Trust Company (Nominees) Limited v Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited
[2013] FCA 1393
FEDERAL COURT OF AUSTRALIA
Trust Company (Nominees) Limited v Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited [2013] FCA 1393
Citation: Trust Company (Nominees) Limited v Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited [2013] FCA 1393 Parties: THE TRUST COMPANY (NOMINEES) LIMITED ACN 000 154 441 v GIPPSLAND SECURED INVESTMENTS LIMITED ACN 004 860 057 File number: NSD 1486 of 2013 Judge: FARRELL J Date of judgment: 18 December 2013 Catchwords: CORPORATIONS – debentures – borrower corporation doubtfully solvent – application by trustee for freezing orders pursuant to section 283HB(1)(b) of the Corporations Act 2001 (Cth) – application by Trustee for order prohibiting payments to related bodies corporate and related entities under section 283HB(1)(g) – concern about potential for unequal treatment of debenture holders
CORPORATIONS – debentures – borrower corporation doubtfully solvent – application by trustee for orders under section 283HB(1)(c) of the Corporations Act 2001 (Cth) for security to be immediately enforceable – security held pursuant to debenture trust deed – proposal by trustee to appoint receiver following Court order – relevance of doubtful solvency of borrower company – relevance of lack of trustee confidence in borrower’s management – relevance of ASIC benchmarks – relevance of impact of receivership on local community – trustee’s power to enforce security pursuant to the trust deed contested – ASIC appearance amicus curiae – Court’s discretion to make orders
CORPORATIONS – debentures – application by trustee for orders under section 283HB(1)(c) of the Corporations Act 2001 (Cth) for security to be immediately enforceable – security held pursuant to debenture trust deed – adjournment application – alternate proposal by local investors – debenture holders meetings – relationship between Chapter 2L of the Corporations Act 2001 (Cth) and schemes of arrangement pursuant to section 411 of the Corporations Act 2001 (Cth) – trustee powers and discretions – adjournments to permit commercial negotiation – failure of commercial negotiation – ASIC appearance amicus curiae – Court’s discretion to make orders
PRACTICE AND PROCEDURE – reopening hearing before judgment – new evidence or new circumstance – difference between application to reopen and unsolicited submissions on appeal
Legislation: Corporations Act 2001 (Cth) ss 9, 283AA, 283AB, 283AC, 283BB, 283BF, 283DA, 283EA, 283EB, 283EC, 283GA, 283HA, 283HB, 283HB(1)(b), 283HB(1)(c), 283HB(1)(g), 283HB(2), 411, Part 2L.2, Part 2L.4; Chapter 2L, Chapter 6D
Federal Court of Australia Act 1976 (Cth) ss 37AF(1), 37AG(1)(a)Corporate Law Economic Reform Program Bill 1998
Federal Court (Corporations) Rules 2000 (Cth) r 2.13
Cases cited: Australian Securities and Investments Commission v Bridgecorp Finance Ltd (2006) 58 ACSR 499
Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461
Bale v Mills (2011) 81 NSWLR 498
Bull v Lee (No 2) [2009] NSWCA 362
Carr v Finance Corporation of Australia Limited (No 1) (1981) 147 CLR 246
Cement Australia Pty Ltd v Australian Competition and Consumer Commission (2010) 187 FCR 261
Granitgard Pty Ltd v Termicide Pest Control Pty Ltd (No 3) [2009] FCA 82
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296
Hawthorn Glen Pty Ltd v Aconex Pty Ltd (No 1) [2007] FCA 2010
Helou v PD Mulligan Pty Ltd (2003) 57 NSWLR 74
Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22
National Australia Bank Limited v Bond Brewing Holdings Limited (1990) 169 CLR 271
Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068
Singh v Secretary, Department of Employment and Workplace Relations [2009] FCAFC 59
Smith v New South Wales Bar Association (1992) 176 CLR 256
Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232
The Trust Company (Nominees) Limited v Southern Finance Limited, in the matter of Southern Finance Limited [2012] FCA 1339
Urban Transport Authority of NSW v NWEISER (1992) 28 NSWLR 471Date of hearing: 25 July 2013, 20 August 2013, 22 August 2013, 23 August 2013, 26 August 2013, 28 August 2013, 2 September 2013 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 316 Counsel for the Plaintiff: Mr A W Street SC, Mr A Macauley (25 July 2013) and Mr W R Potter (20, 22 and 23 August 2013) Solicitor for the Plaintiff: Ashurst Australia Counsel for the Defendant: Mr R Newlinds SC (25 July 2013) and Mr R M Foreman Solicitor for the Defendant: Minter Ellison Counsel for Local Investor Group: Mr S T White SC Solicitor for Local Investor Group: Gadens Lawyers Counsel for ASIC: Mr M Izzo
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1486 of 2013
IN THE MATTER OF GIPPSLAND SECURED INVESTMENTS LIMITED
BETWEEN: THE TRUST COMPANY (NOMINEES) LIMITED ACN 000 154 441
PlaintiffAND: GIPPSLAND SECURED INVESTMENTS LIMITED ACN 004 860 057
Defendant
JUDGE:
FARRELL J
DATE OF ORDER:
2 SEPTEMBER 2013
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Pursuant to section 283HB(1)(c) of the Corporations Act 2001 (Cth), the security created under clause 10.01 of the Trust Deed for First Ranking Debenture Stock entered into between the Plaintiff and the Defendant dated 22 December 1995, as amended and supplemented from time-to-time (Trust Deed), and registered on the Personal Property Securities Register as registered security interest number 201112091303459, be enforceable immediately, notwithstanding the requirements under clause 12.01 and clause 15.01 of the Trust Deed.
2.Order 1 of these orders be entered forthwith.
3.Orders 1 and 2 of the Court's orders made in the proceeding on 25 July 2013 be vacated on and from the appointment of a receiver or receiver and manager by the Plaintiff or further order of the Court.
4.There be liberty to apply at one day's notice.
Confidentiality orders
5.Pursuant to section 37AF(1)(b) of the Federal Court of Australia Act 1976 (Cth), and on the ground specified in section 37AG(1)(a), until further order, or the end of 4 years, whichever occurs first, access to the documents listed in Schedule 1 are to be restricted to:
(a) the parties' solicitors on record;
(b) the parties' counsel;(c)any representative of the Australian Securities and Investments Commission; and
(d)representatives of the Local Investor Group referred to in the affidavit of Ross Blakeley sworn on 12 August 2013, their solicitors and counsel.
6.Liberty to apply in relation to these orders on 7 days written notice.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
SCHEDULE 1
Document
Reference
Detail
Affidavit of Rupert Clive Smoker sworn 25 July 2013
Paragraphs 24(c), 40, 47 and 51
Restrict paragraph 24(c), 40, 47 and 51.
Exhibit RCS 1
Tab 9
Restrict section 3.1 of the letter from the Plaintiff to the Defendant dated 22 March 2013, and attachment 2 to the reporting protocol that is a schedule to that letter.
Exhibit RCS 1
Tab 10
Restrict entire contents behind Tab.
Exhibit RCS 1
Tab 14
Restrict section 3.1 of the letter from the Plaintiff to the Defendant dated 22 March 2013, and attachment 2 to the reporting protocol that is a schedule to that letter.
Exhibit RCS 1
Tab 15
Restrict attachment 2 to the reporting protocol.
Exhibit RCS 1
Tab 17
Restrict entire contents behind Tab.
Exhibit RCS 1
Tab 19
Restrict entire contents behind Tab.
Exhibit RCS 1
Tab 21
Restrict section 2 of, and the appendix to the letter from the Plaintiff to the Defendant dated 9 July 2013.
Exhibit RCS 1
Tab 23
Restrict section 2 of, and the annexures to the letter from the Defendant to the Plaintiff dated 10 July 2013.
Exhibit RCS 1
Tab 25
Restrict attachment 2 to the reporting protocol.
Exhibit RCS 1
Tab 24
Restrict the first sentence of section 3 of the letter from the Plaintiff to the Defendant dated 12 July 2013.
Restrict the words appearing between the first and second bullet pointed sentences of section 3 of the letter from the Plaintiff to the Defendant dated 12 July 2013.
Restrict the annexure to that letter.
Exhibit RCS 1
Tab 27
Restrict entire contents behind Tab.
Exhibit RCS 1
Tab 29
Restrict section 1 of the letter from the Plaintiff to the Defendant dated 17 July 2013.
Exhibit RCS 1
Tab 37
Restrict entire contents behind Tab.
Affidavit of Rupert Clive Smoker sworn 31 July 2013
Paragraph 10(b)
Restrict the table in paragraph 10(b)
Exhibit RCS 2
Tab 2
Restrict entire contents behind Tab.
Exhibit RCS 2
Tab 13
Restrict documents which were provided to Ernst & Young during their review of GSI's books (ie email chain dated 26 and 27 August 2012 and a memorandum dated 3 September 2012) which are annexed to the letter from the Plaintiff's solicitors to the Defendant's solicitors dated 29 July 2013.
Affidavit of Rupert Clive Smoker sworn 16 August 2013
Paragraphs 10(b)-(f), 17(c) and 32
Restrict paragraphs 10(b)-(f), 17(c) and 32.
Exhibit RCS 3
Tab 2
Restrict section 3.1.2(i)-(vi), and the following subparagraphs (i)-(ii), section 3.3.1 "Impaired Loans" of the letter from the Defendant to the Plaintiff dated 2 August 2013.
Restrict the letter dated 31 July 2013 addressed to the Sale Advisor of Gippsland Secured Investments Limited annexed to the letter from the Defendant to the Plaintiff dated 2 August 2013.
Restrict the letter dated 30 July 2013 addressed to the Sale Advisor of Gippsland Secured Investments Limited annexed to the letter from the Defendant to the Plaintiff dated 2 August 2013.
Restrict the draft deed of forbearance annexed to the letter from the Defendant to the Plaintiff dated 2 August 2013.
Exhibit RCS 3
Tab 7
Restrict the words beginning with "Valuations" on page 2 and ending with "loans subject to impairment" on page 3 of the letter from the Defendant to the Plaintiff dated 6 August 2013.
Restrict the document entitled "GSI – Progressive valuation summary – excluding Riviera" annexed to the letter from the Defendant to the Plaintiff dated 6 August 2013.
Exhibit RCS 3
Tab 12
Restrict the words beginning with "We note that" on page 1 and ending with "(other than those listed in (a) above)" on page 1 of the letter from the Plaintiff to the Defendant dated 14 August 2013.
Exhibit RCS 3
Tab 13
Restrict section 1(a) -(c) of the letter from the Defendant to the Plaintiff dated 15 August 2013.
Restrict the annexures to the letter from the Defendant to the Plaintiff dated 15 August 2013.
Affidavit of Rupert Clive Smoker sworn 26 August 2013
Annexure A
Restrict Annexure A in its entirety.
Affidavit of Quentin James Olde sworn 12 August 2013
-
-
Exhibit QO 1
Tab 2
Restrict entire exhibit.
Exhibit QO 1
Tab 3
Restrict entire exhibit.
Exhibit QO 1
Tab 6
Restrict entire exhibit.
Affidavit of Glenn Sanford sworn 9 August 2013
Paragraphs 26(c)-(d), 49, 66(a) 75(b)
Restrict paragraphs 26(c)-(d), 49, 66(a) and 75(b).
Exhibit GAS 1
Tab 7
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 8
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 9
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 10
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 13
Restrict section 3.1 of the letter from the Plaintiff to the Defendant dated 22 March 2013, and attachment 2 to the reporting protocol that is a schedule to that letter.
Exhibit GAS 1
Tab 18
Restrict revaluation summary provided by Craig Munday appearing on page 8 behind Tab 18 (annexed to the "Status update on Reporting Protocol & other matters" dated 16 May 2013).
Restrict revaluation summary provided by Craig Munday appearing on page 17 behind Tab 18 (annexed to the "Status update on Reporting Protocol & other matters" dated 5 June 2013).
Restrict revaluation summary provided by Craig Munday appearing on page 26 behind Tab 18 (annexed to the "Status update on Reporting Protocol & other matters" dated 12 June 2013).
Restrict revaluation summary appearing on page 34 behind Tab 18 (annexed to the "Status update on Reporting Protocol & other matters" dated 8 May 2013).
Restrict revaluation summary provided by Craig Munday appearing on page 41 behind Tab 18 (annexed to the "Status update on Reporting Protocol & other matters" dated 19 June 2013).
Exhibit GAS 1
Tab 20
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 24
Restrict section 2 of, and the appendix to, the letter from the Plaintiff to the Defendant dated 9 July 2013.
Exhibit GAS 1
Tab 26
Restrict section 2 of, and the annexures to the letter from the Defendant to the Plaintiff dated 10 July 2013.
Exhibit GAS 1
Tab 28
Restrict the first sentence of section 3 of the letter from the Plaintiff to the Defendant dated 12 July 2013.
Restrict the words appearing between the first and second bullet point sentences of section 3 of the letter from the Plaintiff to the Defendant dated 12 July 2013.
Restrict the annexure to that letter.
Exhibit GAS 1
Tab 30
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 31
Restrict section 1 of the letter from the Plaintiff to the Defendant dated 17 July 2013.
Exhibit GAS 1
Tab 37
Restrict entire contents behind Tab.
Exhibit GAS 1
Tab 45
Restrict documents which were provided to Ernst & Young during their review of GSI's books (ie email dated 26 August 2012 and memorandum dated 3 September 2012) which are annexed to the letter from the Plaintiff's solicitors to the Defendant's solicitors dated 29 July 2013.
Exhibit GAS 1
Tab 50
Restrict section 3.1.2(i)-(vi), and the following subparagraphs(i)-(ii) section 3.3.1 "Impaired Loans" of the letter from the Defendant to the Plaintiff dated 2 August 2013.
Exhibit GAS 1
Tab 52
Restrict the words beginning with "Valuations" on page 2 and ending with "loans subject to impairment" on page 3 of the letter from the Defendant to the Plaintiff dated 6 August 2013.
Restrict the document entitled "GSI – Progressive valuation summary – excluding Riviera" annexed to the letter from the Defendant to the Plaintiff dated 6 August 2013.
Affidavit of Glenn Andrew Sanford sworn 19 August 2013
Paragraphs 16, 17 and 18.
Restrict paragraphs 16, 17 and 18.
Exhibit GAS 2
Tab 4
Restrict entire contents behind Tab.
Exhibit GAS 2
Tab 11
Restrict the words beginning with "We note that" on page 1 and ending with "(other than those listed in (a) above)" on page 1 of the letter from the Plaintiff to the Defendant dated 14 August 2013.
Exhibit GAS 2
Tab 13
Restrict section 1(a) - 1(c) of the letter from the Defendant to the Plaintiff dated 15 August 2013.
Restrict the annexures to the letter from the Defendant to the Plaintiff dated 15 August 2013.
Exhibit GAS 2
Tab 18
Restrict the excel spread sheet annexed to the Defendant's solicitors letter to the Plaintiff's solicitors dated 16 August 2013.
Affidavit of Glenn Andrew Sanford sworn 26 August 2013
Entire Exhibit GAS 3
Restrict entire exhibit.
Affidavit of Ross Andrew Blakeley dated 12 August 2013
Paragraphs 12(b), 13, 31-37 and 39(a)
Restrict paragraphs 12(b), 13, 31-37 (but do not restrict paragraphs 37(a)-(d)) and 39(a).
Exhibit RAB 1
Tab 5
Restrict entire contents behind Tab.
Affidavit of Duncan Johnston sworn 20 August 2013
Annexure DJ3
Restrict Annexure DJ3 in its entirety.
Affidavit of Duncan Johnston sworn 2 September 2013
Paragraph 26
Restrict Paragraph 26 in its entirety.
Affidavit of Duncan Johnston sworn 2 September 2013
Annexure DJ15
Restrict all of paragraph (b) appearing at page 11 and continuing onto page 12 of Annexure DJ15.
Affidavit of Glenn Andrew Sanford sworn 2 September 2013
-
-
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1486 of 2013
IN THE MATTER OF GIPPSLAND SECURED INVESTMENTS LIMITED
BETWEEN: THE TRUST COMPANY (NOMINEES) LIMITED ACN 000 154 441
PlaintiffAND: GIPPSLAND SECURED INVESTMENTS LIMITED ACN 004 860 057
Defendant
JUDGE:
FARRELL J
DATE:
18 DECEMBER 2013
PLACE:
SYDNEY
REASONS FOR JUDGMENT
On 2 September 2013, I made orders under s 283HB(1)(c) of the Corporations Act 2001 (Cth) (Corporations Act) that the security under the trust deed defined in [3] below be immediately enforceable. I vacated orders made on 25 July 2013 under ss 283HB(1)(b) and 283HB(1)(g) and I made orders under ss 37AF(1) and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) restricting access to some documents or parts of documents. These are my reasons for making those orders. Unless otherwise indicated, all references in these reasons to a provision of a statute are references to a provision of the Corporations Act.
Gippsland Secured Investments Limited (GSI and Company) is an unlisted public company incorporated on 17 December 1970. GSI’s main activities are to accept funds from investors and to lend principally on the security of registered mortgages over real property in Australia. It holds an Australian financial services licence issued in December 2003 and an Australian credit licence issued in February 2011, in each case by the Australian Securities and Investments Commission (ASIC) pursuant to the Corporations Act. Security for moneys lent by GSI is heavily concentrated in the Gippsland area of Victoria. As at 31 January 2013, of its 246 loans, 85% in number and 73% in value were made to borrowers where the loan security was located in the Gippsland area and many of the Noteholders live there. The majority of GSI’s shareholders, directors and staff reside in the Gippsland area and it has offices at Bairnsdale (head office), Warragul, Sale, Maffra, Lakes Entrance and Orbost.
The Trust Company (Nominees) Limited (Trust Company and Trustee) was formerly known as Permanent Nominees (Aust.) Limited and it is approved by ASIC to be a trustee for the purposes of s 283AC(1)(f). Trust Company and GSI are parties to a document entitled “Trust Deed for First Ranking Debenture Stock” dated 22 December 1995 (as amended and supplemented from time to time) (Trust Deed). It is a trust deed for the purposes of s 283AA(1). Accordingly, GSI issues debenture notes pursuant to the Trust Deed (GSI Notes or Notes) and Trust Company is trustee in respect of the GSI Notes, in each case pursuant to Chapter 2L. As at 9 August 2013, the face value of GSI Notes on issue was $142.2 million with various tenures ranging from “at call” to 3, 6, 12 and 24 months.
Some relevant aspects of the Trust Deed are:
·Trust Company has a floating charge over the assets and undertaking of GSI to secure its obligations under the GSI Notes (clause 10.01 of the Trust Deed). The Trust Deed is registered on the Personal Properties Securities Register as a registered security interest. That charge does not hinder the way in which GSI may deal with its assets (including the payment of dividends) until the security becomes enforceable (subject to limitations on creating other security over assets) (clauses 10.02 and 13.01 of the Trust Deed). GSI Notes rank pari passu upon enforcement (clauses 5.04 and 5.08(f)).
·Upon the occurrence of events listed in clauses 12.01(a) to 12.01(p) (Defaults), after first issuing written notice, Trust Company can enforce the charge and call the moneys secured by the Trust Deed (clause 12.01), it can fix the charge (clause 10.08) and exercise any of the powers listed in clauses 14.01 and 15.01, including the power to take possession of the charged property and appoint (and remove) a Controller (which includes a receiver and manager under s 9 of the Corporations Act).
·Relevantly, clause 12.01 of the Trust Deed provides:
Upon the occurrence of any of the following events, that is to say:
(a) if the Company fails to pay the principal in respect of any Stock within 7 days after the same becomes due and payable;
…
then the Trustee may enforce the Charges pursuant to this Deed and the Monies Hereby Secured shall at the option of the Trustee become immediately due and payable PROVIDED THAT the Trustee may take no action to enforce the Charges unless and until the Trustee serves on the Company a notice:(i) stating that a breach of this Clause 12.01 has occurred or exists; and
(ii) stating that it is a notice pursuant to this Clause 12.01; and
WITHOUT PREJUDICE to the effect of any provision of or the exercise of any power arising under this Deed the Trustee may contemporaneously with the notice referred to in the preceding Paragraphs (i) and (ii) convert any Charge into a fixed charge over all or any specified part of the Mortgaged Property.
·Subject to direction of the holders of GSI Notes (Noteholders or Debenture holders) who hold GSI Notes with at least 20% of the face value of all GSI Notes mandating enforcement, under clause 17.04, Trust Company has an “absolute discretion” in enforcing the charge or to determine that moneys secured under the Trust Deed become immediately payable upon an event referred to in clause 12.01 occurring.
·There is an obligation imposed on GSI to provide various reports to Trust Company, including an obligation to provide a Quarterly Report and a Directors’ Certificate by the last day of the month following the end of each quarter (clauses 9.06 and 9.07) (Quarterly Report and Directors’ Certificate respectively).
·GSI covenants to have Total Tangible Assets of at least $1 million (clause 8.01).
APPLICATION
On 25 July 2013, Trust Company filed an application seeking, among other things, the following orders which would apply until further order of the Court:
(a)Under s 283HB(1)(b) restraining GSI from paying any money to Debenture holders under the Trust Deed;
(b)Under s 283HB(1)(g) restraining GSI from paying any money to any related body corporate or related entity (as defined in the Corporations Act);
(c)Under s 37AF(1)(b) of the Federal Court of Australia Act 1976 (Cth) restricting access to affidavits and exhibits and the terms of any judgment or order to the parties’ solicitors on record, their counsel and any representative of ASIC in order to prevent prejudice to the proper administration of justice.
The application also sought an order pursuant to s 283HB(1)(c) that the security held by Trust Company for GSI Notes be immediately enforceable at the time that the orders are made.
In the alternative to the orders referred to in [5](a), [5](b) and [6], Trust Company sought directions in relation to the performance of its functions as trustee under the Trust Deed pursuant to s 283HA.
Evidence
Hearings occurred on 25 July, 20 August, 22 August, 23 August, 26 August, 28 August and 2 September 2013. All evidence was provided by affidavit and the following affidavits were read and exhibits tendered:
(a)Mr Rupert Smoker sworn on 25 July 2013 (25 July Smoker Affidavit) and exhibit RCS 1 (comprising two folders). Mr Smoker is a director of Trust Company and head of its Corporate and Debt Capital Markets Trustee Services group and he (with other senior members of Trust Company) is responsible for activities of Trust Company as trustee in respect of GSI Notes. Mr Smoker also swore affidavits and exhibits were tendered as follows: 31 July 2013 (31 July Smoker Affidavit) and exhibit RCS 2; 16 August 2013 (16 August Smoker Affidavit) and exhibit RCS 3; 22 August 2013 (22 August Smoker Affidavit) and exhibit RCS 4; and 26 August 2013 (26 August Smoker Affidavit).
(b)Mr Glenn Sanford sworn on 9 August 2013 (9 August Sanford Affidavit) and exhibit GAS 1 (comprising two folders). Mr Sanford is the Managing Director of GSI. Mr Sanford also swore affidavits and exhibits were tendered as follows: 19 August 2013 (19 August Sanford Affidavit) and exhibit GAS 2; 26 August 2013 (First 26 August Sanford Affidavit) and exhibit GAS 3; 26 August 2013 (Second 26 August Sanford Affidavit) and 2 September 2013 (2 September Sanford Affidavit).
(c)Mr Quentin Olde sworn on 9 August 2013 (Olde Affidavit) and exhibit QO 1. Mr Olde is an official liquidator and a senior managing director of the corporate finance/restructuring practice of FTI Consulting (FTI Consulting). FTI Consulting is an advisor to GSI.
(d)Mr Ross Blakeley sworn on 12 August 2013 (Blakeley Affidavit) and exhibit RAB 1. Mr Blakeley is an official liquidator and a senior managing director in the corporate finance/restructuring practice of FTI Consulting.
(e)Mr Duncan Johnston sworn on 20 August 2013 (20 August Johnston Affidavit). Mr Johnston is a director of Accounting Solutions Victoria Pty Limited, advisor to a group of members of the East Gippsland business community (Local Investor Group also referred to as the Rescue Group). Mr Johnston also swore affidavits as follows: 26 August 2013 (26 August Johnston Affidavit); 28 August 2013 (28 August Johnston Affidavit) and 2 September 2013 (2 September Johnston Affidavit).
(f)Mr Robert Hinton sworn on 20 August 2013 (Hinton Affidavit). Mr Hinton is a partner of Gadens Lawyers and he acts for Local Investor Group.
GSI objected to a number of paragraphs of the 25 July, 31 July and 16 August Smoker Affidavits and by consent those paragraphs were limited to evidence of Mr Smoker’s state of mind only.
CHAPTER 2L
Powers of the Court
The Court’s powers relevant to the matters in dispute are:
Section 283EC Court may order meeting
(1)Without limiting section 283HA or 283HB, the Court may make an order under either of those sections for a meeting of all or any of the debenture holders to be held to give directions to the trustee. The order may direct the trustee to:
(a)place before the debenture holders any information concerning their interests; and
(b)place before the debenture holders any proposals to protect their interests that the Court directs or the trustee considers appropriate; and
(c)obtain the debenture holders’ directions concerning the protection of their interests.
(2)The meeting is to be held and conducted in the manner the Court directs. The trustee may appoint a person to chair the meeting. If the trustee does not exercise this power, the debenture holders present at the meeting may appoint a person to chair the meeting.
Section 283HA General Court power to give directions and determine questions
If the trustee applies to the Court for any direction in relation to the performance of the trustee’s functions or to determine any question in relation to the interests of the debenture holders, the Court may give any direction and make any declaration or determination in relation to the matter that the Court considers appropriate. The Court may also make ancillary or consequential orders.
Section 283HB Specific Court powers
(1)If the trustee or ASIC applies to the Court, the Court may make any or all of the following orders:
(a)an order staying an action or other civil proceedings before a court by or against the borrower or a guarantor body;
(b)an order restraining the borrower from paying any money to the debenture holders or any holders of any other class of
(c)debentures;
(d)an order that any security for the debentures be enforceable immediately or at the time the Court directs (even if the debentures are irredeemable or redeemable only on the happening of a contingency);
(e)an order appointing a receiver of any property constituting security for the debentures;
(f)an order restricting advertising by the borrower for deposits or loans;
(g)an order restricting borrowing by the borrower;
(h)any other order that the Court considers appropriate to protect the interests of existing or prospective debenture holders.
(2)In deciding whether to make an order under subsection (1), the Court must have regard to:
(a)the ability of the borrower and each guarantor to repay the amount deposited or lent as and when it becomes due; and
(b) any contravention of section 283GA by the borrower; and
(c) the interests of the borrower’s members and creditors; and
(d) the interests of the members of each of the guarantors.
It is the position of all parties that there has been no contravention of s 283GA.
Statutory context
Chapter 2L establishes a regime under which, if a borrower corporation wants to raise funds by an offer of debentures which requires disclosure under Chapter 6D or which does not need that disclosure because of ss 708(14) or 708A, or if it issues debentures under a scheme of arrangement or as consideration for a takeover, it must do a number of things. It must first enter into a trust deed which complies with s 283AB and appoint a trustee that complies with s 283AC (which prescribes a limited class of eligible trust corporations): s 283AA.
The trust deed must provide that the right to enforce the borrower’s duty to repay, any charge or security for repayment and the right to enforce any other duty that the borrower (or a guarantor) has under the terms of the debentures or the provisions of the trust deed or Chapter 2L are held in trust by the trustee for the benefit of debenture holders: s 283AB.
Part 2L.2 sets out the duties of the borrower corporation. The duties include an obligation to carry on and conduct its business in a proper and efficient manner and to make available to the trustee all of its financial and other records for inspection and give any information, explanations and other assistance the trustee requires about matters relating to those records: s 283BB. The borrower corporation must provide quarterly reports to the trustee within one month after the end of each quarter and lodge a copy with ASIC: s 283BF.
Part 2L.4 sets out the duties of the trustee. Among other things the trustee must exercise reasonable diligence to ascertain whether the property of the borrower that is or should be available will be sufficient to repay the amount deposited or lent when it becomes due; exercise reasonable diligence to ascertain whether the borrower has committed any breach of the terms of the debentures, the provisions of the trust deed or Chapter 2L and do everything in its power to ensure that the borrower remedies any breach known to the trustee: s 283DA(a), (b) and (c). The trustee must give debenture holders a statement explaining the effect of any proposal that the borrower submits to debenture holders before any meeting that the Court calls in relation to a scheme of arrangement under s 411(1) or (1A) or that the trustee calls under s 283EB(1): s 283DA(g). The trustee must comply with any directions given to it at a debenture holders meeting referred to in ss 283EA, 283EB or 283EC unless the trustee is of the opinion that the direction is inconsistent with the terms of the debentures or the trust deed or the Corporations Act or is otherwise objectionable and has either obtained or is in the process of obtaining an order from the Court under s 283HA setting aside or varying the direction: s 283DA(h). The trustee must apply to the Court for an order under s 283HB if the borrower requests it to do so: s 283DA(i).
The statutory predecessor of Chapter 2L was introduced into the Corporations Law by the Corporate Law Economic Reform Program Bill 1998, the Explanatory Memorandum for which explains that the court’s powers and the processes involved in obtaining a court order are intended to be streamlined by the new legislation. It goes on to state:
8.4 The Bill will remove the complexity of the current procedures for applying to the Court. The Bill gives ASIC and the trustee a clear right to apply to the court for remedial orders. The right to apply to the court can be exercised at any time, and does not require the trustee to believe the borrower or any of the guarantors will not be able to repay the debentures (proposed subsection 260NB(1)) …
8.5 The court’s current power to order that irredeemable debentures are enforceable immediately is subject to a number of conditions (current section 1055). The Bill will remove these conditions (proposed paragraph 260NB(1) (c)). Placing conditions on the court’s powers is unnecessary given the overriding requirement that the court have regard to the interests of each of the parties.
Case law
These provisions have not been the subject of extensive judicial consideration. The principles are generally not contentious between the parties. I will deal with the minor areas of difference later in this judgment.
The Court’s jurisdiction in this area is usefully summarised in The Trust Company (Nominees) Limited v Southern Finance Limited, in the matter of Southern Finance Limited [2012] FCA 1339 at [16] per Yates J:
Section 283HB confers a broad remedial and protective jurisdiction on the Court. The powers of the Court are confined by the specific matters identified in subsection (1), although a plenary grant of power is provided by paragraph (g) to make any order that the Court considers appropriate to protect the interests of existing or prospective debenture holders. The exercise of the discretion to grant relief under subsection (1) is affected by subsection (2) only to the extent that the matters that are identified in that subsection are matters to which the Court must have regard. …
This is a case in which orders were sought and made under s 283HB(1)(b), (f) and (g).
In Australian Securities and Investments Commission v Bridgecorp Finance Ltd (2006) 58 ACSR 499 (Bridgecorp), Barrett J at [14] identified two questions: whether the orders sought are orders that s 283HB(1) allows the court to make and whether in all of the circumstances (having regard in particular to s 283HB(2)), a beneficial purpose will be served by making the orders. At [18], Barrett J noted that s 283HB(1)(g) and similarly worded provisions are intended to confer a broad remedial and protective jurisdiction. Once relevant interests are identified, it is open to the court to make any order that appears to it to be calculated to safeguard those interests. In Bridgecorp, orders were sought and made under s 283HB(1)(g) by consent to put on a formal footing an enhanced monitoring and reporting regime between the debenture issuing company and the trustee for debenture holders (and an embargo on the rolling over of debenture investments) in circumstances where there was no breach of the trust deed.
In Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 (Elderslie) at [31] Lindgren J commented on the scope of s 283HB(1)(c) as follows:
The provision on which the plaintiff relies, s 283HB(1)(c), envisages that there may be circumstances in which a security is not yet immediately enforceable in accordance with the terms of the security and the general law, but it will be appropriate for the Court to make an order that the security be immediately enforceable. An obvious example is a situation in which debentures have not fallen due for payment but all the evidence shows that the borrower is insolvent and will not be able to pay the debentures when the time for payment arises.
These propositions in Bridgecorp and Elderslie were endorsed by Rares J in Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461 (Provident Capital) at [75] and [77].
The subject matter, scope and purpose of Chapter 2L are relevant matters in considering the exercise of the discretion created by s 283HB(1) which is otherwise unconstrained except by s 283HB(2): Parliament intended, when it conferred power on the Court to make orders under s 283HB, to supplement the armoury of relief that the Court could otherwise give under the general law, the provisions of debenture trust deeds or other provisions in the legislation and are designed to provide protection to investors in debentures: Provident Capital at [78]. Provident Capital dealt with an application under s 283HB(1)(d) and (c).
In Provident Capital at [73], Rares J noted the relevance of the impact of receivership on the borrower corporation:
Nonetheless, the power under s 283HB(1)(d) must be exercised in light of the fact that an incident of the appointment of a receiver will be that the company will lose “its title to control its assets and affairs”: National Australia Bank Limited v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277 per Mason CJ, Brennan and Deane JJ, citing the phrase of Viscount Haldane LC in Parsons v Sovereign Bank of Canada [1913] AC 160 at 167. The appointment of a receiver is also likely to cause damage to the company concerned. The purpose of the powers that s 283HB confers on the Court is to enable it to make appropriate orders that it considers necessary to protect the interests reflected in Pt 2L itself.
HEARING ON THURSDAY 25 JULY 2013
A brief hearing was held in the late afternoon of 25 July 2013, at which Trust Company and GSI were represented by Counsel. The orders set out in [5] were made by consent, other than the restriction of access to terms of any judgment or order referred to at [5](c). Counsel for GSI read to the Court advice received from ASIC that it would not attend the hearing as it had not had time to consider the affidavit material supporting the application provided by Trust Company.
Trust Company provided a brief written outline of submissions on which it relied. The 25 July Smoker Affidavit was read and RCS 1 was tendered. Counsel for Trust Company pressed for an immediate hearing of the application, submitting that:
(a)On 19 July 2013, GSI announced that it had been provided with information showing that there would be a need to increase materially GSI’s provisions for impairment of the value of loan securities and the directors had concluded that as a result of recognising impairments it was possible that GSI would have a deficiency in its net tangible assets.
(b)On the same day, GSI froze repayment of all “at call” and “term” GSI Notes for 7 days. GSI has no power to continue the freeze after 26 July 2013.
(c)Despite requests by Trust Company on 26 June and 12 July 2013 for GSI’s Quarterly Report for the period to 30 June 2013, GSI had not provided them. On 24 July 2013 (after a market announcement by GSI and the receipt on 19 July of “an uncertain proposal to address a net asset deficiency”) GSI advised Trust Company of its financial position as at 30 June 2013. The financial statement it provided showed a net equity of $3,761,561 in respect of which $2,514,725 was a deferred tax asset which would be non-existent if no profits are derived. Notes to that financial statement indicate that further impairments may be required once further information about certain property assets was available.
(d)Trust Company had, at midday on 25 July 2013, received a spreadsheet indicating that GSI had a net tangible asset deficiency of $2.609 million. Trust Company has lost confidence in the management of GSI.
(e)If the Court ordered that security under the Trust Deed was immediately enforceable, Trust Company intended immediately to appoint receivers and managers because it believed that that was most likely to achieve the maximum return for debenture holders.
(f)Under clauses 5.04 and 5.08(f) of the Trust Deed, Trust Company has a duty to ensure that debenture holders rank equally. The evidence effectively showed that GSI was insolvent and cannot pay the debenture holders when the time for repayment arises and will be in default under the Trust Deed on 26 July 2013. Unless the freeze was continued in respect of payments to debenture holders, given the net asset deficiency, debenture holders would be treated unequally.
(g)Trust Company relied on the comments of Lindgren J in Elderslie at [31].
(h)It was Trust Company’s view that the security under the Trust Deed would be enforceable under clause 12.01 on 26 July 2013 because there would be a Default under clause 12.01(a) due to non-payment of principal on GSI Notes which had matured on and from 19 July 2013 when the directors of GSI imposed the freeze on redemptions. This view was based on Trust Company’s understanding from cash flow reporting provided by GSI that amounts accrue for payment under GSI Notes on each day.
Counsel for GSI opposed proceeding immediately with hearing the application for orders pursuant to s 283HB(1)(c) because:
(a)Making that order would have the effect of a final order and GSI had only received notice of the application on 25 July 2013; it needed some time to prepare for a final hearing;
(b)GSI had, by letter of 24 July 2013 to Trust Company, advised that there was a sale process underway with a timetable for identification of a possible bidder for GSI’s loan book from among four substantial institutions or a recapitalisation proposal from members of the East Gippsland business community which might result in indicative bids by 7 August and notification of a preferred bidder by 9 August (a Friday); and
(c)It was appropriate for this sale process to progress and the hearing of Trust Company’s application under s 283HB(1)(c) should be stood over until after 9 August. Counsel noted that this is what had occurred in Elderslie: the application was stood over from 13 June 2008 to allow a recapitalisation proposal to be explored, although orders were ultimately made under s 283HB(1)(c) on 2 July 2008.
The Court stood the matter over to 13 August 2013 to enable any sale process or recapitalisation proposal to be advanced and to allow GSI time to prepare a response to the application. The following emerged from the course of submissions concerning any actions which might be required to protect the assets of GSI until the Trust Company’s application was heard and determined:
(a)Upon a Default under the Trust Deed, Trust Company as trustee had the right to enforce security upon giving written notice stating that a breach has occurred or exists under clause 12.01 of the Trust Deed. This is in contrast to the position considered by the Court in Elderslie where a 14 days’ notice period applied. Trust Company’s view was that security would be enforceable on 26 July 2013 by reason of the freeze on redemptions which had been in force since 19 July 2013;
(b)As there was no current disclosure document, no new funds were being accepted by GSI;
(c)Despite the sale and recapitalisation proposals, there was no intention by GSI to enter into a binding agreement for the sale of assets during the period; and
(d)The parties consented to the Court making orders which prohibited GSI from making any payments to debenture holders under the Trust Deed or making payments to related entities or related bodies corporate until further order.
The Court noted that as Trust Company had lost confidence in GSI’s management, Trust Company might appoint a receiver on the next day and the timetable for evidence and submissions which had been set down may become irrelevant.
BACKGROUND
Against the background of the recent appointment by Trust Company of receivers and managers to Banksia Securities Limited (also a company which issued debentures under Chapter 2L), on 15 November 2012, Trust Company wrote to GSI advising that it proposed to appoint an expert accountant to act as its delegate and agent under the Trust Deed to review GSI’s books, records and operations and to report to Trust Company in its capacity as trustee. After negotiations as to the identity of the expert, Ernst & Young was appointed on 19 December 2012 (at GSI’s expense) to report on (among other things) the impaired value of GSI’s loan book and GSI’s net asset/equity position based on various sensitivities and assumptions.
Ernst & Young Report
Around 31 January 2013, Ernst & Young gave GSI a draft report for the purpose of confirming factual accuracy. The draft report, among other things, identified potential sensitivity adjustments which Ernst & Young thought may be required, including a collective loan provision of $3.1 million. The draft report and the final report delivered on 6 March (EY Report) contained the following recommendation for “immediate” timing:
Additional sources of equity to strengthen GSI’s balance sheet should be explored (including through Director guarantees) to provide protection from loan impairment risk
Ensure that The Trust Company’s information needs are fully and promptly met
Broader sector issues (i.e. further collapses of businesses with similar models) may result in a loss of depositor confidence making GSI’s business model of lending from retail investors unsustainable. GSI should start making contingency plans for other potential funding sources (i.e. structured financing) or exit routes (i.e. loan book sales) now
At 5.1% (prior to considering additional impairment) the current equity position of GSI does not provide a reasonable capital reserve should loan impairment eventuate – which could be caused through broader property market issues. GSI should suspend dividend payments until potential impairment issues are quantified and a more significant net equity position is developed.
Trust Company concerns arising from EY Report
Mr Smoker says that the EY Report provided a number of grounds for concern by Trust Company that GSI’s assets may not be sufficient to repay its liabilities to Noteholders including:
(a)Insufficiency of GSI equity: The EY Report contained a statement under the heading “Balance sheet solvency” that:
GSI’s equity position does not provide a sufficient reserve in case of further write-downs that may result from continued weakness in property markets it is exposed to … Significant additional work is required by Management to substantiate provisions which was not possible for the purpose of this report (including instructing full revaluations of properties). We note that should equity write-downs be recognised and disclosed in Product Disclosure Statements [it] may cause secondary liquidity issues due to impacts on depositor confidence.
(b)Currency of valuations: A number of valuation reports relied on by GSI for monitoring loan collateral may have been outdated and Ernst & Young had concerns as to the quality and suitability of a number of those valuation reports; and
(c)Riviera Loans: Impairments which Ernst & Young recommended should be recognised in relation to specific loans identified in the 25 July Affidavit at [24](c) (Riviera Loans).
GSI’s response EY Report
GSI provided two written responses to the draft EY Report. Mr Sanford says that for the reasons set out in those responses, the GSI board also did not agree with many of the recommendations in the final EY Report: 9 August Sanford Affidavit at [17]-[27] and GAS 1 at tabs 8 and 9. The responses included the following commentary:
(a)GSI management reviews liquidity on a daily basis;
(b)GSI prepares actual cash flow statements every six months as part of preparing half yearly financial statements;
(c)GSI has an excellent record of prompt reporting to Trust Company;
(d)At fortnightly meetings, GSI’s Arrears Committee reviews individual loans for specific impairment at least at half yearly intervals and in the interim may choose to “turn off” interest and/or make specific provision in management accounts;
(e)GSI’s Loan Approval Committee considers each loan application individually and no loans are approved outside of the Committee;
(f)GSI is not a high-volume lender and is able to carefully consider each application on its merits. GSI has averaged only 5.7 loan approvals per month over the five years to 30 June 2012;
(g)The graph of median values for Victoria, East Gippsland Shire and Baw Baw Shire show that the latter two areas, in which GSI principally operates, are generally less volatile than Victoria, not more;
(h)GSI had engaged a consultant familiar with the industry to assist GSI to look at its balance sheet and consider ways to improve GSI’s equity position (which had occurred before 6 February);
(i)GSI typically pays a monthly dividend of $10,000 on ordinary shares and a quarterly RPS dividend of around $45,000. These are accommodated within ongoing profitability. The special dividends on ordinary shares normally payable following each half yearly result have been cut back in recent years to preserve capital;
(j)GSI would obtain new valuations as part of a review of the loan portfolio, including high-risk loans;
(k)GSI provided information in respect of retention/rollover trends and changes in credit over the prior 13 months;
(l)Any changes in specific impairment provisions would be dealt with by GSI on a case-by-case basis;
(m)Having regard to, among other things, the views of GSI’s auditor in relation to the accounting standards under which GSI operates, GSI did not consider a collective impairment provision appropriate at that time;
(n)GSI had not, in its 40 year history, suffered a shortfall in liquidity;
(o)Retention of “at call” investments had been resilient despite market volatility, with around $20 million over the period September 2008 to October 2012;
(p)GSI acknowledged broader industry issues and said it has started contingency planning;
(q)GSI disagreed with Ernst & Young’s proposed sensitivity adjustments. Ernst & Young suggested a more than three fold bigger provision in relation to a specific large loan. GSI thought its collective provision should be $439,000 compared to Ernst & Young’s suggested $3.1 million (among other variations). This led to an Ernst & Young assessment of equity at $0.9 million compared to GSI’s assessment of equity at $6,132,788;
(r)On the topic of benchmarking, GSI had an historical lending risk reserve of $475,015 (or 0.4% of the loan portfolio) against an actual bad debt loans experience over the past seven years of $393,393 and 0.5% of risk-weighted assets as a benchmark propounded by the Australian Prudential Regulatory Authority. GSI also said:
We are fully aware of the strong growth we have seen in deposits, particularly over [the] past two years, and the flow on effect in the size of the loan portfolio. This has also seen an increase in our exposure to development loans. The extent to which we approve and maintain development lending is constantly under review and we have no intention of the loan portfolio becoming more heavily slanted in that direction. …
(s)On the topic of collective provisions:
GSI has a loan portfolio of circa 250, non-homogenous loans and is closely acquainted with each loan and their individual credit risks and therefore deals with any impairment by making specific provisions as deemed appropriate on a case by case basis. We do not agree that a $3.1M collective provision is warranted given the above and the fact that all our lending is secured. We do however understand your thinking and agree that at least in the current climate some level of general provision, over and above specific provisions, may be appropriate. Having regard to the various factors, we feel a provision in the order of 0.5% of the loan book is appropriate and is reflected in the sensitised equity table above. Subject to market considerations, we will look to increase the 0.5% over time. In addition, whilst we believe on the evidence available that our specific provisions are appropriate at this time, we intend reviewing all loans with the benefit of any new valuations obtained, to ensure the appropriate level of specific provision is in place.
In the 9 August Sanford Affidavit at [26], Mr Sanford notes that the final EY Report, among other things, estimated that an additional impairment of $2.6 million should be raised in connection with non-performing loans. However, Ernst & Young noted that significant additional work needed to be undertaken by management to substantiate the appropriate level of provisioning. Ernst & Young recommended that revaluations be obtained for the majority of properties they had assessed and expressed the view that it was only from these valuations that a definitive specific provision estimate could be identified; once specific provisions have been fully assessed, the collective provision would be able to be better defined but collective provisioning would require a high degree of judgment; and a formal valuation should be obtained for the Riviera Loans and some other steps in relation to the Riviera Loans (which are the subject of confidentiality orders).
In an email to Trust Company dated 7 March 2013 which attached GSI’s half yearly reports, Mr Sanford said:
The Directors have reviewed the accounts in light of both the draft and final EY report.
In particular we have made further specific provisions in relation to various loans. We have reviewed (and continue to review) the RPL loan [Riviera] identified in the report. For various reasons (which we are happy to discuss with you obviously if you wish) we do not consider it necessary that we make any specific provision on this loan at this time although obviously it continues to be closely monitored. We have also carefully considered the issue of a provision for general impairment and discussed the matter further with our auditor. We are of the view that is not necessary to make a general provision in the accounts at this time. As mentioned in our responses to E&Y, we intend carrying out a thorough review of the entire loan book (that process has already started) and in that process we’ll obviously continue to review the issue of both specific and general impairment.
As discussed, I and the Directors are happy to discuss matters arising from the EY report at your convenience.
GSI seeks Trustee consent to be named in Prospectus 18
On 14 March 2013, GSI wrote to Trust Company seeking its consent to be named in a proposed Prospectus 18 for GSI Notes. Prospectus 17 was due to expire on 21 April 2013.
Reporting Protocol
On 22 March 2013, Trust Company wrote to GSI indicating that as a condition of providing its consent to be named in Prospectus 18, it would require GSI to agree to a reporting protocol (Reporting Protocol). That letter set out a range of Trust Company’s concerns and it included the comment:
The findings set out in the EY Report have raised concerns of a risk that GSI’s total tangible assets may not be sufficient to satisfy Note holders’ claims in full. We consider that we do not currently have sufficient information to conduct the necessary investigations into GSI’s tangible asset position, in particular in relation to the Loan Assets.
These risks and concerns necessitate additional investigations by us regarding the Loan Assets … We have consulted with EY in preparing our information requirements set out in section 2 of the Reporting Protocol.
…GSI’s equity ratio as at 31 December 2012 was 3.93%, being equity of $6,412,644, compared to total assets of $154,294,736.
In our view, an equity ratio of 3.93% is insufficient given the scale of the GSI’s operation and current market conditions and sentiment. The low level of equity in GSI is concerning to the Trustee.
Liquidity Report and Equity Improvement Report
On 3 April 2013, GSI accepted the Reporting Protocol under which it agreed:
(a)to obtain revaluations of certain properties on terms to be agreed, with a valuer being appointed by 30 April 2013 and delivery of reports by 1 July 2013;
(b)to take certain steps in relation to the Riviera Loans;
(c)to submit a weekly liquidity report in an agreed format (Liquidity Report);
(d)that Trust Company would, at GSI’s cost, engage Ernst & Young as Trust Company’s delegate under the Trust Deed to monitor GSI’s cash flow and liquidity position and advise Trust Company as directed from time to time; and
(e)(under item 3(b)) to report to the Trustee in writing by no later than 1 July 2013 describing the steps that GSI proposes to take to increase GSI’s equity ratio to not less than 8% by 31 December 2013 to comply with Benchmark 1 of ASIC’s Regulatory Guide 69 Debentures and notes: Improving disclosure for retail investors (Equity Improvement Report).
Half-Yearly Accounts
On 8 April 2013, GSI issued its Half Yearly Accounts for the period ended 31 December 2012 which indicated, among other things, a net loss after tax attributable to members of $63,084. It contained a statement that “whilst the underlying interest margin was strong and operating expenses in line with budget, bad and doubtful debts significantly affected the result. The Company is expecting to trade profitability during the remaining of FY 13”.
Prospectus 18
On 8 April 2013, Trust Company agreed to be named in Prospectus 18. On 19 April 2013, GSI lodged with ASIC Prospectus 18 pursuant to which it accepted applications for GSI Notes; it was a replacement prospectus for an earlier version which had been lodged on 8 April.
Disclosure on Benchmark 1
Prospectus 18 made the following disclosure in relation to ASIC Benchmark 1:
ASIC’s benchmark for equity ratio is that issuers maintain a minimum of 8% equity, or 20% equity where more than a minor part [10%] of the issuer’s activities is property development or lending funds directly or indirectly for property development. This calculation is based on the formula nominated by ASIC as follows:
Total equity
total liabilities + total equity…….
GSI’s equity ratio does not satisfy ASIC’s benchmark. Currently, property development or lending for property development forms more than a minor part of the Company’s activities, so the relevant equity ratio benchmark is 20% equity. As at 31 December 2012, the Company’s equity capital was $6,412,644 which equated to 3.93% equity under the ASIC formula above. In this respect, the Company does not satisfy with the applicable benchmark. The reasons for the Company’s equity position are set out below.
GSI has always operated in accordance with its Trust Deed which requires that it maintain capital of at least $1M or 0.5% of the total tangible assets (whichever is the greater), to a maximum of $5,000,000. The Company currently has equity capital in excess of the Trust Deed minimum. ….
The Company has chosen to structure its business with this level of capital, which exceeds Trust Deed requirements, because it believes its lending policies (see section 8.4 of this prospectus) provide a means for the Company to manage the credit risk associated with its principal business activities. While past performance may not be indicative of future performance in all circumstances, the Company notes that in its business it has never defaulted on a payment of principal or interest to a GSI Note holder since it commenced trading in 1970.
Repayment of principal and interest
Prospectus 18 also disclosed at “7.4 Repayment of principal and Interest”:
The Company will repay “At Call” GSI Notes in part, or in full with interest accrued, upon the Company receiving a signed withdrawal form from the holder. Repayment is subject to the Company having sufficient liquidity. See section 4, Benchmark 2 – Liquidity for further information on liquidity.
Rollovers
The way in which the company deals with the rollover of Fixed Term GSI Notes is set out in Benchmark 3 of section 4 of this prospectus.
The disclosure in relation to Rollovers said:
ASIC’s benchmark for rollovers is that all issuers should clearly disclose their approach to rollovers, including:
(a)what process is followed at the end of the investment terms; and
(b)how they inform those rolling over or making further investments of any current prospectus and continuous disclosure announcement.
Rollovers are important to issuers who rely on the continuity of funds invested beyond the initial term.
….
At least seven (7) days prior to the maturity of existing term GSI Notes, holders of existing fixed term GSI Notes will be sent a pre-maturity letter that states the current prospectus (and any relevant ongoing disclosures) is available to them from the Company website ( and if investors do not have access to the website, that they may request a hard copy, free of charge, of these documents.If an investor requests repayment in writing on a withdrawal form and returns to us the Certificate for GSI Notes, the fixed term investment, together with interest accrued to the maturity date, will be dispersed in full on the maturity date. … Repayment of the investment will be processed in accordance with the investor’s instructions
An investor may request that the fixed term investment is reinvested for a similar term of the current interest rate applicable to that term, renewed on a different basis or repaid. If written instructions are not received for a renewal or repayment, the principal and interest accrued shall, upon maturity, be re-invested for a similar term at the current rate of interest payable at the time applicable to that term. In the case of a Special GSI Note … where the same term is not available at maturity, re-investment will be for the next shortest term then available, or ‘At Call’ if there is no shorter term. Further information is in section 7.4 of this prospectus.
Trust Deed provision dealing with repayment of principal and interest
Clause 5.07(b) of the Trust Deed provides:
Redemption of any Stock shall be effected in accordance with the terms and conditions set out in the First Schedule (unless otherwise provided in the terms of issue thereof).
The First Schedule to the Trust Deed “General Conditions Applying to the Debenture Stock” provides at condition 3:
Except when payment is required to be made to the Trustee pursuant to this Deed, and subject always to the terms and conditions of issue contained in any relevant prospectus or offer document the tender to the Company of the relevant Debenture Certificate (if issued), a written request for redemption and evidence of identity (if so required by the Company) shall be conditions precedent to the right of the Debentureholder to receive payment of the principal amount and premium (if any) represented by the Debenture Certificate and the Company shall not be obliged to pay nor shall it be deemed to have committed any breach under this Deed by failure or refusal to pay the principal amount or premium (if any) unless the relevant Debenture Certificate (if issued) and written request and evidence of identity (if required) has been tendered to the Company subject in the case of a lost or destroyed Debenture Certificate to the provisions of Condition 7.2.
Review of loans and equity disclosure
Prospectus 18 disclosed under “Risks to consider” on page 4 and “Property and valuation risk” on page 13 that it was undertaking a review of certain loan assets and security properties and the outcome of that review may impact on the value of GSI’s Total Tangible Assets. Prospectus 18 stated that as at 31 January 2013 (unless otherwise stated):
(a)As at 31 December 2012, GSI’s equity capital was $6,412,644. When calculated against its Total External Liabilities, this gave an equity ratio of 3.93%;
(b)As at 19 April 2013, GSI’s investments are limited to Authorised Investments based on its current assets to liabilities ratio. This means that as at the date of Prospectus 18, GSI’s Total External Liabilities exceeded 96% of its Total Tangible Assets;
(c)Of its 246 mortgage loans (totalling $118,527,217) 18 had principal and interest payments which were more than 30 days in arrears for a total sum of $12.03 million;
(d)GSI had advanced seven loans to directors and related parties totalling $4,376,567.
Revaluations
The review referred to in Prospectus 18 and required by the Reporting Protocol involved the valuation of the security properties for 31 loans and three directly owned properties. The valuations were to be returned by 1 July 2013, and by agreement between GSI and Trust Company, some of the return dates were extended to 31 July 2013.
On 26 June 2013, GSI sent to Trust Company tables which outlined the results of a number of the revaluations conducted under the Reporting Protocol (Revaluation Tables). Mr Smoker says that in telephone conversations with representatives of GSI on that day he expressed concern regarding the extent of the decline in values addressed in the Revaluation Tables. Mr Smoker requested that the Quarterly Report for the period ended 30 June 2013 be provided as soon as possible following the end of that period and that the Revaluation Tables be taken into account in its preparation: 25 July Smoker Affidavit at [35]-[38].
On 27 June 2013, GSI’s financial adviser FTI Consulting provided a report in relation to the Riviera Loans. Mr Sanford says that the FTI Consulting report indicated that the impairment required in relation to the Riviera Loans was a number which is subject to a confidentiality order but which is less than half that suggested by Ernst & Young, and GSI adopted the impairment recommended by FTI Consulting: 9 August Sanford Affidavit at [49]-[50].
Following his review of that report and the Revaluation Tables, Mr Smoker was concerned that the value of the securities held by GSI “may have declined to levels beneath those levels previously reported by [GSI]”: 25 July Smoker Affidavit at [41]. As at 30 June 2013, GSI had received valuations in respect of 6 of 19 loans which were to be reviewed under the Reporting Protocol: 9 August Sanford Affidavit at [51].
Equity Improvement Report
Representatives of Trust Company and GSI held telephone conversations concerning progress of items in the Reporting Protocol on 1 May, 8 May, 16 May, 23 May, 5 June, 12 June and 19 June and during each of those telephone conversations the Equity Improvement Report was discussed. Mr Smoker says that: “No satisfactory proposal was made in any of those telephone conversations to address item 3(b) of the Reporting Protocol”: 25 July Smoker Affidavit at [34]. Status updates on the Reporting Protocol of 16 May, 5 June and 12 June indicate that the status of the Equity Improvement Report was “not started”: GAS 1 tab 18.
The Equity Improvement Report was due on 1 July 2013 under the Reporting Protocol and GSI provided it to Trust Company by letter on 3 July 2013 (two days late). That letter said:
We refer to Trust’s query in relation to the steps GSI would take to increase its equity ratio in accordance with Benchmark 1 of ASIC Regulatory Guide 69 “Debentures and notes: Improving disclosure for retail investors”.
The steps GSI proposes to take in relation to the equity ratio are as follows:
1.Review and consider GSI’s current level of capital after its 30 June 2013 financial statements are finalised;
2.Consider any mandatory capital requirements imposed by regulation (e.g. ASIC CP 199)
3.Consider in the context of GSI’s operations, the most appropriate level of capital going forward.
4.Take whatever steps are then deemed appropriate to meet such capital levels, e.g. in the event greater capital is required - changes to dividend policy, capital raising (internal/external), downsizing, etc.
Mr Smoker did not consider that the contents of GSI’s letter dated 3 July 2013 complied with clause 3(b) of the Reporting Protocol: 25 July Smoker Affidavit at [43].
Need for a replacement prospectus and withdrawal of Prospectus 18
On 8 July 2013, GSI sought Trust Company’s consent to a replacement prospectus because GSI wanted “to update its equity and related benchmark disclosures as at 30 June 2013” having regard to an interim view formed by the GSI board that there was a need for additional impairments. By 8 July, GSI had received valuations for 17 of 19 priority loans and two of three directly owned properties: 9 August Sanford Affidavit at [54]-[57].
Trust Company declined to give its consent at about 5 pm on 9 July 2013. It required GSI to provide further information regarding a decrease in GSI’s total equity as at 30 June 2013 to about $5.6 million, as disclosed in the draft replacement prospectus.
On 10 July 2013, GSI withdrew Prospectus 18 and suspended acceptance and processing of new applications and rollover of maturing GSI Notes. GSI made a continuous disclosure announcement on its website which provided in part as follows:
The company is presently seeking to make amendment to its current Prospectus and is waiting approval of a replacement. In the meantime, effective immediately and until further notice, we are unable to accept any new invetments [sic]. At Call or Fixed Term or additions to existing investments and the rolling over of existing investments is not permitted. At Call Investors may make withdrawals as normal.
By letter of 10 July 2013, GSI sought Trust Company’s consent to the issue of a further replacement prospectus, confirmed to Trust Company that it would continue to repay funds in accordance with the terms of existing GSI Notes and that its financial circumstances and liquidity allowed it to do so and offered to provide liquidity reports more frequently than required under the Reporting Protocol.
12 July 2013 letter from Trust Company to GSI
Riviera Loan provisions and reliance by GSI on FTI Consulting
On 12 July 2013, Trust Company wrote to GSI outlining, among other things, its concerns about the extent to which GSI had recorded provisions in respect of the likely impairment of the value of its loans. Trust Company acknowledged GSI’s advice that it had made impairments in relation to the Riviera Loans as suggested by FTI Consulting, but expressed concern that further impairments may be required as suggested by Ernst & Young.
On 15 July 2013, GSI’s financial adviser FTI Consulting advised GSI that following meetings it has held with Trust Company, Ernst & Young and lawyers in relation to the Riviera Loans, its estimated impairment of the Riviera Loans was for an amount more than four times larger than as it had stated on 27 June 2013. GSI adopted the revised impairment recommended by FTI Consulting.
Request for early provision of Quarterly Report to 30 June 2013
The 12 July 2013 letter from Trust Company also required GSI to provide the Quarterly Report for the period ending 30 June 2013 by no later than 4 pm on 19 July, notwithstanding, as GSI had pointed out, that under the Trust Deed it would not normally be due until the end of the month.
Appendix A Methodology
The 12 July letter also required GSI to apply assumptions set out in Appendix A to the letter in calculating tangible asset values and appropriate levels of impairments and provisions (Appendix A Methodology). This would require deductions relating to factors such as Goods and Services Tax (where applicable), estimated distressed sale discounts, estimated selling and associated period discounts and estimated holding costs. Mr Sanford says that although GSI did not agree with the Appendix A Methodology, GSI adopted it in the revaluation reports to Trust Company.
Freeze on payments to related parties
On 16 July 2013, GSI undertook to Trust Company that it would not make redemptions out of fixed term GSI Notes or pay directors fees or allow withdrawal of GSI Notes held “at call” by GSI directors or their related parties without notice to Trust Company.
FTI Consulting hired to provide corporate advisory services
On or about 17 July 2013, Mr Sanford engaged FTI Consulting to provide general corporate advisory services to GSI.
Concern about potential for unequal treatment
On 17 July 2013, Trust Company wrote to GSI expressing concern that GSI’s loan asset impairment provisions may be insufficient, that there may be a deficiency in its net tangible assets compared to its liabilities, that its equity may be inadequate and that there was a risk of unequal treatment of Noteholders as a result.
Voluntary freeze on redemptions by GSI, possible deficiency in net tangible assets
On 19 July 2013, by letter GSI acknowledged to Trust Company that although a review of GSI’s loan book and secured property has not been completed, the Directors of GSI had now been provided with information showing that there would need to be a material increase in GSI’s provisions for impairment of loans and the Directors concluded that the result of recognising the impairments was that it was possible that GSI would have a deficiency in its net tangible assets. While the review was continuing the Directors would not be able to reach any final conclusions on the matter. That letter also:
(a)acknowledged Trust Company’s concerns (expressed in a letter of 17 July) about payments to Noteholders (due to the risk of unequal treatment) and advised that at 9 am on 19 July, GSI had implemented a voluntary suspension of redemption of “at call” and “term” GSI Notes;
(b)advised that GSI had engaged FTI Consulting to propose potential transactions which may include sale and/or capital raising proposals, as a means of addressing the net tangible asset deficiency; and
(c)requested Trust Company to forebear from taking any steps to enforce its security or seeking orders under Chapter 2L.
“At call” and matured “term” GSI Notes
As at 19 July 2013, the value of “at call” Notes was $19,985,210, being Notes which Noteholders can demand repayment on immediate notice to GSI. Also at that date there were “term” Notes to the value of $455,424.88 which had matured subsequent to the voluntary suspension: 31 July Smoker Affidavit at [10]-[11].
Continuous disclosure notification
On 19 July 2013, GSI posted on its website notification of the voluntary suspension of redemptions and it contained the following statement:
[T]he Directors now believe an increased provision may be required, and would reduce the Company’s net tangible assets position to the extent it may have insufficient equity for the shortfall.
Press reports
GSI’s freeze on redemptions was widely reported in the press on 22 and 23 July 2013.
Recapitalisation or sale of loan book
Appointment of FTI Consulting as advisor
On or about 22 July 2013, GSI engaged FTI Consulting to act as its advisor in connection with potential recapitalisation or sale of part or all of its loan book.
Trust Company request for information and Quarterly Report
On 23 July 2013, Trust Company wrote to GSI requiring it to provide: (1) a detailed outline of GSI’s proposal to ensure that Noteholders are paid in full; (2) confirmation of GSI’s tangible asset position using the Appendix A Methodology; (3) any documents or information which had not already been provided to Ernst & Young or Trust Company which gave rise to the risk of a deficiency in GSI’s net tangible assets referred to in the notification of 19 July; (4) full particulars of money, obligations or other assets held by GSI which GSI records as equity; and (5) the Quarterly Report for the period ending 30 June 2013.
GSI proposes timetable
On 24 July 2013, GSI advised Trust Company that it would need to continue the suspension of redemptions and applications for a period of time while it pursued recapitalisation efforts by way of the sale of its loan book or a recapitalisation proposal made by a group comprising members of the East Gippsland business community. It set out a timetable culminating in the receipt of indicative offers and the identification of a preferred bidder by Friday, 9 August 2013. This letter also advised that it would provide Trust Company with a report on its net asset position by noon on 25 July and the Quarterly Report would be provided no later than 31 July 2013 and that GSI would consent to orders under Chapter 2L for a “moratorium to effect the [voluntary suspension].”
First Revaluation Summary – deficiency of $2,609,000
On 25 July 2013, GSI gave to Trust Company a spreadsheet entitled “GSI - Progressive Valuation Summary – excluding Riviera (Appendix A to Trustee’s letter dated 12 July 2013)” containing (among other things): (1) a list of the revaluations of properties which had been reported to Trust Company as at 25 July 2013 under the Reporting Protocol (First Revaluation Summary); and (2) a list of adjustments at the foot of which appeared the term “Net Tangible Assets (Draft)” which showed a deficiency of $2,609,000.
Court orders freeze on redemptions and adjourns Trustee’s application
On the application of Trust Company, the Court made orders on 25 July 2013 freezing redemptions of GSI Notes. The hearing was adjourned to 13 August 2013.
Trust Company Press Release of 26 July
On 26 July, Trust Company issued a press release which said, among other things:
TRUSTEE GIVES GIPPSLAND SECURED INVESTMENTS LIMITED SEVEN DAYS TO DEVELOP RECAPITALISATION PROPOSAL
The Trust Company (Trustee), as Trustee of the notes or debentures issued by Gippsland Secured Investments Limited (GSI), today announced it has provided a seven day ‘grace period’ before deciding whether to appoint receivers to GSI.
…
We have a present right to enforce the Trustee’s security and appoint receivers, following GSI defaulting on its obligations to note holders.
…
Importantly, The Trust Company acknowledges the emergence of community support for GSI in regional Victoria over recent days. We have therefore offered a seven day ‘grace period’ (until close of business next Friday, 2 August 2013) for GSI to develop a formal recapitalisation proposal to address the financial difficulties it faces.
…
The Trust Company has given GSI firm guidelines for any recapitalisation proposal presented to us at the end of the seven day period, saying it must:- be sufficiently certain to implement, and of sufficient size to support any deficiency in GSI’s balance sheet disclosed by them;
- address the liquidity impacts of recent events announced by GSI;
- not involve the sale of any loans for less than their face value;
- ensure that note holders are treated fairly and equally.
“We will not accept any proposal from the company that envisages a forced sale process for its assets, as we consider this is not in the best interests of note holders,” Mr Grbin said.
…Dispute about Trust Deed enforcement powers
On the same day, solicitors to GSI wrote to solicitors for Trust Company twice:
(a)Challenging Trust Company’s view that there would be a Default under clause 12.01(a) of the Trust Deed, there could be no failure of GSI to pay moneys “due and payable” until the orders made by the Court on 25 July are discharged, or alternatively it would be an abuse of process by the Trust Company to rely on the orders (for which Trust Company had applied) to give rise to a Default.
(b)Denying that GSI was insolvent or any right of Trust Company to enforce security on that basis.
(c)Taking issue with Trust Company’s press release.
Trust Company responded on 26 July in the following terms (among others):
In its letter dated 19 July 2013, GSI confirmed that it suspended redemptions of at call investments by investors, effective from 9:00 am on 19 July 2013.
Since that time, amounts of principal have accrued for payment by GSI.
As at today, those amounts of principal remain unpaid by GSI.
Under clause 12.01(a) of the Trust Deed, if GSI fails to pay principle in respect of any GSI Notes within 7 days of it becoming due and payable, we may take steps to enforce our security and at our option all amounts due in respect of the GSI Notes become immediately due and payable.
As noted below, we do not intend to enforce our security at this stage pending any recapitalisation proposals provided by GSI. However, we reserve, without limitation, all of our rights to do so and under the Trust Deed, the Corporations Act 2001(Cth) and at law.
Trust Company concern about loan book sale or recapitalisation process
In that letter, Trust Company also indicated that it was unacceptable to it that any sale of assets by GSI results in a shortfall to GSI Noteholders. Trust Company said that it was not appropriate for GSI to expend funds on a sale process with the assistance of FTI Consulting and GSI’s lawyers because it was unlikely that any sale process would realise enough funds to pay out all Noteholders and such costs may erode funds available to Noteholders. In relation to recapitalisation or equity contributions, Trust Company said that in view of the confirmed net tangible asset deficiency the need for immediate equity was clear and “the period of time available to GSI to recapitalise on a solvent basis is limited”. Trust Company stressed that any equity proposal should take account of the funding requirements of GSI including the size of its net tangible asset deficiency forecast, its impact and the need to ensure that Noteholders are treated fairly and equally in distributions.
Dispute about impact of Court order freezing redemptions on Trust Deed enforcement powers
On 29 July 2013, solicitors for Trust Company wrote to the solicitors for GSI and said (among other things):
The Voluntary Suspension [made by GSI on 19 July] and the Court’s orders made by consent do not affect the consequences of the contractual obligation and failure to pay principle in respect of any stock within 7 days after the same became due and payable. The clear position is that since 19 July 2013:
(c)GSI has not paid the amounts of principal that have become due and payable by GSI, including requests for redemption of “at call” notes issued by GSI; and
(d)the non-payment of those amounts is an event under clause 12.01(a) of the Trust Deed, which gives rise to an entitlement of the Trustee to enforce its security on written notice to GSI under clause 12.01 of the Trust Deed.
If amounts of principal have fallen due for payment since 9am on 19 July 2013 the Trustee’s security is enforceable.
…
The hearing in the proceedings will concern only the question of whether the Court can make an order under section 283HB(1)(c) of the Act. The enforceability of the Trustee’s security under the Trust Deed is a separate and distinct matter upon which there is, from the Trustee’s perspective, no room for dispute.
Until your correspondence on 26 July 2013, the Trustee was proceeding on the understanding that the event which would cause the Trustee’s security under clause 12.01(a) was common ground and would inevitably occur on 26 July 2013. In any event, nothing done by the Trustee has waived or abandoned the entitlement to exercise the contractual powers under the Deed or the consequences that flow from the event under clause 12.01(a). Indeed, in court on 25 July 2013:
(a)the Trustee’s senior counsel made clear that the Trustee reserved its rights under the Trust Deed to enforce its security;
(b)her Honour made it clear to the parties that any right of the Trustee to enforce its security would not be affected by the orders, in which event the hearing listed for 13 August 2013 would not be required; and
(c) no dispute was raised by senior counsel for GSI on that question.
Representatives of your firm and GSI’s counsel were in court and no wider restraint was obtained from the Court in light of the expressed intention to exercise the power to appoint if the Trustee saw fit to do so. …
GSI’s position on Trust Deed enforcement powers, whether it has withheld information from Trustee and loan book sale/recapitalisation proposals
Second, if Noteholders are willing to exchange their Notes for interests in Open MIS and Closed MIS, they would not be within the Chapter 2L regime and the Notes would be cancelled. Whether or not there could be a “run” on Open MIS because of pent up demand would depend on the terms of the Open MIS in relation to the redemption of interests under that managed investment scheme. It is unknown what regulatory requirements ASIC might impose or what would be acceptable to Noteholders; that is something which is likely to be established only after an Implementation Agreement is signed. Since Local Investor Group envisaged that Open MIS might perform a similar function to GSI it is likely that the regulator would seek to establish that Open MIS is in a position to meet any representations which might be made about the availability of redemptions of units issued by Open MIS or distributions (in the nature of interest payments) on those interests.
These unknown factors about solvency and capital requirements weigh against the conclusion that the Recapitalisation Proposal as it stood on 2 September 2013 would address the circumstances which are in favour of making an order under s 283HB(1)(c).
Time to elapse before a scheme can be put to Noteholders
Local Investor Group suggests that it will take around four months before a scheme can be put to Noteholders for consideration; Trust Company suggests that it could take longer than six months.
If this proposal were in a position to be put to Noteholders imminently, then it might well have been appropriate to allow Noteholders to decide between appointing a receiver or adopting the Recapitalisation Proposal, particularly if Local Investor Group were to cover GSI’s external advisor costs as now proposed, and in circumstances where it is not clear that the Noteholders will be paid in full under either proposal. Trust Company appeared to advance the proposition in correspondence with GSI and before the Court that it would only consider a proposal appropriate to be put to Noteholders if it would result in their being paid in full: but what if that is not possible or likely on any contingency? I consider that GSI’s current financial position need not have been determinative in favour of the appointment of a receiver. It may even be more appropriate that Noteholders be given the choice where it is not clear which path lies to repayment in full or what level of discount from that amount the Noteholders could tolerate. Under a scheme of arrangement Noteholders would have had the benefit of an independent expert’s report in assessing the alternatives and the Noteholders would be in the best position to decide between the alternatives for their own reasons (which might or might not include the impact of GSI’s failure on the Gippsland area balanced against their own interests as Noteholders).
Even though Mr Johnston sought to adduce evidence of the return to Noteholders and costs incurred in the receivership of a comparable company, and to compare it unfavourably to the amount which he assesses may ultimately be paid to Noteholders if the Recapitalisation Proposal proceeds, I do not consider that the Court was in a position to assess that the return would be better under either regime. This is because: (1) Mr Johnston’s assessment of the return under the Recapitalisation Proposal is not disinterested (as he acts for Local Investor Group and a company associated with him is a borrower from GSI); (2) there is substantial execution risk in the Recapitalisation Proposal and the proposal is not yet finalised; (3) there can be no assurance about the impact of market factors on GSI’s loan assets and property over the period of years which may have an impact on the return to debenture holders under the Recapitalisation Proposal; (4) the costs incurred in individual receiverships vary with the circumstances of each company; and (5) I have had regard to the evidence of Mr Olde about the adverse impact of receivership on the value attributed to the assets of a company in receivership.
Recapitalisation Proposal and Chapter 2L
Counsel for Trust Company suggested that such a proposal could not fall within s 283HB or be for the purposes of Chapter 2L because it related to the acquisition of interests under a managed investment scheme: see [237]; Counsel suggested that the Recapitalisation Proposal was designed for the benefit of Local Investor Group as investors, not as a community group rescuing GSI and that Local Investor Group was trying to hold Trust Company “hostage” to these commercial interests. I reject this submission. The proposal does not need to fall within s 283HB since it is only Trust Company which is seeking an order under s 283HB, not Local Investor Group.
However, s 283DA(g) clearly envisages that the Chapter 2L regime will operate with, not exclusively from, other regimes under the Corporations Act. For instance, s 283DA(g) requires the trustee to give debenture holders a statement explaining the effect of any proposed scheme of arrangement before any meeting ordered by the Court under s 411(1) or (1A).
I do not see any reason why it would not be open to Noteholders to approve a scheme of arrangement proposed by GSI which would have them exchange their Notes for other interests, whether or not Trust Company recommended it (although it is undoubtedly commercially more likely to be accepted if it were endorsed by the trustee). Certainly its proponents’ interests would have to be well identified. However, if the Court is satisfied that Noteholders acting reasonably might consider approving such as scheme as in their interests, it would be open to the Court to adjourn Trust Company’s application or refuse it so that Noteholders had that opportunity. Indeed, some of Trust Company’s submissions about what its “rights” under the Trust Deed are and whether any proposition could be put to Noteholders of which it did not approve were misconceived. Trust Company’s powers under the Trust Deed are to be exercised in a fiduciary capacity and it would certainly be open to Noteholders to approve a scheme of arrangement which might return them less than 100 cents in the dollar if they perceived that it might be a higher return than a receivership of GSI would or might deliver.
Impact on Gippsland community
ASIC submitted that the impact of GSI being placed into receivership on the Gippsland community was not a relevant consideration in relation to whether an order should be made under s 283HB(1)(c), even though the majority of both Noteholders and shareholders of GSI are residents of the Gippsland region and there is affidavit evidence that appointing a receiver to GSI would adversely affect the residents of the region.
I accept that the primary consideration must be the protection of debenture holders as such. However, I do consider that, if Noteholders are not materially prejudiced and there is no material risk to the borrower’s assets (for instance because of fraudulent management) then this factor might properly weigh in the factors which a Court takes into account in deciding whether to grant an adjournment to allow a proposal to be developed or to permit a meeting with Noteholders to be held. The regional impact of a decision to place GSI into receivership is a factor which might reasonably have led Trust Company to consult with Noteholders, particularly after support emerged for GSI from the local community in the form of Local Investor Group. I acknowledge that it may have been difficult to consult Noteholders meaningfully, even at a high level, until the Recapitalisation Proposal was more settled and its implications (rather than the bare Terms Sheet) could be set before Noteholders.
Hardship regime
Local Investor Group’s proposal of an offer to Noteholders after the Implementation Agreement is signed to redeem Notes to the extent of $2,500 or 25% of the face value of their Notes (whichever is less) was an attempt to deal with discussions concerning a hardship regime, and I do not regard it as central to the proposal nor in the circumstances necessary to comment further on it as to whether it inappropriately discriminated between Noteholders.
Conclusion
I was not satisfied that the Recapitalisation Proposal as it stood on 2 September 2013 did adequately address the circumstances in favour of the grant of the order for which Trust Company had applied under s 283HB(1)(c), although it might have done had GSI been in a position to put the proposal to Noteholders imminently. The question which then arose was whether the undertaking of Local Investor Group to provide $300,000 to fund GSI’s external advisor costs (including Trust Company’s costs) for two weeks in order to allow time for negotiation of an Implementation Agreement justified a two week adjournment, in light of Local Investor Group’s indication that it would provide $1.975 million to fund GSI’s (and Trust Company’s) expenses leading up to consideration of a scheme of arrangement thereafter.
Adjournment application
One of the difficulties of considering the merits of the adjournment application and Trust Company’s application under s 283HB(1)(c) is that many of Trust Company’s written and oral submissions to the Court did not demonstrate a full appreciation of the Recapitalisation Proposal as represented by the Terms Sheet signed on 18 August 2013, as opposed to the draft of 12 August 2013. A number of the submissions were, surprisingly, simply technically wrong. The problem is epitomised in the written submissions of 22 August 2013 (see [118] which sets out Trust Company’s view of the “Flaws in the terms sheet”), but this issue remained a feature of Trust Company’s submissions throughout. For example:
(a)Trust Company’s written and oral submissions after 18 August referred to a 50% split of Local Investor Group’s contribution between debt and equity, which was not a feature of the Terms Sheet although it was a feature of the 12 August draft;
(b)Trust Company persisted in a view that conversion of Notes to equity did not address the net tangible asset deficiency, which was clearly wrong. Although another of Trust Company’s submissions, that solvency is not just a balance sheet test, is clearly right, it is concerning that communications from Trust Company as late as 30 August 2013 make statements about the inadequacy of the proposed cash injection to address the balance sheet deficiency;
(c)While Trust Company was right to be concerned about the possibility of a run once the Court ordered freeze was lifted, it appeared to fail to appreciate the potentially different regulatory treatment of debentures and interests in a managed investment scheme for which the ASIC Benchmarks may not have been relevant and which might allow a “run” to be avoided. The only time that Trust Company appeared to acknowledge that the ASIC Benchmarks might not be relevant was at point six of its letter of 23 August 2013 referred to at [126] which said:
That said, we are mindful of the issues that you raised last night (through [Local Investor Group’s lawyers]) regarding the applicability of RG 69 to the recapitalised GSI (if the Rescue Group’s proposal can be implemented). Our initial reaction is that until any scheme is approved and has become effective, we believe that that the RG 69 regulatory policy should still apply unless expressly waived by ASIC.
(d)Many of the submissions appeared overly committed to achieving compliance with ASIC Benchmarks, which is not mandated and for which the four year implementation period for transition to an 8% equity benchmark has not yet started. It was open to Trust Company to allow more flexibility than it appeared willing to do in its communications with GSI and Local Investor Group.
The nature of the arguments presented by Trust Company from 22 August 2013 was apt to a mind closed to the Recapitalisation Proposal (despite subsequent meetings) and the submissions of Counsel seemed overly concerned with vindicating Trust Company’s “rights” or punishing GSI management. Exposure of the directors and management to investigation by an external administrator is not an end in itself: Trust Company did not provide any evidence to suggest that an investigation would be fruitful either because of actionable conduct of GSI directors or management or in realising funds to distribute to Noteholders. Although the Recapitalisation Proposal is undoubtedly complex and has substantial execution risks and issues to be addressed, it had persons of considerable commercial reputation and apparent wealth as its proponents. There was evidence of the commitment of Local Investor Group in its willingness (albeit demonstrated late in the proceedings) to put at risk over $2 million ($300,000 to the point of the Implementation Agreement being signed and $1.975 million thereafter). Even allowing that Trust Company’s loss of confidence in GSI’s management may have been reasonably based, it is difficult to understand why this matter has not been approached with greater willingness for commercial negotiation designed to shape a proposal with less complexity or execution risk.
Trust Company submitted that the Recapitalisation Proposal is just an “informal receivership” (see [118]), as though that is necessarily a bad thing. Counsel asserted that it was inappropriate for Trust Company to be “held hostage” to the Recapitalisation Proposal (see, for instance [157]). That is curious since informal work outs can avoid the opprobrium and therefore the value destruction inherent in external administration and they can often be executed at least as efficiently as an external administration. Further, Trust Company’s own action in issuing the press release of 26 July is likely to have had the effect of discouraging alternative proposals for purchase of some or all of the loan book which alone or together with the Recapitalisation Proposal may have alleviated GSI’s financial position to the benefit of Noteholders. If an informal work out has a realistic prospect of a better return to Noteholders than external administration, then a trustee should approach it with an open mind. Indeed, where a borrower’s solvency is problematic but an informal workout has a realistic prospect of success, the trustee would be in a better position than the Court is in to supervise the negotiation and implementation of that arrangement. It was open to Trust Company to conclude that the complexity and execution risk attached to the Recapitalisation Proposal did not give it a realistic prospect of success within an acceptable timeframe, but whether that is a necessary conclusion has been clouded by Trust Company’s apparent unwillingness or inability to come to terms with the technical detail of the Recapitalisation Proposal.
Having said that, Trust Company was entitled to be concerned about the complexity, execution risk and the time that the Recapitalisation Proposal would take to be implemented during which Noteholders would not have access to redemptions. Many of the major outstanding items referred to in Trust Company’s letter to GSI of 20 August 2013 (see [113] above) remained to be addressed after the negotiation of the Implementation Agreement was completed.
Had GSI engaged with the seriousness of its situation earlier, the Recapitalisation Proposal, or some other arrangement necessary to deal with GSI’s apparent net asset deficiency, may well have been more advanced. Trust Company may also not have lost confidence in GSI and its management, which it appears to me has coloured Trust Company’s attitude to the possibility of sale of some or all of GSI’s loan book and the Recapitalisation Proposal.
There are seven factors determinative of my decision not to grant a two week adjournment for the development of an Implementation Agreement. These factors have a cumulative effect.
The first factor is the complexity and execution risk attached to the Recapitalisation Proposal coupled with the long time frame of four to six months before Noteholders would get an opportunity to vote on the Recapitalisation Proposal.
The Recapitalisation Proposal was still evolving. The “pledges” made by members of Local Investor Group might be firmed into legally enforceable commitments within the two week time frame, but they were not at that point on 2 September 2013. No licensed responsible entity had been identified or agreed to act in relation to either of the MISs, and the terms of the MISs and underlying documentation had to be agreed. There would be new Board members of GSI. It is highly likely that the proposal would raise regulatory issues which would take time to address and they might include consideration by ASIC as to whether elements of Regulatory Guide 69 should be applied at least to Open MIS if it were contemplated that it would allow redemptions. It is also not clear how any “run” on Open MIS would be funded if it allowed redemption of interests. This is apart from the need to obtain an independent expert’s report and other advice relevant to approval of a scheme of arrangement.
I was also not convinced that Local Investor Group correctly estimated the costs of implementing so complex an arrangement: it is possible that costs would blow out with the result that unless Local Investor Group were prepared to commit further funds, the process would stall after many months and a receiver would be appointed at that point. During all of this time, it may be that a process for making hardship payments to Noteholders could be agreed, but it is possible that Noteholders would not be willing to wait that time. There were many ways in which this proposal could fail before it came to the Noteholders for approval with the result that the appointment of a receiver was merely deferred, not avoided and this might also prejudice the pool of funds available to Noteholders.
The second factor is the fact that Trust Company does not support the development of the proposal in its role as trustee for Noteholders. While it was possible that that situation could change upon the Implementation Agreement being finalised, it appears unlikely if it did not change when Local Investor Group was willing to put approximately $2 million at risk to develop the proposal to the point of Noteholder vote on the scheme. Without Trust Company’s support, the development of the Recapitalisation Proposal is substantially more difficult and likely to be more costly for reasons previously expressed. I regard Local Investor Group’s willingness to put this amount of money at risk as a significant matter: if it was insufficient to result in Trust Company being willing to support an adjournment for two weeks, I consider that it would be futile to grant an adjournment to allow negotiation of the Implementation Agreement.
The third factor is that Trust Company must also explain the proposal to Noteholders in accordance with s 283DA(g) before a meeting to approve a scheme under s 411(1) or (1A) is held: if Trust Company opposed the proposal, then this may affect the likelihood of Noteholders approving the scheme of arrangement. In addition, Trust Company has not demonstrated full appreciation of the elements of the Terms Sheet, and that would have to change before it met its obligations under s 283DA(g).
The fourth factor is the need for ongoing Court supervision to facilitate progress of the proposal. That need was demonstrated during the passage of the many hearings in the proceedings. Local Investor Group made changes to the Recapitalisation Proposal having regard to matters addressed in the proceedings, not generally through a course of negotiation with GSI or Trust Company. Some of the issues, such as the necessity to deal with the fact that GSI has an apparent net tangible asset deficiency and therefore may be inhibited from expending money on development of the proposal, should have been apparent to Local Investor Group and it should have been in a position to propose a solution rather than only deal with the issue responsively when it emerged during the proceedings. It is not enough to say that this is a well-intentioned group of local investors: if the Recapitalisation Proposal was to get “legs”, it needed momentum and a demonstrated appreciation of the issues. Further, it was not appropriate that Mr Johnston did not make plain to the Court his interests in the success of the Recapitalisation Proposal: I do not accept the submission by GSI’s Counsel referred to at [157] that the fact that Mr Johnston was a director of a borrower from GSI was adequately addressed in the exhibit to the Olde Affidavit; the Court was not taken to this exhibit before this issue was raised by Trust Company: the Court should be in a position to understand the interests at play so that it can evaluate arguments appropriately.
If that is the only way the Recapitalisation Proposal could be progressed, it is likely that a two week adjournment to reach an Implementation Agreement will be only the first of many adjournments. I accept Counsel for Trust Company’s argument that it is not appropriate for the Court to be the venue for such negotiations: it was my reason for the adjournment from 28 August 2013 to 2 September 2013 to allow commercial negotiation.
The fifth factor is the inappropriateness of adopting an ongoing process in which GSI would incur legal costs of dealing with the adjournment applications if that is the only way that the Recapitalisation Proposal could be developed. GSI would incur significant legal costs for itself and Trust Company in contested hearings. Those costs would not be met by Local Investor Group since it agreed to fund costs of implementation of the Recapitalisation Proposal but not the costs of these hearings. In circumstances where GSI’s solvency is doubtful, I do not think it appropriate for the Court to support a regime in which that expenditure on contested court applications is a likely necessary component especially in a four to six month time frame.
Had Trust Company been more supportive of, or at least demonstrated more openness to, the Recapitalisation Proposal and had Noteholder consideration of it at a scheme meeting been more imminent, then I consider that an adjournment may have been appropriate if Local Investor Group funded GSI’s abnormal costs during that period. Having said that, I did not consider persuasive the imputed interest rate for Notes set out in the 2 September Sanford Affidavit or the putative “profit” suggested.
The sixth factor is the need to resolve the impasse. If Trust Company will not support the development of the Recapitalisation Proposal, and as Mr Sanford has acknowledged that GSI will not be able to pay Notes as they fall due in a relatively short time frame unless Trust Company consents to a replacement prospectus, I consider that it is in the interests of Noteholders that the current impasse be resolved by the Court making the order for which Trust Company applied. Given the attitude of Trust Company to the Recapitalisation Proposal and GSI, it is likely that Trust Company’s submission was right that receivers will be more efficient and effective in conducting negotiations with Local Investor Group (should they relent in their intention not to negotiate with a receiver) or negotiations with other parties. While it would be open to Trust Company to supervise an informal workout if it thought it likely to be most productive of optimal return to Noteholders, in the face of Trust Company’s application the Court should act to resolve the impasse in the absence of a proposal which is imminently capable of consideration by Noteholders.
The seventh factor is that although Trust Company had not, to 2 September 2013, sought to exercise its powers under clause 12.01(a) of the Trust Deed, it remained open to it to do so, albeit that that might lead to a further contest between Trust Company and GSI. Such action by Trust Company would make any adjournment futile.
CONCLUSION
If the Recapitalisation Proposal was more advanced, and GSI was in a position to put it to Noteholders imminently, then it is likely that it would have been appropriate for the Court to grant an adjournment to permit Noteholders to consider the proposed scheme, even against Trust Company’s opposition. This is true even if the Recapitalisation Proposal could not guarantee that Noteholders would receive repayment of all amounts due to them, since receivership may also not have that result. It was a theme of Trust Company’s communications that it could only support the Recapitalisation Proposal or the sale of the loan book if it demonstrated that Noteholders would be repaid in full. That position may be sustainable where it is clear that Noteholders can be paid in full under some available option. However where it is not clear that full recompense can be achieved under either such a proposal or receivership there is no reason why properly informed debenture holders should not be given the choice of the course to be taken.
GSI did too little, too late. It is the sad reality that once a financier (or trustee under a Chapter 2L trust deed) has brought in a financial adviser to examine a company’s affairs because of concerns about capital adequacy or solvency (whether or not those concerns are shared by the borrower), the appointment of an external administrator is a likely outcome unless the company fully appreciates the imminent threat and takes steps to address the possible contingencies, for instance, by arranging alternate sources of funding or capital.
I thank ASIC for its intervention and its Counsel for constructive and timely written and oral submissions.
I certify that the preceding three hundred and sixteen (316) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. Associate:
Dated: 18 December 2013
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