Blue Sky Private Equity Limited v Crawford Giles Pty Ltd

[2012] SASC 28

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

BLUE SKY PRIVATE EQUITY LIMITED v CRAWFORD GILES PTY LTD & ORS

[2012] SASC 28

Reasons for Decision of The Honourable Justice Gray

29 February 2012

EQUITY - TRUSTS AND TRUSTEES - APPLICATIONS TO COURT FOR ADVICE AND AUTHORITY - PETITION OR SUMMONS FOR ADVICE - GENERALLY

EQUITY - TRUSTS AND TRUSTEES - APPLICATIONS TO COURT FOR ADVICE AND AUTHORITY - PETITION OR SUMMONS FOR ADVICE - PARTICULAR CASES

Trustee of a unit trust seeks declarations, directions and advices from the Court with respect to questions that have arisen in the conduct and management of the trust - where declarations, directions and advices sought relate to the conduct of the former trustee and whether that trustee had validly declared a distribution and further whether there had been any valid redemption or partial redemption of units - advice sought as to how the current trustee is to proceed.

Held: declarations, advices and answers given.

Supreme Court Civil Rules 2006 (SA) r 206(1); Trustee Act 1936 (SA) s 90, s 91 and s 92; Administration and Probate Act 1919 (SA) s 69; Trustee Act 1925 (NSW) s 63, referred to.
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; Strang v Owens (1925) 42 WN (NSW) 183; In re Diplock [1948] Ch 465; Ministry of Health v Simpson [1951] AC 251; In re Musgrave [1916] 2 Ch 417; Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; Farrow Finance Co Ltd (in liq) v ANZ Executors & Trustee Co Ltd (1997) 23 ACSR 521; Re Magarey Farlam Lawyers Trust Accounts (2007) 99 SASR 40; Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653, considered.

BLUE SKY PRIVATE EQUITY LIMITED v CRAWFORD GILES PTY LTD & ORS
[2012] SASC 28

Civil

GRAY J.

1. In this proceeding the plaintiff, Blue Sky Private Equity Ltd, the trustee of a unit trust, the Professional Capital Investments Equities Trust, seeks declarations, directions and advices pursuant to sections 90, 91 and 92 of the Trustee Act 1936 (SA)[1] and the inherent jurisdiction of the Court with respect to questions that have arisen in the conduct and management of the Trust.

   [1]    See also Rule 206(1) of the Supreme Court Civil Rules 2006 (SA).

2. Crawford Giles Pty Ltd as trustee of the Runamuck Superannuation Fund, Julie Giles as trustee of 4 Iron Enterprises Trust and David Giles are unitholders in the Trust.  They are described together as the Giles Group in these reasons.  They are interested parties who have appeared in the proceeding.  No other unitholders have appeared.

3. When the proceeding was first listed for hearing, the Giles Group opposed a number of the directions sought by Blue Sky.  However, during the hearing Blue Sky and the Giles Group resolved on an agreed course of action.  The Giles Group joined with Blue Sky in seeking both advice and directions.  As advice and directions are sought from the Court, I have given consideration to the circumstances giving rise to the proceedings and heard submissions from both the trustee and the Giles Group as to why I should give the advice and directions sought.  I consider it appropriate to proceed in this way as there are a number of interested persons, who although served with the proceedings, have not appeared.  Those persons are unitholders, some in an identical position to the Giles Group and others in a different position. 

4. Before coming to discuss the advice and directions sought, it is necessary to trace the general history of the matter. 

   Background

5. The Professional Capital Investments Trust was established and governed by a constitution dated July 2005.  The former trustee and manager of the trust was PCI Equity Pty Ltd.  That company is now in liquidation.  On 31 March 2009, Blue Sky was appointed as trustee of the trust by order of the Supreme Court of South Australia. 

6. PCI Equity, the former trustee, was newly incorporated for the purpose of acting as trustee of the trust.  Its initial directors were Nick Barbato and Kevin Chin.  Mr Chin resigned as the director on 31 August 2006.  Mr Barbato continued thereafter as sole director until PCI Equity was placed in liquidation. 

7. The constitution contained provision for a custodian.  The role of the custodian, Australian Equity Trustee Ltd, was to receive all investment monies, to hold the assets of the fund and to distribute income.  Mr Barbato terminated the role of the custodian in December 2007. 

8. The Australian Financial Services licence of PCI Equity was restricted to provision of financial advice and dealings in financial products with wholesale investors.  It was a condition of the licence that PCI Equity hold a minimum of $50,000.00 in surplus liquid funds. 

9. An information memorandum was used to promote the trust.  This memorandum set out an investment strategy and investment criteria whereby the trust would invest in five to 12 Australian Securities Exchange listed Australian companies and two to three private Australian companies, would invest no more than 15 per cent of the portfolio in one company and would retain a minimum of between five and ten per cent of the portfolio in cash. 

10. The constitution serves as the trust deed of the trust.  The trust is a fixed unit trust.  There are no different rights attaching to units in the trust.  All units rank equally and are of equal value. 

11. The constitution provided for the appointment of a fund administrator.  MacKenzie Coultas Funds Administration were appointed as fund administrator on 31 May 2005.  The role of the administrator included maintaining a register of unitholders, processing redemption requests and preparing unit price calculations. 

12. The Australian Securities Investments Commission began investigating PCI Equity for purported breaches of its Australian Financial Services licence and of the Corporations Act 2001 (Cth). In June 2007, following the investigation, PCI Equity provided an enforceable undertaking to the Commission. Thereafter PCI Equity continued to operate under the enforceable undertaking until it was replaced as trustee by the plaintiff, Blue Sky. The enforceable undertaking required PCI Equity to prepare and circulate a second information memorandum setting out the trust’s investments as at the date of the memorandum, setting out how the unit price would be calculated once per week, stating that the fund had limited liquidity and informing all unitholders that they should have the intention to invest in the fund for a period of at least five years.

13. The constitution made provision for the appointment of an approved valuer.  No such appointment had been made.  The trustee was audited annually and the manager of the trust performed a valuation of the trust’s assets each week and calculated a unit price each week. 

14. The trust made four principal investments through share holdings in Haley Ltd, Firewire Ltd, CommStrat Ltd and Bio Central Laboratories Ltd.  As at 30 June 2008, 16,452,130 units of the trust were on issue.  The largest single investor was Christie Queensland Pty Ltd, being a company under the control of Matthew Perrin.

15. In late 2008, Mr Barbato commenced promoting a proposal for the creation of a separate fund he called the PCI No 2 trust.  Mr Barbato sought to involve Mr Perrin in this new fund.  Mr Perrin emailed Mr Barbato on 7 November 2008, stating that cash flow was “very tight” and forewarning that he would need to redeem his shares from PCI Equity post the Haley Ltd sale.  Mr Barbato responded to Mr Perrin the same day stating he wanted to close PCI No 2 by mid February 2009 and that:

    My aim is to close fund No.2 in mid Feb (assuming Haley money comes in 31 Dec).   Targeting at least $15m for Fund No.2.  I am hoping that you will have the wares to roll your existing investment of $4.6m and possibly top up to clean $5m by mid Feb.  I am not fussed if you took money out of Fund No.1 and reinvested in Fund No.2, so that total investment across two funds totaled [sic] $4.6-5m.

16. On 3 December 2008, Mr Perrin emailed Mr Barbato and outlined his plan which involved him receiving $4,500,000.00 from the trust and using this to buy out Babcock & Brown’s investment in a Chinese company called Global Mart Ltd before re-investing the same amount in PCI No 2.  Mr Barbato responded on the same date, stating:

    I have no problems at all with the list of events below.

    If you need extra capital for the buyout of Babcocks I am happy to have a look at it, given inflow of capital to PCI (even taking out your $4.5m) from Haley sale.  If there was an opportunity and is appropriate I would transfer this asset to No. fund as first investment once its [sic] set up.

17. In December 2008, a number of further transactions occurred.  Those transactions were preceded by a third party purchasing all the shares in Haley Ltd.  As a consequence the trust received $12,392,968.60 on 30 December 2008.  Mr Perrin further liaised by email with Mr Barbato and directly with MacKenzie Coultas regarding transfer of funds to the abovementioned company Christie Queensland and a company named Barana Capital Pty Ltd. 

18. MacKenzie Coultas emailed Mr Barbato stating that a payment to Mr Perrin could not be made on 31 December 2008 as the unit price had not been calculated.  However Mr Barbato instructed them to pay the $4,500,000.00 in accordance with Mr Perrin’s instructions.

19. On 30 December 2008, the trust made a payment of $2,823,107.40 to a bank account operated by Barana Capital.  On 31 December 2008, the trust made a further payment of $1,676,892.60 to the account of Christie Queensland – as noted earlier, an entity controlled by Mr Perrin. 

20. During January 2009, Mr Barbato was receiving redemption requests from unitholders.  He consulted with his advisers as to his powers to defer redemption payments.

21. On 7 January 2009, Mr Barbato was informed by MacKenzie Coultas that they did not believe he had the power to suspend redemptions.  On 9 January 2009, Mr Barbato emailed MacKenzie Coultas stating that he wanted to defer payment of distributions and redemptions, that the trust would invest in PCI No 2 and that the trust would use all the money in PCI to pay for the new investment in the second trust.  MacKenzie Coultas’ consequent internal correspondence reveals the following query:

    Should we request that he runs this past the auditors?  If investors find out that he paid perrin in advance and not the others... I also said to him to be very careful as he is already under the watchful eye of ASIC

    Further internal correspondence followed:

    I think he should pay those who had a redemption request in at the same time as Perrin so that its equitable between all investors. ...

22. Following this exchange, payments were made to the only other investors who had purportedly requested redemptions prior to this time – investors associated with MacKenzie Coultas. These payments were treated as full redemptions.  These entities associated with MacKenzie Coultas have repaid the funds received.  The Perrin and MacKenzie Coultas interests were the only unitholders to receive a full payment in response to a redemption request.

23. On 16 January 2009, MacKenzie Coultas made a payment of $5,400,000.00 to Perrin’s account. The transfer was stated to be:

    … an investment from Fund No.1 into Fund No.2 and then Fund No.2 will be investing directly into GlobalMart. …

24. Having regard to the evidence of Mr Barbato at his examination in the Federal Court, it may be concluded that the payment was made in circumstances where Mr Barbato: was aware that PCI No 2 had not been established as a trust; had requested, but not received, audited accounts of Global Mart; was in receipt of documents pre-signed by Mr Perrin that he was instructed to fill in himself; had had no communication with any director of Global Mart other than Mr Perrin; was aware that PCI No 2 had its own bank account but the funds were transferred to Mr Perrin’s personal account in the belief that Mr Perrin was better placed than the Australian banking system to transfer funds promptly overseas; had received no communication from Babcock & Brown, the party supposedly selling its interest in Global Mart, in respect of the investment; and, understood that the trust would not have liquidity to pay out redemptions to other investors until the $5,400,000.00 had been repaid.

25. During January and February 2009, many unitholders communicated with Mr Barbato seeking to have their units repurchased or redeemed.  There is no suggestion that these unitholders were other than bona fide.  In February 2009, part payments were made to a number of unitholders.  Eleven investors who had lodged withdrawal requests between 5 January and 12 January 2009 received payments totalling, in aggregate, approximately $425,000.00.  The investors who received funds were: Runamuck Super Fund ($42,212.35), 4 Iron Enterprises Trust ($85,315.83), Dr MAC Nugent Pty Ltd S/F ($49,891.52), Gary and Judy Owen, Rex Super Fund ($103,303.47), Matthew Belfrage ($5,735.79), Kate Meaney ($4,301.84), Gary Robb & assoc S/F ($45,396.53), Robert Nairn Pty Ltd ($23,025.75), Ally D Pty Ltd ($17,383.78), J & A Butterworth Nominees ($22,930.17) and David Giles ($23,719.78).  This group of investors is referred to as the “Group Two” investors.

26. Other investors had lodged withdrawal requests in January and February 2009, but did not receive any payment. Further, redemption certificates were generated for other investors who did not receive a payment.

27. Records from MacKenzie Coultas disclose that it was contemplated that those investors who did not attempt to redeem would be unilaterally allocated an additional 25.03 per cent of units in the trust.  None of these transactions ever proceeded, and there is no indication of any assent to this proposed course by PCI Equity. 

28. On 26 February 2009, Mr Barbato emailed unitholders advising that all redemptions were suspended.  On 4 March 2009, Mr Barbato by letter advised investors of the purported reason behind the suspension of redemptions.  Thereafter, no further payments have been made to investors in response to the withdrawal requests lodged under clause 10 of the constitution.

29. On 3 March 2009, Mr Perrin was declared bankrupt.  On 4 March 2009, Christie Queensland was placed into liquidation.  On 16 March 2009, PCI Equity placed itself into voluntary administration and on 14 April 2009, was placed into liquidation.

30. In June 2010, Blue Sky commenced proceedings in the Federal Court of Australia against PCI Equity, Mr Barbato, MacKenzie Coultas and the insurer for PCI Equity and Mr Barbato.  In December 2010, Blue Sky settled the proceedings.  This resulted in a net recovery payment of approximately $1,890,000.00 being paid to Blue Sky on 22 December 2010.  Blue Sky provided unitholders with an investor update informing them of the settlement and foreshadowing a distribution in January 2011.

31. On 24 December 2010, MacKenzie Coultas wrote to Blue Sky stating that PCI Equity, as then manager of the trust had declared a distribution as at December 2008 totalling $4,554,302.01.  The letter requested that Blue Sky reinstate this distribution and pay it to unitholders.

32. On 17 February 2011, solicitors on behalf of the Giles Group wrote to Blue Sky seeking, amongst other things, an undertaking that no monies be distributed to any unitholder until the issues articulated in the letter were finalised.  The within proceedings were commenced on 30 March 2011. 

33. Before turning to discuss the declarations, advices and directions sought, it is convenient to set out some relevant clauses of the constitution.  Clause 8 is headed “Income of the Trust” and is in the following terms:

    8.1 Entitlement

    Subject to the rights conferred and subject to this clause 8, at the end of each Financial Year, the Unitholders shall be entitled to payment of the Taxable Income derived by the Trust during the Financial Year in proportion to Units held.

    8.2 Distributions

    (a)     The Manager shall make or cause to be made distributions of the Income of the Trust biannually ending on the last days of December and June in each Financial Year.

    (b)     The first distribution will be for the period from the Completion Date until the end of that half year period. 

    (c)     The payments of such distributions will be made one calendar month after the end of each half and the Manager shall include or cause to be included a statement setting out the particulars of the distribution.

    (d) Notwithstanding anything to the contrary contained in this Constitution, the Manager shall ensure that the Custodian shall make distributions directly to the Unitholders, provided however that the Manager shall be entitled to direct the Custodian to deduct from any amount so payable on whatever account an amount on account of any Tax which is payable or subject to deduction or withholding by, or assessed to, the Custodian. The Unitholder will be advised of such deduction at the time the payment or distribution is made and this will be sufficient for the Manager to discharge its duties under this Constitution in this regard.

    8.3  Accounts

    The Manager shall send, or cause to be sent, within six weeks of the Audit of the Accounts being completed to each Unitholder:

    (a)     a statement of the Accounts for that Financial Year in relation to the Assets;

    (b)     a copy of the report of the Auditor on the statement set out in clause 8.3(a).

    8.4  Income or Capital

    Subject to any express provisions in this Constitution to the contrary, if any question shall arise as to whether any money or property constitutes income or capital the question shall be determined in accordance with this Constitution and having regard to generally accepted accounting principles and to any provisions of the Income Tax Act which operate to treat receipt and dispositions otherwise than in accordance with generally accepted accounting principles and if any question shall arise as to whether any expense is chargeable against income or capital (or at all) such question shall be determined in accordance with this Constitution.

34. Clause 10 of the constitution concerns redemption of units, and relevantly provides:

    10    Redemption of Units

    10.1   Manager Will Repurchase or Redeem Units

    Subject to the succeeding provisions of this clause 10, the Manager hereby convenants that it will during the continuance of the Trust at the rerquest of a Unitholder repurchase from such Unitholder, or at the option of the Manager cause the redemption of, the Units to which such request relates at the Repurchase Price calculated in accordance with the provisions of this Constitution provided that:

    (a)    the Manager may in its sole discretion refuse to repurchase or cause to be redeemed Units in the Trust to a value of less than the Minimum Withdrawal unless the aggregate Unit Value of the total number of Units in the Trust held by the requesting Unitholder is less than the Minimum Unitholding and the request relates to all of the Units held;

    (b)    where the repurchase or redemption pursuant to a request by a Unitholder would result in the value of the total number of Units held by that Unitholder being less than the Minimum Unitholding the Manager shall be entitled without request from the Unitholder to repurchase or cause to be redeemed the balance of the Units in the Trust held by the Unitholder; and

    (c)    the Manager may in its sole discretion for a period of no more than 60 days or such longer period as the Manager considers reasonable refuse to repurchase or cause to be redeemed Units where such repurchase or redemption within that period would result in the Manager or the Trust having insufficient funds or such repurchase or redemption would otherwise prejudice the interests of the remaining Unitholders.

    10.2   Manner of Request

    (a)The Withdrawal Request shall specify the number or dollar amount and Units required to be redeemed or repurchased and shall be made in any one of the following ways:

    (1)In writing in such form as from time to time is prescribed by the Manager and delivered to any office of the Manager or any other place agreed to in writing by the Manager;

    (2)In such other manner as is from time to time prescribed by the Manager.

    (b)     A Withdrawal Request may not be withdrawn or revoked except with the written approval of the Manager.

    10.3Receipt of Notice

    The Units comprised in the Withdrawal Request shall be repurchased by the Manager or at the option of the Manager caused to be redeemed not later than sixty days following receipt of the Withdrawal Request (which shall be the time of actual receipt of the Withdrawal Request is received before 12.00 noon on a Business Day, or the commencement of business on the next following Business Day if received on a day which is not a Business Day or after 12.00 noon on a Business Day) provided that if the cheque for the Subscription has not been honoured and the proceeds of that cheque have not been received, the Managermay [sic], notwithstanding clause 10.1 and 10.2, at its sole discretion refuse to repurchase, cause a redemption or redeem (as the case may be) or distribute income in relation to those Units until the Business Day following the day upon which such cheque is honoured by the Bank on which it was drawn and the proceeds of that cheque received.

    10.4   Proceeds of Repurchase or Redemption

    (a)     Subject to the provisions of clause 10.5, on repurchase or redemption (as the case may be) the Manager shall in respect of each Unit comprised in the Withdrawal Request pay or cause to be paid to the Unitholder an amount equal to the Repurchase Price applicable to the Unit as at the time the Manager next calculates the Net Assets following receipt by the Manager of the Withdrawal Request.

    (b) If there is any undistributed income entitlement of the Unitholder standing to the credit of the Unitholder in the Accounts (that is, a distribution to be made under clause 8.2(a) or 8.2(b) but not yet paid under clause 8.2(c)) in respect of the Units comprised in the Withdrawal Request, such entitlement shall remain credited to the Unitholder and be distributed to the Unitholder in accordance with the provisions of this Constitution notwithstanding that the Unitholder has ceased to be the holder of the relevant Units.

    (c)     The Manager shall be entitled to deduct from the moneys payable to the Unitholder in accordance with clause 10.4(a) and clause 10.4(b) any fees or other moneys unpaid by the Unitholder in their capacity as Unitholder to the Manager and the total amount to be paid to the Unitholder for all the Units specified in the Withdrawal Request shall be rounded downward to the nearest cent.

    10.5Repurchase or Redemption

    (a)     Where the Units specified in the Withdrawal Request are being repurchased, the Manager shall pay to the Unitholder the moneys referred to in clause 10.4 out of the Manager’s own funds.

    (b)     Where the Units specified in the Withdrawal Request are being redeemed, the Manager shall:

    (1)pay (or cause to be paid) to the Unitholder (or to the Manager for the account of the Unitholder on the terms of clause 10.5(f) all or part of the moneys referred to in clause 10.4 out of the Net Assets of the Trust (or if there shall be any unpaid fees or other moneys owed by the Unitholder to the Manager to pay those moneys to the Manager for its own benefit and the balance to the Unitholder or to the Manager for the account of the Unitholder on the terms of clause 10.5(f)) and the Manager shall ensure that a sufficient amount of the Assets are available in Cash to enable such payment to be made; and/or

    (2)distribute (or cause to be distributed) to the Unitholder or to hold on behalf of the Unitholder such Assets as the Manager shall specify having a value (ascertained in accordance with clause 17) equivalent to the moneys referred to in clause 10.4 or the balance of such moneys where a payment is also made in accordance with clause 10.5(b)(1) (less the amount of any unpaid fees or other moneys owed by the Unitholder to the Manager, which shall be paid to the Manager in Cash) in such manner as the Manager determines.

    and the Manager shall use reasonable endeavours to ensure that after such redemption the Trust will retain sufficient Assets to meet any commitments of the Trust.

    (c)     Upon receiving a direction in accordance with clause 10.5(b), the Custodian shall pay to the Unitholder (or to the Manager for the account of the Unitholder, where applicable) the moneys referred to in clause 10.4 having, if necessary, realised such of the Assets as have been for the purpose specified in writing by the Manager, distribute to the Unitholder the Assets specified by the Manager or hold the Assets specified by the Manager for the benefit of the Unitholder (as the case requires).

    (d)     If the moneys paid or Assets distributed to the Unitholder shall have been furnished from the Net Assets pursuant to clause 10.5(b), redemption of the Units is effective on the day when payment of such moneys is deemed by clause 22.2(b) to have been made or the Assets are so distributed, and the Units shall not be released, but this shall not restrict the right of the Manager to create additional and/or to issue further Units of the Trust.

    (e) If the moneys paid to the Unitholder shall have been provided wholly out of the funds of the Manager pursuant to clause 10.5(a), repurchase of the Units in respect of which the moneys so provided have been paid is effective on the day when payment of such moneys is deemed by clause 22.2(b) to have been made, and the Manager shall be entitled to the benefit of the Units and may at any time thereafter resell each of such Units in accordance with the terms of this Constitution.

    (f)     Where the Custodian pays all or part of the moneys referred to in clause 10.4 to the Manager for the account of the Unitholders pursuant to clause 10.5(b)(1) out of the Net Assets, the Manager shall hold such moneys exclusively for the benefit of the respective Unitholders entitled to such moneys and shall remit those moneys to the Unitholders as soon as practicable, (but in any event not later than the expiration of the period referred to in clause 10.3).

    10.6Entry in Register

    On repurchase or redemption the Manager shall make an appropriate entry in the Register specifying the number of Units in the Trust which have been repurchased or redeemed.

    10.7Redemption of Units Held by Manager

    (a)Notwithstanding that the Manager has repurchased any Units itself, the Manager shall be entitled at all times and from time to time to request that redemption of Units to the benefit of which it is entitled by virtue of the provisions of this Constitution.

    (b)The provisions of this clause 10 shall apply so far as they are applicable and unless otherwise provided elsewhere in this Constitution in respect of all or any of the Units held by the Manager in respect of which a redemption request is made.

    10.8Suspension of Obligation to Repurchase

    The obligations of the Manager to repurchase or redeem Units in the Trust from a Unitholder pursuant to the preceding provisions of this Constitution relating to or howsoever concerning the repurchase or redemption of Units from Unitholders shall be suspended if the Trust shall be terminated provided that notwithstanding termination of the Trust the Manager shall be obliged to redeem or repurchase Units where the request for redemption or repurchase shall have been received prior to the date of termination of the Trust.

    Declarations

1. Blue Sky seeks declarations that:

   -PCI Equity did not validly declare any distribution from the trust as at 31 December 2008.

   -Blue Sky is under no obligation to make a distribution of $0.27 cents per unit to all unitholders as a distribution of profits for the period ending 31 December 2008.

   -There has been no valid redemption or partial redemption of the units held by the Group Two investors. 

   -The unit price calculated by PCI Equity was incorrectly valued at $1.0783 cents per unit for each of the Group Two investors.

   -Blue Sky is entitled to offset from each of the Group Two investors the future redemption from the trust until such time as those redemptions equate to the total amount of $0.27 cents per unit received by each of the Group Two investors.

2. I am satisfied that it is appropriate to make each of the declarations sought.  There is ample evidence to support the conclusion that there was no valid declaration of a distribution as at 31 December 2008.  The records of the trustee do not support a conclusion that a distribution was made.  Further, it may well be that PCI Equity was acting in breach of trust in and about December 2008 in preferring the interests of one particular unitholder against all others. In these circumstances, Blue Sky is under no obligation as the present trustee to take any action in regard to the purported December 2008 distribution declaration.

3. In my view, the evidence establishes that there was no valid redemption or partial redemption of the units of each of the eleven unitholders identified earlier in these reasons as the Group Two investors. 

4. The evidence placed before this Court as to the valuation of the assets of the trust at relevant times, establishes that the units in the period from December 2008 to February 2009 were incorrectly valued at $1.0783.  The payments made in consequence of the purported distribution declaration and consequent on the purported redemption or partial redemption of units were made without any apparent legal basis to do so and the trustee was entitled to offset from each of the unitholders future redemptions from the trust until such time as those redemptions equate to a total amount received in February 2009 by each unitholder who purported to redeem or partially redeem. 

   Advice and Directions

5. The trustee tendered to the Court valuation evidence to enable the Court to consider the unit value as at 26 February 2009.  The evidence as to the assets held by the trust are not in issue.  Ernst and Young provided a written valuation of those assets.  Claims against third parties have been finalised subsequent to 26 February 2009.  However, those claims were in existence as choses in action as at 26 February 2009.  The amount recovered from those third parties is not in issue and is established by business records tendered to the Court.  An adjustment was made to add back the cost of the Ernst and Young valuation.  The total value of the assets of the trust once the above calculations have been made is $6,793,509.37. 

6. The evidence establishes that there were 13,535,289 units as at 26 February 2009.  This leads to a unit value of 0.5019.  A full redemption of a unit as at 26 February 2009 would accordingly be at a price of $0.5019.  I am satisfied, having regard to the evidence tendered to the Court, that it is appropriate for the trustee to proceed on the basis that the unit price as at 26 February 2009 is $0.50 per unit.  This represents a price of $0.5019 rounded down to $0.50. 

7. On 16 September 2011, the Court was informed that the trustee wished to make an offer to all unitholders to resolve possible disputes concerning the activities of the former trustee, PCI Equity.  The Giles Group indicated to the Court that this was a course that they supported.  I am satisfied that it is appropriate to give Blue Sky, as the present trustee, advice and directions.  Blue Sky appears to have made full disclosure of all relevant matters known to it and I consider that it is entitled to proceed under the protection of advice and directions from the Court. 

8. Such a course is authorised by the provisions of the Trustee Act and in particular section 91. Sections 90-92 of that Act provide:

   90—Parties entitled may apply to Court by summons

   (1)     Any person entitled to apply for an order of the Supreme Court under this Act may apply by summons, and may give evidence, by affidavit or otherwise, in support of that summons, and may serve such person or persons with notice of the application as he may deem entitled to service thereof.

   (2)     Upon hearing the application the Court may either dispose of the matter in the first instance, or may direct a reference to the Master to inquire into any facts which require investigation, or may direct the application to stand over until the right of the applicant has been declared in an action instituted for that purpose, or to enable the applicant to adduce evidence, or for further consideration, or to enable notice or any further notice of the application to be served upon any person, and may deal with the applicant, and may make such order with respect to costs as shall seem just.

   91—Advice and directions of court and commission

   Sections 69 and 70 of the Administration and Probate Act 1919 apply to trustees as defined by this Act, and section 90 of this Act shall extend to applications under either of the same sections, but without limiting the powers of the Supreme Court, apart from the said section 90, with regard to such applications.

   92—Power to make order in action or matter

   When in any action or matter, either by the evidence adduced therein, or by the admission of the parties, or by a report of the Master, the facts necessary for an order under this Act appear to the Supreme Court to be sufficiently proved, the court may make such order under this Act.

   Sections 69 and 70 of the Administration and Probate Act 1919 apply to trustees as defined by this Act, and section 90 of this Act shall extend to applications under either of the same sections, but without limiting the powers of the Supreme Court, apart from the said section 90, with regard to such applications.

9. Section 69 of the Administration and Probate Act 1919 (SA) is headed “Public Trustee and other persons may obtain judicial advice or direction” and relevantly provides:

   (1)The Public Trustee shall, and any trustee, executor, or administrator may, when in difficulty or doubt, apply to a Judge for advice or direction as to matters connected with the administration of any estate, or the construction of any will, deed, or document.

   (2)Such application may be made either without notice to or upon summons served upon any of the parties interested.

   (3)Any person interested in any estate, who is dissatisfied with the conduct of the Public Trustee in any matter connected with the management or administration thereof, may apply to a Judge by summons to be served upon the Public Trustee to review such conduct.

   (4)A Judge may, upon the hearing of an application under this section, make any order, declaratory or otherwise, that he sees fit as to the administration of the estate, or the construction of the will, deed, or document, which is the subject of the application, and also as to the costs of the application.

   (5)Any such order made in the absence of an interested party shall have the same effect, or be of the same force or validity, so far as regards protection to the Public Trustee, or other trustee, or the executor, or administrator, as if the same had been a decree or order made in an action where all parties concerned were represented.

   (6)The Judge may refer any question of law arising on an application under this section for the opinion of the Supreme Court, or may direct an issue to be tried by, or an action to be instituted in, the Supreme Court.

10. I also mention Rule 206(1) of the Supreme Court Civil Rules 2006 (SA), to which, along with the above provisions of the Trustee Act, the within application is made pursuant.  That Rule is headed “Actions for administration”, and relevantly provides:

    (1)In an action related to a trust or deceased estate, the Court may (if it thinks fit) determine questions arising in the action without making an order for administration.

11. The scope and reach of the relevant comparable advice and directions provision of the Trustee Act 1925 (NSW) was considered by the High Court in Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand.[2]  The High Court approved, and it might be suggested, encouraged, trustees in appropriate cases to make applications for advice and directions.  It was pointed out that in performing this role, the Court in a non-adversarial proceeding was in substance giving draft advice.  The observations of the High Court directly support the course followed by the trustee in this proceeding. 

    [2]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66.

12. Before turning to discuss the advice and directions sought, it is convenient to say something more about the decision of the High Court in Macedonian.  In the decision, the High Court was concerned with section 63 of the New South Wales Act, which is in comparable terms to the scheme in place in South Australia.  The Court expressed their observations with respect to section 63 to be applicable to State comparators.[3] The plurality, Gummow A-CJ, Kirby, Hayne and Heydon JJ undertook a detailed analysis of the progenitor provisions and made the following general points about section 63.[4]  First, in the absence of express words, implications are not to be read in to sections conferring jurisdiction.  The Court did however identify one jurisdictional bar to section 63 relief; namely, that the applicant “must point to the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument.”[5]  Second, again in the absence of express words, no limitations on the power to give advice are to be read in.  For similar reasons, it was said that, third, there was no limitation on discretionary factors.  Fourth, the summary character of section 63 procedure was emphasised.  Fifth, the private and personal advice function of section 63 was identified:[6]

    …s 63 operates as "an exception to the Court's ordinary function of deciding disputes between competing litigants"; it affords a facility for giving "private advice". It is private advice because its function is to give personal protection to the trustee.

    [Footnote omitted.]

    [3]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, fn 48.

    [4]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, [54]-[74].

    [5]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, [58].

    [6]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, [64].

13. The role of context was the sixth matter identified by the Court.  More specifically, it was observed that the application of section 63 will tend to vary with the type of trust involved.  Finally, the relationship of section 63 to rights of indemnity was identified as the seventh matter, and as to this matter the following was said:[7]

    In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of personal liability for costs.

    [7]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, [71].

14. The Court made it clear that an application for judicial advice is not only directed to the personal protection of the trustee, but equally to the purpose of protecting the interests of the trust.[8]

    [8]    Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, [72].

15. Predating the decision in Macedonian, Debelle J, in Re Magarey Farlam Lawyers Trust Accounts (No 3), extensively reviewed the history of the mechanism in South Australia of a trustee, executor or administrator applying to the Court for advice and directions.  It is convenient to set out a substantial passage from Debelle J’s reasons:[9]

    [9]    Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, [41]-[47].

    The ability to apply for directions is a well-established procedure available to those administering the affairs of others. Two well-known instances of the procedure are the ability of the liquidator of a company to apply for directions pursuant to s 479 of the Corporations Act 2001 (Cth) and the ability of a trustee, executor or administrator of the estate of a deceased person to apply for advice and directions: s 69 of the Administration and Probate Act 1919 (SA) and s 91 of the Trustee Act 1936 (SA).

    The application for directions has a relatively long pedigree. In Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 McLelland J examined the historical development of the various statutory provisions for directions in England and in New South Wales. I gratefully adopt his analysis and add a note on the development of the procedure in South Australia.

    A statutory procedure for application for directions by a trustee, executor or administrator was introduced in England by s 30 of the Law Property Amendment Act 1859 (UK) (22 and 23 Vict c 35). Those provisions had developed from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the court. The two main classes of such persons were, first, trustees of trust property, or executors or administrators of a deceased estate, under administration by the court pursuant to a decree for general administration and, secondly, receivers (and managers) appointed by the court in respect of property the subject of litigation. McLelland J said (at 677):

    These various statutory provisions for directions were a development from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the court. Two main classes of such persons were (1) trustees of trust property, or executors or administrators of a deceased estate, under administration by the court pursuant to a decree for general administration, and (2) receivers (and managers) appointed by the court in respect of property the subject of litigation. In such cases the exercise by those persons (to whom I will collectively refer as official administrators) of administrative or managerial functions was subject to close control by the court and in many instances they could safely exercise their powers only with the approval, and in accordance with the directions, of the court see, eg, as to trustees, Re Furness [1943] Ch 415, and as to receivers and managers, Gardner v London Chatham and Dover Railway Co (No 1) (1867) LR 2 Ch App 201 at 211 and Rosanove v O'Rourke [1988] 1 Qd R 171 at 173.

    Generally speaking, if the court gave a direction to an official administrator who had made a full and fair disclosure to the court of the material facts, the official administrator might act in accordance with the direction without thereby incurring personal liability to any of the persons in whose interests the administration was being conducted, for example, creditors or beneficiaries of a deceased estate: see Waller v Barrett (1857) 24 Beav 413; 53 ER 417; Dean v Allen (1855) 20 Beav 1; 52 ER 502; Williams v Headland (1864) 4 Giff 505, 66 ER 806, Pinnock v Hull (1876) 2 VLR (Eq) 18 at 24-25 and Chisholm v Gilchrist (1902) 2 SR (NSW) (Eq) 84; (1902) 19 WN (NSW) 140 at 86.

    Section 30 of the 1859 Act in the United Kingdom was soon adopted and enacted in South Australia by s 25 of the Act No 6 of 1860 entitled An Act to amend the Law of Property and for other purposes, a provision in almost identical terms of s 30 of the 1859 Act. It provided:

    25.Any trustee, executor, or administrator shall be at liberty, without the institution of a suit, to apply by petition to the Court for the opinion, advice, or direction of the Court, on any question respecting the management or administration of the trust, property, or the assets of any testator or intestate, such application to be served upon, or the hearing thereof to be attended by all persons interested in such application, or such of them as the Court shall think expedient, and the trustee, executor, or administrator, acting upon the opinion, advice, or direction given by the Court, shall be deemed, so far as regards his own responsibility, to have discharged his duty as such trustee, executor, or administrator, in the subject matter of the said application: Provided, nevertheless, that such application shall not extend to indemnify any trustee, executor, or administrator in respect of any act done in accordance with such opinion, advice, or direction as aforesaid, if such trustee, executor, or administrator shall have been guilty of any fraud, or wilful concealment, or misrepresentation, in obtaining such opinion, advice, or direction; and the costs of such application shall be in the discretion of the Court.

    Section 25 (and s 30 of the 1859 Act) made the protection of the official administrator explicit in terms which broadly reflected the position under the general law following a decree for general administration. The proviso to s 25 was particularly relevant. The official administrator was protected only if full disclosure had been made.

    In South Australia in 1880 the ability to obtain the advice and direction of this Court was extended to Public Trustee by s 28 of the Public Trustee Act 1880 (SA). The terms of s 28 were, however, similar to what is now s 69 of the Administration and Probate Act. The predecessor of s 69 was s 99 of the Administration and Probate Act 1891 (SA). It was in identical terms to what is now s 69 save that s 69 is now set out in six subsections which contain the provisions of the four subsections in s 99 of the 1891 Act.

    In 1893 the Trustee Act 1893 (SA) repealed, among other statutory instruments, s 25 of the Act No 6 of 1860. Section 78 of the Trustee Act 1893 provided a power for a trustee to obtain the advice and direction of the court in terms which are very similar to what is now s 91 of the Trustee Act 1936.

    These are the legislative antecedents of what is now s 69 of the Administration of Probate Act 1919 and s 90 of the Trustee Act 1936 and of s 37 of the Public Trustee Act 1995 which preserves the ability of Public Trustee to apply to the court for directions. It is unnecessary for present purposes to examine the later history of what is now s 479 of the Corporations Act. It is sufficient to refer to Nathan (at 677).

    Section 47 of the Legal Practitioners Act is but another instance of a statutory procedure for application for directions based on s 30 of the 1859 Act of the United Kingdom and the other provisions in this State which have since been enacted.

    [Footnotes omitted.]

1. In the within proceeding, Blue Sky sought advice and direction in the following terms to enable it to proceed to make an offer to unitholders:

   1.To determine the unit price of units in the Professional Capital Investments Equities Trust as at 26 February 2009 at $0.50 cents per unit;

   2.To make the following offer in order to resolve outstanding claims for redemption:

   That the Group Two and Group Three investors (as referred to at paragraph 78.3 of the Mark Sowerby Affidavit sworn 4 April 2011) elect within 14 days of the service of this Order to either:

   2.1    accept the sum of $0.50 cents per unit in full redemption of their units (other than any units subscribed for in the Rights Issue of December 2009) to be paid when the suspension on redemptions is lifted or when the Trust is finally wound up, whichever is earlier; or

   2.2    withdraw their redemption requests.

   3.That any Group Two and Group Three Investors that fail to make an election within 14 days referred to in Order 2 above is deemed to have elected to withdraw their redemption requests.

   4.That pursuant to Order 2 above the Group Two Investors will retain their payments from February 2009, and no recovery action will be taken, but these amounts will be set off against any final payment.

   5.That all Unitholders who participate in the Rights Issue be entitled to retain their or its units obtained under the Rights Issue and that such units rate equally with all other units of the Trust.

   6.That the trustee finalise and pay any and all redemption requests referred to in Order 1 above prior to any income or any other distribution being made to all other Unitholders of the Trust.

2. I am satisfied that it is in the interest of the unitholders to resolve any outstanding claims for redemption through the mechanism of the above offer.  I am satisfied that the offer is on fair terms to all unitholders and that there is no unfairness between the Giles Group and other unitholders.  In the circumstances, I made an order in the above terms on 20 September 2011. 

   Questions Raised in the Application

3. Counsel for Blue Sky requested that the Court answer the following questions posed in the application.  Counsel for the Giles Group submitted that it was appropriate to answer the questions in the manner sought by the trustee.  I consider it appropriate to answer those questions. 

   Question 1

4. Question 1 is the following terms:

   Is the trustee under an obligation to make a specific distribution of “Income of the Trust” referable to the period ending 31 December 2008, and if so, was there an obligation to distribute $0.27 per unit?

   For the following reasons, the answer to this question – No.

5. The trust was established pursuant to the constitution.  That document serves as the trust deed of the trust.  The trust is a fixed unit trust.  There are no different rights attaching to units in the trust at any point in time.  All units rank equally, with equal rights to both income and capital of the trust.  The units in the trust are of equal value.[10]  The entitlement of unitholders to distributions of the ‘income of the trust’ is governed by clause 8 of the constitution.

   [10]   Clauses 4.1 and 4.2.

6. There are, the trustee submitted, two aspects to the distributions.  First, at the end of each financial year, the unitholders ‘shall’ be entitled to payment of the ‘taxable income’ derived by the trust during the financial year in proportion to the units held.[11]  Secondly, the manager shall also make a separate (interim) distribution of the ‘income of the trust’ as at 31 December in each year, however, the amount of that interim distribution is not prescribed by the constitution, and is within the discretion of the manager.

   [11]   Clause 8.1. 

7. The manager’s obligation under the constitution is to make the payment of distributions within one calendar month after the end of each half year – that is by 30 July and 31 January each year – and to provide unitholders with a statement setting out the particulars of the distributions.[12] 

   [12]   Clause 8.2(c).     

8. Clause 8 of the constitution concerns income of the trust and was set out earlier in these reasons.  The trustee submitted that the effect of clause 8 of the constitution is as follows:

   ·distributions of the ‘income of the trust’ are to be made biannually in respect of the income earned in the periods ending on 31 December and 30 June of each year (clause 8.2(a));

   ·by the end of each ‘financial year’, being the period of 12 months ending on 30 June in each year, unitholders are entitled to have received all of the ‘taxable income’ derived by the trust during the financial year in aggregate, on a prorated basis between unitholders (clause 8.1);

   ·the obligation under clause 8.1 of the constitution to distribute ‘taxable income’ (subject to the balance of clause 8) is fixed by reference to the concept of taxable income for the purpose of the Income Tax Assessment Act 1936;

   ·the underlying commercial purpose for the requirement to distribute all of the ‘taxable income’ during the financial year is so as to avoid separate taxation of that taxable income in the hands of the trust, also known as ‘entity taxation’. That is, under section 99 of the Income Tax Assessment Act a trustee who earns taxable income but who distributes it to the beneficiaries of the trust in the year in which the income was earned, is not liable to pay tax on the amount of that income, whereas the beneficiaries are.  By contrast, if the income is not so distributed, the trustee is liable to pay the tax, and to do so at the highest marginal rate.  To the extent that the beneficiaries are not liable to pay tax, or are entitled to pay tax at lower than the highest marginal rate, they suffer a detriment accordingly; and

   ·it is, however, within the discretion of the manager as to the extent to which ‘income of the trust’ is distributed at each of the half yearly rests. 

9. That is, while it is necessary that there be a distribution of income biannually, the obligation under clause 8.2(a) is not to distribute all of the ‘income of the trust’ (as calculated for that half year period) as at each half year, but such amount as the manager determines. 

10. I agree with this construction.  Importantly, there is different language employed between clauses 8.1 and 8.2(a).  Clause 8.1 provides a right in the unitholders to payment of their share of the ‘taxable income’.  Clause 8.2(a), by contrast, is not expressed in terms of a right of unitholders, but rather a duty in the manager.  Further, unlike clause 8.1, clause 8.2(a) is silent as to what distribution is required.  Finally, ‘income of the trust’ is defined under the constitution in a manner that includes all income, or revenue, under the application of generally accepted accounting principles.  This is a quite different concept to ‘taxable income’, which, of its nature, requires the subtraction of deductible expenses.  It is therefore akin to ‘profit’ under the application of generally accepted accounting principles, as opposed to ‘revenue’.  Accordingly, clauses 8.1 and 8.2(a) deal with very different concepts. 

11. In assessing whether there is ‘income of the trust’ to be distributed, the question whether receipts into the trust are to constitute income or capital of the trust is to be determined in accordance with the constitution, having regard to generally accepted accounting principles and the provisions of the Income Tax Assessment Act.[13]  The ‘income of the trust’ is therefore a matter determined by the provisions of the constitution.  The consequence of this, the trustee submitted, is that the manager is under an obligation to make biannual distributions of ‘income’, to the extent that there has been income received from investments.  However the extent of those distributions is entirely a matter for the discretion of the manager, provided that all ‘taxable income’ is distributed by year-end. 

    [13]   Clause 8.4. 

12. Providing that there was some income earned from the ‘investments’ of the trust in the half year, the trustee from time to time has an obligation to make a distribution referable to that half year period.  Further, the extent of that distribution is entirely within the discretion of the trustee from time to time; and there is no obligation to distribute all of the ‘income of the trust’ earned in the six month period to 31 December in each year.

13. The trustee was not under an obligation to make a distribution of all of the ‘income of the trust’ as at 31 December 2008, nor indeed was the trustee obliged to make a distribution of any specific sum under the terms of the constitution. 

    Question 2

14. Question 2 is the following terms:

    Is the trustee, in the events that have happened, under an obligation to make a distribution of $0.27 per unit to all unitholders of the trust other than the Group 2 Investors, as a distribution of profits in respect of the period ending 31 December 2008?

    For the following reasons, the answer to this question is – No.

15. The trustee identified seven matters in support of its argument that the above question ought to be answered in the negative; that is, that there is nothing from PCI Equity which indicates any intention to make a broad based distribution to all unitholders. I too shall refer to seven matters. 

16. First, the payment of the distribution was required to have been made by 31 January 2009,[14] and no such payments were made. Second, no statement was prepared setting out the particulars of the distribution in conformity with clause 8.2(c). Third, no unitholder received a payment outside of the lodgement of a redemption request. Fourth, there was no resolution or other document indicating the payment of a distribution. Indeed, the contemporaneous communications suggest that PCI Equity was not prepared to proceed with a distribution while there were insufficient funds held in the trust. Fifth, the proceeds of the sale of the Haley Ltd shares were not ‘income of the trust’. The proceeds of the Haley Ltd sale, which led to a contemplated distribution, were a capital receipt. In the circumstances, the trustee submitted that there was no obligation on PCI Equity to make a distribution of those profits as at 31 December 2008, and indeed that this was not ‘income of the trust’ available for distribution. I agree. Sixth, a worksheet before the Court could not have been effected permissibly under the constitution because there was no power to allot units in the trust as the means of effecting a distribution of income. Finally, a distribution in the manner contemplated in that worksheet, which proposed terms where PCI Equity was, unilaterally, to discriminate between unitholders, was contrary to the requirement that all units rank equally.[15]

    [14]   Clause 8.2(c).

    [15]   Clause 4.2.

17. Accordingly, PCI Equity did not in fact make a distribution of 27 cents per unit, or any other amount, as a distribution of ‘income of the trust’ as at 31 December 2008.  The trustee has no obligation to make such a distribution. 

    Question 3

18. Question 3 is the following terms:

    Does the trustee have a present obligation to redeem the units of any of the investors of the Trust pursuant to the requests made of the former trustee?

    For the following reasons, the answer to this question is as follows – No.

19. The repurchase and redemption of units is governed by clause 10 of the constitution.  Clause 10 contemplates, either, the ‘repurchase’ of units by the manager – that is, the purchase of the units by the manager acting in its own right – or alternatively, the redemption of units, which is where the manager, acting qua trustee, causes the units to be cancelled in exchange for a payment to the unitholder.  The effect of clause 10.1 is that, subject to the balance of clause 10, unitholders have a right to compel the manager to ‘repurchase’ the units.  The alternative of ‘redemption’ of units is at the option of the manager.

20. As earlier mentioned, pursuant to clause 4.2(b) there are no different rights attaching to units in the trust at any point in time.  Because the units in the trust are of equal value at any given date, central to the notion of repurchase or redemption is the need for the units in the trust to be frequently re-valued in order that the ‘repurchase price’ can be ascertained.  The earlier mentioned information memorandum provided that the unit price on any given day is calculated as the net value of the trust’s investments – net tangible assets pre-tax – and that the manager’s practice is to calculate the unit price at the end of each week.  The provisions of the constitution relating to the valuation of units are addressed further below.

21. For a unitholder to request the repurchase or redemption of their units, pursuant to clause 10.2 a unitholder must lodge a ‘withdrawal request’ indicating that the unitholder wishes for some or all of their units to be redeemed or repurchased. 

22. In cases of illiquidity, the manager may, in its sole discretion, refuse to repurchase units specified in the withdrawal request or refuse to cause such units to be redeemed.  The ability of the manager to exercise such a discretion arises “where such repurchase or redemption … would result in the Manager or the Trust having insufficient funds or such repurchase or redemption would otherwise prejudice the interests of the remaining Unitholders”.[16]

    [16]   Clause 10.1(c).

23. There is a presumption within clause 10.1(c) that the manager will not suspend the repurchase or redemption of units for a period of greater than 60 days, although that period may be extended for such longer period as the manager considers reasonable.  For the purpose of any longer period of suspension of repurchase or redemption of units, the manager must similarly have regard to whether the repurchase or redemption would have the stated effect of resulting in insufficient funds for the repurchase or redemption, or that it would otherwise prejudice the interests of the remaining unitholders.

24. A withdrawal request for the purpose of clause 10.2 is to specify the number of the units, or alternatively the dollar amount of the units, required to be redeemed or repurchased.  There is no notion in clause 10 of a partial redemption request pertaining to a fraction of a unit.  More generally, the constitution does not contemplate the division of units into fractions of a unit. 

25. The significance of the distinction between repurchase and redemption of units is that, where the units in the withdrawal request are being repurchased, the manager shall pay to the unitholder the moneys in question out of the manager’s own funds – clause 10.5.  Indeed, that is the very nature of a repurchase, that there is a transfer, rather than cancellation, of the units.  It follows that the manager cannot be acting qua trustee when acquiring the units pursuant to a ‘repurchase’, but acting in its own right, whereas the manager is acting qua trustee when effecting a redemption of units. 

26. Accordingly, to the extent that it is a repurchase of units, rather than a redemption of units, any breach of trust occasioned by a failure to comply with the constitution gives rise to a claim against PCI Equity in its own right, and not as against the trustee from time to time.       This is significant because under clause 10.1, the manager’s obligation is to repurchase the units in the ‘withdrawal request’, unless the manager has positively elected to cause the redemption of the units. 

27. Clause 10.3 specifies the timing obligation for the manager to respond to the withdrawal request.  It provides that the manager shall cause the repurchase or redemption not later than 60 days following receipt of the withdrawal request. 

28. It was pointed out by the trustee that in the case of each of the Group Two investors, that 60 day period had not yet elapsed by the time that the manager caused all redemptions to be suspended on 26 February 2009. 

29. The question that arises is as to the effect of a suspension of redemption or repurchase of units under clause 10.1(c) where notice of the suspension is given after a withdrawal request has been lodged.  The trustee submitted that the suspension is effective and no bar to a refusal to repurchase or redeem even in respect of those withdrawal requests that were already lodged, and, it was said, especially so where the 60 day period contemplated by clause 10.3 had not yet elapsed, as is the case here.

30. First, the manager’s right to refuse to redeem or repurchase units under clause 10.1(c) is expressed in terms of a plenary power which the manager may exercise in its sole discretion.  Second, the very nature of the discretion which the manager is to exercise under clause 10.1(c) is to refuse to redeem or repurchase units, which is only a discretion that falls to be exercised once one or more withdrawal requests have been lodged.  Third, the discretion to be exercised by the manager under clause 10.1(c) requires the manager to consider the effect that a redemption or repurchase will have upon the funds available to the manager or the trust.  That is only a discretion which can be exercised in the knowledge of the extent of the units to be redeemed or repurchased pursuant to one or more withdrawal requests, and the funds available at that time.  Other than in an extreme case – like that which emerged in early 2009 where substantial trust assets had been lost – the insufficiency of funds cannot be determined at large but only as a response to the withdrawal requests that had been lodged at any point in time.  This is an assessment which necessarily must occur later in time than the lodgement of any withdrawal requests.

31. Fourth, one of the purposes of the clause is to ensure that the interests of the remaining unitholders are not prejudiced by an obligation to redeem units.  Viewed objectively, the intention of this clause is to enable the manager to act in a responsive manner when the consequence of withdrawal requests would have this effect.  Fifth, this focus upon the position of the remaining unitholders is reinforced by the manager’s obligation under clause 10.5 to use reasonable endeavours to ensure that after redemption of units the trust retains sufficient assets to meet the commitments of the trust.

32. For these reasons, for so long as the suspension of redemption or repurchase is operative under clause 10.1(c), the trustee submitted that there is no present obligation to meet the withdrawal requests.  The suspension can remain in place for so long as the trustee reasonably considers that “such repurchase or redemption … would result in the Manager or the Trust having insufficient funds or such repurchase or redemption would otherwise prejudice the interests of the remaining Unitholders”.[17]  However, the question still remains as to whether, in the events that happened in early 2009, a redemption was effected, in whole or in part, by the actions of PCI Equity in respect of any of the unitholders.

    [17]   Clause 10.1(c).

33. For this purpose, the question is whether the actions of PCI Equity in early 2009, including the part payment to the Group Two investors, was in fact a redemption of units which must now be completed by the trustee.  The trustee submitted that it was not, and for the following reasons, I agree.

34. First, under clause 10.4(a), subject to the operation of clause 10.5, the manager’s obligation is to pay to the unitholder an amount equal to the ‘repurchase price’ in respect of each unit comprised in the withdrawal request.  This, the trustee submitted, has two consequences: it is not open to the manager to acquire or redeem some only of the units the subject of the withdrawal request; and it is a single payment of the ‘repurchase price’ which is to be made to the unitholder.

35. Further, clause 10.5(d) expressly provides for the point at which the redemption is effective.  That clause provides that redemption of the units is effective “on the day when payment of such moneys is deemed by clause 22.2(b) to have been made …”.

1. Clause 22.2(b) then speaks of payment to the unitholders by cheque which is when presented a good discharge to the manager.  Again, clause 10.5(d) is contemplating a single payment to the unitholder.  The redemption is effected only once the payment of the repurchase price has been made.  In the absence of payment of the repurchase price, no redemption has occurred.  Here, even in the case of the Group Two investors, there has been no payment of the repurchase price.

2. On the repurchase or redemption, the manager is to make an appropriate entry in the register of unitholders specifying the number of units in the trust which have been repurchased or redeemed.[18]  This has not occurred in respect of any of the units the subject of the withdrawal requests, including for those units of the Group Two investors.

   [18]   Clause 10.6.

3. Further, the payment cannot be characterised as a redemption of a fractional part of the units that are the subject of the withdrawal request.

4. Clause 10.2 provides for specification of the units which the unitholder ‘required’ to be redeemed or repurchased, which militates in favour of a construction that all of the units that are the subject of the withdrawal request are to be considered as a single transaction. 

5. Next, the redemption and repurchase regime under clause 10 contemplates a redemption or repurchase only where the transaction would see the unitholder disposing of the entirety of its holding, or otherwise disposing of at least $500,000.00 worth of units and at the same time still retaining $500,000.00 worth of units.  Clause 10.1(a) contemplates that the redemption or repurchase will be for an amount of at least the ‘minimum unitholding’ of $500,000.00, unless the unitholder holds units of less than that amount and the request relates to the whole of that unitholder’s holding.  Clause 10.1(b) recognises the inconvenience of unitholders retaining an ownership of less than the ‘minimum unitholding’, and permits the unitholder’s holding to be redeemed without request if the resultant holding would be for less than $500,000.00. 

6. Finally, there is no indication that it was the intention of PCI Equity, or any of the Group Two investors, to redeem some only of the units of Group Two investors by the partial payment.  That is, not only is such a regime inconsistent with the constitution, it is also inconsistent with the intention of PCI Equity, which is demonstrated by acknowledgments sent to the Group Two investors.  Those documents suggest that PCI Equity’s intention was to redeem all of the units that were the subject of the withdrawal requests, and that this is what was required by the Group Two investors.  The trustee submitted that it is not open, ex hypothesi, to give effect to a transaction which was inconsistent with the intention of the parties, so as to now characterise the payment as being a redemption of some only of the units held by the Group Two investors.

7. Consequently, even in respect of those unitholders who received a partial payment – the Group Two investors – there has been no effective redemption of their units. 

   Question 4

8. Question 4 is in the following terms:

   In respect of those Group [Two] Investors who have received a partial payment, how is that payment to be characterised:

   4.1     as a credit to the capital account of each such investor?

   4.2    alternatively, as a pro-rated redemption of certain of the units, as the unit price then prevailing?

9. The trustee contended that the answer to 4.1 above ought to be yes, but that in the event that it was answered in the negative, that the answer to 4.2 ought to be yes.   The consequence of my above conclusions and my acceptance of the submissions advanced by the trustee is that the Group Two investors received a payment which was neither a distribution of profit nor a valid redemption.  In that event, there is no indication that the payment was intended as a gift.  An inference to that effect would not be lightly drawn.  It is more likely that PCI Equity was intending to make an initial payment towards a full redemption of each of the Group Two investors’ units.  However, in accordance with my answers above, this was not the effect in law of PCI Equity’s actions.

10. It was submitted that ostensibly, the trustee could recover the amounts paid to the Group Two investors as money paid under a mistake of fact.  Where money has been paid either under a mistake of fact or under a mistake of law, there is a prima facie entitlement to recover that money as money had and received.[19]  It is sufficient if the mistake has caused the payment to be made; it is not necessary to demonstrate that the mistake was fundamental.[20]

    [19]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 378.

    [20]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 376-378.

11. The rationale for the law of restitution is unjust enrichment.[21]  In David Securities, the majority of the High Court observed:[22]

    …The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognizes would make an order for restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust.

    [Footnote omitted.]

    [21]   Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 227, 254-257, 267; Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662, 673; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.

    [22]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.

12. The trustee submitted that as the passage indicates, the burden of proof that there is no unjust enrichment lies on the payee, in this case the Group Two investors.  Enrichment is unjust because the payee has no right to receive it or, as the case may be, to retain the money or property which the payer has paid or transferred to him.[23] The question whether the enrichment is unjust is not to be determined by some subjective evaluation of what is fair or unconscionable.[24]  It depends on proving one of the established defences.

    [23]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 393.

    [24]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.

13. In addition, the trustee submitted that there is a right in equity to proceed either in rem (where there has been no mixing of the trust property with other assets) or in any event in personam against the recipients of the trust estate who have received funds by reason of mistake of fact or law, providing that the recipient did not receive the property for value without notice.

14. Each of the Group Two investors has received a payment without any consequential value being transferred to the trust.  None of the units have been cancelled.  Each of the Group Two investors is therefore a volunteer.

15. In those circumstances, where the transferee of trust property is a volunteer who takes without notice and there is no question of mixing, then the property is held on behalf of the trust, whose equitable rights persist.[25] 

    [25]   See Strang v Owens (1925) 42 WN (NSW) 183.

16. If the transfer is of moneys for a volunteer who innocently mixes it with money of his or her own, as was the case in In re Diplock,[26] there are special rules attaching to the proprietary remedy as laid down in In re Diplock and summarised in Jacob’s Law of Trusts in Australia.[27]  In addition, there is a right in personam to proceed in equity provided that the primary remedy against the defaulting trustee had first been exhausted or compromised.[28]There is no general defence of ‘change of position’ to the equitable claims,[29] unlike the position in respect of a common law claim for restitution.[30]

    [26]   In re Diplock [1948] Ch 465.

    [27]   JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [2711].

    [28]   See JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [2318] and [2710].

    [29]   Ministry of Health v Simpson [1951] AC 251, 276.

    [30]   David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.

17. The trustee submitted that it has an in personam claim against each of the Group Two investors in respect of the moneys paid to them. 

18. The trustee proposed to deal with the issue by recognising the payment as a credit to the capital account of each of the Group Two investors, and off-setting future distributions to which those unitholders may be entitled until the point is reached where each of the unitholders are treated ratably and therefore fairly. 

19. This is consistent, it was said, with the principle that a trustee may recover an overpayment out of any interest the beneficiary still has under the trust,[31] or out of future payments of income due to that beneficiary.[32] It is a general rule of equity that, in the administration of an estate, errors of account between trustees and beneficiaries will, as far as possible, be corrected.[33] The trustee therefore submitted that question 4 should be answered in terms that the payment to the Group Two investors is to be characterised as a credit to the capital account of each such investor.  I agree.  Accordingly, there is no need to consider the alternative proposed characterisation.  In reaching this conclusion, and bearing in mind my earlier conclusion that the payments were made not in accordance with the terms of the constitution, I have had regard to the observations of the High Court in Youyang Pty Ltd v Minter Ellison Morris Fletcher, in relation to the rigour of the rule that it is a trustee’s obligation to adhere to the terms of the trust in all things great and small, important and seemingly unimportant.[34]  Further, counsel drew my attention to the following passage in Jacobs Law of Trusts in Australia, which passage sets out five principles discerned by the authors from a number of decisions on the topic of erroneous payments to beneficiaries:[35]

    (1)Where a trustee has overpaid a beneficiary as a result either of a mistake of law or of a mistake of fact, the trustee is entitled to recoup the payments out of other funds due or to become due to the beneficiary under the same trusts, whether capital or income.

    (2)The trustee cannot so recoup, if the income of a beneficiary is subject to restraint or anticipation.

    (3)It makes no difference that the underpaid beneficiary in such circumstances is the trustee himself.

    (4)When a trustee has mistakenly paid a beneficiary he may usually recover against that beneficiary by utilising the common law remedy of money had and received.

    (5) Overpayments made in respect of one trust cannot be recouped out of payments due to the beneficiary from the same trustee under another trust.

    [Footnotes omitted.]

    [31]   See JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [1737] citing Livesey v Livesey (1830) 3 Russ 287; 38 ER 583; Dibbs v Goren (1849) 11 Beav 483; 50 ER 904; Re Powell (1907) 7 SR (NSW) 874; 24 WN (NSW) 217; Re Musgrave [1916] 2 Ch 417; Burns v Leda Holdings Pty Ltd [1988] 1 Qd R 214, 227.

    [32]   See JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [1737] citing Church v Talbot (1901) 1 Sr (NSW) Eq 13; 18 WN (NSW) 33; Re Musgrave [1916] 2 Ch 417; Macphillamy v Fox (1932) 32 SR (NSW) 427; 49 WN (NSW) 191; In re Ettelson [1946] VLR 217, 220; Re Robertson [1953] VLR 685; [1954] ALR 53.

    [33]   In re Musgrave [1916] 2 Ch 417.

    [34]  Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484, [32]-[44].

    [35]   JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [1738] citing a number of decisions. 

20. Of particular relevance are the decisions of Ministry of Health v Simpson[36] and In re Musgrave.[37]In Simpson, the personal representatives of an estate acting under a mistake of law distributed the deceased residuary estate on the basis that it was valid, to beneficiaries who received the payments in good faith.  The residuary disposition was invalid.  It was held that the next of kin not only had a claim against the personal representatives, but also a direct claim in equity against those who had wrongly received the residuary distribution, subject to having first exhausted remedies against the personal representatives.  In his speech, Lord Simons made the following observations, in effect stating that a legatee wrongly receiving a distribution, was not immune from a direct claim even if the legatee had spent the money:[38]

    Finally, my Lords, I must say some words on an argument of a more general character put forward on behalf of the appellant. The Court of Chancery, it was said, acted upon the conscience, and, unless the defendant had behaved in an unconscientious manner, would make no decree against him. The appellant or those through whom he claimed, having received a legacy in good faith and having spent it without knowledge of any flaw in their title, ought not in conscience to be ordered to refund. My Lords, I find little help in such generalities. Upon the propriety of a legatee refusing to repay to the true owner the money that he has wrongly received I do not think it necessary to express any judgment. It is a matter on which opinions may well differ. The broad fact remains that the Court of Chancery, in order to mitigate the rigour of the common law or to supply its deficiencies, established the rule of equity which I have described and this rule did not excuse the wrongly paid legatee from repayment because be had spent what he had been wrongly paid. No doubt the plaintiff might by his conduct and particularly by laches have raised some equity against himself; but if he had not done so, he was entitled to be repaid. In the present case the respondents have done nothing to bar them in equity from asserting their right. They can only be defeated if they are barred at law by some Statute of Limitations.

    [36]   Ministry of Health v Simpson [1951] AC 251.

    [37]   In re Musgrave [1961] 2 Ch 417.

    [38]   Ministry of Health v Simpson [1951] AC 251, 276.

21. In In re Musgrave, in giving advice and directions, Neville J referred to the practice of the Chancery Court in recouping moneys wrongfully paid out of future payments, rather than commencing a fresh action.  It is to be noted, however, that this reference was made in the context of the administration of deceased estates.  In that decision, a testator had given several annuities to his sons and others and directed that all annuities should be paid free of deduction. The trustees had paid the annuities for some years without deducting income tax.  Neville J held that the trustees were entitled to deduct the income tax they had paid out of residue from future payments of the annuities.  Neville J made the following observations:[39]

    It has been in my opinion the practice of the Court, when administering an estate of a deceased person in cases where trustees have under an honest mistake overpaid one beneficiary, in the adjustment of the accounts between the trustees and the cestui que trust, to make allowance for the mistake in order that the trustee may so far as possible be recouped the money which he has inadvisedly paid. I have been referred to a variety of authorities in which an application for the refunding of the money so paid has failed, and I think in the case of Pooley v. Ray, and in most of the other cases to which I have been referred, it has been because of the principle that a man cannot recover money which he has paid under a mistake of law, and it has been held that the mistake as to the payment of the income tax was a mistake of law, or a misconstruction of the statutes. It may well be that these cases may still stand in modern times on that footing. Certainly that doctrine, so far from having been extended, has, I think, been very substantially limited in recent times, and in my opinion the mere fact that a mistake is an honest mistake of law, as long as it is not a mistake of public law, which every one is bound to know, has not prevented the Courts from giving relief to one party as against the other - doing justice between the parties. I think the case of Stone v. Godfrey puts the view that the Courts have taken as well as any case that I have in mind.

    In the present case certain annuities and legacies were given "without deduction," and it is obvious that there is an ambiguity, having regard to the position in which we find the authorities, underlying those words. "Without deduction" has been held to mean without any deduction except that of income tax, and those decisions bind me; but it is quite obvious that a layman may very reasonably, in giving what he believes to be effect to the words which the testator has used in this will, come to the conclusion that when he says "without deduction" he means without deduction, and therefore that you cannot deduct income tax. But that is not so. Consequently certain payments have been made for income tax which now turn out to have been improper. They are no doubt in one sense in breach of trust, and the question is whether in making future payments to the same cestuis que trust the trustees are entitled to recoup themselves for the amount they have overpaid.

    In dealing with the questions raised by summons under Order LV. I ought to treat them as though the Court were administering the estate in respect of which the questions are raised, and if the Court could make this adjustment between the trustee and the cestui que trust in the case of an administration I ought to direct that that adjustment should be made out of Court, because Order LV. was intended to obviate the expensive necessity of bringing actions for administration where determination is wanted of minor points arising out of the execution of the trust.

    It appears to me that, in accordance with the practice which I understand has always existed, the Court in a proper case - of course there may be cases in which it would be most inequitable to do it - will adjust the rights between the cestui que trust and the trustee who has overpaid through an honest and, so to speak, permissible mistake of construction, or of fact. I think, therefore, that the trustees in the present case are entitled to deduct from future payments the income tax which they have overpaid.

    I have been referred to the case of In re Horne, and it was said that that lays down the general principle that where a mistake has been made by the trustee he cannot get this adjustment against the cestui que trust. I do not think the learned judge put it so high as that. It has nothing to do with the decision of the case before me; clearly it can be supported on other grounds. I do not think that decision is sufficient to alter the practice which in my opinion has existed.

    I ought to have said I am supported in the view which I take by the decision of In re Ainsworth, before Joyce J.

    [Footnotes omitted.]

    [39]   In re Musgrave [1961] 2 Ch 417, 423-425.

22. The law on questions of mistake of fact, mistake of law and the rationale of unjust enrichment is vexed.  Also, the propositions of law as set out in Jacob’s text extracted above concerning recoupment from capital is “far from clear” as the authors of that text acknowledge.  The trustee submitted that this was the state of the law.  For the purposes of this advice and directions, I am prepared to act on the propositions with respect to he answer to question 4 as advanced. 

    Question 5

1. Question 5 is not applicable given my reasoning above and characterisation of the payment to the Group Two investors as a credit to the capital amount of each such investor. 

   Question 6

2. Question 6 is in the following terms:

   In respect of any application for redemption by Group [Two] or Group [Three] Investors:

   6.1    to the extent that the investor received an acknowledgment of redemption from the former trustee, does that bind the new trustee to redeem at that redemption price?

   6.2    alternatively, is the trustee entitled to perform a proper valuation as at the relevant date?

   6.3     at what date is the valuation to be undertaken as at?

   For the following reasons, the answer to 6.1 above is – No.

3. The redemption or repurchase of units is to occur at the ‘repurchase price’ as determined by the Manager from time to time in accordance with the constitution and the information memorandum.  The trustee submitted that at least inferentially under clause 10.4(a) the ‘repurchase price’ applicable to the unit is to be based on the ‘net assets’ of the trust as at the date of the next calculation of ‘net assets’ following receipt of the withdrawal request.

4. The valuation of trust assets is dealt with in clause 17 of the constitution, which provides:

   17.1   Timing of Valuations

   The Manager may ascertain the Net Assets at any time in its absolute discretion but in any event shall (subject to clause 17.7) do so not less frequently than once in each calendar month.

   17.2   Valuation of Assets

   A valuation or revaluation of any Asset may be made at any time and from time to time but in any event shall (subject to clause 17.7) be made not less frequently than once in each calendar month. 

   7.3     Net Assets

   In ascertaining the Net Assets the Manager shall take into account the valuation or revaluation of any of the Assets carried out in accordance with clause 17.2.

   17.4   Valuation by Approved Valuer

   (a)     The Manager shall have the right at any time and from time to time to instruct an Approved Valuer to value any or all of the Assets and shall upon receipt of such valuation promptly send a copy to the Auditor.

   (b)     The costs of such valuations shall be borne by the Trust.

   (c)     Where such a valuation discloses a figure lower than the value of the Asset as shown in the books of accounts of the Trust then for the purposes of ascertaining the Net Assets that lower figure shall be taken into account in substitution for the value of the Asset as shown in the books of account of the Trust.

   17.5   Valuation Principles

   (a)     The Manager may cause any of the Assets to be valued at any time (not limited to once a day) and the Manager may calculate the value of the Net Assets of the Trust as at any time (not limited to once a day), in each case, in its absolute discretion.

   (b)     The Manager’s determination of the value of the Net Assets of the Trust including the determination of any part of the Trust or an Asset of the Trust shall be final and binding on all Unitholders.

   (c)     The Manager is not to be regarded as having the knowledge of a valuer or any other expertise in valuation.

   (d)     The valuation method or policy for any type of Asset is to be determined by the Manager and the Manager may vary it whenever it so decides.  Where the Manager values any Asset of the Trust at other than its market value then a description of the valuation method or policy applied by the Manager must be given to the Auditor for the time being of the Trust prior to its implementation.

   17.6   Postponement of Valuation

   Without in any way limiting this clause 17, if the Manager determines that due to circumstances prevailing on the Australian Stock Exchange or affecting any Asset it is not practicable to value any Asset at any particular time or that any valuation obtained would not properly reflect the realisable value of the Assets, then the Manager may postpone the valuation or revaluation of any Asset so affected for the purpose of this clause 17 and may postpone the determination of the Net Assets for the period while such circumstances exist.

5. The manager’s determination of the value of net assets is stated to be final and binding on all unitholders.[40]  It was submitted by the trustee that this clause merely operates to prevent unitholders seeking to go behind the values as determined by the manager.  It does not absolve the manager, it was said, of the need to comply with the constitution.    There is merit to this submission.

   [40]   Clause 17.5(c).

6. PCI Equity did not engage an independent valuation expert as it had power to do under the terms of clause 17.4(e) of the constitution. 

7. The trustee submitted that it is appropriate for it to undertake its own valuation of the net assets of the trust for the purpose of the determination of the value of net assets.   For the following reasons, pressed by the trustee in submissions, I accept this submission. 

8. Mr Barbato emailed both MacKenzie Coultas and Grant Thornton on 10 June 2008 asking that the trust’s holdings in Bio Central, Firewire and Haley Ltd be re-valued, in each case up from the previous valuation.  The basis for the change in the valuations was stated to be as follows:

9. BioCentral:

   I have negotiated with [the CEO of BioCentral] that he purchase 321 shares held by PCI in BioCentral by 30 June 2009 at no less than $7,500 per share or $2,407,500….  The current book value of this holding is $1.5m.  Thus I would like to revalue to total $2m.

10. Firewire:

    Due to increase in sales (unit sales up 175% from last year), future margin (FOB margin of over 50% from 30% due to Thai vertical manufacturing), profitability (profitability in 2009 of $2.5m due to increased sales and margin from loss making start up), presence (sales now in 25 countries) I would like to increase this stake by 7.5% from my cost price

11. Haley:

    Due to increase in sales, profitability, presence especially in US, partnering with Oracle, I would like to increase this stake by 7.5% from my cost price (see attached overview).

12. These revaluations were ultimately processed and reflected in PCI’s audited accounts.  Mr Barbato’s evidence in his examination was, however, that the securities were held at cost (subject to such upward revaluations) and the auditor would review this annually.

13. In accordance with clause 17.5 of the constitution, where PCI Equity valued any asset at other than its market value then a description of the valuation methodology must be given to the auditor prior to its implementation. There is no evidence that this ever occurred. 

14. The trust’s accounting policy in respect of the revaluation of investments is apparent from note 1 to its financial statements, which discloses that gains and losses on the revaluation of investments ‘to net market value’ were to be recognised as income or expenses respectively in the income statement.

15. In December 2008, Mr MacKenzie emailed Mr Barbato in respect of its investment in Firewire and specifically the impact the carrying value of this company would have on redemption payments. Firewire had, at around this time, completed a rights issue in order to raise capital at a heavily discounted issue price.  In his email Mr MacKenzie states:

    I think you have a problem.

    The prospectus does not state that the overall value of the company is an amount greater than the multiplication of total shares on issue at a price greater than 0.003 cents.  Given the huge dilution in the number of shares on issue because of the 11-4 issue I think you would really struggle to convince the auditor that the 11 new shares are at a cost of 0.003 but the existing 4 shares are worth 0.093 cents each giving an overall value of around 0.0073.

    If all of the shares were valued at 0.003 then the carrying value of the investment reduces from $5.559M to $1.795M a reduction of $3.764M or 22 cents per unit.

16. Mr Barbato did not re-value the investment in Firewire based on this advice, and the Perrin distribution proceeded at the higher amount.  At his examination, Mr Barbato stated he was ‘comfortable’ with the trust carrying the investment at cost.

17. The constitution provided that where a valuation discloses a figure lower than the value of the asset as shown in the books of the accounts of the trust, then for the purpose of ascertaining the net assets, that lower figure shall be taken into account in substitution for the value of the assets as shown in the books of accounts of the trust.

18. The Perrin redemption in December 2008 was based upon the over-valuation of the Firewire shares.  The write-down of this investment alone would, according to MacKenzie Coultas Funds Administration, have led to a reduction in the redemption amount of 22 cents per unit.  The redemption was for 3,332,494.6801 units.  The effect of this aspect of the over-valuation alone was $733,148.00.  The trustee submitted that in addition, the valuation of the BioCentral shares as at December 2008 appears highly suspect. 

19. The trust invested in BioCentral shares, in tranches, from 2006 to mid 2007.  As at mid 2007, the trust held 293 shares.  In July 2007, PCI Equity entered into negotiations for the subscription for an additional 195 shares for $1,608,750.00.  In July 2007, PCI Equity paid $606,177.50 to BioCentral, and received a commission of $70,785.00 in its own right.  In November 2007, BioCentral wrote to PCI Equity making a call on the outstanding amount of $887,072.50.

20. By letter dated 13 December 2007, BioCentral wrote to PCI Equity giving notice that the unpaid shares would be forfeited.  Mr Barbato wrote to Piper Alderman addressing this issue in January 2008 and a person from that firm drafted a letter on PCI’s behalf to BioCentral. BioCentral wrote again in January 2008 disputing PCI’s contentions.

21. In April 2008, Mr Barbato wrote to Grant Thornton seeking to revalue the investment in BioCentral down to $1.5m stating that that was the amount that he was offered for the purchase of the BioCentral shares.  On 10 June 2008, Mr Barbato wrote to Grant Thornton seeking to re-value the BioCentral shares to $2m stating “I have negotiated with [the CEO of BioCentral] that he purchase 321 shares held by PCI in BioCentral by 30 June 2009 at no less than $7,500 per share or $2,407,500.  The current book value of this holding is $1.5m.  Thus I would like to revalue to total $2m.”, which was the value ultimately reflected in the 2008 accounts.  There appear to be no records to support the purported offers for the purchase of the BioCentral shares.

22. For these reasons, the trustee submitted that there is a sufficient doubt underlying the valuations undertaken by PCI Equity to warrant a fresh consideration of the value of the units for the purposes of satisfying any redemption. 

23. The trustee contended that there has not yet been a valid redemption.  The steps to be taken to give effect to the redemption, including the valuation, are therefore to be undertaken by the trustee.  The trustee submitted that there is no warrant for it to be held to an incorrect or suspect valuation undertaken by PCI Equity. 

24. The trustee submitted that the redemption at the valuation contemplated by PCI Equity in 2009 would constitute a breach of trust.  Where trustees are intending to perform an action which would constitute a breach of trust, the Court will, on the application of a beneficiary, grant an injunction restraining them.[41]  A fortiori, the trustee cannot be forced to commit an action which would constitute a breach of trust merely because the former trustee was taking steps which would have had that effect. 

    [41]   Referring to JD Heydon and M J Lemming, Jacob’s Law of Trusts in Australia (7^th ed, 2006) [2304] and the cases cited therein.

25. Finally, the question arises as to the date at which the valuation of the units in the trust is to be performed in circumstances where there has been a suspension of the repurchase or redemption of units.  Clause 10.4(a) would appear to require the valuation to be undertaken as at the date when the net assets were next calculated by PCI Equity, irrespective of the subsequent suspension of the redemption. 

26. The answer to question 6 therefore, is as follows: the trustee is not bound to apply any suspect valuation performed by PCI Equity, but is entitled to perform a proper valuation as at the relevant date; and, the date that the valuation is to be undertaken is the date that PCI Equity next undertook an assessment of net assets following receipt by PCI Equity of each withdrawal request.

    Costs

27. Both the trustee and the Giles Group sought an order that they recover their costs from the assets of the trust fund on a solicitor and client basis.  I consider that the Giles Group were appropriately joined and that in the circumstances provided considerable assistance in resolving the difficult and complex issues arising from the conduct of PCI Equity.  In the circumstances, I would exercise my discretion that both the trustee and the Giles Group recover their costs to be taxed on the basis of solicitor and client. 

28. In this respect, it is to be noted that in proceedings brought by trustees for guidance of the Court as to the construction of the trust instrument or some question arising out of the course of administration of the trust, the costs of all parties are usually treated as necessarily incurred for the benefit of the trust and so ordered to be paid out of the trust fund.  Drawing on the decision of Hansen J in Farrow Finance Co Ltd (in liq) v ANZ Executors & Trustee Co Ltd[42] and the decisions to have followed it, White J in Re Magarey Farlam Lawyers Trust Accounts,[43] with Nyland and Kelly JJ agreeing, concluded that in some cases it may be appropriate in principle for the costs of participants in an application for directions to be paid from a fund rather than borne by the parties themselves or by the unsuccessful party.[44] In Farrow Finance Co Ltd (in liq) v ANZ Executors & Trustee Co Ltd it was held that the costs of the participants in the application should form part of the liquidator’s costs in the winding up of the insolvent company.  There Hansen J observed:[45]

    In my opinion, the general principles which apply to the question of costs upon an application by a liquidator for directions include these: where the application is necessitated only by the stand taken by one particular creditor, or a certain group of creditors acting only in their own interest, and the question involved is not a complex one, then costs should generally follow the event. In other words, if the position which the liquidator always intended to adopt is vindicated, and the submission of the opposing creditors is rejected, then those creditors should be liable for the liquidator’s costs of the application …

    On the other hand, where the issue involved is a complex one, or one involving a relatively novel proposition in law, then the starting point is that the costs of all necessary parties are to be paid by the liquidator and counted as costs in the liquidation …

    [42]   Farrow Finance Co Ltd (in liq) v ANZ Executors & Trustee Co Ltd (1997) 23 ACSR 521.

    [43]   Re Magarey Farlam Lawyers Trust Accounts (2007) 99 SASR 40.

    [44]   Re Magarey Farlam Lawyers Trust Accounts (2007) 99 SASR 40, [47]. White J made reference to a number of examples where orders had been made for payment of the costs of the parties who have participated in a hearing of an application for directions: Re Masureik & Allan Pty Ltd (1981) 6 ACLR 39; Re New Cap Reinsurance Corporation Holdings Ltd and the Corporations Law [2001] NSWSC 1001; Re Ansett Australia Ltd (2002) 41 ACSR 598; Re GPI Leisure Corporation Ltd (in liq) (1994) 53 FCR 365; Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334.

    [45]   Farrow Finance Co Ltd (in liq) v ANZ Executors & Trustee Co Ltd (1997) 23 ACSR 521, 526-527 as cited by White J in Re Magarey Farlam Lawyers Trust Accounts (2007) 99 SASR 40, [47].

29. Counsel for the Giles Group also drew the Court’s attention to the reasons of Sheller JA in the Full Court of the New South Wales Supreme Court in Hughes v NM Superannuation Pty Ltd, where his Honour observed:[46]

    …It is I think well-established that, where the terms of a trust document in the context of events which have happened reasonably lead to a trustee to seek administrative advice from the Court as to its meaning and how it should be administered, all parties properly joined should have their appropriate costs out of the Fund.

    [46]   Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653, 671.

    Conclusion

30. I make the declarations, answer the questions raised, give advice and directions and make orders as to costs as set out in these reasons.  I direct that the trustee prepare minutes of order to give effect to the foregoing.