, that would not of itself mean that an assignment of all rights (including those capable of assignment) would fail, as the judgment at first instance suggested;
  • Leveraged Equities as assignee has sole right to exercise all rights assigned to it, independent of and clearly divided from any continuing obligations of Macquarie Bank – notwithstanding the complex assignment arrangement, "Macquarie bore the ultimate financial responsibility of providing further advances to the borrower, whilst Leveraged Equities, as assignee, had the right to repayment of the funds and the right to exercise powers on default". The assignment documents then had the effect of imposing, as between Macquarie Bank and Leveraged Equities, an obligation on Leveraged Equities to assume the obligation of making further advances. As Justice Jacobson said, "whether or not there was any bifurcation of rights...there was certainly no duplication".

Finally, in respect of notice, Justice Jacobson determined that Mr Goodridge should have been found by the primary judge to have received the notice of assignment. However, he also stated that if the presumption of service (in section 170(1)(b) of the Evidence Act) is satisfied, then section 12 of the Conveyancing Act will be satisfied by deemed, rather than actual, notice unless sufficient evidence is adduced to raise doubt about the presumption.

What does it mean for securitisations?

The analysis in relation to the transaction case is a confirmation of the application of principles of assignment that had been assumed to be fundamental before the first instance judgment. The new principles of law that seemed to arise from Justice Rares in respect of what rights were and were not fundamentally assignable have not been adopted on appeal.

Just as comforting for securitisation practitioners is the confirmation that the standard structures used to assign receivables are effective, not just from a legal perspective but also from a documentation and structural perspective.

Similarly, the appeal judgment has confirmed that the market's previous understanding of novations and notices to perfect legal title was correct, and need not change in light of the first instance judgment.


Mr Goodridge is entitled to seek leave to appeal to the High Court, and media reports have indicated that he has expressed an intention to do so.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.