Australian Executor Trustees Limited v Provident Capital Limited

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 808 of 2012

AND: PROVIDENT CAPITAL LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQ)

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 Australian Executor Trustees Limited is the trustee for holders of debentures issued by Provident Capital Limited, to which I appointed receivers on 29 June 2012: Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461. The trustee has applied for directions under s 283HA of the Corporations Act 2001 (Cth), as to its position in light of allegations and investigations concerning its conduct as trustee in the period leading up to its application to the Court for the appointment of the receivers. 2 At about the time that the Court appointed the receivers, the trustee also appointed the same persons as receivers under a private appointment pursuant to the debenture trust deed. That appointment has continued to the present time. However, in the circumstances described in the evidence currently before me, as will appear, the private appointment is soon to come to an end. 3 Over the course of the receivership, the current receivers have substantially progressed the realisation of all of the properties that provided the security for the debenture holders. There remain only six loans for the receivers to realise in the loan portfolio previously administered by Provident.

Statutory context 4 Relevantly, the Corporations Act in Pt 2L provided that: 283AC Who can be a trustee … (2) A person may only be appointed or act as trustee (except to the extent provided for by section 283AD) if the appointment or acting will not result in a conflict of interest or duty. This subsection is not intended to affect any rule of law or equity. (3) An offence based on subsection (1) or (2) is an offence of strict liability. 283DA Trustee's duties The trustee of a trust deed entered into under section 283AA must: (a) exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available (whether by way of security or otherwise) will be sufficient to repay the amount deposited or lent when it becomes due; and (b) exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of: (i) the terms of the debentures; or (ii) the provisions of the trust deed or this Chapter … 283F Civil liability for contravening this Chapter (1) A person who suffers loss or damage because a person contravenes a provision of this Chapter may recover the amount of the loss or damage from: (a) the person who contravened the provision; or (b) a person involved in the contravention. This is so even if the person did not commit, and was not involved in, the contravention. 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. 5 If a trustee acts contrary to the requirements of s 283AC(2), it commits an offence of strict liability pursuant to s 283AC(3). Ordinarily, a trustee for debenture holders has a number of substantive duties, of a supervisory and protective nature, to perform under ss 283BF and 283DA. However, the duties under s 283BF are suspended by s 283BG(a) while a borrower is under external administration. Provident is under external administration because it is in liquidation and has receivers and managers appointed to its property. 6 The trustee also has other relevant active duties under s 283DA, first, to exercise reasonable diligence to ascertain whether the property of the borrower and each guarantor that is, or should be, available, whether by way of security or otherwise, will be sufficient to repay the amount deposited or left when it becomes due to debenture holders and, secondly, to supervise compliance with the trust deed. Here, those duties have now been subsumed, in a practical way, by the appointment of the receivers by the Court.

The Victorian proceedings 7 The trustee's position has been complicated because in 2014 proceedings were commenced by Innes Creighton against it in the Victorian District Registry of the Court, as representative proceedings under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Victorian proceedings). Mr Creighton claimed loss or damage under s 283F(1) of the Corporations Act and damages at common law for anxiety and stress, together with interest and costs, in respect of the trustee's conduct as trustee and its failure earlier to appoint receivers to Provident under the trust deed. The nature of those proceedings has evolved and recently, on 26 June 2015, Middleton J granted leave to Mr Creighton to file an amended originating application and an amended statement of claim. 8 The current constitution of the group under Pt IVA of the Federal Court of Australia Act is now defined as comprising all persons who on 18 September 2012 were holders of debentures issued by Provident, that being the date on which Provident entered voluntary administration, and who suffered loss or damage as a result of the trustee's contraventions of s 283DA of the Corporations Act, as alleged in the statement of claim. The amended statement of claim is detailed, and sets out a number of allegations about poorly performing loans or inadequate security that Mr Creighton alleges Provident ought to have appreciated and should have precluded the issue of further debentures after the particular times nominated, commencing in around December 2008. It is not necessary for me to go into further detail as to those matters. 9 In substance, the common questions that are now pursued in that proceeding, which will affect all group members, relate to: the nature and scope of the trustee's obligations under s 283DA of the Corporations Act; what, if any, steps the trustee was obliged to take from early December 2008, in light of what it knew or ought to have known about the then financial position, performance and assets of Provident; if the trustee had taken those steps, whether Provident would have been precluded from issuing further debentures after that time, either because of Court orders or steps that might have been taken by the Australian Securities and Investments Commission; and if the trustee had taken those steps, would receivers have been appointed at an earlier time to the property of Provident secured by the fixed and floating charge to protect the interests of the debenture holders so that a greater realisation may have occurred?

The New South Wales proceedings 10 The trustee is also involved in proceedings that were filed on 10 June 2015 in the Supreme Court of New South Wales (the New South Wales proceedings). Those proceedings are also of a representative character. The plaintiffs, John and Rosemary Smith, claim compensation under s 283F(1)(a) of the Corporations Act by reason of alleged contraventions by the trustee of s 283DA(b)(ii). Mr and Mrs Smith have sued on behalf of themselves and the class of persons who, first, held debentures issued by Provident as at the date the Court appointed receivers (29 June 2012), secondly, suffered loss and damage by reason of Provident's conduct alleged in the statement of claim and, thirdly, have signed a litigation funding agreement with a funder called Litman Holdings Pty Ltd. Their statement of claim is a lengthy, and is apparently, a more complex document than that in the proceedings before Middleton J. It raises common questions about whether: Provident breached the loan to valuation ratio criteria in the trust deed; Provident breached requirements of the trust deed concerning the use of debenture funds; Provident having breached s 283BB(a) by not carrying on and conducting its business in a proper and efficient manner; Provident breached requirements in the trust deed for solicitors' certification of title; whether a trustee exercising reasonable diligence in the position of the trustee would have done or ought to have done or failed to do a number of things that are set out in detail in the pleading; and whether the trustee failed to meet its obligation under s 283DA(b)(ii) to exercise reasonable diligence to ascertain whether Provident had committed any of its breaches of its obligations previously alleged. 11 Again, it is not necessary to go into the detail of those proceedings.

Other matters 12 On 22 May 2015, I appointed the liquidators of Provident as special purpose receivers to investigate any claims against the trustee that Provident might have, for the purposes of ensuring that any possible rights that may enure for the benefit of the debenture holders in relation to the Court receivership could be pursued directly for their benefit, to the extent that the special purpose receivers consider that appropriate. The reason that such an order was necessary was because, at the moment, the receivers hold a dual appointment as appointees of both the Court and the trustee. 13 I am satisfied by the evidence of Marcus Ayres, who is one of the receivers, and Yvonne Kelaher, who is a senior relationship manager employed by the trustee, that the trustee's current responsibilities and activity in its office are of a very limited nature and will narrow substantively further when, as is imminent, their private appointment as the receivers by the trustee comes to an end. This is because the active realisation work by the receivers, over which the trustee could exercise any supervisory functions, has reduced to the six remaining unrealised loans. The trustee currently receives periodic updates in relation to the receivers' progress in realising the assets and their enforcement activity. Those updates are substantially necessary by reason of the private appointment, since that work is also covered by their duties as Court-appointed officers. The trustee must approve the receivers' draft of periodic updates for provision to debenture holders and remuneration. Again, those functions largely flow from the current dual appointment.

The issue 14 The trustee filed an interlocutory process on 19 May 2015 seeking directions under s 283HA as to whether it was disqualified from continuing to act in office under s 283AC(2), or whether it would be justified, or obliged, to retire as trustee under cl 9 of the trust deed or the Court ought to terminate its appointment and appoint a new trustee in its place. 15 The trustee filed that interlocutory process because of its understandable concern that it may have been placed in a position in which it would be acting in conflict of interest or duty if it remained in office, having regard to the Victorian proceedings and the then foreshadowed New South Wales proceedings as well as the investigation by the liquidators as special purpose receivers. Relevantly, cl 9 of the trust deed replicates the statutory duty of a trustee under s 283AC(2).

Consideration 16 A trustee has a proprietary right in the trust fund to indemnify or exonerate itself in respect of its expenses, including its costs of defending itself successfully in litigation brought against it in respect of its conduct as a trustee: Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 246 [49]-[51] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ. The mere fact that a trustee has such a proprietary right cannot, of itself, create for him, her or it a conflict of interest and duty, because that right is a necessary incident of any trustee holding office: Buckle 192 CLR at 246 [48], 247 [50]. 17 In the case of a professional trustee, such as that here, the trust deed will contemplate that the trustee will receive remuneration and, so, obviously, the trustee will have a disclosed and approved interest in receiving that remuneration at the same time as owing its fiduciary and trust duties to the cestuis que trust. 18 The mere existence of those two rights does not, of itself, create a conflict of interest or duty for the purposes of the law. That is because each beneficiary must be taken to have given a fully informed consent to the trustee acting while entitled to the benefit of those rights the former (the right to indemnity and exoneration) as a necessary incident of the trustee holding office, and the latter (the right to remuneration) as a right expressly conferred on the trustee by the trust deed. 19 The requirements of s 283AC(2) appear to be far more narrow than the situation at general law, where a person who is a fiduciary cannot act or continue to act without making full and frank disclosure to, and receiving the fully informed consent of, the cestuis que trust where there is either an actual, or a real and sensible possibility of, a conflict between the trustee's or fiduciary's interest or duty and the interests of the beneficiaries or cestuis que trust: see Pilmer v The Duke Group Ltd (2001) 207 CLR 165 at 199 [78] per McHugh, Gummow, Hayne and Callinan JJ. 20 Indeed, s 283AC(2) expressly provides that the precise statutory prohibition that it prescribes does not affect any rule of law or equity. That indicates that the standard that the Corporations Act contemplates, particularly having regard to the creation in s 283AC(3) of an offence of strict liability, is of an actual conflict of interest or duty that is the product of the trustee having been appointed or continuing to act. The beneficiaries must be taken to have understood at the time of a trustee's appointment, that the trustee will, and will be able to, exercise appropriately the proprietary rights of indemnity or exoneration against the trust assets where appropriate. 21 The issue here is whether the trustee, if it continues to act, will have a conflict of interest or duty where third parties are suing it or the liquidators are investigating any possible action that Provident may have against it, in respect of its conduct as trustee and under the trust deed. 22 As Ms Kelleher explained, the trustee is currently earning from Provident about $8,000 plus GST per quarter, for providing its services under the trust deed. It must answer occasional correspondence from debenture holders seeking information, perform other relatively formal functions under the trust deed in respect of the debenture holders or others and approve the receivers' remuneration pursuant to the private appointment. Since that appointment is shortly to come to an end, I am satisfied that there is no reason on the material before me to think that the trustee should be replaced because of any risk that, under s 283AC(2), or otherwise, its continuing to act will result in it being placed in a position where its interest or duty will be, or there will be a reasonable possibility of it being, in a conflict with the interests of the debenture holders. 23 Moreover, Ms Kelleher explained that there is a limited class, of about three other professional trustee companies, available to perform work of the nature required by the debenture trust deed for Provident's debenture holders, and by Pt 2L of the Corporations Act. I am satisfied that it is unlikely that any of those other trustee companies would be interested in, let alone prepared to assume, an appointment to replace the trustee, and moreover, that to do so would cost the estate in the order of $100,000. I cannot see any practical benefit to the debenture holders to justify such an expense, in circumstances where the trust property is currently in the possession of the receivers as officers of the Court and where the private appointment is likely to come to an end in the very near future. 24 In my opinion, the trustee will be able to continue to act in what is essentially a formal role, with no substantive active duties, once the receivers retire from the private appointment. If and when the trustee decides to apply to exercise any claim for indemnity or exoneration against the trust property, it accepts that it should apply to the Court for directions as to whether it would be justified in doing so. In those circumstances, there is an additional reason why there is no possibility that the conduct of the trustee in making such an application will create a conflict between its interest and duty, since it will not be able to, or seek to, resort to trust property unless the Court forms the view that it is entitled to do so. The trustee is not currently seeking to resort to any part of the trust estate to pay for its costs of defending the Victorian proceedings and will not be able to do so for the New South Wales proceedings or the investigations by the liquidators, as special purpose receivers, without having the advice of the Court that it would be appropriate for it to do so: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 93-94 [69]-[71], 120 [166] per Gummow ACJ, Kirby, Hayne and Heydon JJ.

The potential for wasteful duplication in the two representative proceedings 25 I must also observe that there is a likelihood of there being an extravagant waste of the trust estate that will possibly occur by reason of the two concurrent representative proceedings. No doubt, at some point there will be a need for consideration as to whether one of those proceedings ought be cross-vested into the one Court for case management to avoid unnecessary duplication of costs. The parties and the Courts will need to ensure that the damages that are sought to be recovered from the trustee, for the stated benefit of debenture holders who have lost the full value of their investments, will not be frittered away on litigation funding charges and duplicated legal costs in two proceedings that will cover what is likely to be very similar, if not identical, ground. Each proceeding appears to have a considerable overlap in the represented classes, although the New South Wales class appears to be narrower, being limited to persons who have signed litigation funding agreements with a particular funder. 26 The burden on the administration of justice generally, of having to accommodate class actions of this nature, to say nothing of the waste of the potential funds that might be available from the trustee by maintaining two very large causes of action over substantively the same ultimate subject matter, cannot be gainsaid. Hopefully, at some point, common sense will prevail over what may be thought to be the commercial interests of those promoting the two class actions, for the asserted ultimate benefit of the persons who have suffered loss and damage here.

Conclusion 27 In my opinion, it is appropriate to make orders giving the trustee advice under s 283HA that it is not disqualified from continuing to act as trustee under s 283AC(2) and that it is not justified, or obliged, to retire as trustee under cl 9 of the trust deed, provided that the trustee does not seek to avail itself of any right of indemnity from the trust fund without seeking the prior direction of the Court. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.