Capelli v Shepard
[2010] VSCA 2
•29 January 2010
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 3729 of 2009
| SERGIO CAPELLI | Appellant |
| v | |
| CRAIG PETER SHEPARD and MARK XAVIER MENTHA (IN THEIR CAPACITIES AS RECEIVERS AND MANAGERS OF ENVIRONINVEST LTD (ACN 080 743 791) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | First and Second Respondents |
| and | |
| ENVIRONINVEST LTD (ACN 080 743 791) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | Third Respondent |
| and | |
| JAMES PATRICK DOWNEY (IN HIS CAPACITY AS LIQUIDATOR OF ENVIRONINVEST LTD (ACN 080 743 791) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | Fourth Respondent |
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| JUDGES | DODDS-STREETON and MANDIE JJA and BYRNE AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 27 October 2009 |
| DATE OF JUDGMENT | 29 January 2010 |
| MEDIUM NEUTRAL CITATION | [2010] VSCA 2 |
| JUDGMENT APPEALED FROM | Re Environinvest Ltd [2009] VSC 33 (Judd J) |
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CORPORATIONS – Managed Investment Schemes – Where ‘plainly insolvent’ responsible entity of registered schemes ordered to wind them up pursuant to s 601ND Corporations Act 2001 (Cth) – Whether receivers of responsible entity had standing to apply to wind up schemes – Whether schemes non-viable – Whether schemes insolvent – Whether just and equitable to wind up schemes – Whether trees on lease allotments ‘scheme property’ – Whether scheme constitution definition of ‘scheme property’ repugnant to statutory definition – Whether primary judge had power to vary priority for costs orders.
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| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr M J Galvin | Brian Ward & Partners |
| For the First to Third Respondents | Mr J G Santamaria QC Mr H N G Austin | Minter Ellison |
| For the Fourth Respondent | Mr J L Evans | Deacons |
| For the Australian Securities and Investments Commission appearing as amicus curiae | Mr I G Waller SC Dr J P Moore | Australian Securities and Investments Commission |
DODDS-STREETON JA
MANDIE JA
BYRNE AJA:
Background
The appellants are investors in various annual projects in a managed investment scheme (‘PYEP scheme’) registered under Part 5C.1 of the Corporations Act 2001 (Cth) (‘the Act’) based on the establishment, maintenance and management of eucalyptus plantations. The first respondent, Environinvest Ltd (Receivers and Managers Appointed) (in Liquidation) (‘EIL’) is and was the responsible entity of the PYEP scheme.
The second and third respondents (Messrs Shepard and Mentha), are the receivers and managers of EIL (‘the Receivers’).
The fourth respondent (Mr James Downey) was and is the liquidator of EIL and (by the decision below) was also appointed the liquidator of the PYEP scheme and several other managed investment schemes of which EIL was the responsible entity.
The Australian Securities and Investments Commission (‘ASIC’) appeared as amicus curiae.
The Orders Below
Based on his reasons for judgment given on 12 February 2009, on 23 February and on 26 February 2009 Judd J made a number of orders and declarations. His Honour, inter alia:
· ordered EIL as the responsible entity to wind up the registered managed investment schemes (including the PYEP scheme) pursuant to s 601ND of the Act, in accordance with the schemes’ respective constitutions and any order made by the Court under s 601NF(2) of the Act;
· ordered that a liquidator of the schemes be appointed from the roll of official liquidators, as it was impracticable for EIL to take responsibility for the winding up;
· directed the Prothonotary to appoint a liquidator of the schemes;
· declared that the investors’ leases and other scheme documents did not terminate automatically on the making of an order to wind up the scheme;
· declared that the investors’ leases and the trees on their leased allotments were scheme property which could be dealt with by the scheme liquidator in the winding up process;
· declared that the leases could be terminated by the scheme liquidator under the scheme constitutions;
· declared that EIL was indemnified out of the assets of the schemes for its costs and expenses in bringing the application to wind them up (including the reasonable costs, expenses and remuneration of the receivers in causing it to so apply);
· ordered that the costs of the proceeding of EIL, the scheme investors and parties associated with the Adelaide Bank (‘the Adelaide Bank parties’) be paid out of the scheme property on an indemnity basis; and
· ordered (by consent of the parties appearing on 23 February 2009) that the above costs of the proceeding would be paid in priority to the costs of winding up, including the scheme liquidator’s costs (‘the priority for costs orders’).
On 30 April 2009, his Honour varied the orders and declarations made on 23 February 2009 in relation to the appointment of the liquidator of the schemes and the priority for costs. As appears from his Honour’s reasons given on 30 April 2009, during the two months following the February orders, no official liquidator willing to act had emerged, due (at least in part) to the priority for costs orders.
On 30 April 2009, his Honour therefore ordered that Mr Downey (who was already the liquidator of EIL) be appointed liquidator of the schemes and that the costs of EIL, the investors and the Adelaide Bank parties, instead of enjoying priority, would rank equally with the costs of winding up.
Notice of Appeal
By a Notice of Appeal dated 10 March 2009, and amended by leave granted on 4 September 2009, the appellants appeal from the judgment, orders and declarations below made by Judd J on 23 February 2009 and 26 February 2009 (excluding the parts relating to ‘Excluded Offer Investors’).
Application for Leave to Appeal
The appellants also seek leave to appeal from his Honour’s order of 30 April 2009 varying the priority for costs orders. The application for leave was ordered to be heard with the appeal.
Notices of Contention
By a Notice of Contention dated 10 September 2009, EIL and the Receivers contend that winding up the PYEP scheme on the just and equitable ground was justified on the additional ground that ‘the relevant registered managed investment scheme had been mismanaged by [EIL] and was in disarray’.
By a Proposed Notice of Contention dated 6 October 2009, Mr Downey (in his capacity as liquidator of the PYEP scheme), contends that the trial judge had power to vary the priority for costs orders on the additional ground that the orders of 23 February 2009 were made without any or any adequate notice to the persons actually or intentionally affected by them, namely, the scheme’s liquidator, and the creditors and beneficiaries of the PYEP scheme.
Issues
The principal issues on appeal are:
(a)Whether the Receivers had the capacity to prosecute the winding up application in the name of, and on behalf of, EIL.
(b)Whether the trees are scheme property of the PYEP scheme.
(c)Whether it was just and equitable that the PYEP scheme be wound up.
(d)Whether the trial judge had the power (under the rules or pursuant to the Court’s inherent jurisdiction), after 23 February 2009 to vary his order with respect to the priority of the investors costs.
The Facts
The uncontroversial facts, as set out in the agreed statement of facts or found by the primary judge, are as follows.
EIL, as an unlisted public company, promoted and managed investment schemes for, inter alia, the establishment and management of eucalyptus plantations, in which members of the public were invited to participate.
Prior to amendments to the Corporations Law in 1998 with respect to the registration of managed investment schemes resulting from the enactment of the Managed Investments Act 1998 (Cth), the PYEP scheme (as it eventually came to be known) was governed by a trust deed. EIL acted as trustee. After the amending legislation, EIL registered a constitution for its existing eucalypt plantation scheme and became the responsible entity of the PYEP scheme.
Members of the public were invited to invest in the PYEP scheme as growers of eucalypt trees in individual projects (that is, annual participations) for each of the years 1998 to 2003. Land in Victoria, Western Australia and South Australia was leased from companies related to EIL and third-party landlords and ultimately allotted and subleased to investor growers. Most of the land owned by companies in the EIL Group was mortgaged to the Commonwealth Bank of Australia (‘the CBA’).
The growers engaged and paid EIL to manage their plantations. In some cases, investment by the growers was financed by BEP Finance Pty Ltd or Blackburne Pty Ltd (‘Blackburne’). In subsequent years, the loans were purportedly assigned to entities including Primary Yield Finance Pty Ltd, a company associated with EIL, and then to ABL Nominees Pty Ltd, a subsidiary of the Adelaide Bank Ltd.
EIL also promoted two later schemes: PYEP 7 (with projects promoted in 2004 and 2005) and PYEP 9 (with projects promoted in 2006 and 2007); and three excluded offer projects promoted in 1998, 1999 and 2000. Those schemes and the excluded offer projects were the subject of the application below. This appeal concerns only the PYEP scheme.
The plantations managed by EIL were located on 42 properties mostly, but not exclusively, near Beaufort in Victoria. Seventeen properties were owned by EIL. Two other properties were owned by Environinvest Pastoral Pty Ltd (‘Environinvest Pastoral’) and two were owned by Blackburne. Those companies were related to EIL. Five other properties were owned either by Mr Roger Pescott (a director of EIL and related companies) or by companies controlled by a Pescott family member. Other properties were apparently owned by a third party unrelated to EIL, but were leased to a related entity.
On 16 May 2001, EIL granted the CBA a registered debenture charge. Seventeen of the 19 properties owned by EIL and/or Environinvest Pastoral were mortgaged to the CBA, as was one property owned by Blackburne. Two other properties owned by EIL were subject to a first mortgage to the St George Bank and a second mortgage to the CBA. The other property owned by Blackburne was mortgaged to the St George Bank.
Although there were a number of different schemes and projects over an extended time frame, the primary judge described in detail the arrangements for the project prior to the restructure in 2000 (when there was a trustee and manager), apparently because they were broadly typical of all project arrangements.
Of the 1999 project, his Honour stated:
…
Prior to a restructure of the PYEP scheme in 2000, to conform with the requirements of the Managed Investments Act 1998, each project (but not the excluded offer projects) was administered by a trustee, Burke Bond Corporate Ltd, pursuant to a trust deed made between Burke Bond Corporate as trustee and EIL as manager. Each applicant for allotments in a project was required to pay a once only management fee and an amount for the first year’s rental under the lease agreement. An annual plantation maintenance fee was also payable.
The 1999 prospectus stated that an applicant would become a grower by completing the attached application form and power of attorney and paying the appropriate subscription sum. The management fee per allotment was $2,730. For the minimum six allotments the management subscription fee was $16,380. This sum was apparently to cover the cost of preparation and establishment of the plantation. The annual land rental for six allotments was $540 and the annual plantation maintenance cost, $180.
Each grower was required to and did engage EIL as manager to develop, establish and maintain the plantation. For the 1999 project the plantation was to be established on land owned by Blackburne.
The 1999 lease arrangements were not straightforward. Blackburne leased the land to S.T.Y. (Afforestation) Pty Ltd, described as the landlord, which in turn leased the land to Burke Bond Securities Ltd, described as the lessor. Burke Bond Securities leased the land to the growers. STY was described in the prospectus as having been in the business of processing pulpwood for over 30 years.
The complex lease structure was apparently designed to facilitate the growers right to require STY to purchase some of the growers’ trees during growth years three to eight. In the third growth year the grower had a qualified right to require STY to pay a price of $3,850 for the trees on an allotment. In the fourth year the payment increased to $4,300; in the fifth year, $4,800; in the sixth year, $5,350; in the seventh year, $5,900; and in the eighth year, $6,550. The right was apparently designed to allow each grower, if they wished, to dispose of all of their trees by the eighth year of growth. There were qualifications on the obligation of STY to take the trees. Having acquired a growers’ interest in trees, STY assumed all continuing liabilities of the grower in respect of those trees.
The 1999 prospectus assumed that trees would reach maturity by eight years. For those who did not dispose of their trees to STY, estimates were given in the prospectus of the projected returns from the harvested timber.[1]
[1][2009] VSC 33, [33]-[38].
His Honour observed that the total investment in the eucalypt plantation schemes between 1998 and 2007 was $56,899,699, while about $11 million was invested in other schemes promoted by EIL. Thus, nearly 84 per cent of EIL’s investment revenue was attributable to the eucalyptus schemes as a whole. Approximately 400 investors (including corporations and partnerships) had acquired interests in the schemes. Some properties had large numbers of individual investor plantations and many included plantations allocated to investors in different projects. Some had large individual holdings, while other properties had only one investor plantation. Some investors invested very substantial sums in scheme projects, with several investments exceeding $1 million and one exceeding $7 million, while most investors subscribed for less than 100 allotments.
The following number of investors invested in registered scheme projects each year.[2]
[2]Ibid [40].
1998 16 1999 28 2000 78 2001 51 2002 20 2003 13 2004 37 2005 49 2006 36 2007 37
His Honour observed that the lease arrangements varied from project to project. His Honour stated:
Some growers leased directly from EIL while others leased their land from related entities. Under the lease agreement promulgated for the 1998 project, Burke Bond Corporate was lessor and STY agreed to purchase trees from the grower commencing in year three of the lease at a predetermined price. For the 1999 project, Burke Bond Securities was lessor and STY agreed to purchase trees at the prescribed times. The same parties and a similar regime existed under the 2000 project, but in 2001 Custodial Ltd assumed the role of lessor. No buyback agreement was included in the lease agreement employed by EIL for that year. From 2002 EIL became landlord and there was no buyback agreement forming part of the lease.
The lease agreements employed by EIL from 2003 to 2007 acknowledged the growers’ ownership of trees on each allotment during the continuation of the grower lease. The lease agreements also granted to EIL a lien over the trees for any sum owing under the lease. The earlier lease agreements did not contain any such express acknowledgement, although they acknowledge the growers’ right to use the land for the purpose of growing trees.
The term of each lease ended upon the first clear fall of any trees to be planted on the land. That termination provision persisted until the regime was changed in 2004 to include an early termination right in favour of growers and provide for termination on the day following harvest or a date in accordance with the constitution. All constitutions provided that the leases terminate upon termination of the scheme. The event defined in the early lease agreement, as the first clear fall of trees, seems to correspond, in all practical respects, with the concept of harvest employed in the later lease agreements.[3]
[3]Ibid [49]-[51].
Numerous investors subsequently fell into dispute with EIL over the ‘buy back’ of a portion of their trees. As at 30 June 2008, the amount of lease and management fees outstanding due to the ‘buy back’ dispute was $4,870,877. Further, the PYEP scheme itself incurred a cash shortfall of $1,920,751 for the year ending 30 June 2008.
On 19 September 2008, the directors of EIL appointed Mr Downey as administrator of the company and twelve related companies. Three days later, on 24 September 2008, the CBA appointed the Receivers as receivers and managers of the property of EIL and three other related companies, of which Mr Downey was also administrator.
On 1 October 2008, the Receivers obtained authorisation to pay EIL’s insurance premiums in order to protect against plantation loss and orders that they be indemnified for the expenditure.
As at 14 October 2008, EIL was indebted to the CBA in the sum of about $46 million.
On 14 October 2008, the Receivers filed an Originating Process, under s 601WD(1)(a) of the Act naming themselves and EIL as plaintiffs, seeking orders winding up the PYEP scheme (and other schemes conducted by EIL) and appointing an independent scheme manager.
On 21 October 2008, the directors of EIL submitted a Report as to Affairs which disclosed unsecured liabilities of $77,509,900.
On 24 October 2008, the creditors resolved to wind up EIL (and the twelve associated entities) and to appoint Mr Downey as liquidator. As at that time, the PYEP scheme had 206 members.
By the time of the hearing before the primary judge, EIL was in default under certain leases it had taken over properties employed as part of the PYEP scheme.[4]
[4]See, Agreed Statement of Facts, filed 20 August 2009, [14] – [20].
The proceeding below
The plaintiffs below were EIL and the Receivers.
The defendant was the liquidator of EIL, Mr Downey.
Also represented below were:
· ASIC;
· Certain investors; and
· ABL Nominees, a company which gave financial accommodation to a lender to certain scheme investors and subsequently appointed receivers to the lender on 22 September 2008.
Following the filing of the application to wind up the schemes, the Court ordered notice to be given to the scheme members.
On 7 November 2008, Ferrier Hodgson was appointed for the sole purpose of assessing the solvency and viability of the schemes. Ferrier Hodgson reported that the schemes were not insolvent and were incapable of becoming so, because they treated the scheme as trust property liable only to indemnify EIL (as trustee) for expenses in administering the scheme, rather than for expenditure or liabilities incurred in its role as manager.
Ferrier Hodgson nevertheless concluded that the schemes and excluded offer projects as a whole were not viable and had negative net present value.
EIL and the Receivers applied to wind the schemes up on the following broad grounds:
(1)EIL, as the responsible entity, was hopelessly insolvent. Receivers had been appointed to its assets and undertakings under a charge and mortgages over 17 parcels of land employed in the schemes and it had no funds with which to continue to perform any of its functions;
(2)The schemes have failed;
(3)The schemes were insolvent;
(4)There was no alternative responsible entity willing to assume the role of EIL;
(5)Even with adequate funding, the schemes were not viable; and
(6)The schemes had been mismanaged by EIL.[5]
[5][2009] VSC 33, [14].
The investors opposed the application to wind up the schemes on the following grounds:
(1)The plaintiffs did not have standing to apply to wind up any of the schemes;
(2)The application was, in any event, premature because not enough was known about the viability of each individual plantation;
(3)When considering whether it was just and equitable to wind up the schemes the growers’ interests were paramount;
. . .
(5)If a winding up order were to be made:
(a)the leases should be preserved; and
(b)a scheme liquidator did not, in any event, have power to deal with the leases and the trees standing on the plantations because they did not constitute scheme property.[6]
[6]Ibid [16].
The plaintiffs also contended that under the scheme constitutions the ‘project documents’ including the leases, automatically terminated on winding up of the schemes. That would permit access to the trees for harvest or sale.
Before the primary judge, the investors applied to appoint an interim receiver to the PYEP scheme for the limited purpose of investigating the viability of the various plantations.
His Honour held that:
(1)The Receivers had standing to bring the application in the name of EIL as the responsible entity under s 601ND(1)(a) of the Act, to wind up the schemes;
(2)A receiver should not be appointed to the PYEP scheme for the limited purpose of assessing viability of individual plantations;
(3)The schemes should be wound up on the just and equitable ground;
(4)If an order to wind up any scheme were to be made:
(a)the investor’s leases did not automatically terminate on the making of the winding up order;
(b)the leases and the trees constituted scheme property for the purpose of the winding up;
(c)an independent liquidator should be appointed to undertake the winding up. (As stated above, his Honour varied that order on 23 April 2009.)
Issue (a) – Standing – The Capacity of the Receivers to bring or continue a proceeding for the winding up of the PYEP Scheme
As stated earlier, EIL is the registered proprietor of a little over half of the land, comprising a number of separate titles, upon which the trees, the subject of the PYEP Scheme, were planted. That land was the subject of a number of registered mortgages given by EIL, or related companies, in favour of the CBA, which appointed the Receivers to get in the debt of some $46 million plus interest secured by the said mortgages (and certain registered charges). Maps were in evidence before the trial judge that showed, in respect of a number of separate titles or allotments the subject of the CBA’s securities, that there was a ‘patchwork’ of plantations representing the investments and sub-leases of various of the investors (including the appellants).
Section 601ND(1) of the Act empowers the Court to direct the responsible entity of a registered scheme to wind up the scheme if:
(a) the Court thinks it is just and equitable to make the order; or
(b)within 3 months before the application for the order was made, execution or other process was issued on a judgment…in favour of a creditor of, and against, the responsible entity…and the execution or other process has been returned unsatisfied.
Section 601ND(2) provides that an application for such a winding up order may be made by the responsible entity, a director thereof, a member of the scheme or ASIC.
The appellants submitted below that the Receivers did not have the capacity to bring or continue this proceeding in the name of the responsible entity (EIL) at least insofar as an order for the winding up of the PYEP Scheme was concerned. The issue below was referred to as being one of ‘standing’.
His Honour dealt with the issue as follows:
The growers challenged the standing of the plaintiffs to bring and maintain an application in the name of EIL to wind up the schemes. They submitted that the only power to wind up schemes is to be found in Part 5C of the Act. Section 601EE(2) authorises the court to wind up a managed investment scheme that was required to be registered but which was unregistered. Because the excluded offer projects were not required to be registered, s 601EE has no application. The other schemes are registered.
The growers submitted that the winding up provisions in Part 5C.9 of the Act are confined in their application to registered schemes. I agree. An application to wind up a registered scheme, other than one made by a creditor of the responsible entity in its capacity as the scheme’s responsible entity, may only be made by the responsible entity, a director, a scheme member or ASIC. [s 601ND was set out]
The plaintiffs’ application, made under s 601ND(1)(a) of the Act, authorises the court to make an order directing the responsible entity of a registered scheme to wind up the scheme if the court thinks it is just and equitable to make the order. The receivers submitted that they are entitled to bring the application in the name of EIL.
The growers submitted that the powers of the receivers do not extend to authorise this proceeding in the name of EIL and accordingly there is no proper applicant. They submitted that upon the appointment of the liquidator to EIL, the receivers ceased to be agents of the company, although they may continue to act pursuant to their powers as agents of the mortgagee. Their limited authority, it was submitted, did not extend to maintaining this proceeding.
The growers submitted that the receivers’ powers are confined to dealing with property subject to the charge. That is, the secured property. They submitted that the power to bring this application is not property over which the CBA holds security. The growers submitted that it would be open to the plaintiffs to maintain the proceeding with the approval of the liquidator, but this has not been sought and obtained.[7]
[7]The liquidator is a party to the proceeding. He was represented by counsel, although chose not to attend throughout most of the hearing. He raised no objection to the application by the receivers in the name of EIL.
In my opinion, the receivers have power to bring this application on behalf of EIL. The property charged was “all and singular the undertaking and property of the mortgagor and all its assets whatsoever and wheresoever both present and future…” The business of EIL was, prior to 30 June 2000, to act as project manager and promoter of the scheme. After 30 June 2000, and the registration of constitutions, EIL became the responsible entity and project manager. Its business as responsible entity formed part of its undertaking with consequential rights and obligations under each constitution and the Act. For example, by reason of its role as responsible entity, EIL has a right of indemnity under each constitution. There is no suggestion that such a right does not form part of the charged property.
The winding up provisions in Part 5C.9 of the Act contemplate a winding up carried out by the responsible entity, as does each constitution. While s 601NF(1) authorises the court to appoint a person, other than the responsible entity, to ensure that a registered scheme is wound up in accordance with its constitution, the order contemplated under s 601ND(1) is one directing the responsible entity of a registered scheme to wind up the scheme. Winding up the scheme is plainly part of the business of the responsible entity.
The deed of appointment of the receivers of EIL expressly acknowledged,
That the functions, powers and authorities of the Receivers and Managers extend to the Charge or acting in its capacity as responsible entity of any Scheme.
The receivers also rely upon s 420 of the Act and in particular paragraphs (2)(a)(h) and (k). [The relevant provisions of s 420 were set out]
The receivers submitted that the prosecution of this proceeding is a matter which is “necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the object for which the receiver was appointed” within the meaning of s 420(1) of the Act. They submitted that it is only through the winding up of the schemes that the final position and the assets and liabilities of EIL can be ascertained. The receivers further submitted that the limitation upon the scope of their power, adverted to by the growers, is one which prevents them from creating new liabilities provable in the winding up. They submitted that the prosecution of this application does not purport to create any liabilities provable against EIL in the winding up. Accordingly, there is no principle of law which would prevent them from maintaining this proceeding in the name of EIL.
ASIC supported the submissions made on behalf of the receivers in relation to standing. It submitted that they were authorised to bring this application on behalf of and in the name of EIL to seek a winding up order under s 601ND(1)(a) of the Act. It also submitted that the power was to be found in s 420(1) and (2)(k) of the Act.
In my opinion it is necessary and convenient for the receivers to make and maintain this application to wind up the schemes. It is part of the business or undertaking of EIL, under each of the constitutions, to wind up the schemes in prescribed circumstances and by the prescribed process. There is no reason to segregate that part of its business or undertaking from its overall function as scheme manager and responsible entity which is subject to the charge in favour of the CBA. The receivers have been expressly authorised by their instrument of appointment to exercise the powers of EIL as responsible entity.
Managed investment schemes require a functional and solvent responsible entity. EIL is insolvent and in liquidation. It does not have funds available to it to continue to manage the schemes. The proper management of the plantations will require substantial capital if they are to be maintained. In the absence of proper maintenance the interest of the growers, as scheme members, is at risk. The growers, EIL and the CBA all have an interest in protecting the trees.
It is not only convenient, but necessary that EIL make this application. ASIC did not make any application. The directors did not make any application and the members opposed the application.[8]
[8][2009] VSC 33, [59]-[72] (citation in original).
As stated earlier, EIL went into liquidation after this proceeding had been commenced. On appeal, the appellants, in their written submissions, emphasised their contention that, after EIL had gone into liquidation, the Receivers lost the capacity to continue with the proceeding because, in short, they became the agent of the secured creditor (the CBA) rather than the agent of EIL. However, in oral submissions, the appellants said that they had overstated the relevant principles dealing with the effect of liquidation of a debtor on the powers of receivers appointed by a secured creditor. Instead, the appellants shifted the emphasis of their submission to the Receivers’ capacity to bring the proceeding in this case rather than merely to continue it after EIL’s liquidation had commenced.
The appellants submitted that the Receivers lacked the capacity to bring the proceeding in the name of EIL for the winding up of the Scheme in substance because it did not serve any practical or practicable purpose of their Receivership. The appellants said that the evidence showed that it was the intention of the Receivers to use this proceeding to free the land from the sub-leases in favour of the growers or investors. The appellants argued that, as the CBA was the mortgagee of the reversionary interest, it was not possible by a winding up of the Scheme to free the mortgaged land from the sub-leases and therefore the winding up proceeding was an exercise in futility.
The appellants submitted that the Receivers did not have the capacity to bring a proceeding in the name of EIL seeking the winding up of the Scheme either under the relevant mortgages or under the Act.
In relation to the terms of the mortgages, cl 9.4 provided that the Receivers had power, inter alia:
(a)to take possession of collect and get in the whole or any part of the mortgaged property;
…
(e) to sell or concur in selling … all or any of the mortgaged property;
…
(l)to bring or defend any action suit or legal proceedings in the name of the Mortgagor or otherwise for all or any of the purposes aforesaid;
…
(n)to do all such other acts and things without limitation as the receiver shall think expedient in the interests of the Mortgagee …
The appellants submitted that these powers were not wide enough to enable the Receivers to bring a proceeding in the name of EIL for the winding up of the Scheme.
Section 420 of the Act relevantly provides:
(1)Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed.
(2)Without limiting the generality of subsection (1), but subject to any provision of the court order by which, or the instrument under which, the receiver was appointed, being a provision that limits the receivers powers in any way, a receiver of property of a corporation has, in addition to any powers conferred by that order or instrument, as the case may be, or by any other law, power, for the purpose of attaining the objectives for which the receiver was appointed:
…
(k)to … bring or defend any proceedings or do any other act or thing in the name of and on behalf of the corporation…
The appellants submitted that this provision did not empower the Receivers in the name of EIL to seek the winding up of the Scheme.
The Receivers submitted that they did have the capacity in the name of EIL to bring the proceeding seeking to wind up the Scheme. They said that, as was common ground, all the assets and undertaking of EIL were charged to CBA under the registered charge. They submitted that the CBA therefore had, under its security the benefit of all the rights of EIL including those existing under the Scheme documents and Constitution. They emphasised that land was the principal tangible asset of EIL and that the proceeding to wind up the Scheme was ‘a step towards unlocking the land’ for the benefit of the secured creditor. The Receivers submitted that their plain purpose in so proceeding was to free the land (so far as possible) from the burdens of the Scheme documents.
Before considering the foregoing submissions, it is important to refer to the uncontradicted evidence adduced before the trial judge as to the relevant purposes of the Receivers. Craig Peter Shepard,[9] in an affidavit sworn 14 October 2008, said, inter alia:
[9]Mr Shepard was the firstnamed plaintiff and his co-receiver, Mark Francis Xavier Mentha, was the secondnamed plaintiff. EIL was the thirdnamed plaintiff. In the amended originating process the plaintiffs sought a variety of other relief, apart from the winding up of the PYEP Scheme and various other schemes, including directions, and orders in relation to their costs and expenses.
53.It is my opinion that a sale of the Assets should be continued for the following reasons:
(a)a large proportion of the freehold land in question is mortgaged to CBA, and CBA has appointed the Receivers to ensure that its charged assets are realised;
(b)the trees are annexed to the land and would be considered as fixtures for this purpose (no harvesting has taken place); and
(c)it makes sense to sell the trees together with the land, given that the Tree Schemes are effectively insolvent and there is no cash available with which to otherwise continue ongoing silvicultural activity.
54.For the above reasons, it is my opinion that there is an alignment of the interests of CBA and Growers to complete the sale process as soon as possible.
…
58.Mr Mentha and I are in the process of arranging for the sale of the Assets to be advertised… However, the proposed sale is currently being impacted by the level of uncertainty surrounding the mechanics by which we can effect a sale. I am concerned that this uncertainty is hampering the sale process and I am keen to ensure that we do not lose any interested buyers …
…
60.Procuring a winding up of the Tree Schemes will enable a sale of the land and trees unencumbered by Grower Leases. It is my opinion that this course of action will secure the best price possible for the Assets.
61.To ensure that an equitable result is achieved for all parties, Mr Mentha and I intend to retain an independent expert to ensure that any apportionment of the respective value as between land and trees, once a sale is consummated, is in the best interests of the Tree Scheme members.
In our opinion, the evidence of the Receivers objectively demonstrated that their bringing of the proceeding in the name of EIL for the winding up of the Scheme was for the purpose of attaining the better realisation of the secured property (ie. the land). It was reasonable for the Receivers to take the view that they would be better able to sell the land at a satisfactory price if the Scheme was wound up because that would, to a greater or lesser extent, reduce the doubt and uncertainty that might otherwise affect potential purchasers. That is so whether or not the consequence of winding up the Scheme would be to terminate the investors’ sub-leases, but it was at least arguable that that consequence might also have been obtained, either upon a proper construction of the Act and the Scheme documents or by obtaining an appropriate order from the Court. It is not to the point to say this consequence was not borne out by the judgment at trial.
Furthermore, we consider that, within the terms of cl 9.4(n) of the mortgages, it was established by the evidence that the Receivers thought it was ‘expedient in the interests of the Mortgagee’ to bring the proceeding in the name of EIL for the purposes mentioned. We think that it is sufficient to satisfy that provision to show that a receiver held that view bona fide and, in the present case, the bona fides of the Receivers in that regard were not challenged. If it be necessary that we go further, we think that their view was reasonable.
We do not think that it is necessary to have recourse to s 420 of the Act but it would appear that the requirements of that provision are not of a more stringent nature.[10]
[10]See, for example, Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86, 88-90 (McLelland J).
For those reasons, and also for the reasons stated by the learned trial judge, we think that the Receivers had the capacity to bring and to continue this proceeding in the name of EIL insofar as it sought the winding up of the PYEP Scheme.[11]
[11]The appellants did not contend that there was any problem about the Receivers, in the name of EIL, seeking the other relief set out in the amended originating process.
Issue (b) – Winding up
The primary judge concluded that the circumstances compelled an order that the managed investment schemes be wound up on the just and equitable ground.
His Honour stated:
Notwithstanding the opinion expressed by Ferrier Hodgson to the contrary, I am satisfied that each scheme is insolvent in the sense that it is wholly dependent upon EIL for management and administration. EIL does not have the funds to continue its functions in relation to the schemes. Substantial funds will be required. The growers have not advanced any proposal for the future management of the schemes. In many instances the growers have withheld amounts due under management agreements and leases as part of an ongoing dispute with EIL. The plantations are being maintained by the receivers pending the outcome of this proceeding.
In Re Orchard Aginvest Ltd,[12] Fryberg J was prepared to proceed on the basis that an order to wind up a scheme under s 601ND could be made merely because the Primary Agribusiness Fund, a registered managed investment scheme, was insolvent. His Honour did not attempt to draw a distinction between the responsible entity and the scheme (the Fund) for that purpose. Insofar as the scheme is characterised as no more than a trust fund or “scheme property” held on trust for scheme members by the responsible entity, the condition of insolvency may not easily attach. But in my view the scheme is something more than trust assets or scheme property.
By adopting a more generous definition of a scheme, by reference to the scheme documents, relationships, objectives, inputs and outcomes, the concept of insolvency may be applied without much difficulty if the scheme has broken down because the responsible entity has no funds to continue the management and administration of the scheme and no reasonable prospect of getting in those funds. The scheme is, in my view, insolvent; it has failed and it is just and equitable that it should be wound up.[13]
Viability
Ferrier Hodgson have opined that the schemes as a whole are not viable. Their analysis was designed to ascertain whether the plantations or some of them, had a positive net present value. The assessment assumed funding, which is not available. Even if substantial funds were to made available over the next eight or nine years only the 1998 project yielded a modest net present value. Because budgeted expenditure applied in the report did not include a component for head office overheads, that conclusion may be optimistic.
A calculation of net present value, on the assumption that funds would be available from some source to maintain plantations, is unrealistic when there is no prospect that such funds will be available. Moreover, the property rights necessary to continue the scheme are being eroded. EIL is currently in arrears in rental payments for land leased by it. It is the lessee of nineteen properties employed in the schemes. The owners of some properties have terminated leases and re-entered their land. There is default in the payment of rent in relation to other land. The CBA has appointed receivers over seventeen properties.[14]
[12][2008] QSC 2.
[13]See also Cumulus Wines v Huntley [2004] NSWSC 609 at para [21].
[14][2009] VSC 33, [103]-[107] (citations in original).
His Honour rejected the investors’ contention that winding up of the PYEP scheme was premature because they had not had an adequate opportunity to investigate the viability of individual plantations and the possibility of finding a replacement responsible entity. He dismissed the investors’ related application made on 9 December 2008 to appoint an interim receiver and manager of the PYEP scheme to investigate and report on the state and viability of each plantation.
His Honour took the view that the Ferrier Hodgson Report constituted a useful review of solvency and viability, which the growers had already had the opportunity to consider.
His Honour stated:
Having regard to the financial position of EIL, the fragile lease structures, the refusal by numerous growers to pay rental and management fees and the growers’ failure to put forward any rescue proposal or replacement responsible entity, a further report on viability on individual plantations is not warranted. The viability of individual plantations cannot determine the outcome of this application. It is not possible to wind up only part of the scheme. Individual circumstances may, of course, influence the way in which the winding up takes place. For example, it is open to the scheme liquidator to postpone some part of it.[15]
[15]Ibid [112].
His Honour also rejected the investors’ contention that the scheme should not be wound up unless the Court were satisfied that ‘it is in the growers’ best interest and not to their disadvantage’.[16] Such an approach was, he considered, unduly narrow. In reliance on Re PWL Ltd; Ex Parte PWL Ltd (Formerly Palandri Wines Ltd) (admins apptd) (No 2) (‘PWL’),[17] and Re Orchard Aqinvest Ltd (as responsible entity for the Primary Agribusiness Fund) (‘Re Orchard’),[18] his Honour concluded that it would be just and equitable ‘for the Court to intervene and wind up a registered scheme when the original arrangement as set out in the prospectus has broken down’.[19]
[16]Ibid [113].
[17][2008] WASC 232.
[18][2008] QSC 002.
[19][2009] VSC 33, [114].
His Honour concluded that EIL was ‘plainly insolvent’. He stated:
EIL is plainly insolvent, even though no attempt has been made to value its right to indemnity from scheme property. Its right to indemnity is disputed by the growers. EIL has no funds with which to carry on business as manager of the schemes.[20]
There is also a dispute between some growers and EIL (or STY) over buy back rights. Growers have sought to exercise their right to require STY or EIL to purchase trees. As a consequence of the dispute, the growers have withheld lease and management fees, as at 30 June 2008, in the sum of $4,829,799.
Cash flow forecasts for each of the registered schemes indicated a cash shortfall for the PYEP scheme to 30 June 2008 of $1,920,751. The cash shortfall for the PYEP 7 scheme to 30 June 2008 was $799,849; and for the PYEP 9 scheme to 30 June 2008 was $397,756. These cash shortfalls will compound, in the absence of adequate funding, as time passes. Future maintenance of the plantations will require a substantial cash injection. Management of the plantations requires culling, weed control, fertilisation, replacement of dead seedlings and pest control. There are substantial insurance premiums to pay as well as labour and equipment costs. EIL also has obligations under leased properties.
In their report as to affairs, the directors of EIL estimated its financial position was in deficit between $96 million and $106 million with unsecured liabilities in excess of $77 million. While there is some uncertainty about the accuracy of the report, it is plain that EIL is hopelessly insolvent, without funds to continue to manage the plantations or perform its duties as responsible entity. Its assets, including many of the scheme properties, are in the hands of the receivers. EIL is indebted to the CBA in a sum in excess of $46 million.
EIL is also in default under some of the leases taken by it over properties employed as part of the schemes. It has failed to pay rent in respect of Addisons, Eurambeen North, Eurambeen South and Q2. Further defaults are inevitable.
St George Bank is moving to exercise its rights as mortgagee in respect of the Pomonal and Ledcourt properties, both owned by EIL. The CBA has already appointed receivers of the land mortgaged to it. Nevertheless, the growers submitted that the schemes are not insolvent and that no order should be made winding them up, at least at this time.[21]
[20]Ibid [53].
[21]Ibid [55]-[58].
Although the investors also opposed winding up on the ground that it would automatically terminate their leases, his Honour held that a winding up order did not have that effect.
His Honour also rejected the investors’ argument that the winding up application should be refused on the basis that it was actuated by the collateral purpose of more efficient realisation of the charged property. He observed that while the Receivers acknowledged that purpose, it was not the basis for the winding up order, which he made because there was no alternative.
Submissions on appeal
Before us, the appellants submitted that his Honour erred in concluding that it was just and equitable to wind up the schemes, including the PYEP scheme.
First, the appellants submitted that winding up could not achieve a beneficial outcome and was, in particular, incapable of facilitating the Receivers’ avowed aim of a ‘lock stock and barrel sale’ of scheme assets to benefit all stake-holders. The schemes must be wound up in accordance with the constitution which, on a proper construction, did not empower the liquidator to sell the trees, because they were not scheme property. Further, his Honour had held that the winding up order did not terminate the leases encumbering the land (although the responsible entity was, by cl 34.4 of the constitution, empowered to terminate agreements and arrangements it had entered into with the investors, including leases). The appellants contended that the approach of Robson J in Re Timbercorp Securities Limited (In Liquidation) (‘Timbercorp’)[22] should have been adopted in preference to a winding up order.[In Timbercorp, Robson J directed that the liquidators of an insolvent responsible entity could cause it to amend certain almond scheme constitutions to empower the responsible entity to assign, terminate, surrender or otherwise deal with the growers’ sub-leases or licences, in order to effect a sale or recapitalisation of the almond scheme’s assets on an unencumbered basis, without the schemes being wound up.]
[22][2009] VSC 510.
In our opinion, his Honour did not err as alleged. The existence of a course alternative to winding up, even if it were established to entail advantages (such as the more effective sale of scheme assets) would not in itself exclude winding up on the just and equitable ground. In the present case, however, the alternative now advocated by the appellants was not advanced before his Honour. Its asserted advantages, both particular and general, over winding up and the degree of support for it, were not established. The possible detriments and added complications of adopting such a course after the making of the winding up order were likewise unexplored. Moreover, in contrast to the Timbercorp scheme, the schemes in the present case were established by unchallenged evidence to be unviable.
Secondly, the appellants submitted that his Honour erred in finding that the PYEP scheme was insolvent, because the concept of insolvency as traditionally defined in corporations legislation could not apply to managed investment schemes.
In our opinion, his Honour did not err as alleged. While alive to contrary arguments, he concluded that the insolvency of a managed investment scheme was possible, in a limited sense at least, if a sufficiently broad concept of a scheme and a common sense approach were adopted. His Honour rejected Ferrier Hodgson’s conclusion that the schemes were not insolvent, because, in his view, it underestimated their liability to indemnify EIL by failing to include its expenditure in the role of scheme manager. The negative impact of the indemnity would, his Honour thought, have a potentially profound impact on the solvency and viability of the schemes and individual plantations.
Relevant Legislation
Under Part 5C.9 of the Act, a registered scheme may be wound up if required by its constitution, (s 601NA) at the direction of members (s 601NB), if the responsible entity considers the scheme’s purpose has been or cannot be accomplished (s 601NC(1)) or by order of the court (s 601ND).
The relevant sections of Part 5C.9 are as follows:
601ND Winding up ordered by Court
(1) The Court may, by order, direct the responsible entity of a registered scheme to wind up the scheme if:
(a) the Court thinks it is just and equitable to make the order; or
(b) within 3 months before the application for the order was made, execution or other process was issued on a judgment, decree or order obtained in a court (whether an Australian court or not) in favour of a creditor of, and against, the responsible entity in its capacity as the scheme’s responsible entity and the execution or process has been returned unsatisfied.
(2) An order based on paragraph (1)(a) may be made on the application of:
(a) the responsible entity; or
(b) a director of the responsible entity; or
(c) a member of the scheme; or
(d) ASIC.
(3) An order based on paragraph (1)(b) may be made on the application of a creditor.
601NE The winding up of the scheme
(1) The responsible entity of a registered scheme must ensure that the scheme is wound up in accordance with its constitution and any orders under subsection 601NF(2) if:
(a) the scheme’s constitution provides that the scheme is to be wound up at a specified time, in specified circumstances or on the happening of a specified event and that time is reached, those circumstances occur or that event occurs; or
(b) the members pass an extraordinary resolution directing the responsible entity to wind up the scheme; or
(c) the Court makes an order directing the responsible entity to wind up the scheme; or
(d) the members pass a resolution removing the responsible entity but do not, at the same meeting, pass a resolution choosing a company to be the new responsible entity that consents to becoming the scheme’s responsible entity.
(2) The responsible entity of a registered scheme may wind up the scheme in accordance with its constitution and any orders under subsection 601NF(2) if the responsible entity is permitted by subsection 601NC(3) to wind up the scheme.
(3) Interests must not be issued in a registered scheme at a time after the responsible entity has become obliged to ensure the scheme is wound up, or after the scheme has started to be wound up.
601NF Other orders about winding up
(1)The Court may, by order, appoint a person to take responsibility for ensuring a registered scheme is wound up in accordance with its constitution and any orders under subsection (2) if the Court thinks it necessary to do so (including for the reason that the responsible entity has ceased to exist or is not properly discharging its obligations in relation to the winding up).
(2) The Court may, by order, give directions about how a registered scheme is to be wound up if the Court thinks it necessary to do so (including for the reason that the provisions in the scheme’s constitution are inadequate or impracticable).
(3) An order under subsection (1) or (2) may be made on the application of:
(a) the responsible entity; or
(b) a director of the responsible entity; or
(c) a member of the scheme; or
(d) ASIC.
PYEP Constitution
The PYEP scheme constitution states:
34.1 Events which cause a winding up
The Responsible Entity:
(a) must wind up or cause the winding up of the Project if:
(i)the Project comes to the end of its terms (as set out in this Constitution);
(ii)the Project is without a responsible entity;
(iii)a court orders the Project be wound up pursuant to section 601ND of the Corporations Act; or
(iv)any of the other circumstances set out in section 601NE of the Corporations Act apply; and
(b)may wind up or cause the winding up of the Project in accordance with section 601NC of the Corporations Legislation
34.2 Process of winding up
(a)The winding up shall be conducted in accordance with the provisions of Part 5C.9 of the Corporations Act.
(b)The Responsible Entity must convert to money all Scheme Property, deduct all proper costs and then divide the balance amongst the Growers (as the case requires) according to their interests.
(c)The Responsible Entity may make interim distributions during the winding up process as it sees fit.
(d)The Responsible Entity must proceed with the winding up efficiently, diligently and without undue delay. However, if it is in the interests of Growers to do so, then the Responsible Entity may postpone any part of the winding up for such time as it thinks desirable.
34.3 Responsible Entity may without proceeds of realisation
The Responsible Entity may retain from the proceeds of realisation of Scheme Property such funds as in the reasonable opinion of the Responsible Entity may be required:
(a)to meet future payment obligations which the Responsible Entity reasonably believes will fall due after a distribution is made to Growers; and
(b)to pay its own remuneration and expenses for work to be done prior to and following the realisation of Scheme Property.
34.4 Termination of other agreements
During the winding up of the Project, the Responsible Entity may terminate any other agreements or arrangements it has entered into with the Growers which relate to this Project. The Responsible Entity must give notice to the Growers of the termination of those agreements or arrangements.
Section 601ND of the Act does not refer to the insolvency of the scheme. Section 601ND(1)(b) obliquely suggests insolvency, as an execution returned unsatisfied in favour of a creditor echoes a traditional act of bankruptcy or its corporate equivalent. Section 601ND(1)(b) is, however, directed at the responsible entity in its capacity as such, rather than the scheme. While s 601NE(1)(a) states that the scheme’s constitution may provide for winding up in specified circumstances or on the happening of a specified event, the PYEP scheme constitution makes no reference to insolvency.
Some authorities have accepted that a managed investment scheme may be insolvent and that its insolvency would justify winding up on the just and equitable ground. In Re Orchard, Fryberg J accepted an uncontradicted submission to that effect. His Honour found that a scheme was insolvent,[23] because the income earned by the farms it operated were insufficient to enable it to pay rent for the farms it leased, and its liabilities exceeded, by a small margin, its assets.
[23][2008] QSC 002, p 12
Fryberg J observed that:
There is no direct authority cited to me to establish that a mere insolvency makes the winding up one which would be just and equitable but in the absence of any submission to the contrary I am prepared to proceed on the basis that the terms of the section are satisfied by that condition of insolvency.[24]
[24]Ibid p 3.
In Cumulus Wines Pty Ltd v Huntley Management Ltd; Reynolds Wines Ltd v Huntley Management Ltd, Austin J accepted that certain unregistered managed investment schemes (the operation of which was unlawful) were:
… insolvent, when one takes into account interest and principal owing by investors who have borrowed. The financial records for projects 2 and 3 … are in a less than satisfactory state, because some pages of financial statements are missing and the financial statements have not been properly audited. Nevertheless it is reasonably clear that the income from those two projects to date has been insufficient to pay expenses of operating the grape growing businesses (including very substantial management fees) and interest on investors’ loans. Significant amounts of loan principal and interest have been accruing each year.[25]
[25](2004) 40 ACSR 58, 63; [2004] NSWSC 609.
Austin J stated that the continuation of the schemes in their present state was untenable, because their operation contravened s 601ED(5) and the existing managers and trustees were likely to retire shortly, leaving the schemes without any management at all.
His Honour rejected an application for an extension to explore alternative courses to winding up, because the schemes were insolvent and there was no realistic basis for expecting improvements of the magnitude needed to turn the situation around.
In Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd (‘Knightsbridge’),[26] Pullin J ordered the winding up of a registered managed investment scheme on the just and equitable ground because the administration and original arrangement had broken down. His Honour stated:
ASIC points to the fact that the whole administration of the scheme has broken down. Knightsbridge Managed Funds is under administration. Knightsbridge Finance is insolvent and a liquidator appointed. The immediate difficulty is that there are no funds available to continue with the winding up. To date, Mr Carrello has been operating as liquidator of Knightsbridge Finance and in that capacity, working on the winding up of the KFM Scheme and the unregistered schemes, using funds advanced by the State government. The State, via the Finance Brokers Supervisory Board, has informed Mr Carrello that funding will cease. If the State ceases its funding, there is no suggestion that any creditors are prepared to fund the liquidator on a scale necessary to complete the task at hand. Mr Carrello gave evidence that if his funding from the State runs out, he will then have to seek to disclaim the contracts which oblige Knightsbridge Finance to manage the schemes. If that happens, then the work that has to be done to manage and bring to a conclusion the winding up of the loans, will grind to a halt.[27]
[26][2001] WASC 339.
[27]Ibid [63].
In PWL, EM Heenan J relied on Re Orchard and Knightsbridge. His Honour stated:
Counsel for the plaintiff submits and I accept that, generally, it is just and equitable to order the winding-up of a registered management investment scheme pursuant to s 601ND(1)(a) of the Act if it is insolvent: Re Orchard Aginvest Ltd (as responsible entity for the Primary Agribusiness Fund) [2008] QSC 002. Further, it is just and equitable for the court to intervene and to wind-up a registered scheme where the original arrangement as set out in the prospectus of the scheme has broken down: ASIC v Knightsbridge. The phrase 'just and equitable' is broad and designed to accommodate a multiplicity of situations. It is not possible to define the phrase in exhaustive terms. In each case it will be a question of fact for determination upon the evidence relating to the scheme or corporation put before the court: Re Tivoli Freeholds Ltd [1972] VR 445 at 468; and Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374. A determination of whether or not it is just or equitable to wind-up the entity will not depend upon particular factual categories: Re Straw Products Pty Ltd [1942] VLR 222 at 223.
Some further guidance can be derived from authorities dealing with applications to wind-up an unregistered scheme pursuant to s 601EE(2) of the Act. In Cumulus Wines Pty Ltd v Huntley Management Ltd [2004] NSWSC 609 ; (2004) 50 ACSR 58 [21]–[28], the court observed that schemes should be wound-up where; the estimated future income of the scheme was unlikely to achieve a return for investors and there was no realistic basis for expecting that future income and expenses would change to such a degree as to make a return to investors achievable; it was untenable for the schemes to continue in their then current state; and, further, that the schemes were then insolvent. In ASIC v Chase Capital Management an application was made under s 601EE(2) of the Act and it was held that an unregistered scheme may be wound up where the investments of the scheme are in a questionable state. Counsel for the plaintiff also invokes authorities dealing with the winding-up of a corporation on the just and equitable ground where it is apparent that the company has failed to meet its objectives and will be unable to do so: Re Pacific Fisheries Ltd (1909) 26 WN (NSW) 127; Re Co-operative Development Funds of Australia Ltd (No 3) (1978) 3 ACLR 437; and Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. I am satisfied that these principles apply to the present consideration of whether any or all of these six registered managed investment schemes should be wound-up upon the grounds relied upon and I shall proceed on this basis.[28]
[28][2008] WASC 232, [43]-[44].
Barrett J, writing extra-judicially,[29] observed that the registered managed investment scheme was a form of collective investment arrangement ‘cast in the trust mould’.[30] Barrett J noted Re Orchard, but questioned whether the concept of insolvency of a managed investment scheme was meaningful or whether s 601ND(1)(b) of the Act would be interpreted to allow some form of winding up in insolvency.
[29]R I Barrett, Insolvency of Registered Managed Investment Schemes, Paper delivered at Banking and Financial Services Association Conference, Queenstown, New Zealand, July 2008. Accessible at: p 2.
Barrett J stated:
How meaningful is it to speak of the insolvency of a registered managed investment scheme? The truth is that a trust or a managed investment scheme cannot become insolvent. It is not a person. It cannot sue or be sued. It does not own property. It is the trustee (or responsible entity, in registered scheme terminology) that owns property and owes money. Debts are incurred by the responsible entity and it is to that entity that creditors must look for payment. The responsible entity, as trustee, in turn, looks to rights of indemnity and reimbursement once the creditor’s demand is made.[31]
[31]Ibid.
Barrett J pointed out that an independently wealthy responsible entity would itself be responsible for the liabilities referable to the scheme it had contracted (subject to an indemnity from scheme property and, in some cases, from the beneficiaries), but it could probably seek to wind up the scheme if it were no longer financially viable and the original purpose could not be accomplished.
Barrett J observed that if the responsible entity could not meet the liabilities of a financially non-viable scheme and was itself insolvent, it would no longer be eligible to act, but it would be practically impossible to secure a new responsible entity as (under s 601FS of the Act) it would inherit, inter alia, its predecessor’s liabilities. If, on the other hand, the responsible entity were insolvent, but the scheme was financially healthy, finding a replacement responsible entity should be unproblematic.
In our opinion, there is much force in Barrett J’s opinion that the traditional concept of insolvency which presumes a legal personality and inability to pay debts as they fall due (commercial insolvency) or, at any rate, an excess of liabilities over assets (balance sheet insolvency) is, strictly speaking, inapplicable to managed investment schemes, which are predicated on trust property and are not in themselves legal persons, but rather, a network of obligations and relations between various entities.
Nevertheless, a scheme may colloquially be characterised as insolvent in the sense that, as in Re Orchard, the liabilities referable to it cannot be satisfied as they fall due from its income or readily realisable assets.
In the present case, his Honour, in our view, did not conclude that the schemes were insolvent in the strict and technical sense. He was well aware that they were not legal persons capable of incurring liabilities.
In the light of his express qualifications and the context of the judgment as a whole, his Honour’s statement that the schemes were insolvent may be read as a short-hand expression of a number of interrelated factors, including the non-viability of the schemes, the related insolvency of the responsible entity, its inability to fund the continued operation of the schemes, the unavailability of any replacement entity and the consequent breakdown of the original scheme arrangements set out in the prospectuses.
Thirdly, the appellants conceded that, if (as the primary judge found) the responsible entity were hopelessly insolvent, and no other entity could be found to replace it, the schemes could not continue, justifying winding up on the just and equitable ground. They submitted, however, that his Honour erred in finding that EIL was insolvent, because the evidence did not support that conclusion.
In our opinion, his Honour did not err as alleged. The appellants’ attempt to challenge, before us, the finding of EIL’s insolvency, which was admittedly important to his Honour’s conclusion that the schemes should be wound up, was not the subject of a ground of appeal or the appellants’ written submissions.
The evidence that EIL was insolvent was not challenged below. Mr Craig Shepard, who gave comprehensive evidence of EIL’s ‘hopeless insolvency’, was not cross-examined. The Report as to Affairs estimating a shortfall of about $100 million as at 19 September 2008, based on the estimated recoverable value of assets and liabilities, was in evidence and was unchallenged. It was not disputed that the company appointed an administrator under s 436A of the Act, the creditors resolved to wind up EIL and the CBA, as secured creditor, appointed receivers and managers and provided interim funding.
In our opinion, the unchallenged evidence before his Honour amply supported the essentially factual conclusion that EIL was insolvent. The finding was not the subject of appeal and it was not open to the appellants to challenge it before us.
Fourthly, the appellants submitted that winding up should not have been ordered in circumstances where Ferrier Hodgson concluded that some individual projects and plantations were probably viable. Moreover, the Ferrier Hodgson Report was, the appellants submitted, procured in the unduly short time frame of three weeks, and was therefore unsatisfactory.
In our opinion, his Honour did not err as alleged. He was entitled to find, as he did, that the crucial issue was the viability of the schemes as a whole, rather than the viability of individual projects or plantations. There was no evidence to suggest that the Ferrier Hodgson Report was unreliable or unsatisfactory due to its prompt preparation.
The winding up of schemes on the ‘just and equitable’ ground in s 601ND(1)(a) of the Act is derived from a traditional ground for winding up in corporations law. Although the just and equitable ground in corporations law originally tended to be confined to categories established by precedent, the House of Lords’ decision in Re Westbourne Galleries Ltd[32] established its broad and ambulatory character. It confers a very wide discretionary power, which is applicable both in established and novel contexts. The situations which have characteristically invoked the application of the just and equitable ground in corporations law include, (relevantly to the present case) the breakdown of the parties’ fundamental trust and confidence in a corporate quasi-partnership; the exercise of powers in a way entirely outside the parties’ original contemplation;[33] deadlock;[34] and failure of the substratum of the enterprise, in the sense of conduct entirely outside the general intention and common understanding of the members when they became members.[35]
[32][1973] AC 360.
[33]See Re Wondoflex Textiles Pty Ltd [1951] VLR 458, 467 (Smith J).
[34]See Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426.
[35]See Re Tivoli Freeholds Ltd [1972] VR 445.
In Strong v J Brough & Son (Strathfield) Pty Ltd, Young J stated:
…[I]f a company is formed for one purpose and one purpose alone, and if that purpose is accomplished, or, alternatively, if its accomplishment has become impossible, then the shareholders are entitled to a winding up and a return of their investment.[36]
[36](1991) 5 ACSR 296, 300.
In our opinion, the case law on the winding up of corporations on the just and equitable ground informs the application of s 601ND(1)(a). In the present case, where the responsible entity was, on unchallenged evidence, plainly insolvent, no replacement for it was identified, no alternative proposal (save for further, perhaps redundant, investigation) was advocated, the PYEP scheme as a whole on unchallenged evidence was not viable and the purposes and arrangements contemplated in the prospectus had broken down, the primary judge did not err in ordering that the PYEP scheme be wound up on the just and equitable ground.
It is therefore unnecessary to consider the matters alleged in the Notice of Contention.
Issue (c) – The Trees as Scheme Property
His Honour made a declaration as to the ownership of the trees growing on the leasehold properties which were affected by the PYEP scheme:
All trees standing on allotments leased by Growers investing in Primary Yield Eucalypt Project ARSN 093 575 270 (‘the PYEP Scheme’) are part of scheme property for the purposes of the winding up of the PYEP scheme and may be dealt with and sold by the Scheme Liquidator as part of the said winding up in accordance with the constitution of the PYEP scheme.
On behalf of the investors it was contended that the trees were not part of the scheme property. It was the investors, as lessees of the project land, who had rights over the trees – to cultivate them and to harvest them in due course – and these rights continue until the lease is terminated. Accordingly, his Honour’s declaration should be set aside.
Counsel for the receivers and managers of the property of EIL and for EIL itself, contended that the trees were part of the scheme property and should therefore be dealt with by EIL, as scheme liquidator, in accordance with its duties to wind up the scheme pursuant to clause 3.4 of the scheme constitution.
ASIC, which had before the primary judge supported the investors’ submissions on this point, now supported the receivers and managers, contending that the trees are scheme property.
Following argument to which we will later refer, the parties were invited to submit a draft of the order which they contended for if the declaration were set aside.
In response, the receivers and managers and EIL proposed the following order:
1.Pursuant to s 601NF(2) of the Corporations Act 2001 (Cth) (“the Act”), the Court being satisfied that, by reason of the provisions of the constitution of the PYEP Scheme (“Constitution”) being inadequate and impracticable, it is necessary to give directions about how Primary Yield Eucalypt Project ARSN 093 575 270 (“the PYEP Scheme”) is to be wound up, directs that:
(a)all trees standing on allotments leased by Growers investing in the PYEP Scheme; and
(b) the right to harvest, sell and otherwise deal with the said trees,
are part of Scheme Property for the purposes of the winding up of the PYEP Scheme and may be dealt with accordingly by the Scheme Liquidator as part of the said winding up.
Counsel for ASIC proposed this:
1.All trees standing on allotments leased by Growers investing in Primary Yield Eucalypt Project ARSN 093 575 270 (“the PYEP Scheme”) are part of scheme property for the purposes of the winding up of the PYEP Scheme.
2.Pursuant to s 601NF(2), the Court directs that the trees referred to in paragraph 1 above may be dealt with and sold by the Scheme Liquidator as part of the said winding up.
and alternatively:
1.All trees standing on allotments leased by Growers investing in Primary Yield Eucalypt Project ARSN 093 575 270 (“the PYEP Scheme”), and all rights of the Growers in relation to those trees, are part of scheme property for the purposes of the winding up of the PYEP Scheme.
2.Pursuant to s 601NF(2), the Court directs that the trees and the rights referred to in paragraph 1 above may be dealt with (including by way of sale) by the Scheme Liquidator as part of the said winding up.
It is necessary to note at the outset how this matter arose for consideration by the primary judge. The question as to the ownership of the trees was not raised in the originating process.[37] This process was largely concerned with the question whether the schemes, including the PYEP scheme, should be wound up and by whom.
[37]See amended originating process dated 10 November 2008.
In the course of argument before the primary judge, the parties raised for consideration two subsidiary matters: whether the investors’ leases were terminated automatically upon the making of an order winding up the schemes or whether the scheme liquidator had the power to terminate them. The second matter was as to the power of the scheme liquidator to deal with the trees standing on the leasehold land.
His Honour concluded that the leases did not terminate upon the winding up and this decision has not been challenged on appeal. His Honour expressed the view that the leases might, in the appropriate case and upon notice to the investors concerned, be terminated by the scheme liquidator, presumably pursuant to cl 34.4 of the constitution.[38] This was not the subject of any order and is not the subject of appeal.
[38]This, and the other provisions of the constitution referrable to a winding up of the scheme, are set out at paragraph [79] above.
His Honour determined the issue with respect to the trees in these terms:
For the purpose of winding up the schemes, I have found that the leases and trees standing on the allotments leased by growers investing in the registered schemes may be dealt with by the scheme liquidator in the winding up process. The trees are scheme property for that purpose and the leases may be terminated under cl 34.4 of the PYEP constitution and the corresponding provisions in the other constitutions.[39]
His Honour then made the declaration which is set out at paragraph [106] above.
[39][2009] VSC 33, [145].
The question as to the ownership of the trees and, indeed, the other questions determined at trial concerned not only the PYEP scheme but also the PYEP No.7 scheme and the PYEP No.9 scheme. As we have mentioned, this appeal does not concern these latter schemes.
The PYEP scheme ran from 1998 to 2003 and covered a number of projects. We were provided with a set of scheme documents which were said to be typical of those throughout the period of the scheme. They comprise the scheme constitution, and a lease agreement and a management agreement which were entered into with each investor. Although the scheme changed in 2000 as a consequence of legislative changes at that time, we were told that nothing of any significance for present purposes arose from these changes. The scheme then on foot was transformed into a managed investment scheme which was subject to Chapter 5C of the Act. EIL became the responsible entity. We were being told that the scheme constitution is applicable to all the PYEP scheme projects.
The problem with respect to the ownership of the trees arises from a disconformity between the definition of scheme property in the Act and that in the constitution. Section 9 of the Act provides an inclusive definition of scheme property:
scheme property of a registered scheme means:
(a) contributions of money or money’s worth to the scheme; and
(b)money that forms part of the scheme property under provisions of this Act or the ASIC Act; and
(c)money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d)property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and
(e)income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
Note 1: Paragraph (a)—if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property.
Note 2: For provisions that are relevant to paragraph (b), see subsections 177(4), 1317HA(1A), 1317HB(3) and 1317HD(3) of this Act and subsection 93A(5) of the ASIC Act.
In cl 1.1(ii) of the constitution, the definition of scheme property is in these terms:
(ii)“Scheme Property” has the meaning given to the expression by section 9 of the Corporations Act and which, for the avoidance of doubt, is limited to the proceeds of the Project held in the Proceeds Fund and the Application Moneys held in the Application Fund; and …
In order to understand the significance of the qualification to the statutory definition which is contained in cl 1.1 of the constitution, it is necessary to consider the function and role of the Application Fund and the Proceeds Fund under the constitution.
Application fund is not defined in the constitution. In cl 1.1(e) application money is defined in these terms:
“Application Money” means the amount payable by an Applicant to acquire an Interest in the Project in accordance with clauses 5.1(c)(i) and (ii) and as provided in the Project Documents and listed in item 2 of the Schedule.
Clause 6.2 deals with application money as follows:
All Application Money shall be deposited into the Application Fund and held by the Responsible Entity as bare trustee for the Applicant until the Applicant is accepted as a Grower [investor] and issued an interest in the Project and Responsible Entity transfers the Application money in accordance with clause 7.[40]
[40]The reference should be to cl 8.
An applicant for investment in the scheme is required to complete an application form contained in the prospectus[41] and to pay to the responsible entity $13,200.[42] This sum comprises:[43]
· An application fee of $8,800 (GST inclusive)
· An establishment fee of $4,114 (GST inclusive) payable under the management agreement
· A lease rental of $286 (GST inclusive) for the first year payable under the lease agreement.
[41]Clause 5(1)(a).
[42]The applicant is presumed to be applying to invest in the minimum holding of three allotments, that is, six hectares.
[43]Constitution schedule 2.
This application money, in the case of any applicant might therefore comprise the application fee, or each of the three payments which the applicant must make in order to acquire an interest in the project. Subject to cl 8, it is held in the Application Fund by the responsible entity as bare trustee for the applicant. If the application money still remains in the Application Fund for 12 months, it must be refunded to the applicant unless the applicant permits it to remain that fund.[44]
[44]Clause 6.4.
By cl 8 the responsible authority may, not must, transfer the application money out of the Application Fund when the investor has been issued with an interest in the project and the necessary agreements have been executed, and the responsible entity is ready and willing to perform its obligations under the project documents. The transfer is from the Application Fund to the responsible entity or its nominee.
In terms of the definition of the scheme property in the constitution, the application money, not the application fee, is part of the scheme property only during the period commencing on its receipt by the responsible entity upon application and continuing until its transfer out of the Application Fund. It will be recalled that, pursuant to cl 6.2, during this period the money is held by the responsible authority as bare trustee for the applicant. We observe that, notwithstanding this bare trust, the responsible entity is required by s 601FC(2) to hold the scheme property upon trust, not for the applicant, but for the scheme members, a requirement which is repeated in cl 12.1 of the constitution.
The constitution contains a number of provisions with respect to the application of the scheme property. It must be held separately for the investors for the term of the project;[45] it may be held by an agent of the responsible entity;[46] it may be invested in authorised investments;[47] it may be pledged as security for borrowings by the responsible entity;[48] and the responsible entity and its officers are entitled to certain indemnities from it.[49] Furthermore, upon the winding up of the scheme, the responsible entity must convert into money the scheme property and divide the balance, after deduction of proper costs, to the investors.[50]
[45]Clause 12.1.
[46]Clause 12.2.
[47]Clause 13.1.
[48]Clause 13.2.
[49]Clause 23.5.
[50]Clause 34.2(b).
The difficulty with these provisions is that, once the application money is transferred out of the Application Fund, that is, for the greater part of the time that the scheme is on foot, the money, or anything acquired by it, does not form part of the scheme property as defined in cl 1.1.
The second component in the cl 1.1 definition of the scheme property is ‘the proceeds of the project held in the Proceeds Fund’.
The Proceeds Fund is the fund established under cl 4(a)(ii) of the constitution.[51] This is the fund into which is to be deposited ‘all proceeds and other money generated from the Project (including but not limited to harvest proceeds and insurance proceeds) but excluding the application money’.[52] This, too, is not altogether what it seems because the obligation of the responsible entity under cl 19.1 is to pay into the Proceeds Fund all proceeds from the operation of the project, but after deduction of the entitlement of the responsible entity under cl 20. Notwithstanding the generality of cl 4(a)(ii), it seems to be intended that the money flowing into this fund will be generated from the harvest because the amount to be paid out of the fund to each grower pursuant to cl 21 is calculated by reference to the grower’s share in the sale proceeds of the harvest for the year in question.
[51]Clause 1.1(cc).
[52]Clause 4(a)(ii).
The consequence of all of this is that second component of the cl 1.1 definition of scheme property is likely to be nil except for the period between the deposit into the Proceeds Fund of the net proceeds (if any) of any year until they are distributed to growers within 20 days after the last day of the harvest year pursuant to cl 21. In cl 1.1(v) harvest year is given the same meaning as in the management agreement but it is not defined in the management agreement.
The PYEP scheme took no application after 2003 and its responsible entity has since become insolvent and therefore unable to perform its harvesting functions under the management agreement. It seems likely, therefore, that there is now nothing in the Application Fund or in the Proceeds Fund. Accordingly there would be no scheme property in terms of the cl 1.1 definition.
His Honour declined to accept that the cl 1.1 definition of scheme property was effective to limit the responsibility of the responsible entity as scheme liquidator to wind up the scheme under Part 5C.9 when an order for winding up is made pursuant to s 601ND(1). While it is true to say, as counsel for the investors contended, that the duty of the responsible entity under s 601NE(1)(B) to ensure that the scheme is wound up ‘in accordance with its constitution’, its abiding obligation is to wind up the scheme. ‘Managed Investment Scheme’ is defined in s 9 of the Act to mean, so far as is here relevant:
managed investment scheme means:
(a) a scheme that has the following features:
(i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
(ii)any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(iii)the members do not have day‑to‑day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or …
As the primary judge observed[53] this scheme is more than its constitution. It is a broader concept defined by the scheme documents, the constitution, and the management agreements. In terms of the statutory definition, it includes the contributions which the growers have made and which are to be pooled and used to produce financial or proprietary benefits.
[53][2009] VSC 33 [77] and [86].
The statutory definition of scheme property in s 9 reflects this definition. It includes these contributions to the scheme, the money which forms part of the scheme under the Act or the ASIC Act and, importantly for present purposes, it includes ‘property acquired directly or indirectly, with, or with the proceeds of these contributions’.
The promoters and members of the PYEP scheme cannot enjoy the benefits accorded to managed investment schemes under Chapter 5C and at the same time disavow the requirements of Part 5C.9 when the scheme is to be wound up. In particular, they cannot achieve this by the drafting strategy of pretending a doubt about the statutory definition and using this pretence to emasculate the definition. We would construe the qualification contained in the cl 1.1 definition, at least for the purposes of Part 5C.9, as having no application inasmuch as it is predicated upon a doubt as to whether the statutory definition is, or is not, limited to the proceeds in the Proceeds Fund and the application moneys held in the Application Fund. An indication that this is the intent of cl 34 is evident in cl 34.2(b) which contemplates that the scheme property might be other than a fund and in cl 34.4 which contemplates the termination of certain agreements as part of the winding up process.[54]
[54]These provisions of the constitution are set out at paragraph [79] above.
We see no basis for doubt that the application moneys held by the responsible entity in the Application Fund and the proceeds held by the responsible entity in the Proceeds Fund are scheme property. Equally, we see no reason to doubt that the scheme property is not limited to that property. Accordingly, we agree with the primary judge that, for the purposes of the winding up at least, the scheme property comprises the property which falls within the statutory definition. It is that property which is to be dealt with in accordance with cl 34 where the court makes a winding up order under s 601ND.
His Honour then concluded that, since the trees were purchased and planted using the contributions of investors, they are ‘property acquired directly or indirectly with, or with the proceeds of contributions’. Accordingly, they are part of scheme property and the declaration set out above was made.[55] In the context of the debate between the investors and ASIC, on the one hand, and the receivers and managers and EIL, on the other, as to whether the trees were part of the property to be wound up, his Honour was correct in concluding that they did.
[55]See paragraph [5] above.
The argument upon appeal, however, exposed a difficulty. It was that the trees, when planted on the leased land, become part of the land. The rights of the investors and, indeed, those of the scheme liquidator in respect of the trees, must accommodate the fact that, when planted, these rights were less than the rights of ownership.
The lease in the Appeal Book which was typical of the lease entered into and under the PYEP scheme has its own difficulties. It shows that the registered proprietor of the land is STY (Afforestation) Pty Ltd (‘STY’). This is a company within the EIL Group which was placed in administration on 19 September 2008.[56] Its property was placed in the hands of receivers and managers on 22 September 2008.[57] The lessor is Burke Bond Corporate Pty Ltd (‘Burke Bond’), a company which is not said to be part of the EIL Group. The recitals in the lease assert only that Burke Bond leases the land to the grower with the consent of STY. It may be, therefore, that the lessee holds the land as tenant of STY which itself acts through its agent Burke Bond.
[56]Affidavit of Craig Peter Shepard, sworn 14 October 2008, [8].
[57]Ibid [9].
The term of the lease is until the first clear fell of trees to be planted. According to the product disclosure statement this is expected to occur about 10 years after planting.[58] In the opinion of the agricultural consultant retained by EIL, this is not likely to occur before 20 years after planting.[59] In the meantime, the land and the trees require cultivation and maintenance, but with no harvest proceeds. This work is, of course, to be carried out by EIL under the management agreement. The lease provides in cl 2 that the lessee is entitled to use the land for the cultivation and harvesting of trees for sale.[60]
[58]Ibid [22].
[59]Ibid [23].
[60]Clause 2.1.
Clause 7 of the lease provides that STY will, at the request of the lessee, ‘purchase the lessee’s right title and interest in the trees’ and that, thereupon, STY assumes the liability of the lessee to make payments to EIL under the management agreement and, further, that the rights under the lease of the parties to the lease in respect of the allotment cease.[61]
[61]Clause 7.4.
Accordingly, it was said that the scheme property includes, not ownership of the trees, but rather the rights with respect to them, which rights the scheme acquired using the contributions. Likewise, it includes the like rights with respect to the leases themselves. We think that this is correct. What these rights are in a given case we are unable to determine. Mr Shepard’s affidavit describes the complexity of the PYEP scheme and the projects which are included in it. We mention by way of example that the owners of the allotments differ in differing projects within the scheme.[62]
[62]Affidavit of Craig Peter Shepard, sworn 14 October 2008, [29]-[30].
It was contended on behalf of ASIC that it is legally possible for the owner of land to deal with standing timber separately from the land on which it stands and that the scheme documents, in particular cl 7 of the lease, achieve this. In this sense, it might be said that property in the trees can pass from the lessor to the scheme. Accordingly, ownership of the trees is part of the scheme property and may be converted into money by the scheme liquidator. We consider that the scheme documents do not achieve this objective. The right conferred by cl 7 is to require the purchase of the investor’s ‘right title and interest in the trees’.
Next, it was put on behalf of the receivers and managers and EIL and also on behalf of ASIC, that the Court might give directions about the matter pursuant to s 601NF(2) which is in these terms:
The Court may, by order, give directions about how a registered scheme is to be wound up if the Court thinks it is necessary to do so (including for the reason that the provisions in the scheme’s constitution are inadequate or impracticable).
We do not think it appropriate that we should exercise this power as suggested. First, the question is not in terms raised in the appeal. Second, we are not at all confident that a power such as this might be used to affect rights to property. It may be that ‘directions as to how a registered scheme is to be wound up’ are limited to procedural rather than substantive matters. There is, of course, the further difficulty that not all the scheme members were represented on the appeal and that companies such as STY and Burke Bond and, perhaps, other persons with an interest in the leasehold land, are not parties to the proceeding. We would not be prepared to act without the benefit of full argument from all affected parties.
The primary judge noted that the arguments advanced on behalf of the investors, and supported before him by ASIC presupposed that the trees were owned by the investors and not held upon trust for them as scheme members.[63]Accordingly, they were not property of the scheme and could not be sold in a winding up of the scheme. His Honour rejected this conclusion, taking what we have called a broader concept of the scheme.[64] He was attracted to the ASIC contention that the scheme liquidator, nevertheless, had the power to realise property which was part of a scheme even though the project documents vested legal title in the trees in the individual investors.[65]
[63][2009] VSC 33, [80].
[64]See paragraph [135] above.
[65][2009] VSC 33, [85].
The scheme documents do not vest legal title in the trees in the investors. They acknowledge, as is plainly correct, that the investors have an interest in the trees and rights and obligations with respect to them. The rights in respect of the trees of the investors as lessees of the land depend upon the terms of the scheme documents, notably, the lease – cl 2.1 (right to cultivate and harvest) and cl 7 (right to require the landlord to purchase the investors’ rights in the trees). These rights are part of the scheme property available to the scheme liquidator upon a winding up of the scheme.
His Honour posed, as an absurd consequence, an outcome which would deny the scheme liquidator access to the standing trees for the purposes of a winding up until they are harvested some years in the future.[66] Notwithstanding that the scheme and the scheme documents have about them such an air of unreality that absurdity may not be surprising, we, too, shrink from the conclusion contended for on behalf of the investors. Clause 2.1 of the lease gives to the investors extensive rights to use the demised land for the establishment and harvesting of a plantation of trees. These rights are part of a venture pursuant to which the investors hope to receive financial return from a primary production business.[67] It is to be expected that, if the venture should fail, the assets of the venture might be realised to satisfy creditors and, where appropriate, to be distributed among the venturers. We agree with his Honour that the scheme property does include present rights to and interests in the standing trees insofar as those rights and interests were acquired by the application of contributions.
[66]Ibid [90] and [97].
[67]See cl 2 of the constitution.
We return now to the terms of the declaration. It will be apparent that we consider that the relevant part of the scheme property is not the trees themselves; it is the rights of the parties to the scheme with respect to those trees. Accordingly, read literally, his Honour was not correct to express the declaration in the terms that the ‘trees … are part of scheme property’. Nevertheless, it is abundantly clear that in formulating the declaration, his Honour had in mind, not the trees, but rights over and interests in the trees. This is apparent from the manner in which the question arose in the trial below and from his Honour’s judgment.
It is trite to assert that ownership is a bundle of rights in respect of a thing. This concept underlies the definition of ‘property’ in s 9 of the Act. In this case these rights are those conferred upon investors by the scheme documents. We would therefore construe his Honour’s declaration as the equivalent of the following:
The rights over and interests in all trees which were acquired with the proceeds of contributions to the Primary Yield Eucalypt Project ARSN 093 575 270 (“the PYEP scheme”) standing on allotments leased by growers investing in the PYEP scheme are part of scheme property for the purposes of the winding up of the PYEP scheme and may be dealt with and sold by the scheme liquidator as part of the said winding up in accordance with the constitution of the PYEP scheme.
We would suppose that the parties understood this to be the case leaving it to the Court to work out on a case by case basis what those rights and interests are. We would therefore reject the submissions of the appellants on this issue.
Issue (d) – The Costs Order – Investors’ application to amend notice of appeal
The investors, by summons filed on 20 July 2009, seek leave to amend their notice of appeal to challenge certain orders of the trial judge as to priority for costs made on 30 April 2009. In this order his Honour varied orders previously made on 23 February 2009 and 26 February 2009 the effect of which we have set out above.[68]
[68]See paragraphs [6] and [7] above. There is no mention of the order of 26 February in those paragraphs.
His Honour had concluded on 12 February 2009 that each of the registered management investment schemes should be wound up and the court on 23 February 2009 ordered pursuant to s 601NE(1) that EIL as responsible entity wind up the scheme.[69] We have determined that his Honour did not err in so ordering. The question which then remained was as to the machinery which should be put in place to give effect to the winding up. For reasons which have not been challenged, the order also made provision pursuant to s 601NF(2) for the appointment of a person to take responsibility for ensuring that the scheme be wound up in accordance with its constitution and with the orders of the court. This person is referred to as the scheme liquidator.[70]
[69]Order 2.
[70]Order 4.
By Order 3, his Honour made a conventional order for the Prothonotary to nominate a person from the roll of Official Liquidators to act as scheme liquidator. No complaint is made about this order.
Orders were made also to the effect that the parties should have their costs on an indemnity basis paid out of the scheme property.[71] Similar orders were made with respect to the costs of the winding up including the costs of the Scheme Liquidator. No complaint is made about these orders.
[71]Orders 5, 6, 7 and 8.
In each of Orders 5, 6 and 7, however, his Honour ordered that the costs so ordered be paid in priority to the costs of the winding up and the scheme liquidator’s costs, the subject of Order 8. This and the similar order made on 26 February[72] are the orders which have led to difficulties.
[72]Order 1.
In short, no person nominated by the Prothonotary was prepared to assume the office of Scheme Liquidator on the basis that the costs under Order 8 ranked in the winding up after other orders for costs.
And so, on 30 April 2009, his Honour was asked by the receivers to vary the orders made on 23 February to provide for the appointment of Mr Downey, the liquidator of EIL, to act as Scheme Liquidator. His Honour acceded to this application making provision to avoid conflict of interest which might arise by reason of his holding office as liquidator of EIL and that of Scheme Liquidator. No complaint was made of this order and Mr Downey has entered upon the office of Scheme Liquidator.
It is another order made on 30 April 2009 which is the subject of the proposed appeal. This is the order removing the priority given to all parties other than the scheme liquidator with respect to costs of the application to wind up. What is sought to be argued is that his Honour did not have the power to make this variation order or, if he did, he erred in its exercise.
The question did not arise until 30 April 2009, after the filing of the Notice of Appeal. Accordingly it would have been necessary for an fresh notice of appeal to have been served by 14 May or an application made to amend the existing notice so as to raise the question on the appeal. In fact the evidence shows that on 14 May the solicitors for the investors wrote to the solicitors for the receivers advising of their clients’ intention to challenge the order of 30 April 2009.[73] For some reason this was not put into effect for some six weeks until 25 June when a draft amendment circulated. We were told that this was the first Mr Downey heard of the challenge.[74]
[73]Affidavit of Jane Elizabeth Kupsch, sworn 20 July 2009, [12].
[74]Outline of submissions of James Patrick Downey in opposition to the application for leave to amend the appellant’s notice of appeal, dated 3 August 2009, [5].
While it is desirable that all questions be raised and argued at the same time leave to amend out of time may be refused where there is unexplained delay or where by reason of the delay a party has acted to their detriment. In this case the delay of itself is not great. In the context of the prejudice to affected parties, it is of greater moment. In his affidavit sworn 31 July 2009 Mr Downey has set out the work he has done as Scheme Liquidator in the periods 30 April to 14 May, and from 14 May to 30 July. In respect of work done in these periods has estimated his fees and expenses at about $16,000 and nearly $80,000, respectively. If the priority order of 30 April is set aside his prospects of recovering these amounts may be in jeopardy. In any event, it is clear that he accepted the appointment only on the basis that he enjoyed that priority. If a party wishes to challenge such an order it must move with very much greater alacrity than have the investors in this case. We should add that counsel for Mr Downey invited counsel for the investors to give an undertaking to the effect that they would ensure that the costs of the liquidation be paid in the event of an insufficiency of the scheme property. No such undertaking was forthcoming.
In any event, we do not think that the point which the investors would raise by their proposed amendment has sufficient prospect of success to warrant leave being given. The reasons given by the primary judge for concluding that he had the power to vary the perfected order of 23 February are compelling.[75] The order of 23 February was made at a time when most, but not all, of the interested parties were before the Court. We respectfully agree with his Honour that the order for priority is ‘not the operative and substantial part’[76] of the winding up order; it was but a machinery order made to give effect to the order for winding up. Accordingly, the court had inherent power to vary it in the appropriate case. Moreover, his Honour on 30 April was faced with the difficulty that the winding up could not go ahead unless the priority order was varied. It would be unthinkable that this important order would be frustrated only because the machinery, which all present on 23 February considered appropriate, turned out to be unworkable.
[75](Unreported, Ruling of Judd J, 30 April 2009), [11].
[76]See Bailey v Marinoff (1971) 125 CLR 529, 539-40 (Gibbs J, dissenting)
The application for leave to amend the Notice of Appeal will be refused.
Conclusion
In our opinion, the appeal and the application to amend the Notice of Appeal should be dismissed.
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