CSSL v Commercial Nominees of Australia [2002] NSWSC 468 | Case summary

2107/01 CSSL PTY LTD V COMMERCIAL NOMINEES OF AUSTRALIA LTD (IN LIQ) & ORS JUDGMENT 1 HIS HONOUR: Rodney Mackay Sutherland was appointed liquidator of the defendant company, Commercial Nominees of Australia Ltd ("CNAL"), by this Court on 10 May 2001. Upon investigating the affairs of CNAL, he discovered that the company was involved in an arrangement described as the "Midway Gardens Partnership" ("MGP"). The MGP was established by CNAL in 1999, to develop land at Eagleby in Queensland as a retirement village and to acquire shares in a listed public company called AHC Ltd. Investors in the MGP filled out an application form attached to an information memorandum. The MGP was governed by a partnership agreement dated 1 June 1999. 2 There were eight investors in the MGP, whom I shall call "the Partners". Mr Skinner, Mr Seckold, Mr Kinder, Mr Ross Honeyman and Mr Chris Honeyman each invested $400,000, as did CNAL in its own right. Johmar Developments Pty Ltd invested $200,000, and CNAL also invested $1,400,000 as trustee for the Equity Enhanced Fund ("the EEF"). The total amount subscribed by the Partners was $4 million. 3 CNAL also made loans to the Partners, acting as trustee of the Enhanced Cash Management Trust ("the ECMT"). An information memorandum was issued in relation to the ECMT. In the case of most applications (with the exception of the application by Johmar Developments) 95 percent of the entire partnership interest was lent to the Partner by CNAL as trustee of the ECMT. The total amount lent was $3.54 million. In the case of each Partner except Johmar Developments and CNAL itself, the Partner and CNAL entered into a loan facility deed to invest in the MGP, and a second loan facility deed to invest in the MGP to purchase the AHC Shares. By clause 7 of the first deed, the borrower agreed to provide the lender such security as the lender may in its absolute discretion require by way of charge over the borrower's interest in the MGP, and by clause 7 of the second deed the borrower agreed to provide the lender a charge over the full amount of the borrower's AHC Shares held by the custodian of the MGP. The custodian was CNAL. 4 During 1999 CNAL acquired 1,372,761 AHC Shares and purchased the Eagleby land. AHC was appointed manager of the MGP. Attempts were the made to secure finance from the National Australia Bank but it appears that they were unsuccessful, and Mr Sutherland has concluded from his investigations that no finance was ever obtained to commence construction of a retirement village. However, debts have been incurred by CNAL with respect to such matters as municipal council rates and land tax. There are no funds in the liquidation of CNAL to pay those debts. 5 On 13 February 2001 the Australian Prudential Regulatory Authority made orders replacing CNAL as trustee of the ECMT and the EEF. In each case it appointed Ferrier Hodgson Management Services Pty Ltd ("FHMS") as the new trustee. FHMS asserts that the loan agreements between the MGP Partners and ECMT give ECMT a charge over each Partner's interest in the MGP and the AHC Shares. 6 After being appointed liquidator and conducting some investigations, Mr Sutherland moved to sell the Eagleby land and the AHC Shares. On 9 November 2001 he wrote to each of the Partners other than CNAL, setting out the amount of each Partner's debt to the ECMT and explaining that by virtue of its asserted charge, FHMS claimed that the total proceeds of each partnership interest arising from the sale of the land and shares should be paid to it in reduction of each Partner's debt to ECMT. The letter said that Mr Sutherland intended to realise the assets of the MGP and the AHC Shares and to distribute the net sale proceeds in accordance with the MGP partnership agreement, subject to any securities that the ECMT may have over the individual partnership interests and shares. Mr Sutherland sought the written consent of each Partner to the dissolution of the MGP and the distribution of the net proceeds of sale to FHMS. 7 The letter of 9 November 2001 did not produce written consents by the Partners to this course of action. In fact some of the Partners expressly opposed the proposed course of action. By letter dated 17 January 2002 FHMS, in its capacity as trustee of the EEF and therefore as a Partner, purported to terminate the MGP under the terms of the partnership agreement on the ground that one of the Partners (namely CNAL) had become "bankrupt". For reasons I shall explain, there appears to be some doubt as to whether that purported termination was effective. 8 On 20 February 2002 Mr Sutherland wrote to the Partners making a different proposal. The letter noted that the Partners' objection to the previous proposal related to distribution of the proceeds of sale of partnership assets, but not to the dissolution of the MGP and the realisation of its assets. The letter sought the unanimous consent of the Partners to dissolve the MGP, under clause 18.1 of the partnership agreement. It said that once that consent was received, Mr Sutherland would realise the assets of the MGP and hold them under the partnership agreement, pending agreement or an order of the Court for their distribution. The letter said that unless unanimous approval of the Partners was received, Mr Sutherland would have no alternative but to apply to this Court for directions. Some but not all of the Partners agreed to Mr Sutherland's proposal. 9 Mr Sutherland now applies, by amended interlocutory process, for directions that he would be justified in selling the land and the shares and retaining the net proceeds of sale pending agreement of the Partners or further order of the Court. The Partners other than CNAL in its own right are respondents to the application. Three respondents were represented at the hearing of the application, namely Mr Skinner, Mr Chris Honeyman and FHMS as trustee of the EEF. FHMS as trustee of the ECMT has also appeared as a respondent. Correspondence disclosing the attitude of Johmar Developments and Mr Seckold to the application is in evidence. Mr Kinder and Mr Ross Honeyman have been served with the application and have not appeared. Subject to submissions as to costs, none of the respondents to the application opposes the making of the directions that Mr Sutherland seeks, although counsel for FHMS has proposed some modifications to which I shall refer. 10 Section 479 (3) of the Corporations Act 2001 (Cth) states that a court-appointed liquidator may apply to the Court for directions in relation to any particular matter arising in the winding up. McLelland J analysed the nature of applications under that subsection, and the consequences for the liquidator, in Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWR 679. He observed (at 679): "… that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the Court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction." 11 In Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466 a liquidator made investigations which revealed that the company may have been the trustee of a trading trust which had received substantial funds from investors. The liquidator could not find an executed trust deed or an information memorandum in final form, but he found unexecuted drafts and other evidence that the documents had been acted on. I decided it was appropriate to give directions under s 479 (3) that the liquidator would be justified in recognising the existence of a trust in terms of the draft trust deed and in recognising the claims of investors as beneficiaries of the trust. There is an analogy between Bastion's case and the present case, although the present case is in some respects easier. Here the liquidator's investigations have identified executed documents constituting the MGP and evidencing the partnership interests and the loan arrangements with CNAL as trustee of the ECMT. 12 CNAL, the company in liquidation, is the "Custodian" and "Responsible Partner" under the terms of the partnership agreement. The land and shares held by CNAL are partnership property the title to which is vested in CNAL in a fiduciary capacity. As liquidator of CNAL, Mr Sutherland is empowered by s 477 (2) (c) to sell or otherwise dispose of all or any part of the property of the company. This allows him to dispose of CNAL's partnership interest under the terms of the partnership agreement, but not to dispose of the partnership property, because the partnership property is not property of the company. Any power to dispose of the partnership property must be found in the partnership agreement. 13 As far as I can see, while the partnership agreement gives the Responsible Partner wide powers to carry out the partnership business and manage the partnership (clause 9), the agreement does not give the Responsible Partner, or the Custodian, power to sell the land and shares unless the partnership is dissolved. Clause 18.1 of the partnership agreement provides, subject to the law, that the partnership agreement may only be terminated prior to the Term where agreed to by all the Partners, or on the happening of certain events including the bankruptcy of any Partner. The word "bankruptcy" does not always include company liquidation. I have not received submissions as to whether company liquidation is included in "bankruptcy" as a matter of construction of clause 18.1, and I shall therefore not make any observations on that matter. There is at present no agreement by all the Partners to dissolve the partnership, but it may be that all the Partners will give their agreement if I make some directions which take effect once the partnership has been dissolved. In the absence of the agreement of all of the Partners to dissolve the partnership, or the dissolution of the partnership in some other fashion, I would be disinclined to give the directions sought by Mr Sutherland, because they may amount to directions that he would be justified in breaching the terms of the partnership agreement. 14 As I have said, the directions sought by Mr Sutherland are that he would be justified in selling the land and shares and holding the proceeds of sale pending agreement with the Partners or further order of the Court. The partnership agreement provides that on dissolution of the partnership, the partnership funds (including, it seems, proceeds of realisation of partnership assets) are to be dealt with in a manner agreed by the Partners, and in the absence of agreement they are to be applied in payment of the debts and liabilities of the partnership, and then applied to the Partners in accordance with their interests after deducting what may be due from the Partners to the partnership (clauses 18.3 and 18.2). Consistently with those provisions, it would be appropriate for the Court to give directions to Mr Sutherland that upon dissolution of the partnership (whether under the partnership agreement or in some other fashion), he would be justified in selling the land and shares, deducting the cost of realising those assets, and retaining the net proceeds pending agreement with the Partners or further order of the Court. 15 FHMS wishes to modify the directions in two ways. First, it says that after its appointment as substitute trustee by the Australian Prudential Regulatory Authority, it investigated ways of realising the AHC Shares, and it has acquired some knowledge on that subject. Moreover, since the principal sums of the loans made by the ECMT have not been repaid, FHMS in its capacity as trustee of the ECMT has the greatest interest in obtaining a good price for the land and shares. Therefore FHMS proposes that the direction concerning sale of the AHC Shares be qualified by a proviso that Mr Sutherland should first obtain the approval of FHMS in its capacity as the trustee of the ECMT for the price and terms of the sale. 16 There is no obligation on the Responsible Partner, in realising the partnership assets on dissolution of the partnership, to consult the financier of the Partners, nor any obligation on its liquidator to do so. However, if FHMS has some relevant information which might assist the sale process or enhance the price, without slowing down or obstructing the process, it would be wise as a practical matter for Mr Sutherland to have the benefit of that information. I cannot see any disadvantage to the interests of CNAL or the Partners in his consulting with FHMS and even sharing information with it. Since there is no obligation to have the consent of FHMS, I think it would be wrong in principle to qualify the direction by requiring that approval be obtained. However, it would be appropriate, in my view, to add to the direction with respect to sale of the shares a further direction that Mr Sutherland would be justified in consulting with FHMS with respect to the price and terms of the sale before the sale takes place. 17 FHMS also wishes to add to the direction with respect to holding the proceeds of sale of the land and shares a provision to the effect that the proceeds are to be held subject to whatever rights and interests the parties may have in the AHC Shares and/or the Eagleby land respectively. I do not think it appropriate to add those words. The position is that if the partnership is first dissolved, CNAL will be acting as Responsible Partner under the terms of the partnership agreement in realising the partnership's assets. The rights and interests of the parties will be determined by the law. If there are any valid security interests over the partnership assets, the purchaser's title, and the security-holder's access to the proceeds of realisation, will depend upon principles of property law including the law as to the priority of interests. If there are any valid security interests over partnership shares, as opposed to the partnership assets, the entitlement of the relevant Partners to share in the proceeds of realisation of the partnership assets will be affected by those security interests. The introduction of qualifying words in the direction to Mr Sutherland will not enhance or limit any rights or interests that otherwise exist, and is unnecessary for the protection of any such rights or interests. Further, the additional wording of the direction appears to me likely to create uncertainty. 18 My conclusion, therefore, is that I should make directions under s 479 (3) that, upon the dissolution of the Midway Gardens Partnership, the liquidator of CNAL would be justified in · selling, for the best price reasonably obtainable, the 1,372,761 shares in AHC Limited registered in the name of CNAL; · consulting with Ferrier Hodgson Management Services Pty Ltd with respect to the price and terms of that sale before the sale takes place; · selling the land registered in the name of CNAL at Eagleby, Queensland; · paying from the proceeds of the respective sales the reasonable disbursements of realising the respective assets; and · retaining the proceeds of the sale of the AHC Shares and the Eagleby property in separate interest-bearing accounts pending agreement with the respondents or further order of the Court. 19 Mr Sutherland seeks an order that his costs of the present application be paid from the net proceeds of sale of the AHC Shares and the Eagleby property, divided equally. In my opinion that is an appropriate order. The solicitors for Johmar Developments contended that the costs of the application should be paid by the non-consenting parties or out of the interests of CNAL in partnership assets, but I disagree. In my opinion the correct order, when directions are sought by the liquidator of the Custodian and Responsible Partner with respect to realisation of the partnership assets, is that the partnership assets (and hence the Partners rateably) should bear the costs of the application. 20 I shall direct Mr Sutherland to bring in short minutes of orders to reflect these reasons for judgment. **********

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CSSL v Commercial Nominees of Australia

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