In the matter of PrimeSpace Property Investment Limited (in liq)

[2016] NSWSC 1450

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of PrimeSpace Property Investment Limited (in liq) [2016] NSWSC 1450
Hearing dates:	30 September 2016
Decision date:	13 October 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Pursuant to s 511 of the Corporations Act 2001 (Cth), the Court directs that the liquidators of the Third Plaintiff would be justified in distributing funds held by the Third Plaintiff in its capacity as trustee of the PrimeSpace Northbourne Trust (“PSNT”) to pay the Third Plaintiff’s reasonable costs and expenses in: the liquidators investigating claims made by Canberra Finance Group Pty Ltd (“CFG”) against the Third Plaintiff in its capacity as trustee of PSNT in proceedings 2016/120251 (“CFG Proceeding”); the liquidators and the Third Plaintiff taking any steps in the CFG Proceeding as are necessary pending carrying out of the investigations; and the liquidators and the Third Plaintiff taking such other steps or action incidental to the foregoing. Parties to be heard as to costs following determination of remaining issues in the application.
Catchwords:	CORPORATIONS — Winding up — Application for directions under s 511 of the Corporations Act 2001 (Cth) — where proceedings were brought against trustee in its capacity as trustee of a particular trust on the basis of certain transactions purported to be binding on it – where liquidators of trustee sought directions that they be justified in distributing funds of the relevant trust to pay the trustee’s reasonable costs and expenses in the liquidators investigating claims made against the trustee – where proposed investigations would allow liquidators to better assess likelihood of a successful defence of the proceedings and included conducting public examinations and obtaining legal advice on whether proceedings be defended or cross-claim brought – where trust creditor that was joined as defendant to the application opposed application on various grounds – whether the subject of the directions sought involves issue of propriety and reasonableness – whether directions sought ought be made.
Legislation Cited:	- Corporations Act 2001 (Cth), ss 511, Pt 5.9 - Evidence Act 1995 (NSW), s 136 - Supreme Court (Corporations) Rules 1999 (NSW), r 2.13
Cases Cited:	- Re Crest Realty Pty Ltd (in liq) (No 2) [1977] 1 NSWLR 664 at 672; (1977) 2 ACLR 502 - Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 - Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 - Re PrimeSpace Property Investment Limited (in liq) [2016] NSWSC 1113 - Re RiverCity Motorway Pty Ltd [2014] FCA 1008; (2014) 102 ACSR 185 - Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 - Wells v Wily [2004] NSWSC 607; (2004) 50 ACSR 103
Category:	Procedural and other rulings
Parties:	Shaun Robert Fraser (First Plaintiff) Anthony Gregory McGrath (Second Plaintiff) Primespace Property Investment Limited (in liquidation) (Third Plaintiff) IQIT Nominees Pty Ltd as trustee for the IQ Investment Trust (Defendant)
Representation:	Counsel: V Whittaker (Plaintiffs) D Stack (Defendant) S Golledge (Canberra Finance Group Pty Ltd – Creditor)   Solicitors: Johnson Winter & Slattery (Plaintiffs) Bridges Lawyers (Defendant) HWL Ebsworth (Canberra Finance Group Pty Ltd – Creditor)
File Number(s):	2016/107316

Judgment

Background to this application

1. By Amended Interlocutory Process filed by leave on 30 September 2016, the Plaintiffs, Messrs Fraser and McGrath as joint and several liquidators of PrimeSpace Property Investment Limited (in liq) (“PPIL”) and PPIL seek several directions under, inter alia, s 511 of the Corporations Act 2001 (Cth). A trustee of another trust, IQIT Nominees Pty Ltd (“IQIT Nominees”) as trustee for the IQ Investment Trust (“IQIT”) was joined as defendant in the proceedings. A third party, Canberra Finance Group Pty Ltd (“CFG”) was granted leave to be heard in the application under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). In the event, it did not consider that the submissions made by the Plaintiffs affected its interests and it made no submissions on the application.

2. I now set out the nature of PPIL’s role, drawing on my summary of it in my earlier judgment ([2016] NSWSC 1113) (“Earlier Judgment”) in a previous application by the liquidators, which reflected evidence also led in this application. PPIL acted as responsible entity and trustee of funds and trusts within the Prime Access Group. PPIL is presently the trustee of the PrimeSpace Northbourne Trust (“PSNT”) and also of PrimeSpace Property Trust No 3 (“PSPT3”) and the trustee and responsible entity of the Prime Access Property Fund (“PAPF”) (which is an unlisted managed investment scheme which funded property investment and development activities) and was formerly the trustee of IQIT. PPIL, as responsible entity of PAPF, also owns all the units in the Prime Office Property Fund ("POPF"), which in turn owns all of the 10,460,000 ordinary units in PSNT. Another entity, PS Office Pty Ltd, is trustee of POPF. A further 4,070,000 preference units in PSNT are held by PPIL as bare trustee for IQIT Nominees as the current trustee of IQIT. PSNT participated in the IQ joint venture, which funded and managed the IQ Smart Apartment development in Canberra, and held an interest of approximately 39% in that joint venture. PSNT's interest was funded by a construction facility from a bank, the issue of convertible notes and equity invested by PSNT and funded by PAPF. Titles to the apartments were issued in late May 2015 and the construction facility was repaid on 8 July 2015. PSNT has to date received interim distributions from the IQ joint venture in excess of $6.8 million.

3. IQIT was established in 2012 as a unit trust for the purpose of raising monies to assist with the development of the IQ Smart Apartments, and the constitution for PSNT was then amended to create a class of preference units, which were entitled to receive distributions in priority to ordinary units. It is common ground that, on 8 July 2015, IQIT’s preference units in PSNT converted into loan notes, by reason of matters to which I referred in the Earlier Judgment.

4. Although other issues are raised by the Amended Interlocutory Process, the only issue which was addressed on the first day of a hearing before me was the question whether the liquidators would be justified in expending funds held by PPIL as the trustee of PSNT in respect of the conduct of examinations, the production of documents and obtaining Counsel’s opinion in respect of transactions between PPIL and CFG and proceedings that have been brought by CFG against PPIL in this Court (“CFG Proceedings”). By consent of the parties, an order was made that that question be determined separately from and prior to the other matters raised by the application. Further questions as to the potential expenditure of funds by PPIL as trustee and responsible entity of PAPF, in investigating matters relating to the issue of convertible notes by PPIL and as to the remuneration of the liquidators, were deferred to a further hearing of the proceedings listed in mid-November 2016.

5. The direction now sought by the liquidators is to the effect that:

“[T]he Liquidators would be justified in distributing the funds held by PPIL in its capacity as trustee of PSNT to pay PPIL’s reasonable costs and expenses in:

(a)   the Liquidators investigating the claims made by [CFG] against PPIL in its capacity as trustee of PSNT in proceedings numbered 120251 of 2016 issued in this Court (“CFG Proceeding”) including by:

(i) conducting examinations and seeking production of documents pursuant to Part 5.9 of the Corporations Act; and

(ii)   obtaining an opinion from counsel for the purpose of determining whether PPIL in its capacity as trustee of PSNT would be justified in defending the CFG Proceeding and bringing any cross-claim in the proceeding.

(b)   the Liquidators and PPIL taking any steps in the CFG Proceeding as are necessary pending the carrying out of the investigations referred to in (a) above; and

(c)   the Liquidators and PPIL taking such other steps or action incidental to any of the foregoing.”

6. Although the liquidators had originally sought further directions that they would be justified in causing PPIL to defend the CFG Proceedings and bring any new claims in relation to the CFG Proceedings, they did not press for such directions at this hearing. That course was plainly sensible, since the question whether the CFG Proceedings should be defended or any new claims in them should be brought may well depend upon matters disclosed by the proposed examinations, if they take place.

The affidavit evidence and the relevant facts

7. The liquidators relied, first, on Mr Fraser’s affidavit dated 6 April 2016, which was also read in proceedings that led to the Earlier Judgment, which set out the nature of the activities of PPIL, PAPF, POPF, PSNT and IQIT, and addressed matters relevant to whether preference units in PSNT issued to IQIT had previously converted to loan notes.

8. By his second affidavit dated 12 July 2016 (“Fraser 2”), Mr Fraser referred to the Prime Retail Property Fund, of which PS Retail Pty Ltd (recs and mgrs apptd) was responsible entity, which was established to fund and manage the Summer Centre Orange development, a regional shopping centre and apartment development in Orange, NSW (Fraser 2 [8(e)]). Mr Fraser also outlined the steps which had been taken by the liquidators since PPIL was placed in liquidation, although much of that evidence will be relevant to other aspects of this application. Mr Fraser referred to particular areas of concern raised in the liquidation, including transactions between PPIL (as trustee for PSNT or as responsible entity for PAPF) and CFG and potential claims against the directors of PPIL for breach of duty relating to the CFG transactions (Fraser 2 [47]). Mr Fraser also set out, at some length, the circumstances relating to the dealings between PPIL and CFG in respect of the Summer Centre Orange development (Fraser 2 [48]–[76]) and the matters which have given rise to the CFG Proceedings. I now set out those matters, drawing upon Mr Fraser’s evidence of these matters and the summary of those matters in the Plaintiffs’ written outline of submissions, which fairly reflects Mr Fraser’s evidence.

9. On or about 18 December 2012, CFG entered a Loan Agreement, Guarantee Deed and Call Option Deed which provided that CFG would lend $1.2 million for the Summer Centre Orange development, and PPIL, as the responsible entity of PAPF, would guarantee the loan. By the Call Option Deed, CFG was purportedly granted an option to purchase four apartments in the IQ Smart Apartment development at their list price and to offset the outstanding loan amount against the purchase of those apartments. A First Supplemental Deed was entered into on about 28 March 2013 in relation to a further advance of $300,000 (Fraser 2 [50]) and a Deed of Variation was entered into in about 27 May 2014 with respect to an additional amount of $450,000 (Fraser 2 [51]). PPIL as trustee of PSNT was not a party to the earlier transactions, although Australian Executor Trustees Limited (“AETL”) was a party to the Call Option Deed in its capacity as custodian of PSNT. A Second Supplemental Deed dated 27 May 2014 first included PPIL as a party to the transactions in its capacity as trustee of PSNT (Fraser 2 [52]) and purportedly included PPIL (as trustee of PSNT) as a guarantor under the Guarantee Deed and permitted CFG to set-off its indebtedness under the Call Option Deed, arising on the exercise of the options, against the indebtedness of PPIL as trustee of PSNT under the Guarantee Deed.

10. After the appointment of administrators to PPIL, CFG claimed to exercise the option to purchase four units in the IQ Smart Apartment development and to set-off the purchase price of the units against the amount owed to it under the transaction documents referred to above (Fraser 2 [54]–[55]). If that set-off is valid, then PPIL, in its capacity as trustee of PSNT, will not receive any sale proceeds from CFG for the sale of those units, which are estimated to be a total amount of $2,347,500 (Fraser 2 [55]), although, I interpolate, it seems that the relevant loans had not been made by CFG to PPIL as trustee of PSNT or applied to the IQ Smart Apartment development. If the Second Supplemental Deed validly made PPIL a guarantor in its capacity as trustee of PSNT, then PSNT would also ultimately bear that liability (Fraser 2 [56]).

11. Mr Fraser observed in his second affidavit (Fraser 2 [57]) that:

“It is not readily apparent to me that PSNT benefited from becoming a guarantor of PS Retail’s liabilities some 18 months after the initial loan was advanced to PS Retail; nor that it benefited from becoming a grantor pursuant to the Call Option Deed at this time. On their face, the CFG Transactions raised questions about potential breaches of the Corporations Act and directors’ duties.”

12. Mr Fraser also indicated that, following review of the file maintained by PPIL’s solicitors and advice obtained from the liquidators’ solicitors in relation to the transactions, he had formed the preliminary view that (Fraser 2 [58]):

“(a)   there was no recorded proper basis for PPIL as trustee of PSNT assuming liability under the Guarantee Deed by way of the Second Supplemental Deed;

(b)   there was not a mutual intention to include PPIL as a party to the transactions in its capacity as trustee of PSNT;

(c)   in entering into the transactions, PPIL may have been in breach of its duties as trustee of PSNT;

(d)   in entering into the transactions, the directors of PPIL may have committed breaches of their directors’ duties; and

(e)   CFG may have been knowingly concerned in such breaches, depending upon the extent of its involvement and knowledge.”

13. Mr Fraser referred to correspondence with Mr McDonald, a director of PPIL, in respect of the transactions but that correspondence was ultimately not tendered in the application. The liquidators also sought information from CFG, but CFG’s solicitors have indicated that information will not be provided other than as required in the CFG proceedings. It seems to me that CFG’s approach to that matter strengthens the liquidators’ case for the exercise of the statutory powers of examination. Mr Fraser expresses the view (Fraser 2 [63]) that it is in creditors’ interests for the liquidators to undertake further investigations by conducting examinations under Pt 5.9 of the Corporations Act, including of two directors of PPIL and two directors of CFG. A draft application and examination summons has been prepared, but was not tendered in the application.

14. Mr Fraser’s evidence was initially that the estimated total cost of conducting the examinations and obtaining Counsel’s advice following the examinations about potential proceedings would be approximately $200,000 (Fraser 2 [64]). However, Ms Whittaker, who appeared for the liquidators, indicated, in the course of submissions, that the initial estimate of the costs of conducting the examinations and obtaining Counsel’s advice had been undertaken on a “conservative” basis and the liquidators ultimately indicated that the likely cost of the examinations, on the assumption that they would take place over a two day period, would be more modest, in the order of $85,000.

15. Mr Fraser’s second affidavit also set out (Fraser 2 [69]) the matters raised by CFG, in the CFG Proceedings, in seeking rectification of transaction documents to impose liability upon PPIL at an earlier point in time and seeking declarations that it validly exercised certain rights in respect of the purchase of units in the IQ Smart Apartment development. Mr Fraser also identifies additional issues arising from the fact that AETL has been joined as a defendant in the CFG Proceedings and that PPIL will potentially be contractually obliged to meet AETL’s costs of those proceedings.

16. A third affidavit of Mr Fraser dated 23 August 2016 was directed to steps that had been taken to give notice of these proceedings to interested parties and to developments in the CFG Proceedings since Mr Fraser’s earlier affidavits.

17. Mr Fraser’s fourth affidavit dated 21 September 2016 (‘Fraser 4”) provided further information in support of the liquidators’ application for remuneration, which is not to be determined by this judgment, and responded to matters raised by IQIT Nominees in its submissions and in Mr Powderly’s affidavit dated 2 September 2016 in this application and otherwise updated the position in respect of the progress of the liquidation. Mr Fraser also indicated that the liquidators considered that, where PPIL was the trustee of PSNT, they could not disregard the interests of PSNT’s beneficiary, POPF as the ordinary unitholder in PSNT and referred to the potential impact of accepting CFG’s claims on the interests of POPF and to correspondence from persons interested in POPF seeking to require the liquidators to investigate the CFG transactions. Mr Fraser also expresses the view that, where he and Mr McGrath have formed the view that the transactions involve potential breaches of duty by PPIL and its directors and identified the possibility that CFG was knowingly concerned in those breaches:

“[I]t may not be appropriate for Mr McGrath and me as liquidators to cause PPIL not to contest the CFG Proceedings and therefore have judgment entered against it (with ancillary orders against us).”

18. Importantly, Mr Fraser also notes that, if CFG had not commenced proceedings, the liquidators would not have accepted a proof of debt from CFG, based upon the CFG transactions, without undertaking a significant investigation process and, had they reached the conclusion that the proof of debt lodged by CFG could not be accepted, it is likely that CFG would have appealed that decision and the matter would have been subject to court proceedings in any event (Fraser 4 [73(d)]). I will refer to the significance of that matter below.

19. Mr Fraser’s fourth affidavit also attaches a table indicating the link between the CFG Proceedings and potential returns for creditors, which indicates that the best outcome for creditors would be if the CFG claim was rejected, without dispute, an outcome that the liquidators consider is unlikely; the second best outcome for creditors would be the successful defence of the CFG Proceedings; the third best outcome for creditors would be the admission of CFG’s claim in the near future, without contest, since that would avoid additional costs and additional interest payable to CFG; and, not surprisingly, the worst outcome is if the CFG Proceedings are defended without success. The liquidators will, of course, be in a better position to assess the likelihood of those outcomes if they are permitted to undertake the investigations and examinations which they now wish to undertake. Mr Fraser recognises that fact in his fourth affidavit, observing that (Fraser 4 [75]):

“Whilst the table illustrates that creditors may be better off if the CFG Proceedings are successfully defended, than if the claim is not contested and paid in full now, the decision as to whether to pursue that course depends upon a number of factors, primarily the legal prospects of a successful defence, countered by the risks involved proceeding and other commercial considerations. The liquidators wish to conduct the investigations that are the subject of this Interlocutory Application so that they are in a better position to determine the prospects and risks involved in proceeding with defending the CFG Proceedings …”.

20. IQIT Nominees relies on the first affidavit of its director, Mr Paul Powderly, dated 2 September 2016. Mr Powderly refers to the entry into the IQ Joint Venture Agreement in respect of the IQ Smart Apartment development and to matters relating to CFG’s purported exercise of an option to purchase four apartments from AETL in April 2015 and to issues that were raised in respect of that matter at that time. Mr Powderly also contends, in his first affidavit, that the liquidators were on notice of the CFG claim, the allegations concerning the CFG transactions and possible breaches of trust and the need to investigate the veracity of those allegations since April 2015. Mr Powderly also makes calculations, which were admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) by way of submission only, as to the accrual of interest on IQIT and CFG’s claims since the liquidators’ appointment. Mr Powderly also refers, in evidence also admitted with a limiting order under s 136 of the Evidence Act as submission only, to potential risks of the defence of the CFG Proceedings, although I will note below that those matters have lesser relevance so far as the directions sought by the liquidators are now confined to the conduct of examinations and obtaining Counsel’s advice as to CFG’s claims in the first instance. By a second affidavit dated 29 September 2016 (“Powderly 2”), Mr Powderly dealt with matters relevant to the liquidators’ remuneration, which need not be addressed at this point, and with updated interest calculations and the potential return to IQIT from PSNT.

Whether a direction should be given

21. Ms Whittaker submits that the liquidators are properly in need of a direction as to these matters in the liquidation because, apart from a project management role for the IQ Smart Apartments joint venture which ceased prior to the liquidation, PPIL had no substantive business activities outside its role as trustee and responsible entity of the several trusts (Fraser 2 [9]–[13]) and has no substantive assets in its own capacity. Mr Fraser’s evidence is that PPIL’s activities are now restricted to identifying, getting in and realising assets of the various trusts (Fraser 2 [14]). Ms Whittaker draws attention to the observations of Brereton J in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 that, inter alia, a trustee is entitled to resort to and apply trust assets for the discharge of liabilities incurred in the authorised conduct of the trust; that indemnity is secured by an equitable lien over trust assets which arises by operation of law and confers a proprietary interest in the trust property and has priority over claims of beneficiaries; and, upon a trustee’s liquidation, its right of indemnity and lien vests in the liquidator (at [11]); and that right of indemnity is available for expenses that are “properly” or “reasonably” incurred by the trustee (at [12]); and that an insolvency practitioner must act with the same care as a prudent business person would act in their own affairs at their own cost and risk (at [29]). Ms Whittaker submits that it will, having regard to these principles, often be appropriate for liquidators to seek the court’s direction as to whether a particular course that they propose to take is reasonable in advance of incurring disbursements and performing the relevant work

22. In Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [65], Goldberg J observed that:

“There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.”

23. I summarised the circumstances in which the court may give a direction to a liquidator in a voluntary winding up in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [8]:

“Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a Court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be “just and beneficial” to give the relevant direction. The Court may give such a direction where it will be “of advantage in the liquidation”: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: Handberg v MIG Property Services Pty Ltd at [7].”

24. In Re RiverCity Motorway Pty Ltd [2014] FCA 1008; (2014) 102 ACSR 185, to which Ms Whittaker refers, Greenwood J provided directions to the liquidators of companies as to the conduct of proceedings in the Federal Court of Australia to which those companies were or may have become parties. His Honour there identified the choice facing the liquidators in that case, which has some similarity to the issue facing the liquidators in this case, as follows (at [45]-[46]):

“The applicants say that in the present case a question of propriety and reasonableness arises because two possible courses of action are open to the liquidator concerning the NSW proceedings. On the one hand, the liquidators could take no further role in those proceedings nor attempt to obtain indemnity under any policy of insurance that might be thought to respond to a claim or liability in respect of a claim. Such a course would limit the costs and expenses the liquidator would otherwise incur which would have the effect of preserving the available cash balances, at least in the interim.

However, the claims are substantial. In my view, it is in the interests of the creditors, for the liquidators to investigate whether any policy of insurance responds, and to continue to monitor, investigate and respond to the NSW proceedings and seek to preserve and enforce any rights under any policy of insurance and, in consequence, incur the costs of doing so.”

25. In the Earlier Judgment, I also noted (at [8]) that the court has power to determine any question arising in a voluntary winding up on a liquidator's application, and to exercise the powers which the court could exercise in a winding up by the court, under s 511 of the Corporations Act, if it is just and equitable to do so and that:

“… the Court may exercise that power to assist a liquidator in the proper performance and discharge of his or her duties and functions, including giving advice as to the proper course of action when a matter involves a legal issue of substance: Re Ansett Australia Ltd v Korda (2002) 155 FCR 409 at [65]; Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27 at [7]; Re Willmott Forests Ltd (No 2) (2010) 88 ACSR 18 at [51].”

26. I am satisfied that there is here an issue of propriety and reasonableness that faces the liquidators, and not a mere commercial decision, and a real controversy as to the steps that should be taken by the liquidators, as was well illustrated by IQIT’s detailed submissions. I am also satisfied that the giving of a direction in this case will clarify the course which the liquidators should adopt and will be of advantage to the liquidation of PPIL.

27. It seems to me that the transactions between CFG and PPIL to which I have referred above raise several questions which the liquidators may properly consider warrant further investigation. Those questions include, first, what was the benefit to PPIL of granting an option, if it did so, to allow CFG to purchase apartments in the IQ Smart Apartment development, in December 2012, and set-off the purchase price against an amount advanced to a separate trust in respect of a separate development? Second, did the grant of such an option bind PSNT, if PPIL was not, on its face, party to the transaction in its capacity as trustee of PSNT, although it was party to the transaction as the responsible entity of PAPF, and where AETL was party to the Call Option Deed as custodian of PSNT? Third, what was the benefit to PSNT of entry into the Second Supplemental Deed on or about 27 May 2014, if it was not already liable as a guarantor and if a set-off arrangement was not already binding upon it? Fourth, would any issues as to any lack of benefit to PSNT from the transactions have been apparent to CFG, its directors or advisers from the structure of the transactions, or were they otherwise disclosed to them? It is necessary to do no more for the purposes of this application than recognise that these questions properly arise, and I express no view as to the manner in which they would be resolved in any substantive proceedings. As I noted above, the liquidators have in fact formed the view that creditors’ interests would be served by conducting examinations under Part 5.9 of the Corporations Act as identified in Mr Fraser’s second affidavit.

Matters raised by IQIT Nominees

28. In its initial submissions, IQIT Nominees addressed a range of matters relating to the history of the liquidation, some aspects of which may be relevant to the other issues that have been deferred in this application. IQIT Nominees there addressed five concerns as to the wider directions initially sought by the liquidators in respect of the CFG Proceedings.

29. First, IQIT Nominees submitted that, if the liquidators did not defend the CFG Proceedings, IQIT was likely to be repaid in full in the immediate future and, consequentially, the party that would benefit from the successful defence of the CFG Proceedings is the ordinary unitholder in PSNT, POPF and, through it, PAPF. In supplementary submissions, the liquidators respond that they cannot disregard the interests of PSNT’s beneficiary, the ordinary unitholder POPF, in which PAPF holds a 100% interest, in determining whether to conduct examinations (Fraser 4 [73(a)–(b)]); and that the liquidators have, as I noted above, formed the view that the CFG transactions may involve breaches of duty such that it may not be appropriate for the liquidators not to conduct the CFG Proceedings and allow judgment to be entered against PPIL (Fraser 4 [73(c)]).

30. As I noted above, the liquidators also point out that, even if CFG had not commenced proceedings, the liquidators would not have accepted its proof of debt without undertaking investigations and any refusal of the proof of debt may have resulted in proceedings about the dispute the subject of the CFG Proceedings in any event (Fraser 4 [73(d)]). That matter is, it seems to me, of particular significance, since it suggests that the defence of the CFG Proceedings does not place IQIT in a worse position than it would have been, had CFG lodged a proof of debt and the liquidators performed their duty to investigate the basis of that proof of debt. It is difficult to see that there is any principled basis on which the liquidators should more readily meet CFG’s claim, if they are not satisfied that it has a proper basis, because CFG has brought proceedings to assert that claim than they would have been had that claim been advanced by way of proof of debt.

31. The liquidators also rely on Mr Fraser’s evidence that IQIT and other creditors of PSNT would not presently be paid in full, even if the CFG Proceedings were not defended, since all assets of PSNT have not yet been realised (Fraser 4 [73(e)]). As I noted above, Mr Fraser also sets out, in his fourth affidavit, a table of potential outcomes for IQIT and other creditors of PSNT depending on whether the CFG Proceedings are successfully defended (Fraser 4 [74]). Ms Whittaker points out that the likelihood of the relevant outcomes depends upon the legal prospects of a successful defence and that the investigations that the liquidator seeks to undertake will clarify that matter (Fraser 4 [75]).

32. It seems to me that the first aspect of IQIT Nominee’s submission to which I referred in paragraph 29 above is not established by the evidence, since it appears that full repayment will not occur until the assets of PSNT are realised. The second aspect of that submission, that POPF is the only party that benefits from the defence of the CFG Proceedings, is only correct in part. It appears, from the liquidators’ modelling of outcomes, that both IQIT and POPF would benefit from the more favourable outcomes for PSNT arising from a successful defence of the CFG Proceedings, to the extent that any shortfall to each of them would be avoided.

33. I also accept the Plaintiffs’ submission that they should, at the least, be cautious in not pursuing a meritorious defence of CFG’s claims, to POPF’s disadvantage, simply because that may be to the commercial advantage of IQIT. Mr Stack, who appears for IQIT Nominees, drew attention to the decision in Wells v Wily [2004] NSWSC 607; (2004) 50 ACSR 103 which provides some assistance, at least by way of analogy, in identifying the factors which are relevant to balancing the interests of IQIT as a creditor of PSNT and POPF as a unitholder in PSNT in the relevant circumstances. Austin J there referred (at [28]) to the observations of Needham J in Re Crest Realty Pty Ltd (in liq) (No 2) [1977] 1 NSWLR 664 at 672; (1977) 2 ACLR 502 that a liquidator is subject to a duty to act “in a responsible way in the administration of the trust in the name of the company”. Austin J also there noted (at [33]) that the interests of creditors and the interests of beneficiaries of a trust are to be addressed on the basis that they are not interests at the same level since:

“If the trustee has acted properly and within its authority in incurring debts on behalf of the trust, the trustee has a right of indemnity or recoupment and an equitable lien, giving it priority to the interests of the beneficiaries, and the creditors are entitled to be subrogated to those rights.”

34. His Honour also noted (at [34]) that:

“Where it appears likely that the trust assets will need to be realised to meet the claims of trust creditors, the principal duties of the liquidator will be to identify the trust creditors, and then to realise the assets and distribute them to trust creditors entitled to receive distributions and thereafter, to the beneficiaries, while in the meantime attending to the administration of the trust so as to preserve the value of the trust assets. There is no more a necessary conflict of duties here than there is in the case of a liquidator of a non-trustee company, who has duties to both creditors and contributories.”

35. It seems to me that those observations properly identify the duties of the liquidator of a trustee company, although it should be recognised that, here, the steps which the liquidators seek to take in respect of CFG may be a necessary step in determining the trust creditors that are in fact entitled to receive distributions and, in particular whether CFG is properly a trust creditor. It also does not seem to me that the fact that trust creditors will rank higher than unitholders has the necessary consequence that the liquidators would be entitled to disregard unitholders’ interests in making a relevant decision.

36. Second, IQIT Nominees advanced a submission that, for practical purposes, IQIT and other creditors of PSNT would have to fund a defence and cross-claim of the CFG Proceedings until they were determined. That issue seems to me to be of lesser weight, so far as the directions that are now sought are limited to the conduct of examinations and the obtaining of Counsel’s advice and at a lesser cost than the defence of the proceedings, which can be undertaken promptly, and any question of a defence and cross-claim will be deferred until the outcomes of that examination and advice are known. IQIT Nominees also submits that if its debt is subordinated to the debts of the other creditors of PSNT, as is one possible construction of the relevant documentation, then it will be the only entity funding the liquidators and bearing the costs arising from an unsuccessful defence. While that proposition may well be correct, it seems to me that it is the consequence of the ranking of creditors of PSNT, and is a situation that could commonly arise in respect of a liquidation where there are different ranking creditors. It does not seem to me that the Court should accept any general proposition that a liquidator must not pursue examinations or obtain Counsel’s advice or conduct proceedings in respect of a meritorious claim, where the advantage of doing so would flow to both higher ranking and lower ranking creditors, or indeed to contributories, but the costs of doing so would (by reason of the priorities in the liquidation) potentially be borne by lower ranking creditors if those proceedings are unsuccessful.

37. Third, IQIT Nominees noted that the evidence led before the Court did not address the liquidators’ remuneration and legal costs in respect of the defence of the CFG Proceedings. That question can be deferred, where the directions that are now sought do not extend to the conduct of the CFG Proceedings generally, but only to examinations and obtaining Counsel’s advice. I have referred above to the liquidators’ reduced estimate of the costs and disbursements likely to be incurred in respect of those matters, and there is no reason to think that the liquidators’ remuneration in respect of those matters will be material to the outcome of the liquidation.

38. Fourth, IQIT Nominees submitted that a defence of the CFG Proceedings was likely to significantly delay the distribution of funds from PSNT to IQIT and its other creditors. That submission appears to raise essentially the same issue as IQIT Nominee’s first submission, which I have now addressed in paragraph 32 above.

39. Fifth, IQIT Nominees submits, although recognising that this is a matter that is “perhaps of lesser significance”, that the liquidators do not explain why liquidators’ examinations were not carried out earlier. IQIT Nominees submits that the liquidators have been made aware of allegations in respect of the CFG transaction since April 2015 and have been investigating that transaction since at least May 2015. IQIT Nominees also points to the fact that interest has accrued on the CFG advances, as to which PSNT is sought to be made liable, at a very high rate of interest over the relevant period. It appears that CFG contends that interest on its claim against PSNT accrues at a default interest rate of 30% per annum, compounding monthly, from the date of default. That contention plainly increases the risk to PSNT, and indirectly to IQIT, of a delay associated with an unsuccessful defence of the CFG proceedings. On the other hand, that contention might be thought to improve PPIL’s prospects of a successful defence of the proceedings, in its capacity as trustee of PSNT, since it is plainly relevant to the question whether entry into the relevant transactions could properly have been in, or understood to be in, PSNT’s interest. I do not neglect the Plaintiffs’ submissions, and Mr Fraser’s evidence, that there were negotiations between CFG between August and December 2015. While IQIT Nominees criticises the lack of detail in that evidence, it seems to me that this matter is of tangential relevance, where such negotiations did not bring about a successful resolution of the matters in dispute.

40. Mr Fraser’s evidence is that the liquidators could not feasibility have proceeded with public examinations prior to making this application (Fraser 4 [85]–[91]). That is not a complete answer to the possibility that this application could have been made at an earlier point, although, in fairness, it should be recognised that the liquidators also seem to have been dealing with complex issues in respect of the entitlements of parties to the trusts at earlier stages. It does not seem to me that it is necessary to determine this question. It seems to me that the question whether the directions now sought should be made is to be determined having regard to the position that now exists, and any examinations can be conducted promptly for the reasons that I note below.

41. IQIT Nominees also submits that the CFG Proceedings are already on foot and the reality is that it is unlikely that the proposed examinations could be conducted in this Court or the Federal Court of Australia before early 2017 (Powderly 2 [14]). There is evidence that dates may be available in the near future before a Registrar in the Supreme Court of the Australian Capital Territory, even if dates before a Registrar may not presently be available in this Court or in the Federal Court until early 2017. It seems to me that there are also other steps that the Court may take, if it is necessary to do so, such that examinations can be conducted in November or December 2016.

42. In summary, IQIT Nominees identifies several issues arising from its submissions, the first being whether POPF should be solely responsible for funding the liquidators’ actions in the CFG Proceedings. No submission was put to support that result and it seems to me that the funding of the liquidators’ actions, if properly undertaken, is properly undertaken by recourse to the assets of the relevant trust, PSNT, with the ultimate economic impact of that funding to be left to be determined in accordance with the relevant trust documents. IQIT Nominees identified a second issue whether the Court’s advice should be limited, at this point, to the conduct of the examinations and the obtaining of advice. That is the only advice now sought by the liquidators. Third, IQIT Nominees identified an issue whether the liquidators should be required to make an immediate interim distribution to creditors and IQIT, other than CFG, pending the determination of the CFG Proceedings. That proposition was not pressed in oral submissions by Mr Stack on behalf of IQIT Nominees and I need not further address it.

35. IQIT Nominees also questions the utility of examinations, noting that two of the four persons identified for examination, being two directors of PPIL, Mr and Mrs McDonald, have responded to a request for information issued by the liquidators and indicated their willingness to provide further information (Fraser Ex SF4, pp 110–111). I am not persuaded that an offer by the directors of PPIL to provide such information, presumably by correspondence, is such as to displace the utility of the production of documents by compulsory process or the conduct of examinations on oath or affirmation. IQIT Nominees also submits that it might be thought that the two other persons who are to be examined, being two directors of CFG, Mr and Mrs Bird, are unlikely to provide any useful evidence. I would not myself be so pessimistic. First, the Court can have regard to the fact that the examinations will be undertaken under oath or affirmation and should not infer that witnesses examined in that situation will not be frank and truthful. Second, even if one had less confidence in the value of the oath, the questions that are likely to arise in these particular examinations may well encourage relevant witnesses to acknowledge that they recognised matters that may be apparent to any reasonable person, lest they face significant risks as to their credit in the ongoing proceedings.

36. In supplementary submissions, IQIT Nominees indicated that it was exploring whether the liquidators may have failed in duties owed by them to PSNT and those entitled to PSNT’s assets, implicitly by delay in conducting the relevant examinations or challenging CFG’s position, and invited the Court:

“to ensure that the rights of PSNT (and those entitled to its assets) as against the Liquidators in respect of their conduct as liquidators of PPIL, are not prejudiced by any direction or order made by the Court.”

It is by no means apparent to me that the form of direction that is sought would prejudice any such right of PSNT or those entitled to its assets. IQIT Nominees identified no such prejudice and also formulated no particular qualification to the directions sought that it suggested should be made to address such prejudice, if it might otherwise arise. Where IQIT Nominees has not itself identified any such qualification or afforded the liquidators the opportunity to respond to it, it does not seem to me that the Court should seek to do so.

Conclusion

45. For the reasons that I have set out above in dealing with the parties’ submissions, it seems to me that the liquidators should properly be directed that they would be justified in utilising funds held by PPIL on PSNT’s behalf to conduct the relevant examinations and obtain the relevant opinion from Counsel. It seems to me that it necessarily follows that the liquidators would also be justified in taking such steps in the CFG Proceedings as are necessary pending the carrying out of the relevant investigations, in order to preserve the benefit of such investigations, and taking such other steps or action incidental to those matters.

46. Accordingly, I make the following direction:

“Pursuant to s 511 of the Corporations Act 2011, (Cth), direct that Messrs Fraser and McGrath (“Liquidators”) as joint and several liquidators of PrimeSpace Property Investment Limited (in liq) (“PPIL”) would be justified in distributing the funds held by PPIL in its capacity as trustee of the PrimeSpace Northbourne Trust (“PSNT”) to pay PPIL’s reasonable costs and expenses in:

(a)   The Liquidators investigating the claims made by Canberra Finance Group Pty Ltd (“CFG”) against PPIL in its capacity as trustee of PSNT in proceedings numbered 120251 of 2016 issued in this Court (“CFG Proceeding”) including by:

(i) conducting examinations and seeking production of documents pursuant to Part 5.9 of the Corporations Act; and

(ii)   obtaining an opinion from Counsel for the purpose of determining whether PPIL in its capacity as trustee of PSNT would be justified in defending the CFG Proceeding and bringing any cross-claim in the proceeding;

(b)   The Liquidators and PPIL taking any steps in the CFG Proceeding as are necessary pending the carrying out of the investigations referred to in (a) above; and

(c)   The Liquidators and PPIL taking such other steps or action incidental to any of the foregoing.”

47. I will hear the parties as to costs following the determination of the remaining issues in the application.

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Decision last updated: 14 October 2016