3465/04 CUMULUS WINES PTY LTD (ACN 107 786 318) AS MANAGER OF CENTRAL HIGHLANDS WINE GRAPE PROJECTS NO.2 & NO.3 V HUNTLY MANAGEMENT LTD (ACN 089 240 513) AS TRUSTEE OF CENTRAL HIGHLANDS WINE GRAPE PROJECTS NO.2 & NO.3 & ANOR
3529/04 REYNOLDS WINES LTD (ACN 061 232 657) (RECEIVER APPOINTED) (IN LIQUIDATION) AS MANAGER OF CENTRAL HIGHLANDS WINE GRAPE PROJECT NO.4 V V HUNTLY MANAGEMENT LTD (ACN 089 240 513) AS TRUSTEE OF CENTRAL HIGHLANDS WINE GRAPE PROJECT NO.4 & ORS
JUDGMENT
1 HIS HONOUR: These are proceedings for the winding up of three investment schemes. In proceeding No 3465 of 2004, the plaintiff ("Cumulus Wines") seeks orders for the winding up of two schemes, namely the Central Highlands Wine Grape Projects numbers 2 and 3 ("Project 2" and "Project 3" respectively). In proceeding No 3529 of 2004, the plaintiff ("Reynolds Wines") seeks an order for the winding up of the Central Highlands Wine Grape Project number 4 ("Project 4").
Outline of the project structures
2 The primary object of each of Projects 2 and 3 was to cultivate and harvest wine grapes, on behalf of investors. The primary object of Project 4 was to cultivate and harvest wine grapes and process the harvest to produce wine, on behalf of investors. Project 2 commenced in 1996, and Projects 3 and 4 commenced in 1997. Projects 2 and 3 were intended to operate for 15 years, although the term of Project 3 was subsequently extended to 17 years. Project 4 was intended to operate for 20 years. For each project, a prospectus was issued and investment funds were collected. Approximately 2,669 investors participated in the three projects.
3 A few of the investors subscribed their own money, but in most cases the investor borrowed the amount of the investment by a loan on which interest was to be paid out of profits of the scheme. Although there is a measure of uncertainty about the contractual arrangements in some cases (considered below), it appears that at least some of the loans were "non-recourse" loans on which interest would accumulate if the scheme generated insufficient profits to pay it.
4 The structure of the schemes in Projects 2 and 3 was the same. The owner of the land on which the grape vines were to be grown granted a long lease to the scheme trustee, who sub-leased the land back to the landowner under a sub-lease agreement. The landowner granted each investor the right to farm grapes in return for a fee. There was a trust deed for each scheme, between the investors, the landowner, the trustee and the manager of the scheme, under which the trustee held the leasehold interest in the land for the benefit of investors, and the manager undertook management responsibilities for the scheme. The manager also contracted with the investors to carry out the growing, picking, sale and distribution of grapes in return for a fee, and to account to the investor for any profits after deduction of the fee, and interest on any loan made to the investor.
5 Although the identity of the entities has changed over time, the current position is that Cumulus Wines is the manager of both schemes, and is also the landowner and (by assignment) the owner of the loans to the investors. It was appointed manager by a deed dated 19 May 2004. The defendant Huntley Management is the trustee of both schemes, appointed on 2 July 2003.
6 The structure of Project 4 is more complicated, but there is a broad similarity, in that most of the investors borrowed the amount of their investments under "non-recourse" loans; the landowners (two in this case, as there are two parcels of land) leased the land to the trustee who in turn subleased the land back to the owners; there was a trust deed for the scheme, between the investors, the landowners, the trustee and the manager; there were farm agreements between the landowners and the investors to permit the investors to farm grapes on the land; and there were management agreements between the investors and the manager for the growing, picking, sale and distribution of the grapes. The principal differences between Project 4 and the other two projects were that Project 4 contemplated the processing of grapes into wine; there were substantially more interconnected service agreements; and there was another layer of ownership and a head lease for one of the parcels of land.
7 The manager of the scheme for Project 4 is now Reynolds Wines. It was appointed as the management company pursuant to a deed of retirement and appointment dated 15 April 2002. It went into voluntary administration on 4 August 2003, and is now in liquidation. Receivers and managers were appointed on 7 August 2003, and were replaced by the present receivers on about 19 May 2004. The trustee is, as with Projects 2 and 3, Huntley Management, which was appointed on 2 July 2003. The landowners are the second and third defendants, Vinland Farms and Angullong, related companies of which are the owners by assignment of the loans to investors.
Statutory requirements
8 At the time of their commencement, the three schemes were regulated by the "prescribed interests" provisions of Divisions 5 and 5A of Part 7.12 of the Corporations Law. The Managed Investments Act 1998 (Cth), which commenced on 1 July 1998, introduced Chapter 5C into the Corporations Law, and the new provisions were carried over into Chapter 5C of the present Corporations Act. Under the old "prescribed interests" regime, regulated investment schemes were required to have a trustee and manager. Under Chapter 5C the old prescribed interests concepts have been replaced by new definitions, the central concept being "managed investment scheme", now defined in s 9 of the Corporations Act. The three investment schemes fall within the definitions of "managed investment scheme".
9 A registered managed investment scheme has a single "responsible entity" rather than a trustee and a manager: s 601EA(2)(a). The responsible entity is required to operate the scheme (s 601FB(1)), and it holds the scheme property on trust for the scheme members (s 601FC(2)). In addition to this major structural change, Chapter 5C has altered the regulation of investment schemes in many ways: for example by defining the duties of the responsible entity, its officers and employees; regulating changes of responsible entity; requiring a registered scheme to have a constitution complying with statutory requirements, and a compliance plan, and a compliance committee; and providing for the winding up and deregistration of schemes.
10 The legislature recognised that compliance with the new regime would take time, and so it adopted transitional provisions which allowed the old regime to continue to apply to existing schemes for two years (that is, until 30 June 2000): Corporations Law, s 1454. ASIC was empowered by s 1454(2) to extend the two-year period. On 14 May 1999 ASIC made declarations in relation to Project 2, Project 3 and Project 4 extending the transitional period to 30 June 2004.
11 Section 1457(1) required the management company of a scheme to convene a meeting of prescribed interest holders to choose a responsible entity for the purpose of applying for registration of the scheme under the new regime, or to decide that the scheme should be wound up. Section 1457(2) provided that if, at the meeting, the prescribed interest holders did not either choose a proposed responsible entity or resolve to wind up the scheme, the management company could apply to the court for an order directing it to wind up the scheme. The substance of s 1457 of the Corporations Law continued under s 1408 of the Corporations Act, and the section applied to the three schemes until 30 June 2004 by virtue of ASIC's extending order.
Investor meetings
12 None of Cumulus Wines, Reynolds Wines and Huntley Management is prepared to Act as the responsible entity of any of the three schemes. Attempts have been made to find an alternative responsible entity. Huntley Management has advertised for an alternative entity to operate the schemes as registered schemes under Chapter 5C after 30 June 2004, but no entity willing and able to do so has been identified. The plaintiffs as managers, and Huntley Management as trustee, may retire by giving three months notice in writing (clauses 16.4 and 17.3 of the respective Investment Deeds). It seems likely that the plaintiffs will do so if no orders are made for winding up, and that Huntley Management will do so unless it is given responsibility for winding up the projects.
13 Meetings were convened under s 1457(1) for Projects 2 and 3 by Huntley Management as trustee (because the former management company refused to do so), and were held on 17 May 2004. The explanatory memoranda distributed prior to the meetings put investors on notice that there was no entity willing to continue to operate the schemes after 30 June 2004. Resolutions to wind up Projects 2 and 3 were put to the meetings, but they were not passed by the requisite 75% of prescribed interest holders - 72.18% of investors in Project 2, and 63.93% of investors in Project 3 voted in favour of the winding up resolutions. No resolution for the appointment of a responsible entity was put to the meetings because Huntley Management had been unable to identify any entity willing to operate those two projects. There was an issue as to whether the meetings were effectively convened for the purposes of s 1457 when they were convened by the trustee rather than the manager, but it is unnecessary for me to decide that issue, because by the time the winding up applications were heard, on 1 July 2004, s 1457 had ceased to apply to the schemes and they were governed by the new regime in Chapter 5C (and in particular, ss 601ED and 601EE).
The applications
14 The applications to wind up the three schemes have been brought by Cumulus Wines and Reynolds Wines as the managers of the schemes. The originating processes were filed on 16 June and 21 June 2004 respectively. They sought, in the alternative, an order for winding up under s 1457(2), or under s 601EE, depending upon whether the application was heard and determined on or before 30 June, or after that date. As I have said, the applications were heard on 1 July, so only s 601EE is relevant. It should be recorded, however, that the two plaintiffs have acted with expedition in attending to the administration of the meetings of investors to secure resolutions for the winding up of the schemes, and when the requisite majorities were not obtained, in making the present applications to the court.
15 At the hearing at the application, two investors, Mr Johnson (Projects 2 and 3) and Mr Robinson (Project 4), appeared and were represented by counsel, and opposed the making of orders for winding up the schemes. They attempted to give evidence of the attitude of investors generally, but I rejected that evidence on discretionary grounds and allowed them to adduce evidence only with respect their own grounds for opposition. I shall return to their objections to winding up later.
Winding up under s 601EE
16 Section 601ED sets out the circumstances in which a managed investment scheme must be registered with ASIC under s 601EB. It is plain that Projects 2, 3 and 4 are managed investment schemes required by s 601ED to be registered. They have not been registered, and cannot be, in the absence of an entity or entities that would be prepared to act as responsible entity for each scheme. Section 601ED(5) states:
"A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered."
17 It would thus be unlawful for Cumulus Wines to continue to operate Projects 2 and 3 after 30 June 2004, and for Reynolds Wines to continue to operate Project 4 after that date.
18 The Act makes provision for the court to wind up a managed investment scheme that is operated in contravention of s 601ED(5), as follows:
"601EE (1) If a person operates a managed investment scheme in contravention of subsection 601ED(5), the following may apply to the Court to have the scheme wound up:
(a) ASIC;
(b) the person operating the scheme;
(c) a member of the scheme.
(2) The Court may make any orders it considers appropriate for the winding up of the scheme."
19 Section 601EE gives the court a discretionary power to make orders for the winding up of the scheme. The factors relevant to the exercise the discretion include the protection of investors and the public interest in preventing breaches of the Corporations Act: ASIC v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at [74]-[75]; ASIC v Pegasus Leveraged Options Group (2002) 41 ACSR 561 at [90]-[93].
20 The standing of the plaintiffs under s 601EE(1)(b) depends upon being "the person operating the scheme". If they operate any of the three schemes after 30 June, they contravene s 601ED(5). It may be that by seeking orders under s 601EE, the plaintiffs are to that extent operating the respective schemes in violation of s 601ED. This problem could have been avoided if ASIC were prepared to make the applications, or to exercise its powers of modification under s 601QA, but ASIC has showed a puzzling and unsatisfactory unwillingness to become involved in these proceedings, although the plaintiffs have approached it up. If the plaintiffs, by making the applications to me on 1 July 2004, could be regarded as having to that extent operated the three schemes contrary s 601ED, such a contravention would be undertaken solely for the proper purpose of placing the matter of illegality before the court so that it could be addressed.
Insolvency of the projects
21 The evidence before me shows that the schemes are insolvent, when one takes into account interest and principal owing by investors who have borrowed. The financial records for Projects 2 and 3 were inherited by the present manager and trustee, the plaintiff and the defendant in proceeding No 3465-2004, from the former management company, and they are in a less than satisfactory state, because some pages of financial statements are missing and the financial statements have not been properly audited. Nevertheless it is reasonably clear that the income from those two projects to date has been insufficient to pay expenses of operating the grape growing businesses (including very substantial management fees) and interest on investors' loans. Significant amounts of loan principal and interest have been accruing each year.
22 Thus, in Project 2, in the financial year 2000 there was no distribution to investors and at the end of the year the total amount owing in respect of management fees, other fees, principal and interest was over $2.15 million. There was no distribution in the financial year 2001 and the latter amount increased to over $3.74 million. In the year 2002 there was, in unusual circumstances, a distribution to investors of nearly $1 million, which was applied, in the case of investors who had borrowed, to pay interest on their loans, with no net receipt by them, although investors who had not borrowed received a small distribution. In the financial year 2003 there was a distribution of about $428,000, which, again, was applied to reduce interest for those investors who had borrowed, leaving outstanding interest of over $1.87 million. At the end of the 2003 year, the loan principal stood at over $12.21 million. There has been no return to the investors, except for the small number of investors who did not take out loans to finance their investments, who received a modest return in some years.
23 The pattern for Project 3 is similar, although in that case there were distributions in the financial years 2000 and 2002, but not in 2001 and 2003. The amount of outstanding interest at the end of the 2003 year was over $5.11 million, and the loan principal was over $21.61 million. There were outstanding management fees of over $380,000.
24 The evidence indicates that the average yield per hectare for Projects 2 and 3 is much lower than would be needed, bearing in mind current and forecast future prices per tonne for grapes, to generate sufficient income in future to pay management fees and accrued and ongoing loan repayments so as to achieve a return for the investors who have taken out loans.
25 The financial records of Project 4 are also in an unsatisfactory state. Nevertheless, it is clear that the income from Project 4 has been insufficient to pay investors' loans and management fees. All of the income from Project 4 has been applied to reduce the accrued debts and management fees and there has been no return for any investors, including those who have invested their own funds. At the end of the financial year 2003 the amount of outstanding interest was over $9.4 million, loan principal was over $37.11 million, and there were outstanding management fees of nearly $1 million. When one takes into account the average yield per hectare and the current and forecast future prices per upon of grapes, it is most unlikely that Project 4 will generate sufficient income in the future to pay the accrued and ongoing loan principal and interest and management fees, so as to achieve a return for investors who have taken out loans.
The plaintiffs' case for winding up the projects
26 The plaintiffs submit that it is untenable for the three schemes to continue in their present financial state. Their continued operation since 30 June is in contravention of s 601ED(5). Further, if the schemes are not wound up its seems likely that both the existing managers and the existing trustee will retire, on three months' notice in writing, and the schemes will then be without any management at all. All of the investors, the majority of whom were in favour of winding up at the 17 May 2004 meetings, will then be locked into illegal schemes with no active management, unless ASIC (which has shown a peculiar lack of interest) or one of the investors applies to wind the schemes up under s 601EE. If an application is made in those circumstances, the court will be faced with the same question as is presented now, but time will have elapsed without anything happening to the advantage of investors or anyone else.
27 I agree with these submissions, and therefore it seems to me that the appropriate course is to make orders for the winding up of the three projects.
28 It was submitted on behalf of the investors that ASIC should be asked for a further extension of the transition period, to give the managers the opportunity to explore other alternatives. It was also submitted that, before making a decision to wind up the projects, the court should consider appointing a receiver to investigate and report on the alternatives available, with the fees of the receiver being paid from the scheme. The difficulty with these proposals is that the schemes are insolvent and, according to the evidence, there would need to be an enormous improvement in the price of grapes, or an even greater improvement in production quantities, to turn the situation around. There is no realistic basis, on the evidence, for believing that any such developments will occur, and therefore no point in deferring the inevitable decision to wind up the schemes.
Issues raised by investors
29 At directions hearings on 16 and 21 June 2004, I required Huntley Management to send to all investors a copy of the originating process, the orders that I then made, and a notice. The notice explained that the proceedings were seeking to have the projects wound up on an urgent basis and nominated a website from which copies of documents filed in the proceedings could be accessed. The notice also informed investors that if they wished to be heard in relation to the applications for winding up, they should seek independent legal advice and they may wish to apply for leave to be heard under rule 2.13 of the Supreme Court (Corporations) Rules 1999.
30 Some deficiencies in the registers of investors made it difficult for Huntley Management to communicate with some investors, but it advertised the proceedings in the Weekend Australian newspaper on 26 June 2004. I am satisfied that Huntley Management has taken all appropriate steps, bearing in mind the urgent circumstances produced by the illegality of the schemes after 30 June, to bring the proceedings to the notice of investors.
31 As I have said, two investors appeared by leave at the hearing before me, to oppose the applications for orders for the winding up of the projects. Additionally, a number of investors sent submissions and other material by facsimile to my chambers, without filing any notice of appearance. It is obviously inappropriate for a person who is affected by proceedings before the court to open up a channel of communication directly with the judge in chambers. Our basic principles of procedural fairness require that evidence and submissions relevant to a matter before the court be communicated in open court, by a person who has filed a notice of appearance in the proceedings, thereby becoming entitled to the fruits of success and subject to the consequences of lack of success. Although I had some misgivings as to whether I should do anything at all with the material transmitted by facsimile, I decided to pass it on to counsel for the plaintiffs, who in turn made copies available to counsel for the two investors who were represented at the hearing. The parties were able to take the material into account in their respective submissions.
32 The investors who have appeared or made written representations in relation to the winding up applications have, in substance, raised five issues:
(a) they claim that the managers of the projects, and the trustee, have a personal interest in the winding up of the projects, and have not adequately investigated alternative courses of action;
(b) they claim that either they would not be liable to repay their loans and accrued interest if winding up orders were made, or the court should release them from any further obligations under the loan agreements;
(c) they assert a claim under the Agricultural Tenancies Act 1990 (NSW);
(d) they claim that they will be prejudiced as a result of a winding up if they lose their rights to occupy and operate their "farms";
(e) one of the investors claims that the investors had no right to appoint their own responsible entity, a right that (he submits) they would have under s 601FM if the projects were registered under Part 5C.
33 I have decided to reject each of these submissions, for the reasons set out below.
Conflicts of interest
34 The Assetinsure Group, in which Cumulus Wines is a subsidiary, is interested in the outcome of the winding up applications because the Group owns the land for Projects 2 and 3, and the investor loan book for those projects. The winding up of the projects may lead to the Group obtaining some benefit, which will go to reduce the debt owing to the Group. Assetinsure Pty Ltd, the parent company, issued a "credit enhancement shortfall bond" for a "bond amount" of $30,000,000 in connection with the projects. Through its subsidiary Cumulus Wines, Assetinsure acquired the assets of Reynolds Wines as a means of mitigating its losses incurred in honouring the bond. It will remain the largest creditor of Reynolds Wines even after the acquisition and realisation of those assets.
35 It is obviously inappropriate for Cumulus Wines, or for that matter Reynolds Wines, to be made responsible for the winding up of the projects, but that is not proposed. It is not impermissible for the person operating the scheme, having standing to make an application for the winding up of the scheme under s 601EE, to bring the application for a self-interested reason. Here, the position of the Assetinsure Group and its interest in the outcome of the application are matters disclosed in the evidence.
36 The evidence does not indicate that Huntley Wines, the trustee of the schemes, stands to benefit directly or indirectly from the winding up of the projects, except to the extent that it would benefit if it became the person responsible for winding up and was able to charge fees. Apart from the prospect that it may have a role in the winding up of the projects, its only interest appears to be as the trustee, entitled to charge fees and owing duties to the investors as beneficiaries.
Investors' liability to repay loans
37 As I have said, most of the investors (in fact, all but 50 of the total of 2,669 investors in the three projects) obtained loans to finance their investments. These were referred to in the hearing as "non-recourse" loans, presumably meaning that the capital and interest of the loans was, except as expressly provided, to be paid out of the investment rather than by recourse to the other assets of the investor.
38 Upon close analysis, however, the question whether the loans are truly non-recourse in this sense depends upon resolving some uncertain questions of construction. I shall consider the loan agreement used in respect of Project 2 (the loan agreements for the other projects are generally similar). The parties to the agreement are the investor/borrower, the lender, the landowner and the manager. It provides for a loan of a capital sum for a term of 15 years. Interest for the first and second years of the loan is payable in advance, but interest on the third and subsequent years is payable only from the income derived from the sale of grapes after deducting farm fees and management fees.
39 Clause 4 provides for three principal payments and for the balance of the principal sum and interest (from year 3 onwards) to be payable only from the income from "the Business". As senior counsel for the plaintiff pointed out, it is not clear from the agreement whether "the Business" refers to each investor's separate "business" operated as part of Project 2, or the business of Project 2 as a whole. This becomes relevant to the interpretation of clause 7.
40 Clause 7.1 states that the investor has no liability for payment of principal and interest other than out of the income of "the Business", provided that the investor pays the first two years' interest and initial principal payments and complies with his or her obligations under the farm agreement. Clause 7.1 is subject to clause 7.5, which says that the investor is liable for repayment of principal and interest at the end of the term of the loan agreement in certain circumstances, including where "the Business" or the investor's interest in "the Business" is wound up.
41 It appears that some of the investors contend that clause 7.5 was deleted from the version of the loan agreement that they signed. Others say that, to the extent that clause 7.5 qualifies the non-recourse nature of the loan, the court should not make orders for winding up in circumstances where that provision would be triggered, or alternatively, the court should make the orders for winding up conditional upon non-recovery of the loans. The precise ground for this claim to relief by the investors has not been identified.
42 The plaintiffs seek to answer the investors' concern by offering undertakings to the court for the investors' benefit. Prior to the hearing, Cumulus Wines as manager and as assignee of the loan books, in respect of Projects 2 and 3, and as plaintiff in the proceedings relating to those two projects, offered to release each investor from any further liability under their loan agreements in return for a release by the investor in respect of all claims relating to Projects 2 and 3, including (without limitation) any claims under the Agricultural Tenancies Act. Reynolds Wines, though manager and plaintiff, is not the owner of the loan books for Project 4, but it has offered to undertake to use its best endeavours to cause the owners of the Project 4 loan books, the third defendant and an entity associated with the second defendant in the Project 4 proceedings, to make an equivalent offer of mutual releases to the investors in that project. In its final form, the undertaking was given directly by the third defendant, and the second defendant undertook to cause its related entity to act.
43 During the course of the hearing before me, that undertaking was supplemented by another one. The second undertaking, given by the plaintiff in the Projects 2 and 3 proceedings, and by the second and third defendants in the Project 4 proceedings, is an undertaking not to enforce the loan agreements for recovery of either capital or interest against the investor's personal assets, if the investor does not enter into an agreement for mutual releases. However, in this case the loan will not be extinguished, and the undertaking party wishes to be able to assert a set-off of the loan against any judgment sum entered against it in any proceedings taken by the investor in respect of the relevant project. In answer to a question by me, senior counsel for the parties offering this undertaking informed me that the only continuing significance of the loans would be as a basis for asserting set-off in those circumstances.
44 I agree with submissions made on behalf of the plaintiffs that, given the two undertakings now offered, the making of a winding up order will not lead to enforcement the loans against investors, notwithstanding clause 7.5 and the equivalent provisions in the other loan agreements. The undertakings have the effect of reinforcing the non-recourse nature of the loans. The only circumstances in which "recovery" of the loan amounts and interest will occur is in the event that the investor obtains judgment and there is a set-off, and the investor who wishes to have the loan released entirely has available the opportunity to enter into an agreement for mutual release. In those circumstances, it does not appear to me that any practical prejudice will arise to any investor, even if clause 7.5 is applicable in the investor's case and is triggered by the orders that I shall make.
Claim under the Agricultural Tenancies Act
45 The Agricultural Tenancies Act 1990 (NSW) gives a "tenants" an entitlement to compensation, payable at the end of the tenancy, for improvement on a farm carried out by them with the consent of the owner (s 6(4)) and in certain cases without the owner's consent (s 7(4)). The Act provides for disputes, including disputes about such compensation, to be resolved by mediation or arbitration, and sets out procedures for that purpose. Section 22 provides that a court has no jurisdiction in respect of a dispute relating to a right conferred by the Act. Even if I had jurisdiction to do so, it would clearly not be appropriate for me to purport to determine any claim for compensation in respect of improvements in this case, as the necessary parties are not before the court and the evidence has not been directed to the issue of compensation. Nevertheless, it is relevant to note some difficulties that, according to the plaintiffs, will be encountered if claims under the Act are made.
46 Thus, the plaintiffs admit that the areas of land occupied by each investor pursuant to the farm agreements are arguably not large enough to be "farms" within the meaning of the Act. They say that the "improvements" made by the investors were required to be made under the terms of the farm agreements in consideration of the landowners' obligations under those agreements, and it is therefore arguable that they do not give rise to any entitlement to compensation under the Act: Lismore City Council v Green Gro Pty Ltd (2003) 56 NSWLR 204. Further, they contend that the "improvements" made by the investors were in fact made by the manager of each project on their behalf, in accordance with the management agreements, and fees payable to the managers for carrying out this work have not been paid in full. Arguably these are matters that would be taken into account under s 17 of the Act in determining what is "fair compensation" for the investor's improvements.
47 More importantly for the present case, I cannot see how orders for the winding up of the projects would prevent any investors from applying to have any claims for compensation determined by arbitration under Part 4 Division 2 of the Act. In my opinion, therefore, the issue of potential claims under the Act has no bearing on the exercise of the court's discretion to wind up the projects.
Loss of rights with respect to "farms"
48 The investors complain that orders for the winding up of the projects will inevitably lead to termination of the "farms", with the result that the landowners or managers will be unjustly enriched, because they will have the benefit of the growing vines for no cost.
49 In his affidavit on behalf of the two investors who have appeared, Mr Dennis suggests that the landowners may obtain a benefit in the order of $6 million, said to be the amount realised for the Project 3 crop in the previous year. In fact it seems that the total operating revenue for Project 3 for the year ended 30 June 2002 was approximately $6 million, but expenses for the year were $5 million, leaving only about $1 million to be distributed to investors. Of that amount, about $992,000 was applied to pay interest on investors' loans, leaving about $3.47 million in interest still owing. The total operating revenue was significantly lower than $6 million in all other years, and in some years no "distributions" were made at all. In relation to Project 4, there has been no surplus of revenue over expenses in any year, and therefore no "distribution" to investors at any time.
50 The leases from the landowners to the trustee do not, as far as I can see, contain any provisions authorising the landowners to terminate in the event that orders are made for the winding up of the schemes. However, it seems likely that the leases will come to an end at some time after the commencement of a winding up. This is because the person responsible for winding up the schemes will have to decide whether to continue to perform the lessee's obligations, or to allow default to occur. If he decides on the latter course, then in all probability the landowners will terminate the leases. Presumably the same applies to the sub-leases and farm agreements relating to the projects. When the relevant agreements have been terminated, the operation of the "farms" will have effectively been brought to an end (compare ASIC v Takaran Pty Ltd (2002) 43 ACSR 46, at [37]-[42]). The landowners will then have possession of the land on which the grape vines are growing.
51 I doubt whether this outcome can properly be described as "unjust enrichment", either in a general sense or by reference to specific legal doctrines. No specific doctrine or body of cases was invoked in submissions. As to the general fairness of the outcome, it is necessary to consider the nature and effect of the bargains made by the investors.
52 The investors entered into investment schemes under which, by farming agreements, they obtained non-exclusive contractual rights to occupy portions of the land and to farm grapes on those portions. The agreements do not appear to give the investors any profits a prendre or other proprietary interests in respect of the land, and if that is correct, their rights are of such a nature that they will come to an end when the agreements are terminated. That is the investment bargain they have struck. Their investments have failed. Where they have made the investment out of their own money, their funds have been lost although they have received a modest return in some years for some projects; where they have borrowed the amount invested, they will not be required to repay the amount borrowed but there has been and will be no return on the investment.
53 Any assessment of the overall fairness of the outcome would have to take into account, in addition to the position of the investors, the position of other parties including the managers and financiers as well as the landowners. In particular, as mentioned above, the Assetinsure group will remain the largest creditor of Reynolds Wines after the assets have been realised.
Right of appointment of responsible entity
54 The argument on this point was advanced principally by Mr Taylor, an investor who made some written submissions. His point appears to be that the investors have no right to appoint their own responsible entity, though they would have had such a right, under s 601FM, if the projects were registered managed investment schemes under Part 5C.
55 This contention appears to overlook clauses 16.2 and 17.1 of the Investment Deed for each project, under which the manager and trustee are required to retire if investors representing at least 50% of the "farms" in the project pass a resolution for their removal at a meeting. Clause 18.3 empowers 50 investors or 10% of the investors in the project to require the manager to convene a meeting of investors. These rights are not quite the same as the rights of interest holders in a registered managed investment scheme, but they are not greatly different. Significantly, it appears from the evidence that the investors have not sought to invoke their rights under the Investment Deeds to complain about the performance of the manager or the trustee, or to contend that the manager should be disqualified because of a conflict of interest.
56 In his affidavit, Mr Dennis implies that a responsible entity could have been found to operate the projects as registered managed investment schemes if a more extensive search had been undertaken. But he does not specify what additional steps should have been taken. The obvious problem for any prospective responsible entity is the income of the projects is unlikely to be sufficient to cover management fees, let alone interest on loans and any positive return for investors. In my opinion the clients of Mr Dennis have not provided any foundation, by reference to realistic and practical considerations, for the contention that the attempts to find a responsible entity have been inadequate.
57 The difficulty of finding a responsible entity was identified in the explanatory memorandum for the meeting of investors, which was circulated on about 7 April 2004. According to the evidence, the investors have taken no steps to put forward a responsible entity themselves. The suggestion by Mr Dennis that the investors should have been given the opportunity to consider whether they would play a "collective role" in the management of the projects is too vague to have any persuasive force.
The person to be responsible for winding up the projects
58 The plaintiffs contend that it would be appropriate for the court to appoint the defendant, Huntley Management, as the person responsible for the winding up pursuant to s 601EE(2), although they offer as a less preferred alternative the appointment of Mr Dean-Willcocks, a registered liquidator. Either those appointments would avoid any conflict of interest that the plaintiffs as managers may have, as managers with an interest in recovery of management fees, if they were left to be responsible for the winding up. Additionally, the plaintiffs' own evidence is that they do not have the appropriate expertise to carry out the winding up of the projects.
59 The plaintiffs submit that Huntley Management has the expertise to carry out the winding up of the projects, and is willing to do so. It would bring to the task its existing knowledge and understanding of the projects. Therefore, in the plaintiffs' submission, Huntley Management would be able to finalise the winding up of the projects more quickly and economically than a registered liquidator.
60 On the other hand, Huntley Management is the trustee of the leasehold interests in the land on which the grape vines have been grown. Its duty as trustee is to protect the interests of the beneficiaries, the investors. Its seems to me that this duty might come into conflict with the duty that it would undertake if it were appointed to wind up the projects. For example, one of the immediate issues for Huntley Management will be whether to try to keep the leasehold interests alive. I do not know whether it would have access to sufficient funds to do so, but if that were so, there may be an issue whether it should pay rent in the interests of investors so as to prevent the landowners from terminating the leases, even though that may not be a rational step to take in the winding up of the projects. I am not sure, from the evidence, whether that example identifies a real problem, but it does seem to me that the dual roles that Huntley Management would occupy if it were appointed to wind up the schemes would create the potential for such conflicts on a recurring basis. It would be better to have the winding up carried out by a registered liquidator even if there is some additional cost in doing so.
Conclusions
61 On the basis that the undertakings that I have described have been given, my decision is that the plaintiffs have made out of their case for orders under ss 601EE for the winding up of the managed investment schemes constituted by the three projects. I have decided that the correct course is to appoint Mr Dean-Willcocks, who has consented to act, as the person responsible for the winding up of the projects.
62 Although the two investors who appeared at the hearing did not persuade the court against making orders for the winding up of the projects, they raised some issues of substance, and their intervention may have served to encourage the plaintiffs to give the revised undertakings that were articulated at the hearing. I think the correct course is that their costs should be paid out of any available assets of the three projects, and if there are available assets in more than one project, their costs should be borne equally by the projects with assets.
63 Given the urgency of the case, arising because the operation of the projects became illegal after 30 June, I reviewed the evidence and submissions on the evening of the hearing day, and having satisfied myself as to the appropriate outcome, I made the orders foreshadowed above on the following day, 2 July. These reasons for judgment had been substantially prepared by then, but I decided to take a little more time to complete them, and so I announced on 2 July, with the assent of the parties, that I would publish my reasons for judgment subsequently. I now do so.
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