These reasons determine an application by a receiver and manager for directions that it is justified in not taking steps to sell certain real estate. The Court decides that the receiver is so justified. The proceedings in which this advice is being sought are complex.
On 26 September 2014, Kunc J appointed Mr Jamison Louttit as receiver ("the Receiver") of all the property and undertaking of the three corporate defendants in these proceedings. The orders appointing the Receiver also provided that he may apply to the Court for directions as and when he considered it appropriate to do so. The present motion dated 13 July 2018 is brought pursuant to that leave.
[2]
The Bread Research Institute
The undertaking and operations of the three defendants arose to facilitate research into the quality and production of bread in New South Wales after World War II. Following a Royal Commission, an Institute called the "Bread Research Institute" was established in Sydney to promote research into improving the quality of wheat and the efficiency of milling flour for bread in this State. The Bread Research Institute changed its name to Rosewood Research Pty Limited ("Rosewood"), the first defendant in those proceedings. The other two defendants, Pathway Properties Pty Limited ("Pathway Properties") and Asia-Pacific Technology Pty Limited ("Asia-Pacific Technologies"), subsidiaries of Rosewood, held physical assets and intellectual property of the Bread Research Institute and its successor, Rosewood.
Pathway Properties holds certain real property in northern Sydney ("the subject property") in its capacity as the trustee of the new Horizons Property Trust. The subject property carries infrastructure used for the research operations of Rosewood. The subject property is said to be worth in excess of $62 million and Pathway Properties is a borrower under a $29 million facility. The lender holds security over the subject property and Rosewood and Asia-Pacific Technologies have provided guarantees and other security for these borrowings.
The subject property includes a building leased to 3M Australia Pty Limited ("the 3M Building") and other older improvements including a Pilot Mill ("the Pilot Mill"), a facility which may be used experimentally to simulate the commercial milling of varieties of wheat.
There are three other defendants. These are the fourth to sixth defendants, who are the directors of the first to third defendants (referred to collectively as "the companies"). The fourth to the sixth defendants are referred to collectively in these reasons as "the directors".
The plaintiffs, Grain Technology Australia Ltd, ("Gtech"), Mr Raymond Schwartz ("Mr Schwartz"), Manidra Flour Mills Pty Ltd ("Manidra Flour Mills ") and Bakers Delight Holdings Ltd ("Bakers Delight Holdings") are companies and individuals who have prominent roles in the growing of wheat, the milling of flour and the production of bread in New South Wales, or are otherwise associated with Rosewood.
The origins of these proceedings may be traced back to Rosewood's corporate restructuring. The plaintiffs allege that since the time of its incorporation in 1948, Rosewood and the other defendants held their assets upon an express, or alternatively a constructive, charitable trust. This charitable trust was for the specified purposes of benefiting a section of the public, comprising participants in the grain food industries, being charitable purposes for the advancement of education or other purposes beneficial to the community, including research ("the charitable trust"). Alternatively, it is claimed that the Pilot Mill is held upon an express, or alternatively a constructive charitable trust, for specified purposes of research, training, problem-solving and wheat variety evaluation, being charitable purposes ("the Pilot Mill charitable trust").
The Pilot Mill was originally constructed in the mid-1980's for approximately $2 million. The immediate trigger to these proceedings seems to have been a decision in the early 2000's by three members of Rosewood to convert it from being a company limited by guarantee to a proprietary company. That conversion gave the company a significant tax liability. As a company limited by guarantee, Rosewood had a tax exemption for educational and research purposes. The incurring of this tax liability led parts of the wheat, milling and bread industry, represented by the plaintiffs, to commence these proceedings. The overt purpose of the proceedings is to have a trust declared over Rosewood's assets and for the re-constitution or restructure of the trust, to ensure that these very valuable assets were always used for the original charitable purposes.
The plaintiffs' statement of claim alleges particular acts of misconduct against Rosewood and Pathway Properties, contrary to the alleged charitable trust or contrary to the alleged Pilot Mill charitable trust. Rosewood and Pathway Properties are alleged to have engaged in the planning for, and expenditure of, funds in planning for the demolishment of buildings on the subject property containing the research facility, including the demolishing of the Pilot Mill and related buildings and the institution of the further subdivision of the subject property.
In their first cross-claim, the companies seek declarations that the undertaking of the companies is held on certain charitable trusts and seek the appointment of new trustees of those trusts. The companies also seek orders for the approval of an administrative scheme, which would include authority for the receiver to transfer the trust property to a not-for-profit corporate entity. The objects of the cross-claim are generally consistent with the objects of the charitable trusts claimed by the plaintiffs.
On 24 May 2013, the companies gave undertakings in these proceedings that, upon the plaintiffs' giving the usual undertaking as to damages, the companies would refrain from selling, disposing or diminishing the value of any of their assets. On 16 September 2015, Hallen J authorised the Receiver to "investigate the retention or sale" of the subject property and he released the Receiver from his 24 May 2013 undertaking to the extent necessary to permit the Receiver to act in accordance with that release. Hallen J's authorisation of the Receiver went no further than to "investigate" potential sales of the subject property, not actually to sell the property.
Voluminous evidence was tendered on this application. Much of it was directed to issues that would only be ventilated at a final hearing. This evidence included: the history of the Pilot Mill; the purposes of the claimed Pilot Mill charitable trust; evidence of the current research and industry educational facilities at the subject property; and evidence of the functionality, uniqueness and hypothetical relocation costs of the Pilot Mill. As to the latter, the evidence infers the costs of relocating the existing components of the Pilot Mill to a new building is $6.895 million. The cost of constructing a new Pilot Mill without using any existing components of the Pilot Mill is $8.965 million.
The aim of the plaintiffs' present suit is to preserve these assets, including the Pilot Mill and research facilities for the benefit of the grain food industry, to ensure the original purposes of the Bread Research Institute continue to be realised. The Court did not have to decide on this application any issues of the uniqueness of the Pilot Mill, the history of Rosewood or the Bread Research Institute, or any of the other more specific evidence which is relevant to the establishment of the charitable trust or the Pilot Mill charitable trust. But having some of this material as background was nevertheless useful.
Shortly after the application was called on for hearing, the Court was told that the parties to the main proceedings had resolved their differences in a Deed of Settlement. But a hearing is still required to declare the claimed charitable trusts and for the approval of schemes to fulfil their charitable purposes.
[3]
Consideration of the Receiver's Application for Directions
Uncertainty about the future value of the subject property, and the Receiver's duty in the face of the imminent settlement of the principal proceedings, has brought this application on.
This application comes well within the Court's powers to provide directions to the Receiver not only on matters of law, but also in relation to the propriety or reasonableness of Receiver's contemplated exercise of discretion: Mariconte v Batiste (2000) 48 NSWLR 724; [2000] NSWSC 288. It is often expedient in a receivership for the Receiver to obtain directions from the Court on important issues, such as the sale of property, borrowings, commencing legal proceedings, and the giving up of possession: Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 245, (at [247]); (1992) 10 ACLC 520.
The Receiver seeks directions that it would be justified in not selling the subject property nor taking any steps to dispose of the property. The Receiver does not ask the Court to make a commercial decision. But the Receiver is conscious that he has been appointed to preserve and maintain the value of the subject property. The present evidence suggests that the subject property may decrease in value. Unsolicited offers for its purchase have recently been received.
The commercial position of the subject property may be shortly summarised. The net receipts in respect of the property for the year ending 30 June 2017 were just over $2.6 million, and for the year ending 30 June 2018 just over $3.9 million. The market value of the subject properties increased from $42.3 million in June 2014 to $62.2 million in June 2018. Expert valuation advice suggests that just over 9 years remain on the 3M lease. Once that lease expires, the 3M Building is expected to be highly sought after and is thought likely to attract strong purchaser competition.
But any owner of the subject property will face key risks in the near term. One of these is the potential diminution in value of the property as a result of the reducing lease term. Also, changing economic conditions may result in a softening of capitalisation rates and a resultant reduction in the value of the subject property. The Receiver has also received a number of unsolicited expressions of interest, with respect to the purchase of the property. The highest is in the range $57 million to $62 million. A decision by the Receiver not to sell the subject property, followed by a fall in the market, would draw criticisms of the Receiver.
Balanced against these general factors are a number of considerations unique to the subject property. There is strong evidence that the Pilot Mill is unique. If the property were sold, the Pilot Mill would be likely to be demolished. A demolition would be directly contrary to the purposes of the various charitable trusts claimed in the pleadings. Given the caretaker role of the Receiver to preserve the assets of the charitable trusts pending the resolution of the proceedings, the Receiver presently considers that the sale of the subject property would be inappropriate.
The Receiver seeks the Court's directions.
[4]
Decision
The Court considers that, pending resolution of these charitable trust proceedings, a dominant consideration here is the preservation of the Pilot Mill in its current form. Balanced against the possibility of loss of value by holding the subject property in a falling real estate market is the countervailing risk associated with selling the property, leading to the Pilot Mill being demolished, having the Pilot Mill charitable trust later upheld, and then having to rebuild the Pilot Mill at a cost of potentially more than $8 million. The Court would not readily contemplate the destruction of an asset over which a charitable trust was claimed before its status was determined. Moreover, the evidence used as a basis to infer the existence of the charitable trust and the Pilot Mill charitable trust is well documented.
The Court will give the directions sought that the Receiver would be justified in not taking steps to sell the subject property. The giving of this direction means that the Court will not give the alternative direction as sought, that the Receiver would be justified in taking steps to sell the subject property.
The Receiver's motion contemplated some relief for the companies' undertaking not the sell or dispose or diminish the value of the subject property. Such a release would be particularly necessary if the Receiver was directed that he would be justified in selling the subject property. In view of the directions given, such a release may not be necessary. But for more abundant caution, that release will be included in the orders made.
The plaintiffs consented to these orders. These are charitable trusts proceedings bought under the Charitable Trusts Act 1993. The Attorney General is a party to the proceedings. He also consents to the principal relief sought on the Motion. The Court so will order.
[5]
Costs
There is a difference between the parties in relation to costs. The Attorney General submits much of the plaintiffs' evidence adduced on the Motion can be used at the final hearing and did not need to be adduced on the Motion. Indeed the Attorney General submits that the plaintiffs did not need to appear on the Motion.
In my view, the plaintiffs' appearance on the Motion has been useful to the Court understanding the issues. The plaintiffs' will have their costs of the Motion. But the plaintiffs should not include in those costs any costs of the preparation of evidence which will be deployed at the main hearing. The Court will limit the costs orders in this way.
The Court orders and directs pursuant to Order 4 of the Orders made on 26 September 2014 in these proceedings, the inherent jurisdiction of the Court and/or s 424(1) of the Corporations Act 2001 (Cth) as follows:
1. Direct that the Applicant, in his capacity as Court Appointed Receiver & Manager of all of the property and undertakings of each of the First, Second and Third Defendants, is justified in not taking steps to sell the item of real property being Certificate of Title folio identifier [address not published], North Ryde, in the State of New South Wales ("the Property"), being the whole of property at [address not published], North Ryde which includes the building leased to 3M Australia Pty Ltd (ABN 90 000 100 096) and the old building.
2. An order that the Applicant be released from the undertakings given to the Court by the First, Second and Third Defendants on 24 May 2013 to the extent necessary to permit the Applicant to act in accordance with the directions of the Court contemplated by direction (1).
3. The costs of the Applicant upon his Motion dated 13 July 2018 be paid from the assets of First to Third Defendants on an indemnity basis.
4. The costs of the Plaintiffs upon this Motion shall be paid from the assets of the First to Third Defendants on the ordinary basis, provided that upon any assessment of those costs the Plaintiffs may not recover any costs that relate to evidence that is adduced at the final hearing of these proceedings.
5. Note that the Attorney General will pay his own costs of the Motion.
[6]
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Decision last updated: 30 August 2019