Australian Securities and Investments Commission v Bridgecorp Finance Ltd

CATCHWORDS : CORPORATIONS - debentures - statutory jurisdiction to make orders to protect interests of debenture holders - where ASIC and borrowing corporation agree on enhanced review and reporting arrangements - whether court should make orders

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.9, 283GA(3), 283HB, 657D(2), 1323(1)

CASES CITED : Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 20 ACLC 1530

PARTIES : Australian Securities and Investments Commission - Plaintiff Bridgecorp Finance Limited - Defendant

COUNSEL : Mr D.R. Stack - Plaintiff Mr G.C. Lindsay SC - Defendant

SOLICITORS : Kim Turner - Plaintiff Freehills - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4309/06 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v BRIDGECORP FINANCE LIMITED JUDGMENT 1 I have before me an application by Australian Securities and Investments Commission ("ASIC") for certain orders directed to the defendant, Bridgecorp Finance Limited ("BFL"). In seeking the orders, ASIC relies upon s.238HB of the Corporations Act 2001 (Cth). BFL consents to the making of the orders but, in light of the statutory requirement that the court have regard to certain matters in deciding whether to make an order under s.238HB (and come to a particular view about the effect of the order it makes), ASIC and BFL have placed certain factual material before the court in the form of a statement of agreed facts. 2 The orders sought will, if made, impose upon BFL certain requirements in respect of debentures issued by BFL which go beyond the requirements imposed by the Corporations Act and by the trust deed relating to the debentures. In circumstances to which I shall come, BFL is content to submit to the additional requirements. 3 BFL is a wholly owned subsidiary of a New Zealand company, Bridgecorp Holdings Limited ("BHL"). BFL was incorporated under the then Corporations Law in 2000. It is the vehicle by which the group's business of providing bridging and property finance is carried on in Australia. It obtains funds from various sources, principally the issue of securities which are "debentures", in terms of the definition in s.9 of the Corporations Act. Investment in those debentures has been solicited in such a way as to attract a need for disclosure in accordance with Chapter 6D, with the result that, in order to comply with s.283AA, a trust deed has been entered into and a trustee has been appointed. The trust deed is dated 22 March 2002. The trustee is Permanent Nominees (Aust) Limited. 4 Permanent Nominees, as trustee, holds a performance guarantee also dated 22 May 2002 from BHL. It is apparently accepted that BHL is thereby a "guarantor", as defined by s.9, in relation to the debentures of BFL. 5 ASIC's interest in BFL arose as a consequence of the issue of a prospectus in December 2005 and a supplementary prospectus in February 2006. On 17 February 2006, ASIC issued an interim stop order under s.739(3) in relation to these prospectuses. A final stop order was issued under s.739(1) on 3 April 2006. BFL consented to that order without admissions. BFL is not currently issuing new debentures or writing new loans. 6 Certain steps of an investigatory kind were subsequently taken by Permanent Nominees as trustee and by both BFL and BHL. The trustee retained Mr Brian Silvia, an experienced accountant, to undertake a review of the operations and records of BFL for the purpose of ensuring that BFL was in a position to meet its obligations to the holders of the debentures. Subsequently and separately, BFL and BHL engaged Deloitte Touche Tohmatsu ("Deloitte") to undertake an independent solvency review of BFL, including an assessment of the adequacy of loan provisioning. 7 Mr Silvia reported a number of conclusions, including weaknesses associated with heavy reliance on intra-group transactions and a need for significant additional provisioning. Certain steps by way of sale of some receivables and a capital injection were noted by Mr Silvia as having improved matters. Deloitte reported in May 2006 an opinion that BFL was able to pay its debts as and when they became due. Deloitte recommended that certain precautions be taken, including constant monitoring of the financial position to ensure that BFL remains solvent. Following receipt of the results of the investigations by Mr Silvia and Deloitte, BFL took further steps with respect to doubtful debt provisioning, improvement of the capital position (as well as liquidity and cash flow) and an enhanced regime of reporting to the trustee for debenture holders. The report as at 31 July 2006 showed gross assets of $122,937,000 (after recognition of the additional provisioning), liabilities to debenture holders of $91,776,000, net assets of $20,743,000 (compared with a minimum of $10 million recommended by Mr Silvia) and cash of $2,364,000. 8 It is with a view to putting on to a formal footing an enhanced monitoring and reporting regime agreed between BFL and the trustee (and an embargo on the rolling over of debenture investments) that ASIC now asks that the court make orders. As I have said, BFL consents to the making of those orders. There is no suggestion that BFL is in breach of the trust deed or the Corporations Act. It gives its consent as a reflection of its co-operation with ASIC in the discharge of ASIC's regulatory role. It accepts that the orders will provide a formal expression of what is otherwise an informal agreement between ASIC and BFL designed to facilitate ASIC's monitoring and supervision in the ordinary course. 9 The substantive orders sought by ASIC (and consented to by BFL) are as follows: "1. Unless and until the Defendant ('BFL') has lodged a Prospectus or a Replacement Prospectus in accordance with the requirements of Part 6D.2 of the Corporations Act , BFL, by itself, its servants, agents and employees is restrained from: (a) promoting, offering and issuing debentures; and/or (b) extending the redemption date of all unredeemed debentures issued by it; and/or (c) otherwise rolling over all unredeemed debentures issued by it, to one or more persons ('the Debenture Holders') who currently hold debentures issued pursuant to Prospectus' and Supplementary Prospectus' issued by BFL from time to time. 2. Until further order, BFL, in addition to the requirements presently imposed by Chapter 2L of the Corporations Act , is to provide Permanent Nominees (Aust) Limited ('the Trustee') each month with a written report which: (a) addresses each of the matters identified in the document annexed and marked 'A'; (b) identifies any material deterioration in BFL's: (i) actual net profit before tax, when compared to the director approved monthly budget/ forecast for the relevant financial year; (ii) actual cash flow, when compared to the director approved monthly budget/ forecast for the relevant financial year; and (iii) net asset position, when compared to the director approved monthly budget/ forecast for the relevant financial year; and otherwise opines on the solvency of BFL.

3. Until further order, BFL is to, in addition to the requirements presently imposed by Chapter 2L of the Corporations Act , provide the Trustee each week with a written report which identifies: (a) the balance of cash held by BFL at the end of the previous week, excluding any deposits held in any Locked Hedging Fund Accounts ('locked accounts'); and (b) all cash receipts and payments made by BFL during the previous week.

4. To the extent it has not already done so, BFL is to forthwith engage ('the Retainer'), at the expense of BFL, an independent firm of Chartered Accountants to: (a) review ('the Mortgage Book Review') the mortgage loan book of BFL by 11 September 2006 (or such later date, as is agreed between the Plaintiff and BFL) with a view to establishing and verifying the underlying security value and repayment timing of specific cashflow important loans within that book; and (b) provide a written report to Bridgecorp and the Trustee by 18 September 2006 (or such later date, as is agreed between the Plaintiff and BFL) , in respect of the Mortgage Book Review. In relation to this Order and without limitation to the scope of the Order in paragraph 3(a) above, the Retainer is to require that in carrying out the Mortgage Book Review the matters identified in the document annexed and marked 'B' shall been taken into consideration and addressed.

5. BFL is to notify (in a form approved by the ASIC) all of the debenture holders, in writing, of these orders and the outcome of the Mortgage Book Review, by 30 September 2006 (or such later date, as is agreed between the ASIC and BFL)." 10 The annexures "A" and "B" set out particular areas for monitoring and reporting. 11 As I have said, ASIC's application for these orders is advanced under s.283HB(1). Section 283HB is as follows: " 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.

Note: The Court may order a meeting of debenture holders to be held (see section 283EC)." 12 This provision has been in this form since 15 March 2000 when the Corporate Law Economic Reform Program Act 1999 commenced. It is a modified version of a provision which formed part of a new statutory regime with respect to debentures introduced in 1964. Section 94D added in that year to the uniform companies legislation of the States and Territories enabled a trustee for debenture holders to enlist the aid of ASIC's predecessors in imposing requirements on borrowing corporations. Those predecessors were given power to require the trustee to apply to the court for orders generally analogous with those now described in s.283HB(1). That 1964 provision was one of several which, according to Parliamentary debates (see New South Wales Hansard, 1 April 1964, p.8180), represented a nationwide response to "the problem posed by the disastrous failures of certain corporations which had borrowed from the public by way of fixed interest securities". Reid Murray, Stanhill, Latec and H.G. Palmer are names from that era that come to mind in that connection. 13 Neither Mr Stack of counsel, who appeared for ASIC, nor Mr Lindsay SC, who appeared for BFL, has found any instance in which the court has made an order under s.74D of the uniform legislation, analogous provisions of either the Companies Act 1981 (Cth) and corresponding State Codes or the Corporations Law in its original form or the present s.283HB. The application must therefore be approached, in the first instance, simply by reference to the terms of the legislation. 14 There are, it seems to me, two questions arising: first, whether the particular orders sought are orders that s.283HB(1) allows the court to make; and, second, whether, in all the circumstances (and having regard, in particular, to the matters in s.283HB(2)), a beneficial purpose will be served by the making of the orders. 15 I begin by considering the matters in s.283HB(2). It is clear that paragraph (b) may be ignored: it is concerned solely with the situation where a condition is applied to an exemption under s.283GA(3) so that there arises under that section an obligation to comply with the condition. No conditional exemption applies here. As to the matter in paragraph (a) of s.283HB(2), the agreed facts show that BFL is at present in a state where it is expected to have the ability to repay amounts deposited or lent as and when they become due and that the orders are sought with a view to providing enhanced means for the monitoring of that ability by the trustee, with ASIC playing a role in communication to debenture holders of certain outcomes. 16 That leaves for consideration the matters in paragraphs (c) and (d) of s.283HB(2). As to paragraph (d) (concerning the interests of members of the guarantor, BHL), nothing need be said beyond the obvious observation that reduction in the risk of default by BFL in respect of its debentures is consistent with the interests of the members of the guarantor. Paragraph (c), concerning the interests of members and creditors of BFL itself, prompts generally the same observation. 17 Turning to s.283HB(1) and the description of the orders the court is empowered to make, the focus is upon paragraph (g). ASIC and BFL contend that the orders sought should be considered by the court to be appropriate "to protect the interests of existing or prospective debenture holders". Other provisions of the Corporations Act refer to a concept of protecting persons' interests. Under s.657D(2), for example, the Takeovers Panel may, in defined cases, make any order "that it thinks appropriate to … protect the rights or interests of any person affected by the circumstances". Under s.1323(1), the court is empowered to make various orders where it "considers it necessary or desirable to do so for the purpose of protecting the interests of a person …". Mr Stack referred to an observation of Palmer J in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 20 ACLC 1530 in relation to the latter provision: "The words in s1323(1) 'protecting the interests' of an aggrieved person are as wide as they could be, and deliberately so. What "the interests" of aggrieved persons may be and how they ought to be protected are matters incapable of categorisation or of precise definition. Indeed, it would have been folly on the part of the legislature to attempt to define or limit what interests should be protected or how: to do so would have been to ignore the sad reality that the ingenuity of fraudsters is inexhaustible, their snares for the gullible pitiless and of infinite variety, and the eagerness of the foolish to be parted from their money irrepressible."

18 Section 283HB(1)(g) and similarly worded provisions are obviously intended to confer a broad remedial and protective jurisdiction. Once relevant interests are identified, it is open to the court to make any order that appears to it to be calculated to safeguard those interests. In the present context, the relevant interest is the interest of the holders of debentures in receiving the payments due to them under their debentures as and when those payments become due. I am satisfied that the particular measures directed towards independent review and enhanced reporting now proposed will operate to safeguard that interest. 19 There remains the question whether the court should, as it were, endorse measures that are already agreed between ASIC and BFL - in other words, whether there will be any utility in the making of the orders when the way forward is agreed. I am satisfied that there will be utility. Although the subject matter may perhaps be one in relation to which ASIC is empowered by s.93AA of the Australian Securities and Investments Commission Act 2001 (Cth) to accept an enforceable undertaking, a useful and beneficial purpose is served by the construction of a regime of compulsion based on orders of the court and the sanctions that non-compliance with such orders attracts. The court should therefore make the orders the parties ask it to make. 20 I should note, in conclusion, that Permanent Nominees, the trustee for debenture holders, is not a party to the present application and did not wish to place any matter before the court. In circumstances where ASIC makes the application, absence of the trustee is not a significant matter, particularly if it is clear (as it is here) that the trustee has been closely involved in the formulation of the proposals the court is asked to implement. Absent ASIC interest and involvement, however, it would be expected that the trustee might bring a matter such as the present before the court. The aim of the statutory provisions in this area is to stock the armouries of trustees so that they may be active in the protection of debenture holders. **********

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