Re Environinvest Ltd (No. 6)
[2012] VSC 173
•23 February 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2384 of 2010
IN THE MATTER OF ENVIRONINVEST LIMITED
(RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
(ACN 080 743 791)
| ENVIRONINVEST LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 080 743 791) (IN ITS CAPACITY AS RESPONSIBLE ENTITY OF EACH OF THE MANAGED INVESTMENT SCHEMES LISTED IN SCHEDULE 1) | First Plaintiff |
| JAMES PATRICK DOWNEY (IN HIS CAPACITY AS SCHEME LIQUIDATOR OF EACH OF THE MANAGED INVESTMENT SCHEMES LISTED IN SCHEDULE 1) | Second Plaintiff |
| MARKO YURI MISKO & ORS | Defendants |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 23 February 2012 | |
DATE OF JUDGMENT: | 23 February 2012 | |
DATE OF REASONS: | 14 May 2012 | |
CASE MAY BE CITED AS: | Re Environinvest Ltd (No. 6) | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 173 | |
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CORPORATIONS – Managed Investment Scheme – Winding up by a person appointed under s 601NF(1) of the Corporations Act 2001 (Cth) – Conflict of duty – Person appointed to wind up the schemes also the liquidator of the Responsible Entity – Directions in winding up under s 601NF(2) of the Corporations Act – Approval of deeds of sale – Approval of mediated agreement as to costs, expenses and remuneration – Scheme liquidator excused from compliance with obligations arising under scheme constitution – Discharge of scheme liquidator on completion of winding up.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S Rubenstein | Norton Rose |
| For the Defendants | No appearance |
HIS HONOUR:
Environinvest Ltd (Receivers and Managers Appointed) (In Liquidation) (Environinvest) is the responsible entity for the Primary Yield Eucalypt Project (ARSN 093 575 270) (PYEP) and is the first plaintiff. James Patrick Downey, the second plaintiff, is liquidator of both Environinvest and of several of its managed investment schemes, including PYEP.
The winding up of the schemes[1] provoked several applications by the liquidator for court approval of sale transactions and distributions in the course of winding up.[2] Some applications arose because of a conflict between Mr Downey’s role as liquidator of the schemes and of the responsible entity. This was one such application.
[1]Re Environinvest Ltd [2009] VSC 33; [2010] VSCA 2.
[2]Environinvest Ltd v Great Southern Property Managers (No 2) 11 March 2010; Re Environinvest Ltd (No 3) [2010] VSC 3013; Re Environinvest Ltd(No 4) [2010] VSC 549; Re Environinvest Ltd (No 5) [2011] VSC 474.
This application followed the realisation of a property known as Modesty Park, on which trees had been planted as part of the PYEP scheme. The property comprised approximately 173 hectares. The land had been leased by an Environinvest company, but Mr Downey was not able to gain access and realise the value in the scheme trees because the registered proprietor, Roger Pescott, had purported to terminate the lease and re-enter the property. Mr Downey did not have sufficient funds to oppose the termination and re-entry.
The Modesty Park property was mortgaged to RMBL Investments Ltd. As a consequence of a default under the mortgage, RMBL took possession of and subsequently sold the property. The sale took place in March 2001. The sale price was $975,000. After discharge of the mortgage there was a surplus of approximately $126,000.
The PYEP scheme and Environinvest are two of three claimants to the surplus funds. By his application, the liquidator sought the court’s approval of terms of settlement dated 18 October 2010, as varied by deed of variation made 21 September 2011, under which the scheme became entitled to $11,610.81 and Environinvest became entitled to $77,703.10. Mr Downey also sought orders facilitating his discharge as scheme liquidator of the PYEP scheme. On 23 February 2012 I made the orders set out at the conclusion of these reasons, which explain the basis for doing so.
Background
As liquidator of PYEP, Mr Downey endeavoured to realise as much value from the scheme property as he could. His first application sought approval to pursue the sale of PYEP scheme assets under an Asset Sale Deed and two other agreements.[3] At that time, the proposed sales were considered to represent the only agreements by which the liquidator could recover any value for scheme members.[4] The court sanctioned the sale and an apportionment of the proceeds between the land and the trees,[5] with the proceeds attributable to the trees made available as funds in the winding-up of PYEP.
[3] Re Environinvest Ltd (No 3) [2010] VSC 301 [23], [24].
[4] Re Environinvest Ltd (No 3) [2010] VSC 301 [39].
[5] Re Environinvest Ltd (No 3) [2010] VSC 301 [9], [55].
Between the first and second applications a mediation was conducted. Agreement was reached, recorded in terms of settlement dated 18 October 2010. According to the terms of the agreement, priority was given to Universal Distributing claims by the receivers and ABL, with any residual funds allocated between claimants on a basis of agreed percentages.[6]
[6] Re Environinvest Ltd (No 4) [2010] VSC 459 [23].
One purpose of the second application was to obtain court approval of a regime for apportionment and distribution of funds set out in the terms of settlement. Court approval was a condition precedent to the proposed distribution.[7] The distribution regime was approved and an order made approving the payment of the liquidator’s costs and expenses in winding up of the PYEP scheme from the proceeds of sale of the scheme property.[8] This order reflected the agreement reached under the terms of settlement.
[7] Re Environinvest Ltd (No 4) [2010] VSC 459 [27].
[8] Re Environinvest Ltd (No 4) [2010] VSC 459 [46], [47].
The third application also concerned the realisation of scheme assets. Ferguson J approved an arrangement under which rights to the trees on the Emu Downs and Whitestone properties were surrendered, allowing the receivers to sell the properties.[9] In return, the liquidator received a proportion of the net sale proceeds of each of the properties.[10]
[9] Re Environinvest Ltd (No 5) [2011] VSC 474 [7], [23].
[10] Re Environinvest Ltd (No 5) [2011] VSC 474 [11].
Ferguson J was required to deal with a further complication, which also arises on this application. The terms of settlement approved in Re Environinvest Ltd (No 4) were agreed on the assumption that it was unlikely that any further PYEP scheme property would be realised. As a result the terms included mutual releases which meant that interested parties had no ongoing entitlement to further funds received from the sale of PYEP scheme property.[11]
[11] Re Environinvest Ltd (No 5) [2011] VSC 474 [9], [17].
To address that constraint, the parties proposed that the distribution mechanism approved in Re Environinvest Ltd (No 4) be extended through a deed of variation.[12] The liquidator sought the court’s approval to enter into that deed. Ferguson J considered that s 601NF(2) of the Corporations Act 2001 (Cth), which deals with the winding up of a registered scheme, provided power to make such an order. In particular, Ferguson J found that “the acceptance and implementation of the Receivers’ proposal and the deed of variation are aspects of the winding up of the PYEP Scheme”[13] based on the circumstances in which the application was made, including:[14]
(a)the fact that the funds to be received under the Receivers’ proposal represent a benefit that was otherwise not expected or foreseen;
(b)receipt and subsequent distribution of those funds is consistent with the previous mechanisms mandated by the Court; and
(c)Mr Downey is of the opinion that the Receivers’ proposal is commercially prudent and pragmatic in light of the limited financial resources that he has at his disposal as scheme liquidator.
[12] Re Environinvest Ltd (No 5) [2011] VSC 474 [18].
[13] Re Environinvest Ltd (No 5) [2011] VSC 474 [22].
[14] Re Environinvest Ltd (No 5) [2011] VSC 474 [23].
Modesty Park surplus funds
At the time of the application made to Ferguson J, the liquidator foreshadowed the realisation of trees at Modesty Park. That possibility was noted by Ferguson J in her judgment.
Mr Pescott’s trustee in bankruptcy and Mr Downey acting in his capacity as liquidator of Environinvest, and in his capacity as liquidator of the PYEP Scheme, all made a claim on the surplus.
While the PYEP Scheme claim was relatively straightforward, based on an entitlement to the value of the scheme trees growing on the property, the Environinvest claim was a little more complex. Mr Downey, as liquidator of Environinvest, alleged that the property was transferred from the Environinvest owner to Mr Pescott pursuant to a contract of sale dated 31 August 2007, for a price of $1.34 million. He alleged that Mr Pescott did not pay the purchase price. Environinvest claimed a lien over the property as an unpaid vendor.
Given the conflict Mr Downey had between his two roles, he engaged separate legal representation for Environinvest and the PYEP Scheme to negotiate the 14 February 2012 agreement, and to reach agreement as to the acceptability of a proposed division between Environinvest and the PYEP Scheme.
On 14 February 2012 a resolution was agreed between the competing claimants, and this agreement forms the basis of Mr Downey’s proposal that the $89,313.91 be divided between Environinvest and scheme members on the basis of the relative values of the land and the trees. Because the trees had already been removed from the property by the purchaser, no valuation was available. Instead, Mr Downey proposed that the relative values of land and trees at a comparable property, Morton Hill, be employed. At Morton Hill, 87% of the value had been attributed to the land, and 13% to the trees. On this basis $11,610.81 from the Modesty Park surplus was apportioned to scheme members and $77,703.10 to Environinvest.
Court approval
Mr Downey’s conflict of interest is apparent in each of the two agreements for which he sought the court’s approval. The principles to be applied in giving the court’s approval to the agreements pursuant to s 601FN(2) of the Corporations Act 2001 (Cth) are set out in Environinvest Ltd (No 3). Section 601FN(2) provides that:
the Court may, by order, give directions about how a registered scheme is to be wound up if the Court thinks it necessary to do so (including for the reason that the provisions in the scheme’s constitution are inadequate or impractical).
In Environinvest Ltd (No 3) I said,[15]
In my opinion this provision authorises the approval and declarations of the kind sought by Mr Downey.[16] It was not submitted otherwise. The asset sales agreements are a step in the process of winding up the schemes and converting scheme property into money. The necessity for the approval sought arises from the conditional nature of the agreements. The application is fully justified because of the position of conflict in which Mr Downey has found himself. It is to be noted that his position of conflict was imposed upon him by order of the court.
[15]Re Environinvest Ltd (No 3) [2010] VSC 301 [31].
[16] Re Stacks Managed Investments Ltd (2005) 219 ALR 532, [52]; Re Rubicon Asset Management Ltd (2009) 74 ACSR 346, [51].
While the sum involved in this application is considerably less than that under consideration in Environinvest Ltd (No 3), his conflict remains. It was fully anticipated at the time of Mr Downey’s appointment. That conflict does not, however, represent a barrier to the orders being made.
Counsel for the plaintiffs submitted that Mr Downey’s entry into the 14 February 2012 agreement, and the proposed division of proceeds between the PYEP Scheme and Environinvest were justified. The following four circumstances persuade me that the orders approving entry into the agreements should be made:
(a) the funds represent an unanticipated benefit to the PYEP Scheme;
(b)that the approach in apportioning the funds between Environinvest and PYEP is transparent and justifiable given that the trees have now been removed and are incapable of valuation;
(c)given the limited financial resources available to Mr Downey, the proposals are commercially prudent and pragmatic;
(d) the application is unopposed.
On the hearing of the application no other interested party chose to appear. I am satisfied that all interested parties had been notified of the application and hearing date. The fifth affidavit of Lee Pascoe, affirmed on 23 February 2012, provided details of the service of the application and supporting material. The list of interested parties includes Environinvest; the receivers appointed to the assets; the ABL receivers; the Registrar of Titles; the Australian Securities and Investments Commission; and the growers listed in two schedules. In addition, a letter was sent by a representative of Mr Downey to all growers recorded as participants in the PYEP Scheme, advising them of the hearing date of the application.
It follows that the court should give its approval to the agreement including the proposed distribution in accordance with the first table in Schedule 2 of the Terms of Settlement. This reflected the plaintiffs’ submissions, and accords with the deed of variation approved by Ferguson J in Re Environinvest Ltd (No 5).
Discharge of liquidator
In Re Environinvest Ltd (No 4) Mr Downey sought to be excused from a requirement under the scheme constitution to prepare final accounts, to have them audited and from any obligation to comply with s 301(1) of the Corporations Act (Cth), which requires the preparation of an audited financial report for a financial year and an auditor’s report. In that proceeding I expressed doubt as to whether those requirements were applicable in the course of a winding up.
Clause 31.5 of the scheme constitution under consideration in that proceeding required that, upon forming the view that the winding up was complete, the responsible entity was required to engage a registered company auditor to audit the final accounts of the scheme and must send a copy of the report to the growers within 60 days after receiving the report. The constitution of the PYEP Scheme does not contain an obligation that the responsible entity prepare final accounts or that it engage an auditor to audit those accounts or prepare an audit report. There is, however, an obligation on the responsible entity to maintain accounting records, and to record and explain the financial position of the scheme, and to have those accounts properly audited. There is also, of course, s 301(1) of the Act requiring a responsible entity to prepare accounts and have those accounts audited.
In Re Environinvest Ltd (No 4), I relieved Mr Downey of the obligation under the constitution (not applicable in the present case) to prepare final accounts and engage an auditor. Mr Downey now seeks to be relieved of any obligation to prepare final accounts and to engage an auditor on essentially the same grounds as those supporting the orders made in the earlier application. He is a certified practising accountant and the person responsible for the preparation of a final report of receipts and payments, which it is proposed will be sent to scheme members. The receipts and payments are not complicated, involving, as they do, a limited number of transactions. Mr Downey does not have the funds to engage an auditor. In my opinion Mr Downey should be relieved of what I consider to be an unnecessary and expensive obligation, in the special circumstances of this case, to prepare formal accounts and have them audited. After all, the court has supervised this winding up at almost every step, due to the inherent conflict of interest imposed upon Mr Downey by his appointment as liquidator of the PYEP Scheme and of Environinvest.
I am satisfied that Mr Downey should be excused from preparing final accounts for the scheme and from appointing an auditor. For the reasons set out at paragraphs 42 and 43 of Re Environinvest Ltd (No 4), Mr Downey is also excused from compliance with s 301(1) of the Act, insofar as it is applicable. The liquidator of the PYEP Scheme will instead be ordered to send by ordinary prepaid post, to the last known address of each of the growers in the PYEP Scheme, a copy of the final report of receipts and payments of the PYEP Scheme.
Mr Downey will be discharged as liquidator of the scheme upon filing and serving an affidavit deposing to the fact of compliance with the orders made as to distribution of funds, the prescribed notification to the growers, and the requirements of Regulation 5C.9.01 of the Corporations Regulations 2001 (Cth) with respect to the PYEP Scheme.
On 23 February 2012 the following declaration and orders were made:
THE COURT DECLARED THAT:
1.The second plaintiff is justified in accepting the amount agreed to be apportioned to the PYEP Scheme from the Environinvest Portion (as that term is defined in the affidavit of James Patrick Downey sworn 20 February 2012 (the Tenth Downey Affidavit) as set out in the letter exhibited as “JPD-181” to the Tenth Downey Affidavit) (the apportionment amount).
2.The apportionment amount is to form part of the Further PYEP Scheme Proceeds (as that term is defined in the affidavit of James Patrick Downey sworn 13 September 2011) for the purposes of the Terms of Settlement dated 18 October 2010 (exhibited as “Confidential JPD 124” to the affidavit of James Patrick Downey sworn 10 November 2010) (as varied by the Deed of Variation being Annexure A to the orders of the Court made 21 September 2011).
THE COURT ORDERED THAT:
3.The apportionment amount is to be distributed by the first plaintiff in accordance with the first table in Schedule 2 of the Terms of Settlement.
4.The second plaintiff send by ordinary prepaid post to the last known address of each of the Growers in the PYEP Scheme a copy of the final report of receipts and payments of the PYEP Scheme.
5.In so far as any obligation arises, the second plaintiff is excused from ensuring that the first plaintiff, in its capacity as responsible entity of the PYEP Scheme, complies with section 301(1) of the Corporations Act 2001 (Cth).
6.Upon the filing and service of an affidavit deposing to the fact that the second plaintiff has complied with:
i) paragraphs 3 and 4 of this order; and
ii) the requirements of Regulation 5C.9.01 of the Corporations Regulations 2001 (Cth) with respect to the PYEP Scheme
the second plaintiff is discharged as the Scheme liquidator of the PYEP Scheme.
SCHEDULE 1
PRIMARY YIELD EUCALYPT PROJECT (ARSN 093 575 270)
PRIMARY YIELD EUCALYPT PROJECT NO. 7 (ARSN 108 736 705)
PRIMARY YIELD EUCALYPT PROJECT NO. 9 (ARSN 117 062 601)
0
6
0