Pyrenees Vineyard Management Ltd v Frajman
[2008] VSC 552
•4 December 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 9508 of 2008
IN THE MATTER of Glenkara Estate Vineyard Project (ARSN 093 317 643)
| PYRENEES VINEYARD MANAGEMENT LTD (ACN 078 249 019) | Plaintiff |
| v | |
| RUSSELL FRAJMAN | Defendant |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24 November 2008 | |
DATE OF JUDGMENT: | 5 December 2008 | |
CASE MAY BE CITED AS: | Pyrenees Vineyard Management Ltd v Frajman | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 552 | |
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Corporations – Managed investment scheme – Winding up under Constitution – Responsible entity entitled to set off scheme member liabilities and entitlements – s 601FC(2) of the Corporations Act2001 – Rule in Cherry v Boultbee.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N.J. O’Bryan SC with Mr C.T. Moller | O’Donnell Salzano Lawyers |
| For the Defendant | Mr S.J. Maiden | Stewart Peters Lawyer |
HIS HONOUR:
Introduction
This application is made under s 601NF(2) of the Corporations Act 2001 for directions concerning the winding up of a managed investment scheme. The plaintiff is the responsible entity of a registered scheme, known as Glenkara Estate Vineyard Project. The plaintiff wishes to set off, in the winding up, moneys payable to and by growers under scheme agreements.
The project was established in 1997 with the aim of growing and selling table wine grapes on and from land located near Landsborough in central Victoria. On 23 June 2008, at a meeting of members of the scheme, a resolution was passed directing the plaintiff to wind up the project. In the course of winding up, the plaintiff has identified more than $5 million in grower’s fees, due to it from growers pursuant to management agreements between the plaintiff and the growers; and amounts due to each grower upon termination of the vineyard lease and under a pipeline reversion agreement. While all grower’s fees are payable to the plaintiff, Glensborough Estate Pty Ltd, the registered proprietor of the land, is liable to growers for payments under the pipeline reversion agreements and, in some cases, upon termination of the vineyard leases.
On 7 November 2008 the defendant, Russell Frajman, was appointed under Rule 18.03(1) of the rules of court to represent all growers. There are more than two hundred growers who leased one or more vineyard allotments. The defendant was represented by counsel and assumed the role of contradictor. Each grower was notified of the plaintiff’s application but only one grower, Mr Geer, has indicated any opposition, although he did not appear to make submissions.
Background
The project was established under a project deed between the plaintiff as responsible entity, Glensborough as owner of the freehold of the land, Sandhurst Trustees Ltd as the investors’ representative and the growers who subscribed for interests in the project at different times. Under stage 1 of the project, Glensborough leased 168 half hectare vineyard allotments to growers. Each lease was for 20 or 21 years. Stage 1 allocations were made on or before 30 May 1998. Thereafter, a further 438 vineyard allotments were allocated to subscribing growers under stage 2.
When subscribing for an interest in the scheme under stage 1, each grower entered into a vineyard lease. Glensborough was lessor and the plaintiff was appointed manager. A nominal rental of $150 per year was payable. Each grower agreed to procure the establishment of a vineyard on the vineyard allotment in accordance with a development plan. The grower was required to bear all costs incurred in respect of the development and to cultivate, maintain and manage the vineyard. Glensborough was entitled to terminate the lease if the project was terminated in accordance with the project deed. On termination the grower had the option of selling all vineyard improvements to Glensborough or removing the improvements . If the grower exercised the sale option, Glensborough was required to pay to the grower the improvements fee prescribed in the schedule.
Each vineyard lease was subject to and conditional upon the grower entering into, on or prior to its commencement date, a development agreement with the plaintiff for the development of each vineyard; a management agreement with the plaintiff for the management of each vineyard; and a grape purchase agreement.
Under stage 2, vineyard allotments were sub-leased to growers by the plaintiff, which had taken a head lease from Glensborough. The terms of each sub-lease between plaintiff and grower were, in material respects, the same as each lease between Glensborough and grower, except that the agreement, under which a grower might become entitled to the improvements fee, was recorded in a separate option agreement between Glensborough and grower.
The project suffered from inception through lack of water for irrigation. In 2002 the plaintiff recommended to growers, who agreed, that a 14 kilometre pipeline be constructed to pipe water from the Wimmera river to the vineyards, providing an alternative source of water for irrigation. The cost of the pipeline was shared between growers and Glensborough. The growers contributed $2,400 per vineyard allotment while Glensborough paid the balance, in the sum of $200,000. It also made a water rights capital contribution of $195,000. Each grower received an interest in the pipeline pursuant to a pipeline reversion agreement with Glensborough under which the grower was entitled to a reversion payment calculated by reference to the effective life of the pipeline and grower contribution. Each grower was required to sell his, her or its interest in the pipeline to Glensborough 30 days after the termination of a vineyard lease. There was no option to exercise.
The continuing drought and a decision made by the water management authority prevented the diversion of any useful quantity of water through the pipeline to the vineyards. As a consequence, grape production rapidly diminished and so did revenue. The plaintiff sought financial accommodation from a related entity, Stanford Financial Services Pty Ltd, which in turn was funded by the National Australia Bank. As at 30 September 2008 Stanford had advanced loans totalling $3,760,120.
Winding Up
The National Australia Bank recently withdrew its support. An attempt by the plaintiff to restructure the project was not successful and on 23 June 2008 the growers directed the plaintiff to wind up the project. As a consequence, the head lease and each vineyard lease was terminated.
Following the commencement of the Managed Investments Act 1998 (Cth) the project deed was replaced by a constitution in substantially the same terms. The Constitution is dated 30 June 2000. Clause 13 makes provision for winding up the project:
13.2The Responsible Entity shall wind up the Project or cause the Project to be wound up in any of the following circumstances:
13.2.2The Growers direct the Responsible Entity to wind up the Project by extraordinary resolution passed at a meeting of Growers duly convened under Part 2G.4 of the Corporations Law.
13.3Unless otherwise required by the Corporations Law, the Responsible Entity is responsible for the winding up of the project and shall:
13.3.1Convert to money all growers interests and Authorised Investments, deduct all proper costs, including unpaid Development Fees, Management Fees, Lease Fees and Grower Fees, and then divide the balance amongst the growers according to each Growers Interest in the Project. The Responsible Entity may make interim distributions during the winding up process as it sees fit.
Grower’s Fees
Under their management agreement, each grower is required to pay management fees to the plaintiff. Clause 10 provides,
10.1The Grower must pay to the Manager in respect of each Financial Year during the Term the Management Fee which shall be paid annually in advance.
10.2The Manager shall, if the Grower holds an A Class or C Class Vineyard Entitlement, from the fifth Financial Year, or if the Grower holds a B Class Vineyard Entitlement, from the sixth Financial Year, take the Management Fee from moneys due to the Grower as payment for Grapes purchased from the Grower by the Purchasers pursuant to the Grape Purchase Agreements (‘Grape Income’). In the event that in any Financial Year the Grape Income is insufficient to meet all or part of the Management Fee for any reason whatsoever (‘Outstanding Fee’) then the Manager shall carry the Outstanding Fee for that Financial Year and will take from the Grape Income of the next Financial Year or subsequent Financial Years until the Manager is reimbursed in full the Outstanding Fee together with interest which shall be calculated upon the Outstanding Fee from the due date until it is paid in full. The interest rate shall be equivalent to the rate from time to time which would normally be charged by the National Australia Bank on overdrawn accounts of an equal amount to the Outstanding Fee.
As at 30 June 2008 outstanding growers’ fees ranged between $10,000 and $15,000 per vineyard allotment, depending upon the timing and terms of the growers’ investment in the scheme. The plaintiff’s proposal is that it be permitted, for the purpose of winding up the scheme, to set off against the growers’ liability for fees (together with a small amount due in respect of each vineyard allotment for costs associated with the 2008 harvest) the pipeline reversion payment, the vineyard improvements fee and a small amount due to each grower from the sale of grapes. The net effect, according to the plaintiff, is to leave a surplus of less than $100 due to some stage 1 growers; and in the case of the remaining stage 1 growers and all stage 2 growers a balance owing to the plaintiff of between about $1,400 and $3,700 in respect of each vineyard allotment. To expedite the winding up, the plaintiff proposes to forgive any balance owing by the growers after making the proposed adjustment.
Under the development agreement grower liability was limited to the development fee; and under the management agreement, grower liability was limited to the management fee. Because all leases have been terminated the liability of each grower is limited to the unpaid portion of any such fees, and a small amount for shared expenses in respect of the 2008 grape harvest.
All growers have been notified of the plaintiff’s application. One grower, Mr Geer, contends through the defendant that management fees are not recoverable by the plaintiff because cl 10.2 of the management agreement transfers the financial risk and burden to the manager who agreed to carry unpaid fees, together with interest thereon, to be reimbursed only out of the proceeds from the sale of grapes. Mr Geer contended, in correspondence with the defendant’s solicitor, that the manager should be taken to have accepted such a construction because it had in fact accumulated unpaid management fees.
While cl 10.2 may be inelegantly expressed, I am of the opinion that cl 10.1 is paramount, imposing upon the grower an enduring obligation to pay the management fee. Clause 10.2 is an arrangement of convenience, predicated on the assumptions justifying initial cash projections and investment decisions, that the proceeds from the sale of grapes would eventually exceed management fees. The project would not have been considered viable on any other basis.
Had the parties intended that growers would never be required to pay outstanding fees in the event of declining grape sales, it would have been a simple matter to record such a limitation of liability in the management agreement. Instead, when the parties did address the limitation of liability, in cl 14 of the management agreement, the growers’ liability to pay the management fee was confirmed, as was the plaintiff’s right to compel payment.
In my opinion each grower remains liable to the plaintiff for unpaid management fees. I note that the plaintiff proposes to apply a proportionate amount of the grape sale proceeds for the 2008 season in reduction of growers’ outstanding balances as contemplated under cl 10.2.
Improvements Fee
For stage 1 growers, their entitlement to the improvements fee arose under cl 13.4 of their vineyard lease. Clause 13.4 provided:
13.4 After termination
(a)Upon the expiry of the Term or upon termination of this Lease under clauses 13 or 14 the Grower shall have the option to sell to the Lessor all plant, equipment and other property which is acquired and installed on the Vineyard Allotment including but not limited to posts and trellises, irrigation equipment, vine rootlings, the Vines and the Grapes (‘Improvements’) (‘Sale of Improvements Option’).
(b)If the Grower elects to exercise the Sale of Improvements Option then:
(i)it shall notify the Lessor in writing of same within 14 days of the expiry of the Term or the termination of this Lease (‘Improvements Notice’) and the Lessor shall pay the Grower a fee in accordance with Item 9 of the Schedule (‘Improvements Fee’) in consideration for the Improvements. The Improvements Fee shall be payable within 90 days of the sale and purchase of the Improvements;
(ii)the Grower and the Grower’s Employees may within 14 days of service of the Improvements Notice enter the Vineyard Allotment for the purpose of removing things brought onto the vineyard Allotment by or on behalf of the Grower which do not form part of the Improvements (if any);
(iii)the Lessor will be legally entitled to any things brought onto the vineyard Allotment by or on behalf of the Grower and not removed within 14 days of service of the Improvements Notice (if any);
(iv)the Parties agree that any items referred to in paragraph (iii) and not removed within 14 days of service of the Improvements Notice will be deemed to be worthless and the Lessor will not be obliged to pay to the Grower any compensation in respect of those items.
(c)If the Grower elects to not exercise the Sale of Improvements Option and does not serve an Improvements Notice on the Lessor then:
(i)the Grower and the Grower’s Employees may within 1 month after termination with or without vehicles enter the Vineyard Allotment for the purpose of removing the Vines, the Grapes and all of the Grower’s Property and other things brought onto the Vineyard Allotment by or on behalf of the Grower;
(ii)the Lessor will be legally entitled to any of the Vines, the Grapes, the Growers property and other things brought onto the Vineyard Allotment by or on behalf of the Grower and not removed within 1 month after termination;
(iii)the Parties agree that any items referred to in paragraph (a) and not removed within 1 month after the termination of this Lease will be deemed to be worthless and the Lessor will not be obliged to pay to the Grower any compensation in respect of those items.
The improvements fee prescribed in item 9 of the schedule is $8,250.00.
No grower has purported to exercise his, her or its option during the option period and no one sought to remove their improvements. Nevertheless, the plaintiff is willing to give credit to each stage 1 grower for the amount of the improvements fee. Stage 2 growers are entitled to the improvements fee whether or not they exercised their option.
For stage 2 growers, who took sub-leases from the plaintiff, the improvements fee is payable under an option agreement with Glensborough. The terms of that option are quite different to those found in the stage 1 leases. Under the option agreements, the grower is deemed to have exercised the option if having failed to do so. The need for an option in such circumstances is questionable. The significance to this application is, however, that $8,500 is due to each stage 2 grower 120 days from termination of each lease, whether or not the option was exercised.
Pipeline Reversion Payment
Each grower, whether subscribing under stage 1 or stage 2, entered into a pipeline reversion agreement with Glensborough. Under the agreement the grower agreed to sell his, her or its interest in the pipeline to Glensborough for the reversion payment. The grower was required to sell the interest to Glensborough 30 days after the expiry or termination of the vineyard lease. The amount of the reversion payment is calculated by reference to a formula set out in item 2 of schedule 1. It has been calculated at $1,957.94 in respect of each vineyard allotment. There is no option to exercise. The obligation to pay the pipeline reversion fee is, according to the pipeline reversion agreement, that of Glensborough.
Submissions
The plaintiff submits that upon its proper construction, cl 13.3.1 of the Constitution requires the plaintiff to do the very thing the plaintiff now proposes should be done. The plaintiff, however, drew attention to the fact that Glensborough is a different legal entity from the plaintiff - a circumstance that would ordinarily militate against a set off. The plaintiff also drew attention to the fact that the pipeline reversion agreements were not part of the original project plan, having come into existence because of the impact of the unanticipated drought. Thus, it might be argued, the pipeline reversion payment does not fall within the definition of “Grower’s Interest” in cl 13.3.1.
The plaintiff also relies upon the operation of s 601FC(2) of the Corporations Act to establish the necessary degree of mutuality to support an equitable set off; and invokes the rule in Cherry v Boultbee.[1]
[1](1839) 4 My & Cr 442; 41 ER 171.
The defendant, while supporting the overall proposal, raised questions about the availability of equitable set off; but conceded that s 601FC(2) appeared to overcome the apparent lack of mutuality. The defendant also conceded that if the plaintiff’s reliance of s 601FC(2) were accepted, the rule in Cherry v Boultbee applied to authorise the proposed set off.
Winding up under the deed – cl 13.3.1
Under cl 13.3.1, the plaintiff is required to convert to money “all Grower’s Interests and Authorised Investments” and deduct unpaid fees to arrive at a distributable amount. “Grower’s Interest” is defined in the constitution to mean:
An interest in a managed investment scheme within the meaning of s 9 of the Corporations Law and includes the Grower’s right and title in the particular Lease, Development Agreement, Management Agreement and Grape Purchase Agreements which constitutes the Grower’s Business and Grower’s Vineyard…
Section 9 of the Corporations Act defines an “interest in a managed investment scheme” to mean,
A right to benefits produced by the scheme (whether the right is actual, a prospective or contingent and whether it is enforceable or not).
In my opinion, the improvements fee, due to growers under their leases or option agreements, is a benefit produced by the scheme. It is not necessary to attempt to align Glensborough and the plaintiff in order to satisfy the conventional requirement of mutuality. There is obviously a close connection between the plaintiff and Glensborough. Glensborough is beneficially owned by Ferdinando Anthony Ursini and Charles Peter Pellegrino; and those individuals are the directors of the plaintiff and Glensborough. But, of greater significance, in my view, is the role of Glensborough and its land and undertaking within the scheme.
In Australian Securities and Investment Commission v Primelife Corporation Ltd[2] Goldberg J said that,
Essentially a managed investment scheme that falls within the definition may be described as a network of contractual rights and contractual obligations.
[2](2006) 58 ACSR 447 at [13].
Each vineyard lease granted by Glensborough describe it as a party to the project deed which established the project. It was a party to the initial deed. Glensborough was, quite plainly, a joint promoter of the project. The vineyard leases were fundamental to the existence of the project; and the improvements fee, payable on termination, is a by product of the scheme documentation and therefore a benefit produced by the scheme. It is a “Grower’s Interest” for the purposes of the winding up.
The plaintiff’s obligation in the winding up is prescribed by the Constitution. It is to convert to money all “Grower’s Interests” and distribute a net amount to growers. The fact that another entity provides a benefit to growers under the scheme does not relieve the plaintiff from its duty to account to growers in the winding up for that benefit. The benefit forms part of a fund to be administered and distributed by the plaintiff in the winding up.
In my opinion the pipeline reversion payment also constitutes a benefit produced by the scheme and is to be administered by the plaintiff in the winding up under cl 13.3.1. The pipeline became a scheme improvement or scheme investment made in furtherance of the scheme objectives. As such, the rights of each grower under the pipeline reversion agreement is a by-product of the scheme documentation. It is a benefit produced by the scheme and a “Grower’s Interest” for the purpose of the winding up. Thus, the amounts due to growers form part of the fund to be administered, adjusted as required under cl 13.3.1 and ultimately distributed to growers.
The plaintiff submitted in the alternative that the pipeline was an Authorised Investment, which is defined in the constitution as an “improvement… suitable for the purposes of the Project” or an “improvement of a Grower’s Vineyard”. While it seems unnecessary to decide, I am of the view that the pipeline falls within both limbs of the definition. On this basis the growers’ entitlement to the pipeline reversion payment is to be adjusted by the plaintiff in the winding up by deducting from it the amount of any outstanding growers’ fees before making a distribution to a grower.
Section 601FC(2)
The winding up provisions in cl 13.3.1 of the Constitution reflect the operation of s 601FC(2) of the Corporations Act. That section provides:
The responsible entity holds scheme property on trust for scheme members.
Section 9 of the Corporations Act defines scheme property to mean:
(a) contribution of money or moneys worth to the scheme; and
(b)money that forms part of the scheme property under the 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 paragraphs (a), (b) or (c); and
(e)income and property derived, directly or indirectly, from contributions, money or property referred to in paragraphs (a), (b), (c) or (d).
Section 9 defines “property” as,
any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.
In Re Investa Properties Ltd and Anor[3] Barrett J held, concerning the scope and operation of s 601FC(2),
12…That section declares in unequivocal terms that the responsible entity of a registered management investment scheme “holds scheme property on trust for scheme members”. The term “scheme property”, as it relates to a registered scheme, is defined by s.9. It means contributions in money or money’s worth to the scheme, certain other money, “property acquired, directly or indirectly, with, or with the proceeds of” such contributions and money and income and property derived directly or indirectly from any of the foregoing. It is reasonably clear, I think, that that definition operates upon and in relation to pre-existing money and property at the point at which a particular scheme becomes a registered managed investment scheme…
13Implicit in what I have just said is the proposition that s.601FC(2) does not just specify the manner or capacity in which the responsible entity holds property independently vested in it but is, rather, a provision which establishes and maintains the connection between all property within the definition of “scheme property” and the responsible entity. This seems to follow from the definition of “managed investment scheme” (which contemplates a relationship between participants and a “scheme”), read in conjunction with provisions such as ss.601FB(1), 601FB (4)(a), 601FC (1)(i) and (j) and 601HA(a) and (c) which envisage for the responsible entity functions which could not be performed unless it was the owner of scheme property. In particular, the responsible entity could not appoint an agent to hold scheme property on its behalf unless it was, in a real sense, the legal owner of the property. Section 601FC(2) produces a legal result when two circumstances coincide. One is that a particular entity is the “responsible entity” of a particular registered managed investment scheme. The other is that particular property is “scheme property” of that scheme. The legal result of the coincidence of circumstances is that the entity holds the property and does so as trustee.
14The section could have said that if scheme property is held by the responsible entity, that entity holds it on trust for scheme members; or that such scheme property as is held by the responsible entity is held on trust for scheme members. It says neither of these things. It expresses itself to apply indiscriminately to property having such a connection with the scheme of which the entity is responsible entity as to make the property scheme property of that scheme. It declares in unequivocal terms that that property is held by the responsible entity and that it is held on trust for scheme members.[4]
[3](2001) 187 ALR 462; [2001] NSWSC 1089.
[4]Emphasis added.
In my opinion the vineyard allotments, improvements and the pipeline constitute scheme property. It does not matter that the land is legally owned by Glensborough or that the pipeline reverts to Glensborough upon termination of the leases. If the land and pipeline are scheme property, held on trust for the growers by the plaintiff, any distinction between the plaintiff and Glensborough falls away when considering the winding up of the scheme by the trustee. The entitlement of growers under the various agreements with Glensborough became entitlements to be brought to account and administered by the plaintiff in the winding up.
Rule in Cherry v Boultbee
The plaintiff further submits that by reason of the operation of s 601FC(2) there exists sufficient mutuality between parties and transactions to establish a right in the plaintiff to set off, according to equitable principles, the growers’ liability and entitlements. The plaintiff also invokes the rule in Cherry v Boultbee.[5] That rule, if applicable, would authorise the plaintiff to deduct unpaid growers’ fees before distributing to growers the benefit of the improvements fee and the pipeline reversion payment.
[5](1839) 4 My & Cr 442; 41 ER 171.
The principle underlying the rule in Cherry v Boultbee is that the person controlling a fund, whether as trustee, liquidator or in some other capacity, may deduct from the entitlement of a beneficiary any amount the beneficiary is obliged to contribute to the fund. The person administering the fund may invoke the rule to protect the fund from claims to a distribution by beneficiaries with an unsatisfied obligation to the fund.[6] While it is questionable as to whether a beneficiary may invoke the rule, because its purpose is to protect the fund, in the present case it is the trustee calling the rule in aid of the winding up.
[6]In Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, 150; [1915] 2 Ch 442; Gray v Gray (2004) NSWCA 408 at [89]-[100].
The plaintiff, in winding up the scheme, is possessed of a fund which includes the entitlement of each grower to the improvements fee and the pipeline reversion payment, notwithstanding the fact that the entitlement arose under a contract with the related corporation, Glensborough. In my opinion the rule has application to the present facts so that the plaintiff may adjust the growers’ entitlement to participate in the fund by deducting outstanding grower obligations. The administrator of the fund (the plaintiff) may invoke the rule to protect the fund because there is a debt or liability due to the fund by the growers.[7]
[7]In Re Watson [1896] 1 Ch 925, 937; In Re Pennington & Owen Ltd [1925] 1 Ch 825, 830.
Conclusion
Under cl 13.3.1 the plaintiff is required to deduct from each grower’s entitlement the unpaid grower’s fees before making any distribution to a grower. Clause 13.3.1 is sufficient to authorise the plaintiff to deduct from the growers’ entitlement to the improvements fee, pipeline reversion payments and the proceeds from the sale of grapes, the cost of harvest and unpaid growers’ fees. Section 601FC(2) of the Corporations Act also provides the necessary mutuality to attract the operation of the rule in Cherry v Boultbee. In the circumstances it seems unnecessary to consider whether the rules applicable to equitable set off would achieve the same outcome by a less flexible process of reasoning, although the mutuality existing between grower obligations to and entitlements from the fund point to the same conclusion.
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