RUNDELL as Trustee for Palermo Unit Trust, MM Trust, Time Trust, Metro Trust, Parkfield Trust, Riverside Trust, Murray Trust, Timewize Trust, River Trust and River Gem Trust -v- REGISTRAR of TITLES
[2014] WASC 230
•27 JUNE 2014
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: RUNDELL As Trustee for Palermo Unit Trust, MM Trust, Time Trust, Metro Trust, Parkfield Trust, Riverside Trust, Murray Trust, Timewize Trust, River Trust and River Gem Trust -v- REGISTRAR OF TITLES [2014] WASC 230
CORAM: CHANEY J
HEARD: 25 JUNE 2014
DELIVERED : 27 JUNE 2014
FILE NO/S: CIV 1757 of 2014
BETWEEN: PHILIP MILTON RUNDELL As Trustee for Palermo Unit Trust, MM Trust, Time Trust, Metro Trust, Parkfield Trust, Riverside Trust, Murray Trust, Timewize Trust, River Trust and River Gem Trust
Plaintiff
AND
REGISTRAR OF TITLES
Defendant
Catchwords:
Trustees - Directions - Proposed sale of trust assets - Sale to associate of beneficiary - Beneficiaries in dispute - Whether sale in best interests of beneficiaries and trust estate
Legislation:
Trustees Act 1962 (WA) s 92
Result:
Directions sought by plaintiff should be made
Category: B
Representation:
Counsel:
Plaintiff: Ms K F Banks-Smith SC
Defendant: No appearance
Anthony Palermo (First Interested Party) : Mr C Colvin SC
John Palermo (Second Interested Party) : Mr K L Christensen
Solicitors:
Plaintiff: William & Hughes
Defendant: No appearance
Anthony Palermo (First Interested Party) : Rockwell Olivier
John Palermo (Second Interested Party) : Gaden Lawyers (WA)
Cases referred to in judgment:
Breen v Williams [1996] HCA 57; (1996) 186 CLR 71
Northwest Capital Management v Westate Capital Ltd [2012] WASC 121; (2012) 264 FLR 424
Re Coopers & Allens (1876) 4 Ch D 802
Re the Palermo Unit Trust; Ex parte Philip Milton Rundell (as Trustee For Various Trusts) [2014] WASC 69
Richard V Mackay (1997) 11 Tru LI 23
CHANEY J: This is an application for directions pursuant to s 92 of the Trustees Act 1962 (WA). The directions sought are to the effect that the plaintiff is justified in completing contracts for the sale of land held by him in his capacity as trustee of various trusts, and is justified in applying the proceeds of the sale of two of the properties in reduction of the debt of a related company to the National Australia Bank (NAB). The plaintiff also seeks consequential orders as to the acceptance by the Registrar of Titles of transfer of land instruments executed in a specified way.
The plaintiff, Mr Rundell, was appointed as the independent trustee of a number of trusts pursuant to orders of the Master made on 25 September 2013. The trusts in respect of which Mr Rundell was appointed trustee include the Palermo Unit Trust, the Time Trust, the Parkfield Trust, the Metro Trust, the Riverside Trust, the MM Trust, the Murray Trust, the Timewize Trust, the River Trust and the River Gem Trust. The trusts are all discretionary trusts, save for the Palermo Unit Trust.
The beneficiaries of the trusts are brothers John Palermo and Anthony Palermo, and interests associated with them. For convenience, I will refer to those beneficiaries as John and Anthony respectively. The contracts of sale in respect of which the directions are sought are for the sale of various properties held within various trusts to a company called Jolida Investments Pty Ltd (Jolida), which is a company associated with John. Anthony opposes the sales and the making of the directions sought by Mr Rundell in these proceedings.
This is the second time that the trustee has sought the Court's sanction to enter into agreements for the sale of land owned by the various trusts to entities associated with John. The previous application, which was heard on 26 February 2014, considered an offer by entities associated with John to purchase some 25 separate properties for a purchase price of $11.267 million (the December offer). The offer the subject of this application is different from the December offer.
On 10 March 2014, I delivered reasons declining to make the directions sought in the previous application (March Decision).[1] I observed in that decision that the relationship between John and Anthony had completely broken down and that they, or associated entities or family members, are engaged in extensive litigation in this and other courts. It is clear that the position has not changed since that decision was published.
[1] Re the Palermo Unit Trust; Ex parte Philip Milton Rundell (as Trustee For Various Trusts) [2014] WASC 69.
The function of the Court
It is accepted by all parties that the Court has the jurisdiction under s 92 of the Trustees Act to make the directions sought. There was also no issue between the parties as to the principles to be applied. It is important to bear in mind that the Court is not being asked to exercise the trustee's discretion itself.[2] As Millet J said in Richard v Mackay, the function of the court
is to ensure that the proposed exercise of the trustee's powers is lawful and within power and does not infringe the trustee's duty to act as ordinary, reasonable and prudent trustees might act, but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of the beneficiaries or the trust estate.[3]
[2] Thomas on Powers, 2nd ed, Oxford University Press, [11.76].
[3] Richard V Mackay (1997) 11 Tru LI 23, 24 (Millet J).
The duties of a trustee include the duty to act in the best interests of the beneficiaries,[4] the duty to exercise the same care as an ordinary, prudent person of business would exercise in the conduct of his or her own business,[5] the duty to sell the estate to the best advantage of the beneficiaries that they can,[6] and the duty to be impartial as between beneficiaries.[7]
[4] Trustees Act 1962 (WA) s 19(1)(c).
[5] Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, 137 (Gummow J).
[6] Re Coopers & Allens (1876) 4 Ch D 802, 815 (Jessel MR).
[7] Northwest Capital Management v Westate Capital Ltd [2012] WASC 121; (2012) 264 FLR 424 [295] (Edelman J).
The contracts
The offers in respect of which approval is sought in the present proceedings involve Jolida purchasing 14 properties currently owned by various of the trusts. The properties concerned are contiguous (except to the extent that they are separated by roads) and are referred to by the parties as the Flats properties. They are situated south‑west of the town site of Pinjarra. Twelve of the properties are mortgaged to the NAB to secure a debt owed by the previous trustee of the Palermo Unit Trust, Tomar Pty Ltd (Tomar). In relation to the other two properties, one is owned by the MM Trust, and the other is owned by the River Gem Trust. Those other two properties are unencumbered.
The purchase price for the 14 properties is $8.475 million. It is proposed that the whole of that purchase price will be applied in reduction of the debt to the NAB. The NAB has agreed to discharge its mortgages over the 12 encumbered properties on receipt of the $8.475 million, despite the fact that will leave a shortfall in payment of the whole NAB debt.
The prices allocated to the various lots under the present offer are, with one exception, the same as the prices to be paid in respect of those lots in the December offer. In order to utilise the transfer duty assessments that were obtained in relation to the sales contracts associated with the December offer, those contracts were utilised in the present offer subject to some variations which are set out in a deed of variation dated 30 May 2014. The deed of variation varies the sales contracts so as to:
•change the settlement date,
•remove the subject to finance clause,
•vary the price of one of the sale contracts to include an increased selling price for one of the sale properties,
•provide that any and all compensation claims remain with the trustee for him to pursue for the benefit to the beneficiaries of the relevant trusts,
•make the sales contracts interdependent with each other,
•make the sales contracts subject to and conditional upon subordination of creditors of the MM trust which are controlled by John to the claims of all other creditors (including creditors controlled by Anthony) that are to be paid from further realisations of the assets of the MM trust, and
•impose on the buyer an obligation to pay the trustee's costs of the present action.
The Opteon valuation report
In January 2014, Mr Rundell obtained a valuation report from a Mr Ray Codalonga, a director of Opteon (Western Australia) Pty Ltd, as to the value of the land owned by the trusts which was the subject of the December offer (January Opteon report). Because that valuation specified a period of three months as the period within which the report could be relied upon, Mr Rundell obtained an updated valuation report dated 16 May 2014 (May Opteon report) for the purpose of considering the offers from Jolida. The May Opteon report valued the lots on four different bases. They were a per lot market value ($10.97 million), a per lot distress sale value ($8.784 million), a single parcel market value ($7.5 million) and a single parcel distress sale value ($6.375 million).
Prior to receipt of the May Opteon report, Mr Rundell commissioned another valuer to provide a desktop review of the January Opteon report. That desktop review described the methodology and rationale of the January report as generally sound and consistent, and considered that the evidence contained in the report appeared to represent a fair range of market evidence. It also considered the selling period utilised by Opteon for a single parcel sale to be realistic. The May Opteon report substantially reflected the methodology and opinion as to value in the January Opteon report.
The trustee's reasons for supporting the sale to Jolida
In an affidavit sworn on 22 January 2014, which was filed in relation to the proceedings concerning the December offer but also relied upon in the current proceedings, Mr Rundell explained that:
•the former trustee of the Palermo Unit Trust, Tomar, was indebted to the National Australia Bank in an amount which was, at that time, $9.75 million;
•Tomar was in default in respect of that loan;
•NAB had appointed receivers to Tomar;
•the former trustees of the trusts (that have a right of indemnity to the assets of the trusts) are all sureties for Tomar in respect of Tomar's debt, together with Anthony and John personally;
•The income generated by the properties was substantially inadequate to meet the servicing needs of the NAB debt;
•he did not have funds at his disposal to service the NAB loan; and
•NAB was threatening to appoint receivers to all of the trusts properties that are mortgaged to secure the Tomar debt.
Since the March decision, Mr Rundell has continued to liaise with NAB and with its solicitors. On 4 April 2014 NAB, through its solicitors indicated that it was prepared to forebear further enforcement rights on the basis that the proposed sale of the Flats properties to Jolida proceeds and a substantial payment was made by John in relation to fees and interest on the Tomar facility. The letter threatened that if payment was not made in accordance with a timetable set out in the letter, the bank reserved its rights to take action under its securities.
Mr Rundell said, however, that NAB had agreed that it would discharge its mortgages over the sale properties upon payment of the proceeds of the proposed sale to Jolida. NAB would then rely upon its fixed and floating charge over the assets of Tomar in order to recover trust and related party loans due to Tomar which would then be applied to meet the balance of the NAB debt. Mr Rundell's proposal is to market, and attempt to sell, other properties owned by the trusts which are not the subject of this application, nor the subject of mortgages in favour of NAB. The proceeds of realisation of unencumbered properties of the other trusts would then be available to Tomar and could be utilised to satisfy the debt due to NAB.
In these circumstances, Mr Rundell has reached the conclusion that it is in the best interests of the beneficiaries of the trusts for him to sell the Flats properties to Jolida for the following reasons:
•sale prices achieved by the contracts are a better outcome than the sale price predicted by the single parcel sale scenario, or the per lot distress sales scenario, which are identified in the May Opteon report;
•advice obtained from Knight Frank, in a marketing submission obtained in May 2014 in relation to marketing the Flats properties, suggested that there is a risk that the market could not absorb the sale of 14 lots quickly, and that considerable effort should be placed in sourcing a buyer for the sale as one parcel or multiple adjoining parcels;
•the apparent lack of interest in a property being marketed by Knight Frank which adjoins two of the lots comprising the Flats properties;
•the Office of State Revenue had assessed the transfer duty on the consideration as set out in the December offer (which, with one exception, is the same as in the present offer) and had accepted the values in the knowledge that the contracts were related party sales;
•the significant costs and charges associated with marketing and selling the Flats properties, the imposition of default interest and enforcement expenses by NAB, the appointment of receivers, and the holding costs which would be incurred during an extended marketing period, could all be avoided;
•the transaction provided for subordination of the debts of creditors associated with John to give priority to other creditors of the MM trust, including those associated with Anthony;
•the willingness of the NAB to discharge its mortgages upon receipt of the consideration to be paid, which indicates that the NAB accepts that enforcement action would be unlikely to achieve a higher price;
•the substantial reduction in the debts to the NAB will result in an opportunity to realise the remaining unencumbered properties of the trust in an orderly and strategic manner;
•there is no prejudice arising from the sale of the Flats properties to the recovery of any other realisable assets of the trusts;
•there may be a potential benefit to the beneficiaries of the trusts by the set-off of taxable capital gains profits incurred on realisation of certain CBD properties within the financial year against the losses that can be attributed to the sale of the Flats properties;
•no other commercial outcome with Anthony and John has been secured; and
•NAB's entitlement to deny any further forbearance and enforce its securities at any time.
Is the trustee justified in completing the sales to Jolida?
Anthony opposes the making of the directions sought by the trustee. There are a number of reasons why he contends the directions should not be given. I will deal with those in detail below. I have reached the view, notwithstanding Anthony's objections, that the trustee is justified in proceeding with the sale of the Flats properties to Jolida on the terms of the current proposal.
The starting point in considering whether completion of the agreements is consistent with the trustee's duties is the context in which the transactions arise. There are two important components to that context.
The first, and more important, is the situation with NAB. While the trustee, with the cooperation of, and substantial financial contributions by, John, has managed to achieve forbearance, most recently until 30 June 2014 (only a few days away) I accept that there is a grave risk that NAB will refuse any further forbearance, and exercise its rights under its securities to appoint receivers who would then take steps to sell the secured properties. For reasons which I will address below, I do not accept that that eventuality would be likely to produce a better outcome than would be achieved by the proposed sales to Jolida.
The second important aspect of context is the dysfunctional relationship between John and Anthony. In opposing the present application, Anthony suggests that that an alternative to the sale to Jolida would be the orderly sale of other land which is not the subject of mortgage to NAB, with a view to progressively reducing the NAB debt, and utilising funds which might be obtained from settlement of the compensation claim relating to some of the Flats properties for the same purpose. Putting aside whether NAB would be prepared to forbear to enable that proposition to proceed, it is a proposition which would be dependent upon at least a degree of cooperation from John and Anthony and their associated entities. For example, funding would be required in the short term to meet whatever interest and charges might be demanded by NAB, and agreements would be required in relation to the priority of debts owed to entities associated with John and Anthony respectively by the trusts whose unencumbered land would be sold. It is abundantly clear that there can be no confidence that even a small degree of co‑operation which might be required to deal with issues of that nature could be achieved. That is so notwithstanding Anthony's assertion through his counsel that he will co‑operate in such a plan. It is reasonable for the trustee, faced with that level of conflict, to take a view that a proposal, which is definite and which avoids the potential for NAB to enforce its securities by the appointment of receivers, is in the interests of the beneficiaries.
I accept, subject to my observations below in relation to capital gains tax, that the factors identified by Mr Rundell as supporting completion of the agreements do justify him doing so.
The trustee must take the same care as an ordinary, prudent person of business would exercise in the conduct of his own business.[8] In this case, Mr Rundell has taken independent advice as to the likely realisable value of the relevant properties, about which I will say more below. He has obtained a desktop assessment of the valuation report upon which he relies. He has carried out an analysis of the likely return to the trusts in the event of different sales scenarios, a matter, which I also deal with further below. He has sought and obtained a review of his methodology and analysis of the likely returns by an experienced independent chartered accountant with experience as a liquidator. The review supported his analysis. When confronted with responsive commentary on the valuation upon which he relies, and information concerning the planning prospects of the relevant land, he has sought and obtained a response from appropriately qualified experts, including the valuer. He has brought all that information to account in forming and maintaining his view. All of those things point to a high level of care of the type which would be exercised by a prudent person in the conduct of their own business.
[8] Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, 137 (Gummow J).
It is necessary to turn to the various matters raised by Anthony which he argues should lead to rejection of the application. Counsel for Anthony identified nine matters which he considered militated against the sanctioning of the agreements.
Sale to a beneficiary
Anthony notes that the proposal involves sale of a substantial part of the assets of the various trusts. He acknowledges that there is nothing in the trust deeds, or in law, which precludes the trustee from selling trust property to a beneficiary. He contends, however, that the sale is at under market value, and is being proposed in a context of dispute between John and Anthony. He submits that the trusts have for some years been undertaking the development of the Flats properties, and that the sale to Jolida would in effect deprive Anthony of the potential fruits of his efforts to that end over an extended period of time.
I accept that there is evidence that the land, if sold in an orderly fashion over time, might achieve greater purchase prices of individual lots than is being proposed in the Jolida offers, and thus the proposed sales are for less than 'market value' in that sense, I do not accept that it is not open to the trustee to proceed on the basis that, in the circumstances which pertain, which require a sale in one line, the price being paid achieves the value of the flats properties sold on that basis. I will deal with that question in more detail below in the context of a different basis of objection raised by Anthony.
In the present circumstances which have confronted the trustee, I do not consider the fact that he has dealt with, and now supports, an offer from one of the principal beneficiaries is indicative of the lack of impartiality. I accept Mr Rundell's evidence that he has been careful to enable either of the principal beneficiaries to put forward proposals to deal with the land held by the trusts, and that he has considered proposals from each of John and Anthony. That is also a matter to which I will return later in these reasons.
Circumstances in which the price has been set
Anthony contends that the amounts allocated to each lot for the purpose of the December offer (which, with one exception, is the same as the amount for each lot contained in the current offer), demonstrates that the trustee must have provided the Opteon valuation figures to John before the December offer was made. That is because the amount allocated as the price for most of the lots is precisely the forced sale values found in the January Opteon report. Anthony argues that that inference demonstrates that the trustee has not acted for the benefit of the trusts, but rather has, in effect, colluded with John so as to enable the purchase by John of the Flats properties contrary to the interests of the trusts.
In fact, of course, the formal Opteon report was dated 6 January 2014, after John had made his December offer. Mr Rundell had, however, commissioned the Opteon report on 5 December 2013, and had received indicative values of the trusts' properties by e‑mail on 20 December 2013. The December offer was made on 24 December 2013
Mr Rundell denies that he ever provided to John, or discussed with him, the valuation reports obtained from Opteon prior to the commencement of the earlier proceedings. John denies that he ever saw the list of indicative values provided to Mr Rundell on 20 December 2013 before he read Mr Rundell's affidavit of 25 February 2014 filed in the earlier proceedings, which had been served on his solicitors and which attached the schedule of indicative values. Mr Codalonga, the valuer at Opteon who carried out the valuation, deposed to the fact that at no time did he discuss the values of the properties with John Palermo.
It seems highly improbable that the correlation between the consideration allocated to individual lots in the December offer, and the values attributed to the same lots in the Opteon valuation, is purely coincidental. It is apparent that there was contact between John and Mr Codalonga in relation to the land title descriptions during November 2013. The properties comprising the Flats properties were contained in a schedule sent by John to Mr Codalonga on 22 November 2013 under the heading 'Properties already valued'. That heading was not explained in the evidence before me. It appears from a letter written by Mr Rundell's solicitors to Anthony's solicitors that that contact between the valuer and John was in relation to the valuer undertaking a valuation for BankWest, which was anticipated to be the funder of John's purchase under the December offer, and is to provide finance in the event that the current proposal is approved.
The hearing of this matter proceeded by way of affidavit evidence, and none of the deponents were cross‑examined. The relevant factual question for present purposes is whether Mr Rundell disclosed the valuation figures to John. In light of the express denials by both Mr Rundell and John of that fact, there is no basis upon which I can reject that evidence. If John was aware of the figures attributed to the value of each lot by Opteon, before making his offer, it is at least as likely that he became aware of that information through dealings with Mr Codalonga (although I note Mr Codalonga's denial that the values were discussed) or possibly through BankWest. All of that is, however, speculation. I am not satisfied that the inference should be drawn that Mr Rundell disclosed the indicative valuation figures to John prior to the submission of the December offer.
Evidence of higher values for Flats properties
Anthony contends that the Jolida offers should not be accepted because there is evidence of higher values that can be achieved for the Flats properties. He points to the fact that the May Opteon report attributed a per lot market value of $10.97 million. The Knight Frank marketing submission (which is not a valuation) attributed values if sold as individual lots in the range of $10 million to $11.8 million. Anthony also points to a proposal (which never became a formal offer) discussed in correspondence in early December 2013 for John to pay to purchase the 25 trust properties, including the Flats properties, with a value of $10.86 million attributed all to the Flats properties. On the basis of that evidence, John argues that the Jolida offers would result in a sale at less than full value.
It may well be the case that, if the trustee were in a position to market the individual lots over an extended period, the gross realisation on sale of all the lots would result in a higher gross figure than the amount which will be obtained under the sales to Jolida. The difficulty with that argument is, however, that the trustee simply does not have the resources to service the debt to NAB, even if some properties could be sold within a relatively short time and the proceeds used to reduce the balance owing to NAB. The argument also ignores the reality that NAB has threatened to impose interest at the penalty rate under the contract, and for a brief period before the most recent forbearance was arranged, had imposed the penalty rate. The luxury of an orderly sale over time is simply not available. In any event, the net return would, as figures prepared by Mr Rundell demonstrate, be significantly affected by the length of time required to sell the properties.
As to the particular evidence relied upon by Anthony in this context, it can be observed that the Knight Frank marketing submission in fact puts the value of the Flats properties sold as a single parcel at $6.7 million to $8.5 million, less than the offer by Jolida. The fact that there was discussion of an offer by John of a greater amount in December 2013 is not evidence of value, and is not a matter that should cause the trustee to attribute less weight to the professional valuation upon which he relies.
Criticism was also made of the Opteon report on the basis that Mr Codalonga did not give proper consideration to the development potential of the land, and in particular in relation to one lot, lot 9000, which had already been the subject of some special rural subdivision, and had been approved for further subdivision. In the context of this issue, reliance was placed on commentary on the May Opteon report, by another valuer, Ms Le Fevre, and on evidence of Mr Hajigabriel, a planner who had for some considerable time been assisting the Palermo interests in relation to development of the Flats properties. That evidence led to evidence in response being adduced on behalf of Mr Rundell from Mr Codalonga, who maintained his opinion notwithstanding Ms Le Fevre's comments, and from a planner, Mr Allerding, about the development potential of the Flats properties.
In the context of this case, it is not necessary, and it was not urged upon me, that I undertake a detailed analysis of the planning prospects of the Flats properties and the consequential effects on value. The question to be answered is whether the completion of the Jolida sales is in the best interests of the trust estate, and whether the trustee would be acting as a prudent person of business would conduct their own affairs. That involves weighing up of all the circumstances which have a bearing on the decision.
In this case, the trustee has obtained a valuation from an independent qualified valuer. He has had a desktop review undertaken to ascertain whether there is any reason on the face of the valuation why he should not rely upon it. That review endorsed Opteon's methodology. Having been presented with a commentary on the valuation by Ms Le Fevre, the trustee has sought and obtained a response to ascertain whether the commentary alters the views of the valuer. It did not. Mr Rundell obtained independent advice from a planner in relation to the potential of the properties.
Having reviewed the evidence of the two planners, it is reasonable to conclude that the prospects of more intensive use of the Flats properties (putting lot 9000 to one side) are relatively long term. Planning processes are notoriously slow. There are reasons to think that, eventually, some form of more intensive development will be achievable on the Flats properties. It is clear, however, that the nature and form of further development is quite uncertain. Mr Codalonga has brought that to account in his decision to attribute rural values to the Flats properties.
As to lot 9000, it appears that Mr Codalonga was not aware that a subdivision approval was in place for that lot. He was, however, aware of the fact that road and fencing works had been undertaken to further extend the special rural subdivision into that lot. So much was recited in his report. Having regard to the zoning as special rural he adopted a higher land value than he applied to other lots. He noted, as was the case, that there is a proposal to rezone the land from special rural back to rural. It is clear, therefore, that, whilst Mr Codalonga did not know that a subdivision had been approved, he had regard to the potential for special rural subdivision in assessing the value attributed to lot 9000.
In my view, it is reasonable for the trustee to rely on the objective independent opinion of value expressed by Opteon.
Failure to test the market
Anthony contends that a further reason to decline the direction sought is that there has been no proper testing of the market by the trustee, but rather he has concentrated his efforts on the offers from John. Although he acknowledges that he was invited to, and did, submit his own proposal in relation to the sale of the trust assets in order to meet the NAB debt, a matter to which I will return below, Anthony contends that that does not amount to testing the market so as to be satisfied that the best possible outcome for beneficiaries is being achieved.
Although it is not correct to say that the trustee has not had discussions or made enquiries about other ways of dealing with the trust assets, I accept that much of the focus of the trustee, at least in relation to the Flats properties, has been on the acceptability of the proposals put by John and Anthony respectively. I do not accept that, however, that is reason for criticism of the trustee, nor a reason to conclude that he has not sought to act in the interests of the trusts. It must be borne in mind that overlaying the trustee's actions has been the need to keep the NAB at bay. It is quite apparent from the trustee's affidavit that he does not consider that it would be in the interests of the trusts for receivers to be appointed. It is unsurprising, therefore, that when proposals have been put to him which have the capacity to substantially satisfy NAB's requirements, he has focused on assessing whether those proposals should be taken up.
There is much in the materials to suggest that simply to place all of the trusts properties on the market would have the effect of flooding the market with a resulting depression in prices and the likelihood of a long timeframe to complete sales. In my view, the trustee was justified in focusing his efforts, in the context of limited resources, on assessment of the proposals being put forward. There is no reason to suggest that 'testing the market' would have produced any better outcome. A prudent person acting in relation to their own business, could reasonably be expected to rely on expert valuation and analysis of options available, in the face of the pressing issue of loan default, as the basis for decision‑making.
Analysis of benefit
In assessing the offers, Mr Rundell prepared a series of schedules demonstrating the net returns on the sales of the properties on each of the four bases over selling periods ranging from six months to 48 months. The schedule brought to account interest at the penalty rate, marketing costs, selling fees, receivers' fees and other expenses and income from the properties. Those schedules demonstrated that only if the highest per lot market value rates (as assessed by Opteon) were achieved by sale of all properties within 12 months would the net return be better than if the contracts with Jolida are completed.
Criticism was made of those schedules by Anthony on the basis that they fail to bring to account the possibility of progressive reduction in the amount of the NAB debt as properties were sold, assumed interest at the penalty rate, and assumed that NAB would not forbear on the appointment of receivers.
I consider it reasonable for the trustee to have assumed the appointment of receivers and the imposition of penalty interest rates in the event that the sales to Jolida do not proceed. NAB is supportive of the proposed transactions. It appears to accept that the proposed transactions will result in realisation of the secured properties for value. It has reserved its rights to proceed to act under its securities if the matter is not resolved by the present proceedings. There is every reason to think that its patience will have come to an end if the proposed agreements are not implemented. It is true that the schedules prepared by Mr Rundell do not take account of the possibility of progressive reduction in the amount of the bank debt as a result of sales occurring from time to time. It is, of course, impossible to predict what properties might sell within any particular timeframe, and thus the calculation could never be accurately undertaken in advance of the properties being placed on the market and sales achieved. The difference in net return from sales over time, as against that achieved by the proposed contracts as shown on the schedules, is very significant. The evidence of the valuers and real estate agents supports the conclusion that, given the number of lots, it would not be reasonable to think that sales at the per market lot valuation could be achieved for all lots within 12 months. Even allowing for progressive sales and reduction of the NAB debt, it is unlikely that a better net return could be achieved under any practical alternative scenario.
Potential upside for flats properties
Anthony argues that implementation of the sales to Jolida fails to recognise the potential upside to value of the Flats properties. That submission is based upon the planning evidence as to potential future development of the Flats properties.
As I have already noted, while future development of the Flats properties may occur in the mid to longer term, there remains considerable uncertainty as to the nature and form of development that might be applied to the various lots. It may well be that there will eventually be a significant increase in the value of the lots because more intensive development is permissible at some time in the future. The reality, however, is that the trustee is confronted with a need to deal with NAB immediately. The trusts do not enjoy the capacity to simply wait for future development potential to crystallise, which from a planning point of view may be many years away. It is a sad consequence of the breakdown of the relationship between John and Anthony that whatever long‑term plans they may have had either together or individually can no longer be achieved.
Presentation of an orderly sales process to NAB
Anthony contends that NAB has only ever been presented with proposals by entities associated with John, which have been supported by the trustee, and has never had the trustee present a proposal for the orderly sale of the properties as the preferred course to be taken by the trustee without John's proposal available as an alternative. He argues that if the Court refuses to approve the sales to Jolida, an opportunity will arise for that to occur.
It is the case that, by e‑mail dated 17 March 2014, Anthony put a proposal to the trustee which essentially involved each of Anthony and John providing additional security to NAB in the sum of $2 million on the basis that the bank would forbear for a maximum two‑year period, capitalise interest and renegotiate the interest rate. The proposal involved the appointment of selling agents to sell all of the trust properties and certain other relatively minor provisions. Mr Rundell made some amendments to the proposal, and with Anthony's permission submitted it to NAB and Anthony's lawyers to develop. Mr Rundell said he believed that the proposal had merit. He subsequently met with officers of the NAB and their lawyers to discuss the proposal.
On 20 March 2014, NAB's lawyers wrote to Mr Rundell's lawyers rejecting Anthony's proposal. It is apparent from the letter that John had also put a proposal to NAB on 13 March 2014, which NAB also rejected. In relation to Anthony's proposal, NAB's lawyers said that the proposal contained legal risks that were unacceptable to the bank. The letter called for any further proposals to be submitted by 24 March 2014 failing which the bank reserved all its rights.
The reality of the position is that the trustee requires the cooperation of either or both of John or Anthony to put any proposal to NAB for forbearance. That is because, as is evident from the terms of NAB's forbearance from time to time to date, payment of arrears of interest and extension fees has always been required. The trustee did not, and does not, have the resources to satisfy the banks requirements without the beneficiaries cooperation and support. He was not in a position to make any proposal, other than to place the properties on the market and reduce indebtedness of the bank when sales were achieved. Such a proposal seems most unlikely to have been acceptable to NAB, at least in persuading it to forbear its penalty interest charges.
I do not consider that the failure by the trustee to put any proposal to NAB for 'orderly sales', other than the one which he supported when proposed by Anthony, suggests that the interests of the beneficiaries have not been pursued. Nor do I consider that the Jolida offer should not be accepted until such time as a proposal for 'orderly sales' is developed and submitted to NAB.
Capital gains tax benefits
Anthony submits that the potential capital gains tax benefits (alluded to by Mr Rundell as one of the reasons why the Jolida contracts were in the beneficiaries' interests) have not been adequately demonstrated, and in any event would accrue to different trusts from those which own the Flats properties.
As I understand the capital gains tax position, it is that certain capital losses would be incurred as a result of the sales under the Jolida contracts. Other trusts related to the Palermo interests have, in the current financial year, sold other properties at a capital profit. It would be possible for those trusts to distribute their capital profits to the trusts which will suffer a capital loss on sale of their Flats properties. The losses could then be offset against the gains, thus reducing the ultimate tax burden of the trusts collectively.
Anthony is correct in his contention that the benefit which might be achieved from a capital gains tax liability perspective is a benefit enjoyed by trusts other than those involved in the sales under the Jolida contracts. Presumably, the trustee is mindful of the fact that the beneficiaries under all of the trusts concerned are associates of John and Anthony, and thus some indirect benefit flows by minimising the overall tax burden of the trusts within the group.
In the circumstances, I do not consider that the possibility of achieving benefits in certain trusts by minimising capital gains tax liability is a basis upon which the transactions should be found to be justified. It may or may not be an incidental benefit to the whole group, but it is not a factor which I bring to account in my determination of whether the directions sought should be made.
Alternatives available
Finally, Anthony argues that there are two preferable alternatives to proceeding with the Jolida sales. The first is to proceed with an orderly sale, and the second is to allow the NAB to proceed with the receivership.
I have already concluded that the first alternative is not a practically available option, and the second is likely to result in a less favourable outcome for the beneficiaries than is achieved by the Jolida contracts.
Conclusion
In the circumstances, the directions sought by the trustee should be made.
It was contended by Anthony that, in the event that there was to be a direction that the trustee is justified in completing the sales, the direction should be qualified by the expression 'in the present circumstances' in order to preserve any rights which Anthony may have to take action against the trustee in relation to concerns as to the manner in which he has performed his role to date. I do not consider that such a qualification is appropriate, even if it is open. It is the case that my determination that the trustee is justified in completing the contracts is based upon an assessment of all the circumstances as they presently exist. Beyond that, it is no part of the task of the Court in an application of this nature to express any view, or even make any suggestion one way or the other, about the potential for claims to be made against the trustee. Having reached the view that entry into the Jolida contracts is in the interests of the beneficiaries and the trust estates, the directions sought should be made.
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