Re Primary Securities Ltd [2016] VSC 536 (9 September 2016)

2 Pursuant to orders made by Elliott J of 29 July 2016, Primary provided written notice to scheme members of the making of this application. Although I was informed that a number of scheme members were present in Court, only Moss Willis Capital Pty Ltd (Moss) sought to oppose the application. It was granted leave to appear and provided two affidavits in support by Mr William James Moss of 25 August 2016 and Ms Vicki Elizabeth Bell of 25 August 2016.

3 The parties also provided further affidavits following the oral hearing.[1]

4 The plaintiff seeks orders pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 which provides as follows:

54.02 Relief without general administration

(1) A proceeding may be brought for any relief which could be granted in an administration proceeding and a claim need not be made for the administration or execution under the direction of the Court of the estate or trust in respect of which the relief is sought.

(2) Without limiting paragraph (1), a proceeding may be brought for -

(a) the determination of any question which could be determined in an administration proceeding, including any question -

(i) arising in the administration of an estate or in the execution of a trust;

(ii) as to the composition of any class of persons having a claim against an estate or a beneficial interest in an estate or in property subject to a trust; or

(iii) as to the rights or interests of a person claiming to be a creditor of an estate or to be entitled under the will or on the intestacy of a deceased person or to be beneficially entitled under a trust;

(b) an order directing an executor, administrator or trustee to -

(i) furnish and, if necessary, verify accounts;

(ii) pay funds of the estate or trust into court; or

(iii) do or abstain from doing any act;

(c) an order -

(i) approving any sale, purchase, compromise or other transaction by an executor, administrator or trustee; or

(ii) directing any act to be done in the administration of an estate or in the execution of a trust which the Court could order to be done if the estate or trust were being administered or executed under the direction of the Court.

5 The rule provides the only statutory basis in Victoria for the trustee of a trust to seek the advice and direction of a Court.[2] The applicable legal principles have been identified by the High Court in the decision of Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand.[3] In Re Centro Retail Australia Limited,[4] Almond J helpfully summarised some of the general points from that decision including that:

...there is no implied limitation on the power to give advice; that there are no implied limitations on discretionary factors; that the procedure is summary in character; and that the advice is private because its function is to give personal protection to the trustee and operates as an exception to the court's ordinary function of deciding disputes between litigants.

6 Counsel for Moss also emphasised that this application is to be determined in the context of a managed investment scheme wherein Primary must comply with the obligations set out under s 601FC(1) of the Corporations Act 2001 (Cth) including that it must act "in the best interests of the members" under s 601FC(1)(c).[5]

7 Since 24 September 2015 Primary has been the Responsible Entity of the Scheme which comprises 125 scheme villas situated at The Ramada Resort Phillip Island. The original Responsible Entity of the scheme was Wyndham Vacation Resorts South Pacific Limited which was part of the Wyndham group of companies.

8 The relevant proceeding arises in circumstances where, following service of a series of default notices, Primary served notice terminating the appointment of the Manager, Resort Management by Wyndham Pty Ltd (RMbW) (another Wyndham entity) on 30 June 2016. RMbW subsequently issued the relevant proceeding against Primary and also Primary Managers (the proposed new manager) seeking to challenge the validity of the termination notice.

9 Primary now wishes to defend the proceeding and seeks judicial advice that it is justified in so doing. Primary Managers does not intend to actively participate in such defence.

Whether orders should be made that Primary is justified in defending the proceeding

10 In the Macedonian Orthodox Community decision, the High Court stated that obtaining judicial advice resolves doubt about whether it is "proper" for a trustee to incur the costs and expenses of prosecuting or defending litigation.[6] In the Victorian Court of Appeal decision in Morris v Smoel the Court also emphasised the importance of 'propriety', stating that it is no part of the Court's function to pass judgment on whether what the trustees propose to do is wise or unwise. Rather, the question for the Court is whether there is power in the trustee to do what is proposed and - assuming there is power - whether it is "improper" to exercise the power which it possesses. [7]

11 The essence of the objection by Moss was that the trustee had not acted in the best interests of the members in serving the termination notice which is the subject matter of the relevant proceeding. It was therefore not in the best interests of the members to defend that proceeding.

12 There were a range of complaints made about the circumstances giving rise to the issue of the termination notice which included that:

• Primary acted inappropriately in establishing and consulting a Panel of a "sub-set" of Villa Owners in deciding to terminate (which consisted of persons who had served on an interim panel prior to Primary's appointment);

• the issue of the notice of termination was precipitous; and

• there was a lack of transparency in the appointment process for the new proposed manager and it had not been demonstrated that the issues arising in relation to the management of the Resort were best addressed by replacing the Manager.

13 The Responsible Entity is ultimately responsible for the making of the decision to terminate. However, given the large numbers of Scheme members, the formation of some "panel" or "committee" of representative members is appropriate. There also appears to have been no impropriety in the appointment of the Panel, nor in undertakings previously given by Primary to the interim panel to "consult with" and "work closely with" the Panel (when formed).

14 Insofar as the complaint was that other members of the Scheme were not invited to participate, the second affidavit of Mr Garton-Smith annexes an explanatory memorandum mailed to all members (including Moss) on 24 August 2015. This includes a statement that Primary would be pleased to talk to any villa owners who "wish to be involved and believe that they are able to make a contribution to such a committee." He also orally invited scheme members to contact him if they were interested in joining the Panel at a meeting (at which Primary was voted in as Responsible Entity) on 24 September 2015.

15 In relation to Moss specifically, there was some conflicting evidence. Thus, in his second affidavit Mr Garton-Smith states that during a telephone call with a Ms Ossovani (a Moss representative) on 22 September 2015 he said he was prepared to consult with Moss who would have to sign a committee member agreement (which he said he would send). He then annexes an email dated 22 September 2015 which attaches the relevant agreement and states that "[a]s discussed, if appointed, we see ourselves as representing Villa Owners and we would want to engage with Moss Capital, report to you and obtain feedback as we investigate and take steps." Ms Ossovani however has sworn an affidavit of 1 September 2016 in which she says that at no time in the oral conversation was she told that Moss was invited to form part of the Panel. She admits receipt of the email of 22 September 2015, but says that, given her treatment at the meeting on 24 September 2015, "it was very clear to me that any attempt by Moss to join the Panel would be absolutely futile and I completely disregarded the email."

16 There was also a further meeting between Mr Garton-Smith and another Moss representative, Mr Bishop, on 19 May 2016. According to Mr Garton-Smith, Mr Bishop said he wanted to be on the Panel. Mr Garton-Smith responded that he would ask the Panel and requested a letter confirming that Moss had no financial links with the Wyndham group. He subsequently followed up with an email of 20 May 2016 asking for a letter that Moss had no commercial links with Wyndham other than the holding of 20 villas. He received no response. Mr Bishop has also sworn an affidavit of 1 September 2016 wherein he provides a different account of the meeting. In particular, he alleges that when he asked if he could join the Panel Mr Garton-Smith replied that Moss could have a direct link to Primary but not via the Panel. He also states that he did not respond to the email of 20 May 2016 as he did not believe it contained an appropriate request.

17 It is not appropriate to resolve disputes as to oral conversations in this (summary) application. However, the objective evidence suggests that Moss was invited to make a contribution by way of the explanatory memorandum of 24 August 2015 as well as in the email of 22 September 2015. I also do not consider that it was "inappropriate" for Primary to make inquiries as to commercial links with Wyndham in considering the constitution of the Panel in May 2016. At that time, default notices had been served on a Wyndham entity and a decision was to be made about whether to serve a termination notice.

18 The evidence of Mr Garton-Smith was also that the Panel was constituted by various Scheme members who represented 15 Scheme villas and had the support of a further 30 Scheme members. He also states that a further 24 Scheme Members had provided written statements in support of the termination. As indicated already, it was also only Moss which appeared to oppose the orders sought in this application. Indeed, notwithstanding that Moss invited expressions of concern from various members it only appeared to receive one email in support of its position.[8]

19 I am therefore not satisfied that Primary "has not shown itself to be acting in the interests of the members as a whole" in relation to the appointment of the Panel as alleged by Moss.

20 The circumstances surrounding the issue and validity of the notice itself are for another day. However, the evidence before me does not suggest that the decision to terminate was "precipitous". Rather, Primary waited for some 6 months until it commenced issue of the default notices. The Manager was then given a further 90 days for rectification.

21 In relation to the appointment of the new Manager, the evidence of Mr Garton-Smith was that he sent a circular to all members of the Scheme about the proposed use of Primary Managers as a vehicle to enable members to take control. Although he is currently the sole director of Primary Managers, it has been proposed that the Panel members will replace him (as director) and that each member will be given a beneficial right to a share in Primary Managers for each Villa held. Thus, Primary Managers will be controlled by members of the Scheme, who will be in a position to control for themselves issues arising in relation to the management of the Resort.

22 Returning then to the issue before me, I am satisfied that it is proper for Primary to defend the relevant proceeding.

23 First, Mr Garton-Smith's unchallenged evidence was that the decision to issue the termination notice was based on evidence which included his personal observations, his consultation with the Panel, photographs as to the state of the site, and the ongoing dissatisfaction of Members with RMbW's performance. Further, that he considered that Primary acted in the best interests of the members of the Scheme in issuing the notice. None of the matters raised by Moss suggest that this evidence should be rejected.

24 Second, I have also read and carefully considered the confidential advice provided. Based on that advice, it appears that it is proper for the trustee to defend this proceeding.

25 Finally, I also accept the submission of Primary that this is not an "internal trust dispute" among beneficiaries but rather a claim brought by an outsider against the trustee. In such circumstances, the proceeding will probably go undefended if Primary does not so defend it, which is highly undesirable.[9] That is, Primary is the proper contradictor.

Whether it is proper to have recourse to the Scheme property to pay costs of defending the relevant proceeding

26 In the decision in Re Frosthollow Pty Ltd,[10] McDonald J states that it will depend on what is in the best interests of the trust as to whether it is appropriate for the trustee to have access to the trust funds to defend a proceeding.

27 In opposing the making of such an order, Moss submitted that such a direction would be inconsistent with the wishes of the members given they did not approve a $75,000 fee when Primary was first appointed. It also highlighted that the decision to terminate was undertaken at the behest of the Panel (rather than all members). It further cited the unlimited nature of the order sought and invited the Court to limit the scope of any order citing two decisions in New South Wales in support: Re Perpetual Investment Management Ltd[11] and Re AMP Capital Investors Ltd.[12]

28 The fact that the members did not approve a $75,000 in 2015 does not shed light on whether it is now proper to fund the defence of the relevant proceeding. I have also already considered that the appointment of the Panel was proper.

29 In terms of whether an order should be limited, the decision in Perpetual appeared to turn on qualifications expressed in the particular opinion (which are not applicable here). In AMP, Slattery J also determined that it was appropriate to await the filing of evidence to be in a better position to assess the merits. However, having regard to the nature of the issues in the relevant proceeding I see no utility in the "staging" of orders which will also involve further interlocutory costs.

30 Pursuant to the Constitution, the Responsible Entity is given rights to have recourse to Scheme property to fund its costs of defending the relevant proceeding. Pursuant to clause 37.5 of the Constitution, the Responsible Entity is entitled to be indemnified out of the Assets for any liability incurred by it in properly performing or exercising any of its powers or duties in relation to the Scheme. Pursuant to clause 39.3(v) of the Constitution the Responsible Entity is also entitled to be paid or reimbursed out of the Scheme insofar as expenses are properly incurred in connection with any court proceeding.[13]

31 It appears that the Scheme will be able to meet the costs of defending the relevant proceeding based on the confidential costs estimate. There is also evidence of a substantial long term savings in the affidavit of Mr Garton-Smith who states that the net benefit to the Scheme would be in the region of $200,000 to $400,000 given the savings in fees currently payable to RMbW.

32 I am therefore satisfied that it is in the best interests of the trust that Primary may have recourse to the Scheme to pay the costs of defending the relevant proceeding.

33 Moss otherwise sought no order for its own costs of this application.

1. It is proper for Primary Securities Ltd (in its capacity as Responsible Entity of the Phillip Island Resort Scheme) to:

a. defend proceeding number S ECI 2016 01155 brought against it by Resort Management by Wyndham Pty Ltd in this Court (the relevant proceeding); and

b. fund the costs of its defence of the relevant proceeding from the Scheme property.

2. Primary's costs of this application be paid from the Scheme property.

3. Moss Willis Capital Pty Ltd bear its own costs of this application.

4. The confidential opinion and costs estimate contained in exhibits RGS-25 and RGS-24 to the affidavit of Robert Garton-Smith of 15 August 2016 be placed in a sealed envelope marked "Confidential" which is not to be opened without an order of this Court.

[1] Primary provided the further affidavit of Mr Robert Garton-Smith of 29 August 2016 and Moss provided affidavits of Ms Marianne Ossovani of 1 September 2016 and Mr Robert Charles Bishop of 1 September 2016.

[2] Morris v Smoel [2013] VSCA 11 at [21].

[3] [2008] HCA 42; (2008) 237 CLR 66 (Macedonian Orthodox Community).

[5] And see clause 31.12 of the Constitution of the Scheme (Constitution).

[6] [2008] HCA 42; (2008) 237 CLR 66 at [71].

[7] [2013] VSCA 11 at [25].

[8] See WM-19 to affidavit of William James Moss of 25 August 2016.

[9] Re IPR Nominees Pty Ltd [2015] VSC 395 at [4].

[10] [2015] VSC 512 at [11].

[11] [2014] NSWSC 784 (Perpetual).

[12] [2010] NSWSC 1259 (AMP).

[13] Which is also confirmed by clause 39.14 of the Constitution.