Re Traditional Values Management Limited (In Liquidation)

[2010] VSC 339

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

LIST E
No. 3539 of 2010

IN THE MATTER of TRADITIONAL VALUES MANAGEMENT LIMITED
(IN LIQUIDATION) (ACN 055 106 100)

GEOFFREY NIELS HANDBERG AND BRENT LEIGH MORGAN (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF TRADITIONAL VALUES MANAGEMENT LIMITED (IN LIQUIDATION) (ACN 055 106 100))	First Plaintiffs
and
TRADITIONAL VALUES MANAGEMENT LIMITED (IN LIQUIDATION) (ACN 055 106 100)	Second Plaintiff

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JUDGE:	Davies  J
WHERE HELD:	Melbourne
DATE OF HEARING:	10 August 2010
DATE OF JUDGMENT:	10 August 2010
CASE MAY BE CITED AS:	Re Traditional Values Management Limited (In Liquidation)
MEDIUM NEUTRAL CITATION:	[2010] VSC 339

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CORPORATIONS – Managed Investment Scheme – Winding up – Where managed investment scheme not viable – Where purpose of scheme cannot be accomplished – Whether just and equitable to wind up scheme – Corporations Act2001 (Cth) s 601ND.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr. J Moore of Counsel	Mills Oakley

HER HONOUR:

1. The first plaintiffs (“the liquidators”) are the joint and several liquidators of Traditional Values Management Limited (in liquidation) (“TVM”). TVM is the responsible entity of the registered unlisted managed investment scheme known as Blue Diamond Deposits Trust Number 1 (“BDT scheme”). The liquidators in their capacity as liquidators of TVM have applied under s 601ND of the Corporations Act 2001 (Cth) (“the Act”) for an order directing TVM to wind up BDT on the “just and equitable” ground. The application is not opposed by any member of the scheme and ASIC has indicated that it neither consents nor opposes the making of the order. For the reasons set out below I consider that the order should be made.

1. The BDT scheme was established on 26 September 2003 as a  mortgage and income fund.  

1. Members of the public subscribe to the scheme by way of the purchase of units in a unit trust.  Each unit entitles the unit holder to a proportionate beneficial interest in the trust fund and to quarterly payments of the net income of the trust fund.  The net income of the trust is derived principally from interest on loans that TVM makes using the subscription funds.  Unit holders may redeem their units at any time on a maximum of 60 days notice. Currently there are 378 unit holders.  The average amount invested by each unit holder was $60,000.

1. The Product Disclosure Statement represented to investors that TVM aimed to provide investors with an attractive return on their unit holding and that they would enjoy the benefits of “above market returns”, the “flexibility of having the funds available at short notice” and “quarterly income distributions”.

1. The liquidators were appointed to TVM on 3 February 2010 at a meeting of TVM’s creditors on the recommendation of the liquidators in their then capacity as administrators of the company.  TVM is insolvent.  Since their appointment they have carried out a number of investigations into the affairs of TVM and the BDT scheme.  Shortly stated those investigations have revealed that:

(a)       the BDT scheme has a large number of non performing loans and has suffered heavy losses;

(b)      quarterly income distributions to investors have not been paid since December 2008 and there is no likely prospect that quarterly income distributions will be made in the foreseeable future;

(c)       unit redemption requests have been frozen since February 2009 due to lack of funds.  There is no likely prospect that the BDT scheme will have sufficient assets in the foreseeable future to pay out unit holders.  The likely return to unit holders is estimated currently to be up to $0.27 for each dollar invested by unit holders before the costs of winding up;

(d)       the BDT scheme has not accepted new unit holder funds or issued any new units since January 2009 and does not have further funds to lend in the market;

(e)       there are a number of matters about way in which the scheme was administered that require investigation and which, if investigated, may lead to recovery of scheme assets for the benefit of investors.

1. It is the view of the liquidators in light of these facts that the purpose of the BDT scheme cannot be accomplished.

1. Section 601ND of the Act is in the following terms:

601ND Winding up ordered by Court

(1)The Court may, by order, direct the responsible entity of a registered scheme to wind up the scheme if:

(a)the Court thinks it is just and equitable to make the order; or

(b)within 3 months before the application for the order was made, execution or other process was issued on a judgment, decree or order obtained in a court (whether an Australian court or not) in favour of a creditor of, and against, the responsible entity in its capacity as the scheme’s responsible entity and the execution or process has been returned unsatisfied.

(2)An order based on paragraph (1)(a) may be made on the application of:

(a)       the responsible entity; or

(b)       a director of the responsible entity; or

(c)       a member of the scheme; or

(d)      ASIC.

(3)An order based on paragraph (1)(b) may be made on the application of a creditor.

1. Recently the Court of Appeal in Capelli v Shepard and Others[1] concluded that a registered scheme may be wound up on the “just and equitable” ground in s 601ND(1)(a) of the Act where the liabilities referrable to the scheme cannot be satisfied as they fall due from its income or readily realisable assets. The Court stated:

   [1](2010) 264 ALR 167.

[102] The winding up of schemes on the “just and equitable” ground in s 601ND(1)(a) of the Act is derived from a traditional ground for winding up in corporations law. Although the just and equitable ground in corporations law originally tended to be confined to categories established by precedent, the House of Lords’ decision in Ebrahimi v Westbourne Galleries Ltd established its broad and ambulatory character. It confers a very wide discretionary power, which is applicable both in established and novel contexts. The situations which have characteristically invoked the application of the just and equitable ground in corporations law include, (relevantly to the present case) the breakdown of the parties’ fundamental trust and confidence in a corporate quasi-partnership; the exercise of powers in a way entirely outside the parties’ original contemplation; deadlock; and failure of the substratum of the enterprise, in the sense of conduct entirely outside the general intention and common understanding of the members when they became members.

[103] In Strong v J Brough & Son (Strathfield) Pty Ltd, Young J stated:

… [I]f a company is formed for one purpose and one purpose alone, and if that purpose is accomplished, or, alternatively, if its accomplishment has become impossible, then the shareholders are entitled to a winding up and a return of their investment.

[104] 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. (references omitted)

1. I am satisfied on the basis of the unchallenged evidence that the BDT scheme is not viable and that 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.  TVM 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 quickly 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.

1. In the circumstances I will make an order under s 601ND(1) of the Act.

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