Bells Securities Pty Ltd v LPG Mourant

[2002] QSC 156

[2002] QSC 156

SUPREME COURT OF QUEENSLAND

CIVIL JURISDICTION

WILSON J

No 3477 of 2002

BELLS SECURITIES PTY LTD  Plaintiff

and

LPG MOURANT AND OTHERS  Defendant

BRISBANE

..DATE 04/06/2002

JUDGMENT

HER HONOUR:  The applicant, Bells Securities Pty Ltd, is the 
  operator of a solicitor's mortgage lending business. 

Beginning in 1996, lenders contributed varying amounts which
  were pooled to make individual loans, referred to as

"contributory loans", secured by what were referred to as

"contributory mortgages" over real property.  The loans were
  made and corresponding securities taken by the applicant as

trustee.  Through this scheme, Bells Solicitors, now

Steindl Bell Lawyers, lent clients' money to borrowers on

the security of mortgages taken over real property.

The scheme is a "managed investment scheme" which was not

registered under the Corporations Law or the Corporations

Act 2001.  A requirement for registration was introduced

after the scheme commenced, but the Australian Securities

and Investment Commission ("ASIC") allowed certain mortgage

schemes entered into before 17 December 1999 to be brought

to an end or "run out" by 31 October 2001. That date was

subsequently extended to 28 February 2002 (subject to

conditions) where the scheme continued to be operated under

the supervision of, relevantly, the Queensland Law Society

Inc.  The Queensland Law Society Inc. supervised the

operation of this scheme until 28 February 2002.  It has

subsisted since then, unregistered.

The applicant seeks an order for the winding up of the

scheme pursuant to section 601EE of the Corporations Act,

with the applicant to be responsible for the winding up,

under the supervision of two chartered accountants, Messrs

Sweeney and Van der Velde of Hall Chadwick.  In the case of

one outstanding loan, the Cofordo loan, it seeks an order

facilitating the transfer of the loan to a registered

scheme.  

ASIC has intervened in the application to oppose the

appointment of the applicant to wind up the scheme.  In its

submission, independent liquidators ought to be appointed.

Over the life of the scheme, 84 loans were made.  Of those,

four remain ‑ the Longhampton loan, the Wickham Developments 
  loan, the Seydel loan and the Cofordo loan.  Each loan is in
  default.

The Longhampton loan  On 14 May 1999, the sum of $1,040,000

was advanced to Longhampton Pty Ltd against the security of

a mortgage over a backpackers' hostel on Magnetic Island. 

The loan was repayable on 14 May 2000.  Before the moneys

were advanced, the borrower produced a valuation of $1.875

million.  The loan went into default in April 2000 due to

the non payment of interest.  There was a longstanding

dispute with the tenant who refused to pay rent because of

the alleged failure of the landlord (the borrower) to carry

out structural repairs.  That was not resolved until October
  2001.

In the meantime, Hall Chadwick had been appointed receiver

manager in September 2000.  Attempts to sell the property

were unsuccessful.  Another attempt, a tender campaign,

closed on 31 May 2002.  The borrower is in liquidation, one

of the guarantors is bankrupt and the other guarantor cannot
  be located.

The Wickham Developments loan  Between August 1997 and July

1998, advances totalling $4,250,000 were made to Wickham

Developments Pty Ltd against the security of a mortgage over
  a motel at South Brisbane.  The loan was repayable on 28

August 1999.  In April 1998, the borrower produced a

valuation of $6.048 million.  It was based on a completed

project rather than an as is basis.  The loan fell into

default on 28 August 1999 when the borrower failed to repay

the principal.  For a time, interest payments were made but, 
  ultimately, proceedings were issued.  Orders were made for

summary judgment, possession and recovery of rental. 

Principal remains outstanding as does a very large sum by

way of interest. In October 2001, a committee of lenders was
  formed which has attended to maintenance and improvement of

the property, negotiated with real estate agents, the motel

managers and others, and reported regularly to lenders.  The
  property remains unsold.

The Seydel loan  On 25 September 1998, $570,000 was

advanced to Seydel Pty Ltd against the security of a

pensioner accommodation complex at Woodridge.  The loan was

repayable on 25 September 1999.  Before the moneys were

advanced, a valuation of $860,000 was obtained apparently by 
  the borrower.  The loan went into default on 25 September

1999 when the borrower failed to repay the principal.  On 31
  May 2000, Hall Chadwick were appointed receiver manager. 

Subsequently, judgment was obtained against the borrower and
  guarantors but apparently it remains unsatisfied.  A

contract to sell the property for $350,000 was due to settle
  on 17 May 2002.

The Cofordo loan  Between June 1997 and March 1998,

advances totalling $4,900,000 were made to Cofordo 273 Pty

Ltd against the security of commercial properties at 63-69

Lake Street, Cairns which were being renovated.  In

January 1998, the borrower produced a valuation of $7

million being a projected valuation on completion rather

than as is.  The loan went into default in December 1998

with non payment of interest.  Receiver managers were

appointed in February 1999.  They appear to have remained in
  place until June 2000. In January 2000, proceedings were

commenced against the valuer.  In August 2000, proceedings

were commenced against the guarantors and judgment was

subsequently entered against one of them.  In October 2001,

a committee of lenders was appointed.  According to one of

the committee members, Mr I R Smith, the committee has met

regularly and, "strenuously worked over some three years of

neglect on the building which had a vacancy rate of 22 per

cent during the period."  Another of the committee members,

an architect, arranged for a Cairns firm to complete plans

and specifications for renovations and repairs and work is

being carried out at a cost in excess of $50,000, paid for

in full by the lenders.  It is proposed to transfer this       mortgage to Shakespeare and Haney Securities Ltd, a            responsible entity. 

Under section 610EE (2) of the Corporations Act the Court      "may make any orders it considers appropriate for the          winding up of the scheme."  It is a wide discretion.  In the    course of argument the following factors were identified as     relevant to its exercise:

(a)the conduct of the mortgage lending business including the circumstances of the four remaining loans;

(b)the potential that the applicant, the operator of the scheme, may face a conflict of interests, strictly a conflict of duty and interest, in winding up its own scheme;

(c)the interests and wishes of contributories;

(d)the comparative costs of the applicant's proposal and those of a winding up by independent liquidators;

(e)the public interest in the integrity of the system of investor protection for which the Corporations Act stands. (See ASIC v. Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at 795 per Justice Owen.)

There are no creditors to be considered.

Counsel for the applicant stressed that of the 84 loans made    by the applicant since 1996 only these four remain.  Be that    as it may, I must determine what is the most appropriate       order to make with respect to the winding up of these four     loans. 

In all four cases, the applicant seems to have relied on       valuations supplied by the borrowers when making the           advances.  They have been in default for periods ranging       from 21 to 44 months.  158 investors are involved.  The        total amount owing including interest is approaching $12       million while the estimated value of realisable securities     is about $9 million.  Hall Chadwick have already been          involved as receivers and managers with respect to two of      the loans, and unidentified receivers and managers have been    involved in a third.  Judgments are apparently unsatisfied.     In one case, proceedings have been instituted against the      valuer.  All attempts to sell have been unsuccessful.

On the material before me, the applicant has not provided a     satisfactory explanation for this state of affairs, which I     consider a weighty factor in the exercise of the discretion.    True it may be that over the whole life of the scheme ASIC     has demanded information only twice and the applicant has in    each case responded and cooperated, apparently to ASIC's       satisfaction.  However, it must be remembered that it was      the Queensland Law Society and not ASIC which was the          regulator until 28 February this year. 

I am not in a position to postulate what, if any, remedies     the contributories may have against the applicant arising      out of the circumstances in which the moneys were advanced     and the subsequent management of the loans.  Suffice it to     say, the possibility of the contributories having recourse     against the applicant is a real one and it gives rise to a     real potential for conflict between the applicant's duty to     the contributories and its own interests.

Counsel for ASIC drew my attention to trenchant criticism of a former member of Bells Solicitors by Justice Chesterman in another case concerning solicitors' mortgage lending: C A & M E C McInally Nominees Pty Ltd and HTW Valuers (Brisbane) Pty Ltd [2001] QSC 388. I have not taken that into account for several reasons. There was no connection between the transaction considered in that case and the present scheme, let alone the four remaining loans. Counsel for the applicant conceded that the solicitor in question had had some past involvement in the scheme I am considering, but he is not a member of the ongoing firm Steindl Bell Lawyers and he would have no involvement in the winding up if I appointed the applicant to conduct it.

In the case of each loan, a substantial majority in number     and value of the contributories has voted in favour of the     applicant's proposal that it be entrusted with the winding     up under the supervision of two chartered accountants from     Hall Chadwick.  A number of them were collectively             represented by counsel who supported the submissions made on    behalf of the applicant.   They expressed confidence in the     applicant's capacity to wind up the scheme and concern at      the costs which would be incurred if independent liquidators    were appointed.

ASIC has expressed concern at the extent and accuracy of the    information provided to the contributories upon which their     votes were sought on various alternatives in relation to the    winding up of the scheme.  It has expressed concern that       there has been nondisclosure of contributories' potential      rights against the applicant or its solicitors.  It has        expressed concern that proper details of the costs of the      proposed supervisors as compared to those of an independent     liquidator have not been provided.  It has expressed concern    that unexplained statements to contributories that the                  appointment of an independent liquidator may have           implications on proceedings against a valuer and that there may be problems in an independent liquidator being comfortable in securing payment. I am not in a position to resolve these issues on this application, but suffice it to say that they illustrate the potential for conflicts between the applicant's duty to contributories and its own interests.

I gained the impression that the contributories' principal concern is that of the potential costs of the winding up.  I was pressed with a submission that there would be an almost inevitable saving in costs if the applicant were appointed to conduct the winding up under the supervision of accountants from Hall Chadwick by virtue of its familiarity with the scheme.

After some confusion, by the conclusion of a hearing the applicant's proposal had apparently become that:

(1)  If appointed to wind up the scheme the applicant would   not charge a day to day management fee.  Presumably it     would charge for work strictly in the nature of winding   up such as work in the realisation of securities, et      cetera.

(2)The supervisors, the accountants from Hall Chadwick, would charge $150 per hour plus GST and out of pocket expenses for reviewing actions taken by the applicant and advisory work and reserved "the right to charge their normal rates as recommended by the Insolvency Practitioners Association of Australia if ... requested to investigate and make decisions."

(3)Any legal work would be performed by Steindl Bell Lawyers.  Fees for work performed prior to 21 May 2001 when the new firm came into existence would be deferred until the conclusion of the winding up and then charged at reduced rates, while fees for work performed after that date would be charged at the Supreme Court scale and paid out of interest received.

ASIC proposed the appointment of Messrs Moloney and Geroff as liquidators.  They proposed charging in accordance with the Insolvency Practitioners Association scale for all work.

It is probably fair to conclude that this could well result in higher charges than those proposed by the applicant and the supervisors.  In relation to legal costs, Messrs Maloney and Geroff would continue to engage the current solicitors if they were prepared to act for less than market rates, provided there was no conflict of interest or it was not otherwise inappropriate.

The expressed wishes of the contributories are a significant factor in the exercise of the discretion to do what is appropriate for the winding up of the scheme.  So, too, is the very real possibility that the applicant's proposal would be less expensive than the appointment of independent liquidators.  However, there is a significant public interest in ensuring the transparency of the winding up process and the safeguarding of the rights of the contributories.  There is good reason to be concerned that the contributories may not be fully apprised of all the circumstances surrounding the making and management of the four loans in question, and that if the applicant's proposal were approved in response to their understandable concern to contain costs they might never appreciate the full extent of their rights.

I have concluded that independent liquidators should be appointed and I will ask counsel to submit a draft order.

...

HER HONOUR:  I order that the costs of all parties of and incidental to the application for winding up be costs in the winding up, such costs to be assessed on the standard basis.  As for the costs reserved by Justice Muir on 7 May 2002, I order that there be no order as to the costs of the adjournment on that day.

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