By an amended summons filed in court on 19 February 2016, the plaintiff, The Trust Company (Re Services) Limited (TCL), seeks judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) (the Act) that it would be justified in entering into and giving effect to a settlement deed dated 8 February 2016 (the Settlement Deed) between it, Arcadia Managed Investments Pty Ltd (Arcadia) and State Street Australia Limited (as custodian of Sunsuper Superannuation Fund), National Nominees Limited (as nominee for Emergency Services Superannuation Scheme) and Commonwealth Superannuation Corporation (as trustee for the ARIA Investments Trust) (together, the Current Unitholders), who are the current unit holders in the Australian Wholesale Property Fund (AWPF).
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Background
TCL is the responsible entity and trustee of AWPF. AWPF is a unit trust and registered managed investment scheme regulated by Chapter 5C of the Corporations Act 2001 (Cth) that was established in 2005 by Allco Financial Group Limited (AFG). As its name suggests, AWPF was established as an investment vehicle in real property.
At the time AWPF was established, Allco Managed Investments Limited (AMIL), which was wholly owned by AFG through Allco Funds Management Limited (AFML), was appointed the responsible entity of AWPF. It was replaced as responsible entity on 1 July 2006 and from that time until 23 February 2009 the responsible entity was Record Funds Management Limited (RFML). At the time AWPF was established, AMIL appointed AFML as investment manager of AWPF.
Two classes of unit were issued in AWPF. One class, described as "funding units", was issued to AFML and another company in the Allco Group. In all, AFML originally subscribed approximately $151,187,077 for funding units at $1.00 per unit using money it borrowed from other companies in the Allco Group. Those units could only be redeemed at a minimum price equal to the subscription price. By a deed poll made on 29 July 2005, AWPF's constitution was amended to permit the responsible entity of the fund at any time to redeem the funding units in its absolute discretion. The other class of unit, which were ordinary units, was issued to wholesale investors pursuant to a Product Disclosure Statement.
The Commonwealth Bank of Australia (CBA) and the Australia and New Zealand Banking Group Limited (ANZ) provided senior debt to AWPF as initial debt funding (Senior Debt Facility). The amount to be borrowed from CBA and ANZ was approximately $363,490,000. The Senior Debt Facility was secured by first ranking securities over AWPF's assets, and structured to allow the loan to be syndicated. The Senior Debt Facility was due to be repaid by July 2008. During 2007, CBA replaced ANZ to become the sole senior lender.
Using funds that it had received from the issue of funding and ordinary units and the Senior Debt Facility, AWPF bought a number of valuable commercial properties. As at June 2015, the net assets of AWPF were $235,655,698.
On 30 March 2006 and 30 June 2006, AFML redeemed a total of 41,500,000 funding units.
On 15 December 2006, AFML and RFML entered into a loan agreement under which AFML lent RFML the sum of $109,687,077 which RFML used to redeem AFML's remaining units in AWPF. The effect was that AFML's equity in the fund was converted into a loan that was subordinate to the Senior Debt Facility. Those arrangements were entered into to avoid a liability for stamp duty that arose because AWPF had been unsuccessful in attracting a sufficient number of wholesale investors. Originally, the loan to RFML was repayable on 31 January 2009. However, following questions raised by CBA, by a deed of amendment made on 1 February 2007, the repayment date was changed to the earlier of the date on which AWPF is terminated and the date on which RFML receives proceeds of subscriptions for further units from which the loan could be repaid.
During 2008, AWPF made a pro rata distribution of surplus funds and repaid part of the debt owed to AFML, with the result that that debt owed to AFML was reduced to $88,948,000.
Subsequently, on 4 November 2008, the Allco Group of Companies collapsed and receivers and managers were appointed to AFG and 69 subsidiaries, including AFML. On 26 May 2009, most of the companies in the group went into liquidation.
On 19 December 2008, CBA approved a conditional extension of the Senior Debt Facility to 30 April 2009. One of the conditions precedent to the extension was the replacement of RFML as responsible entity by TCL, and the replacement of AFML as investment manager by Arcadia.
Prior to 2012, AWPF was restructured in various ways. The details are not relevant to the present proceeding. The effect of the restructure is that the Current Unitholders, which are three large superannuation funds, became the sole unitholders in AWPF. They also lent money to AWPF which was used, among other things, to pay down the debt owed under the Senior Debt Facility.
On 23 July 2012, the receivers of AFML commenced in the company's name a proceeding against TCL seeking rescission of the deed of amendment that amended the repayment date of its loan on the ground, among others, that Messrs Rich and West, the directors of AFML who had entered into the deed, did so in breach of their duties as directors with the knowing participation of RFML. TCL was the only defendant in the proceeding. It did not seek to join the Current Unitholders as defendants. Nor did it seek advice under s 63 of the Act in relation to its defence of the proceeding or the payment of defence costs out of the assets of AWPF.
By a judgment delivered on 11 September 2014 (see Allco Funds Management Ltd (Receivers and Managers Appointed) (In Liquidation) v Trust Company (Re Services) Ltd (In its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251), Hammerschlag J concluded that AFML was entitled to an order rescinding the deed of amendment provided the loan agreement was rescinded at the same time. On 19 September 2014, his Honour made orders to that effect (see Allco Funds Management Ltd (Receivers and Managers Appointed) (In Liquidation) v Trust Company (Re Services) Ltd (In its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1296) and ordered that TCL reinstate AFML as the holder of 90,854,072 funding units in AWPF's register. TCL gave effect to those orders on 17 October 2014.
TCL's total costs of the proceeding heard by Hammerschlag J were $3,440,322.51 plus GST.
Subsequently, AFML delivered a draft commercial list summons and list statement to TCL naming it as a defendant. By those documents, AFML alleged that it was treated differently from the other unitholders between 15 December 2006 and 17 October 2014 and that TCL breached its duties as trustee by defending the proceeding before Hammerschlag J. Claims are also made in the draft documents that TCL breached its duties as trustee in connection with the refinancing of the Senior Debt Facility in 2015 and, in particular, did not act impartially in its dealings with unitholders in connection with the refinancing. Arcadia was involved in that refinancing.
It can be seen from this brief description of the claim that AFML's principal complaint concerns the rights of unitholders between themselves and the effect of Hammerschlag J's judgment on those rights.
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The issues on which advice is sought
Originally, this proceeding was commenced seeking advice that TCL would be justified in paying, or retaining amounts paid from trust assets, its costs of the proceeding before Hammerschlag J (including costs orders against it) and the costs it incurs in connection with AFML's proposed proceeding. However, since this proceeding was commenced, AFML has reached a settlement with the Current Unitholders under which those unitholders agreed to buy AFML's funding units. In addition, the Current Unitholders took an assignment of AFML's claims against TCL. The transfer of the units has taken effect, with the result that the Current Unitholders are now the only unitholders in AWPF. Subsequently, the Current Unitholders entered into the Settlement Deed with Arcadia and TCL by which they settled any claims they might have against those two entities. Relevantly, the Settlement Deed provides (a) for mutual releases between the Current Unitholders and TCL, (b) that TCL and the Current Unitholders release Arcadia from any claims they might have against it and (c) that TCL be entitled to recover all of its costs relating to the litigation before Hammerschlag J, the consequences of that litigation and the current proceeding from the assets of AWPF. That settlement is conditional on TCL receiving the advice that it now seeks in this proceeding.
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Should the advice be given?
In my opinion, TCL is entitled to the advice that it seeks.
There is no question that TCL, as trustee, has standing to seek the advice. The only jurisdictional bar that exists to advice being given under s 63 is that the applicant must point to "the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument": see Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 at [58] per Gummow A-CJ, Kirby, Hayne and Heydon JJ. That requirement is satisfied in this case.
It is appropriate for TCL to seek advice in this case. TCL stands to benefit from the Settlement Deed in its own right and therefore cannot bring independent judgment to the question whether it is in the interests of the Unitholders that it as trustee enter into the deed.
Although it would have been proper for TCL to have sought advice in relation to the defence of the proceeding heard by Hammerschlag J and to have made an application for the joinder of the Current Unitholders to that proceeding, it is important to bear in mind that TCL defended that proceeding for the benefit of the Current Unitholders. At the time TCL defended the proceeding, they were the only unitholders in AWPF and it is strongly arguable that TCL was, therefore, acting for the benefit of unitholders as a whole in defending the proceeding. Consequently, it is strongly arguable that TCL was entitled to be indemnified against its costs of defending the proceeding out of the trust funds on the basis that those costs were reasonably and properly incurred by TCL in discharging its duties as trustee: see s 59(4) of the Act. In addition, cl 19 of AWPF's constitution contains a broad release in favour of the responsible entity (that is, TCL) unless it acted both otherwise that in accordance with the constitution and without a belief in good faith that it was acting in accordance with the constitution. Clause 20 also contains a broad indemnity except in cases where the responsible entity acted negligently, fraudulently or in breach of trust. TCL had a strong case that it was entitled to recover the costs it incurred under that indemnity.
In advice obtained by TCL in relation to the Settlement Deed from Mr Giles SC, Mr Giles refers to the statement of Lindley LJ In re Beddoe [1893] 1 Ch 547 at 557 (quoted by Gummow A-CJ, Kirby, Hayne and Heydon JJ in Macedonian Church at [47]-[48]) that a trustee who without court approval defends an action unsuccessfully is not entitled to be indemnified out of the trust estate except in "very exceptional" circumstances. Whether that is a correct statement of the law is open to some doubt. The question under s 59(4) of the Act is whether the costs were reasonably and properly incurred. A trustee who is unsuccessful in litigation may have some difficulties in satisfying that requirement. But that is not to say that the circumstances must be "very exceptional". In any event, I agree with Mr Giles advice that the aspects of this case that I have already referred to make it "very exceptional". TCL acted honestly in defending the proceeding before Hammerschlag J. It acted on the advice of senior and junior counsel and with the knowledge and approval of the Current Unitholders. At the time, they were the only unitholders in AWPF and TCL defended the proceeding for their benefit.
Moreover, the Current Unitholders are now the only persons who have an interest in AWPF. If TCL had not incurred costs in defending AFML's claim they would have had to incur those costs themselves. It would be odd in those circumstances if TCL were required to repay to AWPF amounts that had been paid in respect of legal costs TCL incurred, or if TCL were not permitted to recover from AWPF's assets costs for which it was liable, when the beneficiaries of that requirement would be the ones who benefited from the expenditure.
It is apparent that each of the Current Unitholders is a sophisticated investor who, in relation to the proposed settlement, is advised by experienced lawyers. It is to be assumed that they have obtained advice from those lawyers before agreeing to the settlement with TCL. It is plain, therefore, that the interests of the beneficiaries of AWPF in connection with the Settlement Deed have been adequately protected. The release of Arcadia was given at their request.
The Settlement Deed has benefits for AWPF. It resolves potentially costly and distracting court proceedings and, in doing so, permits TCL and Arcadia to focus on maximising the value of the fund for all unitholders. If the proceeding was brought, there is at least a risk that TCL would retire as trustee and responsible entity, causing AWPF costs in finding a replacement. Although TCL benefits from the settlement, it benefits in circumstances where the Current Unitholders have made it plain that they have no interest in pursuing proceedings and in a context where it is doubtful that those proceedings would be successful in any event.
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Orders
The orders of the court are:
Pursuant to section 63 of the Trustee Act 1925 (NSW) the plaintiff be advised and directed that it was and is justified, as trustee of the Australian Wholesale Property Fund, in entering into, and is justified in giving effect to, the terms of a deed dated 8 February 2016 between the plaintiff, Arcadia Managed Investments Pty Ltd, State Street Australia Limited (as custodian of Sunsuper Superannuation Fund), National Nominees Limited (as nominee for Emergency Services Superannuation Scheme) and Commonwealth Superannuation Corporation (as trustee for the ARIA Investments Trust).
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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 25 February 2016
Parties
Applicant/Plaintiff:
Allco Funds Management Ltd (Receivers and Managers Appointed) (In Liquidation)