Re Gunns Plantations Limited (In Liquidation) (Receivers and Managers Appointed) (No 4)
[2014] VSC 369
•11 August 2014
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
Corporations List
S CI 2013 2095
IN THE MATTER OF GUNNS PLANTATIONS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 091 232 209)
| DANIEL MATHEW BRYANT, IAN MENZIES CARSON and CRAIG DAVID CROSBIE (in their capacities as joint and several Liquidators of GUNNS PLANTATIONS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 091 232 209)) | First Plaintiffs |
| and | |
| GUNNS PLANTATIONS LIMITED (IN LIQUIDATION) (RECEIVERS & MANAGERS APPOINTED) (ACN 091 232 209) | Second Plaintiff |
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JUDGE: | JUDD J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 & 17 July 2014 |
DATE OF JUDGMENT: | 11 August 2014 |
CASE MAY BE CITED AS: | Re Gunns Plantations Limited (In Liquidation) (Receivers & Managers Appointed) (No 4) |
MEDIUM NEUTRAL CITATION: | [2014] VSC 369 |
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CORPORATIONS — Managed Investment Scheme — Application made under s 511 of the Corporations Act 2001 (Cth) for direction that liquidators are justified in terminating grower rights — Joint sale process agreed with receivers — Ex ante agreement for the allocation of proceeds between liquidators and receivers — Attempt by growers to review and impugn allocation agreement — Allegation that liquidators had breached duty under ss 601FC(1) and 601FD(1) of the Corporations Act 2001 (Cth) — Nature of proceeding — Breach not established.
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| APPEARANCES: | Counsel | Solicitors |
| For the Liquidators | Mr P Corbett, one of Her Majesty’s Counsel, and Ms L Kirwan | Arnold Bloch Leibler |
| For the Receivers of Gunns Group | Mr P Anastassiou, one of Her Majesty’s Counsel, with Mr R G Craig and Ms K Beattie | Ashurst Lawyers |
| For Gunns Growers Pty Ltd | Mr D Shavin, one of Her Majesty’s Counsel, and Mr R Pintos‑Lopez | Mills Oakley Lawyers |
| Mr Trevor Burdon | Appeared on his own behalf |
HIS HONOUR:
This is an application by the liquidators of Gunns Plantations Limited for a direction, pursuant to s 511 of the Corporations Act 2001 (Cth), that the liquidators are justified in terminating all rights of growers in certain managed investment schemes operated by GPL to facilitate the completion of a sale of unencumbered assets by the receivers appointed to GPL and other entities within the Gunns Group.
On 31 May 2013, this Court directed that the liquidators were justified in procuring GPL to amend scheme constitutions to enable it to terminate grower rights. The directions were made following the collapse of the Gunns Group, to facilitate the winding up of the schemes by GPL and realisation of scheme assets in cooperation with the receivers. On 21 August 2013, the liquidators procured GPL to amend the scheme constitutions under s 601GC(1)(b) of the Corporations Act, to include sale and termination powers. When those directions were made, it was on the basis that the liquidators would not exercise any such power of termination without seeking further directions from the Court. This application is made in compliance with that obligation.
The directions sought by the liquidators are as follows:
A direction pursuant to s 511 of the Act that the Liquidators are justified and otherwise acting properly and reasonably in procuring GPL, in its capacity as the responsible entity of the Gunns Woodlot Schemes, to exercise its powers under the constitutions of the Gunns Woodlot Schemes to terminate, relinquish or surrender those of the Project Documents of the Gunns Woodlot Schemes to the extent necessary to allow completion of the Business Sale Contract (as defined in the First Bryant Affidavit) to occur in accordance with its terms.
A direction pursuant to s 511 of the Act that the Liquidators are justified and otherwise acting properly and reasonably in procuring GPL, in its capacity as the responsible entity of the Gunns Woodlot Schemes, to exercise its powers under the constitutions of the Gunns Woodlot Schemes to terminate, relinquish or surrender those of the Grower rights of the Growers in the Gunns Woodlot Schemes to the extent necessary to allow completion of the Business Sale Contract to occur in accordance with its terms.
A direction pursuant to s 511 of the Act that the Liquidators are justified and otherwise acting properly and reasonably in procuring GPL, in its capacity as the responsible entity of the Gunns Woodlot Schemes, to enter into and perform the Side Letter Agreement (as defined in the First Bryant Affidavit) and subsequently the Amended Side Letter Agreement (as defined in the Third Bryant Affidavit) in accordance with its terms.[1]
[1]Amended Interlocutory Process, dated 16 July 2014, [2]–[4].
The liquidators are Ian Menzies Carson, Craig David Crosbie and Daniel Mathew Bryant, all members of the firm PPB Advisory, specialising in corporate recovery, restructure and insolvency. They were appointed administrators of GPL on 25 September 2012, and liquidators on 5 March 2013. The receivers are Mark Korda and Bryan Webster of the firm KordaMentha, appointed to entities in the Gunns Group, including GPL and Gunns Limited, whose assets secured borrowings. The assets under the control of the receivers did not, of course, include scheme assets held on trust by GPL for scheme members.
On 24 April 2014, the receivers entered into a Business Sale Agreement with The Trust Company (PTAL) Ltd, The Trust Company (Australia) Limited and Tasmanian Forest Management Pty Ltd for the sale assets owned by Gunns Group entities, including land, leasehold interests, port operations and other assets, including scheme assets. Some of the land had been employed by GPL for the operation of managed investment schemes, including nine such schemes established by GPL between 2000 and 2009. The schemes were known as the Gunns Woodlot Schemes.
All of Gunns’ Tasmanian assets, including scheme assets, were offered for sale by the receivers, under a sale process commencing on 1 November 2013. The scheme assets offered for sale relate to the 2002–2009 schemes. The schemes comprise 9122 woodlots leased by around 6000 growers. The non-scheme assets offered for sale included the ‘Pulp Mill Opportunity’. The Pulp Mill Opportunity included a site, adjacent to the Tamar Woodchip Mill, on which bulk earthworks had been completed. Federal and State permits had been obtained. Attractive returns were forecast following construction.
The Pulp Mill Opportunity was the only asset not to be acquired by the purchasers under the Business Sale Agreement. Its exclusion from the sale became the catalyst for grower objection to the sale process, and an agreement between the liquidators and receivers for the allocation of proceeds between them. The receivers and liquidators had agreed, in advance of the sale, on the allocation of proceeds as part of a Sale Process Agreement, dated 24 October 2013. The allocation was to be made on the basis of a percentage which varied across a wide range of possible sale proceeds, commencing at USD100 million, ranging up to USD1 billion.
The allocation agreement was initially challenged by Gunns Growers Pty Limited as idiosyncratic and imprudent. But the challenge was mercurial and eventually transformed into an allegation that the liquidators had breached statutory duties owed to the growers.
Gunns Growers represented growers in the 2002, 2003, 2005, 2006 and 2008 schemes. It sought and was granted leave to appear on the application. Trevor Burdon, a grower in the 2000, 2001 and 2002 schemes, was also granted leave to appear. While Mr Burdon appeared on his own behalf, Gunns Growers was represented by senior and junior counsel. Thus, the Court had the advantage of the full participation by a contradictor.
Gunns Growers did not challenge the sale of scheme assets, or that they were ultimately sold as part of a bundle with the Gunns Group assets. Mr Burdon contended that some other course ought to have been followed, to restructure the scheme and preserve value to the growers. His concern was assuaged to some extent by the appointment of a new responsible entity for the 2000 and 2001 schemes.
Following the collapse of Gunns Group, the liquidators of GPL sought expressions of interest for the role of responsible entity. With the exception of the 2000 and 2001 schemes, no satisfactory replacement could be found. GPL had no funds. The scheme landowners were in receivership. The receivers had issued notices of default to GPL under Forestry Right Deeds, adding further uncertainty to the growers’ position and their ability to recover any value from their investments. In the absence of a properly funded entity, willing to assume all responsibility and obligations of a responsible entity for the schemes, I am satisfied that the only course open to the liquidators was to sell scheme assets.
Under the Sale Process Agreement, the liquidators and receivers agreed on a joint sale process for all assets of the Gunns Group. The liquidators had a window within which to sell scheme assets. Their attempt was unsuccessful. Although the attempt may have been explicable, insofar as it was a means of establishing an objective value of the trees, that it did not attract unconditional offers was not surprising.
The ultimate issue on this application was whether the Court should direct that the liquidators are justified in terminating grower rights. They have agreed to do so under a Side Letter Agreement, as varied on 15 July 2014. That description masks its real significance. The Agreement is headed, ‘Deed to Surrender and Release Grower Rights’.
Under the Deed the liquidators agreed to apply to a court for a direction that they were justified in procuring GPL to surrender such rights. The liquidators also agreed on ‘GPL’s proportionate amount of the reasonable sale costs incurred by Gunns and advisors’ fees as described and provided for in the [Sale Process Agreement]’. Following the excision of the 2000 and 2001 scheme assets, the Deed was replaced by a new agreement dated 15 July 2014. The receivers also confirmed the liquidators’ entitlement to their allocation of proceeds of sale according to the Sale Process Agreement, including future proceeds from any sale of the Pulp Mill Opportunity.
The real or central issue in the application, raised by Gunns Growers, was whether the Court should refuse such a direction because of the liquidators’ breach of duty owed to the growers under ss 601FC(1) and 601FD(1) of the Act. Gunns Growers accepted that a court will only interfere with the exercise of commercial judgment if it is unreasonable, involves an error of law or principle, or is the result of some inappropriate conduct by the liquidators. I accept that such a breach, if established, would almost certainly compel court intervention and an investigation into the agreement and the liquidators’ conduct more generally. If satisfied of such a breach, the Court may refuse to make the directions sought. Moreover, because of the general supervisory jurisdiction of the courts over the conduct of liquidators, a court may be moved, of its own motion, to institute some remedial and disciplinary steps. Thus, the nature and scope of the allegation ultimately made by Gunns Growers was of such gravity that it might potentially expose the liquidators to far‑reaching adverse consequences.
The question of apportionment of proceeds between schemes and growers will be dealt with in a separate proceeding.
Background
Growers in the 2002 to 2009 schemes had acquired their interests in the scheme land pursuant to Forestry Right Deeds with GPL. Plantations were established and maintained by GPL under management agreements. The scheme structure did not permit individual growers to establish and maintain plantations, although it was theoretically possible for a grower to elect to harvest. With the collapse of the Gunns Group, including GPL, it became impractical for any individual grower to manage and maintain their plantation without the introduction of a substitute responsible entity.
There were characteristics of the Forestry Right Deeds that became the subject of dispute between the liquidators and receivers, and influenced the outcome of negotiations over the amount to be allocated for growers out of the proceeds of sale. The grant of the forestry right by Gunns Limited to GPL was ‘to carry out the Permitted Activities’, and conferred ‘all right, title and interest in the Trees’. The term ‘Permitted Activities’, meant ‘establishing, planting, tending, maintaining and harvesting the Trees and carrying out the Project’. The ‘Project’ was the ‘Gunns Plantations Limited woodlot project’ for the relevant year. The ‘Trees’ were defined as ‘the trees grown on the Land forming part of the Project whether in the form of seedlings, trees, logs, timber or otherwise’.
The receivers contended that a forestry right was not assignable unless under and for the purpose of the scheme as defined. Thus, the receivers contended, the landlords were not required consent to an assignment unless for the Permitted Activities. The liquidators contended that Permitted Activities ought to be more generously construed, so as to permit an assignment to a party who might maintain the plantation, although not as part of the Project. The significance to the growers of the receivers’ contention, if correct, was that rights under the Forestry Right Deeds would be worthless. The liquidators contended that grower rights under the Deeds had some value, enhanced by the peppercorn rent payable under scheme documents.
Standstill Agreement
The growers’ position was further threatened because the receivers proposed to terminate the head Forestry Right Deeds with GPL. Grower rights would automatically terminate on termination of the head Deed. Upon termination of the Sub‑Forestry Right Deed, all right, title and interest in the trees grown on the land forming part of the woodlot scheme were deemed to be assigned and transferred to GPL. If the trees then vested in the landowner, the growers would be deprived of any opportunity to recover value from them.
Numerous default notices had issued to GPL on 8 November 2012, for breaches which included the failure to pay rent and maintain the woodlots. The risk of termination was avoided by a Standstill Agreement between the receivers and the liquidators dated 5 April 2013, under which the receivers agreed not to terminate the head Forestry Right Deeds and to maintain the woodlots with the support of the lenders. The total cost incurred by the receivers under various service agreements now exceeds $3 million.
The purpose of the Standstill Agreement was to facilitate an orderly sale of assets. The receivers and liquidators had competing interests. The liquidators had a conflict of their own. As liquidators of the schemes, they were obliged to deal with scheme property as trust property on behalf of scheme members. They were also liquidators of GPL in its own right.
The Standstill Agreement could be terminated in certain circumstances, including the appointment of a replacement responsible entity, or the liquidators’ failure to obtain court approval for the termination of grower rights on or before 24 July 2014. Upon termination the landowners would become entitled to exercise all of their rights under the head Forestry Right Deeds, including termination. There was provision for the extension of the deadline for court approval. The receivers and liquidators indicated that the date will be extended to facilitate the delivery of judgment on this application.
The original Standstill Agreement was terminated, but replaced by a new agreement, following the appointment of a new responsible entity to the 2000 and 2001 schemes. The new Standstill Agreement, dated 19 June 1014, is in essentially the same terms as the original agreement.
Sale Process Agreement
In and between August and October 2013, the liquidators and receivers negotiated the terms upon which the various assets under their control might be offered for sale. Their negotiations concluded with the execution of the Sale Process Agreement dated 24 October 2013. Under that agreement the liquidators had an opportunity to market scheme assets independently of, and without interference by, the receivers. If the liquidators received a binding offer for the trees, the receivers could elect to acquire the trees at the same price. The Sale Process Agreement contained an Allocation Schedule by which the division of proceeds could be calculated. Under the agreement, the liquidators were required to seek and obtain court approval to sell scheme assets. Those directions were made by this Court on 31 May 2013.
During the course of the negotiations over the proposed sale process, the liquidators sought advice on the legal risks associated with the assignability of Forestry Right Deeds. Advice from their solicitors was given orally in about September or October 2013, and reduced to writing on 24 April 2014. It was later supplemented by a written memorandum of advice from senior and junior counsel, dated 3 July 2014.
Gunns Growers also introduced advice from senior counsel on the same topics. The liquidators and Gunns Growers wish to maintain the confidentiality of their respective advice. In such circumstances it is not possible to deal adequately with the competing positions. It is also unnecessary. The advice identified a contentious issue upon which opinions may vary. I am satisfied that there existed a legal risk to grower rights, which the liquidators, quite properly, took into account.
Set out below is the Allocation Schedule. It will be observed that each left hand column represents the ‘Total Proceeds’ from the sale of all assets, including the scheme assets, undertaken by the receivers. Each right hand column represents that part of the price to be paid to the liquidators for scheme assets. The Sale Process Agreement and Allocation Schedule did not purport to apportion the proceeds between schemes or growers. No value was attributed to a price of less than $100 million. It was said that was a price below which the receivers were not willing to sell.
Total Proceeds in Receivers’ Process
Total Offer for MIS assets
1,000,000,000
950,000,000
900,000,000
850,000,000
800,000,000
750,000,000
700,000,000
240,000,000
223,250,000
207,000,000
191,250,000
176,000,000
161,250,000
147,000,000
650,000,000
640,000,000
630,000,000
620,000,000
610,000,000
130,000,000
128,000,000
126,000,000
124,000,000
122,000,000
600,000,000
120,000,000
590,000,000
580,000,000
570,000,000
560,000,000
550,000,000
540,000,000
530,000,000
520,000,000
510,000,000
116,525,000
113,100,000
109,725,000
106,400,000
103,125,000
99,900,000
96,725,000
93,600,000
90,525,000
500,000,000
87,500,000
490,000,000
480,000,000
470,000,000
460,000,000
450,000,000
440,000,000
430,000,000
420,000,000
410,000,000
400,000,000
390,000,000
380,000,000
370,000,000
360,000,000
350,000,000
340,000,000
330,000,000
320,000,000
310,000,000
300,000,000
290,000,000
280,000,000
270,000,000
260,000,000
84,525,000
81,600,000
78,725,000
75,900,000
73,125,000
70,400,000
67,725,000
65,100,000
62,525,000
60,000,000
56,550,000
53,200,000
49,950,000
47,700,000
45,500,000
43,520,000
41,580,000
39,680,000
37,820,000
36,000,000
34,220,000
32,480,000
30,780,000
29,120,000
250,000,000
27,500,000
240,000,000
230,000,000
220,000,000
210,000,000
200,000,000
190,000,000
180,000,000
170,000,000
160,000,000
26,100,000
24,725,000
23,375,000
22,050,000
20,750,000
19,570,000
18,405,000
17,255,000
16,120,000
150,000,000
15,000,000
140,000,000
130,000,000
120,000,00
110,000,000
100,000,000
90,000,000
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
15,000,000
15,000,000
15,000,000
15,000,000
15,000,000
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
The liquidators’ attempt to sell scheme assets under the Sale Process Agreement failed. Accordingly, there was no occasion for the receivers to consider exercising their right to acquire those assets at the sale price.
Business Sale Agreement
In and between November 2013 and April 2014, the receivers conducted a sale campaign. They received 17 indicative non‑binding offers, plus other expressions of interest. Following a due diligence process, they received six final binding offers and, after negotiating with the two highest bidders, reaching agreement with the purchasers recorded in the Business Sale Agreement.
When exercising the power of sale, the receivers were required to comply with duties imposed upon them under s 420A of the Corporations Act and the general law, to exercise all reasonable care when undertaking the sale process to sell the property for its market value, or the best price reasonably obtainable having regard to the circumstances existing when the property was sold.[2] While the Pulp Mill Opportunity had been prominently marketed by the receivers and their agents engaged for the sale, it was not sold to the purchasers under the Business Sale Agreement. The receivers will continue to offer the Pulp Mill Opportunity for sale.
[2]Re Timbercorp Securities Ltd (In Liquidation) [2011] VSC 83; Florgale Uniforms Pty Ltd (Receivers & Managers Appointed) (In Liquidation) v Orders (2004) 11 VR 54 at 82; Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617 at [45].
The sale price of the assets sold by the receivers, including scheme assets, under the Business Sale Agreement was $324 662 748. The portion allocated to the liquidators under the Allocation Schedule was $40 565 922. From that sum is to be deducted GPL’s share of sale costs. The liquidators also claim costs and expenses of nearly $15 million.
The negotiation
The case advanced by Gunns Growers dissected the negotiations between the liquidators and receivers which concluded with agreement on apportionment recorded in the Sale Process Agreement. The starting point was an electronic model prepared by Carlton John Frame, chief financial officer of Gunns Group. Mr Frame had been asked by the receivers to assist in apportioning the proceeds of sale between the different asset groups to be offered for sale. The assets were owned by various entities forming part of the Gunns Group, not a single vendor. The growers, through the liquidators of GPL, would be the vendors of scheme assets. The model employed a discounted cash flow methodology to value the assets. Mr Frame said that the model was not designed to value assets encumbered by managed investment scheme interests, as they were not offered for sale on that basis.
The major groups of assets comprised trees (including scheme assets), land, processing sites, nursery, a fibre technology laboratory and research centre, and the Pulp Mill Opportunity.
The model also employed a number of key assumptions. These were market demand, selling price, foreign exchange rates, an implied land rental, a discount rate and a processing margin. Gunns Growers contended that an implied land rental was inappropriate, because a purchaser would not have been interested in such a concept.
The model was made available to the liquidators and reviewed by them. They obtained the opinion of Campbell Jaski, a partner of PPB Advisory, on the validity of various assumptions, and sought an independent review by URS on the reasonableness of assumptions, material issues that might have been overlooked and any potential errors. Meetings took place between the receivers, URS, Mr Frame and representatives of the liquidators to discuss the model. Mr Jaski identified three assumptions he considered were not reasonable. They were land rental rates, exchange rate and the value of the Pulp Mill Opportunity. He adjusted down land rental, and made adjustments to the model to attribute a value to the pulp mill, above salvage value, only when the sale value of all assets exceeded USD250 million. URS and Mr Jaski identified risks associated with the Pulp Mill Opportunity.
Following the meetings, and after receiving advice from URS and Mr Jaski, the liquidators presented the receivers with a summary of outputs on 11 September 2013. An important assumption made by the liquidators was the assignability of the leases. On the basis of that assumption, they justified a peppercorn rent, instead of a much higher implied commercial rent for the land. Another variation was to the percentage value attributed to the Pulp Mill Opportunity, which appeared to coincide generally with the view expressed by Mr Jaski.
The receivers responded, on 18 September 2013, by advancing a new summary of outputs, to which the liquidators responded. Negotiations continued until agreement was finally reached on 11 October 2013 on the ranges and percentages that were reflected in the Allocation Schedule to the Sale Process Agreement.
The model was an important tool in the negotiation, employed by each side in an attempt to persuade the other of the merits of their respective positions. It provided a common language and platform for the negotiations. When seeking to persuade the receivers of their point of view, the liquidators used the model as a vehicle to press for adjustments based on, among other things, a peppercorn rental and a very low percentage of the value attributed to the Pulp Mill Opportunity.
Before incorporating the schedule into the Sale Process Agreement, Mr Jaski was asked to review the reasonableness of the allocation. He gave his initial advice orally, but it was reduced to writing in a report dated 12 May 2014. Mr Jaski expressed the opinion that the final apportionment, agreed between the liquidators and the receivers, was a fair allocation of the sale proceeds.
Grower contentions
The case advanced by Gunns Growers, in opposition to the liquidators’ application, changed over the course of the hearing. Gunns Growers more than fulfilled the role of contradictor; it advanced an affirmative case of breach by the liquidators of statutory duties owed to the growers. It advanced evidence and cross‑examined Mr Bryant, Mr Jaski and Mr Frame with the object of establishing the breach.
Gunns Growers submitted in opening:[3]
[3]Gunns Growers’ Submissions, dated 15 July 2014, [5]–[10] (citations omitted).
The critical issue before the Court involves an idiosyncratic agreement entered into by the Liquidators and the Receivers to provide an up‑front allocation regarding the value ascribed and payable in relation to assets in a joint sale of the Gunns Tasmanian Forestry Estate, particularly the Scheme trees (referred to as the Value Allocation Schedule, which is contained in Schedule 1 of the Sale Process Agreement). That up‑front allocation deal was anomalous. As the Liquidator properly attests: allocation ‘has generally been undertaken at the time of or after the sale by either the purchaser or an independent valuer’.
The Liquidators should not have deviated from the general way in which value should properly have been attributed to the assets of the Tasmanian Forestry Estate, that is by a valuation provided by the purchaser or an independent expert post‑sale.
In the events that transpired, the inherent deficiencies in the up‑front allocation process, which in itself amounts to a real and substantial ground for doubting the prudence of the Liquidators’ conduct, are borne out, and the Liquidators’ error is revealed and ineluctable. Principal amongst these errors is that the up‑front allocation amount included a significant amount attributable in the joint sale process to the Pulp Mill Opportunity, which ultimately did not form part of the purchase under the Business Sale Agreement entered into, and which, if adjusted to reflect the exclusion of this asset from the sale, would have attributed a significant amount more to the price payable to the Scheme trees. In addition, the up‑front allocation was attended by a number of other substantial errors contained in the value allocation model relied upon by the Liquidators as the basis to negotiate the allocation in the Sale Process Agreement, which errors are set out in the expert report of Craig Taylor.
[Paragraph omitted under claim of confidentiality.]
The Liquidators thereby committed an error of principle, amounting to an error of law that the Court should not approve. Accordingly, Gunns Growers submits that the Court should not grant the Liquidator’s application, as there are real and substantial grounds for doubting the prudence of their conduct.
Finally, the Liquidators’ application should not be granted as it is premature as:
(a)their application is to terminate Growers’ Rights necessary to allow completion of the Business Sale Agreement, which as the Receivers evidence provides, will be only finalised in the next few weeks; and
(b)similarly, the Side Letter Agreement, which the Liquidator seeks order to enter into and perform, will be only entered into following the entry into of a new Business Sale Agreement.
A fair distillation of Gunns Growers’ opening submission revealed two primary complaints. First, the fact of an ex ante allocation agreement; and second, the inclusion within the model of a value for the Pulp Mill Opportunity, and the implied rental for scheme land. By the close of evidence, Gunns Growers’ case had undergone a significant change, with further refinement during the course of closing submissions. In its written outline of closing submissions, Gunns Growers contended:
Gunns Growers submits that the evidence adduced in this application supports the conclusion that by entering into an ex ante allocation with the Receivers regarding the value ascribed and payable in relation to assets in the proposed joint sale of the Tasmanian Forestry Estate (the TFE), including particularly the Scheme trees, without seeking to include mechanisms to ensure that reasonably foreseeable events could be taken into account in a manner that did not prejudice the Scheme Growers, the Liquidators committed an error of principle, amounting to an error of law that the Court should not approve.
Gunns Growers submits that the Liquidators, in conducting themselves in their negotiation with the Receivers, should have had regard to the duties that GPL had to the Growers, principally, to act in the best interests of the Growers, as well as its duties in the winding up. In effect, the Liquidators had no other duties to other creditors in the negotiation to balance against their duties to the Growers: their overriding concern should properly have been the best interests of the Growers.
Accordingly, in exercising their powers and carrying out their duties, the Liquidators were required, without condition, to exercise the degree of care and diligence that a reasonable person would exercise if they were in GPL’s position. The authorities provide that in an application under section 511 of Corporations Act 2001 (Cth) (the Act), the Court may consider commercial issues where there is a matter giving rise not only to the need to make a business or commercial decision, but also to issues of reasonableness of conduct.
…
The ex ante character of the agreement necessarily required the Liquidators to engage in a prediction ex ante of the possible outcomes of the joint sale process. The Liquidators’ duties, when exercised in this manner, that is by entering into a predictive negotiation, required them to act with reasonable care to:
(a)identify and accommodate reasonably foreseeable outcomes and, in particular, those that were clearly not in the best interests of the Growers (whether by reference to the duties of GPL or the Liquidators, as the Growers were the principal creditors); and
(b)take steps to protect the interests of Growers to avoid any adverse consequences reasonably likely to flow from those reasonably foreseeable outcomes.[4]
[4]Confidential Gunns Growers’ Closing Submissions, dated 22 July 2014, [1]–[3] and [5] (citations omitted).
Gunns Growers no longer contended that the ex ante agreement was imprudent or unreasonable, but that the liquidators had failed to act with reasonable care and in the best interests of the growers:
First, for the reasons set out below and based upon the evidence, the Liquidators knew or should have known, if they had exercised reasonable care in considering the advice in fact received from experts retained by them and by making proper inquiries, that there was a real and substantial risk that the sale would not include one of the eight asset classes.
A reasonable Liquidator would have understood that the risk was most plain in relation to the Pulp Mill Opportunity (the PMO), that is that it was reasonably foreseeable that the Receivers might sell either but not both of the PMO or the Processing Sites. In fact, the non-sale of the PMO eventuated. Accordingly, this is not a matter of viewing the outcome with the benefit of hindsight; the non-sale of the PMO was readily foreseeable at the time the Liquidators agreed to the Value Allocation Schedule. [Sentence omitted under claim for confidentiality.]
Second, the failure to take into account the possibility of non-sale of one of those assets or asset classes disproportionately impacted the Growers. [Sentence omitted under claim for confidentiality.] Gunns Growers does not rely on the Taylor Report strictly to show ex-post the loss by reference to the events that transpired by taking into account the one scenario of the sale at $330M: it is understood that the parties were engaged in an ex ante prediction of the future sale by reference to a number of prices in relation to the eight assets, and apportioning on a percentage basis between the two parties on that final sale price. [Sentence omitted under claim for confidentiality.] The fact that it was the PMO in the end that was not sold only supports a finding that a reasonable Liquidator, with the information available at the time, would have negotiated, or at least attempted to negotiate, with the Receivers for a mechanism for apportioning value where one of those assets was not sold.
Third, what the Liquidators should have done is not onerous. Having regard to the real and foreseeable possibility that one asset class would not be sold and the significant impact upon the Growers, the Liquidators should have negotiated a method for an apportionment on the clear assumption that one asset was not sold or resisted an ex ante agreement on asset allocation. Schedule 1 of the Sale Process Agreement contains a table with two columns; the amounts in those columns are derived by reference to a percentage attributable to the eight asset classes underpinning the Value Allocation Model. The Liquidators should have insisted upon a further column, which contained the percentages apportioned to those assets. In the event that one asset was not sold, the amount for the MIS Assets would have been easily adjusted by decreasing pro rata the other amounts.[5]
[5]Confidential Gunns Growers’ Closing Submissions, dated 22 July 2014, [7]–[10] (citations omitted). Paragraphs and sentences omitted by agreement between the parties.
In his final address, senior counsel for Gunns Growers advanced what he described as the ‘core’ of their submission: the liquidators had failed to advance, during their negotiations with the receivers, a proposal that the Pulp Mill Opportunity be removed as an asset from the value allocation model if not sold by the receivers.
Gunns Growers contended that the liquidators knew that there was a possibility, even likelihood, that some assets, or asset categories, may not be attractive to particular purchasers. They drew attention to the offer documents prepared by the receivers in which they made it clear that a purchaser may bid for only some of the assets. In a report dated 6 September 2013, URS noted that the perceived value of the pulp mill was substantially influenced by the owners’ capacity to secure access to scheme trees.
Gunns Growers contended that the URS opinion reinforced the liquidators’ duty to at least attempt to change the course of the negotiations.
The liquidators did not contradict Gunns Growers’ contention that they were aware of the possibility that any asset may be excluded by a purchaser from a sale. The evidence revealed that they were aware of such a possibility, as were the receivers, and it was factored into the negotiating process. The liquidators conceded that during negotiations they did not advance a proposal that the value allocation model should be adjusted by the removal of any value attributed to the Pulp Mill Opportunity, or unsold asset.
Gunns Growers did not contend that the liquidators were obliged to procure agreement from the receivers. The breach, they alleged, lay in the liquidators’ disregard of grower interests by their failure to advocate for the change. By so confining their allegation, Gunns Growers sought to accommodate the difficulties inherent in challenging a process of negotiation which necessarily involved more than one advocate. After all, the receivers might not have agreed to the proposal. In theory, at least, according to Gunns Growers, the liquidators would have discharged their duty even though failing to achieve their objective. But Gunns Growers wanted more.
The outcome, which Gunns Growers hoped might be achieved, was a direction from the Court that the negotiations between the liquidators and receivers be reopened and proceed on a footing that would have a substantial transfer of the value of the Pulp Mill Opportunity to scheme assets. Gunns Growers contended that the contribution to the value of the scheme assets, resulting from that adjustment alone, could be in the order of $20 million.
Gunns Growers relied on a report prepared by Craig Taylor, dated 10 July 2014, to support their case. He argued that the value allocation model ought to be adjusted to remove the unsold asset and reallocate its value, and remove or substantially reduce an implied rent. Put simply, Mr Taylor engaged in reverse engineering. He applied the actual purchase price to a static version of the model, which he described as the ‘base case’ with particular settings for input assumptions. He then eliminated the price allocated to the Pulp Mill Opportunity, of around $50 million, at the selected level of purchase price. He also reduced the implied rental to zero, or a peppercorn rent of $1 per hectare plus 5 per cent of harvest proceeds payable under the scheme documents. As a consequence, the value attributed to the land was reduced from approximately $72 million to between around $20 million and $6 million. Having made those adjustments, and distributed the value across other assets, he arrived at a value of the scheme assets of approximately $100 million. Various tables were prepared by Mr Taylor to demonstrate the impact upon the value attributable to scheme assets when the value of the Pulp Mill Opportunity was reduced to nil.
Four witnesses were cross‑examined on this topic. One of the liquidators, Mr Bryant, was cross‑examined by Gunns Growers and Mr Burdon, as was Mr Jaski and Mr Frame, who developed the price allocation model. Mr Frame gave evidence on behalf of the receivers in support of the liquidators’ application. Mr Taylor was cross‑examined by the receivers and liquidators.
The evidence given by Mr Frame under cross‑examination was helpful in explaining the purpose and utility of the model. He explained how the model had been employed during the course of the negotiations, by the manipulation of input data. He said that because there were different owners of assets, ‘we wished to use the model as a tool, if you like, a starting point to apportion the relative values of those assets that the different owners were vending into the sale process’.
Mr Frame said that the Pulp Mill Opportunity was one such asset. As an opportunity, it was valued on a discounted cash flow basis to establish what someone may be prepared to pay for that opportunity. Without a real cash flow, however, earnings were no more than projections. It was not valued on the basis of historical cost.
Mr Frame conceded that, as an opportunity, the pulp mill required a substantial source of timber to be viable. While viability depended upon feedstock, the ownership of feedstock in different hands would not necessarily diminish its value. Mr Frame said that the fact that it had not been sold in the first instance did not mean that it lacked viability as a project and was unattractive to a buyer.
Mr Frame rejected Mr Taylor’s approach. He said:
The model when it was originally prepared wasn't prepared with a base case. It was always intended to be a range based model where there were the various parameters around the key assumptions that we have discussed and those assumptions will spit out, if you like, a whole range of permutations of value against that backdrop of value ranges. So I think what Mr Taylor has done is he has used one specific scenario out of about 300 scenarios and used that as the base case. That is certainly not the intention of the original model, to start with a base.[6]
[6]Transcript, 17 July 2014, page 117, line 28 to page 118, line 7.
Mr Burdon’s primary complaint was the failure of the sale process undertaken by the receivers, and the valuation model, to have proper regard to the enhanced value of timber on his ‘Option 2’ woodlots. The trees grown under Option 2 were intended for high‑value products such as furniture and veneer. The growers incurred additional costs for pruning and thinning, and the duration of the growing cycle was much longer. Mr Burdon had assumed that the Option 2 woodlots comprised around 13 per cent of the scheme assets. The evidence disclosed that it was only around 3 per cent.
The information made available to potential purchasers by the receivers included information about the Option 2 woodlots and the potential use of the timber. I am satisfied that the purchasers had an opportunity to take into account the enhanced value of such woodlots. After all, the purchasers were not unfamiliar with the industry and the assets prior to the bidding process. There was a data room of information for potential purchasers and a due diligence period. Mr Burdon’s contention that his Option 2 woodlots should attract a higher value than those intended for pulp, may be a relevant matter to take into account when the net proceeds in the hands of the liquidators are to be apportioned between schemes and growers.
Relevant principles
While there was no dispute between the parties in relation to the legal principles, the receivers and liquidators sought to emphasise the constraints upon a court interfering with the exercise of commercial judgment.
The authorities provide that, while the courts will generally defer to the commercial judgment of liquidators, they do not act as a rubber stamp. From time to time, the court is necessarily drawn into a consideration of propriety or reasonableness of liquidators’ conduct, or an allegation of bad faith, error of principle or law, or other vitiating circumstances.
In Re Timbercorp Securities Ltd (No 4),[7] the liquidators sought orders and directions that they were justified in procuring the responsible entity to enter into and perform certain sale and purchase deeds and extinguish growers rights. An application was brought under s 1321 of the Corporations Act by an individual to prevent the sale and purchase agreement with the second and third plaintiffs. Croft J cited with approval a passage from the judgment of Austin J, in Corporate Affairs Commission v ASC Timber Pty Ltd:[8]
If it were the Court's function to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal and to substitute its determination for his in, as it were, a hearing de novo, then a much more substantial evidentiary and investigatory process would be needed than has been embarked upon so far in the present proceedings. However, if the Court's function in granting approval under s 477(2)B is simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety and weighing up whether there was any good reason to intervene in terms of the expeditious and beneficial administration of the winding up, approval can be granted in rather more circumscribed proceedings. On the latter view the Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter.
…
The court does not rubber stamp whatever is put forward by the liquidator, but the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.
[7][2009] VSC 530.
[8](1998) 29 ACSR 109 at 118.
In Re Ansett and Mentha,[9] Goldberg J stated:
The court will generally defer to the commercial judgment of liquidators and administrators.
[9](2001) 39 ACSR 355, [65].
In Re Spedley Securities Ltd (in liq),[10] Giles J said:
In any application pursuant to s 377(1) [equivalent to Corporations Act s 477(2A)] the court pays regard to the commercial judgment of the liquidator: Re Chase Corp (Australia) Enquities Ltd (1990) 8 ACLC 1118. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231–2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis.
[10](1992) 9 ACSR 83, [85]–[86].
Put shortly, it is not the role of the court to substitute its own commercial judgment for that of liquidators or administrators. The court is not qualified to do so and it is not part of the judicial function. Street CJ emphasised this limitation in Re Mineral Securities Australia Ltd (in liq):[11]
When the court is required to pronounce upon the commercial prudence of a transaction, it enters upon a slippery and uncertain field. Apart from the lawyer’s disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence restrict the available material to far less than is necessary for the making of a commercial decision.
[11][1973] 2 NSWLR 207 at 232.
The receivers and liquidators emphasised the inherent difficulty confronting a court, on an application such as this, when invited to investigate the course of negotiations between the receivers and the liquidators resulting in the Sale Process Agreement and its important schedule. At one point the liquidators contended that Gunns Growers had assumed an evidentiary burden to persuade the Court of an error of law or principle on the part of the liquidators.
I am not persuaded that contradictors on an application by liquidators under s 511 of the Corporations Act, assume any such burden. No authority was advanced to support the proposition. Gunns Growers was not a party to the proceeding. The liquidators were seeking the exercise of discretion under s 511, to give of a direction that they were justified in selling the scheme assets pursuant to the Sale Process Agreement, the Business Sale Agreement and the Deed of Surrender. A direction to that effect will not be made if the Court is satisfied that there is an error of law or principle, or there are real or substantial grounds for doubting the prudence of the liquidators’ conduct, or suspecting bad faith or impropriety. Such an assessment would not ordinarily impose upon a contradictor an evidentiary burden to establish some particular breach of duty or error of principle. Circumstances may arise, however, in which a contradictor, such as Gunns Growers, assumes an obligation to give notice of an affirmative case. The circumstances of this case provide an example where such an obligation might have arisen had the liquidators required notice and an opportunity to respond.
Liquidators justified
While Gunns Growers abandoned its initial complaint that the ex ante agreement was idiosyncratic, something must be said about what it described as a departure from conventional practice. In my opinion, there were sound reasons for the liquidators to attempt agreement in advance of sale of all assets. The sale of all assets would inevitably be under the control of the receivers. It made eminent sense for those with an interest in the sale of Gunns Group business assets to ensure that they be sold together. As the liquidators observed, to defer price allocation until after a sale may disadvantage growers in a negotiation.
There were a number of risks for growers, not the least of which was the bias that may arise from buyer price allocation. While agreement in advance may introduce complexity, as demonstrated in this case, it also encouraged and motivated the joint aspiration of the liquidators and receivers to obtain the highest possible price across the basket of assets.
Having decided to reach agreement in advance, the use of a dynamic model, such as that designed by Mr Frame, was entirely logical. It proved a useful tool in the negotiation.
Turning to the narrow allegation of breach of duty, there is no substance to Gunns Growers’ contention, that the liquidators’ failure, in the course of their negotiations with the receivers, to advance a proposal that the model and Allocation Schedule should be adjusted in the event the Pulp Mill Opportunity, or some other asset group, was not sold by the receivers, involved a breach by the liquidators of a statutory duty owed to the growers. The notion that a party to commercial negotiations might breach a statutory duty by failing to advance, in the course of negotiating advocacy, a particular proposition for consideration by the opposite party, is arresting. Commercial negotiations are often finely balanced tactical exchanges, conducted against a complex background of known and unknown facts. Risks are assessed and positions advanced in order to achieve an advantage. All of those features were present in this case. The outcome sought by the liquidators was to maximise the return to growers.
The negotiations might have been conducted differently. I am satisfied, however, that the liquidators negotiated in the best interest of growers. They acted prudently. They relied on internal and independent expert advice to verify and manipulate the model and the ultimate allocation agreed with the receivers.
Gunns Growers’ allegation of breach failed on other grounds. The very topics which Gunns Growers contended should have prompted the liquidators to at least attempt to change the course of the negotiations, were not overlooked by them. The allegation of breach was predicated on the possibility that one or more asset or category of assets might not be attractive to a purchaser. But the liquidators and receivers well understood that possibility and elected to sell the basket of assets as a whole in the hope that it would attract the highest value for the whole.
Gunns Growers seemed to assume that there would only be one sale and one buyer. The receivers and liquidators did not. Gunns Growers assumed that a sale of the processing sites, from which woodchip was exported, would diminish the value of the Pulp Mill Opportunity to ‘salvage’. That was also understood by the liquidators, and factored into their negotiation. Moreover, a buyer for the Pulp Mill Opportunity may still be found. Mr Frame was an advocate for the value of the opportunity.
Gunns Growers argued that the failure of the receivers to sell the Pulp Mill Opportunity in the period since the other assets were sold confirmed the validity of their primary contention, that the liquidators ought to have advanced the proposal to the receivers for an adjustment to the model in that event. That observation was, of course, made with the benefit of hindsight. It was also made in the absence of any real examination of the value of the opportunity to a new and different buyer, or to the purchaser under the Business Sale Agreement, should economic circumstances change. The evidence did not address the range of possibilities that might give value to the processing site and a pulp mill.
The case advanced by Gunns Growers misunderstood the model. The misunderstanding was reflected in the opinions of Mr Taylor. Gunns Growers and Mr Taylor adopted a blinkered view of the model which overlooked its limited purpose.
The model was designed to allocate a range of values to a basket of assets. It was not intended to attribute realisable value. It was a dynamic model, unsuited to the use made of it by Mr Taylor. Its purpose was to facilitate the allocation of a sale price between groups of assets, with a variety of owners, without knowing precisely what the price would be. While it employed a discounted cash flow methodology, the introduction of variables enabled those manipulating the model to plot a range of outputs that could then be used to inform commercial negotiations. It was not designed or used to provide the allocation.
The receivers had a price below which they would not sell. There was also a range within which the receivers and liquidators thought a sale might be likely, although there was the hope that a higher price may be obtained which would result in increased allocations to all groups of assets. It was not a valid or meaningful use of the model to reverse engineer, as Mr Taylor did, once the actual sale price was known. Mr Taylor stripped from a static version of the model the notional value allocated to the Pulp Mill Opportunity, and redistributed that value over other assets.
Gunns Growers also disregarded the legal risk to grower entitlements. That was a prominent factor in the negotiations between the liquidators and receivers. The receivers were contending that grower interests were valueless, while the liquidators asserted value. The primary issues concerned the assignability of leases and the inability of growers to realise any value upon termination of the leases. The liquidators, quite properly, sought advice, orally and in writing, from their solicitors and subsequently from senior and junior counsel. Gunns Growers advanced opinions from senior counsel on the question of assignability. The advice exposed a contentious issue on which opinions may differ on various aspects of scheme documents. It was entirely appropriate that the liquidators had regard to those legal risks when negotiating with the receivers and ultimately reaching agreement.
The significance of such risk factors in a commercial negotiation would be influenced by information about market conditions for similar sales. The recent collapse of managed investment schemes, many of which involved tree plantations, provides a rich source of such information. There have been other sales, in similar distressed circumstances, supervised by the courts. The legal and other risks faced by growers, seeking to claw back some value from their investment, have been identified time and again in reported cases. It is surprising that Gunns Growers ignored such risks. The tension between landowners and growers’ rights is notorious.
In a report prepared by URS, dated 31 October 2013, the author compared valuations of scheme assets based upon different implied rentals. Mr Taylor seized on a valuation that assumed a notional land rental cost, resulting in a range of values that roughly coincided with his valuation of approximately $100 million. But URS made a further adjustment, to take account of recent transaction evidence from the realisation of scheme property in other cases, concluding:
Based on our analysis of these transactions we applied an additional discount of [figures omitted under claim for confidentiality] to the DCF values to be consistent with other transactions for assets most like the GPL estate.
Gunns Growers did not call for the author of the URS report to attend for cross‑examination, but criticised the opinion as unsubstantiated. The significance of the URS observations in the present case was not whether the additional discount had been correctly calculated, but that Gunns Growers and Mr Taylor had no regard to such factors at all.
Ultimately, the Allocation Schedule to the Sale Process Agreement was the product of an informed negotiation between the receivers and the liquidators. The liquidators sought to employ the model, with adjustments made by them, as a tool to persuade the receivers, to accept an increase in the percentage allocation in favour of scheme assets. Over the course of the negotiation, the liquidators achieved a substantial increase in the value allocation to scheme assets.
The challenge advanced by Gunns Growers was a good example of the difficulty confronting a court, on an application made under s 511 of the Corporations Act, when asked to investigate the exercise of commercial judgment. Gunns Growers attempted to dissect the negotiation process. It would also have the Court direct the liquidators and receivers to reopen the negotiations and proceed to reach agreement on a different footing. Such a course would be an impermissible exercise of power.
Gunns Growers advanced a case against the liquidators, which first found expression during the course of cross‑examination, and was developed in final submissions. It alleged a serious breach of duty owed by the liquidators to the growers as a basis upon which to persuade the Court to reject the outcome of the value allocation schedule and, in effect, substitute new negotiating parameters.
In my opinion, if a party given leave to appear on an application such as this, wishes to advance a positive case of breach of statutory duty against a liquidator, there may be circumstances in which it is appropriate to require the party to give adequate notice of the allegations to the party against whom it is made. Gunns Growers argued that it only became aware of the basis for its allegation of breach of statutory duty when, under cross‑examination, Mr Bryant conceded he did not suggest to the receivers that the Allocation Schedule be adjusted in the event an asset remained unsold. I do not accept that Mr Bryant’s evidence relieved Gunns Growers of a duty to give prior notice to the liquidators of a serious allegation of breach of statutory duty. The allegation was capable of formulation well in advance of the hearing. After all, the liquidators conceded, and indeed relied upon, their awareness of a risk that the Pulp Mill Opportunity may not be attractive to a particular category of purchaser. The mercurial case advanced by Gunns Growers would not have been tolerated in conventional adversarial proceedings, and should not be encouraged in an application for directions under s 511 of the Corporations Act.
The liquidators might have, but did not object to Gunns Growers advancing such a case, although drew attention to its changing nature. They were content to respond to the allegation of a breach of statutory duty on the material before the Court. In a different case, an adjournment might be warranted to prevent an injustice
Conclusion
I am satisfied that the process of negotiation between the receivers and liquidators, based upon their manipulation of the model, was arm’s‑length, robust and produced a commercially justifiable agreement. The fact that all assets offered for sale by the receivers were not sold in the first instance to the buyers under the Business Sale Agreement is beside the point. A sale of the Pulp Mill Opportunity, or of the land and any infrastructure at ‘salvage value’, may yet take place. If it does, there will be a further payment to the liquidators, for the benefit of the growers. Even if there is no sale of the opportunity, the negotiation and agreement is not undermined. That was in the contemplation of the negotiation parties.
Notwithstanding the wide‑ranging challenge advanced by Gunns Growers, involving a dissection of the negotiation process, cross‑examination of witnesses and vigorous attack on the liquidators, I am not persuaded of any breach, impropriety, error of principle or law or other factor which undermines or vitiates the integrity, reasonableness or commerciality of the decision by the liquidators to enter into the Sale Process Agreement and Side Letter Agreement.
I will make orders generally in terms of paragraphs 2 to 4 inclusive of the Amended Interlocutory Process.
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