Partridge v Equity Trustees Executors and Agency Company Ltd

ORDERS NSD 2191 of 2018 IN THE MATTER OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) BETWEEN: MORGAN JOHN KELLY AND PHILIP ALEXANDER QUINLAN AS JOINT AND SEVERAL LIQUIDATORS OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) First and Second Plaintiffs

HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) Third Plaintiff

AND: CHOO BOON LOO

ELYSIYUM BUSINESS SYSTEMS PTY LTD (ACN 110 669 282)

JUDGE: GLEESON J DATE OF ORDER: 3 March 2020

1. The liquidators' application on 18 February 2020 for a direction pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) or judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) be refused.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GLEESON J: 1 The first and second plaintiffs (liquidators) seek a direction pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) and/or s 63 of the Trustee Act 1925 (NSW) to the effect that they would be justified in refraining, up to and including 3 April 2020, from closing out all extant investments of investors in the third plaintiff. 2 The liquidators sought similar relief in relation to Halifax New Zealand Limited (in liquidation) (Halifax NZ) in the High Court of New Zealand, pursuant to s 284 of the Companies Act 1993 (NZ). 3 The application was supported by an affidavit of the first plaintiff (Mr Kelly).

Background to application 4 On 25 January and 22 August 2019, I made orders to the effect that the liquidators were and would continue to be justified in paying trading expenses, principally in connection with the operation of trading platforms through which Halifax AU conducted its business. 5 In each case, orders were made for any person affected by the order to apply for relief in connection with the order, and for the notification of the orders to Halifax AU's creditors. 6 In the meantime, by interlocutory process filed 3 July 2019, the liquidators sought relief that included the following: 7. A direction, and judicial advice, as to whether the Liquidators and Halifax Australia are entitled to proceed in the following way and, if so, when: (a) Selling, or directing the sale of, or closing out, or directing the closing out of, open investments held through IB Australia; (b) Closing out, or directing the closing out of, open positions held through the MT4 and MT5 investment platforms; (c) Realising the investments held through IB Australia or through the MT4 and MT5 investment platforms in some other way and if so in which way; (d) Realising investments made by Halifax Australia which were made by way of hedging the position of investor clients' investments through the MT 4 and MT5 investment platforms. 7 On about 15 November 2019, the liquidators distributed a notice to investors seeking their views on several matters. Relevantly, the notice invited investors to put forward their views in relation to the closing out of positions. Specifically, the notice stated: Part 4: Issues on which Investor responses are invited Investors are now invited to respond in relation to the following issues. Each of these issues will be addressed in further detail in this section. In particular, investors are invited: … • To notify the Liquidators if they wish to be heard in respect of the application for directions and/or judicial advice in respect of selling, directing the sale of, closing out, or directing the closing out of open investments, open positions, and realising investments through various platforms. The Liquidators consider this to be a relatively urgent matter, and anticipate that this issue would be heard at the first joint sitting if that is an approach the Courts are prepared to accommodate. … Closing out The Liquidators have sought directions and/or judicial advice in each of the Australian Application and the NZ Application that they would be justified in selling, directing the sale of, closing out, or directing the closing out of open investments, open positions, and realising investments through various platforms. Retaining open investments and positions requires the maintenance of investment trading platforms, which incurs a significant ongoing cost, as well as some risk particularly given the foreign ownership of the platforms and resulting limited control which the Liquidators have over their continuation. If open positions and investments are closed, the Liquidators may be able to reduce or even eliminate those ongoing costs and risk. The Liquidators consider this to be relatively urgent, and a matter which ought to be dealt with at the first joint or coordinated hearing of the Australian Court and the NZ Court, assuming the Courts take that approach. … INVESTOR QUESTIONNAIRE - ANNEXURE C Closing out of investor positions … Any investor who wishes to seek to be heard on the closing out of investor positions as explained in Part 4 of the Notice should notify the Liquidators by completing this form and returning it to the Liquidators by 4pm NZDT / 2pm AEDT on [DATE TO BE INSERTED] by sending it to the Liquidators by email to: AU-FMhalifax@kpma.com.au. Investors who wish to be heard on the issue of closing out investor positions may do so by seeking to be heard at a hearing of the NZ Court or the Australian Court, or in writing. Any investor who wishes to be heard should indicate their intention in response to the questions in section 1. below. Any investor who wishes to summarise their objection in writing may do so by completing section 2. below. Those investors should also complete section 1. below. The Liquidators will request that the issue of closing out of investor positions will be determined at an early joint or coordinated sitting of the NZ Court and the Australian Court if the Courts agreed to take a joint or coordinated approach. All investors will be notified of the date of the relevant hearing. The Liquidators will draw any submissions about closing out of investor positions, which are included by investors in this form, to the attention of the relevant Court at the relevant hearing, whether or not the investor seeks to be heard at the hearing. 8 The liquidators received 68 responses concerning this issue. Of these: (1) forty-nine (72%) stated that they did not want investor positions to be closed out; (2) eleven responded without propounding a clear position; and (3) eight supported closing out. 9 A document entitled Update on Liquidators' Investigations (Issues Paper) (annexed to the affidavit of Morgan John Kelly dated 17 February 2020) summarises the reasons given by investors for and against the closing out of all investors' open positions. 10 The principal reason put forward against closing out is that it would immediately liquidate open positions which investors have chosen to leave open for a variety of reasons. The possible additional costs of closing out include: (1) Divestment (for example, brokerage and commission)/ reinvestment (if the investor wished to re-acquire the same investment) costs. (2) Capital gains tax and other taxation obligations. (3) Costs associated with currency conversion. 11 Other arguments against closing out are: (1) Closure of positions may disrupt investors' investment strategy or result in a loss of an income stream (i.e. through dividends). (2) The amount of the deficiency is not sufficiently large (based on the liquidators' current estimate being approximately 9% of investor positions as at 23 November 2018) to make it reasonable to realise all positions for the purpose of distributing the funds. There may be alternatives available, in particular, through an in specie distribution, with Investors making up the deficiency attributable to the particular investment. (3) Some investors view their account as traceable and do not wish to have those traceable positions closed out. 12 Reasons given in favour of closing out include: (1) Continuing exposure to market movements could result in a significant decrease in the value of the mixed fund. (2) Closure would result in a more timely resolution of the liquidation and a faster distribution to investors. (3) Costs incurred in relation to the maintenance of the platforms would be reduced. 13 Relevantly, the Issues Paper notes: (1) As at 31 January 2020, there were 23,949 open positions across the trading platforms with 2,207 investors holding those open positions. The notional value of the open positions was AUD$160,178,071.70. (2) Retaining open investments and positions requires the maintenance of investment trading platforms, which incurs significant ongoing costs. The estimated weekly operating costs before close out are $44,970, in contrast to $18,440 after close out. Further cost reductions may be possible if positions are closed out and after all required data is extracted from the platforms. (3) Further, retaining open positions has some additional risk particularly given: (a) the foreign ownership of the platforms which means the liquidators may have limited control over their continuation or over access by the liquidators and investors to the platforms; (b) movements in global markets may have a negative impact on the value of investments; and (c) any insolvency risk that may be associated with the third party platform owners. (4) By not closing out, and assuming the extensive commingling contended for by the liquidators, individual investors' investment decisions impact on the potential pool of funds available to all or most investors. 14 The Issues Paper states that the liquidators had previously considered that the question of whether investor positions should be closed out may warrant expedition and determination prior to the substantive hearing in relation to the distribution of client moneys. The impetus for early determination is said to have been concerns raised by investors and by the Court as to the costs and risks associated with keeping investor positions open. 15 Having reviewed the responses to the investor notices, the liquidators now consider that an early determination of this issue may be undesirable for the following reasons: (1) The vast majority of investors who responded on this issue were against closing out. The issues raised by these investors are significant and need to be considered in detail and addressed before any closing out. Some of those issues, for example the tax consequences for investors, are very complex with potentially significant consequences for investors. (2) Determination of whether or not to close out and, if so, on what basis, gives rise to a number of issues raised by the orders sought by the liquidators in the proceeding including: (a) whether or not pooling is appropriate or necessary; (b) if pooling is appropriate or necessary, should it be of some or all of the funds; (c) whether any investments are traceable, and, if so, which ones; (d) whether an in specie distribution is appropriate, and, if so, on what terms. (3) Even if investor positions were closed out, investment platforms would need to remain open at least until all positions were closed out and all necessary data extracted from the platforms, which the liquidators anticipate would take a matter of months. There are also benefits from not terminating platforms, including allowing investors to log on and obtain their own information, and retaining metadata in respect of trading history which may be significant in an adjudication of investor claims.

Section 90-15 16 By s 90-15(1), the Court may make such orders as it thinks fit in relation to the external administration of a company. Section 90-15(3) provides that, without limiting s 90-15(1), such orders may include an order determining any question arising in the external administration of the company. 17 Section 90-15 is the successor provision to s 479(3) of the Corporations Act 2001 (Cth) (Act). The Court's power to give a direction under s 90-15 is the same as, or is likely wider than, its powers under former s 479(3) of the Act: Re Plutus Payroll Australia Pty Ltd (In Liq) [2019] NSWSC 1171 (at [4]). 18 In Warner (liquidator), in the matter of Sakr Bros Pty Ltd (in liq) [2019] FCA 547 (at [18]), Griffiths J adopted the following summary of the relevant principles in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9]: [7] I summarised the scope of the Court's power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows: Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: The liquidation of the Company is an "ongoing external administration": s 1551, Corporations Act and reg 10.25.02 (2), Corporations Regulations. Div 90, IPS applies to ongoing external administrations: s 1615, Corporations Act. … The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: … [8] I also referred to the scope of the Court's powers under s 511 of the Corporations Act in that decision and observed (at [8]) that: Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be 'just and beneficial' to give the relevant direction. The court may give such a direction where it will be 'of advantage in the liquidation': …. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty … [9] I also recognise that the Court's powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator's functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so: … (Citations omitted) 19 In Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [65], Goldberg J stated: … [T]he prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment. 20 In Re One. Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [35], Brereton J said: … In short, the court should not make a direction the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment that the liquidator is concerned may prove contentious, unless satisfied that the liquidator's decision is, in all the circumstances, a proper one. 21 The liquidators accepted that it would be inappropriate to make an order if the decision to refrain from closing out is properly characterised as a pure commercial decision for the liquidators. They submit that the decision is not purely commercial, because it raises significant legal issues including issues about taxation law and the extent to which closing out would affect other decisions about the ultimate distribution of the funds held by Halifax AU and Halifax NZ. 22 Inactivity may constitute a breach of trust: see Young v Thomson (2017) 253 FCR 191 at [117]; Partridge v Equity Trustees Executors and Agency Company Ltd (1947) 75 CLR 149 at [164]. Thus, a court may give a direction that a liquidator would be justified in refraining from taking action: see, for example, Re Kerr [2019] FCA 1614; 139 ACSR 192 at [70].

Consideration 23 The likelihood of a decision on closing out the investor positions being contentious is not new. It explains why the liquidators sought directions from the Court on the question in their July 2019 interlocutory process. It also explains why the liquidators sought and obtained views from investors on the subject. 24 The liquidators have been content to proceed on the basis that they have applied for directions on the question of closing out and did not require protection for refraining from closing out until that application is determined. Now they are concerned that they may face criticism for refraining from closing out. 25 However, on the available evidence, I am not satisfied that there is any particular legal issue raised for consideration or attack on the propriety or reasonableness of the liquidators' refraining from closing out prior to 3 April 2020. 26 There is no evidence that any investor has questioned the propriety or reasonableness of the liquidators' failure to close out, or of the prospect that the liquidators might not close out before 3 April 2020. There is no evidence that the liquidators have been criticised for not closing out while the application for judicial advice is yet to be determined. 27 Further, the Court is not in a position to decide whether the liquidators' conduct in refraining from closing out investors' positions is, in all the circumstances, proper. I respectfully agree with the observation of Venning J, at [32] of his Minute/Directions No (8) dated 21 February 2020, that the Court presently lacks sufficient information to provide the advice sought. In particular, the liquidators' duties and powers in connection with the closing out of investors' positions have not been determined by the Court. Nor can the Court decide whether it is advantageous to the liquidation (or to the multiplicity of affected trusts) to refrain from closing out investors' positions on the limited material available. As to the kind of evidence that might be required, in Application by Muhammad Elias Attia [2020] NSWSC 94 at [18], Ward CJ in Eq noted the Court's practice to look for, and where appropriate rely on, a memorandum from counsel that provided careful consideration concerning the decision about which advice is sought.

Conclusion 28 For these reasons, I am not satisfied that the Court should give the direction sought. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.