5.4 Benefits and burdens of Proposed Proceeding not equally shared among investors or beneficiaries
54 Next, Mr Letten's contention that the benefits and burdens of the Proposed Proceeding would not be shared equally among the investors or beneficiaries and the Proposed Proceeding has the potential to extinguish the individual rights of investors.
55 First, the facts. The assets of the Schemes were pooled into the Common Fund following a pooling application: Letten No 7 at [3]-[6]. The distribution of the Common Fund to the investors has been implemented in a way as to bring all of those investors whose claims have been accepted up to a minimum of 27.1 cents in the dollar. Currently, no investor whose claims have been accepted by the Receivers has received less than that amount. However, the majority of investors have received more than 27.1 cents in the dollar while the projects were actually operated: see, by way of example, Letten No 7 at [69], [72], [90] and [98].
56 Next, the Proposed Proceeding is in relation to three of the 21 Schemes and LGHA. Counsel for Mr Letten submitted that the rights of the beneficiaries in those trusts are not the same as the rights of investors who may not be beneficiaries in those trusts who invested in other projects. Further, any recovery will be deposited into the Common Fund for the benefit of all investors, not just those investors in the three Schemes the subject of the Proposed Proceeding. Mr Letten submitted that the inequality between the beneficiaries arises because of circumstances that existed both before and after the Pooling Orders. In relation to LGHA, because it ran a central treasury, the tracing of individual investments was and remains impossible: see, by way of example, Letten No 7 at [238].
57 Third, in addition to the contention that the benefits and burdens of the Proposed Proceeding will not be shared equally among the investors or beneficiaries, Mr Letten submitted that the Proposed Proceeding has the potential to distinguish the individual rights of the investors to commence proceedings. In particular, Mr Letten submitted that the investors have not been told about what has been proposed and no evidence has been put to the Court by the Receivers as to the effect of the differential rate of return that might follow from the Proposed Proceeding.
58 Again, these contentions repay careful analysis. The Pooling Orders including the establishment of the Common Fund were made in November 2010. Mr Letten's contention that because of the "differential return", the Court should not propound a proceeding which isolates three of the 21 Schemes ignores the Pooling Orders, the manner in which modern litigation is conducted and, no less importantly, the duties of the Receivers as trustees. It would be contrary to the principles of modern litigation (and the duties of trustees) for there to be a requirement that they commence litigation in respect of each of the 21 Schemes in circumstances where the Receivers have made a risk assessment and business judgment that it is better to focus on the three strongest claims.
59 Next, the Pooling Orders. As Letten No 7 recorded at [275], 'although some Investors object[ed] to the Scheme property being pooled … it was largely accepted that a scheme by scheme distribution was inappropriate because it was too costly". The reasons for judgment summarised the position in the following terms:
332. … [I]t is to no-one's advantage that a very long time and very large costs be spent in working out the entitlements and liabilities on a Scheme by Scheme basis … where:
1. as a result of the way in which Mr Letten and companies associated with him (including the Corporate Defendants) conducted the Schemes, it is not possible to say now what are the net assets of any Scheme and there appear to have been so many inter-Scheme transactions that it is not possible to say what assets were acquired by what Scheme using whose money;
2. the Receivers have been unable to trace investor contributions because receipts and payments in relation to each Scheme were made through four primary LGHA bank accounts and funds frequently were moved between these accounts, the LGHA bank accounts were often in overdraft and payments were commingled;
3. a number of the Schemes were oversubscribed in that the amount of investor contributions in relation to a particular Scheme exceeded the funding requirements for that Scheme. These oversubscriptions were not refunded or returned to investors: see, by way of example, Schemes numbered 14 (Twinview, see [135] above), 8 (Low Head - see [148] above) and 5 (Cimitiere House, see [205] above);
4. a significant proportion (up to $38 million) of investor contributions to Schemes appears to have been used to pay distributions to investors in other Schemes in circumstances where there were not sufficient profits or funds in the other Schemes to fund payment of distributions: see, by way of example, Scheme numbered 18 (Aurora Park, see [72] above);
5. the tracing of funds is further complicated and, I consider, rendered impossible by the lack of reliable financial and accounting data and the estimated cost ($18 million). Such a cost and burden would reduce what is already a limited expected return with no guarantee of any certainty of outcome.
…
335 … [T]he investors suffered a "common misfortune", and any method of distribution should reflect that fact. Put simply, the alternative - distribution of Scheme property in a particular Scheme to those entitled to the property in proportion to their entitlements - is practically impossible at a number of levels. Given the manner in which these Schemes were operated and the difficulties identified in unscrambling the affairs of the Schemes, no rational person would undertake or engage in that task.
60 In those circumstances, there was and is no differential rate of return from and after the Pooling Orders.
61 The issue of any differential rate of return as a result of events before the Pooling Orders were made was addressed in Australian Securities and Investments Commission v Letten (No 20) (2012) 92 ACSR 630 (Letten No 20), especially at [84]ff. For the detailed reasons set out in Letten No 20, the Common Fund was distributed to investors across all Schemes by permitting investors to claim on the Common Fund for the full amount of their initial contribution but to require the investors to account for the monies already received by the investors by applying the amounts already received by the investors in reduction of the distribution that would otherwise be payable to the investors from the Common Fund (defined as Method 2): see [85]. The reasons for judgment concluded at [91]-[92] by stating:
… [T]he Court accepts that Method 2 achieves the greatest equality amongst the claimants on the Common Fund. It will not please all or even the majority of the investors. In the end, the investors must understand that what they received and were told did not reflect the true state of affairs. Some investors received distributions. Some did not. Some investments did well. Some did not. The fact is that the funds contributed by investors were not necessarily used in accordance with their instructions. The funds were used for a variety of purposes. Moreover, the payments received by investors (if they received them) were funded from a variety of sources. Each investor has faced and continues to face hardship. The hardship varies between investors but the source of their misfortune is common. Method 2 is the best method of achieving equality between investors in this common misfortune.
As a result, investors will be required to bring any payments historically received from the Letten Entities into account in order to asset a claim on the Common Fund.
62 Mr Letten (and Mr Lane) were at the centre of the investors' common misfortune. The contention that the Receivers should not be able to proceed without informing and joining all of the investors to the proceeding, as the proceeding is to be funded out of the Common Fund, is incorrect legally (see [49]) above and contrary to the facts.
63 The costs of the administration of the receivership are borne by the investors in common, as a method of ensuring equality. Similarly, the costs of the Proposed Proceeding, which seeks to add to the Common Fund, will be borne by the investors in common. That principle would apply regardless of the method chosen to fund the litigation. It must be recalled that any financial return from the Proposed Proceeding would be paid into the Common Fund and distributed using Method 2. In that context, it is necessary to consider Mr Letten's submissions about the costs disclosure obligations under Pt 3.4 of the LPA. Counsel for Mr Letten submitted that because it would be the Common Fund which would fund the Proposed Proceeding (at least in relation to Disbursements), the investors became:
1. Third party payers, as defined in s 3.4.2A of the LPA;
2. Entitled to written disclosure of proposed costs: see ss 3.4.9 and 3.4.11 of the LPA; and
3. Entitled to costs disclosure in relation to the proposed settlement of litigious matters: see s 3.4.13 of the LPA.
64 The Investors are not "third party payers" as that phrase is defined in s 3.4.2A of the LPA. They are not persons who are not the client of a law practice but under a legal obligation to pay all or part of the legal costs charged by the law practice. If Mr Letten's submission is founded on the proposition that the Receivers are agents for the investors who, as disclosed principals, have a legal obligation to pay King & Wood Mallesons' legal fees, then that submission falls away because the proceeding is able to be properly instituted by each Company: see [35] above. If, however, the submission is based on the proposition that beneficiaries of a trust incur a legal obligation when the trustee engages a lawyer to act in proceedings to recover the trust fund, then that submission is inconsistent with fundamental and elementary principles about the relationship between a trustee and a beneficiary. The legal obligation to pay the costs is the trustee's alone. The existence of a right of indemnity or exoneration of that liability out of the trust fund does not create a legal obligation in the beneficiaries to personally pay the costs.
65 There is no lack of clarity about the capacity in which the Receivers are proposing to act: they are proposing to cause the Proposed Proceeding to be brought in the names of the trustees of the three Schemes referred to in the Draft SoC - the Companies. The Receivers themselves are not suing in their capacity as alleged trustees, contrary to the submissions of Mr Letten.
66 It is irrelevant whether proceedings are brought in relation to one, two, three, five or 21 schemes. The Receivers exercised judgment (with the benefit of legal advice) in seeking a balance between the costs and complexity of proving the case through the chosen number of schemes, and the possible benefit or return. The fact that the Receivers have not proposed claims in respect of other schemes does not of itself prevent proceedings being brought at a later time if that was subsequently considered appropriate.
67 That leaves the contention that the Proposed Proceeding can only have a material adverse effect on investors and even if the Proposed Proceeding delivered a financial return, it is more than likely that many investors would receive nothing further but that their rights would be extinguished if the action was taken on their behalf. Mr Letten's complaint was that the Receivers had not provided any information or evidence to the Court or to investors about the cost benefit analysis of the Proposed Proceeding and that the cost benefit analysis would need to address:
1. the expected costs of the Proposed Proceeding;
2. the legal advice the Receivers have obtained as to the likelihood of success of the claims;
3. to what extent any judgment against Mr Letten could be satisfied;
4. what net effect the Proposed Proceeding would have on the Common Fund;
5. the level of projected recovery from the Proposed Proceeding to ensure that the Common Fund was increased after the costs of the Proposed Proceeding were deducted.
68 Counsel for Mr Letten further submitted that due to the Disbursements and adverse costs orders that may be made; the investors would actually suffer a loss if the Proposed Proceeding was allowed to be issued because there was no evidence that Mr Letten or Mr Lane had any assets that could satisfy a judgment debt.
69 These contentions may be put to one side. The Receivers have set out the basis of their calculations (see [21] above). It is possible that the investors would receive a lower distribution from the Common Fund if the proceeding is unsuccessful in whole or in part. In the present circumstances, that is a risk, a calculated risk, that the Receivers consider should be taken. For the reasons earlier expressed, the questions which remain about the financial position of Mr Letten (and to a lesser extent, Mr Lane) cannot be relied upon by Mr Letten as a complete, or substantive, defence to the Proposed Proceeding. What steps, if any, he and Mr Lane may take to defend the proceedings is a matter for each of them and their legal advisers.
70 The last matter concerns the contention that if the Proposed Proceeding was instituted and was prosecuted, investors rights would be extinguished without their informed consent for that action to be taken. Again, that contention proceeds on a false premise. In relation to those Schemes unconnected with the Companies, the "rights" however defined are unaffected. In respect of the Companies and LGHA, the "rights" of investors are being prosecuted by the institution of the Proposed Proceeding: see Young v Murphy at 286.