In the matter of PrimeSpace Property Investment Limited (in liq) [2016] NSWSC 1450

Matters raised by IQIT Nominees

In its initial submissions, IQIT Nominees addressed a range of matters relating to the history of the liquidation, some aspects of which may be relevant to the other issues that have been deferred in this application. IQIT Nominees there addressed five concerns as to the wider directions initially sought by the liquidators in respect of the CFG Proceedings.
First, IQIT Nominees submitted that, if the liquidators did not defend the CFG Proceedings, IQIT was likely to be repaid in full in the immediate future and, consequentially, the party that would benefit from the successful defence of the CFG Proceedings is the ordinary unitholder in PSNT, POPF and, through it, PAPF. In supplementary submissions, the liquidators respond that they cannot disregard the interests of PSNT's beneficiary, the ordinary unitholder POPF, in which PAPF holds a 100% interest, in determining whether to conduct examinations (Fraser 4 [73(a)-(b)]); and that the liquidators have, as I noted above, formed the view that the CFG transactions may involve breaches of duty such that it may not be appropriate for the liquidators not to conduct the CFG Proceedings and allow judgment to be entered against PPIL (Fraser 4 [73(c)]).
As I noted above, the liquidators also point out that, even if CFG had not commenced proceedings, the liquidators would not have accepted its proof of debt without undertaking investigations and any refusal of the proof of debt may have resulted in proceedings about the dispute the subject of the CFG Proceedings in any event (Fraser 4 [73(d)]). That matter is, it seems to me, of particular significance, since it suggests that the defence of the CFG Proceedings does not place IQIT in a worse position than it would have been, had CFG lodged a proof of debt and the liquidators performed their duty to investigate the basis of that proof of debt. It is difficult to see that there is any principled basis on which the liquidators should more readily meet CFG's claim, if they are not satisfied that it has a proper basis, because CFG has brought proceedings to assert that claim than they would have been had that claim been advanced by way of proof of debt.
The liquidators also rely on Mr Fraser's evidence that IQIT and other creditors of PSNT would not presently be paid in full, even if the CFG Proceedings were not defended, since all assets of PSNT have not yet been realised (Fraser 4 [73(e)]). As I noted above, Mr Fraser also sets out, in his fourth affidavit, a table of potential outcomes for IQIT and other creditors of PSNT depending on whether the CFG Proceedings are successfully defended (Fraser 4 [74]). Ms Whittaker points out that the likelihood of the relevant outcomes depends upon the legal prospects of a successful defence and that the investigations that the liquidator seeks to undertake will clarify that matter (Fraser 4 [75]).
It seems to me that the first aspect of IQIT Nominee's submission to which I referred in paragraph 29 above is not established by the evidence, since it appears that full repayment will not occur until the assets of PSNT are realised. The second aspect of that submission, that POPF is the only party that benefits from the defence of the CFG Proceedings, is only correct in part. It appears, from the liquidators' modelling of outcomes, that both IQIT and POPF would benefit from the more favourable outcomes for PSNT arising from a successful defence of the CFG Proceedings, to the extent that any shortfall to each of them would be avoided.
I also accept the Plaintiffs' submission that they should, at the least, be cautious in not pursuing a meritorious defence of CFG's claims, to POPF's disadvantage, simply because that may be to the commercial advantage of IQIT. Mr Stack, who appears for IQIT Nominees, drew attention to the decision in Wells v Wily [2004] NSWSC 607; (2004) 50 ACSR 103 which provides some assistance, at least by way of analogy, in identifying the factors which are relevant to balancing the interests of IQIT as a creditor of PSNT and POPF as a unitholder in PSNT in the relevant circumstances. Austin J there referred (at [28]) to the observations of Needham J in Re Crest Realty Pty Ltd (in liq) (No 2) [1977] 1 NSWLR 664 at 672; (1977) 2 ACLR 502 that a liquidator is subject to a duty to act "in a responsible way in the administration of the trust in the name of the company". Austin J also there noted (at [33]) that the interests of creditors and the interests of beneficiaries of a trust are to be addressed on the basis that they are not interests at the same level since: "If the trustee has acted properly and within its authority in incurring debts on behalf of the trust, the trustee has a right of indemnity or recoupment and an equitable lien, giving it priority to the interests of the beneficiaries, and the creditors are entitled to be subrogated to those rights."
His Honour also noted (at [34]) that: "Where it appears likely that the trust assets will need to be realised to meet the claims of trust creditors, the principal duties of the liquidator will be to identify the trust creditors, and then to realise the assets and distribute them to trust creditors entitled to receive distributions and thereafter, to the beneficiaries, while in the meantime attending to the administration of the trust so as to preserve the value of the trust assets. There is no more a necessary conflict of duties here than there is in the case of a liquidator of a non-trustee company, who has duties to both creditors and contributories."
It seems to me that those observations properly identify the duties of the liquidator of a trustee company, although it should be recognised that, here, the steps which the liquidators seek to take in respect of CFG may be a necessary step in determining the trust creditors that are in fact entitled to receive distributions and, in particular whether CFG is properly a trust creditor. It also does not seem to me that the fact that trust creditors will rank higher than unitholders has the necessary consequence that the liquidators would be entitled to disregard unitholders' interests in making a relevant decision.
Second, IQIT Nominees advanced a submission that, for practical purposes, IQIT and other creditors of PSNT would have to fund a defence and cross-claim of the CFG Proceedings until they were determined. That issue seems to me to be of lesser weight, so far as the directions that are now sought are limited to the conduct of examinations and the obtaining of Counsel's advice and at a lesser cost than the defence of the proceedings, which can be undertaken promptly, and any question of a defence and cross-claim will be deferred until the outcomes of that examination and advice are known. IQIT Nominees also submits that if its debt is subordinated to the debts of the other creditors of PSNT, as is one possible construction of the relevant documentation, then it will be the only entity funding the liquidators and bearing the costs arising from an unsuccessful defence. While that proposition may well be correct, it seems to me that it is the consequence of the ranking of creditors of PSNT, and is a situation that could commonly arise in respect of a liquidation where there are different ranking creditors. It does not seem to me that the Court should accept any general proposition that a liquidator must not pursue examinations or obtain Counsel's advice or conduct proceedings in respect of a meritorious claim, where the advantage of doing so would flow to both higher ranking and lower ranking creditors, or indeed to contributories, but the costs of doing so would (by reason of the priorities in the liquidation) potentially be borne by lower ranking creditors if those proceedings are unsuccessful.
Third, IQIT Nominees noted that the evidence led before the Court did not address the liquidators' remuneration and legal costs in respect of the defence of the CFG Proceedings. That question can be deferred, where the directions that are now sought do not extend to the conduct of the CFG Proceedings generally, but only to examinations and obtaining Counsel's advice. I have referred above to the liquidators' reduced estimate of the costs and disbursements likely to be incurred in respect of those matters, and there is no reason to think that the liquidators' remuneration in respect of those matters will be material to the outcome of the liquidation.
Fourth, IQIT Nominees submitted that a defence of the CFG Proceedings was likely to significantly delay the distribution of funds from PSNT to IQIT and its other creditors. That submission appears to raise essentially the same issue as IQIT Nominee's first submission, which I have now addressed in paragraph 32 above.
Fifth, IQIT Nominees submits, although recognising that this is a matter that is "perhaps of lesser significance", that the liquidators do not explain why liquidators' examinations were not carried out earlier. IQIT Nominees submits that the liquidators have been made aware of allegations in respect of the CFG transaction since April 2015 and have been investigating that transaction since at least May 2015. IQIT Nominees also points to the fact that interest has accrued on the CFG advances, as to which PSNT is sought to be made liable, at a very high rate of interest over the relevant period. It appears that CFG contends that interest on its claim against PSNT accrues at a default interest rate of 30% per annum, compounding monthly, from the date of default. That contention plainly increases the risk to PSNT, and indirectly to IQIT, of a delay associated with an unsuccessful defence of the CFG proceedings. On the other hand, that contention might be thought to improve PPIL's prospects of a successful defence of the proceedings, in its capacity as trustee of PSNT, since it is plainly relevant to the question whether entry into the relevant transactions could properly have been in, or understood to be in, PSNT's interest. I do not neglect the Plaintiffs' submissions, and Mr Fraser's evidence, that there were negotiations between CFG between August and December 2015. While IQIT Nominees criticises the lack of detail in that evidence, it seems to me that this matter is of tangential relevance, where such negotiations did not bring about a successful resolution of the matters in dispute.
Mr Fraser's evidence is that the liquidators could not feasibility have proceeded with public examinations prior to making this application (Fraser 4 [85]-[91]). That is not a complete answer to the possibility that this application could have been made at an earlier point, although, in fairness, it should be recognised that the liquidators also seem to have been dealing with complex issues in respect of the entitlements of parties to the trusts at earlier stages. It does not seem to me that it is necessary to determine this question. It seems to me that the question whether the directions now sought should be made is to be determined having regard to the position that now exists, and any examinations can be conducted promptly for the reasons that I note below.
IQIT Nominees also submits that the CFG Proceedings are already on foot and the reality is that it is unlikely that the proposed examinations could be conducted in this Court or the Federal Court of Australia before early 2017 (Powderly 2 [14]). There is evidence that dates may be available in the near future before a Registrar in the Supreme Court of the Australian Capital Territory, even if dates before a Registrar may not presently be available in this Court or in the Federal Court until early 2017. It seems to me that there are also other steps that the Court may take, if it is necessary to do so, such that examinations can be conducted in November or December 2016.
In summary, IQIT Nominees identifies several issues arising from its submissions, the first being whether POPF should be solely responsible for funding the liquidators' actions in the CFG Proceedings. No submission was put to support that result and it seems to me that the funding of the liquidators' actions, if properly undertaken, is properly undertaken by recourse to the assets of the relevant trust, PSNT, with the ultimate economic impact of that funding to be left to be determined in accordance with the relevant trust documents. IQIT Nominees identified a second issue whether the Court's advice should be limited, at this point, to the conduct of the examinations and the obtaining of advice. That is the only advice now sought by the liquidators. Third, IQIT Nominees identified an issue whether the liquidators should be required to make an immediate interim distribution to creditors and IQIT, other than CFG, pending the determination of the CFG Proceedings. That proposition was not pressed in oral submissions by Mr Stack on behalf of IQIT Nominees and I need not further address it.
IQIT Nominees also questions the utility of examinations, noting that two of the four persons identified for examination, being two directors of PPIL, Mr and Mrs McDonald, have responded to a request for information issued by the liquidators and indicated their willingness to provide further information (Fraser Ex SF4, pp 110-111). I am not persuaded that an offer by the directors of PPIL to provide such information, presumably by correspondence, is such as to displace the utility of the production of documents by compulsory process or the conduct of examinations on oath or affirmation. IQIT Nominees also submits that it might be thought that the two other persons who are to be examined, being two directors of CFG, Mr and Mrs Bird, are unlikely to provide any useful evidence. I would not myself be so pessimistic. First, the Court can have regard to the fact that the examinations will be undertaken under oath or affirmation and should not infer that witnesses examined in that situation will not be frank and truthful. Second, even if one had less confidence in the value of the oath, the questions that are likely to arise in these particular examinations may well encourage relevant witnesses to acknowledge that they recognised matters that may be apparent to any reasonable person, lest they face significant risks as to their credit in the ongoing proceedings.
In supplementary submissions, IQIT Nominees indicated that it was exploring whether the liquidators may have failed in duties owed by them to PSNT and those entitled to PSNT's assets, implicitly by delay in conducting the relevant examinations or challenging CFG's position, and invited the Court: "to ensure that the rights of PSNT (and those entitled to its assets) as against the Liquidators in respect of their conduct as liquidators of PPIL, are not prejudiced by any direction or order made by the Court." It is by no means apparent to me that the form of direction that is sought would prejudice any such right of PSNT or those entitled to its assets. IQIT Nominees identified no such prejudice and also formulated no particular qualification to the directions sought that it suggested should be made to address such prejudice, if it might otherwise arise. Where IQIT Nominees has not itself identified any such qualification or afforded the liquidators the opportunity to respond to it, it does not seem to me that the Court should seek to do so.

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