Capelli v Shepard & Ors [2010] VSCA 2

Capelli v Shepard & Ors [2010] VSCA 2 - VSCA 2010 case summary — Zoe

[39]

...

Prior to a restructure of the PYEP scheme in 2000, to conform with the requirements of the Managed Investments Act 1998, each project (but not the excluded offer projects) was administered by a trustee, Burke Bond Corporate Ltd, pursuant to a trust deed made between Burke Bond Corporate as trustee and EIL as manager. Each applicant for allotments in a project was required to pay a once only management fee and an amount for the first year's rental under the lease agreement. An annual plantation maintenance fee was also payable.

The 1999 prospectus stated that an applicant would become a grower by completing the attached application form and power of attorney and paying the appropriate subscription sum. The management fee per allotment was $2,730. For the minimum six allotments the management subscription fee was $16,380. This sum was apparently to cover the cost of preparation and establishment of the plantation. The annual land rental for six allotments was $540 and the annual plantation maintenance cost, $180.

Each grower was required to and did engage EIL as manager to develop, establish and maintain the plantation. For the 1999 project the plantation was to be established on land owned by Blackburne.

The 1999 lease arrangements were not straightforward. Blackburne leased the land to S.T.Y. (Afforestation) Pty Ltd, described as the landlord, which in turn leased the land to Burke Bond Securities Ltd, described as the lessor. Burke Bond Securities leased the land to the growers. STY was described in the prospectus as having been in the business of processing pulpwood for over 30 years.

The complex lease structure was apparently designed to facilitate the growers right to require STY to purchase some of the growers' trees during growth years three to eight. In the third growth year the grower had a qualified right to require STY to pay a price of $3,850 for the trees on an allotment. In the fourth year the payment increased to $4,300; in the fifth year, $4,800; in the sixth year, $5,350; in the seventh year, $5,900; and in the eighth year, $6,550. The right was apparently designed to allow each grower, if they wished, to dispose of all of their trees by the eighth year of growth. There were qualifications on the obligation of STY to take the trees. Having acquired a growers' interest in trees, STY assumed all continuing liabilities of the grower in respect of those trees.

The 1999 prospectus assumed that trees would reach maturity by eight years. For those who did not dispose of their trees to STY, estimates were given in the prospectus of the projected returns from the harvested timber.[1]

[71]

The growers challenged the standing of the plaintiffs to bring and maintain an application in the name of EIL to wind up the schemes. They submitted that the only power to wind up schemes is to be found in Part 5C of the Act. Section 601EE(2) authorises the court to wind up a managed investment scheme that was required to be registered but which was unregistered. Because the excluded offer projects were not required to be registered, s 601EE has no application. The other schemes are registered.

The growers submitted that the winding up provisions in Part 5C.9 of the Act are confined in their application to registered schemes. I agree. An application to wind up a registered scheme, other than one made by a creditor of the responsible entity in its capacity as the scheme's responsible entity, may only be made by the responsible entity, a director, a scheme member or ASIC. [s 601ND was set out]

The plaintiffs' application, made under s 601ND(1)(a) of the Act, authorises the court to make an order directing the responsible entity of a registered scheme to wind up the scheme if the court thinks it is just and equitable to make the order. The receivers submitted that they are entitled to bring the application in the name of EIL.

The growers submitted that the powers of the receivers do not extend to authorise this proceeding in the name of EIL and accordingly there is no proper applicant. They submitted that upon the appointment of the liquidator to EIL, the receivers ceased to be agents of the company, although they may continue to act pursuant to their powers as agents of the mortgagee. Their limited authority, it was submitted, did not extend to maintaining this proceeding.

The growers submitted that the receivers' powers are confined to dealing with property subject to the charge. That is, the secured property. They submitted that the power to bring this application is not property over which the CBA holds security. The growers submitted that it would be open to the plaintiffs to maintain the proceeding with the approval of the liquidator, but this has not been sought and obtained.[7]

In my opinion, the receivers have power to bring this application on behalf of EIL. The property charged was "all and singular the undertaking and property of the mortgagor and all its assets whatsoever and wheresoever both present and future..." The business of EIL was, prior to 30 June 2000, to act as project manager and promoter of the scheme. After 30 June 2000, and the registration of constitutions, EIL became the responsible entity and project manager. Its business as responsible entity formed part of its undertaking with consequential rights and obligations under each constitution and the Act. For example, by reason of its role as responsible entity, EIL has a right of indemnity under each constitution. There is no suggestion that such a right does not form part of the charged property.

The winding up provisions in Part 5C.9 of the Act contemplate a winding up carried out by the responsible entity, as does each constitution. While s 601NF(1) authorises the court to appoint a person, other than the responsible entity, to ensure that a registered scheme is wound up in accordance with its constitution, the order contemplated under s 601ND(1) is one directing the responsible entity of a registered scheme to wind up the scheme. Winding up the scheme is plainly part of the business of the responsible entity.

The deed of appointment of the receivers of EIL expressly acknowledged,

That the functions, powers and authorities of the Receivers and Managers extend to the Charge or acting in its capacity as responsible entity of any Scheme.

The receivers also rely upon s 420 of the Act and in particular paragraphs (2)(a)(h) and (k). [The relevant provisions of s 420 were set out]

The receivers submitted that the prosecution of this proceeding is a matter which is "necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the object for which the receiver was appointed" within the meaning of s 420(1) of the Act. They submitted that it is only through the winding up of the schemes that the final position and the assets and liabilities of EIL can be ascertained. The receivers further submitted that the limitation upon the scope of their power, adverted to by the growers, is one which prevents them from creating new liabilities provable in the winding up. They submitted that the prosecution of this application does not purport to create any liabilities provable against EIL in the winding up. Accordingly, there is no principle of law which would prevent them from maintaining this proceeding in the name of EIL.

ASIC supported the submissions made on behalf of the receivers in relation to standing. It submitted that they were authorised to bring this application on behalf of and in the name of EIL to seek a winding up order under s 601ND(1)(a) of the Act. It also submitted that the power was to be found in s 420(1) and (2)(k) of the Act.

In my opinion it is necessary and convenient for the receivers to make and maintain this application to wind up the schemes. It is part of the business or undertaking of EIL, under each of the constitutions, to wind up the schemes in prescribed circumstances and by the prescribed process. There is no reason to segregate that part of its business or undertaking from its overall function as scheme manager and responsible entity which is subject to the charge in favour of the CBA. The receivers have been expressly authorised by their instrument of appointment to exercise the powers of EIL as responsible entity.

Managed investment schemes require a functional and solvent responsible entity. EIL is insolvent and in liquidation. It does not have funds available to it to continue to manage the schemes. The proper management of the plantations will require substantial capital if they are to be maintained. In the absence of proper maintenance the interest of the growers, as scheme members, is at risk. The growers, EIL and the CBA all have an interest in protecting the trees.

It is not only convenient, but necessary that EIL make this application. ASIC did not make any application. The directors did not make any application and the members opposed the application.[8]

[92]

Notwithstanding the opinion expressed by Ferrier Hodgson to the contrary, I am satisfied that each scheme is insolvent in the sense that it is wholly dependent upon EIL for management and administration. EIL does not have the funds to continue its functions in relation to the schemes. Substantial funds will be required. The growers have not advanced any proposal for the future management of the schemes. In many instances the growers have withheld amounts due under management agreements and leases as part of an ongoing dispute with EIL. The plantations are being maintained by the receivers pending the outcome of this proceeding.

In Re Orchard Aginvest Ltd,[12] Fryberg J was prepared to proceed on the basis that an order to wind up a scheme under s 601ND could be made merely because the Primary Agribusiness Fund, a registered managed investment scheme, was insolvent. His Honour did not attempt to draw a distinction between the responsible entity and the scheme (the Fund) for that purpose. Insofar as the scheme is characterised as no more than a trust fund or "scheme property" held on trust for scheme members by the responsible entity, the condition of insolvency may not easily attach. But in my view the scheme is something more than trust assets or scheme property.

By adopting a more generous definition of a scheme, by reference to the scheme documents, relationships, objectives, inputs and outcomes, the concept of insolvency may be applied without much difficulty if the scheme has broken down because the responsible entity has no funds to continue the management and administration of the scheme and no reasonable prospect of getting in those funds. The scheme is, in my view, insolvent; it has failed and it is just and equitable that it should be wound up.[13]

Viability

Ferrier Hodgson have opined that the schemes as a whole are not viable. Their analysis was designed to ascertain whether the plantations or some of them, had a positive net present value. The assessment assumed funding, which is not available. Even if substantial funds were to made available over the next eight or nine years only the 1998 project yielded a modest net present value. Because budgeted expenditure applied in the report did not include a component for head office overheads, that conclusion may be optimistic.

A calculation of net present value, on the assumption that funds would be available from some source to maintain plantations, is unrealistic when there is no prospect that such funds will be available. Moreover, the property rights necessary to continue the scheme are being eroded. EIL is currently in arrears in rental payments for land leased by it. It is the lessee of nineteen properties employed in the schemes. The owners of some properties have terminated leases and re-entered their land. There is default in the payment of rent in relation to other land. The CBA has appointed receivers over seventeen properties.[14]

[98]

EIL is plainly insolvent, even though no attempt has been made to value its right to indemnity from scheme property. Its right to indemnity is disputed by the growers. EIL has no funds with which to carry on business as manager of the schemes.[20]

There is also a dispute between some growers and EIL (or STY) over buy back rights. Growers have sought to exercise their right to require STY or EIL to purchase trees. As a consequence of the dispute, the growers have withheld lease and management fees, as at 30 June 2008, in the sum of $4,829,799.

Cash flow forecasts for each of the registered schemes indicated a cash shortfall for the PYEP scheme to 30 June 2008 of $1,920,751. The cash shortfall for the PYEP 7 scheme to 30 June 2008 was $799,849; and for the PYEP 9 scheme to 30 June 2008 was $397,756. These cash shortfalls will compound, in the absence of adequate funding, as time passes. Future maintenance of the plantations will require a substantial cash injection. Management of the plantations requires culling, weed control, fertilisation, replacement of dead seedlings and pest control. There are substantial insurance premiums to pay as well as labour and equipment costs. EIL also has obligations under leased properties.

In their report as to affairs, the directors of EIL estimated its financial position was in deficit between $96 million and $106 million with unsecured liabilities in excess of $77 million. While there is some uncertainty about the accuracy of the report, it is plain that EIL is hopelessly insolvent, without funds to continue to manage the plantations or perform its duties as responsible entity. Its assets, including many of the scheme properties, are in the hands of the receivers. EIL is indebted to the CBA in a sum in excess of $46 million.

EIL is also in default under some of the leases taken by it over properties employed as part of the schemes. It has failed to pay rent in respect of Addisons, Eurambeen North, Eurambeen South and Q2. Further defaults are inevitable.

St George Bank is moving to exercise its rights as mortgagee in respect of the Pomonal and Ledcourt properties, both owned by EIL. The CBA has already appointed receivers of the land mortgaged to it. Nevertheless, the growers submitted that the schemes are not insolvent and that no order should be made winding them up, at least at this time.[21]

[108]

(1) The Court may, by order, direct the responsible entity of a registered scheme to wind up the scheme if:

(a) the Court thinks it is just and equitable to make the order; or

(b) within 3 months before the application for the order was made, execution or other process was issued on a judgment, decree or order obtained in a court (whether an Australian court or not) in favour of a creditor of, and against, the responsible entity in its capacity as the scheme's responsible entity and the execution or process has been returned unsatisfied.

(2) An order based on paragraph (1)(a) may be made on the application of:

(a) the responsible entity; or

(b) a director of the responsible entity; or

(c) a member of the scheme; or

(d) ASIC.

(3) An order based on paragraph (1)(b) may be made on the application of a creditor.

601NE The winding up of the scheme

(1) The responsible entity of a registered scheme must ensure that the scheme is wound up in accordance with its constitution and any orders under subsection 601NF(2) if:

(a) the scheme's constitution provides that the scheme is to be wound up at a specified time, in specified circumstances or on the happening of a specified event and that time is reached, those circumstances occur or that event occurs; or

(b) the members pass an extraordinary resolution directing the responsible entity to wind up the scheme; or

(c) the Court makes an order directing the responsible entity to wind up the scheme; or

(d) the members pass a resolution removing the responsible entity but do not, at the same meeting, pass a resolution choosing a company to be the new responsible entity that consents to becoming the scheme's responsible entity.

(2) The responsible entity of a registered scheme may wind up the scheme in accordance with its constitution and any orders under subsection 601NF(2) if the responsible entity is permitted by subsection 601NC(3) to wind up the scheme.

(3) Interests must not be issued in a registered scheme at a time after the responsible entity has become obliged to ensure the scheme is wound up, or after the scheme has started to be wound up.

601NF Other orders about winding up

(1) The Court may, by order, appoint a person to take responsibility for ensuring a registered scheme is wound up in accordance with its constitution and any orders under subsection (2) if the Court thinks it necessary to do so (including for the reason that the responsible entity has ceased to exist or is not properly discharging its obligations in relation to the winding up).

(2) The Court may, by order, give directions about how a registered scheme is to be wound up if the Court thinks it necessary to do so (including for the reason that the provisions in the scheme's constitution are inadequate or impracticable).

(3) An order under subsection (1) or (2) may be made on the application of:

(a) the responsible entity; or

(b) a director of the responsible entity; or

(c) a member of the scheme; or

(d) ASIC.

[109]

34.1 Events which cause a winding up

The Responsible Entity:

(a) must wind up or cause the winding up of the Project if:

(i) the Project comes to the end of its terms (as set out in this Constitution);

(ii) the Project is without a responsible entity;

(iii) a court orders the Project be wound up pursuant to section 601ND of the Corporations Act; or

(iv) any of the other circumstances set out in section 601NE of the Corporations Act apply; and

(b) may wind up or cause the winding up of the Project in accordance with section 601NC of the Corporations Legislation

34.2 Process of winding up

(a) The winding up shall be conducted in accordance with the provisions of Part 5C.9 of the Corporations Act.

(b) The Responsible Entity must convert to money all Scheme Property, deduct all proper costs and then divide the balance amongst the Growers (as the case requires) according to their interests.

(c) The Responsible Entity may make interim distributions during the winding up process as it sees fit.

(d) The Responsible Entity must proceed with the winding up efficiently, diligently and without undue delay. However, if it is in the interests of Growers to do so, then the Responsible Entity may postpone any part of the winding up for such time as it thinks desirable.

34.3 Responsible Entity may without proceeds of realisation

The Responsible Entity may retain from the proceeds of realisation of Scheme Property such funds as in the reasonable opinion of the Responsible Entity may be required:

(a) to meet future payment obligations which the Responsible Entity reasonably believes will fall due after a distribution is made to Growers; and

(b) to pay its own remuneration and expenses for work to be done prior to and following the realisation of Scheme Property.

34.4 Termination of other agreements

During the winding up of the Project, the Responsible Entity may terminate any other agreements or arrangements it has entered into with the Growers which relate to this Project. The Responsible Entity must give notice to the Growers of the termination of those agreements or arrangements.

[120]

Counsel for the plaintiff submits and I accept that, generally, it is just and equitable to order the winding-up of a registered management investment scheme pursuant to s 601ND(1)(a) of the Act if it is insolvent: Re Orchard Aginvest Ltd (as responsible entity for the Primary Agribusiness Fund) [2008] QSC 002. Further, it is just and equitable for the court to intervene and to wind-up a registered scheme where the original arrangement as set out in the prospectus of the scheme has broken down: ASIC v Knightsbridge. The phrase 'just and equitable' is broad and designed to accommodate a multiplicity of situations. It is not possible to define the phrase in exhaustive terms. In each case it will be a question of fact for determination upon the evidence relating to the scheme or corporation put before the court: Re Tivoli Freeholds Ltd [1972] VicRp 51; [1972] VR 445 at 468; and Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374. A determination of whether or not it is just or equitable to wind-up the entity will not depend upon particular factual categories: Re Straw Products Pty Ltd [1942] VicLawRp 52; [1942] VLR 222 at 223.

Some further guidance can be derived from authorities dealing with applications to wind-up an unregistered scheme pursuant to s 601EE(2) of the Act. In Cumulus Wines Pty Ltd v Huntley Management Ltd [2004] NSWSC 609 ; (2004) 50 ACSR 58 [21]-[28], the court observed that schemes should be wound-up where; the estimated future income of the scheme was unlikely to achieve a return for investors and there was no realistic basis for expecting that future income and expenses would change to such a degree as to make a return to investors achievable; it was untenable for the schemes to continue in their then current state; and, further, that the schemes were then insolvent. In ASIC v Chase Capital Management an application was made under s 601EE(2) of the Act and it was held that an unregistered scheme may be wound up where the investments of the scheme are in a questionable state. Counsel for the plaintiff also invokes authorities dealing with the winding-up of a corporation on the just and equitable ground where it is apparent that the company has failed to meet its objectives and will be unable to do so: Re Pacific Fisheries Ltd (1909) 26 WN (NSW) 127; Re Co-operative Development Funds of Australia Ltd (No 3) (1978) 3 ACLR 437; and Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. I am satisfied that these principles apply to the present consideration of whether any or all of these six registered managed investment schemes should be wound-up upon the grounds relied upon and I shall proceed on this basis.[28]

At a glance

Court

Decision date

Before

Source

Judgment (254 paragraphs)

Capelli v Shepard & Ors [2010] VSCA 2 (29 January 2010)

Parties

Legislation Cited (1)

Cases Cited (1)