RE REWARDS PROJECTS LTD (in liq); EX PARTE REWARDS PROJECTS LTD (in liq) [2011] WASC 339 (8 December 2011)

Supreme Court of WA|2011-12-08|Before: Mr J

1 MASTER SANDERSON: This application results from yet another failed managed investment scheme. Rewards Projects Ltd (RPL) is the responsible entity for a substantial number of managed investment schemes. The second plaintiffs are currently the liquidators of RPL and other companies in the Rewards Group. They were previously the voluntary administrators and later the deed administrators of these companies. They sought directions under the Corporations Act 2001 (Cth) and the Trustees Act 1962 (WA). On 24 November, I made the directions sought. I indicated I would publish reasons for doing so. These are those reasons.

2 The application was supported by two affidavits of Martin Bruce Jones, the first sworn 10 October 2011 and the second sworn 23 November 2011. The facts outlined below are taken from those two affidavits and the copious annexures thereto.

3 Some of the schemes managed by RPL were what are described as 'timber schemes'. The purpose of these schemes was to grow teak and sandalwood for the benefit of investors in the timber schemes. Copies of the scheme documents for the Rewards Group Teak Project 2006 are attachments MBJ 2 to MBJ 6, to Mr Jones' first affidavit. They comprise a product disclosure statement, a constitution, a management agreement, a licence agreement and an operations agreement. These documents are in substantially similar form to the equivalent documents for the other timber schemes. Copies of these documents are found on a CD that is annexure MBJ 7 to Mr Jones' first affidavit.

4 The timber schemes operated in the following way. Other than for schemes BWO1, SWO1 and TKO1, RPL leased properties suitable for growing timber. Investors purchased wood lots in the relevant scheme. This entitled each investor to a share of the proceeds of the timber grown on the scheme properties when the timber was harvested and sold. Other than for schemes BWO1, SWO1 and TKO1, investors held a licence of their wood lots pursuant to the terms of the licence agreement. The licence obliged each investor to carry out the timbergrowing pursuits on the wood lots. However, investors also entered into the management agreement, pursuant to which they engaged RPL to carry out the timbergrowing pursuits on their behalf.

5 Investors paid three separate fees. There was an initial application fee. There was a maintenance fee and a harvest fee to be paid out of the investors' share of the harvest proceeds. RPL engaged a related company, Rewards Management Pty Ltd (RMPL) to carry out the timbergrowing pursuits on RPL's behalf. RMPL was paid an initial fee equivalent to that paid by the investor to RPL and the remainder of the maintenance and harvest fees paid by the investors to RPL after deduction of rent payable by RPL to the third party landlords.

6 BWO1 operated slightly differently. RPL owned the land on which the scheme was conducted and therefore there was a direct lease between RPL and the investors, rather than a licence. SWO1 and TKO1 were different again. There was a direct lease from the landowner, RMPL, to the investors. These differences were minor. In all significant respects, these three schemes operated the same way as all of the others.

7 Because of the longterm nature of the timbergrowing pursuits conducted under the timber schemes, RPL undertook to set aside money out of its own funds in a 'Maintenance Fund' to secure its obligations to growers in respect of the initial and ongoing planting and maintenance services. By way of illustration, the Rewards Group Teak Project 2006 product disclosure statement records:

Maintenance

The plantation will be maintained in accordance with the Management Plan to ensure it performs to its potential. Maintenance will include weed and pest control, pruning, culling, nutrient analysis, fertilising, fire control, site maintenance and annual reporting.

[RPL] will retain $480 per Woodlot to secure performance of the ongoing maintenance obligations. This will be released in annual instalments over the first 10 years provided the Independent Forester is satisfied that [RPL] is performing its maintenance obligations. If for any reason, maintenance is not undertaken, [RPL] may use the retained monies to pay another contractor to undertake the work.

8 The constitution of each timber scheme specified how much money per Woodlot RPL was required to contribute to the Maintenance Fund. Those amounts ranged between $175 and $1,000. The money deposited in the Maintenance Fund was intended to be spent by RPL on planting and maintenance activities during approximately the first 10 years of each Timber Scheme. The amounts to be withdrawn each year (with the consent of the Independent Forester) were predetermined.

9 The instrument governing the terms on which the maintenance fund was held is described as the 'Maintenance Fund Deed'. Relevant provisions of that deed are as follows:

The instrument governing the terms on which the Maintenance Fund is held is described as the 'Maintenance Fund Deed': Jones affidavit attachment 'MBJ9' at page 305 ff. Relevant provisions are as follows:

Recital A:

'[RPL] wishes to establish a Maintenance Fund in which it will deposit moneys to secure the performance of its obligations in relation to nominated managed investment schemes.'

Clause 2 - Creation of Maintenance Fund:

'[RPL] intends to maintain a Maintenance Fund to be held in accordance with the terms of this document ... '

Clause 3 - Establishment of Project Fund:

'[RPL] may establish a Project Fund or add to an existing Project Fund by contributing to the Maintenance Fund an amount of money relating to a specific Project. [RPL] must enter into its records the following details:

(a) the name of the Project ...

(b) the amount contributed to the maintenance Fund on behalf of the Project;

(c) whether the contribution relates to some or all of the Woodlots in the Project;

(d) the date the amount was accepted as part of the Project Fund; and

(e) the circumstances in which the [RPL] may withdraw money from the Project Fund.'

Clause 4 - Operation of Project Funds:

'4.1 Project Fund held on Trust for Project Growers

Subject to the terms of this document, [RPL] holds each Project Fund on trust for the growers in the relevant Project.

4.2 Authorised Investments

[RPL] may invest a Project Fund in any Authorised Investments at its discretion.

4.3 Income

[RPL] is entitled to any income or capital appreciation arising in respect of a Project Fund.

4.4 Withdrawal by [RPL]

With the approval of the Independent Forester for a Project [RPL] may withdraw from the Project Fund the project (sic) any amount allowed by the terms of the Scheme Documentation for the Project.

4.5 Withdrawal to meet Costs of Ongoing Services

If directed by the Independent Forester for a Project the Responsible Entity must use the Project Fund for the Project to pay alternative contractors to undertake performance of the Ongoing Services for the Project and to pay all costs incidental thereto.

10 The 'Ongoing Services' is defined to mean the 'ongoing maintenance services [RPL] has contracted with growers to perform pursuant to the terms of the Management Agreement for a Project'. Despite the requirements of cl 3 of the Maintenance Fund Deed, the liquidators have not identified any discrete document recording these matters.

11 Since the second plaintiffs' appointment as voluntary administrators of the Rewards Group companies, they have attempted to make arrangements for the managed investment schemes conducted by RPL to continue. These efforts included attempting to find a replacement responsible entity to take over from RPL. These attempts have come to nothing. RPL is insolvent. As no mechanism to salvage the timber schemes has been identified, the liquidators intend to wind up the timber schemes in the near future.

12 When that occurs, the various constitutions will terminate according to their terms. The liquidators' legal advice is to the effect the licence agreements and management agreements have already terminated. However, if the licence agreements and management agreements have not already terminated, they will terminate according to their terms on the windingup of the timber schemes.

13 The leases over the land on which the timber schemes were conducted have been terminated by the landlords. Control of those properties has reverted to the receivers who are now undertaking the sale of those properties. Accordingly, the timbergrowing activities of the growers in the scheme are no longer being pursued - at least any such timbergrowing activities are not being pursued on behalf of the growers.

14 The legal advice provided to the liquidators is that as a matter of law, termination of a head lease (as distinct from its surrender) effects a termination of any sublease. That is certainly the case where a head lease is forfeited; any sublicence granted by the head lessee will fall with the head lease. It is on that basis the liquidators take the view the growers' licence agreement are at an end. That would appear to be a correct analysis of the legal position.

15 There are various termination provisions in the management agreements. As to termination without fault, cl 15.8(a) relevantly provides:

Subject to the provisions of Subclause 15.6 of this Agreement, the Parties agree that unless this Agreement has otherwise been terminated by either Party under Subclauses 15.1 and 15.5 this Agreement and the Terms shall cease on the earlier of the dates on which ... the Licence is terminated for any reason other than a default by the Grower.

16 The liquidators therefore take the view the management agreements between the growers and RPL are at an end. In my view, that is a correct analysis of the position.

17 As at 12 September 2011, there was $1,909,812.06 in the Maintenance Fund account.

18 It is against that background the plaintiffs sought the following directions:

(a) that Rewards Projects Limited (ACN 089 582 427) (In Liquidation) (RPL) would be acting properly and justifiably in paying the proceeds of the maintenance fund (as defined in the schedule to the originating process) to RPL in its own right; and

(b) that the second plaintiffs would be acting properly and justifiably in causing RPL to pay the proceeds of the maintenance fund to RPL in its own right.

19 RPL is subject to a creditors' voluntary windingup. A liquidator in a voluntary liquidation may apply to the court for directions pursuant to s 511 of the Corporations Act 2001 in much the same way that a liquidator may make such applications in a compulsory windingup pursuant to s 479(3): see Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 [7]. There is an analogous power under s 92 of the Trustees Act 1962 to give directions to a trustee 'concerning any property subject to a trust' or 'respecting the exercise of any power or discretion vested' in him or her as trustee.

20 Subject to the liquidator making full and fair disclosure of the material facts, the effect of such an order is to protect the liquidator from claims that he or she has acted unreasonably, inappropriately or in breach of duty. Effectively the order sanctions a proposed course of conduct: see Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674, 679 680.

21 The power to give directions is not unfettered. The limits of the power were set out by Goldberg J in an oftquoted passage in Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 [65]. Goldberg J said:

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, that 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.

22 As his Honour said, there must be an 'issue calling for the exercise of legal judgment'. The direction sought in its terms the plaintiffs may 'properly and justifiably' not take certain action. I am satisfied there is an issue of propriety or reasonableness to be determined. On that basis, directions are available and it is appropriate they be made.

23 A direction that an external administrator may 'properly and justifiably' carry out a proposed course of conduct is used to signify that it is appropriate that he or she do so. It is a form of direction in common use. By way of example, it was a form used in Mentha v G E Capital Ltd (1997) 154 ALR 565, 571 572. It was a form also used a number of times in the Ansett liquidation. It is implicit in such an order the court is approving the proposed course of conduct.

24 Furthermore, the facts raise for consideration a legal issue as to the entitlement to the funds in the management agreement. This is a legal issue of substance. Without a direction from the court, a degree of personal risk may attach to the second plaintiffs as liquidators. This makes the case one in which directions are available.

25 In summary, then, I was satisfied that it was 'just and beneficial' to make directions of the nature sought. I reached that conclusion for a number of reasons. First, the question of the entitlement to the money held in the Maintenance Fund is a question of law. Second, the question of entitlement to the money held in the Maintenance Fund and the appropriate course for the liquidators to adopt in relation to it is not simply a matter for the liquidators' commercial judgment. Third, the liquidators sought approval from the court for their proposed course of action. Fourth, the liquidators were not asking the court to decide any entitlement to the fund held in the Maintenance Fund that is contested by another party. Finally, there was a risk the liquidators may have been seen to have acted improperly if they had applied the Maintenance Fund as they proposed without court sanction.

26 This matter was first mentioned on 27 October 2011. On that date, I made orders the plaintiffs advertise the application. This was done by uploading copies of the court document to the liquidators' website and making both electronic and hard copies available to any interested party. Neither the liquidators nor the court were contacted by any party wishing to be heard in relation to this application. In making the directions I did, I was satisfied the nature of this application would be brought to the attention of any interested party who may wish to make submissions in relation to the application.

27 Turning, then, to the appropriateness of the directions sought, the money in the Maintenance Fund was specified to be held on trust for the growers to secure RPL's obligations to perform initial and ongoing planting and maintenance services. Neither the Maintenance Fund Deed nor the scheme documents specify what is to happen to any surplus held in the Maintenance Fund if the scheme is wound up, or if the relevant management agreements are terminated.

28 As the management agreements have terminated, there are no ongoing services for RPL to provide. Accordingly, the purpose and objective of the Maintenance Fund are at an end. The underlying purpose or object of the Maintenance Fund is to provide a retention fund so that, in event of nonperformance of maintenance activities by RPL, money is available and may be applied for the benefit of the growers to meet the costs of alternative contractors.

29 On this basis, it is clear the Maintenance Fund was established as a special purpose trust to secure RPL's obligations as to the ongoing services. The relevant agreements that established those obligations have been terminated. Accordingly, the planting and maintenance obligations secured by the Maintenance Fund will not be performed in the future either by RPL or the investors. There is therefore no further use for the money held in the Maintenance Fund.

30 There is a presumption where a trust fails because its purpose cannot be achieved the settlor intended the assets of the trust should revert to the settlor, rather than become the property of the beneficiaries: see Calverley v Green [1984] HCA 81; (1984) 155 CLR 242, 266 (Deane J). The presumption of a resulting trust in favour of the settlor does not apply where the nature of the relationship between the settlor and beneficiary gives rise to a presumption of advancement. The presumption of advancement does not apply in this case, as the relationship between RPL and the investors does not fall into one of the recognised categories where presumption applies. Further, the presumption of a resulting trust can be rebutted by evidence showing a contrary intention. The plaintiffs say they are not aware of any evidence that shows RPL had a contrary intention at the time the maintenance funds were created. I am satisfied, on a reading of the documents, no such evidence exists.

31 In these circumstances, the plaintiffs submitted it would be appropriate for the money currently held in the Maintenance Fund to revert to RPL and to become part of the pool of assets available to satisfy the creditors of RPL. In my view, this is undoubtedly the case. No credible alternative is available.

32 In these circumstances, I made the orders sought by the plaintiffs.

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