In March 2013, the plaintiff, KBL Mining Limited (KBL)
issued a number of notes with an aggregate face value of $10
million pursuant to a Note Issuance Deed (Deed). The
noteholder's right to receive payment from KBL on redemption of
the notes was later assigned to RIKID511 Pty Limited as Noteholder
The Deed provided that KBL could redeem the notes at the expiry
of one year for an aggregate value of $11.3 million, but was
otherwise obliged to redeem the notes at the expiry of two years
for an aggregate value of $12.6 million. There was no benefit to
KBL redeeming the notes at any earlier time. Significantly, the
Deed did not specify if the premium of the redemption value (i.e.
$1.3 million or $2.6 million) constituted 'interest'.
KBL granted security over all of its assets in favour of the
authorised holder of the notes from time to time pursuant to a
General Security Agreement (GSA). The GSA stated
KBL must pay interest on the Secured Money 'owing' to
the Noteholder, in accordance with any agreement requiring interest
to be paid on the Secured Money; and
if there was no such agreement, interest would accrue at a
specified interest rate from the day on which the Secured Money
In this regard, the GSA's interest clause appeared to be a
standard interest clause.
LENDER ATTEMPTS TO CHARGE 'DOUBLE INTEREST'
In January 2015, the Noteholder issued KBL with a notice
demanding payment of interest on what it claimed was the Secured
Money owing to it. The Noteholder claimed that the Secured Money
owing to it was $12.6 million and, therefore also claimed interest
calculated at the specified interest rate contained in the GSA. The
Noteholder contended that it was entitled to interest on the
redemption value of the notes as the premium was part of the price
payable for the redemption of the notes – not interest.
KBL objected to the Noteholder's demand on two grounds.
First, KBL argued that the Secured Money owing to the Noteholder
should be read as meaning the Secured Money 'owing and
payable' to the Noteholder. On this interpretation, no Secured
Money was yet actually owing to the Noteholder. (This argument was
rejected by the court.) Secondly, KBL argued that, in any case, the
notes' premium constituted interest and accordingly, the
interest clause under the GSA specifying a rate of interest was not
WHAT DID THE COURT DECIDE?
The court decided that, in the circumstances, the GSA's
interest clause was not engaged. This was because the return on the
advance of $10 million, namely the premium, constituted interest.
Critical to the court's reasoning was its finding (based on the
term sheet between KBL and the initial noteholder and other
extrinsic evidence) that the objective aim of the transaction was
to improve KBL's cashflow by not requiring cash payments before
the redemption of the notes.
However, the court commented that if it were to only have regard
to the text of the documents without the benefit of any extrinsic
evidence, such as the term sheet and other extrinsic evidence, the
court would have concluded that the Noteholder was entitled to
interest on the redemption value of the notes.
On the application of the plaintiff, the court also ordered that
the GSA be rectified to include a clause expressly stating that no
interest would be payable on the value of the notes if KBL redeemed
the notes in accordance with their terms. On the issue of
rectification, the court was satisfied that it had clear and
convincing proof that at the time the agreement was entered into,
both parties intended that no interest would be payable on the
value of the notes.
PAY SPECIAL ATTENTION TO...
This decision serves as an important reminder when preparing and
negotiating commercial documents. It is imperative that
consideration is given to each clause and whether it will be
applicable to the particular circumstances of the transaction. The
issue in this case could have been avoided if careful attention had
been paid to the interest clause under the GSA and how it related
to amounts payable on the notes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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