City Pacific Income Fund, in the matter of City Pacific Income Fund [2010] FCA 437

REASONS FOR JUDGMENT 1 This is an application to wind up the City Pacific Income Fund (Income Fund) brought by the liquidator of the responsible entity of the fund, which is City Pacific Limited (in liquidation) (City Pacific). The application is brought under ss 601NC and 601ND of the Corporations Act 2001 (Cth). The application is supported by an affidavit of Andrew Hugh Jenner Wily, which outlines the reasons for the application and provides exhibits of the supporting documentation. 2 Section 601NC(1) provides that the responsible entity of a scheme may take steps to wind up a registered scheme if it considers that the purposes of the scheme cannot be accomplished. The section provides for members of the scheme to be notified as set out in s 601NC(2). Having been notified, members may call a meeting to consider the proposed winding up and if no meeting is called within 28 days the responsible entity may wind up the scheme. Section 601ND provides that the Court may "direct" the responsible entity to wind up the scheme if the Court thinks it is "just and equitable" to do so. 3 That purpose is no longer able to be fulfilled, for a number of reasons. By order of this Court made on 28 August 2009, the responsible entity was ordered to be wound upand Mr Wily and Mr David Anthony Hurst were appointed as liquidators. By letter dated 22 January 2010, the Australian Securities & Investments Commission (ASIC) advised the liquidators Armstrong Wily that, as City Pacific was in external administration and as the liquidators had decided to windup the Income Fund, it proposed to exercise its power to cancel the Australian Financial Services Licence (AFS Licence) under s 915B(3)(b) of the Corporations Act without the need for a hearing. The letter noted that once cancelled the AFS Licence would continue in effect as though the cancellation had not happened for the purposes of: 1. the provisions set out in section 601FA and Parts 7.6, 7.7 and 7.8 of the Act; 2. in relation to the provision of financial services in preparation for or in connection with the winding up of the Fund; 3. for the period of three months from the date of cancellation of the Licence. 4 The AFS Licence was cancelled on 12 March 2010 although, as advised, it continues for the limited purposes set out above for 3 months from that date. The consequence of these factors is that City Pacific is no longer able to carry on as responsible entity. The communications with ASIC indicate that ASIC is aware of the proposal to wind up the Income Fund and had voiced no objection to that course. 5 The Income Fund was constituted on 20 February 2006, and the responsible entity was granted an Australian Financial Services Licence (AFS Licence) to carry on a financial service business including to operate the Income Fund. The purpose of the Income Fund, which was set out in a product disclosure statement, was to provide investors with regular, secure income from a selected pool of loans and stable interest investments. 6 The Income Fund has two assets. One is an interest bearing security arranged by Lehman Brothers International Europe, known as the AAA Global Bank Note. The amount of $500,000 was invested in that security. As a result of the global economic conditions, the value of that investment is now estimated to be zero. The major asset of the fund, in which the bulk of its funds were invested, is an investment in Pacific First Mortgage Fund (Mortgage Fund), of which the responsible entity of the Income Fund was formerly the responsible entity. As at 31 December 2008, the Income Fund had over 7,241,358 units on issue at $1 a unit, but at that time valued at $3,235,206. The Mortgage Fund has not paid monthly distributions to investors since June 2008 distributions from it have been temporarily frozen. 7 The position now is that the Income Fund has virtually no income but is still liable for not only its own management fees but also, as it holds close to 95% of the assets in the Mortgage Fund, for that portion of the Mortgage Fund fees. 8 The evidence before me shows that the unit holders in the Income Fund have all been notified by letter. There has been no objection by any of the unit holders to the proposed winding up, and there has been some informal evidence of support for the proposal. As noted above, correspondence with ASIC shows that ASIC has been informed of the proposal and has not registered any objection. It is clear from the present finances of the Income Fund that it cannot achieve the purpose that it was formed to achieve and, in the circumstances, it would appear that it is just and equitable that it be wound up, and the unit holders retrieve what can be retrieved from their original investment. 9 The Constitution of the Income Fund provides that the responsible entity must wind up the scheme or cause the scheme to be wound up on the occurrence of a number of circumstances, one of which is that the Court orders the scheme to be wound up pursuant to section 601ND of the Corporations Act. Winding up pursuant to order of the Court would, therefore, be in conformity with the Constitution of the Income Fund. 10 In his affidavit, Mr Wily has deposed to the proposed methods of winding up the Fund, being either to sell the units in the mortgage fund, or distribute them to the members. It is for this reason that it would seem to be just and equitable, indeed, beneficial to the unit holders to wind up the Income Fund. The difficulty in winding up the Fund may well be to find a purchaser for the units in the Mortgage Fund if it is decided to sell the units. The other possibility canvassed by the liquidators is to distribute the units to the unit holders of the Income Fund in proportion to their holding in the Income Fund. While this method is not specifically authorised by the Constitution of the Income Fund, it is not precluded. 11 In the circumstances that it may be difficult to find purchasers for the units, it would seem to sabotage the purpose of winding up with the intention to avoid unnecessary expense to preclude this method of proceeding, if it turns out that that is the most effective way to wind up the fund. In my view, in the circumstances, the obligation to proceed with the winding up efficiently, diligently, and without undue delay, in accordance with cl 9.3(c) of the Constitution permits the approach proposed by the liquidators. In the circumstances, I am satisfied that, as required by s 601ND of the Corporations Act, it would be just and equitable to make the orders sought by the liquidators. 12 The orders of the Court, therefore, are: (1) The City Pacific Income Fund be wound up. (2) Andrew Hugh Jenner Wily and David Anthony Hurst be appointed as joint liquidators of the Income Fund; (3) The liquidators have all the powers under the constitution of the Income Fund to wind up the Income Fund. (4) The liquidators may, from time to time, receive any fair and reasonable remuneration in relation to the winding up of the Income Fund on the basis of their time charges, plus GST and all reasonable out of pocket expenses in relation to legal or other third party fees, to be deducted from the proceeds of the Income Fund or from the proceeds of the sale of any of the assets of the Income Fund. (5) The liquidators's remuneration and other expenses of the winding up be paid in priority from the assets of the Income Fund; and, (6) costs of the application be costs in the winding up. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.