The Trust Company (Nominees) Limited v Southern Finance Limited, in the matter of Southern Finance Limited

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1909 of 2012

IN THE MATTER OF SOUTHERN FINANCE LIMITED ABN 80 007 352 089 BETWEEN: THE TRUST COMPANY (NOMINEES) LIMITED

JUDGE: YATES J DATE: 26 NOVEMBER 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) 1 This is an application for relief pursuant to s 283HB of the Corporations Act 2001 (Cth) (the Act). The plaintiff is a body corporate approved by the Australian Securities and Investments Commission (ASIC) to be a trustee for the purposes of s 283AC(1)(f) of the Act. It holds the position of trustee in respect of certain notes issued by the defendant, to which I will make further reference. The defendant is a wholly-owned subsidiary of part of a group of companies that provide general investment services, mortgage loans, equipment finance, financial planning and sharebroking to members of the public. It holds an Australian financial services licence. 2 The plaintiff and the defendant are parties to a deed entitled "Trust Deed for First Ranking Debenture Stock" dated 4 July 1997. That deed has been amended and supplemented from time to time. The defendant has made an offer of debentures in Australia pursuant to s 283AA(1)(a) of the Act. The debentures are known as "Southern Notes". The plaintiff is currently the trustee holding these notes on trust for noteholders in accordance with s 283AB(1) of the Act. 3 As at 30 September 2012 the defendant had issued Southern Notes to investors with a total redemption value of $299,299,256. The defendant presently has an open offer to issue Southern Notes pursuant to a document dated 7 May 2012 entitled "Prospectus 15 for the issue of Southern Notes". This prospectus has been lodged by the defendant with ASIC and is published on the defendant's website. 4 On 23 October 2012 the defendant informed the plaintiff that it proposed to enter into a transaction involving the funding of a new subsidiary company that was to acquire and develop a property in Victoria with a capped total investment of $10 million. Although, because of the structure of the transaction, it was agreed that the plaintiff's consent to it was not required, the plaintiff had broader concerns in relation to the defendant due to generally soft market conditions, a reduction in the defendant's assets-to-liabilities ratio and its provisioning for non-performing loans. As a result of these concerns, the plaintiff informed the defendant on 29 October 2012 that it was proposing to engage independent accountants as the plaintiff's delegate to access and review the defendant's books and records and to provide financial advice to it. 5 Independently of these matters, ASIC wrote to the plaintiff on 29 October 2012 and requested information on the liquidity of each of the issuers of debentures in respect of which the plaintiff was acting as trustee. 6 On 31 October 2012 the plaintiff appointed KPMG to undertake an independent business review of the business and affairs of the defendant and the group of companies to which it belongs. It is not necessary for me to descend to all the details described in the evidence of the progress of the review, which is ongoing. 7 Although the review is ongoing, the plaintiff is concerned that there is a demonstrated significant increase in the number of noteholders who are redeeming their investments in Fixed Term Southern Notes where the term has expired, rather than electing to reinvest their initial investment for a further period. The level of new subscriptions for Southern Notes is continuing at a significantly lesser rate than the value of Southern Notes that are being redeemed. 8 The defendant's liquidity ratio is low and its reserves of liquid assets are decreasing. The plaintiff is concerned that the defendant's provisioning in its financial accounts for loans in default or impaired assets appears to be inadequate. I should add, however, that it has not been advanced at the present time that the defendant is in breach of the trust deed or any provision of the Act. 9 Nevertheless, the plaintiff has formed the view that the defendant should not pay any funds to noteholders, issue any new Southern Notes or renew any existing Southern Notes until KPMG has concluded the review, reported to the plaintiff on the financial position of the defendant, and the plaintiff, in its capacity as trustee, has considered the position, then revealed, from the perspective of the protection of the best interests of noteholders. 10 In forming that view, the plaintiff has had regard to the possibility of unequal treatment between noteholders that are able to redeem their Southern Notes in the period prior to KPMG concluding their investigations and elect to do so, and those noteholders that are not able to do so. Of particular concern to the plaintiff is that, in the event that KPMG's report ultimately concludes that the defendant has insufficient assets to meet its obligations to noteholders, the redemption of notes during the period of the investigation would be to the detriment of the defendant's cash position and assets available to meet the obligations to noteholders who were unable, or chose not, to redeem. 11 There is a further matter that I should mention. The defendant has been negotiating for the sale of its loan book to Bendigo and Adelaide Bank Limited. Non-binding heads of agreement have been entered into. The defendant and the bank intend to enter into binding agreements to give effect to the sale by 3 December 2012. 12 The bank has expressed its satisfaction - based on representations made and information provided by the defendant - that, at completion of the proposed transaction, the acquisition of the defendant's loan assets and selected other assets will provide sufficient value to the bank to meet the repayment of principal and interest accrued on all notes on issue by the defendant at the time of their redemption. The bank has stated that should the value of the assets acquired be less than the amount required to satisfy the repayment obligations of notes on issue by the defendant at the anticipated completion of the proposed transaction, any shortfall will be to the account of the bank and not to the noteholders (in the absence of any fraud or misrepresentation by the defendant). 13 The defendant has indicated its preparedness to agree to cease payments to noteholders and to cease accepting new subscription requests with effect from today, 26 November 2012. It has indicated that it does not object to the plaintiff approaching the Court to obtain certain orders. Indeed, I have been provided with orders this morning which I am told are by consent. 14 In that connection, I should also record that ASIC has been kept informed of developments in this matter. There is evidence before me that it neither supports nor opposes the plaintiff's present application and does not seek leave to be heard at the present time. 15 Section 283HB of the Act provides: (1) If the trustee or ASIC applies to the Court, the Court may make any or all of the following orders: (a) an order staying an action or other civil proceedings before a court by or against the borrower or a guarantor body; (b) an order restraining the borrower from paying any money to the debenture holders or any holders of any other class of debentures; (c) an order that any security for the debentures be enforceable immediately or at the time the Court directs (even if the debentures are irredeemable or redeemable only on the happening of a contingency); (d) an order appointing a receiver of any property constituting security for the debentures; (e) an order restricting advertising by the borrower for deposits or loans; (f) an order restricting borrowing by the borrower; (g) any other order that the Court considers appropriate to protect the interests of existing or prospective debenture holders. (2) In deciding whether to make an order under subsection (1), the Court must have regard to: (a) the ability of the borrower and each guarantor to repay the amount deposited or lent as and when it becomes due; and (b) any contravention of section 283GA by the borrower; and (c) the interests of the borrower's members and creditors; and (d) the interests of the members of each of the guarantors. 16 Section 283HB confers a broad remedial and protective jurisdiction on the Court. The powers of the Court are confined by the specific matters identified in subsection (1), although a plenary grant of power is provided by paragraph (g) to make any order that the Court considers appropriate to protect the interests of existing or prospective debenture holders. The exercise of the discretion to grant relief under subsection (1) is affected by subsection (2) only to the extent that the matters that are identified in that subsection are matters to which the Court must have regard. In Australian Securities and Investments Commission v Bridgecorp Finance Ltd (2006) 58 ACSR 499, Barrett J observed at [18] that: … Once relevant interests are identified, it is open to the court to make any order that appears to it to be calculated to safeguard those interests. … 17 I am satisfied on the evidence currently before the Court that it is appropriate to make the orders that are now sought. In coming to that conclusion, I am also naturally affected by the fact that the defendant's consent is forthcoming. 18 There is a further matter to which I should refer. Orders were made on 23 November 2012, the effect of which was to require the hearing of these proceedings, until further order, to proceed in a closed court and in the absence of the public, save for any representative of ASIC. Those orders also provided, first, for the names of the parties not to be published and, secondly, that all pleadings, affidavits and various other documents including the terms of any judgment or order be restricted to the parties' solicitors on the record, their counsel and any representative of ASIC. 19 The plaintiff accepts that there should now be a variation of those orders to the extent that the orders providing for the proceedings to be heard in closed court and for the parties' names not to be identified should now be vacated. There remains the question of the order concerning the limitation of access to documents on the Court file. The plaintiff proposes that that order be varied only to the extent that the orders made on 23 November 2012 and the orders I propose to make today should not be subject to any restriction. 20 The orders that I propose to make today will include that the proceedings be brought back before a Corporations Duty Judge on 4 December 2012. I propose to vary the orders made on 23 November 2012 in the way suggested by Senior Counsel for the plaintiff. It seems to me that when the matter comes back on 4 December 2012, further consideration may be necessary as to whether order 2, made on 23 November 2012, should continue. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.