Australian Olive Holdings Pty Ltd v Huntley Management Ltd

JUDGE: MCKERRACHER J DATE: 21 OCTOBER 2011 PLACE: PERTH

INTRODUCTION 1 In Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) (No 2) [2011] FCA 958 (Saker No 2), I resolved one of two questions (the indemnity question including the insurance salvage question), answering the question pursuant to s 511 of the Corporations Act 2001 (Cth) (CA). After receipt of competing minutes and submissions thereon, I settled the orders reflecting the answers given in those reasons. 2 In these reasons, the same abbreviations are used. 3 Provision was also made in Saker No 2 for Primary Securities Ltd (PSL) to file further submissions within 21 days on the second topic. (I did so (at [59]-[60]) without committing to a position that the question would be answered). 4 Broadly speaking, the second question was whether management fees which had arguably accrued to Great Southern Managers Australia Ltd (GSMA) should be treated as GSMA property by GSMA's liquidators, the plaintiffs, or whether those fees should be released to PSL. On behalf of the scheme investor/growers, PSL advances an argument that PSL has a claim against GSMA for its failure to perform its management services. The failure by GSMA is said to have given rise to the much costlier appointment of PSL as a contracted Responsible Entity (RE), charging fees which have exceeded to a material degree the amounts which would otherwise have been charged by GSMA as RE of the Schemes. 5 There are several legal arguments advanced by GSMA (to which I alluded in Saker No 2) in respect of which PSL had not had an adequate opportunity to present submissions.

WHETHER A DIRECTION SHOULD BE GIVEN 6 As noted in Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) (2010) 190 FCR 501 (Saker No 1) and Saker No 2, s 511 CA provides as follows: 511 Application to Court to have questions determined or powers exercised (1) The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company; or (b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. (1A) APRA may apply to the Court under subsection (1) in relation to a company that is a friendly society within the meaning of the Life Insurance Act 1995 and which may be wound up voluntarily under subsection 180(2) of that Act. (2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. 7 It may or may not be both 'just and beneficial', as required by s 511(2) CA, to answer the question(s) put. As noted by Young J in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 (at 212), there may be many questions where the only order that the Court should make is that the liquidator or the claimant proceed in the ordinary courts in the ordinary way for the determination. 8 In Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, Young J (at 117) also suggested that there are four classes of cases generally amenable to applications for directions, (albeit under s 379(3) in the context of a court appointed liquidator), namely, guidance on matters of law, questions involving legal procedure, whether a liquidator should act on his commercial judgement to postpone a sale because he recognises his legal duty ordinarily requires him to reduce the company's assets into cash as soon as possible and to distribute, or where there are two or more competing purchasers for the company's property and the liquidator can see that it may be alleged that the liquidator has acted in bad faith or in an absurd, unreasonable or illegal way. 9 As noted in Re Southern Cross Airlines Holdings Ltd (in liq) [2000] 1 Qd R 84 (at 92-93), the purpose of seeking directions is to obtain the sanction or imprimatur of the Court to a course of action under consideration where there is a perception as to some risk in pursuing this course of action. Although the terminology of the section is unfettered, the general approach has been to confine it to circumstances in which advice may be given as to the proper course of action in the liquidation rather than to determine the rights and liabilities arising from transactions of a corporation prior to the liquidation. 10 In Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141, Lindgren J noted that directions would not be appropriate: where the Court was being asked to decide questions as against persons making proprietary claims; where the Court had no power to make orders binding upon or affecting the rights of third parties; and where the power did not enable the Court to make orders in the nature of judgments. The function of a liquidator's (and administrators in that case) application for directions is to obtain advice as to the proper course of action in the liquidation (or administration), not to determine the rights and liabilities arising from the company's transactions before the liquidation (or administration). 11 Against that background, it is necessary to consider the competing arguments arising on the current request for directions to determine not only what direction should be given but first and foremost, whether a direction should be given.

GSMA'S ARGUMENTS 12 Shortly summarised, the GSMA arguments (from [61]-[66] of Saker No 2) were that: The funds appropriated are held as GSMA's own. GSMA makes no money claim against PSL or any investor/growers. There can be no set-off as a set-off relates to the setting-off of money claims against each other in order to produce a balance. There is no cross-demand by the plaintiffs against PSL or the investor/growers. Rather, the plaintiffs, as liquidators, seek direction from the Court that they are entitled to appropriate the funds which they hold for management fees. ANZ Fiduciary appointed the receivers and managers on 18 May 2009. As such, the floating charges given by GSMA in favour of ANZ Fiduciary crystallised as at that date. From that date, therefore, ANZ Fiduciary became entitled in equity to GSMA's relevant assets including its cash at bank and the benefit of its right to reimbursement and indemnity. The fact that the investor/growers have asserted a claim for damage, if it be well-founded, would be the sole responsibility of GSMA, not that of ANZ Fiduciary. ANZ Fiduciary simply takes the benefit of the assets as crystallised at the date of appointment of the receivers. It does not step into the shoes of GSMA to incur outstanding obligations it has accrued at that stage. To the extent that the claim of the investor/growers is evident from submissions made by PSL, the claim arose only after the receivers were appointed because it is said to be as a consequence of the appointment of the receivers and managers to GSMA. There is, therefore, a lack of relevant mutuality which could give rise to a set-off (see Business Computers Ltd v Anglo-African Leasing Ltd [1977] 2 All ER 741 per Templeman LJ, particularly at 745-747). There is no evidence that there is any, let alone any sufficient, connection between GSMA's relevant right to reimbursement, indemnity and management fees. The claim for damages asserted on behalf of the investor/growers are unconnected in both time and nature. There is, therefore, no proper basis on which the un-particularised claim for damages asserted on behalf of the investor/growers is such that all of GSMA's legal right to reimbursement, indemnity and management fees are 'impeached' in the relevant sense.

PSL'S ARGUMENTS 13 PSL contends that the assertion that there is no money claim is 'manifestly incorrect' as the plaintiffs are claiming an entitlement to retain the balances of bank accounts which constitute 'scheme property'. The plaintiffs are making a claim in the proceeding that they have rights in relation to these particular funds. They claim those funds ought to prevail over the equitable title of the investor/growers. PSL, however, submits that the funds which are contained in the bank accounts referred to at [6] in Saker No 2, and currently under the control of the plaintiffs, are 'scheme property' within the meaning of s 9 CA as they represent: (a) Contributions by investor/growers of money or moneys worth to the respective programs or plans of actions comprising registered Templegate schemes; (b) Money that forms part of the scheme property under provisions of the CA or the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act); (c) Money borrowed or raised by the REs from time to time with the Templegate Schemes for the purposes of the respective programs or plans of actions comprising those schemes; (d) Property acquired directly or indirectly with or with the proceeds of contributions of or money referred to in (a), (b) or (c) above; or (e) Income and property derived directly or indirectly from contributions, money or property referred to in (a), (b), (c) or (d). 14 PSL argues that each investor/grower in the Templegate Schemes has a proportionate equitable title to the balances of these accounts because, by s 601FC(2) CA, a trust is deemed to exist over all assets that come within the statutory definition of 'scheme property'. By seeking directions as to whether they are entitled to retain funds which constitute scheme property, the plaintiffs are claiming expressly, if not by implication, that the equitable rights of investor/growers to these funds are extinguished or otherwise subordinate to the rights claimed by GSMA in respect of those funds. PSL submits that this is a relevant claim for the purposes of the law of equitable set-off and that at a technical level, a claim of set-off is available to PSL, on behalf of investor/growers, in this proceeding. 15 PSL contends that the balances of the accounts referred to in Saker No 2 (at [6]) are scheme property within the meaning of s 601FC(2) CA and ought to be paid over to PSL forthwith by the plaintiffs. 16 PSL submits, therefore, that this is clearly a case in which there are countervailing debts and money claims and that there is no basis for saying that at a technical level a claim of set-off by PSL on behalf of investor/growers is precluded. 17 As to the claim that ANZ Fiduciary became entitled in equity to GSMA's bank account balances and the benefits of its rights to reimbursement and indemnity, PSL says this is misconceived given that the funds have at all times had the status of scheme property and are accordingly subject to the statutory trust created by s 601FC(2) CA. Each investor/grower had a beneficial interest in these funds, corresponding with the proportionate number of 'Leased Areas' held by that investor/grower. As scheme property, the relevant funds were not legally and beneficially owned by GSMA and were never capable of being charged in favour of ANZ Fiduciary (as security trustee of the GSL Security Trust). Accordingly, these funds lay outside the class of property and rights charged by the mortgage debentures held by ANZ Fiduciary (as security trustee for the GSL Security Trust). 18 As to the plaintiffs' submission that the damages claim of investor/growers is un-particularised, PSL says that this is incorrect as PSL has maintained at all times that for the purposes of enforcing investor/growers' right of set-off in this proceeding, the quantum of this claim is equal to the total of the indemnity and management fees claimed by the plaintiffs. 19 For the purposes of the set-off, the plaintiffs submit that over the remaining lives of the Hamilton, Mossgrove and Jeremy 1 Schemes, investor/growers will suffer a loss equal to the total of the indemnity claimed by GSMA in the amount of $390,369.13 and for management fees totalling $35,813.76 (combined: $426,182.89), as a result of GSMA's breaches of its obligations under the lease and management agreements relating to those Schemes. In this regard, PSL refers to and relies upon [19] and [20] of the affidavit of Mr Robert Garton Smith sworn on 17 March 2011. From the time of PSL's appointment as RE for the Hamilton, Mossgrove and Jeremy 1 Schemes until 30 June 2011, investor/growers in these schemes have suffered the following losses as a result of GSMA's default in performance of its obligations under the lease and management agreements: Loss to investor/growers in Hamilton, Mossgrove and Jeremy 1 Schemes Interim Services Fee $217,800 ($72,600 X 3) ($66,000 + GST per scheme From 04/10 until 30/06/2010) Annual Responsible Entity $247,500 ($82,500 x 3) Services Fee ($75,000.00 + GST per scheme from 01/07/2010 until termination of schemes) TOTAL $465,300.00

20 As noted in Saker No 2 (at [41]), PSL argues that the fees referred to by Mr Garton Smith at [19] and [20] of his affidavit (sworn on 17 March 2011) represent expenditure that investor/growers in the Hamilton, Mossgrove and Jeremy 1 schemes would never have incurred had GSMA not defaulted in the performance of its obligations under the applicable lease and management agreements. It was only upon the appointment of a contract RE and the Templegate Schemes' attendant conversion to contributory schemes that the investor/growers became liable to pay the above interim services and annual RE service fee. Over the remaining lives of these schemes, the above fees, even if discounted to present values, will far exceed the total of the indemnity and management fees set out in the table appearing at [9] of Saker No 2. 21 PSL submits that: (a) the principles enunciated in Business Computers Ltd (at [9]) do not apply in this proceeding because the right of investor/growers to set-off against the indemnities and management fees claimed by GSMA, the amount of their claim for damages, is expressly preserved by s 553C CA; (b) the indemnity and management fees in issue in this proceeding are closely intertwined with the claim for damages asserted by PSL on behalf of investor/growers in that they both arise out of the documents which found the Templegate Schemes and which regulate the relations between the RE and investor/growers (Newfoundland v Newfoundland Railway Co (1888) LR 13 App Cas 199 and Sun Candies Pty Ltd v Polites [1939] VLR 132); (c) the right of investor/growers to damages for GSMA's breach of the lease and management agreements flow out of, or are inseparably connected with, the transactions which gave rise to GSMA's claimed entitlement to an indemnity and management fees. They both arise from the material documents which establish and regulate the Templegate Schemes, namely the scheme constitution and the lease and management agreements (Newfoundland); and (d) GSMA's claimed entitlement to an indemnity and management fees and the claim by PSL (on behalf of investor/growers) for damages are so closely connected as to make it unconscionable for this damages claim not to go in diminution of the whole of the total of the indemnity and management fees in issue in this proceeding. 22 As to the plaintiffs' submission that there is no evidence of a sufficient connection between GSMA's claimed rights to reimbursement, indemnity and management fees and the claim for damages asserted on behalf of investor/growers in the Templegate schemes, PSL submits that this submission is without foundation since it was GSMA's breach of the lease and management agreements with investor/growers which created the need for PSL's appointment as replacement RE, and caused investor/growers to suffer additional losses in the form of additional fees payable to PSL as a contract RE. The countervailing claims of GSMA and the plaintiffs in this proceeding share a common substratum: the Templegate Scheme Constitutions and the lease and management agreements, being the documents which constituted and continue to govern the operation of the Templegate Schemes. 23 In view of the foregoing, PSL submits that the claim for damages asserted on behalf of investor/growers can be set-off in whole against the total of the management fees and indemnity in question in this proceeding, with the result that GSMA lacks all and any entitlement to retain any funds held in connection with the Templegate schemes.

CONSIDERATION 24 The first part of the PSL argument on the management fees (in contrast to the indemnity claim on which I have ruled in Saker No 2) rests on the assertion that the funds, which the plaintiffs have identified as management fees due to GSMA, cannot be appropriated as they are scheme property rather than sums due to the liquidators of GSMA in respect of management fees due to GSMA. 25 Although the point was not developed in argument, it does seem to me, in substance, to be the same argument which I rejected in Saker No 1. I did so on the basis that the seamless takeover sections of the CA are intended to relate to rights, liabilities and obligations which are to be ongoing rights, liabilities and obligations in contrast to those which have already fully accrued. On conversion of the former prescribed interest scheme to a managed investment scheme, cl 14.3 was inserted into the scheme Constitution by GSMA (in circumstances which I held did not constitute a breach of good faith). Clause 14.3(c) provides that on its removal, the RE is entitled to receive the balance of the Trust Maintenance Funds and the new RE must, prior to retirement or removal of the RE taking effect, put into a new Trust Maintenance Fund the sum of money determined by an independent professional forester to be the appropriate amount to be held in that fund as calculated in accordance with cl 38 of the Constitution. Assuming that cl 14.3 was valid, (and I held it was and leave to appeal was refused: see Primary Securities Ltd v Saker and Others (2010) 191 FCR 277), then it appears to be the end of the first part of the matter. 26 I held in Saker No 1 (at [74]) that because the appropriated fees were in respect of expenses already due, they did not fall into the category of fees which should pass over to the new RE in the seamless sense to which s 601FS(1) and s 601FT(1) CA are directed. The relevant line of authority starts with Lindgren J in Re Huntley Management Ltd; Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2009) 76 ACSR 256 which I cited in Saker No 1 (at [37]). I also cited Rares J in Huntley Management Ltd v Timber Corp Securities Ltd (2010) 187 FCR 151 where his Honour said (at [47]), noting Lindgren J in Re Huntley Management Ltd; Australian Olive Holdings, that: … the rights, obligations and liabilities of the former [RE] to which each of ss 601FS(1) and 601FT(1) apply, are impliedly limited to those capable of having an ongoing operation after the change in [RE] … (emphasis added) 27 That point of view was expressly upheld by the Full Court in Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2010) 185 FCR 97 per Jacobson, Gilmour and Foster JJ (particularly at [84]). The reasoning behind this appears to be that the sections are directed to ensuring that the scheme can continue insofar as ongoing obligations are concerned. It does not appear to be directed to past liabilities which have already been discharged. 28 In other words, I have already held that GSMA or now the plaintiffs as liquidators for GSMA are entitled to appropriate those funds in accordance with that clause. 29 The only question then, is whether I should give a direction that they are permitted to do so in circumstances where there is a claimed set-off which is, at one level, cast in fairly nebulous terms and to which specific objection is taken by GSMA. At another level, it appears to relate to direct losses sustained by the investor/growers in that they are required to meet significantly increased fees by engagement of PSL in place of GSMA as a contracted RE. 30 My concern expressed in Saker No 2 was that PSL had not adequately addressed the arguments GSMA had raised as to why there can be no relevant set-off. There has been expansion of the set-off argument but none of the submissions descends to sufficient detail so as to precisely articulate the nature of the claim in damages for failure to discharge duties. 31 As against that, it seems clear that there has been a significant added expense sustained under the schemes and there remains the likelihood that if the investor/growers were ultimately to succeed in proving such a claim, it would be of little value if the liquidators have disbursed the funds to creditors in accordance with the obligations under the CA. There is no evidence to suggest that the investor/growers themselves have contributed to this state of affairs. The most significant prejudice to the creditors, if the liquidators do not disburse the funds, would be delay in receipt of the funds but that is presumably something that is capable of being addressed by expediting the claim and maximising the interest return on the funds in the interim. 32 PSL has indicated that I should answer the question raised by the plaintiffs by saying that the funds should be paid immediately to PSL because the claim is going to vastly exceed any amount due to GSMA. I cannot, in the absence of more adequate identification and articulation of the claim, reach that conclusion but equally, I would not at this stage answer the question in the manner suggested by the plaintiffs, namely, in effect, that the funds should be disbursed by them in favour of the creditors in accordance with the usual provisions of the CA.

CONCLUSION 33 On the basis of this analysis and the authorities cited at [7] to [10] above, I consider it appropriate to decline to answer the question raised by the plaintiffs. Put another way, in the absence of proper pleadings, evidence and argument from PSL, it is inappropriate to answer the question. But that does not mean the liquidators have no options. Much of the future resolution of the issue is capable of lying in the hands of the parties. If the plaintiffs are confident as to their arguments on the claimed set-off, they are in a position to give effect to their confidence. There is not sufficiently clear evidence before the Court at this stage to resolve the question of competing legal or equitable entitlements. It is therefore a matter for the parties to decide on the course each proposes to take. 34 On the question of costs, I consider that the summons was properly pursued. It was the arguments raised by PSL that prevented the direction being given. In those circumstances, the plaintiffs should have their costs as part of the liquidation. 35 The orders will be: 1. The balance of the plaintiffs' summons be dismissed. 2. The plaintiffs' costs be costs of the liquidation. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.