On 25 October I heard an application for approval of a settlement covering some of the claims in these proceedings. The application was made by Mr Jamieson Louttit ("the Receiver"). Mr Louttit is a receiver and manager appointed by the Court for the purpose of these proceedings (to whom I will refer as "the Receiver") and was supported in his application by the other affected parties. On 7 November, I made orders giving effect to the settlement. At the request of the Receiver, I now publish brief reasons for the orders which I made on that occasion.
The proceedings date back to 2013. The factual background and the procedural history are given in various judgments of the Court, in particular: Re Rosewood Research Pty Limited [2014] NSWSC 449; Re Rosewood Research Pty Ltd (No.2) [2014] NSWSC 1226; and Grain Technology Australia Ltd v Rosewood Research Pty Ltd [2019] NSWSC 1111.
In broad outline, the proceedings concern property owned by the first, second and third defendants, to which I will refer as the "Rosewood companies". That property includes land and buildings in northern Sydney worth more than $60 million (the property is subject to a mortgage, but the equity in it is still worth more than $30 million).
The first defendant was formerly known as the Bread Research Institute of New South Wales. It was established following the Second World War (and after a Royal Commission) for the purpose of promoting research into improving the quality of wheat and the efficiency of flour milling in this State. Initially, it was a company limited by guarantee. The second and third defendants are its subsidiaries. The property of the three companies (which also includes intellectual property associated with research undertaken over the years) derives, in whole or in large part, from the first defendant's status as the vehicle for conducting the research in question.
The issues in the proceedings can be traced back to a restructuring which took place in 2000, although the restructuring does not appear to have been controversial at the outset. The restructuring involved converting the first defendant from a company limited by guarantee to a proprietary company limited by shares. The shares were issued to the fourth, fifth and sixth defendants, who were also the directors of the first defendant.
The proceedings began in 2013. The plaintiffs are a group of individuals and companies involved in the grain industry in New South Wales. There were two main aspects to their claims, as ultimately formulated. First, the plaintiffs claimed that the property of the Rosewood companies did not belong to them beneficially, but was held on charitable trust. The plaintiffs also claimed that the restructuring had prejudiced the tax-exempt status of the companies, and made claims against the directors for losses which would or might result from this. As well as joining the Rosewood companies as the first three defendants and the directors as the fourth to sixth defendants, the plaintiffs joined the Attorney-General as seventh defendant. The proceedings on the plaintiffs' claims against the seven defendants have been referred to in the evidence as the "Main Proceedings".
Mr Louttit was appointed as receiver and manager of the property of the Rosewood companies by order of Kunc J in September 2014. Since then he has been in control of the business of the companies. Initially the fourth defendant, Dr McMaster, who had been the managing director of the Rosewood companies, continued to work for them under the ultimate authority of the Receiver. At a later point Dr McMaster's employment was terminated. This forms part of the dispute which was the subject of the settlement.
Following his appointment, and no doubt on advice, the Receiver decided to accept the plaintiffs' contention that the property of the Rosewood companies is subject to a charitable trust, although there remained some disagreement as to the precise terms of that trust. In May 2015, the Receiver caused the first and second defendants to commence proceedings by way of cross-claim, seeking declarations that the property is held on charitable trust. The cross-claim also sought the appointment of a new trustee to the trust and the settling of a scheme of arrangement to administer the trust assets. The Attorney-General was joined as the cross-defendant.
The Receiver also took up the claims which had been articulated by the plaintiffs against the three director defendants. The Receiver's legal advisers prepared and settled a form of cross-claim (described as the second cross-claim) between Rosewood as cross-claimant and five former directors as cross-defendants (these five included the three existing director defendants and two other former directors; I will refer to them collectively as "the Directors"). The cross-claim was never formally filed but has been treated by all affected parties as part of the dispute. In turn, the formulation of the cross-claim led Dr McMaster to advance his own claim against the first defendant for employment entitlements allegedly arising out of the termination of his employment by the Receiver.
The parties agreed to try to resolve the disputes in the proceedings by mediation. The mediation took place before the Hon Keith Mason QC on four separate days between June 2015 and May 2016. It was successful but the task of formulating the terms of settlement was a very lengthy one. Heads of Agreement were not signed until December 2017, and those Heads of Agreement were expressly declared to be non-binding. The Deed of Settlement and Release, the terms of which were the subject of the application before me, was not finally executed until August 2019.
The Deed of Settlement and Release expressly provides that certain aspects of the settlement agreement are conditional upon the "approval from the Court". Hence this application.
[2]
Applicable principles
The authorities have recognised that where the court appoints a receiver, the court may give directions to the receiver as to how the property in question should be administered: see Mariconte v Batiste (2000) 48 NSWLR 724 at [74]-[75] (Austin J). This power has actually been exercised by the Court at earlier stages of these proceedings: Grain Technology Australia Ltd v Rosewood Research Pty Ltd (Black J, 28 February 2017, unpublished); Grain Technology Australia Ltd v Rosewood Research Pty Ltd [2019] NSWSC 1111 (Slattery J).
The principles governing the exercise of the power have been seen as having some analogy with the principles governing the court's power to give judicial advice concerning the administration of a trust to the trustee: see, for example, Mariconte at [74]. (The power extends to giving judicial advice concerning the administration of a deceased estate to an executor or administrator, but for simplicity I will refer from here onwards only to trustees). It is convenient to say something at this point about that power.
The nature and historical development of the judicial advice procedure were discussed in detail in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. The procedure goes back centuries, but was formerly only available in a case where the court had made an order for "general administration" of the trust; that is, an order under which the court was to administer the trust itself.
This limitation was inconvenient and was overcome by two separate procedural reforms. One was the introduction of a specific statutory power to give judicial advice to a trustee. In this State, the relevant statutory provision is the Trustee Act 1925 (NSW), s 63. The other reform involved the adoption of rules of court which enabled proceedings for the administration of an estate or the execution of a trust ("administration proceedings") to be brought piecemeal, without the need for an order for general administration. In this State, administration proceedings are now governed by the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), Part 54.
The types of orders which can be made in administration proceedings are set out in UCPR, r 54.3. They do not expressly include an order for judicial advice, but do include any order which "could be made in administration proceedings": r 54.3(1). In any event, in the St Petka case the High Court stated that an order in administration proceedings was "another means by which judicial advice could be given" (at 84 [41]) and had been viewed as "functionally equivalent" to s 63 (at 87 [48]). UCPR, r 54.3(4)(a) also expressly provides that:
(4) Proceedings may be brought for -
(a) an order approving any sale, purchase, compromise or other transaction by an executor, administrator or trustee.
One of the features of s 63 is that it expressly provides for the protection of a trustee who acts on advice given by the court. If proper disclosure has been made to the court, the trustee cannot thereafter be sued for breach of duty: s 63(2). There is no equivalent provision in the UCPR, Part 54. But in St Petka, the High Court stated that judicial advice obtained in administration proceedings would also protect a trustee against any later complaint that he or she should have acted differently, and against any personal liability for costs (at 86 [45]).
In Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] 3 All ER 198, the administrator of the estate of the reggae musician Bob Marley had to decide how best to realise the estate's assets, which included musical rights deriving from his compositions and recordings. There were several potential purchasers. The administrator entered into conditional contracts to sell the musical rights to one of them. The Supreme Court of Jamaica granted approval for the sale over the objections of all of the beneficiaries. The Privy Council allowed an appeal and set aside the approval because the Jamaican Court had only asked itself whether the administrator had acted with due diligence, not whether the decision had been shown to be the proper one in the circumstances. Lord Oliver of Aylmerton said (at 201):
A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court. If, however, he seeks the approval of the court to an exercise of his discretion and thus surrenders his discretion to the court, he has always to bear in mind that it is of the highest importance that the court should be put into possession of all the material necessary to enable that discretion to be exercised. … The court ought not to be asked to act upon incomplete information and, if it is so asked, the proper course is either to dismiss the application or to adjourn it until full and proper information is provided.
Whether or not this approach still applies to cases of sales and valuations by trustees, it does not apply to applications for judicial advice concerning the institution and defence of legal proceedings. The practice of the court is to ask whether (in the case of the institution of proceedings by the trustee) the opinion of counsel shows that the claim is "properly arguable" and then to ask whether there are "sufficient prospects of success" to justify the claim. This practice was cited with approval by the High Court in the St Petka case (at 119 [162]).
By parity of reasoning, the question when judicial advice is sought for a settlement is whether settlement on the proposed terms is properly open to the trustee. The trustee does not "surrender his discretion" to the court nor does the court seek to determine whether settlement on the terms proposed is actually the proper decision in the circumstances. If the application succeeds, the court orders that the trustee "would be justified" in entering into the settlement but does not direct or order the trustee to do so. In the usual case where the trustee has obtained a legal opinion in favour of the proposed settlement, all the court decides is whether it is reasonable for the trustee to act on that opinion: see Re Perpetual Trustee Company Limited [2010] NSWSC 1403 at [18] per Ball J. This approach may also be contrasted with that of Debelle J in Re IOOF Australia Trustees Ltd [1999] SASC 461 (cited by Austin J in Mariconte at [74]) who said that all the court considers is whether it is proper for the trustee to consider a compromise, and the terms of the compromise are for the trustee to determine.
Returning to the giving of directions to a court-appointed receiver, in Davis v Gray 83 US 203 (1872) at 217-218 the United States Supreme Court said that such a receiver:
… is appointed upon a principle of justice for the benefit of all concerned. …
He is virtually a representative of the court, and of all the parties in interest in the litigation wherein he is appointed. He is required to take possession of property as directed, because it is deemed more for the interests of justice that he should do so than that the property should be in the possession of either of the parties in the litigation. He is not appointed for the benefit of either of the parties, but of all concerned. Money or property in his hands is in custodiâ legis. He has only such power and authority as are given him by the court, and must not exceed the prescribed limits. The court will not allow him to be sued touching the property in his charge, nor for any malfeasance as to the parties, or others, without its consent; nor will it permit his possession to be disturbed by force, nor violence to be offered to his person while in the discharge of his official duties.
This passage was cited with approval in Glazier Holdings Pty Ltd v Australian Mens Health Pty Ltd (Supreme Court (NSW), Young J, 30 April 1998, unrep) and in turn, as to part, by Austin J in Mariconte at [75]. It supports a double analogy between a receiver seeking directions from the court which appointed him or her, and a trustee seeking judicial advice. In the first place, there is a direct analogy between a receiver who acts for the benefit of all of the parties to the suit until their rights to the property are determined and a trustee who is required to administer trust property in the interest of the beneficiaries. There is a further analogy between the court's ultimate control over a receiver, who is "virtually" an officer of the court, and the control exercised by the court over the actions of the trustee of a trust by means of administration proceedings.
As it happens, both s 63 and UCPR, r 54.3(4)(a) would have been available in the present case. As I have mentioned, it is now accepted that the property of the Rosewood companies is held on charitable trust. The Rosewood companies are thus constructive trustees of the property and it would have been open to the Receiver to seek, on their behalf, judicial advice under s 63 or the approval of the settlement under UCPR, r 54.3(4)(a).
But the Receiver in the present case did not rely upon the Rosewood companies status as trustees. Counsel for the Receiver expressly distanced themselves from that idea. Counsel made it clear that the Receiver had already decided to enter into the compromise and was not asking the Court for advice as to whether he ought to do so. Counsel also expressly stated that the Receiver accepted that approval by the Court would not bar future claims against the Receiver concerning the propriety of the compromise.
Usually the fundamental reason (and it is a legitimate one) for seeking judicial advice is to ensure that the propriety of the trustee's action is finally determined and cannot be reopened in subsequent proceedings. The Receiver's approach therefore left me, initially, with some doubt about what the point of the application was. But the Deed of Settlement requires that there be "an approval by the Court" and the Receiver needs this to effect the settlement. Ultimately, it seemed to me that, given that nobody's interests would be prejudiced, the Court could and should, if satisfied that the settlement is a proper one, give the Receiver (and thus the parties) the approval they seek.
The requirement of "approval from the Court" created a difficulty with the wording of the order sought. As we have seen, the Receiver has entered into the Deed of Settlement, and strictly speaking, cannot seek the Court's advice that he "would be justified" in doing something he has already done. The Court has express power to approve a settlement by a trustee under UCPR Part 54, but no express power to approve a settlement by a receiver.
Ultimately the problem was solved by the parties agreeing that, if I was otherwise satisfied that the settlement was proper, I should give a direction that the Receiver would be justified in entering into a settlement in the form of the Deed of Settlement, but excluding any condition of the Court's approval. The parties also agreed that a direction in this form would constitute "approval by the Court" for the purposes of the Deed of Settlement.
[3]
Terms of settlement
Critical elements of the Deed of Settlement can be summarised as follows. First, the claims made by the plaintiffs in the Statement of Claim are to be resolved. All parties acknowledge that the property of the Rosewood companies is held on charitable trust and an application will be made to have the Court settle the terms of a scheme of arrangement for the future operation of the trust. The plaintiffs will no longer pursue their claim against the Directors; instead, the Rosewood companies will pursue their own cross-claim in the interests of the trusts against the Directors (see [9] above). In return, an agreed sum of costs will be paid out of the assets of the Rosewood companies toward the costs of the plaintiffs ($600,000) and the costs of the Attorney-General ($100,000). The second element of the settlement concerns the claims against the Directors. The Directors will pay a sum of money to settle all claims against them. A sum of money will be paid to Dr McMaster to settle his employment related claims.
The result of this settlement, as I understand it, is that the only remaining task for the Court to perform in the proceedings will be to settle the terms of the scheme of arrangement.
The figures for costs for the plaintiffs and the Attorney-General have been the subject of negotiation between those parties and the Receivers, acting on behalf of the Rosewood companies. The costs claimed by the plaintiffs were supported by an affidavit from a costs consultant, who was retained as an expert by the plaintiffs' solicitors, Mr Roland Patrick Matters. The claim by the Attorney-General is supported by a detailed memorandum of costs prepared by the Crown Solicitor's Office. For the purpose of negotiating on costs, the Receivers retained their own costs expert, Mr Ian Ramsay-Stewart.
Counsel for the Receiver submitted that the payment of the plaintiffs' costs out of the assets of the Rosewood companies (and thus of the trust) was justified on two bases. First, the Rosewood companies' cross-claim against the Directors is in large measure based on the claim originally made by the plaintiffs. The work done by the plaintiffs thus saved the Rosewood companies from incurring the costs of formulating these claims themselves. Second, the proceedings are ultimately for the companies' benefit, and the companies would not have initiated them because they were controlled by the Directors. Counsel relied for the second proposition on the authorities which govern the costs of derivative actions in company law: see Wallersteiner v Moir (No 2) [1975] QB 373.
I think these submissions are essentially correct. Had the plaintiffs' claim proceeded to formal determination by the Court, I consider it likely that the Court would have ordered the plaintiffs' costs, or a substantial proportion of them, to be paid out of the assets of the trust. This is because the relief sought by the plaintiffs is relief sought in the interests of the trust. Similarly, I consider that the Attorney-General, who if not a necessary party, is at least an appropriate party to be joined in a charitable trust matter, would likely have received an order for costs in his favour also.
The plaintiffs have incurred costs of more than $600,000. There was some dispute between Mr Matters and Mr Ramsay-Stewart about which part of those costs should properly be recoverable out of the assets of the companies. But while he disagreed with Mr Matters about which costs were recoverable, Mr Ramsay-Stewart accepted that the $600,000 figure is appropriate. He likewise accepted the appropriateness of the $100,000 figure for the Attorney-General's costs. I take the view, therefore, that the quantum of the costs has been determined in what is effectively an adversarial process and should be approved by the Court. I should add that I see no reason to doubt any of the conclusions which have been reached by Mr Ramsay-Stewart.
So far as the settlement of the claim against the Directors (and Dr McMaster's employment claim) are concerned, written advice from counsel for the Rosewood companies has been provided to the Court on a confidential basis. I have read that advice, which canvasses the pleaded claims and the obstacles to success on each of those claims. The analysis is comprehensive and convincing.
I have already set out the principles which apply when the court gives judicial advice to a trustee concerning a settlement. I have also explained why I consider that the giving of directions to a receiver is analogous. The evidence clearly establishes that it was reasonable for the Trustee to act in accordance with the professional advice received concerning the settlement.
[4]
Conclusions and orders
For these reasons, I made the orders on 7 November approving the settlement by giving the directions in the form agreed between the parties.
The orders of the Court were:
Motion - Employment Entitlements Settlement
As to the Motion filed 5 September 2019 (Employment Entitlements Settlement): a direction that the Applicant Receiver and Manager would be justified in entering into a Deed in the same terms as the Employment Entitlements Deed (Exhibit JAL-129 to the 18 October 2019 affidavit of Jamieson Louttit) BUT excluding clauses 3.1(b), 3.2 and 3.3 of that Deed.
(a) Note: The parties agree that the preceding direction constitutes the approval contemplated by clauses 3.1(b), 3.2 and 3.3 of that Deed.
(b) Further Note: The parties further agree that the preceding direction constitutes the approval contemplated by clauses 2.11(b) and 3(a)(iii) of the 16 August 2019 Deed of Settlement and Release (Exhibit JAL-123 to the 9 October 2019 affidavit of Jamieson Louttit).
(c) Note as to justified Deed contents:- The form of the justified Employment Entitlements Deed is Annexure JAL-C to the Confidential 29 October 2019 affidavit of Jamieson Louttit.
Further Motion - Compromise of Second Cross Claim
As to the Further Motion filed 5 September 2019 (Compromise Of Second Cross Claim): a direction that the Applicant Receiver and Manager would be justified in entering into a Deed of Settlement and Release, in the same terms as the 16 August 2019 Deed of Settlement and Release (Exhibit JAL-123 to the 9 October 2019 affidavit of Jamieson Louttit) BUT excluding:
(i) clause 3(a)(i) of that Deed;
(ii) all the words after "satisfactory" in clause 3(a)(iii) of that Deed.
(a) Note: The parties agree that the preceding direction constitutes the approval contemplated by clause 3(a)(i) of that Deed.
(b) Note as to justified Deed contents: The form of the justified Deed of Settlement and Release is Annexure JAL-B to the 29 October 2019 affidavit of Jamieson Louttit.
Additional Motion - Plaintiffs' Costs and Attorney General's Costs
As to the Additional Motion filed 5 September 2019 (Plaintiffs' Costs and Attorney General's Costs): a direction that the Applicant Receiver and Manager would be justified in entering into a Deed of Settlement and Release in the same terms as the 16 August 2019 Deed of Settlement and Release (Exhibit JAL-123 to the 9 October 2019 affidavit of Jamieson Louttit) BUT excluding:
(i) Clauses 2.1(d), 3(a)(i) of that Deed (relating to approval of the Plaintiffs' costs);
(ii) Clause 4.2(b)(ii) of that Deed (relating to approval of the Attorney General's costs);
(iii) Steps 4(a), 4(b) and 5 in Schedule 2 of that Deed.
(a) Note: The parties further agree that the preceding direction constitutes the approval contemplated by clauses 2.1(d) and 4.2(b)(ii) of the 16 August 2019 Deed of Settlement and Release (Exhibit JAL-123 to the 9 October 2019 affidavit of Jamieson Louttit).
(b) Note as to justified Deed contents: The form of the justified Deed of Settlement and Release is Annexure JAL-B to the 29 October 2019 affidavit of Jamieson Louttit.
Further Note as to the Motion, Further Motion and Additional Motion
The parties further note that none of the directions or notes in paragraphs 1 to 3 above derogates from the binding legal effect of the 16 August 2019 Deed of Settlement and Release, and of any party's past or future conduct in fulfilment of it.
Release from Undertakings
An order that the Applicant Receiver and Manager 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 Receiver and Manager to act in accordance with the Orders of the Court contemplated by the preceding directions and agreement of the parties.
The costs of the Applicant Receiver and Manager with respect to the Motion, Further Motion and Additional Motion be paid from the assets and resources of the first to third defendants on an indemnity basis.
[5]
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Decision last updated: 09 December 2019