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

[2016] NSWSC 1113

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of PrimeSpace Property Investment Limited (in liquidation) [2016] NSWSC 1113
Hearing dates:	23 June 2016
Decision date:	28 June 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	See [16]
Catchwords:	CORPORATIONS – Winding up – Application for directions under s 511 of the Corporations Act 2001 (Cth) – Whether liquidators justified in causing distributions to unitholders on the basis that the purported cancellation of units was invalid and of no effect – Application for judicial advice under s 63 of the Trustee Act 1925 (NSW) – Whether trustee justified in making distributions to unitholders on the basis that the purported cancellation of units was invalid and of no effect.
Legislation Cited:	- Corporations Act 2001 (Cth) - Income Tax Assessment Act 1936 (Cth) - Trustee Act 1925 (NSW)
Cases Cited:	- Mier v F N Management Pty Ltd [2006] 1 Qd R 339 - Re Ansett Australia Ltd v Korda (2002) 155 FCR 409 - Re Crusts ‘n’ Crumbs Bakers (Wholesale) Pty Ltd [1992] 2 Qd R 76 - Re Mento Developments (Aust) Pty Ltd (in liq) (2009) 73 ACSR 622 - Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27 - Re Willmott Forests Ltd (No 2) (2010) 88 ACSR 18
Category:	Principal judgment
Parties:	Shaun Robert Fraser (First Plaintiff) Anthony Gregory McGrath (Second Plaintiff) PrimeSpace Property Investment Limited (in liquidation) (Third Plaintiff)
Representation:	Counsel: J Williams (Plaintiffs)   Solicitors: Johnson Winter & Slattery (Plaintiffs)
File Number(s):	2016/107316

Judgment

1. By Amended Originating Process dated 17 June 2016 the Plaintiffs, Messrs Fraser and McGrath as liquidators of PrimeSpace Property Investment Ltd (in liq) ("PPIL") seek directions under s 511 of the Corporations Act 2001 (Cth) and an opinion, advice or directions with the Court under s 63 of the Trustee Act 1925 (NSW). PPIL is the trustee of the PrimeSpace Northbourne Trust ("PSNT") and the advice or directions of the Court is sought in respect of issues arising in a distribution to unitholders at PSNT.

2. The first issue as to which an opinion, advice or direction is sought concerns whether the liquidators are justified in causing PPIL to make distributions to unitholders for PSNT on the basis that the purported cancellation of ordinary units in the Prime Access Property Fund ("PAPF") in February 2015 was invalid and of no effect. A second issue arises, only if the first direction sought is not given, as to whether the liquidators are justified in causing PPIL to make distributions to holders of preference units in PSNT under clause 12.2(1)(a) of PSNT's constitution on the basis that the amount payable by return of capital on a preference unit under that clause over the life of the trust is limited to the initial unit price paid for the preference unit. For reasons that I will explain, it is presently not necessary to address that question. The liquidators also seek, and should have, an order that the costs of and incidental to the application is payable out of the assets of PSNT.

Background

3. The liquidators have, properly, provided a statement of facts under s 63 of the Trustee Act and they also rely on an opinion of Mr Williams of counsel, who also appeared for them in the application. They also rely on affidavit evidence, primarily affidavits of Mr Fraser dated 6 April and 17 June 2016.

4. By way of background, the liquidators were initially appointed as joint and several voluntary administrators of PPIL and subsequently became its liquidators in a creditors voluntary winding up under s 439C of the Corporations Act. PPIL acted as responsible entity and trustee of funds and trusts within the Prime Access group. PPIL is presently the responsible entity of PAPF which is an unlisted managed investment scheme, which funded property investment and development activities, as well as the trustee of PSNT. The first issue in this application, as I noted above, concerns the validity of actions taken in respect of PAPF. PPIL, as responsible entity of PAPF, owns all the units in the Prime Office Property Trust ("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 the current trustee of the IQ Investment Trust. Notice of this application has been given both to PS Office and the current trustee of the IQ Investment Trust and neither seek to appear or oppose the direction sought.

5. PSNT in turn participated in the IQ joint venture, which funded and managed a substantial 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, a date which will be relevant below to this application. PSNT has to date received interim distributions from the IQ joint venture in excess of $6.8 million.

6. The first issue as to which a direction, advice or opinion is sought is directed to whether preference shares in PSNT which were issued to the IQ Investment Trust have converted to loan notes under the terms of the PSNT trust deed. Two of the requirements for such conversion under clause 12.3 of the PSNT trust deed, which identifies the Conversion Date (as defined) at which conversion will occur, have been satisfied, namely that the trustee has paid all amounts owed by it under the construction loan facility and completion of the titling of units in the property has occurred, by 8 July 2015 as noted above. An issue exists as to whether the third element of the definition of Conversion Date, that PSNT becomes subject to tax as if it were a company, because it is or has become a public trading trust for the purposes of the Income Tax Assessment Act 1936 (Cth), is satisfied. That question in turn depends upon whether, at any time during a year of income, the units in PAPF, as the holding trust of PSNT, were held by more than fifty persons. That requirement was satisfied at least until 13 February 2015.

7. However, in December 2014, PPIL as responsible entity of PAPF gave notice to its unitholders under s 601NL of the Corporations Act that the purpose of PAPF could not be accomplished and that, unless the required number of unitholders requested a meeting to consider the proposed winding up within the 28-day period specified in the Act, PPAL would have power to commence a winding up of PAPF in accordance with the constitution of PAPF. Such a meeting was not requested by the requisite number of unitholders and, on 13 February 2015, PIPL gave notice to unitholders that it commenced to wind up PAPF and that, as there would be no return to unitholders, the board had decided that units would be cancelled immediately as that would facilitate recognition of a capital loss for tax purposes. In fact, not all units were cancelled and the units held by one entity associated with a director of PPIL were left in place. PPIL as responsible entity of PAPF also did not convert its Assets (as defined) to money or pay its Liabilities (as defined) as contemplated by clause 22 of PAPF's constitution and PAPF's ordinary unit register was not updated to record a cancellation of the relevant units. PPIL subsequently ceased to be a registered managed investment scheme, purportedly on the basis that it had less than twenty unitholders. The validity of the steps to which I have referred, purportedly taken to wind up PAPF, in turn depends on the requirement of clause 22 of its constitution. I will return to that question below.

The applicable legal principles

8. With that background, Mr Williams draws attention to the scope of the Court's power to determine any question arising in a voluntary winding up on the 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. As Mr Williams submits, 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]. The legal issue here raised, as to the proper operation of clause 22 of PAPF's constitution in the relevant circumstances, is plainly one of substance and I am 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. I accept that whether a direction involves the substantive rights of third parties is, at least, relevant to whether such a direction should be made, but the balance of recent authority indicates that it does not necessarily prevent the making of such a direction: Re Mento Developments (Aust) Pty Ltd (in liq) (2009) 73 ACSR 622 at [49]; Re Willmott Forests Ltd above at [38]–[58]. The Court may more readily make such a direction where, as here, the third parties whose interests might be affected by the direction, at least so far as it concerns PSNT, have been given notice of the application and do not seek to be heard. I will return to the position in respect of persons associated with PAPF below. It seems to me that the Court could also properly give its opinion, advice or direction under s 63 of the Trustee Act which, as Mr Williams also points out, specifically permits a direction or advice as to the rights of beneficiaries as between themselves, subject to the trustee giving notice to a person whose rights may be prejudiced by the distribution before proceeding with it under s 63(8) of the Trustee Act.

Whether a Conversion Date arose under PSNT’s constitution

9. I turn now to the substance of the first question, which depends on whether PSNT was a public trading trust for the purposes of the Income Tax Assessment Act as at 8 July 2015 or thereafter, so that a Conversion Date arose under clause 12.2(3) of PSNT's constitution. Relevantly, PSNT will be a public trading trust if several conditions are satisfied, including that it is a public unit trust, and it will be a public unit trust if it, or a trust that directly controls it, relevantly PAPF, is a public unit trust. As I noted above, PAPF will be a public unit trust if, at any time during a year of income, units were held by no fewer than fifty persons. That will be the case, on the present facts, unless the purported cancellation of units in PAPF took effect on or after February 2015, and that depends on whether that cancellation complied with clause 22 of PAPF's constitution. The advice received by the liquidators from counsel is that that cancellation did not comply with that clause and they seek advice that they would be justified in acting on that basis. It seems to me that the advice which they have received from counsel is plainly correct and the liquidators would in fact be justified in acting on that basis.

10. Clause 22 of PPAF’s constitution relevantly provides that:

“In order to wind up and terminate the Fund, the Responsible Entity must:

1)    convert the Assets into money;

2)    pay the Liabilities;

3)    pay the balance of the Assets (if any) to:

(a)    first, the Holders holding Ordinary Units and Preference Units of an amount equal to the Withdrawal Price of their Units or if there is insufficient money available to make this payment in full the available amount is to be paid to them proportionately based on their respective numbers of Units held as at the termination date;

(b)    second, RC Holders holding RC Units of an amount equal to the applicable Withdrawal Price of their RC Units (calculated in accordance with the RC Terms of Issue) and the DA Holders holding DA Units of an amount equal to the applicable Withdrawal Price of their DA Units (calculated in accordance with the DA Terms of Issue ) or if there is insufficient money to make available this payment in full, the available amount is to be paid to them proportionately based on their respective numbers of RC Units and DA Units held as at the termination date; and

(c)    third, the balance to the Holders holding Classes of Units other than RC Units and DA Units proportionately based on their respective numbers of Units as at the date of termination,

in each case subject to the rights, obligations or restrictions attaching to any particular Unit or Class of Units; and

4)    cancel the Units.”

11. It seems to me that the liquidators are justified in proceeding on the basis that the purported cancellation of the units in PAPF which (as I noted above) was not reflected in its unit register was also not authorised by clause 22 of PAPF's constitution. First, that cancellation was to be the last of several steps contemplated by that clause, namely the conversion of Assets (as defined) into money, the payment of Liabilities (as defined), the distribution of the balance of amounts to unitholders in accordance with their entitlements, and then the cancellation of the units. That clause did not authorise the cancellation of units in PAPF prior to, or without taking, those steps, a fortiori in a manner that amounted to, in effect, a selective cancellation which left all economic value in the trust concentrated in the remaining unit holder. That reading of the clause is consistent with, although it does not depend upon, the concept of a winding up at general law, as involving a getting in of an entity's assets, a satisfaction of its liabilities and the distribution of net proceeds to those entitled to them, generally pro rata between securities in a particular class: Re Crusts ‘n’ Crumbs Bakers (Wholesale) Pty Ltd [1992] 2 Qd R 76 at 78; Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at [15]. Further, quite apart from the fact that the previous steps contemplated by that clause were not taken, I would read paragraph (4) of that clause as providing for the cancellation of all, and not some, of the units in the trust, consistent with the introductory language of the clause which contemplates its termination not its continuance with a smaller number of unitholders. Since the winding up of PAPF was not in compliance with clause 22 of its constitution, it was also not consistent with s 601NC of the Corporations Act which permits the responsible entity, having taken specified steps, to wind up the scheme in accordance with the constitution.

12. It follows that the liquidators are justified in proceeding on the basis that the cancellation of units in PAPF on 13 February 2015 was outside the responsible entity's power, even if it had been implemented by a change to the register, which it was not; there were then more than fifty unitholders in PAPF after 18 February 2015 and it was a public unit trust for the year of income ending 30 June 2016; PSNT was therefore a public unit trust in that year because it was, relevantly, controlled by PAPF; and all the requirements for a Conversion Date under clause 12.2(3) of PSNT's constitution were satisfied when amounts owing to the construction financier were repaid in July 2015; and preference units then converted into interest bearing loan notes on a one for one basis under clause 12.2(2) of PSNT's constitution.

13. It is therefore not necessary, as Mr Williams pointed out, to determine the second question identified by the liquidators, which would only have arisen if the preference units had not converted to loan notes, contrary to the conclusion which I have reached as set out above.

Notice to other parties in PAPF

14. I should note, for completeness, that I gave careful consideration to whether I should stay the operation of the direction which is sought, and require the liquidators to give notice of that direction to unitholders in PPAF and the Australian Taxation Office, and allow those parties an opportunity to be heard before that direction took effect. I have ultimately concluded that I should not take that course. The issue which I am required to address is an issue that arises in the administration of PPIL, although it turns on events in respect of PPAF. The direction, opinion and advice that I will give does not bind unitholders in PPAF or the Australian Taxation Office. The former are still free to contend, if they wish to do so, that their units were cancelled and a tax loss crystalized on that basis, consistent with information provided to them by PPIL prior to the liquidators’ appointment, and the Australian Taxation Office is free to contend to the contrary, if it is so advised. If that matter were disputed, as between the Australian Taxation Office, unitholders in PPAF, or any other third parties, it would likely need to be determined in proceedings binding those parties, rather than in an application for judicial advice in this form. The effect of the advice that I give to the liquidators of PPIL does not determine that matter, as a question of fact or of law, but merely protects the liquidators of PPIL in proceeding on that basis, provided that the relevant information has been placed before the Court in this application.

15. In these circumstances, it seems to me that no useful purpose would be served by requiring such notice to be given where the rights, or indeed the practical interests of, those persons are ultimately not affected by this direction, and where their intervention would delay the resolution of a matter that properly ought to be resolved to permit the liquidators to undertake their role, potentially increase the costs of that resolution, and potentially draw the parties to which notice were given into a form of application which was not ultimately appropriate to determine their rights in any event; compare Re Mento Developments above at [49]. For these reasons, I propose to make the directions sought, and not to stay their application to allow such notice to be given to third parties which are ultimately not affected by them.

16. Accordingly, I make the following orders:

1. Pursuant to section 511 of the Corporations Act 2001 (Cth), Shaun Robert Fraser and Anthony Gregory McGrath in their capacity as joint and several liquidators of PrimeSpace Property Investment Limited (PPIL) are justified in causing PPIL to make distributions to unitholders of the PrimeSpace Northbourne Trust (PSNT) on the basis that the purported cancellation of ordinary units in the Prime Access Property Fund (PAPF) in February 2015 was invalid and of no effect.

2. Pursuant to section 63 of the Trustee Act 1925 (NSW), PPIL, as trustee of PSNT, is justified in making distributions to unitholders of the PSNT on the basis that the purported cancellation of ordinary units in PAPF in February 2015 was invalid and of no effect.

3.    The plaintiffs have liberty to apply without notice.

4.    The costs of and incidental to this application be payable out of the assets of the PSNT.

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Decision last updated: 30 August 2016