Silkman, Dorise Enid v Shakespeare Haney Securities Limited

THE PROCEEDINGS 14By Summons sued out of this Court on 12 November 2010, the plaintiff seeks an order that the defendant produce for inspection and copying by her, her agent or legal representative the following documents : (a)all applications, valuations, appraisals, estimates, loan agreements, mortgages and other securities offered or provided; (b)all variations or extensions of any contractual term; (c)all communications between the defendant and the borrower in relation to any; (i)actual or potential default by the borrower of its obligations to the Shakespeare Haney Premium Income Fund (the "Scheme"); (ii)variations or extensions of any contractual term; and (d)all accounts recording: (i)any advances made or repayments received by or on behalf of the Scheme; (ii)any impairments or provisions for impairment, which relate to any of the mortgage investments or loans by the Scheme that were past due, overdue or the terms of which had been extended during any of the financial years ending 30 June 2007, 2008, 2009 and 2010 . 15The plaintiff does not seek orders for inspection under the Corporations Act 2001 (Cth) as the October letter had foreshadowed. 16Mr A S Martin SC, together with Mr G M Drew of counsel, appeared for the plaintiff. Mr D Kelly SC together with Mr D Piggott of counsel appeared for the defendant. 17The plaintiff put her case relying exclusively on the line of authority commencing in the modern era with Re Londonderry's Settlement; Peat v Walsh [1965] Ch 918 and culminating most recently in McDonald v Ellis (2007) 72 NSWLR 605, which attributes a beneficiary's right to inspect "trust documents" held by the trustee to an equitable proprietary interest of the beneficiary in them. 18The underlying idea is that such documents are themselves either trust property or are so closely related to trust property that they may be characterised as documents in which the beneficiary has such an interest. In Re Simersall; Blackwell v Bray (1992) 35 FCR 584 at 589 Gummow J described this right as proprietary in nature although falling short of a full beneficial interest. It is not necessary to contribute to the prolixity of this judgment by citing the authorities which have followed this approach. Bryson AJ referred to a number of them in McDonald v Ellis . I will call this approach the Londonderry approach. 19On the Londonderry approach the plaintiff need do no more than establish that the defendant is her trustee and that the documents sought are so-called trust documents. The relief is as of right and does not require the exercise of any judicial discretion in favour of the plaintiff. The plaintiff put that trust documents means documents which evidence or record the nature, condition, and value of the assets of the Scheme, and that all the documents called for by the Summons meet these criteria. 20In Schmidt v Rosewood Trust [2003] 2 AC 709 the Privy Council declined to follow Londonderry . Taking what Lord Walker at [51] described as "a more principled and correct approach", it held that a trustee has no equitable proprietary interest in documents so as to give rise to a right of production and inspection but that, as one aspect of the Court's inherent jurisdiction to intervene in the administration of trusts, an order for inspection and production of documents by a trustee may be made at the instance of the beneficiary. I will call this the Schmidt approach. 21In Avanes v Marshall (2007) 68 NSWLR 595, Gzell J followed the Schmidt approach. His Honour made it clear that this did not abrogate the trustee's duty to keep proper accounts and the beneficiary's right to inspect them. 22In Gray v BNY Trust Co of Australia [2009] NSWSC 789 at [33] Bergin CJ in Eq referred to the different views in this Court as well as to writings on the subject. 23My attention was not drawn to any appellate authority in Australia which has squarely considered whether the Londonderry approach or the Schmidt approach should now be followed. 24In Schmidt v Rosewood Trust at [52] Lord Walker did, however, consider that there was support for its approach in Hartigan Nominees v Rydge (1992) 29 NSWLR 405. 25In Rouse v IOOF Australia Trustees Ltd (1999) 73 SASR 484 at [87] and following, [101] and [102] Doyle CJ, with whom Perry J and Martin J agreed, referred to the two lines of authority, finding it unnecessary to resolve whether one or the other should be followed because the issue there before the Court was whether a trustee had a discretion to decline to provide information. The Court considered that a trustee may be entitled to decline to provide information to particular beneficiaries inspection when the trustee has reasonable grounds for considering that to do so will not be in the interests of the beneficiaries as a whole, and will be prejudicial to the ability of the trustee to discharge its obligations under the trust. The availability of the discretion will depend on the circumstances of the particular case. 26The defendant put that the Summons should be dismissed because the Londonderry approach should not be followed and the plaintiff does not have the right to inspect the documents which she asserts. Further, it put that it had a discretion to decline the plaintiff's request, which it properly exercised. 27Absent clear appellate guidance, I propose to follow the Schmidt approach. A consideration of the authorities reveals that the Londonderry approach has jurisprudential difficulties which the Schmidt approach does not have, including: aascribing a workable and principled definition of the term "trust documents"; bdivining the nature of the beneficiary's so-called proprietary interest in such documents. In Hartigan Nominees v Rydge at [444] Sheller JA articulated this difficulty by describing this "trail" as unhelpful if not false; cthat on the Londonderry approach a discretionary beneficiary who has no lesser interest in the due administration of the trust (but who has no proprietary interest in the assets) should, illogically, be denied disclosure; dthat authorities which have taken the Londonderry approach have limited the beneficiary's right to disclosure by reference to the interests of third parties in maintaining confidentiality. It is difficult to reconcile this limitation with the principle for which Londonderry stands; and ereconciling a beneficiary's entitlement to documents such as a settlor's statement of intention or a constituent trust deed (which undoubtedly a beneficiary should properly have) with the fact that these instruments are themselves not assets or appurtenant to assets of the trust. 28It follows that the plaintiff's claim to inspect documents as of right, fails. 29I should say, however, that even had I taken the Londonderry approach I would have refused relief in the terms claimed because the documents called for by the plaintiff go well beyond even the definition of trust documents contended for by her, that is, documents which evidence or record the nature, condition and value of the trust assets. Examples, not exhaustive, follow. 30Firstly, the Summons seeks "securities offered...which relate to any of the mortgage investments or loans...". This formulation extends to securities which were offered but not given and therefore not assets of the trust. 31Secondly, the Summons requires production of "all communications" between the defendant and the borrower "in relation to any actual or potential default" by the borrower "...or variations or extensions or any contractual term..." "which relate to any of the mortgage investments or loans...". The use together of the phrases "in relation to" and "which relate to" together with the reference to potential defaults extends the category of documents well beyond those which evidence or record the nature, condition and value of the trust assets. 32Thirdly, the Summons seeks all accounts recording advances and repayments. This would extend to every primary recording of every payment and receipt on every mortgage. This goes well beyond documents which evidence or record the nature, condition and value of the trust assets. 33Recognising these manifest difficulties, at the close of her submissions in reply, the plaintiff sought an opportunity to reconsider and reformulate the Summons. Given the lateness of the request, I did not accede to it. I said that I would determine the matter at the level of principle. Having regard to my conclusion that the Schmidt approach should be followed, the occasion for the plaintiff to have a further opportunity to reformulate her demand does not arise. One might also anticipate stiff resistance to any such application in the circumstances. 34It is accordingly not necessary to consider whether the defendant, in declining to provide the information, properly exercised the discretion described in Rouse v IOOF Trustees . It was justified in refusing production in the terms sought in any event.

THE SCHMIDT APPROACH 35In reply, and as a fallback position, on the assumption that the Court followed the Schmidt approach, the plaintiff put that the Court should order inspection because she "has concerns" arising out of aan unexplained discrepancy between the defendant's financial statements as at 30 June 2010 and a document published by the defendant as at 30 June 2010 entitled "Loan Portfolio Diversification"; bthe apparent extension of the entire mortgage portfolio in circumstances where there have been significant defaults for years, yet the power of sale has not been exercised, and the defendant's financial statements reveal a risk that it cannot continue to operate as a going concern; and cthe defendant having apparently having advanced money to mortgagors in breach of investment criteria imposed by the Constitution in particular by lending on the basis of "as if complete" valuations as opposed to "as is" valuations (as referred to in the October letter). 36As to her first concern, the plaintiff drew attention to the fact that according to note 13 of the financial statements during the year ended 30 June 2010 the Scheme extended the terms of 45 mortgage investments totalling $144,408,717 (that is, ostensibly, the entirety of its mortgage loan portfolio), and that had it not been for these extensions the mortgage investments would have been overdue by more than one year at 30 June 2010. 37On the other hand, according to the Loan Portfolio Diversification at 30 June 2010, there were loans outstanding of $149,435,000 and 5 loans representing $22.3m (14.9%) that were in arrears greater than 120 days. 38As to her second concern, the plaintiff drew attention to what was asserted in the October letter and to material produced by the defendant including the following. 39The defendant's financial statements as at 30 June 2007 reveal that it had assets in the form of mortgage loans of $308,232,310 and net assets (after taking into account interest bearing liabilities of $64m) of $251,146,007. According to note 9 to the financial statements two loans were considered past due, being that their interest payments were greater than 90 days in arrears. According to the note, the defendant considered these loans to be fully recoverable and did not anticipate any loss of investors' funds. Accordingly no provision for impairment had been raised. 40Its financial statements as at 30 June 2008 reveal that it had mortgage loans of $288,638,239 and that its interest bearing liabilities were over $92m. Its net assets were $218,581,476. Note 12 reveals that there were mortgage investments of $7,105,067 past due 31-120 days and mortgage investments of $4m past due more than year. The note further reveals that during the year the Scheme extended the terms of 25 mortgage investments totalling $64,646,115 (2007: $62,590,332) from longstanding borrowers and that if it had not been for these extensions the mortgage investments would have been overdue by more than 1 year at 30 June 2008. No impairment loss was recognised. It is worthy of note that the 2007 financial statements do not themselves reveal that during that year, 23 mortgage investments were extended. 41Its financial statements as at 30 June 2009 reveal that it had mortgage loans of $206,930,368 and that its interest bearing liabilities were over $62m. Its net assets were $162,000,415. It made a net loss of $27,370,961. Note 3 stated the defendant's significant accounting policies including that its accounts had been prepared on a going concern basis but stated that in the event that the Scheme could not continue as a going concern it may not realise its assets or settle its liabilities in the normal course of operations and at the amounts stated in the financial report. According to note 9 the defendant held mortgage loans directly of $228,107,811 and had recorded unrealised impairment losses in respect of mortgage loans of $21,177,443 (2008: nil). Note 13 reveals that during the year ended 30 June 2009 the Scheme extended the terms of 67 (2008: 25) mortgage investments totalling $228,107,812 at 30 June 2009 (2008: $64,646,115) from longstanding borrowers. If it had not been for these extensions, the mortgage investments would have been overdue by more than one year at 30 June 2009. Unrealised impairment losses of $21,177,443 were recognised in relation to these extended loans (2008: nil impairment loss). 42Also, included in the 2009 financial statements was an independent auditor's report which stated that material uncertainty existed which cast significant doubt about the Scheme's ability to continue as a going concern and whether it would realise its assets and extinguish its liabilities in the normal course of business and at the amount stated in the financial report. 43The basis for the plaintiff's third concern appears from the October letter, in particular, par 23 to 28. 44The defendant put that the Court should not intervene because athe defendant has complied with statutory and equitable obligations to provide information and has offered to provide further information; bin declining disclosure it properly exercised a discretion; cdocuments which the plaintiff seeks include internal documents recording assessments and analyses of investments which the defendant has, under cl 7.2 of the Constitution, complete and unfettered discretion to make; dmuch of the material sought by the plaintiff is confidential, having been provided on that basis by the defendant's borrowers and prospective borrowers. Revelation to the plaintiff of this material will result in the breach by the defendant of obligations of commercial confidence; and ethe plaintiff is motivated by improper purposes and is on a fishing expedition because she is seeking documents to enable a decision to be made whether representative proceedings should be commenced against the defendant, to assist in communicating with other possible class members and to assist in obtaining litigation funding. 45It should be borne in mind that the plaintiff's claim is not for preliminary discovery or for discovery in proceedings already commenced. Part 5 r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW) facilitates preliminary discovery to enable a party who after having made reasonable enquiries has been unable to obtain sufficient information to decide whether or not to commence proceedings against a prospective defendant, to obtain preliminary discovery from that prospective defendant. It should also be borne in mind that the plaintiff's claim is not for inspection of the trust accounts. 46Whilst the defendant undoubtedly has a fiduciary obligation to the plaintiff to provide information as to the amount of the trust property and its investments, the extent of that obligation is affected by the circumstances of the relationship including the terms of the contract between them, in this case the Constitution; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 97; Kelly v C A & L Bell Commodities Corp (1989) 18 NSWLR 248. 47In Hartigan Nominees v Rydge (1992) 29 NSWLR 405 at [419]-[420] Kirby P commented that trustees are nowadays, with increasing frequency, large corporations and are rarely the group of devout clergymen portrayed in Re Beloved Wilke's Charity 42 ER 330. His Honour referred to the likelihood that trustees take advice, are paid fees for the performance of their services and are accustomed to providing reasons and explanations including to courts of law. 48Also unlike the circumstances of those clergymen, the Act and the Constitution impose upon the defendant detailed and onerous obligations (including those described below) calculated to ensure that investors are provided with information sufficient to enable them to assess the value and performance of the assets underlying their investment. 49Section 601FA of the Act provides that "the responsible entity of a registered scheme must be a public company that holds an Australian financial services licence authorising it to operate a managed investment scheme". Section 601FB(1) provides that "the responsible entity of a registered scheme is to operate the scheme and perform the functions conferred on it by the scheme's constitution and this Act". Section 601FC(1)(g) requires the scheme's compliance plan to meet the requirements of section 601HA which provides that the compliance plan must have some functioning compliance committee which has access to the Scheme's accounting records and to the auditor of the Scheme's financial statements and access to information relevant to the responsible entities compliance with the Act. The plan must ensure that Scheme property is valued at regular intervals, that the plan is regularly audited and that adequate records of the Scheme's operation are kept. 50Additionally, cl 25.5 of the Constitution requires the defendant to report to Members for each Financial Year by way of a financial report, directors' report, and Auditors' report within three months after the end of the year. 51Apart from annual financial statements the defendant regularly publishes a document styled "Loan Portfolio Diversification" which provides information about the Scheme's loan portfolio. 52The Scheme also regularly publishes a "Benchmark Disclosure" report which compares its performance to benchmarks set by the Australian Securities and Investments Commission. 53Taking the Schmidt approach, the Court would intervene were it shown that the defendant has fallen short of its duty to make disclosure to the plaintiff, by requiring such disclosure as is needed to remedy the default. It would mould any orders to take into account competing interests for and against disclosure. 54For the following reasons I do not consider that the Court should exercise its discretion to intervene to grant the relief the plaintiff claims. 55Firstly, accepting that the plaintiff (who did not give evidence) has genuine concerns about the matters articulated above, she did not establish either that the defendant has fallen short of its disclosure obligations under the Act or the Constitution or that inspection of the wide scope of documents sought by the Summons is necessary to cure any such deficiency. This is perhaps understandable given that the Summons was framed in reliance on the Londonderry approach. 56Secondly, as to the plaintiff's concerns generally, they relate to whether the information which has been provided is sufficient for her to assess what the trustee has done discloses any actionable breaches of trust than to whether it has fallen short of complying with its duty to provide information. 57Moreover, as to her first concern, whilst there appears to be a discrepancy between the Loan Portfolio Diversification as at 30 June 2010 which shows that there was a loan outstanding of $149,435,000 whereas the defendant's financial statements as at 30 June 2010 reveal mortgage loans of $144,836,721 and unrealised impairment losses of $26,733,260 (yielding an asset value of $118,103,461 in the form of loans), this issue first emerged and was relied upon by the plaintiff in oral submissions, whereupon the defendant offered to provide a formal explanation for it. 58As to her remaining concerns, the defendant expressed a willingness to answer specific questions (under the supervision of the Court), a proposal which drew no ostensible response from the plaintiff who persisted in her application in the terms framed. There was no suggestion that the defendant's offers were not genuine. 59Thirdly, it seems to me that given the wide ambit of the documents sought, the defendant was justified in declining the request for inspection. 60I should record that I would not uphold the defendant's submission that it is entitled to withhold information because of its unfettered discretion to make investments. Clause 7.2 of the trust deed limits that discretion to invest in Authorised Investments. 61I would also not uphold the defendant's submission that relief should be withheld because the plaintiff is acting with improper purposes. Were the plaintiff to have established an entitlement to disclosure, her intentions to use the documents to seek an appropriate remedy would not erode that entitlement. 62As to confidentiality, given the result, the issue does not arise. However, and in any event, the parties were agreed that if documents were to be made available for inspection, orders could be framed to permit any person who might have an interest in keeping them confidential to be heard.

CONCLUSION 63The summons is dismissed with costs. 64This outcome of course does not preclude the plaintiff, if so advised, from moving for preliminary discovery, provided she meets the requirements of the applicable rules. 65The exhibits are to be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 March 2011