Trustees Executors Ltd v Perpetual Trust Ltd
[2012] NZHC 1678
•12 July 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-3569 [2012] NZHC 1678
BETWEEN TRUSTEES EXECUTORS LTD Plaintiff
ANDPERPETUAL TRUST LTD Defendant
Hearing: 12 July 2012
Counsel: C M Stevens and A L Holloway for Plaintiff
J R Billington QC and S E Fitzgerald for Defendant
Judgment: 12 July 2012
(ORAL) JUDGMENT OF HEATH J
Solicitors:
Russell McVeagh, PO Box 8, Auckland Phillips Fox, PO Box 2791, Wellington Counsel:
J R Billington QC, PO Box4338, Shortland Street, Auckland
Copy to:
Financial Markets Authority, PO Box 1179, Wellington
H Rennie QC, PO Box 10242, Wellington
TRUSTEES EXECUTORS LTD V PERPETUAL TRUST LTD HC AK CIV 2012-404-3569 [12 July 2012]
Introduction
[1] Trustees Executors Ltd is the statutory supervisor of two participatory securities of which Perpetual Trust Ltd is trustee. Those funds are known as the Perpetual Cash Fund (the Cash Fund) and the Perpetual Mortgage Fund (the Mortgage Fund).
[2] Trustees Executors has applied for orders under s 49 of the Securities Act
1978 (the Act). Those orders have been sought because the statutory supervisor has formed an opinion that there is “a significant risk that the interests of the security holders” would be “materially prejudiced” if orders were not made.1
[3] Two substantive themes emerge. One relates to confidence. The other relates to the value of securities, from which moneys repaying a loan to Torchlight Fund No 1 LP (Torchlight) may need to be sourced.
The history of the proceeding
[4] This application was first listed before me on 26 June 2012, at the same time that I heard an application by the Financial Markets Authority (the Authority) to lift confidentiality orders made in a proceeding that Perpetual had brought against it. I heard the latter application first. I discharged the confidentiality orders and directed that the content of my judgment on that application could be published and made an order that the Court file not be searched, copied or inspected, without leave of a
Judge.2 Perpetual appealed against that judgment. Its appeal was dismissed on 4
July 2012, by the Court of Appeal.3
[5] At the end of the hearing on 26 June 2012, I gave a series of directions to enable Trustees Executors’ application to be dealt with this week. I ordered that the Authority be served with any papers filed in this proceeding. While the Authority
has been served, it did not seek to be heard on today’s application.
1 Securities Act 1978, s 49(1)(a).
2 Perpetual Trust Ltd v Financial Markets Authority [2012] NZHC 1469.
3 Perpetual Trust Ltd v Financial Markets Authority [2012] NZCA 298.
[6] Today, I have heard from counsel for Trustees Executors and Perpetual on whether it is necessary to make any orders under s 49 “to protect the interests of holders of securities, or members of the public”.4 I do not propose to say much about the issues that have been discussed in Court, as sensible arrangements have now been made for interim orders to be put in place pending a substantive hearing on
3 August 2012.
[7] The choice of a hearing date after 31 July 2012 is deliberate. In a statement to the New Zealand Stock Exchange made just after the Court of Appeal judgment was released publicly, Perpetual’s parent company, Pyne Gould Corporation Ltd, indicated that it “expected” that the loan to Torchlight would be repaid by the end of July.5 An adjournment to early August will enable the statutory supervisor to monitor whether that has occurred. It will also enable the Court to be more fully apprised of developments, when it deals with the substantive application.
Preliminary issues
[8] There are some preliminary points I need to deal with at this stage.
[9] The first relates to a dispute that has arisen over the admissibility of email communications emanating from the solicitors for Perpetual, which have come into the hands of the solicitors for Trustees Executors. That issue has not been the subject of argument today and is adjourned to be determined, if necessary, prior to the substantive hearing on 3 August 2012. To the extent that the emails may have a material effect on each party’s argument, I leave open the door to either party to seek a ruling on the papers before the hearing on 3 August 2012. I invite counsel to confer on that issue and to advise me by joint memorandum. Should such a ruling be required, I have received submissions dealing with this topic in writing.
[10] A second point concerns a number of findings that are recorded in my judgment of 26 June 2012, in the proceedings brought by Perpetual against the
Financial Markets Authority. Necessarily, they were findings made on the state of
4 Securities Act 1978, s 49(3)(g).
5 Perpetual Trust FMA Update, 12.28pm, 5 July 2012.
the evidence before me. That was the basis on which inferences were drawn. Ultimately, those findings may need to be revisited; depending upon evidence that may be put before me in the future by Perpetual. Those findings need to be considered on that footing.
[11] A particular issue arises in relation to the question whether the loan from Perpetual to Torchlight was a “related parties” transaction, for the purposes of the trust deed. The term “related parties” was used loosely at the hearing on 26 June. I did not consider (and have not yet ruled on) the question whether the terms of the trust deed would require the transaction to be characterised as one between “related parties” as defined. The issue of interpretation is whether the words “related companies” in the trust deed include limited partnerships, which were entities not known to the law at the time the trust deed was first formulated. I make it clear that I have not ruled on that legal issue.
Confidence and security
[12] The two substantive themes to which I referred earlier6 are the subject of discrete arrangements that have been discussed and agreed between the parties. The orders that I will make are designed to provide confidence to the market that there is a degree of independent oversight, in relation to Perpetual’s trusteeship of the funds; while not intruding so significantly as to take away the powers of the directors of Perpetual to make decisions on the part of the company. That will be achieved by appointing what I term “Observers” to oversee the activities of the Perpetual board, insofar as it relates only to management of the Cash Fund and the Mortgage Fund.
[13] The second aspect concerns the protection of investors and members of the public in relation to disclosure of the nature of advances and the securities on which they have been made and the likelihood of repayment within a stipulated time. That issue will be addressed by the obtaining of independent valuation reports on the properties in respect of which securities have been granted. The valuers will be appointed on the nomination of Trustees Executors, with the cost of the valuation
being borne by Perpetual out of its own assets not the assets; of either of the funds.
6 See para [3] above.
[14] In addition, other arrangements have been made to enhance market confidence.
[15] One arises out of orders made yesterday in connection with the Mortgage Fund. So far as that is concerned, I record that I was asked by counsel for both parties yesterday to make orders, without opposition. This arose out of publicity and disclosures that followed the decision of the Court of Appeal.7 Redemption requests had been received for the Mortgage Funds.
[16] Perpetual’s position was that the Mortgage Fund’s existing liquidity could meet those redemptions but it had concern about the level of potential requests that may affect liquidity. On that basis, I made the following orders:
[a] Pursuant to s 49(3)(e) of the Securities Act 1978, Perpetual Trust Ltd is restrained from the payment of any redemption payments to investors in the Perpetual Mortgage Fund, effective as of 2pm 5 July
2012, for a period of 8 weeks from the date of the order, or until such earlier time as the parties agree that such an order is no longer
required, or as may be extended in accordance with the Terms of the
Trust Deed.
[b] Leave is reserved for the parties to apply on notice to the Court on an urgent basis in the event that further orders are required under s
49(3) of the Securities Act 1978, including under s 49(3)(a) to amend the provisions of the Trust Deed to implement any proposals that may be considered and agreed during the period the Perpetual
Mortgage Fund is in moratorium.
[17] The second method of enhancing market confidence arises from undertakings that have been given by Perpetual to the Authority and the statutory supervisor. They are recorded in a letter from Perpetual to those bodies dated 9 July 2012. Those undertakings are:8
(a) To, as soon as reasonably practicable, notify TEL and WHK (attention Vivian Fatupaito) upon receipt of any request for redemption of units in the Perpetual Cash Management Fund (PCMF) or Perpetual Mortgage Fund (PMF, and together the “Funds” and each a “Fund”), and to provide the following information to TEL and WHK when notifying any requests for redemption of units in PCMF or PMF:
7 Perpetual Trust Ltd v Financial Markets Authority [2012] NZCA 298.
8 In this extract, “TEL” means Trustees Executors Ltd; “WHK” is an accounting firm engaged by
Trustees Executors, and “PTL” means Perpetual Trust Ltd.
(i) Name of the unitholder;
(ii) Amount of the redemption request;
(iii) Amount of the unitholder’s total holding;
(iv) Details of the status of the unitholder (eg retail client, trust client, wholesale client);
(v) Details of any known relationship or association between the unitholder and PTL, Torchlight No 1 Fund LP or any associated person.
(b) To provide prior notice to TEL of any public or investor communications in relation to the Funds; to consult with TEL as to the content of those communications before publication; and to ensure that any statement made whether written or oral is compliant with the secrecy requirements of the Corporations (Investigation and Management) Act 1989 (if applicable).
(c) Not to remove from New Zealand, transfer (including between the Funds), charge, or otherwise deal with any property or assets of the Funds (except redemptions in the ordinary course of business) except with prior approval of TEL and subject to such terms and conditions that TEL may specify.
(d) To provide a daily statement of cash flows and balance sheet position at the close of each business day to TEL and WHK (attention Vivian Fatupaito) in respect of each Fund in such form as may normally be compiled for the Funds’; unit pricing model.
(e) To take all such steps as are necessary to secure repayment of advances made by PTL as trustee of the Perpetual Cash Management Fund to the Torchlight No 1 Fund LP (and/or its general partner and its wholly owned subsidiaries or related parties) whether pursuant to a loan agreement dated 21 February 2012 or at any other time and whether or not secured, or yet due in terms of any loan or security documentation or any claimed security, and without penalty to the Funds.
(f) To provide TEL with progress reports, at such intervals as TEL may reasonably require, in relation to the steps taken in satisfaction of paragraph (e) above.
(g) To co-operate with, and provide all access reasonably required by, TEL and WHK, or any person appointed to act on their behalf for this purpose, to books, papers, records and personnel of Perpetual and the Funds in connection with these undertakings.
(h) Not to allot securities in PCMF or PMF except with TEL’s prior consent and subject to such terms and conditions as TEL may specify.
(i) With respect to any moneys received for investment in the PCMF or
PMF (unless otherwise approved by the TEL) to:
(i) return (unbanked) any cheque received; and
(ii) place any such other funds received in a trust account, and refund those funds (with any interest accrued),
in each case as soon as reasonably practicable after receipt.
[18] Those undertakings are now given to the Court. They shall enure pending further order of the Court. I expect to reconsider this issue at the hearing on 3
August 2012. Any other powers that are available independently as a matter of statute, to either the Authority or the statutory supervisor, remain unaffected by those undertakings.
Orders
[19] To give effect to the arrangements agreed today, I make the following directions, in relation to this proceeding:
(a) This proceeding shall be adjourned until 10am on 3 August 2012 for further hearing. It is possible that time will become available on 2
August 2012. If so, the hearing will commence that day. Counsel shall liaise with the Registrar in relation to the possibility that the hearing may start on 2 August 2012.
(b) In relation to that hearing, I make the following directions:
(i)Evidence of valuation of each of the properties over which securities have been granted shall be filed and served by Trustees Executors on or before 25 July 2012.
(ii)A joint affidavit from the two Observers,9 shall be filed and served on or before 25 July 2012, outlining what has occurred over the period during which they have performed those functions and identifying any concerns arising during that
period.
9 See para [21] below.
(iii)Any further affidavits from Trustees Executors shall be filed and served on or before 27 July 2012
(iv)Any further affidavits from Perpetual shall be filed and served on or before 30 July 2012.
(v)Submissions from counsel shall be filed and exchanged contemporaneously, by 3pm on 31 July 2012.
(vi)Counsel for Perpetual shall arrange for an updated bundle of relevant documents to be filed and served by 3pm on 31 July
2012. The object of this direction is to obtain an updated volume of documents to which I can refer, in addition to the three volumes placed before me today.
(vii)All deponents, unless expressly excused by counsel for the opposing party, shall be available for cross-examination at the next hearing on 2 or 3 August 2012.
[20] The mortgage securities for the Torchlight advance shall be valued for mortgage lending recommendation purposes by an independent registered valuer (or valuers) nominated by Trustees Executors. Those valuations shall be undertaken as soon as practicable but in any event in sufficient time for the valuation affidavits to be filed and served by 25 July 2012. The valuations shall be as at the date on which they are undertaken and also, having regard to likely development during this time, as at February 2013 when it was originally envisaged that the Torchlight loan would be repaid.
[21] Ms Vivian Fatupaito and Mr Christopher Duffy are appointed jointly as Observers, until further order of the Court. Without limiting any matters arising out of the undertakings given to the Court, the Observers shall be entitled:
(a) to attend Perpetual board meetings, in relation to the Funds.
(b) to ask questions of board members of Perpetual, regarding the
Torchlight advances.
(c) to have full access to any information provided by Perpetual to its investors and/or its investors’ advisors, with respect to the Torchlight advances.
(d)to access any information from Perpetual that is necessary (in their opinion) to identify the flow of cash, in relation to the Torchlight advance from Perpetual, to the ultimate beneficiaries of those moneys. That includes the whole of the sum of approximately $28 million advanced in February and March 2012, as recorded in my judgment of
26 June 2012.10 In the event that either of the Observers is unable to
attend a particular board meeting, he or she may nominate an alternative.
[22] The costs and reasonable expenses incurred by Trustees Executors in commissioning the valuation reports shall be borne by Perpetual out of its own resources (not from the two Funds), as shall the reasonable costs and expenses incurred by Ms Fatupaito and Mr Duffy (or their alternates) as Observers.
[23] All questions of costs on the substantive s 49 application are reserved, to be dealt with at the next hearing.
[24] I confirm that an order previously made, that the Court file not be searched, copied or inspected without leave of a Judge, on notice to the parties, remains in
force pending further order of the Court.
P R Heath J
10 Perpetual Trust Ltd v Financial Markets Authority [2012] NZHC 1469 at paras [17] and [21].
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