Re Elders Forestry Management Ltd
[2013] VSC 747
•21 February 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 7084 of 2012
IN THE MATTER OF THE ITC PULPWOOD PROJECT 2001
(ARSN 096 080 429)
| ELDERS FORESTRY MANAGEMENT LIMITED (ACN 081 643 147) in its capacity as responsible entity of THE ITC PULPWOOD PROJECT 2001 (ARSN 096 080 429) | Plaintiff |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21 February 2013 | |
DATE OF JUDGMENT | 21 February 2013 | |
CASE MAY BE CITED AS: | Re Elders Forestry Management Ltd | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 747 | |
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CORPORATIONS – Application to wind up a managed investment scheme – Scheme commercially unviable – Whether winding up just and equitable – Factors to be taken into account - Relevance of burden on responsible entity – s 601ND(1) of the Corporations Act2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Shavin QC with Dr O Bigos | Herbert Smith Freehills |
HIS HONOUR:
Introduction
The Plaintiff, Elders Forestry Management Limited (EFML), is the responsible entity of the ITC Pulpwood Project 2001 (the Project), a registered managed investment scheme regulated under Chapter 5C of the Corporations Act 2001 (Cth) (the Act).[1] EFML has determined that the Project is not commercially viable and should be wound up.
[1]All section references are to the Corporations Act 2001 (Cth) unless otherwise stated.
EFML seeks an order under s 601ND that the Project be wound up on the basis that it is just and equitable to do so. It relies on the affidavits of Kenneth Andrew Serls dated 19 December 2012 and 7 February 2013, and the affidavit of Ockert Petrus Le Roux dated 20 December 2012.
The documents filed in this proceeding have been served on ASIC and Elders Ltd (Elders). In addition, as required by previous orders, a circular about this proceeding has been sent to the members of the Project (Growers), a notice has been published in a national newspaper, and the Court documents have been posted on EFML’s website. There was a delay in uploading the Court documents to the website. By the time of the hearing the documents had been posted on EFML’s website for 14 days. In addition, EFML has maintained a help number as indicated in the circulars. As of Monday 18 February 2013, no person has indicated an intention to oppose the application nor has any person filed an appearance.
As in similar previous applications, ASIC has stated that it does not propose to intervene in the proceeding or to seek leave to appear at the hearing.
On the hearing of the application, I made the orders sought and gave brief reasons. I indicated that I would publish formal reasons subsequently (which these are) and that I would rely for the most part on the written submissions that had been prepared by Mr Shavin and Dr Bigos which I had been taken through on the application and accepted.
Winding up a managed investment scheme under Chapter 5C
Pursuant to s 601GA(1)(d), ‘the constitution of a registered scheme must make adequate provision for … winding up the scheme’.
Clause 35.2 of the Project constitution provides that:
The Project may be wound up:
(a) at the direction of Applicants and Growers in accordance with section 601NB of the Corporations Law;
(b) if the Responsible Entity considers that the purpose of the Project has been accomplished, or cannot be accomplished, in accordance with section 601NC of the Corporations Law;
(c) if the Court directs the Responsible Entity to wind up the Project; and
(d) in any other circumstances provided for under the Corporations Law.’
Section 601NC(1) provides a procedure whereby a responsible entity which has determined that the purpose of a scheme has been accomplished, or cannot be accomplished, can notify Growers of this fact and inform Growers that the scheme will be wound up unless within 28 days of the notice a meeting is called to consider the proposed winding up. If no meeting is called within that timeframe, the responsible entity may wind up the scheme.
Section 601ND(1)(a) provides that the Court ‘may, by order, direct the responsible entity of a registered scheme to wind up the scheme if … the Court thinks it is just and equitable to do so’.
Historically, the insolvency of the managed investment scheme or the responsible entity, or both, has been considered sufficient for the ‘just and equitable’ ground under s 601ND to be made out. This is borne out by the cases discussed below.
In Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd,[2] the responsible entity was under administration and its agent was insolvent with a liquidator appointed. Pullin J found that the original arrangement for the finance managed investment scheme, as set out in the prospectus, had broken down and it was, as a result, just and equitable for the Court to intervene and wind up the scheme. In addition, Pullin J found that intervention was justified on public interest grounds because the investors required protection.
[2][2001] WASC 339, [63]-[64].
In Re Orchard Aginvest Limited,[3] Fryberg J said that, in the absence of any submissions to the contrary, the insolvency of the managed investment scheme made the proposed winding up one which would be just and equitable under s 601ND.
[3][2008] QSC 002.
In Re PWL; Ex parte PWL Ltd (No. 2),[4] EM Heenan J held that:
Counsel for the plaintiff submits and I accept that, generally, it is just and equitable to order the winding-up of a registered management investment scheme pursuant to s 601ND(1)(a) of the Act if it is insolvent: Re Orchard Aginvest Ltd (as responsible entity for the Primary Agribusiness Fund) [2008] QSC 002. Further, it is just and equitable for the court to intervene and to wind-up a registered scheme where the original arrangement as set out in the prospectus of the scheme has broken down: ASIC v Knightsbridge. The phrase 'just and equitable' is broad and designed to accommodate a multiplicity of situations. It is not possible to define the phrase in exhaustive terms . In each case it will be a question of fact for determination upon the evidence relating to the scheme or corporation put before the court: Re Tivoli Freeholds Ltd [1972] VR 445, 468; and Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 374. A determination of whether or not it is just or equitable to wind-up the entity will not depend upon particular factual categories: Re Straw Products Pty Ltd [1942] VLR 222, 223.
Some further guidance can be derived from authorities dealing with applications to wind-up an unregistered scheme pursuant to s 601EE(2) of the Act. In Cumulus Wines Pty Ltd v Huntley Management Ltd [2004] NSWSC 609; (2004) 50 ACSR 58 [21] - [28], the court observed that schemes should be wound-up where; the estimated future income of the scheme was unlikely to achieve a return for investors and there was no realistic basis for expecting that future income and expenses would change to such a degree as to make a return to investors achievable; it was untenable for the schemes to continue in their then current state; and, further, that the schemes were then insolvent. In ASIC v Chase Capital Management an application was made under s 601EE(2) of the Act and it was held that an unregistered scheme may be wound up where the investments of the scheme are in a questionable state. Counsel for the plaintiff also invokes authorities dealing with the winding-up of a corporation on the just and equitable ground where it is apparent that the company has failed to meet its objectives and will be unable to do so: Re Pacific Fisheries Ltd (1909) 26 WN (NSW) 127; Re Co-operative Development Funds of Australia Ltd (No 3) (1978) 3 ACLR 437; and Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. I am satisfied that these principles apply to the present consideration of whether any or all of these six registered managed investment schemes should be wound-up upon the grounds relied upon and I shall proceed on this basis.
[4][2008] WASC 232, [43]-[44].
EM Heenan J found that there was no practicable prospect of securing another entity to become responsible entity for the schemes nor of raising the capital which would be necessary for any of them to be carried on with a view to profit. This was so notwithstanding that if sufficient capital could be raised there was a prospect that, in the long term, some of the schemes might become profitable.[5] His Honour was therefore satisfied that it was not possible for any of the schemes to achieve its stated purpose, that each of the schemes was insolvent and, noting that there was no opposition to the winding up, that the schemes should be wound up.[6]
[5]Ibid, [18].
[6]Ibid, [89]-[91].
In Shepard v Downey,[7] Judd J found that the forestry managed investment schemes were insolvent and not viable (based on a report of Ferrier Hodgson), and that it was therefore just and equitable that they be wound up under s 601ND. In determining the solvency of the schemes, Judd J said:[8]
In Re Orchard Aginvest Ltd, Fryberg J was prepared to proceed on the basis that an order to wind up a scheme under s 601ND could be made merely because the primary agribusiness fund, a registered managed investment scheme, was insolvent. His Honour did not attempt to draw a distinction between the responsible entity and the scheme (the fund) for that purpose. In so far as the scheme is characterised as no more than a trust fund or “scheme property” held on trust for scheme members by the responsible entity, the condition of insolvency may not easily attach. But in my view the scheme is something more than trust assets or scheme property.
By adopting a more generous definition of a scheme, by reference to the scheme documents, relationships, objectives, inputs and outcomes, the concept of insolvency may be applied without much difficulty if the scheme has broken down because the responsible entity has no funds to continue the management and administration of the scheme and no reasonable prospect of getting in those funds. The scheme is, in my view, insolvent; it has failed and it is just and equitable that it should be wound up.
[7]Shepard (as receiver and manager of Environinvest Ltd (ACN 080 743 791) (in liq)) & Ors v Downey (as liquidator of Environinvest Ltd (ACN 080 743 791) (in liq)) (2009) 69 ACSR 530, [103]-[107].
[8]Ibid, [104]-[105]. (Citations omitted.)
The case of Capelli v Shepard & Ors[9] concerned an appeal by some opposing scheme investors from the decision of Judd J in Shepard v Downey. The appellants submitted, amongst other things, that the approach of Robson J in Re Timbercorp Securities Ltd (in liq),[10] which was to direct the liquidators to bring about a constitutional amendment permitting the sale of the trees as standing timber, should have been adopted by Judd J in preference to the winding up order. The Court of Appeal (Dodds-Streeton and Mandie JJA, and Byrne AJA) rejected the appellants’ submissions and found that the existence of a course alternative to winding up, even if it were established to entail advantages, would not in itself exclude winding up on the just and equitable ground.[11]
[9](2010) 29 VR 242.
[10](2009) 74 ACSR 626.
[11]Capelli v Shepard & Ors (2010) 29 VR 242, [73]-[74].
The Court of Appeal said that the ‘just and equitable’ ground in s 601ND(1)(a) ‘confers a very wide discretionary power, which is applicable both in established and novel contexts’.[12] The Court concluded that:[13]
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.
[12]Ibid, [102].
[13]Ibid, [104].
In Trio Capital Limited (Admin App) v ACT Superannuation Management Pty Ltd,[14] Palmer J ordered that the schemes be wound up on the ‘just and equitable’ ground where, amongst other reasons, the responsible entity was insolvent, it was improbable that a replacement responsible entity would emerge, the major unitholder desired the winding up, the schemes could not continue in operation, and it was in the public interest that the inherently flawed and improvident schemes be terminated.
[14][2010] NSWSC 286, [50]-[51].
In Re Traditional Values Management Ltd (in liq),[15] Davies J ordered the winding up of the scheme under s 601ND(1) on the following bases:
I am satisfied on the basis of the unchallenged evidence that the BDT scheme is not viable and the purpose of the BDT scheme can no longer be accomplished. The BDT scheme does not have the financial resources to enable continuation. The scheme has insufficient income generating assets to pay income distributions and insufficient realisable assets to repay the unit holders their investments on redemption. [The responsible entity] itself is insolvent and no alternative proposal has been advocated. Furthermore, I am satisfied that the scheme ought to be wound up for the protection of the existing unit holders. It is in their interests for the assets of the BDT scheme to be realised and distributed as soon as possible, and for the return to them to be maximised by recovery of scheme assets. The investigations of the liquidators have also revealed significant irregularities in the scheme operations.
[15][2010] VSC 339, [9]-[10].
The ‘just and equitable’ ground in s 601ND is not limited, however, to circumstances where the responsible entity is insolvent. Rather, there have also been cases where the break down in administration of the scheme, or the commercial unviability of the scheme, has been sufficient to justify an order under s 601ND.
In Equititrust Ltd v Members of the Equititrust Income Fund,[16] Applegarth J determined that it was just and equitable to wind up the solvent[17] schemes as, amongst other reasons, the administration of the funds had broken down, the responsible entity (although solvent)[18] was in breach of its AFSL licence, the schemes’ purpose could not be accomplished, and the winding up appeared to have received widespread support from members.
[16](2011) 288 ALR 800, [30]-[31].
[17]Ibid, [17].
[18]Ibid.
In Re Huntley Management Ltd (as responsible entity for the Coonawarra Winegrape Project),[19] the responsible entity made an application to wind up the scheme on the ‘just and equitable’ ground following an unsuccessful s 601NC process.[20] Emmett J gave consideration to an expert’s report which expressed the view that the scheme was not commercially viable[21] and determined that in circumstances where it was abundantly clear that the scheme would not be profitable, that its continuation would continue to incur losses, and where there was no opposition from the members, it was appropriate to grant orders directing that the scheme be wound up under s 601ND.[22] The commercial unviability of the scheme was sufficient for the ‘just and equitable’ ground to be made out, irrespective of the scheme’s solvency.
[19][2012] FCA 330.
[20]Ibid, [13].
[21]Ibid, [6]-[8].
[22]Ibid, [17].
The Project and Project Documents
The purpose of the Project is the cultivation of trees (the Project Trees) and the harvest and commercial sale of the Project Trees in the form of woodchips.
The Project is governed by, inter alia:
(a)a constitution;
(b)a land agreement, pursuant to which an interest in land is granted to the Growers (“Grower Sublease”); and
(c)a management agreement, pursuant to which the Grower engages EFML to, amongst other things, prepare, establish, maintain and ultimately harvest each Grower’s trees;
(collectively referred to as the Project Documents).
A summary of the Project Documents is contained in the prospectus for the Project. Each Grower who applied to become a member of the Project agreed to be bound by the constitution of the Project when the Grower submitted their application form. The Project Documents appoint EFML as responsible entity to provide interests in land to Growers for the purpose of the Project, and to perform services on behalf of Growers for the cultivation, maintenance and marketing of the silvicultural enterprise.
As consideration for the supply of an interest in land and the services provided by EFML on behalf of Growers, the Growers agreed to pay EFML the Primary Services fee, the Planting Services fee, the Annual Services fee, the Land fee and the Harvesting and Marketing Services fee.
Upon applying to enter the Project:
(a)all Growers were required to pay the Primary Services fee in full; and
(b)Growers were required to elect whether to pay the Planting Services, Annual Services and Land fees annually over the course of the Project term (Annual Fee Growers), or to pay these fees as a percentage of the harvest proceeds to which the Grower would be entitled (Deferred Fee Growers). 64 Growers in the Project holding 1,182 plantation units (approximately 54% of the Project interests) elected to pay their fees as Annual Fee Growers, and 66 Growers in the Project holding 989 plantation units (approximately 46% of the Project interests) elected to pay their fees as Deferred Fee Growers.
The Project Trees are located on eight properties in Esperance (Western Australia). Two of the properties are owned by a wholly owned subsidiary of Elders. The remaining properties are owned by third parties. All of the properties are leased to EFML and then subleased to Growers pursuant to a Grower Sublease.
Four of the eight Project leases have already expired and the remaining Project leases will expire in 2014.
The Project had an anticipated 10 year term from planting of the Project Trees to harvest. All the Project Trees are now ready to be harvested in accordance with the Project Documents.
Under the Project Documents each Grower had a right to notify EFML within 12 months of the commencement date that the Grower elected to market and arrange for the sale of their trees themselves. No Grower made this election.
It is impractical for an individual Grower to manage and harvest the trees on their individual lots due to the nature of the Project.
Expressions of interest processes
Elders Forestry Pty Limited (Elders Forestry) is the holding company of EFML. Elders Forestry and EFML are both companies in the Elders Group. Elders and Elders Forestry engaged Macquarie Capital Advisers (“Macquarie”), on behalf of EFML, to undertake a rigorous expression of interest process for, amongst other assets, the Project Trees (Macquarie Process).
EFML and Elders Forestry did not receive any offers from any third parties to purchase the Project Trees or take over EFML’s role as responsible entity of the Project as a result of the Macquarie Process, due to:
(a)the poor yields experienced to date from the Project Trees;
(b)the lack of infrastructure to enable the Project Trees to be exported; and
(c)the poor outlook for woodchip prices expressed in Australian dollars.
In late 2011 and early 2012, Elders Forestry, on behalf of EFML, conducted a further two-stage national and international sale process to sell:
(a)the right to harvest the mature plantations (planted in or prior to 2002) located in the Esperance region; or
(b)an offtake agreement for the plantations located in the Esperance region that were nearing maturity (planted in or after 2003) or an offtake agreement for these plantations on a standing timber (rather than harvested) basis;
(the Elders Forestry Process).
The Elders Forestry Process resulted in two indicative offers being received from Australian parties. One of the offers did not meet the sale criteria and was not pursued further by Elders Forestry and EFML. The other offer was from a participant in the biomass industry. This party submitted a proposal which was subject to the construction of a biofuel plant in the Esperance region in four to five years’ time. The proposal was not acceptable to Elders Forestry or EFML.
Section 601NC process
In August 2012, at the request of the EFML board, Elders Forestry completed a detailed assessment of the marketing options for various plantations of mature wood in the Esperance region in managed investment schemes managed by EFML, including the Project Trees (the Esperance Viability Study).
On the basis of the Esperance Viability Study, EFML concluded that:
(a)there are no opportunities in the Esperance region or within economic haul distance for marketing the Project Trees as logs;
(b)there is no developed market for biomass in the Esperance region; and
(c)due to the deterioration of the Australian woodchip export market the current and foreseeable wood market conditions for pulpwood were extremely poor and as a result the marketing of the Project Trees as woodchip was not commercially viable.
Following from this, in July 2012 a s 601NC notice was sent to Growers informing them of EFML’s intention to wind up the Project on the basis that the purpose of the Project could not be fulfilled.
Two Growers (one Annual Fee Grower and one Deferred Fee Grower), who together held more than 5% of the Project’s plantation units, requested that a meeting of Growers be held to consider the proposed winding up of the Project. Under s 601NB, a resolution to wind up a managed investment scheme must be passed as an extraordinary resolution. An extraordinary resolution is defined in s 9 as a resolution that has been passed by at least 50% of the total votes that may be cast by members entitled to vote on the resolution (including members who are not present at the meeting in person or by proxy). That means for the winding up to be effected under s 601NC in this case, a resolution must be passed by half of the entire population of Growers regardless of whether or not they vote at the meeting in person or by proxy.
On 15 November 2012, the meeting of Growers was held. Under s 253C(2), on a poll each Grower has one vote for each dollar of the value of the total interests they have in the Project. EFML determined that the value of each interest in the Project (referred to as a ‘Plantation Unit’) would be $1.00 and that therefore 2,171 votes could be cast at the meeting.
In order for the winding up resolution to be passed as an extraordinary resolution, not less than 1,086 votes (just over 50% of 2,171) would need to be cast in favour of the resolution.
Only 1,021 votes were cast at the meeting in person or by proxy (i.e. 1,150 votes were not cast at the meeting) and therefore less than 50% of the total votes able to be cast were cast at the meeting.
On a poll, 645 (63.17%) of the 1,021 votes cast at the meeting were in favour of the resolution to wind up the Project. Although a majority of the Growers who voted at the meeting voted in favour of the winding up, the votes received were insufficient to pass the extraordinary resolution.
The fact that the extraordinary resolution was not passed does not militate against the winding up order because the results of the meeting do not reflect the views of all the Growers.
Independent expert’s report
Following the meeting, Elders Forestry and EFML engaged Poyry Management Consulting (Australia) Pty Ltd (“Poyry”) to conduct an independent review of the Project to comprehensively investigate the likely value to Growers from operating the Project according to its original framework.
The Poyry reported that:
(a)the units in the Project held by Annual Fee Growers (Annual Fee Units) have no value and the increase in the hardwood chip price required for the Annual Fee Units to break even far exceeds Poyry’s price forecast; and
(b)the units in the Project held by Deferred Fee Growers (Deferred Fee Units) have no value given Poyry's forecasts. For the Deferred Fee Units to have value:
(i)the landowners would need to be willing to extend the leases;
(ii)funds would need to be found to meet the rental payments after the lease expiry dates;
(iii)an entity would need to be willing to build and operate a woodchip export facility at the Port of Esperance;
(iv)physical space constraints at the Port of Esperance would need to be addressed; and
(v)FOB (free on board) prices would need to increase above Poyry’s forecast by 5%.
Poyry concluded that under the current woodchip market conditions, there is no reasonable prospect that the Project will generate income either for the Annual Fee Growers or the Deferred Fee Growers.
Consequences of winding up
The Plaintiff submits that if the order sought by EFML is obtained and the Project is wound up:
(a)there will be no financial return to Growers from the sale of the Project Trees;
(b)any costs of land clearing and remediation will be borne by EFML and its related entities; and
(c)EFML will not invoice Annual Fee Growers for their fees due for the 1 July 2011 to 30 June 2012 period and the 1 July 2012 to 30 June 2013 period.
The Plaintiff submits that if the Project is not wound up, the Growers will not be any better off given the commercial unviability of the Project as discussed above.
I asked Mr Shavin if there was any suggestion that Elders may receive some collateral benefit if the Project were wound up. Mr Shavin said that Elders would face the same position. He said Elders would have trees on land for which there was no market. Mr Shavin submitted that there was no collateral benefit to Elders if the Project was wound up.
Mr Shavin submitted that the application was not based upon the premise that the responsible entity was insolvent, which had been the case in many other applications where schemes have been ordered to be wound up. He referred me to Re Huntley Management Limited,[23] where Emmett J of the Federal Court made an order for the winding up of a grape growing scheme in circumstances where it was not commercially viable to continue with the scheme, much like this case, but where there was no suggestion that the responsible entity was insolvent.
[23](2012) FCA 330.
The fact that the responsible entity is solvent is no impediment to making the order sought. In my view that fact may be a further reason to make the order winding up the Project as the responsible entity is currently being burdened with the expense of maintaining the Project even though it is not commercially viable. That was not the purpose of the Project. The purpose of the Project was that the responsible entity and the Growers would make a profit. Neither of those objectives is being achieved, nor can it be achieved.
Appropriateness of giving order in the present case
I am satisfied that an Order should be made winding up the Project under the ‘just and equitable’ ground in s 601ND, as:
(a)all of the Project Trees are now ready to be harvested in accordance with the Project Documents;
(b)EFML considers that the Project is not commercially viable and this view is supported by Poyry’s independent expert report;
(c)the purpose of the Project can therefore not be accomplished;
(d)an alternate restructure of the Project is highly unlikely given the results of the Macquarie Process and the Elders Forestry Process;
(e)an ordinary majority of Growers voted in favour of winding up the Project during the s 601NC process; and
(f)as at 5:00pm on 18 February 2013, no Grower has filed an objection to this application.
For these reasons, I will make the orders sought.
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