Re Banksia Mortgages Limited
[2013] VSC 451
•30 August 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
Corporations List
No. S CI 2013 03871
| IN THE MATTER OF BANKSIA MORTGAGES LIMITED (ACN 087 342 238) | |
| BANKSIA MORTGAGES LIMITED IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE BANKSIA MORTGAGE FUND (ACN 087 342 238) | Plaintiff |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 20 August 2013 | |
DATE OF JUDGMENT: | 30 August 2013 | |
CASE MAY BE CITED AS: | Re Banksia Mortgages Limited | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 451 | |
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CORPORATIONS – Managed Investment Scheme – Winding up – Where managed investment scheme not viable – Where purpose of scheme cannot be accomplished – Whether just and equitable to wind up scheme – Corporations Act 2001 (Cth) s 601ND.
MANAGED INVESTMENTS – Application for judicial advice and directions – Whether responsible entity justified in amending constitution of managed investment scheme under s 601GC(1)(b) of the Corporations Act 2001 (Cth) – Amendment to permit portfolio sale of loans – Whether rights of members would be adversely affected by amendment.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | WA Harris SC and M D Rush | Allens Linklaters |
| For Banksia Securities Limited (Receivers and Managers Appointed) | P D Crutchfield SC and Dr O Bigos | Ashurst |
HIS HONOUR:
A. Introduction
The plaintiff (‘BML’) is the Responsible Entity of the Banksia Mortgage Fund (‘BMF’), a registered managed investment scheme (‘the scheme’). BML seeks an order directing it to wind up BMF on the ground that it is just and equitable to do so pursuant to s 601ND(1)(a) of the Corporations Act 2001 (Cth) (‘the Act’).
The foundation for the order is that, following the collapse of a related entity upon which BML depends for funding and vital infrastructure support, it is not viable for BMF to continue as contemplated by its constituent documents, and its purpose cannot be achieved.
A further order is sought, in the nature of judicial advice, to the effect that BML is justified in amending the BMF constitution on the terms contained in a proposed deed poll in accordance with s 601GC(1)(b) of the Act and/or cl 13.3 of the BMF constitution, on the basis that BML, as the responsible entity of BMF, reasonably considers that such amendment will not adversely affect the rights of BMF members.
The amendment is designed to give BML the option (which it does not have at present) to explore a portfolio sale of the loans comprising the interests in the scheme, as referred to more fully hereunder, as a means of winding up BMF in the best interests of scheme members.
The Court’s power to make these orders is conferred by s 601ND of the Act and r 54.02 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) (‘the Rules’). As responsible entity of BMF, BML holds scheme property, including the
loans referred to, on trust for members of the scheme.[1];
[1]Section 601FC(2) of the Act.
BML has filed eight affidavits in support of its application:
(a)three affidavits of Warren Shaw, the chief executive officer of the Banksia Financial Group, sworn 31 July 2013, 13 August 2013 and 19 August 2013;
(b)an affidavit of Joseph Hayes, one of the receivers of Banksia Securities Limited (Receivers and Managers Appointed) (‘BSL’), sworn 12 August 2013;
(c)an affidavit of Nicholas Carr, a director of BML (who chaired the BML board meeting on 29 July 2013), sworn 13 August 2013;
(d)two affidavits of Susan Coulstock, operations manager of the Banksia Financial Group, sworn 13 August 2013 and 19 August 2013; and
(e)an affidavit of Natalie Raynor sworn 19 August 2013.
No member or investor in BMF, or other interested party, has filed an affidavit in opposition to the proposed orders or sought to appear. A short submission has been filed by one BMF member, Mr John Day. I have taken his submission into account.
On 20 August 2013 I made the orders sought and indicated that I would publish my reasons. These are the reasons.
In summary, it is clearly just and equitable that BMF be wound up. Without adequate funding BML cannot continue to manage and operate the scheme. It does not have funding beyond 31 August 2013 and has insufficient resources of its own. Accordingly, there is a risk, indeed a probability that the whole of the administration of BMF and the scheme will break down. There is no replacement or temporary responsible entity. The scheme cannot continue to operate and is unable to fulfil its purpose. It is in the public interest and the interests of investors that BMF be wound up.
Further, in order to achieve the maximum return for investors, BML should have as many options as possible and not be constrained by unreasonable limitations in the constitution of BMF. For the reasons set out in Section E of this judgment it is appropriate and desirable for the court to give the advice sought.
B. Background[2]
The Banksia Group
[2]The background facts which are not in any way controversial are taken from the affidavits and submissions filed by BML.
BML is a member of The Banksia Financial Group (‘the Group’), which was formed in 1999 through an amalgamation of Victorian based debenture companies and contributory mortgage funds. Securities Holdco Limited (‘SHL’) is the parent company in the Group and owns all of the shares in BML. Other Group companies, wholly owned by SHL, include BSL and Cherry Fund Limited (receivers and managers appointed) (‘CFL’).
The Group operated, through member companies, as a non-bank lender in the commercial and rural sectors, offering investment opportunities to the public, mortgage fund management and mortgage loan origination and servicing operations were conducted from ten branches, with a head office in Melbourne, and a primary administration centre in Kyabram.•
BMF
BMF is a registered managed investment scheme structured as a contributory mortgage fund. As noted, BML is the responsible entity of BMF.
Although registered as a single or ‘umbrella’ scheme, BMF consists of multiple sub-schemes.[3] Members of the sub-schemes invest directly in a specific fixed term loan in which the primary security is a first registered mortgage over legal interest in land in Australia. Each sub-scheme investment is offered on individual terms and conditions contained in a document styled ‘BMF supplementary product disclosure statement investment application form’. Further terms and conditions – common to all BMF investments – are contained in the BMF constitution and a BMF product disclosure statement (‘PDS’).
[3]ASIC has provided relief from the need to register each individual sub-scheme if the umbrella scheme is registered: ASIC Class Order [CO 02-238] Mortgage Schemes – Chapter 5C and disclosure relief.
Some features of the BMF scheme - which is no longer taking investments following the appointment of receivers and managers to BSL, were that:
(a) a minimum investment of $10,000 was required;
;
(b)the investment term was usually a maximum of 24 months;
(c)a member would be issued with a certificate of investment once BML accepted his or her application;
(d)interest would be paid to investors monthly or quarterly (reflecting the timing of interest payments by a borrower in the underlying loan);
(e)interest could be fixed or variable during the term of the investment;
(f)payment of interest to investors was underwritten by BML during the term of the investment;
(g)at the expiry of the investment term, investors could withdraw part or all of their investment, or elect to roll over the investment based on the terms and conditions of a “renewal letter”;[4]
(h)BML had an obligation to underwrite timely interest payments to retail investors in BMF for the investment term where there had been a borrower default in payment of interest (‘the Interest Guarantee’).
[4]Following the appointment of receivers to BSL, investors no longer have the option to roll over their loan.
As stated, the supplementary PDS and investment application form contained specific information relevant to each sub-scheme and proposed investment, including details of the sub-scheme property offered as security, the principal sum secured, the interest rate paid by the borrower, the loan to value ratio, the investment term, the investment interest rate and payment frequency, and BML’s management fee.[5]
[5]This information was provided on page 10 of the PDS, and the supplementary PDS and investment application form. BML’s management fee covered ongoing administration, investment management, expense recovery and other fees, was never more than 2.90% of each individual sub-scheme loan amount, and was subtracted from interest paid by the borrower to BML (with the remainder paid to the investor).
The Group’s business model involved BSL and CFL raising funds by the issue of debentures. The Trust Company (Nominees) Limited (‘Trust Company’) acted as trustee for the debenture holders. Capital raised by the issue of debentures by BSL was advanced to borrowers and secured by real property mortgages. The lender and mortgagee of record was Permanent Custodian Limited (‘PCL’).
If BML considered a particular mortgage loan to be a suitable investment for investors in BMF, it would arrange for some or all of BSL’s participation in the loan to be ‘sold down’ into the fund - that is, to investors in BMF - or to CFL. Each loan sold down in whole or in part to BMF investors became a ‘sub-scheme’ of BMF.
The sub-scheme loan agreements having been entered into by the borrower and PCL,[6] PCL held each mortgage loan on trust for BML, which in turn held its interest in the loan and security on trust for the relevant BMF investor or investors.[7] BMF investors only held an interest in the particular sub-scheme loan or loans in which they had invested; such interests were not ‘pooled’ or shared with other investors in the scheme.
[6]PCL granted BML a power of attorney to enter into documents and agreements on PCL’s behalf. The documents are listed in cl 2 of annexure A to the power of attorney agreement.
[7]See cl 1.2 (together with cl 4.2) of the BMF constitution and the definition of “Scheme Property” (in the definition section). See also Supplementary Product Disclosure Statement/investment application form.
As at July 2013:
(a)there were 1,292 retail investors in BMF, with that number decreasing over time (as sub-scheme investments reach the end of their term);
(b)the BMF loan portfolio contained 143 loans with a total value of approximately $126.7 million;
(c)approximately 40.5% (by value) of the loans in the BMF portfolio (valued at $51.4 million) are due to mature on or before 30 November 2013, with the remainder of the loans due to mature by 31 October 2014; and
(d)26 loans (or 18% of the loan portfolio) were in default and the subject of legal action or farm debt mediation, and a further 49 loans (or 34% of the BMF loan portfolio) had matured.
As explained further below, sub-scheme loans are no longer being rolled over (renewed) upon maturity. Accordingly, under current arrangements, as each BMF loan matures, the corresponding sub-scheme investment will end.
Receivership of Group companies
The Group did not have any external funding other than through the issue of interests in BMF and the issue of debentures by BSL and CFL. BSL operated as the Group treasurer, and was an important funding source upon which BML was dependent. Further, BSL:
(a)owned IT infrastructure specific to contributory mortgage schemes which was used across the Group and by BML in particular, pursuant to an undocumented agreement between the two companies;
(b)owned premises in Kyabram and Tatura which it allowed BML to use; and
(c)co-leased eight premises with BML, for which it customarily met the rental obligations.
SHL also provided services (including personnel and marketing services), plant, and equipment to BML, BSL and CFL on terms contained in a management agreement executed in May 2006.
The Group commenced a review of its operations in July 2012, which was subsequently extended to a review of non-performing loans as well. That review revealed there would be a material increase in the previously reported provision for impairment of receivables in BSL’s loan portfolio. These findings ultimately led to the appointment of experienced insolvency practitioners, Messrs McGrath, Hayes, Caddy and Kirman, as receivers and managers of BSL’s assets and undertaking (‘the BSL Receivers’) in October 2012.[8]
[8]The appointment was made by Trust Company, as trustee for BSL’s debenture.
Thereafter, CFL conducted an urgent review of its forecast financial cash flows which showed that it would be unlikely to be able to meet the anticipated level of redemption requests by its debenture holders over the next 12 months. This in turn, led to the appointment of Messrs McGrath, Hayes, Caddy and Kirman as receivers and managers of CFL’s assets and undertaking (‘the CFL Receivers’)on 30 October 2012.[9]
Steps following the appointment of Receivers
[9]Again, this appointment was made by Trust Company as trustee for the CFL debenture holders.
Immediately following the appointment of the BSL Receivers and the CFL Receivers, the Group chief executive and the directors of the Group companies, including BML, gave serious consideration to the position of those companies and, in particular,
whether they could continue to trade in the ordinary course. Their conclusions reflected the severe implications of these events for Group companies and, specifically, BML. They concluded, amongst other things, that:.
(a)the Banksia brand had been irretrievably damaged by the appointment of the BSL Receivers and the CFL Receivers;
(b)the appointment of the Receivers had been attended by heavy media coverage and had inevitably eroded investor trust and confidence;
(c)the prospect of the Group being able to conduct business in the ordinary course as a financial institution was effectively non-existent;
(d)there was no prospect of BSL continuing as the Group treasurer on an ongoing basis and in the ordinary course of business; and
(e)there was no realistic source of external funding available to realise maximum value of the Group assets.
Further, the arrangement by which BSL had refinanced loans which had become impaired (such that those loans would be moved out of the BMF and retail investors in such loans would be offered the opportunity to invest in other BMF loans or be repaid) would no longer continue following the appointment of the BSL Receivers.
Accordingly, BML concluded that new investments for BMF could not be generated, new investors could not be accepted and members would not be permitted to roll over their existing investments into new investments. These conclusions were compendiously reflected in the Group’s financial report for the half-year ended 31 December 2012, and in a letter sent by BML to investors in December 2012. That letter specifically advised that sub-scheme loans would not be renewed upon maturity, with the result that BMF would inevitably wind down over time.
In the circumstances, the directors of BML decided that immediate consideration needed to be given to the appropriate structure for realising the Group’s assets to maximise returns for retail investors and creditors, among others. Because of the potentially significant costs associated with the appointment of external insolvency administrators - thereby reducing the pool of assets available for distribution - an agreement was reached with the BSL Receivers to enable the realisation of the assets of Group companies without the need for the appointment of further external administrators. In particular, arrangements were entered into for the provision of short term funding to BML (by BSL, through the BSL Receivers), to enable continued access to IT infrastructure and other services. That funding support was initially provided pursuant to a Memorandum of Understanding until 31 March 2013 and was thereafter extended on a month to month basis until 31 July 2013. The BSL Receivers have now extended that funding until 31 August 2013 to allow the present application to be made to the Court. However, the BSL Receivers have confirmed in writing, by letter dated 26 July 2013, that they are not presently willing to provide assistance in support of a long-term winding-down of the BMF scheme as existing loans mature (ending on 31 October 2014).
As part of the arrangements to secure the BSL Receivers’ ongoing support to the Group, an agreement was reached for a process to be instituted to, among other things, ascertain whether a new responsible entity could be found to replace BML.
These developments were communicated by BML to BMF investors in February 2013. Investors were told that:
(a)the directors of the companies in the Group had resolved to pursue an orderly process aimed at achieving a solvent winding-up of the affairs of each company in the Group, including BML;
(b)to help achieve this outcome, certain principles of co-operation had been agreed with the BSL Receivers and the CFL Receivers; and
(c)as part of the process of determining the best way forward for BMF and its investors, BML and SHL appointed advisory firm Flagstaff Partners (‘Flagstaff’) to investigate opportunities to transfer the operation of BMF to an organisation with the ability to regenerate the fund so as to preserve and maintain investment opportunities for BMF investors.
There was no substantive feedback from investors in response to the letter.
Between February and July 2013, considerable work was done to explore and, if possible, maintain or find, investment opportunities for BMF investors. A major focus of BML and SHL, with the assistance of Flagstaff, was the establishment of a competitive bid process for the sale of BML’s management rights (in respect of BMF). This involved substantial work including the production of an information memorandum and the identification of possible purchasers, and the selection of 13 parties most likely to be interested in the proposed transaction.:
As part of the process consideration was given to offers from two of the six potential purchasers, namely La Trobe Financial Asset Management Limited (‘La Trobe’) and Balmain Fund Administration Limited (‘Balmain’) in early March 2013. Ultimately and for various reasons no agreement was concluded. The evidence also establishes that no party was prepared to assume the role of replacement or temporary responsible entity. It is inevitable therefore that the only course is for the scheme to be wound up. It has in a sense come to an end in that there are no new investors or loans. However, the existing loans and sub-schemes need to be administered and dealt with in the best possible way. A winding up will provide a mechanism for the orderly and most appropriate way of achieving the best result for members.
From the time of the BSL Receivers’ appointment, BML kept ASIC updated about the situation facing BMF, including the attempted sale of BML’s management rights and a possible transfer of BMF member interests’ into a new fund; correspondence was also exchanged between them regarding the fact that BML was no longer able to satisfy its net tangible asset requirements under its Australian Financial Services Licence. After negotiations with La Trobe concluded, BML enquired of ASIC whether it knew of any entity willing to assume the role of replacement or temporary responsible entity of BMF (in place of BML). ASIC said that it did not.
As at July 2013, BML faced a situation where its ongoing viability remained subject to BSL’s continued financial support (in circumstances where the BSL Receivers had indicated that such support could not be provided indefinitely); where BML was receiving dwindling management fees because no new investments were
replacing those investments which were ‘terming-out’ and where, despite extensive effort as well as discussions with ASIC, no suitable company had been found or come forward to take over as responsible entity of BMF. It was therefore apparent that the investments of BMF members could not be continued and that BMF had to be wound up. As to the method by which this should occur, the BMF constitution appears to provide only one option for the winding up of the fund: a long term winddown of the scheme as loans mature and investments expire.[10] And, in circumstances where the BSL Receivers did not support this option, BML faced having to appoint an external insolvency administrator, with the cost and expense of such a process being borne by BMF investors.;
[10]Clause 10.5 of the BMF constitution specifically at the penultimate dot point on page 17, provides: ‘If BML is the responsible entity after an order or resolution to wind up the Scheme, it will manage the Scheme and all sub-schemes thereunder, and shall take such action as necessary to ensure members’ funds are redeemed at the expiry of each sub-scheme and paid to members with any interest earned and not at that time distributed, or held for re-investment in another scheme if so directed.’
It was against this background that in June 2013, the BSL Receivers put a proposal to BML for a winding-up of BMF by way of a loan portfolio sale, rather than by a terming-out of members’ investments through to October 2014 (as the underlying loans matured). The reasons advanced by the BSL Receivers in favour of this approach were accepted by the directors of BML.
The BSL Receivers and Allens Linklaters, on behalf of BML, wrote to ASIC on 24 and 25 June 2013 informing ASIC of the proposal and explaining the steps involved. This was followed up with telephone conferences on 25 and 28 June 2013, and a further letter on 5 July 2013. On 31 July 2013, a representative of ASIC wrote to Mr Hinchen of Allens Linklaters informing him that, at that stage, ASIC did not have any submissions it wished to make in relation to the proposal or the application to court. There has been no further indication from ASIC that it intends to change its position in this regard.
It is not necessary to set out the essential elements of the proposal at this stage. Any portfolio sale will be subject to the approval of the Court.
On 29 July 2013, the board of BML met to discuss and resolve whether BML should be wound up and, if so, the process by which this should occur; the board further considered whether to amend the BMF constitution to allow BML the option of conducting a winding-up by way of a portfolio sale of loans (‘29 July Meeting’).
.
In summary, the board:
(a)decided it would be in the best interests of BMF members that BMF be wound up, and resolved that BML, in its capacity as responsible entity of BMF, should apply to the Court under s 601ND(1)(a) of the Act for an order directing BML to wind up BMF; and
(b)decided, based on the information before it, that the proposed amendments to the BMF constitution to allow a possible portfolio sale of Long Terms Loans would not adversely affect the rights of BMF members and were in their best interests, and resolved that BML apply to the Court for a direction that it would
be justified in amending the BMF constitution in the terms proposed.
.
The decision and resolution in relation to the winding-up of BMF were made primarily on the basis that the purpose of the scheme - to provide ongoing investment opportunities - could no longer be achieved. This was particularly so having regard to, among other things, the collapse of BSL and its inability to provide (and the BSL Receivers’ position in respect of the provision of) ongoing funding and infrastructure support to BML (and other entities in the Group).
The decision and resolution in relation to the proposed amendment to the BMF constitution were made for reasons including the BSL Receivers’ unwillingness to fund a long-term wind-down of the scheme; the costs of voluntary administration and resultant value destruction for members; the prospect of extracting maximum value in a short timeframe from a portfolio sale (including by reducing risk of borrower default); and the investor protections that would be implemented as part of any portfolio sale, including BML having the final oversight of and the final say in whether to accept any offer, which would itself be the subject of a separate hearing and judicial advice.
C. Steps taken to inform members of BML’s application
Following the directions hearing on 1 August 2013, a number of steps have been taken by BML to inform BMF members about the present application:
(a)members were notified by letter dated 2 August 2013 of the proposed application and that relevant material could be found on the Banksia
website;
·I
(b)the following materials were uploaded onto the Banksia website on 2 August
2013:
:
(i)the originating process;
(ii)the affidavit of Warren James Shaw, CEO of the Group, sworn 31 July 2013 (‘the First Shaw Affidavit’) and exhibits;
(iii)the transcript of the directions hearing of 1 August 2013;
(iv)the orders made at the directions hearing of 1 August 2013;
(v)the notice to members of 2 August 2013; and
(vi) a list of 55 frequently asked questions (FAQs) (with answers)
;
;
,
(c)a telephone hotline was established on 5 August 2013 to respond to investor calls which facility was maintained by Link Market Services (‘Link’);
(d)a facility for member enquiries by email was established and maintained by BML; and
(e)Link has compiled a record of member communications received via the hotline.
I am satisfied that members have had access to all relevant information and an opportunity to be heard. I have also had regard to the FAQ’s and the emails and correspondence with members. Although some of the matters and issues raised may require further analysis and consideration they do not affect the need to wind up the scheme and modify the constitution. All major decisions regarding the winding up will be supervised by the Court.[11]
D. Winding-up BMF on the just and equitable ground
[11]Many members who responded by email and letter raised concerns relating to the treatment of their particular loans. Most of the concerns are valid and relate to the manner in which the loans are ultimately dealt with following the winding up. As pointed out Court approval will be required and members will be able to make submissions if so advised.
In Sergio Capelli v Craig Peter Shepard and Mark Xavier Mentha and Ors (‘Capelli’) [12] the Court of Appeal discussed the history, nature and application of s 601ND of the Act. In relation to its history and nature, the Court said:[13]
[12](2010) 29 VR 242; [2010] VSCA 2.
[13]Ibid [102]-[104], citations omitted.
The winding up of schemes on the ‘just and equitable’ ground in s 601ND(1)(a) of the Act is derived from a traditional ground for winding up in corporations law. Although the just and equitable ground in corporations law originally tended to be confined to categories established by precedent, the House of Lords’ decision in Re Westbourne Galleries established its broad and ambulatory character. It confers a very wide discretionary power, which is applicable both in established and novel contexts.
In Strong v J Brough & Son (Strathfield) Pty Ltd, Young J stated:
... [I]f a company is formed for one purpose and one purpose alone, and if that purpose is accomplished, or, alternatively, if its accomplishment has become impossible, then the shareholders are entitled to a winding up and a return of their investment.
In our opinion, the case law on the winding up of corporations on the just and equitable ground informs the application of s 601ND(1)(a). In the present case, where the responsible entity was, on unchallenged evidence, plainly insolvent, no replacement for it was identified, no alternative proposal (save for further, perhaps redundant, investigation) was advocated, the PYEP scheme as a whole on unchallenged evidence was not viable and the purposes and arrangements contemplated in the prospectus had broken down, the primary judge did not err in ordering that the PYEP scheme be wound up on the just and equitable ground.
Similar observations were made by E M Heenan J in Re PWL Ltd,[14] to which the
Court of Appeal in Capelli also referred:
[14][2008] WASC 232.
The phrase ‘just and equitable’ is broad and designed to accommodate a multiplicity of situations. It is not possible to define the phrase in exhaustive terms. In each case it will be a question of fact for determination upon the evidence relating to the scheme or corporation put before the Court. A determination of whether or not it is just or equitable to wind-up the entity will not depend on particular factual categories.[15]
[15]Ibid [43]. Citations omitted. See also Capelli, [87].
One ‘established’ context in which a winding-up order will be made under s 601ND(1)(a) of the Act is where the purpose of the scheme can no longer be accomplished
.[16] In Re PWL Ltd,[17] E M Hannan J said that “it is just and equitable for the court to intervene and to wind-up a registered scheme where the original arrangement as set out in the prospectus of the scheme has broken down”..
[16]Capelli, [102]-[104]; Trio Capital (Admin app) v ACT Superannuation Management Pty Ld (2010) 4 BFRA 658, [2010] NSWSC 286, [18]-[19].
[17][2008] WASC 232, [43], citing ASIC v Knightsbridge Managed Funds Ltd [2001] WASC 339.
This circumstance has been regarded as one example of the broader category of case in which the court will make an order for winding-up because it is in the public
interest to do so. In Re Rubicon Asset Management Ltd[18] McDougall J said that:,
[18](2009) 77 NSWLR 96, (2009) 74 ACSR 346.
... the court may wind up a managed investment scheme on the just and equitable ground if it is in the public interest to do so. See ASIC v Knightsbridge Managed Funds [2001] WASC 339.
As Pullin J pointed out in that case, the public interest may justify the winding up of a managed investment scheme if the scheme has broken down or if the protection of investors requires that the scheme be wound up.[19]
[19]Ibid [23]–[24].
The principles derived from these cases, as well as the text of s 601ND(1)(a) of the Act, were the subject of discussion and consideration by the directors of BML at the
29 July Meeting. Two questions fell to be determined by the board in relation to the issue of windingup: (1) should BMF be wound-up; and (2) if so, by what means?.
In light of the various matters referred to the board concluded that it was not viable for BMF to continue as contemplated by its constituent documents, and that its purpose could not be achieved. That is, it could not provide investment opportunities on an ongoing basis and on the existing terms (including the Interest Guarantee) to BMF investors. Accordingly, the board decided that it was necessary and appropriate to wind-up BMF. For the reasons identified by the board and given the context and relevant circumstances as set out herein a winding up order must be made.
In my opinion the board’s decision and resolution in relation to the winding-up of BMF is supported by both the text and purpose of s 601ND(1)(a), as interpreted and applied in the relevant authorities. It has been said by courts on numerous occasions that s 601ND(1)(a) employs broad language of an ambulatory character, and is capable of being applied to a broad range of circumstances. One such circumstance is where a public interest in doing so arises because the purpose of the scheme cannot be fulfilled. Here, the purpose of the scheme - to provide members with ongoing investment opportunities based on the terms and conditions contained in BMF’s constituent documents - can no longer be achieved. The matters identified above, as considered by the BML board, show why that is so. The BMF scheme cannot continue to generate and accept new investments when its responsible entity, BML, depends upon but has no secure source of funding support from BSL or any other external organisation, and no suitable replacement for BML as responsible entity of BMF has been identified, despite substantial time and money invested in that process. Further, as an inevitable consequence of the appointment of the BSL Receivers and the correlative inability of BML to roll over existing BMF loans upon maturity, the scheme is already in the process of a natural winding down. In these circumstances, it is appropriate that the Court exercise its discretion in favour of an order directing BML to wind up BMF on the ground that it is just and equitable to do so.
E. Amendment to the BMF Constitution
The next question considered by the board was the means by which winding-up should occur. The BMF constitution provides three alternate ways in which BMF may be wound up: at the direction of members (cl 10.3), by the responsible entity after calling a meeting of members (cl 10.5) or by the Court (cl 10.4). The statutory equivalents of these clauses are found, respectively, in ss 601NB, 601NC and 601ND of the Act.
The board considered all three options. As to the first option of winding-up at the direction of members, it was appropriately decided that, given that there was no indication of any member having attempted or wishing to call a meeting of members, and there is uncertainty about whether a responsible entity is entitled to convene such a meeting under s 601NB, this option ought not be pursued.•
As to the second option - of BML deciding to take steps itself to wind up BMF - the board identified that this process was likely to be more costly than an application to the Court under s 601ND of the Act, without the benefit of any greater certainty as to outcome.[20]
The board also noted that the two-step court process contemplated by the BSL Receivers’ proposed portfolio sale would be both transparent and provide for.
member engagement at each stage.[21] Thus, although the second option under cl 10.5 of the BMF constitution and s 601NC of the Act was in theory available, it was properly concluded to be a less desirable alternative to seeking a direction from the Court under s 601ND(1)(a) of the Act..
[20]Section 601NC contemplates a process of notice to members of the intention to wind up the scheme and, in particular, the provision of an opportunity to members to call a meeting to consider the proposed winding up.
[21]The two step court process involves, first, this application and secondly, if an acceptable offer is made in respect of each sub-scheme, then BML will apply to the Court for judicial approval to proceed with the sale of the loans.
Accordingly BML seeks an order that it is justified in amending the BMF constitution in the terms proposed in the deed poll exhibited to the First Shaw Affidavit. The purpose of this amendment is to give BML the option to explore a portfolio sale of the BMF loans comprising the interests in the scheme as a means of winding-up BMF in the best interests of members. The order is sought:
(a)by way of judicial advice pursuant to r 54.02 of the Rules;
(b)by BML in its capacity as responsible entity of BMF, and, specifically, as trustee of each of the sub-scheme loans which it holds on trust for the relevant investors; and
(c)in circumstances where such amendment is in the best interests of BMF members and the BML board reasonably considers that it will not adversely affect the rights of BMF members in accordance with s 601GC(1)(b) of the Act and/or cl 13.3 of the BMF constitution.
Judicial advice to responsible entities
Responsible entities have often sought directions from the Court - in the form of judicial advice under r 54.02 of the Rules - about proposals to restructure managed investment schemes by constitutional amendment.[22]
[22]Elders Forestry Management Ltd v Seels (2012) 90 ACSR 573,576, [6]-[7] and the cases cited therein: Re Mirvac Ltd (1999) 32 ACSR 107,t [45]-[47]; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194, [2]; Re Abacus Funds Management Ltd (2006) 24 ACLC 211, [24]; Re Cromwell Property Securities Ltd [2006] NSWSC 1449, [14]; Re Macquarie Private Capital A Limited (2008) 26 ACLC 366; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484, [20]; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487, [16].
In the present proceeding, BML, as the responsible entity of BMF, holds ‘scheme
property’ (including the sub-scheme loans) on trust for each investor in accordance with the BMF constitution and each sub-scheme agreement, and pursuant to s 601FC(2) of the Act. Further, the structure of the sub-scheme loan arrangements (involving, at one level, a borrower and PCL, and at another level, PCL and BML), as referred to above, is that BML holds interests in the underlying loans)
on trust for investors in BMF. Thus, it is in its capacity as trustee that BML seeks judicial advice from the Court that it would be justified in amending the BMF constitution in the terms suggested..
The proposed amendment to the BMF constitution
Section 601GC(1)(b) of the Act provides that a registered scheme’s constitution may be modified by the responsible entity if the responsible entity reasonably considers that the change will not adversely affect members’ rights.
The BMF constitution also provides that the constitution may be amended by the responsible entity (BML) if the responsible entity reasonably considers the change will not adversely affect members’ rights (cl 13.3).
The BMF constitution is the in the form of a deed. Accordingly, any change to the constitution is to be effected by an amending deed poll. That is the approach taken in this proceeding. The supplemental deed poll which contains the relevant amending
provisions is exhibited to the First Shaw Affidavit..
The purpose of the proposed amendment is to provide additional flexibility with
respect to the manner in which BMF may be wound-up. In particular, new cl 10A and amended cl 10.7 would permit the scheme to be wound up by way of a portfolio sale of the sub-scheme loans thereby giving effect to the proposal advanced by the Receivers. The winding-up by this means would only occur if BML decides that it is in the best interests of members to proceed with the relevant transaction(s) and, as the new cl 10.7(b)(i) provides, judicial advice is first obtained to the effect that BML is justified in completing a.
transfer of any sub-scheme loan..
A power of attorney is also proposed to be included in cl 10A(b) of the constitution. This will provide the responsible entity with the power to act as a member’s agent in negotiating and executing relevant documents concerning any portfolio sale. Because the scheme documentation[23] would appear to indicate that individual agreements have been entered into with each BMF member (based on the terms of each supplementary PDS/investment application form), the power of attorney will, for the avoidance of doubt, enable the responsible entity to execute relevant transaction documents to carry out a portfolio sale without having to obtain the
individual approval of each member for a variation of that member’s agreement.[24].
[23]See, in particular, clauses 4.2 and 4.8 of the BMF constitution.
[24]As Davies J pointed out in a similar context in Re Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (In Liquidation) (2009) 76 ACSR 146, [2009] VSC 557 (‘Great Southern’), [10], ‘…Case law indicates that simply amending the constitutions would not effect amendment of the [agreements with scheme members] and that it would be necessary for the actual contracts to be varied by agreement between the parties ‘as with any “ordinary” contract.’ Her Honour referred to Alpha Wealth Financial Services Pty Ltd v Franklin River Olive Co Ltd (2008) 66 ACSR 594, 597, [4]-[8] (Pullin JA), 621-623,[120]-[131] (Buss JA); Bailey v New South Wales MedicalDefence Union Ltd (1995) 184 CLR 399,t 439 (McHugh and Gummow JJ). In Great Southern, where judicial advice about a similar constitutional amendment to that presently proposed was sought by the responsible entity, Davies J directed that the responsible entity would be justified in making such an amendment to the schemes’ constitutions to enable the replacement responsible entity (Gunns Plantations) to amend members’ agreements so that it could require, among other things, additional fees to be paid to it by members. See Great Southern, especially [11].
The requirements of s 601GC(1)(b)
In Elders Forestry Management Ltd v Seels,[25] Robson J reviewed a number of cases involving the interpretation and application of s 601GC(1)(b), including the decision of Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd (‘ING Funds Management’),[26] and the decision of Gordon J in Premium Income Fund Action Group Inc v Wellington Capital Ltd.[27] His Honour said that the following principles could be drawn from these authorities:
[25](2012) 90 ACSR 573.
[26](2009) 228 FLR 444, [2009] NSWSC 243.
[27](2011) 84 ACSR 600, [2011] FCA 698.
(a) The [term] ‘members’ rights’ includes a reference to their contractual and equitable rights under the constitution.
(b) A clear distinction is drawn between the rights of members on one hand and the interests of members on the other hand.
(c) In applying the subsection, the responsible entity should undertake a three step approach to its consideration:
(i)the responsible entity should assess members’ rights as they exist before the modification;
(ii)the responsible entity should assess the members’ rights after the modification; and
(iii)if the rights afterwards are different from the rights beforehand, the responsible entity must decide whether the difference in the rights will be, from a members’ perspective, unfavourable.
(d) The responsible authority must decide whether the change will remove, curtail or impair existing rights in a way that is disadvantageous to the members’ rights.
(e) No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, is sufficient to deny the responsible entity the modification power.
(f) The basis for the decision of the responsible entity and the rationale for the decision, as they actually existed in the mind of the decision maker, must be found to conform to the standard of reasonableness. [28]
[28](2012) 990 ACSR 573, 587 [58] (citations omitted).
In Watts and Ors v 360 Capital Re Limitedand Anor,[29] I referred to these authorities, including the passage of Robson J set out above, and concluded that:
(a) The three step approach first articulated by Barrett J in ING Funds Management represents a sound approach that has been consistently followed in subsequent cases.
(b) A critical part of the process is the approach and analysis undertaken by the responsible entity. All steps need to be assessed properly.
(c) If a responsible entity considers that rights will be affected but not adversely, the basis and rationale for such consideration must be recorded and such decision will not be interfered with if it was reasonably open to the responsible entity. Because the emphasis is on what the responsible entity considers is reasonable - and not others - it is of the first importance that full and proper consideration and deliberation is undertaken and recorded by the responsible entity.[30]
[29](2012) 90 ACSR 713, [2012] VSC 320.
[30]Ibid [41].
The “the three step” approach articulated by Barrett J in ING Funds Management was undertaken by the responsible entity, BML, at the 29 July Meeting. The deliberations of the board, and their conclusions, set out in summary below, are more fully reflected in the First Shaw Affidavit, including the minutes of meeting exhibited to that affidavit, as confirmed in the Carr Affidavit. It is also relevant to note that, prior to the 29 July Meeting, the directors had each received and read a detailed
chronology of relevant events prepared by Mr Shaw, and a letter of advice from Allens Linklaters concerning the proposed constitutional amendments. As the minutes of meeting reveal, this material informed the discussion which took place, the board’s deliberations, and the ultimate decisions reached and resolutions made. These matters are of key relevance since the inquiry into the ’reasonableness’ of the board’s conclusions, for the purposes of section 601GC(1)(b), is to be undertaken by reference to the material before the board and the matters actually taken into consideration.[31],
[31]See, eg, Re Timbercorp Securities Limited (in liq) (2010) 77 ACSR 291, 298 [17] ; Elders Forestry Management Ltd v Seels (2012) 90 ACSR 573, 587 [58], [60]; ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444, 461-462 [102]-[105].
Once the board decided at the 29 July Meeting that BML should be wound up,and that a direction from the Court should be sought to give effect to this conclusion, the next issue concerned the proposed constitutional amendment to allow BMF to be wound up by way of a possible portfolio sale of sub-scheme loans. Discussion commenced by reviewing the essential elements of the proposed portfolio sale, as set out above. It was noted that the appointment of BSL as transaction manager would be governed by the terms of the draft appointment letter under which BML would maintain full transparency over the sale process with the assistance of its advisor, Flagstaff, as well as ultimate control through its final approval of the elements of that process (including the marketing, due diligence, bidder negotiations, and transaction documents) and the decision whether to accept any offer. Further, any contract of sale would be conditional on BML obtaining judicial advice that it would be justified in completing the relevant transaction, with members to be given notice of any such application as well as the opportunity to be heard. In this case, amendment to the BMF constitution is required because its existing terms do not permit BMF to be wound-up by way of a portfolio sale.
The board was informed by its legal advisers present at the meeting that the constitutional amendment could be effected by either a special resolution of the members pursuant to s 601GC(1)(a) of the Act, or unilaterally by the responsible entity if it satisfied the requirements of s 601GC(1)(b). It was noted that ASIC generally considered that members of the scheme were best placed to determine the scheme’s future.
The directors ultimately concluded that the preferable course was for the amendment to be made by BML in this case (subject to judicial advice) for reasons including the legal and practical issues which would attend the convening of a members’ meeting. These include, for example, uncertainty whether one meeting of all members could be held or whether individual meetings for each sub-scheme were required, the costs involved, and the delay to the commencement of the.
portfolio marketing process.[32].
[32]As set out in Watts & Watts v 360 Capital Re Limited (2012) 90 ACSR 713, [2012] VSC 320, [40], ‘Section 601GC(a)(b) is designed to protect the rights of members of registered schemes while permitting responsible entities to amend the constitutions of schemes in ways that they reasonably consider do not adversely affect members’ rights, without the inconvenience and expense of convening meetings of members’.
The board then turned to the question whether the proposed constitutional amendment made pursuant to s 601GC(1)(b) of the Act would be in the best interests of members, in accordance with its overarching obligation under s 601FC(1)(c) of the Act. This involved consideration of:
(a)the circumstances in which BML currently found itself (as set out in the chronology and referred to already in these submissions), the most significant of which was BML’s limited access to ongoing funding and the BSL Receivers’ present unpreparedness to continue funding BML to enable it to wind down BMF via a ‘terming-out’ of scheme loans in accordance with their existing maturity dates;
(b)the Receivers’ rationale for the proposal; and
(c)matters referred to in Allens Linklaters’ letter of advice which referred to the foregoing considerations and included specific reference to the following:
(i)at some point enforcement action may be the only course available to recover a given loan, which inevitably involves costs and the risk of not recovering its full market value;
(ii)withdrawal of financial support from BSL would inevitably result in BML having to appoint a voluntary administrator who would proceed to wind up BMF with likely value destruction for members with the costs of administration borne out of the assets of BMF;
(iii)the portfolio sale proposal offers BMF members the opportunity to realise their investments without potentially destructive impact of mortgagee’s sale and voluntary administration; and
(iv)no sub-scheme loans would be sold as part of the portfolio sale process unless and until the Court confirms that BML is justified in completing the sale.
By reason of all these matters, when considered collectively, the board decided that it would be in the best interests of members to amend the BMF constitution in the terms proposed.
Next, the board considered each element of the three-step process identified by the authorities as required to be undertaken in order that a constitutional amendment be made pursuant to s 601GC(1)(a) of the Act. The board took the first two steps of assessing the existing members’ rights and comparing them to the rights that would exist after modification of the constitution. The directors concluded that the amendment would affect members’ rights because, under the existing constitution, members are entitled to have their investments, with the loans underlying them, ‘term out’ in the ordinary course. The proposed amendment would give BML the power to bring forward the realisation of members’ investment interests.
The final question - being the “third step” in the process - involved the board deciding whether the difference in rights would be, from a member’s perspective, unfavourable or disadvantageous, and thus amount to an adverse affectation of
members’ rights. The directors again gave specific consideration to Allens Linklaters’.
advice, as well as factors including the following:,
(a)BML does not have sufficient funding to enable it to continue operating BMF unless the constitutional amendments are made to give effect to the BSL Receivers’ proposal;
(b)the only available alternative would be the appointment of a voluntary administrator to BML;
(c)the proposed constitutional amendments would expand the circumstances in which BML could achieve a benefit for members;
(d)the proposed constitutional amendments would not give BML a unilateral power to complete a sale, but instead give BML the additional option of exploring a portfolio sale as a means of winding-up BMF;[33] and
(e)BMF members would not bear any of the costs of the portfolio marketing process if it did not achieve a sale, and that the costs of the portfolio sale process would only be borne out of sale proceeds if BML considered that, in order to complete the proposed transaction, that would be in the best interests of members.
[33]As was the case in Elders Forestry Management Ltd v Seels (2012) 90 ACSR 573.
Against this background, each director stated that he considered that members’ rights would not be adversely affected by the change to the BMF constitution.
In light of all the relevant facts and matters discussed and deliberated upon by the BML board, it was reasonably open to the directors to reach the conclusion that members’ rights would not be adversely affected by the proposed constitutional amendment, in accordance with s 601GC(1)(b) of the Act. The proposed amendment does no more than give BML an additional means of realising value for, and in the best interests of, members of BMF, in the context of a winding up of the scheme. The power to effect a portfolio sale of sub-scheme loans conferred by the proposed amendment is expressly conditional upon BML first obtaining the approval of the Court that it would be justified in doing so. Accordingly, as in Re Willmott Forests Limited (Receivers and Managers appointed) (in liq),[34] no BMF members will have their rights under the loan arrangements changed, altered or affected by force of the constitutional amendments.
[34]Re Willmott Forests (Receivers and Managers appointed) (in liq) [2011] FCA 1517 concerned the collapse of Willmott Forests Limited (WFL), which was the responsible entity for a number of timber growing managed investment schemes. In the context of a ‘de facto winding up’ of the schemes, WFL’s liquidators applied to the Federal Court for directions that WFL was justified in unilaterally amending the scheme constitutions to allow it to terminate grower leases and other project documents in order to facilitate a sale of the timber assets. The liquidators told the Court (see [79]) that any sale contract entered into pursuant to the proposed constitutional amendments would be made conditional on the obtaining of a direction from the court that the liquidators would be justified in completing the transaction. DoddsStreeton J held that the proposed amendments were justified on the basis that they did not adversely affect member rights, noting that the interests of members under the leases and other project documents “would not be terminated or disclaimed without the court’s consent and without payment of the value of the rights” ([117]).
Further, it was prudent and reasonable for the board to resolve that any amendment to the constitution be conditional upon judicial advice first being obtained that the responsible entity was justified in making this change. For these reasons, it is appropriate for the Court to give the direction and advice sought by BML in its originating process.
F. Conclusion
For the reasons set out herein I made the orders, direction and advice sought. No order was made in respect of costs. I specifically reserved liberty to apply. Any member or interested party (with standing) and of course BML may bring the matter back before the court if so advised.
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