Relief against forfeiture - When is it available
On 17 December 2009, Justice McDougall in the Supreme Court of NSW handed down judgment in the case of RHG Mortgage Securities v BNY Trust Company  NSWSC 1432. The decision looked at whether relief against forfeiture is available for defaults in security arrangements but also serves as a reminder to take care of the details in complex securitisation arrangements. Corrs acted for BNY Trust Company of Australia (BNY) in this matter.
The RHG group of companies (RHG) issued publicly rated notes in respect of a series of securitised residential mortgages which it managed. BNY was security trustee for the benefit of the secured creditors.
According to the security arrangements, if an “Amortisation Event”, occurred, RHG was required to pay the whole of any excess income generated by the underlying pool of mortgages to one of the secured creditors. Failure to do so would result in an “Event of Default”.
An investigative accountant appointed by BNY to audit RHG’s reports found that an inappropriate methodology had been used in RHG’s calculations and there had been multiple Amortisation Events in different months that had been overlooked by RHG.
BNY called a meeting of the secured creditors with the intent that they would resolve to accelerate the debt, enforce the charge and appoint a receiver.
Relief against forfeiture
Relief against forfeiture is an equitable remedy available to prevent a party from exercising legal rights which arise as a result of mistake, accident or surprise or where the exercise of the rights is otherwise unconscionable in all the circumstances.
RHG argued that its belief in the validity of its reporting methodology was a mistake and, as the “inevitable end result” of the enforcement process would be the sale of the property by a receiver. RHG contended that this or would be a forfeiture and it should be entitled to relief from the enforcement process if it cured the default by paying the excess funds to the shareholders.
Justice McDougall found that RHG had been aware that their methodology was unreliable for detecting Amortisation Events and it was a conscious commercial risk, rather than a mistake or unconscionability on the part of the defendants, that had led to the Events of Default.
However, his Honour also questioned whether the acceleration of the debt and the enforcement of the charge were “forfeitures” that could be relieved by the court.
Justice McDougall found that although RHG had a relevant interest in the secured property, that interest was not affected by the decision to accelerate the debt.
In particular, the acceleration of the debt and the appointment of a receiver to the secured property would not affect RHG’s equity of redemption. RHG could prevent the sale of the property by repaying the full amount of the monies owing, which would secure the removal of the receiver and discharge the charge.
The court confirmed that mere acceleration of a debt is not in itself a forfeiture. As such it is not open to a debtor to seek relief against forfeiture by finding monies to rectify a monetary event of default that gives rise to a contractual right to accelerate the debt. Rather, to avoid the forfeiture, they must pay the amount of the accelerated debt (which in this case was over AUD$300 million).