Australian Executor Trustees Ltd v Provident Capital Ltd

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FEDERAL COURT OF AUSTRALIA

Australian Executor Trustees Ltd v Provident Capital Ltd

[2012] FCA 728

Citation: Australian Executor Trustees Ltd v Provident Capital Ltd [2012] FCA 728
Parties: AUSTRALIAN EXECUTOR TRUSTEES LIMITED v PROVIDENT CAPITAL LIMITED
File number: NSD 808 of 2012
Judge: RARES J
Date of judgment: 29 June 2012
Catchwords:

CORPORATIONS – receivers – debentures issued by corporation to the public under a debenture trust deed – application by trustee pursuant to ss 283HB (1)(c) and (d) of the Corporations Act 2001 (Cth) for order that security for debentures be made immediately enforceable and receiver appointed to realise that security, notwithstanding absence of event of default under trust deed – where corporation opposes orders sought by trustee and seeks moratorium under s 283HB1(b) on obligations to pay interest on and repay debentures falling due for next twelve months – where financial position of security for debenture holders in corporation’s loan portfolio is deteriorating and 90% of loans non-performing – where corporation likely to have a deficiency of net assets – where there is a need to realise security properties – where appointment of receiver is likely to cause further damage to the corporation – where there have been significant and not isolated failures by corporation to give full and accurate disclosures of its financial position in public financial documents and to Court

Held: s 283HB(1) confers a broad remedial and protective jurisdiction on the Court – such provisions are intended to protect members of public who have invested in corporations that raise funds by the issue of debentures – the interests of the corporation’s creditors, and in particular debenture holders, require that receiver be appointed

Legislation: Corporations Act 2001 (Cth) Ch 2L, ss 283BB(a), 283HB(1)
Cases cited: Australian Securities & Investments Commission v Bridgecorp Finance Limited (2006) 58 ACSR 499 applied
National Australia Bank Limited v Bond Brewing Holdings Ltd (1990) 169 CLR 271 considered
Owners of “Shin Kobe Maru” v Empire Shipping Company Inc (1994) 181 CLR 404 applied
Parsons v Sovereign Bank of Canada [1913] AC 160 considered
Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 applied
Re New York Taxi Cab Limited;  Sequin v The Company [1913] 1 Ch distinguished
The Queen v Australian Broadcasting Tribunal;  Ex parte 2HD Pty Ltd (1979) 144 CLR 45 applied
Date of hearing: 29 June 2012
Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 86
Counsel for the Plaintiff: Mr AW Street SC with Mr J Hynes
Solicitor for the Plaintiff: Henry Davis York
Counsel for the Defendant: Mr I R Pike SC with Ms F T Roughley
Solicitor for the Defendant: Baker & McKenzie
Counsel for the Amicus Curiae:  Australian Securities and Investments Commission Mr D R Pritchard SC
Solicitor for the Amicus Curiae:  Australian Securities and Investments Commission Conrad Gray, Lawyer

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 808 of 2012
BETWEEN:

AUSTRALIAN EXECUTOR TRUSTEES LIMITED
Plaintiff
AND:

PROVIDENT CAPITAL LIMITED
Defendant

JUDGE:

RARES…

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Details
Case
[2012] FCA 728
Decision Date

CaseChat Overview and Summary

The case of Australian Executor Trustees Ltd v Provident Capital Ltd involves an application by the trustee to the Federal Court of Australia under sections 283HB(1)(c) and (d) of the Corporations Act 2001 (Cth). The trustee seeks to have the security for debentures issued by Provident Capital Ltd be made immediately enforceable, and for a receiver to be appointed to realise the security, despite the absence of an event of default under the trust deed. Provident Capital Ltd opposes these orders and seeks a moratorium on its obligations to pay interest and repay debentures falling due over the next twelve months. The central issue in this case is whether the Court should exercise its broad remedial and protective jurisdiction under section 283HB(1) of the Corporations Act to appoint a receiver and make the security for the debentures immediately enforceable, despite the absence of a default event, given Provident's deteriorating financial position and the need to realise its security properties.

The Court found that section 283HB(1) confers a broad remedial and protective jurisdiction on the Court, which is intended to protect members of the public who have invested in corporations that raise funds by issuing debentures. The Court held that the interests of Provident's creditors, particularly the debenture holders, require that a receiver be appointed to realise the security properties. The Court emphasised that the statutory provisions should not be read down or limited by implications not found in the express words. The appointment of a receiver, while likely to cause damage to Provident, is necessary to protect the interests of the debenture holders, especially given Provident's inability to repay its debts as they fall due and its deteriorating financial position. The Court also noted the importance of ensuring that Provident's assets are realised in an orderly manner to maximise a fair and pro rata return to all debenture holders.

Accordingly, the Court made orders appointing Philip Patrick Carter, Anthony Milton Sims, and Marcus William Ayres of PPB Advisory as joint and several receivers of Provident's property secured by the fixed and floating charge. The Court restrained Provident from paying any money to debenture holders under the trust deed until further order. The Court also required Provident to pay the plaintiff’s costs and provided for certain undertakings by Provident, such as providing immediate access to its books, records, and computer passwords to the plaintiff and its representatives. The Court stayed the orders, other than the restraint on payments to debenture holders, until 4 pm on 3 July 2012, to allow Provident to make the required undertakings.

Orders

Orders of the court

1. Pursuant to s 283HB(1)(c) of the Corporations Act 2001 (Cth):

(a) Philip Patrick Carter, Anthony Milton Sims and Marcus William Ayres of PPB Advisory be appointed as joint and several receivers of the property of the defendant secured by the fixed and floating charge dated 11 December 1998 (the charge) and comprising the security for the debentures issued by the defendant pursuant to the trust deed dated 11 December 1998 as amended (the deed);

(b) the receivers have all of the powers prescribed by:

(i) the charge and shall be treated in all respects as if they were appointed under that charge; and

(ii) s 420(2) of the Corporations Act 2001 (Cth);

(c) until further order the defendant be restrained from paying any money to debenture holders under the trust deed dated 11 December 1998.

2. The defendant pay the plaintiff’s costs.

3. Upon the defendant by its Senior Counsel giving to the court the following undertakings:

(a) the usual undertaking as to damages;

(b) to provide immediate access to the plaintiff and its representatives to all books, records and computer passwords of the defendant;

(c) not to make any payment to any person or engage in any transactions up to and including 4 pm on 3 July 2012;

(d) not to destroy any records;

the orders made on 29 June 2012 by Rares J, other than order 1c, be stayed up to and including 4 pm on 3 July 2012.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The trustee seeks orders under s 283HB(1) of the Corporations Act 2001 (Cth) making the security immediately enforceable despite there being no event of default, appointing receivers to Provident and requiring distributions to be paid to all the debenture holders pro rata in reduction of their face value regardless of different rates of interest or time for repayment.BACKGROUND The trustee commenced these proceedings on 8 June 2012. As result of that Provident sought, in effect, a moratorium on its obligations to pay interest on, and repay, debentures falling due for the next 12 months. Some of the debentures contain terms enabling Provident to defer repayment and payment of interest for up to one year, others for 180 days and others for 90 days. A small proportion of debentures issued prior to 2007 do not provide for any such deferral of payments. Provident, in effect, seeks an order under s 283HB(1)(b) for a universal moratorium of 12 months on all debenture repayments to be followed by the actuation of its own entitlements to defer, for the maximum permissible period, repayment of any debentures that contain such a provision. While the moratorium is in place Provident will seek to go about realising the security properties in its fixed term interest portfolio (or FTI portfolio) which is the security for the debenture trust deed. The circumstances that have given rise to this situation include the fact that 90% of that property portfolio consists of non performing loans.THE TRUST DEED The trust deed confers a number of powers on the trustee including:·a discretion not to enter a possession of the company’s assets or appoint a receiver (cl 7.1);·a power to apply to the Court for directions in relation to any matter arising in respect of the deed (cl 7.4.8)·a power, after the occurrence of an event of default, for the trustee to declare all money owing actually or contingently on any debentures to be immediately due and payable and to take action to enforce the fixed and floating charge given to it by Provident, either itself or by the appointment of a receiver (cl 11.2). Clause 11 of the trust deed deals with events of default, including:“11. Enforcement11.1Events of defaultThe following events are events of default:11.1.1if the Company fails to pay any money within 21 days after the day upon which the payment becomes due and payable;11.1.2if the Company defaults in the performance of any obligation under this deed and, where reasonably capable of remedy, that default is not remedied within 21 days after the Company has received notice of or otherwise becomes aware of such default; …” Clause 11.5 sets out the manner in which the monies received by the trustee or any receiver as a consequence of the enforcement of the trustee’s rights against Provident must be applied. This includes, after payment of the trustee’s remuneration and expenses and those of any receiver, payment to the trustee for the account of debenture holders in respect of interest accrued but unpaid on the debentures on issue, and next, the face value of the debentures in issue. Clause 12.1 gives the trustee at any time after an event of default has occurred, the right, but not the obligation, to exercise a number of further powers in the manner it thinks fit and notwithstanding a receiver having been appointed. The trust deed has been amended on a number of occasions, including to provide for the power to defer repayment of the debentures and interest.PROVIDENT’S FINANCIAL PROBLEMS EMERGE

Evidence

Evidence Before The Court

The evidence relied on by the trustee in these proceedings had been substantially completed by 13 June 2012. It did not contain any reference to the discussions between Provident and ASIC as to the product disclosure statement for the monthly income fund. That matter was only made the subject of evidence in an affidavit filed on 26 June 2012 by James Nott, a senior specialist in the corporations’ team at ASIC. That was the day before the hearing commenced. However, no reference at all was made in either Mr Nott’s evidence or any other material tendered by the trustee about it being aware of the 2 May 2012 application for the financial services licence.PROVIDENT’S EVIDENCE Mr O’Sullivan swore a substantive affidavit on 25 June 2012 providing detailed responses that Provident made to the allegations and concerns raised in the material filed by the trustee. He set out, among other things, the history of Provident’s successful business operations over the preceding years. He asserted that Provident was able to meet its debts as and when they fell due, other than those that it had been prevented from meeting by an order made by Jacobson J, on 13 June 2012, when setting the matter down for hearing that prevented payment of any amounts of interest or principal in respect of debentures falling due after that day and until the hearing. Mr O’Sullivan explained in some detail in his affidavit how he anticipated that Provident would be able to meet its debts as and when they fell due. He observed that Provident had provided to the trustee, or given its solicitor, a copy of all information that had been requested directly by the trustee in a timely and cooperative manner and was still in the process of dealing with other matters. He said:“As part of [Provident’s] lending business, and in addition to the FTI loan portfolio, [Provident] also:...(b)manages or acts as Responsible Entity for two mortgage funds where the net fund assets are approximately $35 million – the funds are known as the Provident Capital Monthly Income Fund … and the Provident Capital High Yield Fund … [Provident] has acted in that capacity since August 2009” He did not disclose the application by Provident Funds Management for the licence the purpose of which was to have that company act as the new responsible entity for those two funds. Mr O’Sullivan also identified in his affidavit that Provident’s operating costs were offset by all of its activities. Those included, in addition to the FTI portfolio, the profits generated in its other activities, including those in respect of managing and acting as responsible entity of the two funds. He observed that those activities generated in the order of $8 million per annum. He said that the trend was that those sources of revenue had been increasing since their inception in 2009 and were expected to continue to increase for the next five years. He also swore that:“On the basis that [Provident] remains as a going concern, [Provident’s] other profitable business activities support the costs of the FTI portfolio and the liability to debenture holders.” (emphasis added)

Decision

Reasons for decision

I suggested to the parties, in the course of argument, that one possible solution may have been to appoint one or more persons from PPB who have signed consents to be appointed receivers, as persons with authority to have complete and free access to all information, including in computers, held by Provident. That authority would be, in effect, complementary to the trustee’s power under s 283BB. Those persons could report any problems discovered to both the trustee and ASIC.CONCLUSION I am satisfied that I should make a protective order that has the effect of continuing the interlocutory injunction restraining Provident from paying any money to debenture holders at the moment so that its funds can be realised in an orderly way to maximise a fair and pro rata return to all of them. However, as Provident pointed out, an absolute and indefinite moratorium on payments could cause hardship to debenture holders. The moratorium should be ameliorated to permit the payment of a proportion of money due, if possible, over the course of the terms of any such restraint, in a way that will not inhibit the orderly realisation of Provident’s assets. That realisation process should permit, if the assumptions from the valuation of the Queensland property hold good, its realisation by completion of the development. The failure of Provident to disclose to the Court the withdrawal of the PDS and the application by its related company for the licence casts considerable doubt over Provident’s integrity to obtain, manage or hold money from the public. Those matters were obviously relevant to the present application. Mr O’Sullivan’s concept of using the licence, if granted, to “silo” the responsible entity business of the monthly income and high yield funds was a pre-emptive strategy to avoid the consequences of any receivership, whether imposed by the trustee, the bank or the Court. The importance of the licence application satisfied me that Mr O’Sullivan’s omission to mention it in his evidence could not have been accidental. I do not accept Mr O’Sullivan’s evidence, or Provident’s argument, to the effect that this omission was anything other than deliberate. Thus, the consequence of this finding, whether or not a receiver is appointed, on Provident’s business is that it will be unlikely that Provident or a company controlled by Mr O’Sullivan would be, or should be, granted such a licence. Moreover, there are the unsatisfactory features that I have referred to in Provident’s previous public disclosures of its financial position. Those flowed from the concerns raised by ASIC in December 2011 and following, including the unexplained circumstances in which the January information booklet omitted any reference to at least $12 million of a past due loan. Further provisioning will need to be made in Provident’s accounts with more realistic and up to date assessments of the property portfolio and its other assets. That is something that must occur whether or not a receiver is appointed. The deferral of repayment of principal and interest on the debentures will permit a more realistic assessment of what further provisions are needed, perhaps arrived at after some securities are realised over the course of a year or so while that deferral is in place. There is a congruence between the interests of Mr O’Sullivan and management of Provident and those of the debenture holders to realise the highest possible prices for the distressed loan portfolio. It is likely that Provident will not be able to meet its debts as and when they fall due.

Ratio Decidendi

Legal Principle Established

Provident argued that the power to appoint a receiver under s 283HB(1)(d) should be exercised in accordance with the approach taken by Swinfen Eady J in Re New York Taxi Cab Limited; Sequin v The Company [1913] 1 Ch 1 at 8, where his Lordship said:“The company is not in any pecuniary difficulty. No doubt it cannot pay the debenture interest in full yet and will not be able to do so for some considerable time. ... The assets are not in jeopardy in the sense that there is any risk of their being seized or taken to pay claims not really prior to the claims of the debenture-holders. The company is a going concern. No interest is payable till January 1, 1913, and if necessary a further postponement may be authorized. The security is not yet enforceable according to its tenor, and the fact that if now realized it would be wholly insufficient to pay the principal and interest in full is not a sufficient reason for appointing a receiver on the ground of jeopardy.”CONSIDERATION Provident’s argument does not reflect the proper approach to the statutory construction of a power of the kind contained in s 283HB. The power conferred on the Court by that section is remedial and protective of the interests of those who have lent money to corporations on debentures. Provisions conferring jurisdiction or granting powers to a court cannot be read down by making implications or imposing limitations that are not to be found in the express words: Owners of “Shin Kobe Maru” v Empire Shipping Company Inc (1994) 181 CLR 404 at 421 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ. Nonetheless, the power under s 283HB(1)(d) must be exercised in light of the fact that an incident of the appointment of a receiver will be that the company will lose “its title to control its assets and affairs”: National Australia Bank Limited v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277 per Mason CJ, Brennan and Deane JJ, citing the phrase of Viscount Haldane LC in Parsons v Sovereign Bank of Canada [1913] AC 160 at 167. The appointment of a receiver is also likely to cause damage to the company concerned. The purpose of the powers that s 283HB confers on the Court is to enable it to make appropriate orders that it considers necessary to protect the interests reflected in Pt 2L itself. Relevantly, s 283HB(2) requires the Court to have regard to the ability of Provident to repay the amount deposited or lent as and when it becomes due, and the interests of Provident’s members and its creditors. Provident asserts that it needs a moratorium at the moment to suspend its liability to pay its debenture holders their debts as and when they fall due. I am satisfied that Provident is not able to pay the amounts deposited or lent to it as when these become due in the next 12 months. I am also satisfied that the interests of Provident’s creditors, and in particular, the debenture holders, require protection by appropriate orders. In Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 at [31] and [33] Lindgren J held that s 283HB(1)(c) envisaged that there may be circumstances in which a security is not yet immediately enforceable in accordance with its terms and the general law, but it would still be appropriate for the Court to make an order that security become immediately enforceable. He said:“An obvious example is a situation in which debentures have not fallen due for payment but all the evidence shows that the borrower is insolvent and will not be able to pay the debentures when the time for payment arises.”