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[2012] FCA 728
Federal Court of Australia
2012-06-29
Mr J, Rares J
Original judgment source is linked above.
Number of paragraphs: 86
Counsel for the Plaintiff: Mr AW Street SC with Mr J Hynes
Solicitor for the Plaintiff: Henry Davis York
Counsel for the Defendant: Mr I R Pike SC with Ms F T Roughley
Solicitor for the Defendant: Baker & McKenzie
Counsel for the Amicus Curiae: Australian Securities and Investments Commission Mr D R Pritchard SC
Solicitor for the Amicus Curiae: Australian Securities and Investments Commission Conrad Gray, Lawyer
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 808 of 2012
JUDGE: RARES J DATE OF ORDER: 29 JUNE 2012 WHERE MADE: SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 808 of 2012
JUDGE: RARES J DATE: 29 JUNE 2012 PLACE: SYDNEY
REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 Since about 1999, Provident Capital Limited has been issuing debentures to members of the public. The debentures have been issued under a debenture trust deed dated 11 December 1998 between Provident and the original trustee. Since 19 November 2004, Australian Executive Trustees Ltd has been the trustee (the trustee). Currently, Provident owes about $128 million to its over 3000 debenture holders. There are varying dates of maturity for those debentures, extending to 2017. All debentures issued by Provident, regardless of their times of issue, maturity, or interest rates, rank equally in priority of security in proportion to their face value if not repaid in full (cl 2.5). 2 In December 2011, the Australian Securities and Investments Commission (ASIC) raised concerns about Provident's financial affairs and its disclosures in documents that it had issued to the public for the purposes of raising funds. Provident is not currently in default under the debentures or the trust deed. However, the trustee has concerns about Provident's ability to repay all of the debenture holders equally, as and when their debentures fall due in the period up to 2017, when the last debentures mature.
This application 3 The trustee seeks orders under s 283HB(1) of the Corporations Act 2001 (Cth) making the security immediately enforceable despite there being no event of default, appointing receivers to Provident and requiring distributions to be paid to all the debenture holders pro rata in reduction of their face value regardless of different rates of interest or time for repayment.
Background 4 The trustee commenced these proceedings on 8 June 2012. As result of that Provident sought, in effect, a moratorium on its obligations to pay interest on, and repay, debentures falling due for the next 12 months. Some of the debentures contain terms enabling Provident to defer repayment and payment of interest for up to one year, others for 180 days and others for 90 days. A small proportion of debentures issued prior to 2007 do not provide for any such deferral of payments. Provident, in effect, seeks an order under s 283HB(1)(b) for a universal moratorium of 12 months on all debenture repayments to be followed by the actuation of its own entitlements to defer, for the maximum permissible period, repayment of any debentures that contain such a provision. While the moratorium is in place Provident will seek to go about realising the security properties in its fixed term interest portfolio (or FTI portfolio) which is the security for the debenture trust deed. The circumstances that have given rise to this situation include the fact that 90% of that property portfolio consists of non performing loans.
The trust deed 5 The trust deed confers a number of powers on the trustee including: a discretion not to enter a possession of the company's assets or appoint a receiver (cl 7.1); a power to apply to the Court for directions in relation to any matter arising in respect of the deed (cl 7.4.8) a power, after the occurrence of an event of default, for the trustee to declare all money owing actually or contingently on any debentures to be immediately due and payable and to take action to enforce the fixed and floating charge given to it by Provident, either itself or by the appointment of a receiver (cl 11.2). 6 Clause 11 of the trust deed deals with events of default, including: "11. Enforcement 11.1 Events of default The following events are events of default: 11.1.1 if the Company fails to pay any money within 21 days after the day upon which the payment becomes due and payable; 11.1.2 if the Company defaults in the performance of any obligation under this deed and, where reasonably capable of remedy, that default is not remedied within 21 days after the Company has received notice of or otherwise becomes aware of such default; …" 7 Clause 11.5 sets out the manner in which the monies received by the trustee or any receiver as a consequence of the enforcement of the trustee's rights against Provident must be applied. This includes, after payment of the trustee's remuneration and expenses and those of any receiver, payment to the trustee for the account of debenture holders in respect of interest accrued but unpaid on the debentures on issue, and next, the face value of the debentures in issue. Clause 12.1 gives the trustee at any time after an event of default has occurred, the right, but not the obligation, to exercise a number of further powers in the manner it thinks fit and notwithstanding a receiver having been appointed. The trust deed has been amended on a number of occasions, including to provide for the power to defer repayment of the debentures and interest.
Provident's financial problems emerge 8 In late 2011, ASIC became concerned about Provident's 2011 debenture prospectus dated 22 December 2010, under which current debentures were issued and existing ones renewed. ASIC had issued Provident with a notice to produce on 6 December 2011 in relation to other aspects of its businesses. On 22 December 2011, ASIC wrote a letter setting out its concerns to Provident. That followed a meeting held earlier that week between ASIC, Provident and the trustee. Some of those concerns dealt with the state of the loans in the FTI portfolio, the level of arrears provisioning and interest non-accrual for those loans that were security for the debenture holders' investments and the lack of current and "as is" valuations for those distressed security properties. 9 ASIC sought confirmation that Provident was intending to fund the development of a property in southeast Queensland (the Queensland property) for which it had provided a construction loan. The development was a two-stage one providing for construction of 36 townhouses. The first stage, of 18 townhouses, and some ground works for the second stage had been substantially completed, although, the internal fit out of the existing 18 townhouses had not. According to the information booklet published by Provident in January 2012, to which I will refer below, the total debt including accrued interests and costs owing on this property at 30 June 2011 was about $20.1 million. 10 ASIC required Provident in its public disclosures to cross-reference the estimated cash flows associated with completing that development and the risks associated with it. It also required Provident's next prospectus to include information about the valuation of any particular property, where that property accounted for 5% or more of the total value of Provident's property assets, in particular, for the Queensland property. ASIC also required that because it was a development property, the Queensland property ought be re-valued on both an "as is" and "as if complete" basis every 12 months. 11 On 23 December 2011, Provident responded stating that it considered ASIC's concerns were readily addressed by way of disclosure. Provident said, in response to ASIC's request, that it had ceased accepting investments from new investors under its current prospectus that would have expired on 22 January 2012 and also undertook not to accept any further new investments. It said that it withdrew that prospectus. It also informed ASIC that it did not intend to proceed with the lodgement of the draft prospectus for the next year that had been the subject of the ASICs letter and earlier discussions. Provident advised ASIC that it proposed preparing an information booklet to give to all existing investors. Provident said that it intended to consult with ASIC in relation to the form of the booklet and considered that ASIC's disclosure concerns could be addressed in it in a mutually agreeable form.
The January 2012 information booklet 12 Following the consultative process, Provident issued an information booklet later in January 2012. The information booklet referred to ASIC's benchmarks for fixed term investments. These required certain ratios to be maintained and reported on by entities like Provident that sought to raise funds by issuing debentures. Those are not the subject of present concern. The following paragraph in the booklet appeared under the heading "Benchmark 1: Equity Ratio": "Whilst the Company is not engaged in property development, it is funding the construction costs of one loan (the current balance of which now exceeds 10% of the total loan portfolio; further details are set out on page 10) and is taking steps to obtain development approval or maintain existing development approval for 2 other loans (although it is not intending to fund or carry out the construction under these approvals). The Company has determined to take these actions so as to maximise its recovery and minimise any potential exposure to loss arising from these loans. In the light of the current balance of the construction loan, it is now considered appropriate to apply the ASIC Benchmark ratio of 20% instead of the ratio of 8% that applied previously." (emphasis added) 13 The information booklet set out tables of the loans in the FTI portfolio, and the wholesale-funded loan portfolio maintained by Provident, which was another aspect of its business, independent of the debenture side. The loans in the various portfolios and the portfolio totals were stated by number and value in respect of each State and Territory and the largest borrowers were also identified. The Queensland property was identified as consisting of 21% by value and 2.6% by number of the FTI loan portfolio. The following table set out what the FTI loan portfolio contained as loans in arrears as at 30 June 2011: FTI Loan Portfolio Loan Amount % of FTI Loan Portfolio Number of loans % of FTI Loan ($) Portfolio Between 31 and 90 days nil nil nil nil Between 91 and 180 days 22,936 0.0 1 2.6 More than 180 days 70,006,642 73.0 33 84.6 Total 70,029,578 73.0 34 87.2
14 Another table following that one, set out the status of loans more than 90 days in arrears, as at 31 December 2011. It stated that it was owed about $45.5 million in respect of mortgaged property in possession of Provident pending sale. Next, the booklet stated below this further table: "The level of loans in arrears is consistent with the monthly balances throughout the 12 months ended 30 June 2011, but is higher than the levels previously experienced. One of the main reasons for this has been the extra time required to resolve these matters (a significant number of loans have been in arrears for well in excess of 180 days), particularly in the dispute resolution and litigation processes, in dealing with local councils for approvals, and because of changes in the property sale market." (emphasis added) 15 The trustee received regular quarterly reports from Provident. After considering the concerns raised by ASIC, the trustee then arranged for an independent solvency review to be made relating to the debenture-funded loans. It engaged PPB Advisory for that task. PPB prepared a draft report dated 19 March 2012 and followed that with a final report on 27 March 2012. 16 Just shortly before the final report was provided to the trustee and Provident, the trustee had asked, in consequence of the draft report, that Provident immediately attend to, among other things, undertaking regular impairment testing of its FTI portfolio and advise the trustee on becoming aware of any writedown that might cause a deficiency in assets to meet all debenture holder claims. Provident agreed to do so straightaway.
PPB's solvency report of 27 March 2012 17 In its report of 27 March 2012, PPB concluded that, from a cash flow perspective, Provident was solvent and was expected to remain so until at least 31 December 2012. This was primarily due to the forecast loan discharges and Provident's ability to defer the majority of debenture redemptions for up to 365 days. However, PPB identified that the key risk during that period was that the value of the underlying assets available to meet debenture holders' claims could continue to erode. 18 PPB expressed a concern that there was likely to be a deficiency in Provident's balance sheet on a going concern basis of a relatively small but not insignificant sum. This was based on valuations obtained by Provident and its audited accounts to 31 December 2011 in light of PPB's own assessment of Provident's available tangible assets. PPB warned that this deficiency would increase if, as they thought was very likely, further provisioning was required. This was because of the age of some of the valuations that Provident had relied on to ascribe values for the assets in its loan book, the absence of an "as is" valuation for the Queensland property and the lack of any allowance in Provident's accounts for the costs of realisation of other security properties, including selling and holding costs. 19 PPB observed that Provident's capacity to generate sufficient operating income to meet corporate overheads was dependent on the extension of a facility granted to Provident by the Bendigo and Adelaide Bank Limited (the bank) to enable it to engage in a mortgage origination business. That facility was due to expire on 31 March 2012. PPB observed that the FTI portfolio was essentially in work-out because of the 90% of non-performing loans. Among their other conclusions, they drew attention to their opinions that a number of assets in Provident's accounts had no recoverable value. These included a deferred tax asset and what had been recorded as the unsecured balance outstanding due in respect of loans for which the security properties had already been sold . Some of those unsecured amounts were Provident's assessments of the value of its claims in proceedings against guarantors or borrowers on personal covenants, while others were based on the assessed value of negligence actions against valuers or solicitors. All of the proceedings included in the total figure for this asset appear to have been supported by solicitors' opinions indicating that Provident had reasonable prospects of success in each action. 20 PPB discussed the maturity profile of the debentures falling due between March and December 2012. About $22.7 millions worth would fall due by the end of June 2012 and approximately a further $53.5 millions worth would fall due by December 2012. They observed that: "A critical feature to the FTI program is the ability of [Provident] to defer redemptions. While this has never occurred in practice, [Provident] have inserted a condition to any new or rolling debentures that they have the ability to defer any redemption request for up to 365 days." 21 PPB analysed how the power to defer would apply over the period between March to December 2012 so as significantly to reduce pressure on Provident's liquidity during that period. Provident had power to defer over 90% of the amounts due under those provisions during that period. However, that action would have the consequence that those amounts would become due and payable progressively in the succeeding financial period. 22 PPB assessed Provident's asset management policies and procedures. PPB found, as is the case, that Provident did not have any written policy with respect to provisioning and/or write-off procedures. Both provisioning and write-offs are in the sole discretion of Provident's managing director, Mr Michael O'Sullivan. However, PPB also said that the management's proactive approach to dealing with loan arrears, was expected to assist in mitigating future losses on loan exposures and continued: "Notwithstanding the above, a significant component of the FTI funded loan portfolio is in arrears. … We consider this to be due to the underlying quality of the loan and security property rather than any deficiency within the Company's asset management policy and procedures." 23 The report concluded that interest receivable from the FTI portfolio was inadequate to service coupon payments to investors and recoveries of loan principal balances, and interest due to Provident might potentially be insufficient, or not received in a timely fashion, so as to enable it to meet redemptions of debentures when due. However, PPB observed that this deficiency in the returns on the FTI portfolio was offset by the surplus cash flow from Provident's loan origination portfolio funded by the bank and its other business income. 24 A table to PPB's report set out the position of Provident's FTI portfolio. It recorded the principal advanced, interest charged, non-accrued interest and provisions together with valuations of each of the non-performing loans. It was not a pretty picture of financial well being for the FTI portfolio.
The April information booklet 25 On 4 April 2012 Provident issued a new information booklet as part of its disclosure arrangements with ASIC. That booklet repeated verbatim the statement from the January 2012 booklet quoted at [12] above and continued to use the word "now" in the second line. Mr O'Sullivan accepted in cross-examination that that word was not appropriate to use in April 2012. 26 Of more concern was the way in which the April information booklet dealt with the disclosure of the then state of Provident's loan book. The section dealing with the FTI portfolio was as follows: FTI Funded Loan Portfolio Loan Amount % of FTI Loan Portfolio Number of loans % of FTI Loan Portfolio Between 31 and 90 days $5,206,256 5.37% 2 3.64% Between 91 and 180 days Nil Nil Nil Nil More than 180 days $82,210,823 84.81% 32 58.18% Total $87,417,079 90.18% 34 61.82%
(emphasis added) 27 It is immediately notable that the amount stated as being more than 180 days in arrears as at 31 December 2011 had increased by approximately $12 million to about $82.2 million from the corresponding table in the January booklet. But there was no explanation of the change or why it had been made. In addition, the amount in the following table setting out the status of loans more than 90 days in arrears as at 31 December 2011 disclosed as the amount of loans on mortgaged property in possession of Provident pending sale had increased to about $59 million. That table was for the same period as in the January 2012 booklet, unlike the tables for the FTI funded loan portfolios in the two booklets which were stated to be for the periods ended 30 June 2011 (in the January booklet) and 31 December 2011 (in the April booklet). However, the April booklet contained exactly the same paragraph below these tables as I have set out at [14] above except that the 12 month period was stated to have ended on 31 December 2011. 28 It is apparent that there was no consistency in the monthly balances given for FTI portfolio loans in arrears in the two information booklets published by Provident less than three months apart. There has been no explanation in the evidence of how that discrepancy arose. ASIC drew this matter drawn to the Court's attention as a concern, which it is. 29 The April information booklet identified the Queensland property as having a total debt including accrued interest and costs secured on it, after a reduction for impairment provision, as at 31 December 2011, of approximately $19.25 million. Thus, about $800,000 had been written off this debt in the period since the previous booklet without any statement being made to disclose this change. The April booklet stated that the latest valuation of the Queensland property in January 2012 assessed its "as if complete" value at about $26.7 million. It stated that Provident did not have a current "as is" valuation for that property. 30 On 20 April 2012, Provident provided to ASIC and to the trustee a report under s 283BF for the quarter end 30 March 2012 relating to its solvency.
The undisclosed application to ASIC for a licence 31 On 2 May 2012, a company controlled by Mr O'Sullivan called Provident Funds Management Australia Ltd (Provident Funds Management), which was not a subsidiary of Provident but was a related company, applied to ASIC for an Australian Financial Services Licence (the licence). This application was so that Provident Funds Management could act as responsible entity, in place of Provident in respect of Provident's high yield and monthly income funds. This fact only came to the trustee's knowledge during the closing address of Provident's counsel yesterday. The application to ASIC for the licence stated that: "[Provident] is in the process of segregating some of these business activities into separate legal entities and therefore is seeking to transfer the RE licence. Further reasons for this legal separation are: • Separate/reduce the exposure of investors (FTI and [monthly income and high yield] Funds) to each respective entity • Corporate and tax benefits" (emphasis added) 32 The trustee re-opened its case and Mr O'Sullivan was cross-examined on his failure to reveal that application to the trustee or the Court. Also on 2 May, Mr O'Sullivan had said to Phillip Joseph, the chief executive officer of the trustee: "If you approach the Court in relation to Provident's current difficulties, it will be the end of the business."
Updated valuations for FTI security properties and PPB's supplementary reports 33 In late May and early June 2012, the trustee received updated valuations for three of the substantial properties, including the Queensland property, in the non-performing FTI loans portfolio. Those valuations showed, on an "as is" sale, that there would be a substantial reduction in the book value after impairments at which Provident held those properties. The Queensland property had been valued for the trustee by Simon Jarden of Savill's Australia Pty Ltd on a number of different bases. He valued the property on an "as if completed" basis at substantially less than the value as at 2 January 2012 of $26.7 million arrived at by John Robertson, the valuer, whose valuation Provident had given in the January and April 2012 information booklets. Those valuations raised some concerns for Mr Joseph. 34 PPB provided a supplementary report to the trustee on 8 June 2012 dealing with the impact of the new valuations. PPB opined that as a result of the updated valuations, Provident's net asset position of $6.08 million as at 31 December 2011 was overstated. PPB considered that Provident would be required to raise provisions or expense impairment charges of substantial sums against the FTI funded loan portfolio for the year ended 30 June 2012. PPB also opined that on the basis of those new valuations Provident had a deficiency in net assets of a significant sum that was enhanced by the unavailability, in those circumstances, of the contingent asset for deferred tax losses. 35 PPB also opined that if their forecast deficiency in net assets was correct, there would not be sufficient property available to meet claims from all debenture holders based on the updated carrying values. PPB said that Provident was unlikely to be able to reduce the deficiency in the short to medium term through trading profits. That was because, at that time, the bank facility was in lock up following its maturity on 31 March 2012. The bank had indicated it was awaiting receipt of new valuations sourced by Provident to assess their impact on its business before considering whether it would be in a position to renew that facility. PPB said that Provident had not sought an alternate source of funds for its mortgage origination business. PPB also considered that further provisioning for impairment to reflect lower recoverable values of assets within the FTI portfolio would directly impact on Provident's future viability. The report discussed the three updated valuations that PPB had received. 36 PPB suggested that the trustee seek Provident's response to its supplementary report. They stated that the trustee should seek urgent advice as to how to protect the interests of the debenture holders. This was due to PPB's forecast of a deficiency in net assets, using Provident's audited figures as at 31 December 2011, and the likelihood that that deficiency would not be rectified in the short term, unless there was a capital injection to fully reduce the deficit and provide a buffer against future potential risks in the non-performing FTI portfolio.
ASIC's further concerns as to Provident's disclosure of its position 37 Earlier, on 9 May 2012, ASIC had issued notices to Provident in respect of statements made in documents it had issued in its capacity as responsible entity for its monthly income fund. ASIC was concerned about, among others, the accuracy of Provident's assertions of its "proud track record of consistently meeting our investment objective", providing a monthly income in the top 25% of all Australian retail mortgage funds based on returns for one year and continually meeting this objective since August 2010. From late May to 19 June 2012, ASIC engaged in correspondence with Provident about statements in its proposed public disclosure document, or PDS, that Provident wished to use to raise further funds for the monthly income fund. 38 On 19 June 2012, Provident lodged a notice with ASIC that the monthly income fund had ceased to be available. This was the result of the ongoing difficulties Provident was having in satisfying ASIC about the contents of its statements with which ASIC had taken issue. 39 The evidence relied on by the trustee in these proceedings had been substantially completed by 13 June 2012. It did not contain any reference to the discussions between Provident and ASIC as to the product disclosure statement for the monthly income fund. That matter was only made the subject of evidence in an affidavit filed on 26 June 2012 by James Nott, a senior specialist in the corporations' team at ASIC. That was the day before the hearing commenced. However, no reference at all was made in either Mr Nott's evidence or any other material tendered by the trustee about it being aware of the 2 May 2012 application for the financial services licence.
Provident's evidence 40 Mr O'Sullivan swore a substantive affidavit on 25 June 2012 providing detailed responses that Provident made to the allegations and concerns raised in the material filed by the trustee. He set out, among other things, the history of Provident's successful business operations over the preceding years. He asserted that Provident was able to meet its debts as and when they fell due, other than those that it had been prevented from meeting by an order made by Jacobson J, on 13 June 2012, when setting the matter down for hearing that prevented payment of any amounts of interest or principal in respect of debentures falling due after that day and until the hearing. 41 Mr O'Sullivan explained in some detail in his affidavit how he anticipated that Provident would be able to meet its debts as and when they fell due. He observed that Provident had provided to the trustee, or given its solicitor, a copy of all information that had been requested directly by the trustee in a timely and cooperative manner and was still in the process of dealing with other matters. He said: "As part of [Provident's] lending business, and in addition to the FTI loan portfolio, [Provident] also: ... (b) manages or acts as Responsible Entity for two mortgage funds where the net fund assets are approximately $35 million - the funds are known as the Provident Capital Monthly Income Fund … and the Provident Capital High Yield Fund … [Provident] has acted in that capacity since August 2009" 42 He did not disclose the application by Provident Funds Management for the licence the purpose of which was to have that company act as the new responsible entity for those two funds. Mr O'Sullivan also identified in his affidavit that Provident's operating costs were offset by all of its activities. Those included, in addition to the FTI portfolio, the profits generated in its other activities, including those in respect of managing and acting as responsible entity of the two funds. He observed that those activities generated in the order of $8 million per annum. He said that the trend was that those sources of revenue had been increasing since their inception in 2009 and were expected to continue to increase for the next five years. He also swore that: "On the basis that [Provident] remains as a going concern, [Provident's] other profitable business activities support the costs of the FTI portfolio and the liability to debenture holders." (emphasis added) 43 Mr O'Sullivan had been cross-examined on the first day of the hearing. When it emerged on 28 June 2012 during Provident's counsel's final address, that the licence had been applied for on 2 May 2012, Mr O'Sullivan was recalled. He gave no satisfactory explanation for his failure to disclose the licence application. He admitted that its purpose was to segregate the responsible entity business from Provident, as the licence application had stated to ASIC. 44 I was not impressed by Mr O'Sullivan's evidence generally where it conflicted with other evidence. I do not consider that he had been candid with the Court in relation to the withdrawal of the PDS for the monthly income fund or with respect to his failure to reveal the application for the licence.
Provident's present financial position 45 I think it is realistic to accept that until recently Provident has been able successfully to meet its obligations to persons who have lent it money and that the current difficulties with which it is confronted in its FTI portfolio loan book have arisen through no fault of its own, as the evidence of PPB makes clear. I also accept that Provident is managing the arrangements for realising the properties in an appropriate way. However, it is entirely unsatisfactory that Provident has no identifiable yardstick, in terms of a written policy or otherwise, beyond Mr O'Sullivan's discretion, to write-off or identify impaired asset write-downs, particularly against its non-performing FTI portfolio loan book. As these reductions impact directly upon the profit and loss account, as well as the balance sheet, it is not readily or objectively ascertainable how or why Provident made any decisions to write-down certain values. 46 Mr O'Sullivan maintained an optimistic view of the ability of Provident to work its way out of these financial difficulties. He contended that an "as is" valuation of the Queensland property would not reflect its intrinsic value or an appropriate realisation strategy. In my opinion that is correct. The two valuations by Mr Robertson and Mr Jarden in respect of the "as if" completed value, assume that the property will not be affected adversely by geotechnical, zoning or other matters that would impact on its value. There is no reason to think that those assumptions are not well-founded. Both valuers assumed a similar cost to complete the outstanding work on stage one and stage two to the point of the property being ready for sale on an "as completed" basis. 47 Mr Robertson assumed, for reasons which he did not state, that, first, there would be a higher quality finish for the townhouses in stage two than in stage one, and, secondly, there would be a pool built, which assumptions were not in the current plans or specifications. Neither he nor Mr Jarden had seen any specifications. Thus their valuations were, to some extent, impaired by the assumption they had to make as to the cost of completion. 48 Nonetheless, I am satisfied that those valuations provide an upper and lower range of what it would be reasonable to expect the property to realise if completed. It is clear from those valuations that unless the assumptions on which they are based turn out to be materially incorrect, the practicable and sensible course for the realisation of the Queensland property for the benefit of the estate of the debenture holders, will be to allow it to be built and completed. 49 I am not satisfied that Mr Robertson's value is one which I should accept for the purposes of the present application. His reasons for critiquing Mr Jarden's valuations themselves reveal a lack of reliability on his part. Provident has been a mortgagee in possession of the Queensland property since September 2008. Mr Jarden selected a number of other properties as comparable sales, some of which were themselves mortgagee sales. Mr Robertson criticised him for doing so suggesting that the use of mortgagee sales led to the reduced value at which Mr Jarden arrived. In my opinion, that was not a sensible or realistic criticism of a valuation of the expected realisation of a property that has been in the possession of its mortgagee for some years and will be when the development is sold. 50 Mr Robertson also criticised Mr Jarden for proceeding upon alternative assumptions in some of his other valuations. Those were prepared by Mr Jarden on other stated hypotheses. Mr Robertson asserted that Mr Jarden should not have made those assumptions without first finding the factual basis upon which such assumptions could be made. However, Mr Robertson himself had made assumptions that, as I accept, were appropriate. Those assumptions were important to Mr Robertson. Yet, he had no evidence, such as evidence about the geotechnical issues, to justify his making them. He did this in circumstances where a zoning report suggested that there may be such issues that might affect this particular site. All that Mr Jarden did was to explore the possibility that, if the bases upon which his best case valuation proceeded were wrong, other values might need to be considered, so that the trustee could consider its position in an informed way. 51 Moreover, Mr Jarden reviewed a large number of comparable sales of various properties. Each of the features which he identified as to comparability, including those properties he said were inferior or superior, were matters to which Mr Robertson directed his criticisms by simply emphatically agreeing, without acknowledging that he was doing so, with Mr Jarden's ascriptions of inferiority or superiority. 52 On the whole, I am inclined, for the purposes of the present application, to take the view that if the Queensland property were completed, it would realise in the order of somewhere between 25% and 50% of the difference between the two valuations done on an "as if completed" basis, that is, a value in excess of Mr Jarden's valuation but below Mr Robertson's. It is not desirable in a judgment such as the present to go into detail as to these matters, particularly given the need to realise the Queensland property for the benefit of the estate of the debenture holders. What I have said will be sufficient to disclose to the parties the approach to valuation of that property that I have taken. 53 There were two other FTI portfolio security properties which PPB relied on as requiring further provision for impairment in Provident's books. Those two were cross-collateralised and one of them was affected by a mining development. It was a condition of the development consent that the mine operator acquire any property that was either identified land within the development consent or was land affected by noise greater than the noise control levels or dust greater than certain dust emission controls in the consent. One of the two cross-collateralised properties, or at least a portion of it, was affected by what its owners claimed were the effects of noise. Counsel experienced in the area of such work advised Provident that, on the assumption that the mine owner were obliged to acquire the property affected by the noise from the mine, acquisition compensation would be payable under the terms of the development consent for the mine in a sum that exceeded the amount secured for both of the cross-collateralised properties, having regard to a valuation that the PPB obtained for that property. 54 On the other hand, if the mine operator were not required to acquire all that land or a substantial portion of it, the alternate valuations reveal that there will be a need to make a further material reduction in the book value for those two properties, based on what they would be likely to realise. Those alternate valuations assumed that the affected land owner would not be able to compel the mine owner to acquire its land. 55 It is difficult to say with certainty what the position is. In my opinion, there is some probability that the mine owner's obligations will be triggered. But, I do not think that it is possible, on the present state of the evidence, to conclude that there is any certainty as to the outcome. It is necessary to allow, on a contingency basis, for the fact that the carrying value in Provident's books for these two cross-collateralised properties is greater than what they are likely to realise. 56 Provident also valued the potential to recover the residue of loans, where the security property had been sold for less than the amount secured, based on evidence that satisfied me that these rights have a substantive value. Again, I am not prepared to accept in full PPB's assessment that those claims are worthless. However, I consider that they too should not be valued at the full amount that Provident has asserted. This is because the matters are contingent and depend upon Provident's own assessments of what its solicitors' advices of reasonable prospects of success might mean. Having regard to the unsatisfactory view I have formed of Mr O'Sullivan's evidence, I am not prepared to rely on that evidence completely. It is likely that those claims will realise at least 50% of Provident's value, leading to a further diminution in its net assets. 57 On these findings Provident would be likely to have a deficiency of net assets, albeit of a small amount. That, in turn, would trigger the unavailability of the contingent asset of a tax benefit which would only be available were Provident solvent, thus increasing the deficiency materially.
The unsatisfactory disclosures about the FTI portfolio 58 The two information booklets painted a confusing and incomplete picture of the state of arrears in the FTI funded loan portfolio. First, the January 2012 booklet had a table revealing that as at 30 June 2011 there were loans of about $70 million more than 180 days in arrears. Secondly, the table immediately below that revealed that as at 31 December 2011, the loan amount for mortgaged property in Provident's possession pending sale was about $45.5 million. Thirdly, the April information booklet gave a figure of about $82.2 million for loans more than 180 days in arrears as at 31 December 2011. Fourthly, the corresponding figures in the April information booklet of loan amounts for mortgaged property in Provident's possession pending sale as at 31 December 2011 (i.e. the same date as given for this in the January booklet) was about $59 million. Fifthly, each of the two booklets had a paragraph immediately below those tables that stated incorrectly that "The level of loans in arrears is consistent with the monthly balances throughout the 12 months ended" 30 June 2011 and 31 December 2011 respectively. 59 The two sets of figures are not consistent. They do not reconcile. They do not disclose why there was a very large variation between supposedly consistent monthly balances. Mr O'Sullivan did not explain the basis on which Provident could have omitted its largest single outstanding loan from the "disclosure" of loans in arrears in the January 2012 booklet. Provident had been a mortgagee in possession of the Queensland property by then for over three years and the loan had been non-performing for longer than that. The information booklets were published so that Provident's current debenture holders could have information about their investment and on which they could decide whether to reinvest. 60 Mr O'Sullivan accepted in his affidavit, that on reflection, in light of concerns that ASIC had raised between the issue of the first information booklet in January 2012 and March, Provident had been incorrect not to have included the amount of the Queensland property loan in the table of loans and arrears set out at [13] above. I do not understand how, given its size and importance in Provident's books that loan could have been omitted. Moreover, the changed figures in the April 2012 information booklet do not correspond to a simple inclusion of about $19.25 million for this loan in the $12 million that was added. It may be, as suggested by counsel for Provident, that the $12 million adjustment can be attributed to other loans over 180 days in arrears having been realised, so as to reduce that sum. But, in the absence of evidence, I am not satisfied by Mr O'Sullivan's incomplete explanation how that failure to disclose came about or was remedied. 61 In my opinion the above situation is another unsatisfactory aspect of Provident's attention to its obligations to make proper disclosure of financial matters to those interested in investing in securities its issues.
Provident's future prospects of raising funds 62 Mr O'Sullivan gave evidence that in about late May 2012 he explored capital raising with third parties and gave information to the trustee about those discussions. He said that a number of such proposals were being explored but that, depending on the nature of any proposal, it would take between three to six months to negotiate and document any such agreement. The position is that at present there is no concrete proposal on the table. Thus, there is no basis to identify a serious prospect that some refinancing of Provident can occur which will reverse the precarious consequences of its deteriorated non-performing loan book. 63 Similarly, although Provident has been negotiating since prior to March 2012 with the bank for the extension of the origination arrangements, nothing has yet emerged three months after that arrangement came to an end. At the moment the bank has withheld payment of $800,000 that represents income that will be payable to Provident in respect of the earnings of that business. The income stream from that business in respect of loans already written by Provident will continue to enure for its benefit regardless of whether the arrangement is ultimately renewed. There is no evidence of the arrangement or right the bank has to withhold the $800,000. All that appears is that it has withheld the money. It is not suggested by Provident in its evidence that the bank was not entitled to do so. That again raises for me a concern as to whether Provident does have an ongoing ability to continue to run a business with sufficient other ongoing sources of funds so that the picture painted by Mr O'Sullivan in his affidavit will come to fruition. 64 This evidentiary gap accentuates the concern that I have about Mr O'Sullivan's failures to disclose in his affidavit evidence each of Provident's withdrawal of its application to ASIC for the new PDS in respect of the monthly income fund and the licence. It was obvious that the PDS related to what Mr O'Sullivan said was an important source of Provident being able to continue to earn money from other business activities so that it could meet the obligations to debenture holders that it could not meet through its distressed FTI loan book on the debenture loans.
The consequences of appointing a receiver 65 Mr O'Sullivan pointed out the very serious consequences if the Court made the order sought by the trustee for the appointment of a receiver. It was correct for him to have adverted to these matters and to highlight their impact. It is a matter I have been concerned to weigh carefully. Experience of commercial external administrations, including receiverships, is that properties tend to be sold for perhaps less than they would be realised for if sold by an interested, even if distressed, owner or even a mortgagee in possession in Provident's position. Moreover, a receiver generally imposes an extra layer of costs and expenses on the business of the entity to which he or she is are appointed rather than providing a means of saving expenditure. In addition, the appointment of a receiver by a Court will have the almost inevitable effect of triggering events of default in Provident's other security arrangements with lenders such as the bank and third parties, leading to those entities appointing their own receivers and diluting or terminating revenue flows. 66 Indeed, the appointment of a receiver was one of Mr O'Sullivan's concerns that actuated his seeking the licence. Ultimately after some reluctance, he conceded in cross-examination that if the licence were granted, the new responsible entity for the monthly income and high yield funds would be quarantined from any impact of the appointment of a receiver to Provident. 67 I accept that it was Mr O'Sullivan's and Provident's intention that Provident would continue to earn substantively all of the fees generated at present as the income that it now receives for the purposes of managing, on behalf of the new responsible entity, those two funds. However, his long term planning demonstrates that Mr O'Sullivan saw the writing on the wall. That was why he said when recalled to give evidence that the application was "based around an objective of the company's to silo the RE [responsible entity] role for the fund". He intended that the income that those funds would derive would be earned by Provident Funds Management and so be "siloed" or protected from the consequence of the appointment of a receiver to Provident. That is a matter that I must have regard to in weighing the balance of how the Court should exercise its powers under the present application. 68 Mr O'Sullivan pointed out that Provident proposes that a moratorium of 365 days should be ordered by the Court so that the pressure of having to fund interest and principal repayments on the debentures for that period will not fall on Provident. He said that a moratorium will allow Provident to concentrate its whole energies to the realisation of its distressed loan book for the benefit of its debenture holders. There is a considerable amount to be said in favour of such a proposal.
The statutory provisions 69 The provisions of Ch 2L of the Act deal specifically with debentures. Importantly, s 283BB provides for what a borrower, such as Provident, must do, as follows: "283BB General duties The borrower must: (a) carry on and conduct its business in a proper and efficient manner; and (b) provide a copy of the trust deed to: (i) a debenture holder; or (ii) the trustee; if they request a copy; and (c) make all of its financial and other records available for inspection by: (i) the trustee; or (ii) an officer or employee of the trustee authorised by the trustee to carry out the inspection; or (iii) a registered company auditor appointed by the trustee to carry out the inspection; and give them any information, explanations or other assistance that they require about matters relating to those records." (emphasis added) 70 Part 2L.8 gives the Court power to give any direction and make any declaration or determination in relation to any matter on which the trustee applies to the Court for a direction in relation to performance of its functions, or in relation to the interests of debenture holders. Critically, s 283HB provides: "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 debentures; (c) 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); (d) an order appointing a receiver of any property constituting security for the debentures; (e) an order restricting advertising by the borrower for deposits or loans; (f) an order restricting borrowing by the borrower; (g) 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."
Provident's argument on statutory construction 71 Provident argued that the power to appoint a receiver under s 283HB(1)(d) should be exercised in accordance with the approach taken by Swinfen Eady J in Re New York Taxi Cab Limited; Sequin v The Company [1913] 1 Ch 1 at 8, where his Lordship said: "The company is not in any pecuniary difficulty. No doubt it cannot pay the debenture interest in full yet and will not be able to do so for some considerable time. ... The assets are not in jeopardy in the sense that there is any risk of their being seized or taken to pay claims not really prior to the claims of the debenture-holders. The company is a going concern. No interest is payable till January 1, 1913, and if necessary a further postponement may be authorized. The security is not yet enforceable according to its tenor, and the fact that if now realized it would be wholly insufficient to pay the principal and interest in full is not a sufficient reason for appointing a receiver on the ground of jeopardy."
Consideration 72 Provident's argument does not reflect the proper approach to the statutory construction of a power of the kind contained in s 283HB. The power conferred on the Court by that section is remedial and protective of the interests of those who have lent money to corporations on debentures. Provisions conferring jurisdiction or granting powers to a court cannot be read down by making implications or imposing limitations that are not to be found in the express words: Owners of "Shin Kobe Maru" v Empire Shipping Company Inc (1994) 181 CLR 404 at 421 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ. 73 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. 74 Relevantly, s 283HB(2) requires the Court to have regard to the ability of Provident to repay the amount deposited or lent as and when it becomes due, and the interests of Provident's members and its creditors. Provident asserts that it needs a moratorium at the moment to suspend its liability to pay its debenture holders their debts as and when they fall due. I am satisfied that Provident is not able to pay the amounts deposited or lent to it as when these become due in the next 12 months. I am also satisfied that the interests of Provident's creditors, and in particular, the debenture holders, require protection by appropriate orders. 75 In Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 at [31] and [33] Lindgren J held that s 283HB(1)(c) envisaged that there may be circumstances in which a security is not yet immediately enforceable in accordance with its terms and the general law, but it would still be appropriate for the Court to make an order that security become immediately enforceable. He said: "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." 76 His Honour adverted to the facts that the debenture holders' position then was deteriorating but the evidence had not reached the point that all would be well and the position saved only if the notice provision creating an act of default in the debenture trust deed were followed. That decision was justified by the power now found in s 283HB(1)(c) that obviates the general law restriction imposed in New York Taxi [1913] 1 Ch at 8. 77 In addition, in Australian Securities & Investments Commission v BridgeCorp Finance Limited (2006) 58 ACSR 499 at 504 [18] Barrett J held that s 283HB(1)(g), and similarly worded provisions, were intended to confer a broad, remedial and protective jurisdiction. He said that once relevant interests were identified under s 283HB(2), it was open to the Court to make any order that appeared to it to be calculated to safeguard those interests. His Honour there identified the interests of debenture holders in receiving payments due to them under their debentures as and when they became due as being such a consideration, justifying the making of, in that case, orders by consent. I agree. 78 The conferral of power on the Court to make orders under s 283HB was intended by the Parliament to supplement the armoury of relief that the Court could otherwise give either under the general law, the provisions of debenture trust deeds or other provisions in legislation. There are no constraints on the exercise of the powers under s 283HB(1), other than the requirement that the Court have regard to the relevant considerations in subs (2). However, the subject matter, scope and purpose of Pt 2L is a relevant matter in considering the exercise of the discretions created by s 283HB(1): The Queen v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd (1979) 144 CLR 45 at 49-50 per Stephen, Mason, Murphy, Aickin and Wilson JJ. These provisions are intended to provide protection for persons who have invested in companies that have raised funds by way of issuing debentures. 79 My concern has been to balance the obviously deleterious consequences to Provident that would flow from the appointment of a receiver against the circumstances of its lack of candour in disclosure and its deteriorating non-performing FTI loan book, coupled with its own inconclusive future prospects. I am mindful that, until recently, its business has been run successfully for those investing in it, and that if a receiver were appointed the prospects of any further substantive contribution by any ongoing business of Provident will be remote. I am also conscious that PPB did not express a view that Provident's management of the realisation of its assets was other than appropriate. 80 I suggested to the parties, in the course of argument, that one possible solution may have been to appoint one or more persons from PPB who have signed consents to be appointed receivers, as persons with authority to have complete and free access to all information, including in computers, held by Provident. That authority would be, in effect, complementary to the trustee's power under s 283BB. Those persons could report any problems discovered to both the trustee and ASIC.
Conclusion 81 I am satisfied that I should make a protective order that has the effect of continuing the interlocutory injunction restraining Provident from paying any money to debenture holders at the moment so that its funds can be realised in an orderly way to maximise a fair and pro rata return to all of them. However, as Provident pointed out, an absolute and indefinite moratorium on payments could cause hardship to debenture holders. The moratorium should be ameliorated to permit the payment of a proportion of money due, if possible, over the course of the terms of any such restraint, in a way that will not inhibit the orderly realisation of Provident's assets. That realisation process should permit, if the assumptions from the valuation of the Queensland property hold good, its realisation by completion of the development. 82 The failure of Provident to disclose to the Court the withdrawal of the PDS and the application by its related company for the licence casts considerable doubt over Provident's integrity to obtain, manage or hold money from the public. Those matters were obviously relevant to the present application. Mr O'Sullivan's concept of using the licence, if granted, to "silo" the responsible entity business of the monthly income and high yield funds was a pre-emptive strategy to avoid the consequences of any receivership, whether imposed by the trustee, the bank or the Court. The importance of the licence application satisfied me that Mr O'Sullivan's omission to mention it in his evidence could not have been accidental. I do not accept Mr O'Sullivan's evidence, or Provident's argument, to the effect that this omission was anything other than deliberate. 83 Thus, the consequence of this finding, whether or not a receiver is appointed, on Provident's business is that it will be unlikely that Provident or a company controlled by Mr O'Sullivan would be, or should be, granted such a licence. Moreover, there are the unsatisfactory features that I have referred to in Provident's previous public disclosures of its financial position. Those flowed from the concerns raised by ASIC in December 2011 and following, including the unexplained circumstances in which the January information booklet omitted any reference to at least $12 million of a past due loan. 84 Further provisioning will need to be made in Provident's accounts with more realistic and up to date assessments of the property portfolio and its other assets. That is something that must occur whether or not a receiver is appointed. The deferral of repayment of principal and interest on the debentures will permit a more realistic assessment of what further provisions are needed, perhaps arrived at after some securities are realised over the course of a year or so while that deferral is in place. There is a congruence between the interests of Mr O'Sullivan and management of Provident and those of the debenture holders to realise the highest possible prices for the distressed loan portfolio. It is likely that Provident will not be able to meet its debts as and when they fall due. 85 On the whole, weighing the interests of both Mr O'Sullivan and his companies as members of Provident and its creditors and, particularly, the debenture holders and having regard to all the matters to which I have referred, I am satisfied that I should appoint a receiver to Provident on the present application. I am of opinion that it is essential that persons, such as Provident, who have control of public money maintain public trust by proper and truthful disclosure. A requirement in s 283BB(a) is that the borrower issuing debentures must carry on and conduct its business in a proper and efficient manner. 86 If I have to choose between trusting Mr O'Sullivan or an independent third person to carry out the management of Provident in the circumstances that have arisen so as to realise the estate I think the scale must tip in favour of the latter. I have not reached this decision lightly. Having regard to my findings in relation to the significant and not isolated failures of Provident, through Mr O'Sullivan, to give proper, full and accurate disclosure in relation to its financial affairs and the state of the loan portfolio in public fundraising documents and to the Court, I am satisfied that the proper course is to protect the interests of Provident's creditors and debenture holders by the appointment of a receiver, notwithstanding that there may not yet have been an act of default. I certify that the preceding eighty-six (86) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.
Australian Executor Trustees Ltd
Provident Capital Ltd