Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd [2006] NSWSC 341 | Case summary

6042/05 - ARROW CUSTODIANS PTY LTD v PINE FORESTS OF AUSTRALIA PTY LTD JUDGMENT 1 HIS HONOUR: The problem in this case concerns how to realise the investments tied up in a pine forest near Oberon, New South Wales. It would appear that about 25 years ago various people thought it would be a prudent investment to plant a pine forest on the land, let the trees mature for about 25 years and then harvest them and split the proceeds amongst the investors equitably. 2 However, the method of carrying out the arrangement was to create some hundreds of individual Torrens titles and within most of the Torrens titles to create tenancies in common, mostly between individual investors and the first defendant, Pine Forests of Australia Pty Ltd (PFA) or its associated company, Pine Forests of Australia (Canberra) Pty Ltd (now in liquidation). 3 A large amount of money was put into the project by N M Rothschild & Sons (Australia) Ltd (Rothschild), and the plaintiff, Arrow Custodians Pty Ltd (Arrow), who is a trustee for that financier. It is reckoned that it is owed, with interest, approximately $7.9 million. The financier was financing a company, Ausforest Ltd. That company is now in liquidation, and is the second defendant to the summons. 4 The summons seeks an order that PFA represent, for the purposes of these proceedings, all the registered proprietors of any title in lots 1, 4, 7, 8, 9 and 10 in deposited plan 264564, other than the second defendant. I made that order on 10 February 2006. 5 The summons then seeks that Messrs Parbery and Smith, chartered accountants and official liquidators, be appointed under s 66G of the Conveyancing Act 1919 as trustees for sale of the whole of the land contained in those lots, with the usual order for vesting, that is the standard consequential orders under s 66G. 6 An order is also sought pursuant to s 138 of the Real Property Act 1900 that the investors produce their certificates of title to those trustees so that all lots can be consolidated and the trustees obtain title, or that those certificates be cancelled and a new certificate of title be issued for the lots. 7 PFA filed a cross-summons on 3 March 2006. By an order I made on 3 April I postponed the issues arising under that cross-summons, other than order 3(i), and that seeks an order that Messrs Alexander and Hicks be appointed the trustees for sale. 8 Each set of counsel and solicitors provided to me before the case started an outline of the orders that they were seeking and the evidence upon which they intended to rely. That made it clear that all of the parties agreed that an order for sale should be made and that the real point of difference was who should be appointed the trustees. 9 Section 66G (1) of the Conveyancing Act provides as follows: "Where any property ... is held in co-ownership the court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition." 10 Although the holding of the land is spread over a large number of persons, it is quite clear that the persons before the court, who are the proprietors or their representative, all agree to an order under s 66G being made, and, accordingly, I will make it. 11 The next question is who should be appointed the trustees for sale. There are two competing sets of trustees. The plaintiff, who has the support of the second defendant, says that the trustees to be appointed should be Messrs Parbery and Smith, who are official liquidators. It is put that they are experienced men of commerce and that they are completely independent. 12 The first defendant says that the trustees to be appointed should be Mr Alexander, who I will describe further shortly, and Mr Hicks, who is an official liquidator based in Newcastle. Mr Hicks has had previous experience with plantations of this nature. He is the liquidator of Pine Forests of Australia (Canberra) Pty Ltd and in Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692, I appointed him to deal with lot 3 in the deposited plan, being adjoining land to the present. 13 Mr Alexander is a director of PFA. He is a graduate in engineering from Sydney University. He is also qualified in business management. He says that he is particularly familiar with the subject land and with the practical and legal considerations involved in harvesting trees and selling this type of land. He says that he has a personal interest in getting the highest possible value. He is rather suspicious that professional official liquidators would take the easy way out and arrange a fire sale. He is willing to work as a trustee without remuneration, and that, in connection with Mr Hicks, an experienced liquidator, with experience in the industry, they would provide a better solution than the appointment of Messrs Parbery and Smith. 14 As I said earlier, the present case concerns six lots; 1, 4, 7, 8, 9 and 10 in the relevant deposited plan. Immediately adjoining is lot 3, which I dealt with in Crocombe, and also lots 5, 12 and 14, which are virtually wholly owned by PFA. 15 No matter who is appointed the trustees for sale, very awkward commercial decisions will have to be made. The evidence provided by the plaintiff, which I will need to oversimplify because there is no need to go into detail at this stage, seems to indicate that the prime value of the land is in the timber. The trees are now at or close to maturity and they could be harvested and sold for about $9 million. However, that $9 million does not take into account two factors; (a) that selling all the timber in one year would probably exceed the capacity of mills in Bathurst and Oberon and might, in any event, reduce the price because of oversupply; and (b) that the cost of harvesting will be considerable. Seven percent of the total area is evidently extremely steep and this will either increase the cost of harvesting, or, alternatively, mean that trees on the steeply sloping land will be left in situ, unsold. 16 However, once the trees have been cut down, it is very questionable as to whether the land has much value at all for the reason that there will be stumps and other debris, and the cost of removal, rezoning, et cetera, would probably not be an economic proposition. Indeed, this appears to be what might be happening with lot 3, which has now been mainly harvested. We do not know just how much the cost of harvesting would reduce that $9 million. However, it would appear that the process of selling the trees will occupy some years because of the first of the factors I mentioned. There will thus be a necessity for whoever is appointed the trustees to make a decision as to which of the lots to harvest first. 17 Indeed, there will be an earlier problem, and that is that there does not appear to be any cash available. Thus, the trustees will have to negotiate with the harvester to be paid on a deferred basis, or to obtain loan finance, or, on the other hand, will have to sell one or more of the lots with the timber standing on them, so as to produce the cash to harvest the others. The trustees will almost certainly find that different investors will have different views as to which lots should be sold and which harvested. To take the extreme example, PFA only owns one out of one hundred shares in lot 10, or one percent, but 146 out of 250 shares, or 58.4 percent, in lot 4. 18 Another way of dealing with the matter would be to sell the whole of the land as one lot. This, according to the evidence, would probably reduce the sale price by about 10 percent, but, on the other hand, there would be the compensating advantage that the costs of sale would be reduced. However, a problem that might arise if this strategy were adopted is whether it would be good or adverse to sell the subject lots together with lots 3, 5, 12 and 14, the Crocombe lots, and the three lots that are wholly owned by PFA. A commercial decision would have to be made on that matter. 19 I should add that the evidence tends to show that if one was to put aside the standing timber, and just sell the land as land, the value would appear to be closer to $3 million than to the $7.9 million that is claimed by Rothschild. The significance of this fact is that it tends to discount the fear that there would be any encouragement to any trustee for sale to have a fire sale. 20 There are also other very serious problems, not the least of which is that no-one can afford to insure the plantation and that it appears to be in a heavily forested area and the summer bush fires could take away most of that $9 million without compensation. There is also, it would appear to me, another problem as to how the trustees are going to be paid, but no-one has raised that so I assume that appropriate collateral arrangements have been made. 21 When deciding upon trustees for sale, where there is no consent, four factors usually need to be considered by the court. These are, in no particular order of importance; (1) the principle that the court tends to prefer the preference of the person with the greater interest in the land. That factor in the present case does not get us anywhere because it is hard to see who really does have the greater interest. (2) the trustees should be independent and as free from conflict of interests as possible. I will come back to that. (3) the trustees, particularly where they have more active duties than merely to sell a piece of real estate, should have the appropriate skill, expertise and experience; and (4) the court should endeavour to get the best value for the parties' money and see that as between two equally alternative proposals the cheaper is preferred. 22 On that fourth point, Mr Alexander says that he will work for free. Mr Hicks has given evidence that his standard charge-out rate is $354 an hour for partners and $143 an hour for senior associates. Mr Parbery and Mr Smith have a standard rate of $440 per hour for partners and $174 for equivalent senior associates. Doubtless some of the cost differential is explained by the fact that Mr Hicks has an office in Newcastle, at which probably the rent is cheaper than the premises that have to be used by Messrs Parbery and Smith in Sydney. 23 One has to be a little careful about charge-out rates because a person charging a lesser sum may in fact take more time than a person at a higher charge-out rate. However, in the instant case there is no evidence at all to suggest that Mr Hicks is in any way a lesser competent person in the field of insolvency and associated skills than Messrs Parbery and Smith. Accordingly, the cost factor favours the position put forward by Mr Pike on behalf of the PFA. 24 So far as skill and experience is concerned, again, the position advocated by Mr Pike is slightly ahead. However, Messrs Smith and Parbery are well experienced in the management of all sorts of businesses over their professional careers, so that it is, to my mind, that Mr Pike's proposal is only marginally ahead on this factor over that put forward by Mr McHugh and Mr Kulevski for the plaintiff. 25 Before coming to independence, I should note that it is significant to take into account that Mr Hennessy for the second defendant favours Mr McHugh's proposal. 26 So I believe that it really comes down in the end to the question of what weight one gives to independence. There is no doubt at all that Messrs Parbery and Smith are completely independent. That goes against them in one sense, in that they will probably take a little longer to familiarise themselves with the matter at a cost of $440 an hour, but otherwise the factor goes in their favour. 27 At some stage, as I have said, very awkward decisions will have to be made as to how to get the best return for the investors and the second defendant's mortgagee over these six lots. Mr Pike says that the problems are going to arise any way because under s 66H of the Conveyancing Act the trustees have a duty to consult. The section says that so far as practicable the trustees shall consult the persons beneficially entitled to the income of the property until sale, and so far as consistent with the general interest of the trust give effect to the wishes of such persons, or, in the case of dispute, of the majority according to the value of the combined interest of such persons, but a purchaser shall not be confined to see that the provisions of that section have been complied with. 28 There are considerable problems with s 66H in the present case. The first is that it is practically impossible to ascertain the wishes or consult with all the co-owners because the costs would be prohibitive. The best that any trustee would do would be to send out a circular to the co-owners asking them for an e-mail address and e-mail all those who responded. 29 Secondly, the trustees are required to consult. That means not just informing the beneficiaries of the proposal and giving a limited time to object, but giving sufficient information about proposals and giving the beneficiaries sufficient time to evaluate the proposal and then listening to the responses; see eg cases such as R v Secretary of State for Social Services; Ex parte Association of Metropolitan Authorities [1986] 1 WLR 1 at 4. 30 However, the section then says that the trustees shall, so far as consistent with the general interest of the trust, tend to prefer the wishes of the persons with the larger interest. That is going to be very difficult as the interests of the persons in each lot are in different proportions. 31 I do not consider the section means that because PFA has the largest interest in many of the lots that the trustees are virtually directed to do what PFA wants. In my view, the trustees must exercise independent commercial judgment, must inform people of their proposals, receive the views of the beneficiaries, but they only give effect to the wishes of the majority holders so far as consistent with the general interest of the trust. They are not bound necessarily to act in accordance with the directions or comments of the largest set of proprietors of each lot, or the whole of the lots, but must view the purposes of the whole of the trust, and that is to see that the investors generally receive the maximum outcome. 32 Now, looking at it this way, it seems to me that the same problems do not arise as Mr Pike puts it. This is because if Messrs Alexander and Hicks are the trustees they will be in a position of some conflict because of their interest in lot 3, in the case of Mr Hicks and lots 5, 12 and 14 in the case of Mr Alexander. If, on the other hand, Messrs Parbery and Smith are appointed trustees, then whilst those concerns will have to be ventilated, and PFA's views will have to be consulted and paid good heed to, ultimately an independent evaluation will be made by the trustees. 33 Mr McHugh reminded me of the principle that the court tends not to appoint a beneficiary as a trustee in this sort of situation, particularly where there would be some ill feeling between some beneficiaries and others, and cited Johnstone v Johnstone (1902) 2 SR (NSW) (Eq) 90. That case notes a valid principle, one, of course, that is not to be applied unthinkingly to every situation, but a good guideline just the same. 34 Now, putting all those factors together, and it is not a situation of scoring each under each heading, adding them up and dividing by four, but rather to consider all of the matters of interest, independence, skill and experience and costs. It seems to me that, despite the Alexander/Hicks proposal being slightly ahead on some factors, I should give greater weight to the factor of independence and, in my view, the investors generally would be better served by appointing Messrs Parbery and Smith, even though their administration might be slightly more expensive. 35 The ordinary order for s 66G schemes has been proposed and no-one has any problem with that. 36 The only other matter to consider is s 138 of the Real Property Act 1900 which permits the court, in limited circumstances, to direct the Registrar General to cancel certificates of title and to issue new ones. The court is only permitted to do that where there is proceedings for the recovery of the land, or proceedings for the production of the certificate of title. It is a last resort section. One of the reasons for this is that it is against the public interest to have a duplication of cancelled folios in the Register to be circulating in the community; see Lank v Lank (1973) 21 FLR 384 and Botterill v Botterill (2000) 10 BPR 18787. 37 However, the court has in the last ten years or so been faced with a number of situations where the holdings are complicated and where ordering cancellation and new certificates of title under s 138, despite that risk, appears to be the best solution. As the amended summons now seeks an order for the production of the certificates of title, it seems to me that I can now make an order under s 138. 38 Mr McHugh has submitted that I should make orders 1A and 3 to 6 in the amended summons filed in court today (not the further amended summons that is to be filed by tomorrow) and he has also submitted that the proper order as to costs is that PFA should pay them because only one matter has been contested and that is who should be appointed the trustees. 39 Ordinarily in this sort of matter the costs are paid out of the proceeds of sale, and the reason for that is that when parties enter into a joint venture, partnership or scheme of this nature, the costs of setting it up and the costs of winding it down are suitably to be paid by the investors. It is true that one point was debated before me, in which PFA was unsuccessful, but as the matter had to come to the court in any event, no time was wasted and, indeed, the court was put in a position where it could make the best choice for the investors, having heard strong arguments from each side. Accordingly, in my view, the ordinary order for costs should apply, that is, that the costs of all parties should be paid out of the proceeds of sale. 40 The exhibits may be returned on the basis that they will be preserved by the solicitors concerned until the present litigation is finalised and returned to the court if requested. 41 I thus make the orders suggested by Mr McHugh, together with the order for return of exhibits and costs, and stand over the balance of the proceedings to the Registrar on 4 May 2007 with liberty to apply in the meantime.

Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd

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