Loan forfeiture for RHG

Supreme Court Justice Robert McDougall yesterday described the approach taken by RHG Group in a case dealing with an alleged loan default as similar to Humpty Dumpty denying the accepted meaning of words.

The NSW Supreme Court ruled that RHG was in default on one condition of a $750 million loan contract between October last year and July and in default on anther condition in December and January

The court ruled that RHG is not entitled to relief against forfeiture of the mortgages used as security for the loan, which are now likely to be sold to repay the debt. An injunction against forfeiture granted in September was dissolved.

RHG now faces a number of questions about its future. It faces the loss of one significant source of revenue and, having defaulted on one loan, must deal with the risk of cross-default under other borrowing obligations.

The company requested a trading halt yesterday and advised the Australian Securities Exchange that the directors would make a statement about the outcome of the case. By the close of business there had been no further communication.

In January 2008 RHG entered into a $750 million funding arrangement with a European bank, UniCredit, through its Singapore branch trading as HVB. RHG issued mortgage securities (Series UniCredit notes) to HVB, and ultimately those securities ended up with Elektra, a special purpose vehicle linked to HVB.

The RHG loans are the back book of loans originated as Rams Home Loans before the sale of that bran to Westpac in late 2007.

Late last year UniCredit and its security trustee, BNY, notified RHG of an event of default, resulting from arrears rates going above a prescribed level.

This set in train a process that would result in a special meeting of creditors, the appointment of a receiver to the trust and the sale of the assets to pay out the loan.

RHG went to court to seek relief, which was granted in September and then the matter went back to court for a final hearing.

In his judgement yesterday Justice McDougall said the heart of the dispute was the concept of an amortisation event. According to the loan contract, an amortisation event occurs if arrears greater than 90 days are more than one per cent of the outstanding loan balance.

Once an amortisation event has occurred the payment terms to the note holders change. The whole of the excess income must pass to the note holder to the exclusion of the issuer.

If an amortisation event had occurred and RHG had not made the payments required to rectify the situation then an event of default would occur.

Where the security trustee has actual knowledge that an event of default has occurred it must appoint a receiver to the secured property.

RHG argued that the phrase "loans… in arrears for greater than 90 days" was ambiguous, because there is more than one way of calculating arrears.

The HVB side argued 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 loan agreement.

McDougall said: "In substance, the plaintiffs' (RHG's) 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.

"On the plaintiffs' approach the calculation of arrears excludes certain overdue payments that, on the ordinary English meaning of the word "arrears", are in arrears. The plaintiffs' approach gives credit for amounts paid, in reduction of arrears, after the date as at which arrears are calculated.

"I do not think that the plaintiffs' approach to construction should be accepted."