Australian Executor Trustees Ltd v Provident Capital Ltd, in the matter of Provident Capital Ltd

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

IN THE MATTER OF PROVIDENT CAPITAL LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) BETWEEN: AUSTRALIAN EXECUTOR TRUSTEES LIMITED ACN 007 869 794

AND: PROVIDENT CAPITAL LIMITED ACN 982 735 573 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

JUDGE: RARES J DATE: 24 DECEMBER 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 On June 29 June 2012, I appointed Philip Carter, Anthony Sims and Marcus Ayres of the accountancy firm, PPB Advisory, as joint and several receivers of the property of Provident Capital Limited secured by a fixed and floating charge dated 11 December 1998 that comprised security for Provident's debenture holders for the reasons I gave in Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461. They were soon after appointed as receivers of the same property by the trustee for the debenture holders, Australian Executor Trustees Limited, under its contractual powers conferred by the charge. 2 The receivership has proved to be complex and involved. During the course of the receivership earlier this year, the receivers conducted examinations of several persons concerning the affairs of Provident. As a result of those examinations, it became apparent that Mr Carter, and possibly his other co-receivers, had a possible conflict of interest and duty. On 16 December 2013, Yates J ordered that Mr Carter retire and stood the matter over to me, as the docket judge, to determine how to deal with any residual issues arising from the possible conflict.

How the problem arose 3 On 17 September 2013, Mr Ayres received information from the receivers' solicitors that the audit of Provident performed by PricewaterhouseCoopers for the financial year ended 30 June 2007 could be the subject of a cause of action that Provident had in respect of the audit work. The limitation period in contract for the audit expired on 27 September 2013, which made urgent the need to consider the taking of advice about and, if appropriate, institution of proceedings against PricewaterhouseCoopers for the relevant audit year. That created a complication because Mr Carter had been a partner in PricewaterhouseCoopers at the time of the audit, albeit that he had played no role in the firm's auditing work, his focus being on insolvency work, as it had for many years prior. Two of the other partners at PPB, who had joined the firm in about 2010, had also been PricewaterhouseCoopers partners at the relevant time and would be potential defendants. 4 Mr Ayres perceived, as did Mr Carter, that this created the potential for a conflict of interest and duty in Mr Carter's remaining as a receiver. As a result, on 27 September 2013, Mr Carter retired as a receiver under his contractual arrangements by a deed entered into between him and the trustee. On the same day, the continuing receivers caused Provident to commence proceedings in the Supreme Court of New South Wales against all the partners IN PricewaterhouseCoopers at the relevant time, including the three who were by now members of PPB. Those proceedings have not yet been served because the receivers have been investigating aspects relating to them and the formulation of a means of dealing with the conflicts that had been identified. The receivers have not yet decided whether to prosecute those proceedings. 5 Mr Ayres realised on being told in mid-September 2013 of the potential conflict that there was a problem. He immediately gave instructions to his solicitors that it was important for the receivers to apply to the Court for directions and for Mr Carter to retire as soon as possible, but that step did not occur until, ultimately, 16 December 2013. On that day, the receivers approached Yates J as Corporations duty judge seeking orders providing for Mr Carter to retire and complex directions as to how Mr Ayers and Mr Sims could continue to deal with the receivership and the Supreme Court proceedings. They asserted to his Honour that the application was a duty judge matter. 6 His Honour ordered that Mr Carter retire. Mr Carter had had no involvement in the conduct of the receivership since the conflict had been identified two months earlier. The receivers had proposed a complex arrangement within PPB that was intended to establish a "Chinese wall" so as to isolate Mr Carter and the other two PPB partners from any knowledge of, or involvement in, the prosecution of the Supreme Court proceedings. His Honour expressed some concern on that occasion, saying that what was then proposed by the receivers about dealing with their potential conflict was a lot more complicated than they appeared to think, and was not a duty judge matter. His Honour stood the balance of the interlocutory application over to be dealt with by me, as docket judge, on 20 December 2013. 7 When the matter came before Yates J, and then myself on 20 December 2013, each of us expressed a concern about the receivers' delay in approaching the Court. The receivers have now filed extensive affidavit evidence, much of which contains legally-privileged material, that I required be given so that I might satisfy myself as to the appropriateness of the course that should be followed with respect to their remaining in office or not, having regard to the conflict of interest and or duty that had arisen. 8 The receivers and their solicitor, Craig Ensor, explained how the delay in applying to the Court had arisen. Mr Ensor had been concerned to place full information before the Court both as to Mr Carter's retirement from PricewaterhouseCoopers and how the proposed Chinese wall would operate. However, there were delays and difficulties, first, in Mr Carter retrieving information relating to his retirement from PricewaterhouseCoopers and identifying, precisely, any ongoing financial interest, other than his potential interest as a defendant in the Supreme Court proceedings, and, secondly, in formulating exactly how the Chinese wall would be put in place. Those difficulties caused the solicitors acting for the receivers to consider that, in the absence of a full proposal to put to the Court, they had to continue to undertake further preparation for the application. 9 During the course of argument yesterday, senior counsel appearing for the receivers suggested that, in order to protect the very significant investment that the estate has made in the performance of all the work to date by them, it may be appropriate to appoint a special purpose receiver and manager to conduct the Supreme Court proceedings independently of the receivers, who would continue to remain responsible for the balance of the receivership. 10 Today they nominated for consideration the voluntary liquidators of Provident, being Joseph Hayes and Anthony McGrath of McGrathNicol, to act as special purpose receivers. Mr Hayes has sworn an affidavit today, being Christmas Eve, that both he and Mr McGrath have no actual or potential for any real or perceived conflict of interest or duty in acting as special purpose receivers to deal with the issues concerning the Supreme Court proceedings. Mr Hayes also said that he and Mr McGrath had had no prior involvement themselves, nor had any of their partners, in a position of authority in McGrathNicol, with PricewaterhouseCoopers in the period between 30 July 2006 and 30 September 2007.

Consideration - The receivers' position of conflict 11 It is extremely important that in cases where a person who has been appointed to an office by the Court, such as a liquidator, receiver or trustee, apprehends that a potential conflict of interest or duty or other difficulty confronts him or her in the performance of that office, the officer feels not only free, but obliged, to inform the Court immediately of the problem. It is the Court's responsibility to supervise, and, if appropriate, protect its officers in the conduct of their functions on its behalf. The Court must be informed of the problem by the officer, whether or not he or she is fully prepared with every item of information that he or she considers might be desirable to bring to the Court's attention. That is so that the Court can consider for itself how to address the problem and, where appropriate, assist and give relevant directions to the officer as to what is necessary for him or her to put before it. 12 The officer's responsibility to bring the matter to the Court's notice cannot be understated. The officer acts on behalf of the Court, and whilever the problem exists, it has the potential to affect the public's perception of the independence and integrity of the Court. To take an extreme case, far removed from this, it is not difficult to think what would be of the reaction of the public or third parties as to what the Court were doing, if a Court-appointed trustee were charged with defrauding someone, but continued to exercise the office, where the Court was not even aware of those circumstances. 13 It is vital that a Court-appointed officer understand that the Court has a role both to assist him or her in a circumstance of difficulty as soon as it arises as well as to protect its own institutional integrity. Sometimes the difficulty may mean that the officer must be discharged from the office, for example, because a real or substantial possibility of a conflict between the personal interests or duties of the officer and those of the Court or some other difficulty is perceived. 14 The officer conducts a public function on behalf of the Court. It is also critically important for the officer to understand that it is the Court's, and not the officer's, responsibility to determine what, if anything, needs to be done about any such potential conflict or other difficulty. The Court can make its decision as soon as it considers appropriate having regard to the issue. The reason for this is not far to seek. The authorities have made clear that it is of the greatest importance that an officer of the Court appear to be, and is in fact, independent, and that his or her position in exercising his or her functions is not open to challenge. In Re Giant Resources Limited [1991] 1 Qd R 107 at 117, Ryan J distilled the ratio decidendi of the Appeal Division of the Supreme Court of Victoria in Re National Safety Council of Australia, Victorian Division [1990] VR 29 at 34 per Young CJ, Murphy and Marks JJ as follows: "A liquidator should not be put in a position where his independence might be open to challenge. It is of the greatest importance that there should be no possibility of criticism attaching to one of the Court's own officers on the ground of a conflict of interest. The liquidator needs to be seen to be independent in any matter in which his duties as liquidator may require him to investigate." 15 In my opinion, the same is true of a receiver, trustee or any other officer appointed by the Court as its officer for the conduct of any business confided to that person by the Court. In Advance Housing Pty Ltd (in Liq) v Newcastle Classic Developments Pty Ltd (as trustee for the Albans Unit Trust) (1994) 14 ACSR 230 at 233, Santow J held that it was inappropriate for a liquidator to continue in office where he might have had to review transactions in respect of which his partner had given advice that may require proceedings to be taken against that partner. As his Honour said, that situation placed the liquidator in a position where his independence might seem to be in question, albeit there was no suggestion that the liquidator would not perform his duties with complete integrity and to the best of his abilities. Once again, Santow J emphasised that a liquidator must be independent and must also be seen to be so. 16 Likewise, here there is no question as to the professional integrity of the receivers or their solicitors. The receivers have brought this matter before the Court at their own expense and not at the expense of the trust estate. A Chinese wall, even if effective, could not address the real possibility of the conflict Mr Ayers and Mr Sims would have had in conducting significant proceedings, as officers of the Court, on behalf of the debenture holders against three of their current partners at PPB. As Yates J had observed, this raised a question that was a lot more complicated than that which appeared to have been appreciated by the receivers and their lawyers. This unfortunate situation has the consequence that it is not possible for the receivers, as officers of the Court, to exercise their powers with respect to the conduct of the Supreme Court proceedings. 17 If the present state of affairs continued, the receivers would have to make decisions as to whether they should pursue proceedings on behalf of the debenture holders against three of their current partners in PPB, including their now retired co-receiver, Mr Carter. The conflict is self-evident. No Chinese wall could address this. Such a device is adopted to ensure the quarantining of information from persons within the one organisation. It does not, and is not designed to, deal with making decisions about one's professional partners or colleagues including whether to continue or settle proceedings by or against those persons.

Consideration - The appointment of special purpose receivers 18 The Court can exercise its powers to appoint a special purpose liquidator who can conduct proceedings independently of a liquidator who previously had been appointed for the general purposes of the liquidation but was for one reason or another disqualified from being able to do so in respect to the particular special purpose proceedings. This can occur for example, where the potential for a conflict of interest or interest and duty had arisen as Thomas J held in Re Obie Pty Ltd (No 2) [1984] 2 Qd R 155 at 157-158 (also reported as Obie Pty Ltd (No 4 (in liq)) (1984) 8 ACLR 967). 19 The Court also has power to divide business between different liquidators and to appoint an additional or additional liquidators separately, where an actual or potential conflict of interest or duty in the original appointee exists or comes into existence. Thomas J said that the reference of a segregated part of the liquidation to an independent liquidator where a potential conflict of interest existed could only assist the liquidation because, first, it was the proper thing to do and, secondly, it could reduce the issues between the liquidators and persons in that case who claimed that the liquidators were in a conflicted position: Re Obie (No 2) [1984] 2 Qd R at 156-157. Such an appointment would enable the independent liquidator to decide whether or not to pursue a claim without being open to criticism of a perception that his or her decision might have been influenced by reason of the conflicted position of the original liquidator. Austin J took a similar approach in Onefone Australia Pty Ltd v One.Tel Ltd (in liq) (2006) 58 ACSR 466. And I also agree with what Emmett J held in Gusdote Pty Limited v North Queensland Land Development Pty Limited (No 4) [2012] FCA 759 at [7]-[8], namely: "… where the Court has appointed liquidators or a liquidator, the Court has the power to appoint an additional liquidator at a subsequent time, and to limit the respective powers of the original liquidator and the subsequent liquidator. In construing provisions such as s 511 [of the Corporations Act 2001 (Cth) that relevantly provided that a creditor might apply to the Court to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court in a voluntary liquidation] a liberal construction should be given to facilitate the efficient and economical administration and winding up of companies." 20 I am satisfied that the liquidators do not appear to have any relevant conflict of interest or duty and there is no other reason to make it inappropriate to appoint them as special purpose receivers to conduct the Supreme Court proceedings. Indeed, the economy and commonsense of their being appointed suggests that this is an appropriate course in all of the circumstances. The liquidators are familiar, in a general sense, with aspects of the collapse of Provident and what is necessary to recover its assets. There does not appear to be any conflict in the liquidators acting in the interest of the debenture holders under the charge in recovering, to the extent they are advised it is appropriate, any benefit from Provident's cause of action against PricewaterhouseCoopers.

Conclusion 21 The relevant power which falls to be exercised here arises under s 283HB of the Corporations Act. That gives the Court power to make an order appointing a receiver of any property constituting security for debenture holders where the trustee or the Australian Securities Investment Commission applies to the Court, as occurred when I made the original appointment of the receivers on 29 June 2012 for the reasons I gave on that occasion. Here the receivers are applying in their capacity as officers of the Court for relief appointed under s 283HB: cf too Re Obie Limited (No 2) [1984] 2 Qd R 155 at 157. 22 I am of opinion that I should vary the original order either at the request of the receivers or of my own motion by appointing the liquidators as special purpose receivers with the exclusive power to conduct and, if need be, settle or abandon the Supreme Court proceedings. This will enable the receivers to continue to conduct the balance of the receivership, saving the estate the expense of replacing them entirely with new and independent persons. This would not have been necessary but for the accident that was recently discovered of the conflict with the Supreme Court proceedings now brought against PricewaterhouseCoopers because some of the current members of PPB are parties. 23 In all of the circumstances, I am satisfied that it is appropriate to make orders of the nature suggested by the receivers for the limitation of their powers, and for the appointment of the liquidators as special purpose receivers. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.