Trust Company (Nominees) Limited v Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited - [2013] FCA 1393 - FCA 2013 case summary — Zoe

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Trust Company (Nominees) Limited v Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited

[2013] FCA 1393

Federal Court of Australia|2013-12-18|Before: Farrell J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2013-12-18

Before

Farrell J

Source

Original judgment source is linked above.

Judgment (124 paragraphs)

[1]

Background 29 Against the background of the recent appointment by Trust Company of receivers and managers to Banksia Securities Limited (also a company which issued debentures under Chapter 2L), on 15 November 2012, Trust Company wrote to GSI advising that it proposed to appoint an expert accountant to act as its delegate and agent under the Trust Deed to review GSI's books, records and operations and to report to Trust Company in its capacity as trustee. After negotiations as to the identity of the expert, Ernst & Young was appointed on 19 December 2012 (at GSI's expense) to report on (among other things) the impaired value of GSI's loan book and GSI's net asset/equity position based on various sensitivities and assumptions.

[2]

Ernst & Young Report 30 Around 31 January 2013, Ernst & Young gave GSI a draft report for the purpose of confirming factual accuracy. The draft report, among other things, identified potential sensitivity adjustments which Ernst & Young thought may be required, including a collective loan provision of $3.1 million. The draft report and the final report delivered on 6 March (EY Report) contained the following recommendation for "immediate" timing: Additional sources of equity to strengthen GSI's balance sheet should be explored (including through Director guarantees) to provide protection from loan impairment risk Ensure that The Trust Company's information needs are fully and promptly met Broader sector issues (i.e. further collapses of businesses with similar models) may result in a loss of depositor confidence making GSI's business model of lending from retail investors unsustainable. GSI should start making contingency plans for other potential funding sources (i.e. structured financing) or exit routes (i.e. loan book sales) now At 5.1% (prior to considering additional impairment) the current equity position of GSI does not provide a reasonable capital reserve should loan impairment eventuate - which could be caused through broader property market issues. GSI should suspend dividend payments until potential impairment issues are quantified and a more significant net equity position is developed.

[4]

GSI's response EY Report 32 GSI provided two written responses to the draft EY Report. Mr Sanford says that for the reasons set out in those responses, the GSI board also did not agree with many of the recommendations in the final EY Report: 9 August Sanford Affidavit at [17]-[27] and GAS 1 at tabs 8 and 9. The responses included the following commentary: (a) GSI management reviews liquidity on a daily basis; (b) GSI prepares actual cash flow statements every six months as part of preparing half yearly financial statements; (c) GSI has an excellent record of prompt reporting to Trust Company; (d) At fortnightly meetings, GSI's Arrears Committee reviews individual loans for specific impairment at least at half yearly intervals and in the interim may choose to "turn off" interest and/or make specific provision in management accounts; (e) GSI's Loan Approval Committee considers each loan application individually and no loans are approved outside of the Committee; (f) GSI is not a high-volume lender and is able to carefully consider each application on its merits. GSI has averaged only 5.7 loan approvals per month over the five years to 30 June 2012; (g) The graph of median values for Victoria, East Gippsland Shire and Baw Baw Shire show that the latter two areas, in which GSI principally operates, are generally less volatile than Victoria, not more; (h) GSI had engaged a consultant familiar with the industry to assist GSI to look at its balance sheet and consider ways to improve GSI's equity position (which had occurred before 6 February); (i) GSI typically pays a monthly dividend of $10,000 on ordinary shares and a quarterly RPS dividend of around $45,000. These are accommodated within ongoing profitability. The special dividends on ordinary shares normally payable following each half yearly result have been cut back in recent years to preserve capital; (j) GSI would obtain new valuations as part of a review of the loan portfolio, including high-risk loans; (k) GSI provided information in respect of retention/rollover trends and changes in credit over the prior 13 months; (l) Any changes in specific impairment provisions would be dealt with by GSI on a case-by-case basis; (m) Having regard to, among other things, the views of GSI's auditor in relation to the accounting standards under which GSI operates, GSI did not consider a collective impairment provision appropriate at that time; (n) GSI had not, in its 40 year history, suffered a shortfall in liquidity; (o) Retention of "at call" investments had been resilient despite market volatility, with around $20 million over the period September 2008 to October 2012; (p) GSI acknowledged broader industry issues and said it has started contingency planning; (q) GSI disagreed with Ernst & Young's proposed sensitivity adjustments. Ernst & Young suggested a more than three fold bigger provision in relation to a specific large loan. GSI thought its collective provision should be $439,000 compared to Ernst & Young's suggested $3.1 million (among other variations). This led to an Ernst & Young assessment of equity at $0.9 million compared to GSI's assessment of equity at $6,132,788; (r) On the topic of benchmarking, GSI had an historical lending risk reserve of $475,015 (or 0.4% of the loan portfolio) against an actual bad debt loans experience over the past seven years of $393,393 and 0.5% of risk-weighted assets as a benchmark propounded by the Australian Prudential Regulatory Authority. GSI also said: We are fully aware of the strong growth we have seen in deposits, particularly over [the] past two years, and the flow on effect in the size of the loan portfolio. This has also seen an increase in our exposure to development loans. The extent to which we approve and maintain development lending is constantly under review and we have no intention of the loan portfolio becoming more heavily slanted in that direction. … (s) On the topic of collective provisions: GSI has a loan portfolio of circa 250, non-homogenous loans and is closely acquainted with each loan and their individual credit risks and therefore deals with any impairment by making specific provisions as deemed appropriate on a case by case basis. We do not agree that a $3.1M collective provision is warranted given the above and the fact that all our lending is secured. We do however understand your thinking and agree that at least in the current climate some level of general provision, over and above specific provisions, may be appropriate. Having regard to the various factors, we feel a provision in the order of 0.5% of the loan book is appropriate and is reflected in the sensitised equity table above. Subject to market considerations, we will look to increase the 0.5% over time. In addition, whilst we believe on the evidence available that our specific provisions are appropriate at this time, we intend reviewing all loans with the benefit of any new valuations obtained, to ensure the appropriate level of specific provision is in place. 33 In the 9 August Sanford Affidavit at [26], Mr Sanford notes that the final EY Report, among other things, estimated that an additional impairment of $2.6 million should be raised in connection with non-performing loans. However, Ernst & Young noted that significant additional work needed to be undertaken by management to substantiate the appropriate level of provisioning. Ernst & Young recommended that revaluations be obtained for the majority of properties they had assessed and expressed the view that it was only from these valuations that a definitive specific provision estimate could be identified; once specific provisions have been fully assessed, the collective provision would be able to be better defined but collective provisioning would require a high degree of judgment; and a formal valuation should be obtained for the Riviera Loans and some other steps in relation to the Riviera Loans (which are the subject of confidentiality orders). 34 In an email to Trust Company dated 7 March 2013 which attached GSI's half yearly reports, Mr Sanford said: The Directors have reviewed the accounts in light of both the draft and final EY report. In particular we have made further specific provisions in relation to various loans. We have reviewed (and continue to review) the RPL loan [Riviera] identified in the report. For various reasons (which we are happy to discuss with you obviously if you wish) we do not consider it necessary that we make any specific provision on this loan at this time although obviously it continues to be closely monitored. We have also carefully considered the issue of a provision for general impairment and discussed the matter further with our auditor. We are of the view that is not necessary to make a general provision in the accounts at this time. As mentioned in our responses to E&Y, we intend carrying out a thorough review of the entire loan book (that process has already started) and in that process we'll obviously continue to review the issue of both specific and general impairment. As discussed, I and the Directors are happy to discuss matters arising from the EY report at your convenience.

[11]

Repayment of principal and interest 41 Prospectus 18 also disclosed at "7.4 Repayment of principal and Interest": The Company will repay "At Call" GSI Notes in part, or in full with interest accrued, upon the Company receiving a signed withdrawal form from the holder. Repayment is subject to the Company having sufficient liquidity. See section 4, Benchmark 2 - Liquidity for further information on liquidity. Rollovers The way in which the company deals with the rollover of Fixed Term GSI Notes is set out in Benchmark 3 of section 4 of this prospectus. 42 The disclosure in relation to Rollovers said: ASIC's benchmark for rollovers is that all issuers should clearly disclose their approach to rollovers, including: (a) what process is followed at the end of the investment terms; and (b) how they inform those rolling over or making further investments of any current prospectus and continuous disclosure announcement. Rollovers are important to issuers who rely on the continuity of funds invested beyond the initial term. …. At least seven (7) days prior to the maturity of existing term GSI Notes, holders of existing fixed term GSI Notes will be sent a pre-maturity letter that states the current prospectus (and any relevant ongoing disclosures) is available to them from the Company website (www.gsi.com.au), and if investors do not have access to the website, that they may request a hard copy, free of charge, of these documents. If an investor requests repayment in writing on a withdrawal form and returns to us the Certificate for GSI Notes, the fixed term investment, together with interest accrued to the maturity date, will be dispersed in full on the maturity date. … Repayment of the investment will be processed in accordance with the investor's instructions An investor may request that the fixed term investment is reinvested for a similar term of the current interest rate applicable to that term, renewed on a different basis or repaid. If written instructions are not received for a renewal or repayment, the principal and interest accrued shall, upon maturity, be re-invested for a similar term at the current rate of interest payable at the time applicable to that term. In the case of a Special GSI Note … where the same term is not available at maturity, re-investment will be for the next shortest term then available, or 'At Call' if there is no shorter term. Further information is in section 7.4 of this prospectus.

[35]

Dispute about impact of Court order freezing redemptions on Trust Deed enforcement powers 77 On 29 July 2013, solicitors for Trust Company wrote to the solicitors for GSI and said (among other things): The Voluntary Suspension [made by GSI on 19 July] and the Court's orders made by consent do not affect the consequences of the contractual obligation and failure to pay principle in respect of any stock within 7 days after the same became due and payable. The clear position is that since 19 July 2013: (c) GSI has not paid the amounts of principal that have become due and payable by GSI, including requests for redemption of "at call" notes issued by GSI; and (d) the non-payment of those amounts is an event under clause 12.01(a) of the Trust Deed, which gives rise to an entitlement of the Trustee to enforce its security on written notice to GSI under clause 12.01 of the Trust Deed. If amounts of principal have fallen due for payment since 9am on 19 July 2013 the Trustee's security is enforceable. … The hearing in the proceedings will concern only the question of whether the Court can make an order under section 283HB(1)(c) of the Act. The enforceability of the Trustee's security under the Trust Deed is a separate and distinct matter upon which there is, from the Trustee's perspective, no room for dispute. Until your correspondence on 26 July 2013, the Trustee was proceeding on the understanding that the event which would cause the Trustee's security under clause 12.01(a) was common ground and would inevitably occur on 26 July 2013. In any event, nothing done by the Trustee has waived or abandoned the entitlement to exercise the contractual powers under the Deed or the consequences that flow from the event under clause 12.01(a). Indeed, in court on 25 July 2013: (a) the Trustee's senior counsel made clear that the Trustee reserved its rights under the Trust Deed to enforce its security; (b) her Honour made it clear to the parties that any right of the Trustee to enforce its security would not be affected by the orders, in which event the hearing listed for 13 August 2013 would not be required; and (c) no dispute was raised by senior counsel for GSI on that question. Representatives of your firm and GSI's counsel were in court and no wider restraint was obtained from the Court in light of the expressed intention to exercise the power to appoint if the Trustee saw fit to do so. …

[36]

GSI's position on Trust Deed enforcement powers, whether it has withheld information from Trustee and loan book sale/recapitalisation proposals 78 On 30 July 2013, Mr Sanford on behalf of GSI wrote to Trust Company. GSI again contested the impact of the Court's order freezing redemptions on clause 12.01(a). It went on to say: 2.1 Your letter expresses concerns regarding GSI's net tangible asset position, by reference to a draft document (Draft Report) indicating a net tangible asset position of negative $2,609,000. 2.2 As required by Trust, the net tangible asset position identified in the Draft Report was calculated relying on modelling prepared by Ernst & Young. GSI does not accept the methodology for the modelling as accurate. Rather, GSI understands that Ernst & Young's work has principally focused on the valuation of priority loans and provisioning for impairment of those loans and that the modelling is for that purpose rather than to establish the net tangible asset position of GSI. We note that GSI has asked the Trustee for copies of Ernst & Young's interim and final reports to the Trustee on more than one occasion following the Trustee's claims about GSI's net tangible asset position. 2.3 Contrary to the position asserted in your letter, GSI has not confirmed a net tangible asset deficiency. We continue to assess information received, as well as engage with borrower customers relating to alternative steps… 2.4 Contrary to the assertions raised by your letter, GSI has not, at any stage, withheld information that should have been disclosed by it to the Trust. GSI will deliver its Quarterly Report on Wednesday, 31 July 2013, in accordance with the Trust Deed. … 3.1 As you are aware, GSI is working as diligently as possible to develop proposals to maximise the outcome for note holders. While GSI's focus is indeed on effecting a successful recapitalisation, a sale of part of the loan book may facilitate such an outcome. 3.2 As explained in Minter Ellison's letter of 26 July 2013, these two options are not mutually exclusive. 3.3 Trust has purported to direct GSI to cease to explore the possibility of a sale of any part of the loan book, on the basis that Trust is not presently in a position to confirm what Trust considers to be the appropriate strategy for realising GSI's assets. 3.4 GSI considers that ceasing to explore this possibility until such time as Trust forms a view as to the strategy that should be adopted would be inconsistent with its duties, and the interests of all stakeholders, including note holders. 3.5 We confirm that GSI will provide details of its proposed recapitalisation, as requested, by 4 pm AEST on Friday, 2 August 2013.

[41]

Progress report and issues to be addressed before issue of a replacement prospectus 84 On 2 August 2013, GSI gave Trust Company an update about the recapitalisation and sale process which indicated, among other things: (a) The 7 day time period imposed by Trust Company was regarded as insufficient by a number of parties who were approached as partial equity participants; realistically this limited what was achievable with the parties who were engaged in the process. FTI Consulting advised that realistically they would need until 9 August 2013 to provide GSI Directors with advanced proposals and would need to be in a position to indicate to interested parties that Trust Company supports the recapitalisation effort. (b) The issues that must be addressed in order for a replacement prospectus to be issued and for redemptions to be able to be made are: (1) an injection of equity to stabilise the balance sheet following recent impairments to a number of GSI's loans; (2) management of liquidity should a "run on funds" eventuate following the lifting of the freeze on redemptions; (3) a sustainable business model supported by appropriate management and governance for the restructured business; and (4) current capital adequacy requirements need to be met and possible future requirements anticipated. (c) To address these issues, GSI had formulated a strategy with FTI Consulting under which it would: (1) seek an equity injection from Local Investor Group, other interested parties or a combination of both; and (2) manage a downsizing of GSI's loan portfolio in order to provide sufficient liquidity to meet investor redemptions. (d) The estimated equity injection which would be required would be in the vicinity of $6 to $7 million of which the GSI directors may be in a position to contribute $1.5 million. (e) Local Investor Group had pledges of $4.4 million (some of which was in funds already held by GSI) but they believe they could obtain more with time. Local Investor Group comprised individuals who either live in or have strong links with the Gippsland area, some of whom were high net worth individuals with significant business experience and reputation. The Group was not initiated by GSI; it had emanated from a number of local business people who were concerned about the impact of GSI ceasing to trade on the local economy. Some of the members of Local Investor Group could potentially join the board of directors of GSI adding to its business experience and acumen. (f) Six interested parties had been admitted to the virtual data room established to conduct due diligence in relation to expressions of interest which were stored for both recapitalisation assistance and the sale of tranches of the loan portfolio. (g) The Directors of GSI recognised that changes to management policies, corporate governance and organisational procedures are required. Following recapitalisation they intend to implement a gradual reduction in the size of its loan book so as to reduce its future capital requirements with a view to meeting ASIC's benchmarks outlined in the proposals in ASIC Consultation Paper 199: Debentures: Reform to strengthen regulation. (h) It sought a forbearance period from Trust Company to 13 August 2013 in which to outline its strategy in detail based on recapitalisation proposals by interested parties.

[43]

Second Revaluation Summary and Revised Quarterly Report with Second Directors' Certificate 87 On 6 August 2013, GSI provided Trust Company with an updated version of "GSI - Progressive Valuation Summary - excluding Riviera (Appendix A to Trustee's letter dated 12 July 2013)" spread sheet (Second Revaluation Summary) under the Reporting Protocol and: • a draft Statement of Financial Position as at 30 June 2013 and marked "Draft - 06/08/13" showing total tangible equity as a deficiency of $2,177,028. Mr Sanford says that this is after taking into account the impairments set out in the Second Revaluation Summary; • a revised Quarterly Report for the period to 30 June 2013 incorporating a revised version of the First Directors' Certificate (Second Directors' Certificate) which stated as follows: On the basis of the above and the attachment hereto, the undersigned certify that they are unable to form the view that the financial position and performance of the Issuer is such that the property of the Issuer (and of each guarantor, if relevant) will be sufficient to repay the amount of each GSI Note when it becomes due and payable. (Emphasis added) • a covering letter which stated, among other things: Your letter of 2 August 2013 refers to different information provided in the Quarterly Report for the quarter ended 30 June 2013 and in the net tangible asset report (Appendix A Report) prepared by GSI in accordance with the Appendix A format that the Trustee provided. … as an initial observation we consider that it is important to recognise that the Quarterly Report and the Appendix A Report are not intended to report the same information. In particular, the Quarterly Report is prepared in accordance with the requirements of the Trust Deed to set out the value of the assets of the company at the end of the period to which the Quarterly Report relates. … The Appendix A Report has been proposed by the Trustee as the format in which it wishes GSI to report on its net tangible assets, and differs from the Quarterly Report. GSI does not accept that the fact that the Appendix A Report seeks different information from that required to be included in the Quarterly Report is evidence of "apparent confusion". Indeed, GSI understood that the Trustee proposed the Appendix A Report format precisely because the Quarterly Report is required to set out the value of assets of GSI, rather than the net tangible asset calculation that the Trustee seeks. …. Further in relation to the Appendix A Report, we do not accept that it is of itself a method for determining a tangible asset position but instead is a valuation summary schedule designed to consider the new valuations for loan securities and to determine any potential impairment. … As noted below, there are certain aspects of the Appendix A format which we do not consider result in appropriate valuations of assets. … GSI has reviewed the Quarterly Report in light of all the information that it now possesses. We note that the Quarterly Report is a report that includes the value of the assets of the Company at the end of the quarter to which the report relates - in this case as at 30 June 2013. It is not a "running" report that is updated through the period between the end of the relevant quarter and the date when the Quarterly Report is provided. Importantly and to clarify, the Directors (sic) certification provided at the 31st July indicated their belief in the state of affairs existing as at 30 June 2013. If the proper view is that the certification should reflect events from the end of the quarter until the date of signing, we would rely on the amended Quarterly Report attached. To address the fact that a number of events outside the ordinary course of business affected the Company both before and after 30 June 2013, GSI included detailed notes in the Quarterly Report to explain the basis on which the value of the assets of the Company had been calculated… … Importantly, at 30 June 2013 the directors had not determined that the Company's net tangible assets disclosed a deficiency, as information relevant to this conclusion, including valuation reports, were yet to be completed or were under consideration by GSI, its advisers and Ernst & Young. … … In the period since 30 June 2013, the directors have received further information regarding GSI's assets. As a result of receiving and considering this information, the directors are not able to certify at the date of the Quarterly Report - initially, 31 July 2013 and, as amended, at 6 August 2013 - that the property of GSI will be sufficient to repay the amount of each GSI Note when it becomes due and payable. …

[44]

Trust Company concerns and requirements for development of Recapitalisation Proposal 88 On 7 August 2013, Trust Company wrote to GSI; among other things it addressed: • Trust Company's concern regarding GSI's apparent net tangible asset deficiency; • Its concern at GSI's failure to deliver three revaluation reports which were due by 31 July 2013 and the fact that Trust Company would find it difficult to approve any recapitalisation or equity contribution proposed in circumstances where there is uncertainty regarding GSI's net tangible asset position; • Its requirement that any recapitalisation or equity contribution proposal by GSI must incorporate a binding commitment of new funding. To preserve the interests of Noteholders, Trust Company would also require confirmation by GSI of: a) the contractual terms applicable to the new equity arrangements, including that the rights of persons contributing equity to GSI are expressly subordinated to the rights of note holders to repayment of their GSI Notes; b) evidence of the deposit of cleared funds into a solicitors' trust account [by close of business on Friday 9 August]; and c) to the extent that GSI is relying on the conversion of debentures into equity as part of its equity contribution arrangement, we will require evidence of the relevant note holders' binding commitment to release GSI from the liabilities of GSI under the relevant GSI Notes upon conversion to equity. • Reiterating its requirement that the sale of all or any part of GSI's loan book must not be for less than face value; • If GSI presents an acceptable recapitalisation or equity contribution proposal, Trust Company would provide GSI the opportunity to address concerns about the ability of current management and its resourcing to carry on and conduct GSI's business in a proper and efficient manner; and the scope for GSI to address its expected future liquidity crisis should it seek to resume the issue and redemption of GSI Notes in the ordinary course of trading. 89 On 8 August 2013, representatives of Trust Company, Ernst & Young, GSI and FTI Consulting met in Melbourne to discuss a proposal for recapitalisation. 90 On 9 August 2013, representatives of Local Investor Group and their lawyers met with representatives of Trust Company, Ernst & Young and FTI Consulting. There were some discussions around the form that a proposal might take. Later that day a draft terms sheet and evidence of $1.75 million held in a Westpac account as pledge funds was provided to FTI Consulting. 91 On that day, FTI Consulting also received an expression of interest from a financial corporation whose proposal envisaged that it might accommodate the Local Investor Group proposal. 92 On 11 August 2013, Mr Peter Murphy, a director of GSI, requested Trust Company to agree to seek to extend the Court ordered freeze on redemption of Notes for a sufficient period for a detailed proposal from Local Investor Group to be considered by Trust Company and Ernst & Young, and suggested a period of up to four weeks.

[45]

Draft Terms Sheet 93 An updated terms sheet was provided to FTI Consulting, Trust Company and Ernst & Young on 12 August by the solicitors to Local Investor Group. The draft terms sheet recited that: The [Local Investor Group] believes that the economic role GSI plays in the wider Gippsland is irreplaceable and the purpose of the [Local Investor Group's] actions is to: (i) prevent damage to the local Gippsland community that will be caused if GSI's assets were liquidated during receivership, which will in turn create a further impairment of GSI's existing assets; and (ii) continue to provide a viable secondary lender and deposit taker for the region. 94 The Blakeley Affidavit summarises the draft terms sheet at [22]-[26]: Local Investor Group would provide an aggregate of $7.06 million, which it anticipated might be increased if required. $2.21 million of "new money" would be committed by "new investors", $3.35 million would be committed by exchanging Noteholders; and $1.5 million committed by directors and shareholders of GSI. The exchanging Noteholders and at least some of the directors and shareholders would fund their commitment by converting debentures (redemption of which was currently frozen) to equity. This would remedy any net tangible asset deficiency of $3.5 million. A new managed investment fund (New MIS) would be established (with funds from Local Investor Group) which would provide a $3.5 million, two year facility available to GSI, secured over GSI assets; GSI assets would be converted to cash over a period of time; the proposal would be implemented under a scheme of arrangement which would address liquidity issues that may otherwise arise because of a "run on funds" when the Court ordered freeze was lifted. The scheme would likely also involve: existing Noteholders agreeing to a staged redemption of capital over a two year period; there would be some reduction in interest payments to Noteholders (likely 20%) which would fund GSI's working capital requirements; and interest on the debt facility provided by the New MIS would rank in priority to Noteholders and pari passu as to principal. As existing Noteholders are paid out, they may choose to invest in the new managed investment scheme. "The Local Investor Group anticipates that, on this basis, the investments and loan book of GSI (together with its goodwill) will gradually migrate to the MIS Fund". The current directors of GSI would resign and new directors who are experienced business and property professionals nominated by Local Investor Group would be appointed.

[47]

Statement of Trust Company requirements 96 On 14 August 2013, Mr Duncan Johnston (on behalf of Local Investor Group) approached Mr Smoker to establish his attitude to a further three week extension. Mr Smoker indicated that, before Trust Company agreed to an extension, the issues which would need to be addressed were: (1) what the proposed scheme actually is and whether it can realistically be implemented; (2) certainty about post-scheme operating arrangements; and (3) an effective solution for GSI Noteholders experiencing significant financial hardship. 97 At 6 pm on 14 August 2013, GSI published a further continuous disclosure notice on its website. Among other things, it said: In a draft balance sheet of 31 July 2013 prepared by the Company and provided to the Trustee on 6 August 2013, the Company identified a deficiency of approximately $3.17 million (after deducting intangible assets of $3.55 million). The draft balance sheet includes a general impairment provision of $1 million, although that amount remains under review by the Company. At the time the draft balance sheet was prepared, a small number of valuation reports that GSI had commissioned in respect of assets in its loan book remained outstanding. Subsequently, these valuation reports have been received and the Company is satisfied that no further specific impairment provision is required in respect of the loan assets the subject of those valuation reports. 98 On 14 August 2013, Mr Smoker wrote to GSI (and authorised GSI to share the letter with Local Investor Group) setting out: • Trust Company's requirement (all valuations having been received by GSI) that GSI provide an Appendix A Report by 4 pm on 15 August 2013. • A detailed response to the Local Investor Group proposal measured against Trust Company's requirements set out in its letter of 7 August (referred to at [88] above in the third dot point), noting ways in which the proposal would be strengthened. It also set out a range of queries which included what GSI's cash flow would be during the period of implementation of the proposal, what distributions to Noteholders were intended during the implementation period, GSI's advisor costs in relation to the sale and recapitalisation proposal (both incurred and estimated), and a similar costs estimate for Local Investor Group. It acknowledged a request for similar information made by GSI in relation to Trust Company's own costs and advisor costs. • A statement that discussions between GSI and Trust Company's legal advisors about the proposal were constructive and foreshadowing more detailed discussions. • Having regard to a number of contingent factors, including the extent of GSI's net asset deficiency, the Court's willingness to extend the freeze on redemptions, preparation of transaction documents and obtaining court approval to a scheme within a four month period contemplated by the proposal, Trust Company enquired whether GSI had considered its position if those matters cannot be addressed. Trust Company stated its expectation that GSI would not dispute the appointment of a receiver as a means of protecting the interests of Noteholders if that occurred. It said: "As GSI will appreciate, we have continued to forbear in respect of our continuing right to enforce our security against GSI to enable GSI to develop its recapitalisation proposal. We continue to reserve our position in respect of the Federal Court proceedings and our enforcement rights generally." • Trust Company's unpaid expenses were $482,088 (in addition to quarterly fees payable to Trust Company), and $146,732.75 in fees payable to Trust Company's lawyers up to 31 July 2013.

[49]

Sanford view 100 Mr Sanford explains the movement in values resulting in withdrawal of Prospectus 18, the Quarterly Report and First Revaluation Summary and the subsequent Quarterly Report and Revaluation Summaries (including Directors' Certifications): (a) As at 8 July, GSI had received valuations on 17 of 19 Priority 1 Loans and two of three directly owned properties. GSI had not formed a final view on the precise level of provisions required but the Board thought it appropriate to issue a replacement prospectus; (b) The First Revaluation Summary provided on 25 July was prepared having regard to the valuations then available to GSI and assumptions required by Trust Company; (c) GSI prepared the Quarterly Report (including the First Directors' Certificate) for the period to 30 June 2013 provided on 31 July 2013 (and in particular the value of assets of GSI) on the basis of known valuations and impairments at that date. At 30 June 2013, the directors had not determined that GSI's net tangible assets disclosed a deficiency, as information relevant to this conclusion including valuation reports, were yet to be completed or were under consideration by GSI, its advisers and Ernst & Young; (d) GSI reviewed the Quarterly Report as at 6 August 2013, in light of the additional information available to GSI by 6 August 2013. This took into account impairments set out in the Second Revaluation Summary. To address the fact that a number of events outside the ordinary course of business affected GSI both before and after 30 June 2013, GSI included detailed notes in the Quarterly Report; (e) The net tangible asset position and impairments set out in the balance sheet as at 31 July 2013 provided to Trust Company on 15 August 2013 and the Third Revaluation Summary differ from the documents provided to Trust Company on 25 July 2013, 31 July 2013 and 6 August 2013 as a consequence of factors which include: (1) GSI having now received all of the valuations that had been commissioned under the Reporting Protocol, and having determined whether to include any additional specific impairments in respect of the loans associated with the valued properties; (2) Following this, GSI having now determined a collective provision; (3) Fees of Trust Company (and its advisors) as advised on 14 August 2013 and fees incurred by GSI in connection with the Recapitalisation Proposal and these proceedings; (f) The Directors' Certificate in the amended Quarterly Report of 6 August 2013 indicated that the GSI Directors were not able to certify, as at that date, that the property of GSI will be sufficient to repay the amount of each GSI Note when it becomes due and payable. Mr Sanford remained of that view. However, GSI (with FTI Consulting's assistance) continues to explore a potential recapitalisation of GSI with Local Investor Group to address any net tangible asset deficiency and liquidity issues that may otherwise arise at such time as the Court ordered freeze on redemptions is lifted. While Mr Sanford could not say whether the scheme proposed by Local Investor Group would be implemented, he considered it in the interests of GSI Noteholders that GSI be afforded further time to progress negotiations with Local Investor Group as set out in the Terms Sheet with the intention that GSI Noteholders receive 100 cents in the dollar and other creditors of GSI be paid out in full. Mr Sanford says that he considers that this would be a more favourable outcome to GSI Noteholders and other creditors of GSI than the alternatives.

[50]

Terms Sheet for Recapitalisation Proposal finalised 101 On 18 August 2013, GSI and Local Investor Group signed a terms sheet (Terms Sheet) in relation to Local Investor Group's proposal (Recapitalisation Proposal). The following summary is taken from the 19 August Sanford Affidavit. Note the definitions of "Open MIS" and "Closed MIS" below which will be used subsequently in these reasons to distinguish the MIS referred to in the 12 August draft and the MISs to be established under the Terms Sheet: [12] Among other things, the Terms Sheet provides for: (a) an injection of $7.06 million in equity (Commitment Amount), comprising: (i) $2.21 million in cash; and (ii) the conversion of GSI notes held by members of the Local Investor Group (referred to as the Rescue Group) and existing directors and shareholders of GSI with a face value of $4.85 million into equity; (b) the establishment of two managed investment schemes (MIS): (i) an open MIS (New MIS)[in these reasons referred to as Open MIS], which will operate as a mortgage fund and replace GSI's current debenture issuing business (which will cease). New MIS will acquire all performing loan assets, and other assets of GSI (excluding its non-performing loans) (New MIS Assets). The New MIS fund size will initially be approximately $127 million; and (ii) a closed MIS (Closed MIS), which will receive the remainder of GSI's assets, essentially being the impaired loans (Legacy Assets). It will operate as a legacy fund which will trade out (wind down) the non-performing loans of GSI over a period of approximately 2 years. The Closed MIS fund will initially be approximately $12 million. (c) New MIS will continue to provide a loans business in the Gippsland area, and the independent responsible entity (RE) of New MIS will contract to GSI the ongoing provision of mortgage management services; (d) the RE of Closed MIS will engage GSI to manage the wind down of the Legacy Assets in Closed MIS; (e) all persons currently holding notes in GSI (GSI Noteholders) will migrate their investments in GSI Notes into units in New MIS and Closed MIS, subject to the approval of a creditor's scheme of arrangement (Scheme). Under the Scheme, GSI notes will be cancelled in consideration for the issue of units in New MIS and Closed MIS: (i) New MIS units will be issued to GSI Noteholders reflecting the value of the New MIS Assets; and (ii) Closed MIS will issue preferred units to GSI Noteholders for the value of the Closed MIS Assets transferred from GSI; (f) in each case, units will be issued to GSI Noteholders in proportion to the value of the GSI Notes held by them; (g) GSI will be relieved of liability under existing GSI Notes, the trust deed will be terminated, and The Trust Company (Nominees) Limited (Trustee) will release its security (held under the Trust Deed) and cease to act as trustee for GSI Noteholders; (h) the Rescue Group will subscribe for shares in GSI and, if necessary, subscribe for subordinated units in Closed MIS. Under the subordinated units, the Rescue Group will not be entitled to receive distributions from the Closed MIS fund until GSI Noteholders have received 100c in the dollar; (i) of the Commitment Amount, the $1.5 million in equity to be contributed by current directors and shareholders of GSI will rank subsequently to the contributions made by other members of the Rescue Group, which will (in turn) rank subsequently to the interests of GSI Noteholders; and (j) the parties propose to commission an independent expert's report in connection with the Scheme, to ensure GSI Noteholders are able to make an informed decision in deciding whether to approve Scheme resolutions. [13] In relation to ongoing management, the Terms Sheet: (a) contemplates that all but one or two of the current GSI directors will retire upon execution of an implementation agreement in respect of the Scheme; (b) notes that Duncan Johnston, Ray Hack, Bill Dahlsen, Richard Rijs and Harry Rijs have agreed to accept appointments as directors, subject to approval of the Scheme, and John Dahlsen will act as special advisor to the reconstituted board; and (c) provides details regarding governance practices proposed by the Rescue Group. 102 $1.925 million had been placed in the Westpac account which could be transferred to a solicitors' trust account upon signing of the implementation agreement (Implementation Agreement) in respect of the moneys referred to in 12(i) of the Terms Sheet: see [101] above. 103 Clause 6(i) of the Terms Sheet provides: GSI is to pay its own costs and the costs of the Rescue Group and the Trust in relation to the negotiation and preparation of this term sheet, and the implementation of all transactions contemplated by it, including where no transaction is ultimately entered into.

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Hearing on Tuesday 20 August 2013 105 By agreement between the parties the hearing was stood over from 13 August to 20 August 2013. At the hearing, ASIC (through its Counsel, Mr Izzo) appeared amicus curiae and provided a written outline of submissions. Mr White appeared for Mr Duncan Johnston, who sought (and was granted) leave to be heard on the application pursuant to rule 2.13 of the Federal Court (Corporations) Rules 2000 (Cth), there being no objection raised to his appearance. Trust Company and GSI provided written submissions. 106 Counsel for Trust Company indicated that it did not propose to pursue further Local Investor Group's Recapitalisation Proposal and accordingly wished to proceed with the hearing of its application. In a circumstance where GSI's assets may not be sufficient to meet liabilities to GSI Noteholders, Trust Company considered it inappropriate that GSI continue to expend funds in pursuing a restructure proposal which would have the effect of releasing GSI and its directors and shareholders from liability. The Recapitalisation Proposal could be pursued by a receiver. 107 Counsel for Mr Johnston raised two issues: (1) Trust Company had not, until the hearing, suggested that because Local Investor Group was not bearing the costs of the Recapitalisation Proposal that Trust Company's application should proceed: they were only given notice that it was Trust Company's view that they should have "skin in the game" on 20 August; it may be that Local Investor Group would entertain meeting the cost of the Recapitalisation Proposal process; and (2) on the basis of a "ring around", in the course of the day, Local Investor Group had secured signatures from 90 GSI Noteholders representing $23 million or approximately 16.5% of GSI Notes outstanding to requisition a meeting of Noteholders under s 283EA. The purpose of the meeting would be to give directions to Trust Company not to pursue its application under s 283HB(1)(c), not to exercise its powers to appoint a receiver, to remove any receiver who might already have been appointed, to abstain from any such action until Noteholders had had an opportunity to consider the Terms Sheet and to co-operate to implement the proposal if Noteholders vote in favour of it: see Hinton Affidavit. I will call this the First Proposed Meeting. 108 By the 20 August Johnston Affidavit, Mr Johnston deposed that it was only on 19 August 2013 that Trust Company had indicated that it did not regard a $7 million equity investment as sufficient, and Local Investor Group may be able to raise more. He expressed concern that realisation of GSI's assets by a receiver would result in significant loss to GSI Noteholders and have far reaching consequences to the Gippsland community. 109 Trust Company mentioned the dispute which had arisen between Trust Company and GSI as to whether, because GSI had not redeemed any Notes which were "at call" or "term" Notes which had matured since 19 July 2013, Trust Company could rely on clause 12.01(a) as a Default which enlivened Trust Company's powers of enforcement under the Trust Deed, including the power to appoint a receiver. Counsel for Trust Company said that Trust Company had not exercised that power to date because of the dispute, notwithstanding the numerous assertions Trust Company had made publicly, to GSI and to the Court that it had that power. Trust Company asked for a variation of the Court's orders made on 25 July 2013 to make it clear that the orders do not prevent a Default contemplated by clause 12.01(a) from occurring. Counsel for GSI opposed any such variation. 110 The hearing was adjourned until 22 August 2013 to establish what (if any) costs Local Investor Group would be prepared to bear in relation to the development and approval of the Recapitalisation Proposal. If necessary, the Court would hear submissions on the question of variation to the orders made on 25 July 2013 at that hearing. Neither Trust Company nor ASIC had raised any issue of personal dishonesty of GSI management, although Trust Company had lost confidence in the capacity of GSI's management to manage its business and affairs in a proper and efficient manner. 111 Trust Company expressed concern about a company in the position of GSI continuing to expend funds on advisor fees. While the Court was concerned that Trust Company's application for orders under s 283HB(1)(c) be determined expeditiously having regard to GSI's circumstances, the willingness of Local Investor Group to bear such costs would be a significant indicator of both financial capacity and will to implement the Recapitalisation Proposal mitigating or avoiding loss to GSI Noteholders; Local Investor Group appeared to be sophisticated and to have means. The capacity of Local Investor Group to obtain support from GSI Noteholders representing at least 16.5% of the face value of outstanding GSI notes to requisition the First Proposed Meeting was another factor weighing in favour of establishing whether such a proposal could or should be pursued fruitfully. It remained open to Trust Company to exercise any powers it had under the Trust Deed if it was concerned about any delay caused by the brief adjournment proposed. The Court encouraged the parties to negotiate directly.

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Correspondence following Hearing of 20 August 2013 112 Following the hearing on 20 August 2013, Trust Company wrote to GSI, copied to Mr Johnston. The letter noted that following the receipt of revaluations under the Reporting Protocol, GSI had acknowledged a deficiency in its net tangible asset position of $3.8 million. Despite reviewing a number of iterations of the Recapitalisation Proposal, the Proposal did not meet its requirements, and the developments (including the directions to convene a meeting of Noteholders) had not changed its position. It noted "the continuing uncertainty regarding the terms of the Investor Proposal, the apparent significant execution risk and the lack of sufficient equity contributions as part of the Investor Proposal to restore GSI to a positive net tangible asset position" which, despite the uncertainties, GSI appeared to be relying on to form the view that it continue to trade as a going concern. It expressed concern about accruing GSI advisor costs (including costs of Local Investor Group for which GSI had accepted responsibility). It indicated Trust Company's willingness to consider supporting proposals by GSI and other parties to recapitalise GSI, and confirmed that the Recapitalisation Proposal remained under consideration. 113 Annexed to the 20 August 2013 letter was a detailed list of major outstanding items in relation to Local Investor Group's proposal which needed to be addressed including: (1) Funding: confirmation of cash funding, value of Notes to be converted and the total amount of funding to be provided; (2) Implementation: confirmation of four month timeline, proposed Court orders to continue the freeze, Trustee and advisor costs; (3) Transaction costs: confirmation of accrued amounts to date by all parties and advisors, detailed legal and financial scope and fee capping arrangements through implementation for all advisers, expert reports and scheme administrator, a breakdown of the $1.2 million cost estimate, confirmation that GSI advisor costs are to be funded by GSI directors rather than Noteholders and confirmation that Local Investor Group costs are to be borne by them and not Noteholders; (4) Scheme of Arrangement: confirmation of terms being asked of Noteholders, and any proposed form of release of directors and auditor potential claims; (5) GSI's operations during implementation: the role of GSI's directors and management, confirmation of continued GSI solvency and the basis for that view; (6) Proposed management investment schemes: details of initial capitalisation of the proposed MIS, management fee structure, identity of and incorporation and licensing of the responsible entity (noting the desire for it to come from the Gippsland region) and if an existing responsible entity, whether it is licensed to operate that kind of scheme, who the key persons or responsible managers will be and whether they meet the minimum qualification requirements of ASIC policy, how the responsible entity will comply with the financial resource requirements imposed by ASIC Regulatory Guide 166 (Licensing: Financial requirements), insurance, who its directors would be and (if necessary) the members of its compliance committee; (7) Contingency planning: what if the Noteholders or the Court does not approve the scheme, what happens if Local Investor Group withdraws and what happens if an administrator is appointed to GSI? 114 Mr Smoker had a conference call with representatives of Local Investor Group on 21 August 2013 following which he sent an email to GSI indicating, in light of the detail provided in relation to the Recapitalisation Proposal, Trust Company would not object to the Court making orders adjourning the application for four weeks but that it would seek orders capping GSI's advisor and operating costs.

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Trust Company's view of flaws in Terms Sheet 118 Trust Company's written submissions of 22 August 2013 contained a detailed criticism of the Terms Sheet which it is convenient to set out in full (footnotes excluded): Flaws in the term sheet 26. The level of equity proposed in the Investor Proposal is inadequate to satisfy the trustee or bring the defendant up to the ASIC Benchmark. The 12 August 2013 Proposed Terms Sheet and the 18 August 2013 Proposed Term Sheet has the following material deficiencies: a. The Amount of equity of $3,350,000.00 does not render the company balance sheet solvent; b. The GSI Directors and Shareholders proposed exchange is not equity, and further is in fact split half towards debt and half as a full value fresh investment in the "Equity Investment"- that is not treating all debenture holders equally in circumstances of a likely shortfall; c. The Rescue Group are simply facilitating a de facto receivership in the described "orderly realisation" - at a price for debenture holders of releasing the directors and GSI from the solvency and shortfall liabilities; d. The Scheme is still speculative and may well realise less than full recovery for debenture holders - and such a scheme is still available if there is a receivership; e. The locked in reduction of 20% interest for 6 months is a reduction of liability to Noteholders that is not acceptable to the trustee; f. The 50% of the allocation of the rescue group money means that only half the amount is being received by GSI; g. The component of the rescue money that is loan money is debt, not equity; h. The costs of the Rescue Group and the proposed scheme need to be borne by the Rescue Group; i. The current continued management expenses of approximately quarter of a million per week since 19 July, by a company that may be insolvent, is unacceptable to the trustee; j. Given the collapse in equity from 5.1% in January 2013 on out of date balance sheet, 3.93% in March on 31 December 2013 [sic] accounts, the draft 30 June 2013 negative net tangible assets of -$2,609,000 (as at 25 July 2013), and the current negative net tangible assets as at 31 July of -$3,805,986 and the approximately $33 million currently at call with about $26 million in cash assets. The proposed Rescue Group equity is inadequate to get to solvency and nowhere near the 8% ASIC benchmark equity ratio. 27. In a letter on 7 August 2013 the plaintiff set out its requirements that any recapitalisation or equity contribution must incorporate a binding commitment of funding. The plaintiff required (i) confirmation of the contractual terms applicable to any new equity arrangements (including that new equity contributors were to be expressly subordinated to note holders), (ii) evidence of the deposit of cleared funds into a solicitors trust account, and (iii) to the extent that the defendant is relying on the conversion of debentures into equity, evidence of the relevant note holders' binding agreement to release the defendant from liability under the debentures. None of those requirements have been satisfied. 28. The plaintiff's 14 August 2013 letter detailed the three requirements, and the reasons they were not satisfactorily addressed by the Term Sheet, in a table on pages 2 and 3. The same three requirements are still lacking in the 18 August Terms Sheet. 29. The plaintiff trustee has been responding to proposals advanced by the investors and by the directors on a regular basis.

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ASIC submissions 121 In both its written submissions and Counsel's submissions at the hearing, ASIC expressed reservations about the Court granting a four week adjournment: • Trust Company had drawn attention to matters of serious concern in relation to the financial position of GSI: (1) the Third Revaluation Summary and balance sheet as at 31 July 2013 indicated a net tangible asset deficiency of $3.8 million (which took into account $482,088 of accrued fees owing to Trust Company and $146,732 of accrued fees of Trust Company's lawyers); (2) "at call" GSI Notes and "term" Notes which had matured since 19 July had an aggregate value of approximately $33 million (including "at call" Notes of $19,985,210 and "term" debentures of $13,950,042.91 which had matured since 19 July 2013); (3) in the Second Directors' Certificate, the directors of GSI state that they are "unable to form the view" that GSI will be able to repay the amount of each debenture when it becomes due and payable; and (4) GSI states in its quarterly report of 31 July 2013 in respect of the period to 30 June 2013 that in the absence of additional equity it would not have on hand cash or cash equivalents sufficient to meet projected cash needs over the next three months. • These matters would ordinarily justify the immediate appointment of an external administrator. While there is a question to be tried as to whether there is a realistic alternative in the form of the Recapitalisation Proposal, the immediacy of the concerns raised by Trust Company militate in favour of its application being tried without further delay, especially as Trust Company's application of 25 July has been twice deferred to allow the Recapitalisation Proposal to be explored. • If GSI is indeed insolvent (but ASIC is not in a position to express a view on that question), it should not be incurring any amount of further expense. • The capped amount proposed for GSI advisor fees are unlikely in reality to be adequate for GSI to obtain appropriate advice in relation to a scheme of arrangement of the complexity envisaged by the Recapitalisation Proposal. Further, it is better to have the debate now. If, at the end of four weeks, the Recapitalisation Proposal does not proceed, it would be better to have appointed a receiver now. On that basis it would be better to hear Trust Company's application now. • The Recapitalisation Proposal fails to deal with the substantial costs (estimated at $1.2 million by Local Investor Group) which would be incurred in the period after the Implementation Agreement is signed and before Debenture holders vote on a scheme of arrangement. It is a relatively complex proposal involving setting up managed investment schemes. If the Noteholders vote against the scheme, money expended in that way would not be available to repay Noteholders when a receiver is then appointed. • The issue raised by the Court on 20 August - whether Local Investor Group would be prepared to fund from their resources the costs of the Recapitalisation Proposal to the approval stage - was not addressed in the adjournment application. As matters now stand Noteholders would be put at the risk of a depletion of GSI's assets by reimbursement of Local Investor Group's costs and the costs of GSI in the implementation period which would include not only advisor costs but also Trust Company's costs and the costs of Ernst & Young in monitoring GSI's balance sheet over a period of up to four months. The prospect of those costs may neutralise any countervailing concern about the costs of receivership.

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Trust Company's concerns with Recapitalisation Proposal - equity requirement 126 Trust Company's solicitors sent an email to Local Investor Group's solicitors at 11.46 am on 23 August 2013. It is convenient to set out a substantial part of that email in full: …Through [Local Investor Group's lawyers] you have asked that we confirm our position as Trustee in respect of the requirements to recapitalise GSI by a further injection of equity. Given the uncertainty that remains regarding the Rescue Group's proposal and the underlying financial position of GSI, it remains difficult for us to answer that question. We simply do not have enough information to provide a definitive response. Our comments below are provided in good faith and are intended to assist you in considering your position today. 1. As you know, GSI whilst it remains a debenture issuing entity under Chapter 2L of the Corporations Act 2001 (Cth), is subject to the guidelines published by ASIC under RG69. As such, GSI should maintain equity of not less than 8% of its total liabilities. On a total liabilities figure of $150 million, total positive equity of around $12 million would be required. 2. In around November 2012 when we commenced our current review of GSI, GSI's equity position was reported as being slightly under 4% of its total liabilities. It has since emerged that GSI's reported asset values were far in excess of their underlying values, which if correct would mean that GSI's actual equity level at that time was significantly less than 4%. 3. Since November 2012, we have had repeated and continuing discussions with GSI in relation to its lack of equity and the urgent need for GSI to obtain fresh sources of capital. Throughout, our requirement has remained that GSI work towards ASIC's requirement under Benchmark 1 of RG 69, that GSI's equity be not less than 8% of its total liabilities. 4. In April 2013, GSI agreed to provide us with its plan to increase its level of equity to 8% in the reporting protocol signed by GSI's directors, by not later than 1 July 2013. On 3 July 2013, we received the attached response from GSI. Our comments on that letter are: • GSI's response was unsatisfactory. It shows that GSI did not take our equity requirements seriously. • Despite GSI's dire financial predicament and the ongoing Trustee review, GSI had not taken steps to seek additional capital in the period from November 2012 to July 2013. • Had it approached the Rescue Group at an earlier stage of our review, it is apparent that GSI may have been able to improve its equity position. 5. The course of events since that time will be known to you. GSI has now acknowledged openly that its equity position is significantly negative. Current estimates are in the region of a $3.8 million deficiency. The final deficiency will depend on the value of the entire book of assets held by GSI, including loan assets that we and EY have not yet had the opportunity to review. In our view, on the information that we currently have, there is a material risk that the deficiency is greater. 6. That said, we are mindful of the issues that you raised last night (through [Local Investor Group's lawyers]) regarding the applicability of RG 69 to the recapitalised GSI (if the Rescue Group's proposal can be implemented). Our initial reaction is that until any scheme is approved and has become effective, we believe that that the RG 69 regulatory policy should still apply unless expressly waived by ASIC. 7. To assist you in considering your position in terms of the question of the appropriate equity injection into GSI, in our view the amount of cash funding required could not be less than the sum of the following amounts: funds to restore the $3.8 m deficiency; a buffer equivalent to 4% of GSI's liabilities (circa $6 m); and a detailed plan and timing to restore GSI to an 8% buffer (circa a further $6 m); 8. Accordingly, in terms of the objective numbers required the range of new funding would be in the range of $10 million to 16 million, with the high-end representing full compliance with RG69 and the lower end being a restoration to the pre-November 2012 position of GSI. 9. We further note that: The Trust Deed requires that GSI maintain minimum equity of $1m (clause 8.01 of the Trust Deed). At present, GSI does not satisfy that requirement. Any new RE created under the Rescue Group's proposal would require appropriate capitalisation under ASIC's RG 166. Our understanding is that further funding of around $150k would be required for that purpose. Any new RE would require working capital to do the following things as part of its future operations: appropriate insurance under Part 7 of the Corporations Act ensure adequate resourcing member of an external dispute resolution scheme resources to fund both financial statement audit and compliance plan audits under Chapter 5C of the Corporations Act. 10. Finally, if the Rescue Group's proposal was implemented, the transaction costs of implementation and documentation of the proposal would need to be met in full without recourse to note holder funds. To implement the Rescue Group's proposal, we estimate based on current information that transaction costs well in excess of $2-3 million would be required in addition to the capitalisation requirements outlined above.

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Local Investor Group submissions 128 Local Investor Group provided written submissions on 23 August 2013 which it is convenient to set out in full: Submissions regarding the Rescue Group paying the costs of the parties in respect of the proposal 1. The Rescue Group has considered the Court's inquiry made during yesterday's hearing in relation to costs. The Rescue Group is prepared to advance up to $300,000 in connection with the preparation of an implementation agreement, in addition to bearing its own costs moving forward in this matter in respect of the same. The agreement to pay such amounts is subject to conditions which I will outline shortly. 2. The Rescue Group submits that they should not have to pay for the operating expenses of GSI, given that GSI currently receives a weekly revenue of $52,345, which adequately covers GSI's weekly expenses of $29,873. GSI is actually running at a weekly profit of $22,508. However, they are prepared for these costs to be included in the $300,000. 3. Further, E&Y would not be required to have any involvement in connection with the preparation of the Implementation Agreement. 4. The Rescue Group has been advised that the majority of work to be undertaken in connection with the preparation of the Implementation Agreement would be borne by [GSI's lawyers] and [Rescue Group's lawyers]. 5. The Rescue Group understands that the costs likely to be incurred in preparation of the Implementation Agreement over a two week period would be: (a) $40,000 per week by [GSI's lawyers]; and (b) $20,000 per week by FTI [Consulting], which in total adds up to $120,000 over the two week period. 6. The Rescue Group is prepared to advance a total of $300,000 subject to Trust Co and [Trust Company's lawyers] agreeing to cap their fees at $90,000 on a weekly basis. Despite Trust Co and [Trust Company's lawyers] having been request[ed] to cap their fees they have not confirmed their willingness to do so. 7. A telephone conference was held on Wednesday at approximately 4:15 pm between Trust Co, [Trust Company's lawyers], E&Y, GSI, the Rescue Group and [Rescue Group's lawyers] in which the Trust Co was asked to provide numerous information to the Rescue Group. No response was received to these requests until 11:46 am today ("Email"). Submissions regarding capitalisation requirements 8. The Email which was addressed from Trust Co to the Rescue Group, outlined Trust Co's views on the proposed capitalisation, being that the appropriate cash injection for GSI would be in the range of $10 million to $16 million. This was [the] first indication after a number of weeks of communications with Trust Co that it disclosed a figure of this magnitude. 9. That figure is predicated on the Trust Co's view that GSI remains a debenture issuing entity, and so remains subject to guidelines published by ASIC. 10. GSI is no longer a debenture issuer. It will issue no more debentures. The business of GSI will be assumed by the new managed investment Schemes, [t]he ASIC guidelines referred to by the plaintiff do not apply to managed investment schemes. 11. Benchmark 1 in ASIC Regulatory Guide 69 recommends debenture issuers have a minimum capital ratio of 8% (20% if they are involved in property development), to be reported against in prospectuses on an "if not, why not" basis. 12. In Consultation Paper 199, ASIC proposed that debenture issuers such as GSI be required to comply with a mandatory 8% minimum capital ratio of their risk-weighted assets, but phased in over a 4-year period. 13. The plaintiff seeks to impose upon the 1st respondent a capital requirement which is inappropriate, and completely unnecessary, given its current situation. 14. GSI's solvency should be assessed not against ASIC's benchmarks, but by normal accounting concepts. GSI's net tangible asset deficiency is on the plaintiff's calculations, as mentioned yesterday, $3.8 million. 15. The restructure proposal will restore GSI's net tangible asset position to a positive position, which is all that is required to restore GSI to solvency. 16. Funds from the Rescue Group will provide GSI with any necessary working capital for abnormal expenses. GSI's ordinary weekly expenses are approximately $30,000, and it has an income of around $52,000 per week, resulting in free working capital of $22,000 per week, which could be applied to abnormal expenses with any reduction in noteholder funds. 17. We further submit that there are 10 debenture issuers with capitalisation not meeting these requirements. Please see attached document. Submissions regarding capitalisation requirements 18. In light of the fact that: (i) Trust Co advised two hours before the hearing that it would require between $10 million and $16 million to approve a proposal (noting that Trust Co is still unable to provide a definite figure after having appointed E&Y more than 8 months ago); and (ii) it would be necessary for the Rescue Group to raise this additional money in the period before the Implementation Agreement needs to be signed without a disclosure document; and (iii) Trust Co and [Trust Company's lawyers] are not prepared to cap their fees, the Rescue Group believes that the task of funding and implementing the recapitalisation proposal is very difficult, if not impossible, and that there is no point in it agreeing to fund the preparation of an implementation agreement over the next 2 to 4 week period unless Trust Co revises it view that the capital injection need for GSI [sic]. 19. In deciding whether to make an order under s283HB(1)(c) of the Corporations Act, s283HB(2)(c) provides that the Court must have regard to the interest of the borrower's members and creditors. 20. In light of the fact that the Rescue Group received support from debenture holders holding debentures representing approximately $23.5 million worth of debentures (being more than 10% of the nominal value of all debentures on issue) for the calling of a meeting in under 3 hours, and not one of the Debenture holders rejected this approach, the Rescue Group submits that the Court should make an order calling a meeting of debenture holders. 21. If such orders were made to grant such orders [sic] then the Rescue Group would be prepared to pay for the costs of the meeting on the basis that [Rescue Group's lawyers] prepare the notice of meeting, GSI holds the meeting at a venue somewhere in Gippsland and Trust Co agrees that it[s] costs to attend the meeting not exceed $30,000. 22. In the opinion of the Rescue Group's this will not affect GSI current operating costs, and therefore will not be of any detriment to the company. 23. What the Noteholders will be asked to decide at the meeting is whether the company proceed with the Proposal on the basis that the company pay the likely costs of the proposal being between $1.2 and $1.5 million. 24. The Rescue Group submits that in the context of [sic] to your honour that in the context of a $140 million company this figure will not have a significant impact on the return to noteholders that will be received upon a receivership. Disclosure rebuttal 25. Whilst the Rescue Group acknowledges that the notice to debenture holders will not include the same standard of disclosure as a scheme, the Rescue Group submits the Noteholders will be provided with full disclosure in due course upon distribution of a Scheme Booklet. 129 Counsel for Local Investor Group submitted that: The period of the proposed adjournment would now be two weeks, during which an Implementation Agreement would be negotiated, and GSI would be "cash flow positive". The $300,000 committed by Local Investor Group could be used not only to meet GSI's advisors' capped fees, but also if necessary, its operating costs and there was sufficient to pay Trust Company's advisors fees during that period (which they had not agreed to cap) to the extent that GSI was liable for them. Local Investor Group would meet its own costs. GSI would not be required to repay this money, although repayment might form part of a scheme which Noteholders are asked to approve. The First Proposed Meeting of Noteholders had been set down for 5 September 2013. Trust Company had made no attempt to contact Noteholders to find out their position and Local Investor Group was concerned that it was being "met with obstacles and being blocked at every corner". Trust Company had now sought to impose an 8% net tangible assets requirement which would not be relevant as GSI would not continue under the proposal: the only relevant issue was securing GSI's solvency and Trust Company should "be more flexible". In response to a query about when the $300,000 would be paid, Counsel indicated that it could be paid into Rescue Group's solicitors' trust account by 26 August. The $300,000 would not be available to meet costs incurred by GSI before any adjournment. 130 Counsel for GSI submitted that: While GSI disputed the methodology required by Trust Company in the Appendix A Reports, for the purposes of argument before the Court, GSI's net tangible asset deficiency should be taken to be $3.8 million. Relevant to solvency, the net asset deficiency would be addressed by the Recapitalisation Proposal and redemptions are frozen under the Court's orders which may continue if the Recapitalisation Proposal is advanced. During the two week adjournment, Local Investor Group would be bearing costs so that Noteholders would not be worse off and the Recapitalisation Proposal offered the possibility of Noteholders recovering their entire principal. By a letter from its solicitors on 22 August, Local Investor Group had indicated that it would bear their own costs of negotiating the Implementation Agreement and the implementation of transactions contemplated during the adjournment, though reserving the right to seek reimbursement as part of a scheme of arrangement. If a receiver were appointed as a result of Trust Company being successful in its application under s 283HB(1)(c), in addition to receivership costs, Noteholders and GSI shareholders would be worse off because $7 million in new funds and conversion of debt (GSI Notes held by members of Local Investor Group or GSI directors and shareholders) to equity would not occur diminishing the likelihood that Noteholders would be repaid in full.

[65]

Trust Company's submissions 131 Counsel for Trust Company submitted that: • Local Investor Group's proposition that Trust Company had only communicated its position on required equity 12 hours ago was a flight of fantasy. The need for GSI to improve its capital has been conveyed since November 2012 and the Reporting Protocol required GSI to explain its plan for meeting the 8% threshold in the Equity Improvement Report by 1 July 2013. • The Recapitalisation Proposal does not, on its current formulation, adequately address the question of GSI's solvency as solvency is not a balance sheet test, noting that "at call" Notes and Notes which had matured since 25 July 2013 exceeded by $7 million GSI's cash reserves; the Court ordered freeze on the redemption of GSI Notes was not relevant to this issue. The current position of GSI is that it is insolvent. • Trust Company starts from that position in evaluating the proposal; the question is whether the Recapitalisation Proposal provides a substantial injection of capital for the benefit of Noteholders. It is the interests of Noteholders which must be preferred because, due to the insolvency, their interests are in conflict with the interests of members of GSI and the interests of directors who could face recovery action by a receiver. For those reasons, the Local Investor Group's criticism of Trust Company's position is not tenable. • As GSI is insolvent, it should not be expending its funds on advisor fees and paying management salary and director's fees, certainly not expenditure of $998,000 which had been incurred in the past four weeks. • Even if GSI's insolvency did not eventuate because the Recapitalisation Proposal was approved by Noteholders, the Proposal involved a reduction of Noteholders' interest entitlements (which was challenged by GSI). • To the extent that Local Investor Group proposed to convert GSI Notes to equity, or to convert their Notes into partial debt and partial equity, that amounted to an advantage which resulted in unequal treatment of Noteholders. It is not a position where the converting Noteholders are agreeing to surrender their interest and stand behind existing Noteholders. While the converting Noteholders will have exposure to Closed MIS (the entity which holds non-performing assets) as well as Open MIS, they are trying to get the full face value of their Notes; but Noteholders may not get the full face value. • It was not appropriate for Local Investor Group to assert a position "equal" to Trust Company's as trustee for Debenture holders by asking it to cap its expenses during any adjournment. Nevertheless, with estimated costs in the order of $90,000 per week, the $300,000 which Local Investor Group proposes to contribute towards costs while an Implementation Agreement is negotiated during a two week adjournment is likely to be adequate. • However, Local Investor Group's proposal to contribute $300,000 for two weeks to cover costs to complete negotiation of the Implementation Agreement does not address payment of interest accruing on GSI Notes during the two weeks. While it is true that such interest might also not be paid if a receiver were appointed to GSI, it would be open for a receiver to negotiate with Local Investor Group so that the opportunity of recapitalisation on appropriate terms would not be lost if there is no adjournment. Moreover, the receiver would be free to entertain other proposals and would not be captive to Local Investor Group and would be free to pursue other remedies which may be available to pay to Noteholders to the extent possible the face value of Notes and interest accrued. An adjournment to develop the Recapitalisation Proposal is pursuing a flight of fantasy because the Recapitalisation Proposal is "utterly inadequate". • Last, it would be intolerable during an adjournment to leave the GSI directors in control of an apparently insolvent company in circumstances where Trust Company has expressed concern about their management.

[66]

ASIC submissions 132 Counsel for ASIC submitted that: it is more appropriate to consider the merits of the Recapitalisation Proposal in the context of consideration of the Trust Company's s 283HB(1)(c) application than on an adjournment application, to determine whether (in whatever state it is now in) the Recapitalisation Proposal offers the hope of a better return to Noteholders than the appointment of a receiver. This is true even though Local Investor Group is willing to relieve GSI of the need to incur further debts while an Implementation Agreement is negotiated. ASIC had questions about the utility of further negotiation of the Recapitalisation Proposal: • Local Investor Group intends that GSI bears the costs of implementation of the Recapitalisation Proposal from the time that the Implementation Agreement is signed to the time of the scheme meeting at which Noteholders would be asked to approve the Recapitalisation Proposal (estimated at between $1.2 and $1.5 million): see [23] of Local Investor Group's submissions at [128] above. If Noteholders do not vote in favour of the scheme, that money will not be available for distribution to Noteholders in a receivership. • While Local Investor Group intends that the Recapitalisation Proposal will return all of the principal on GSI Notes, there are questions about the capacity of the proposal to do that. The first and most obvious issue is the delay in a return to investors but most significant is whether there will be sufficient investor confidence in the scheme to avoid a run on Open MIS (that is, the MIS with the performing assets). Further, some of the submissions made about the cost of receivership are somewhat alarmist; each receivership should be judged on its own merits. • Last, in relation to the interests of creditors and members of GSI (to which the Court must have regard under s 283HB(2)(c)), the position of members does not rise above that of Debenture holders, and there are few other creditors. 133 Counsel for Local Investor Group submitted in reply: Local Investor Group will not pursue the Recapitalisation Proposal if a receiver is appointed. Counsel for Trust Company referred to the proposal as a "flight of fancy" but that is not consistent with Trust Company's communications with the Group. The written submissions by Local Investor Group (at [128]) foreshadowed at [20] the possibility of the Court ordering that a meeting of Noteholders be convened to approve GSI proceeding with the implementation of the Recapitalisation Proposal to the point of a scheme meeting and therefore to GSI incurring $1.2 to $1.5 million in that period. Local Investor Group was prepared to contribute $30,000 to the cost of such a meeting: see [21] of the written submissions. Counsel conceded that no application had been made to the Court to convene such a meeting. 134 There remained a range of issues on which the Court needed to be satisfied before the adjournment application could be determined and in view of the orders made on 25 July freezing redemptions and the issues concerning GSI's financial position, it was undesirable to delay hearing Trust Company's application pending resolution of those issues.

[68]

Local Investor Group proposal 137 On 26 August 2013, Mr Johnston, on behalf of Local Investor Group provided a draft application and the 26 August Johnston Affidavit in relation to proposed orders to convene a meeting of Noteholders pursuant to s 283EC (Second Proposed Meeting). In written submissions of 26 August 2013, by its Counsel and through the 26 August Johnston Affidavit, Local Investor Group submitted: • It is not in dispute that Trust Company had taken no steps to ascertain the views of Noteholders in relation to the Recapitalisation Proposal, despite the fact that negotiations had been ongoing for a period of weeks and Trust Company has power, under s 283EB to call a meeting of Noteholders to ask for directions. • Given the importance of GSI's business to the Gippsland area, and that many, if not most of the Noteholders live and work in the area, it is important for Trust Company to have an understanding of their attitude. 16% of Noteholders have directed Trust Company to hold a meeting and that threshold was reached in a short space of time (see Hinton Affidavit). • If Trust Company will not convene a meeting, the Court should make the proposed orders which would require GSI to issue a notice of meeting of Noteholders for the Second Proposed Meeting within 24 hours after an Implementation Agreement is signed by GSI and Local Investor Group. It proposed that the meeting be held within seven days after the notice is issued at an address in Bairnsdale, Victoria for the purpose of obtaining directions by Noteholders to Trust Company to take all necessary and expedient steps to facilitate the implementation of the proposed creditors scheme of arrangement in a manner consistent with the Implementation Agreement. • Local Investor Group had offered, during the interim, to provide $300,000 by 27 August to cover (1) costs incurred to reach the point of executing an Implementation Agreement (which is expected to take 14 days) and (2) the day to day operating expenses of GSI incurred from 28 August until the meeting of debenture holders; to provide a further $100,000 if the initial sum proves inadequate; to pay Local Investor Group's own costs in relation to the Implementation Agreement; and to pay the costs of and incidental to the meeting of Noteholders (including the costs of Trust Company in relation to the meeting up to $30,000). • This protects Noteholders pending them having an opportunity to consider the Recapitalisation Proposal: if they decide it should not proceed to a scheme of arrangement they are no worse off because interim costs will have been to the account of Local Investor Group. If they determine to proceed to a scheme of arrangement, they do that in the knowledge of the costs GSI is incurring. It would be inappropriate to deny Noteholders an opportunity to consider and keep alive a proposal which keeps GSI in existence (albeit in a changed form) and is "likely to" result in them receiving full value. • On a number of occasions, Trust Company has indicated that "significant effort" has been made in developing a proposal and, as recorded in Mr Smoker's email to Mr Johnston of 19 August, Trust Company remained "supportive of the Rescue Group's efforts" and is willing "to have further discussions". The submission made by Counsel for Trust Company that the Recapitalisation Proposal is a "flight of fancy" is not in accordance with discussions. • The flaws in the Terms Sheet identified by Trust Company in its written submissions of 22 August (see [118]) refers to the now irrelevant 12 August 2013 terms sheet and the executed 18 August 2013 Terms Sheet without distinguishing between the two; the submission is confusing as a consequence. (The submission attaches a detailed clarification of what Local Investor Group regards as the errors in Trust Company's submission.) 138 Counsel for Local Investor Group suggested that, upon reflection, an application was not required but that it should be treated as a submission that the Court should make such an order under s 283HB(1)(g). 139 Mr Johnston's 26 August Affidavit provided some detail: • The Second Proposed Meeting would be advised of the costs of implementing the Implementation Agreement and that GSI would be liable for those costs, currently estimated at $1.2 - $1.5 million. • Local Investor Group would arrange for $300,000 to be paid into its solicitors' trust account by 27 August 2013, if the Court made the order. Local Investor Group would authorise payments from the account upon presentation of invoices authorised by an officer of Trust Company and an officer of FTI Consulting. • $300,000 advanced by Local Investor Group and its legal fees would only be payable if the scheme of arrangement is approved. It would be paid by Closed MIS but subordinated to existing Noteholders. • Local Investor Group should not be required to pay GSI's operating costs because it would be covered by its regular income (on the basis of no returns from impaired loans), leaving a slight profit. • Local Investor Group's estimate of GSI's advisor costs and operating expenses for two weeks was $180,000. Although Trust Company and its advisors had not agreed to cap their fees, it is likely that $300,000 would be enough in aggregate, but if not, Local Investor Group was prepared to contribute a further $100,000. 140 Mr Johnston also said: • Trust Company, in its submissions, appears still to be referring to the 12 August draft terms sheet, not the Terms Sheet executed on 18 August which sets out the terms of the Recapitalisation Proposal. • The Exchanging Noteholders (members of Local Investor Group who will be converting their Notes) will obtain shares in GSI and possibly units in Closed MIS, but not interests in Open MIS. The Exchanging Noteholders will rank ahead of ordinary shareholders in GSI but after other Noteholders and are therefore at a disadvantage to other Noteholders. • Local Investor Group is motivated by their desire to assist their community, not because they see this as an investment opportunity to enrich themselves. • Only unimpaired loans will go into Open MIS, the risk of the impaired loans will stay with GSI. • If the Implementation Agreement is accepted by Noteholders, they will continue to accrue interest and will have the option to reinvest if they wish to. That would not occur in a receivership. • As at 19 August, Mr Smoker had indicated that Local Investor Group's commitment of $7 million was a "positive development". The 23 August 2013 advice (at [126]) that Trust Company considered a cash injection of $10-$16 million was required was the first time in weeks of negotiation that a figure of that magnitude had been indicated. • That figure is predicated on the need to comply with ASIC's Regulatory Guide 69 of a minimum capital ratio of 8% (20% if the debenture issuing entity is involved in property development), to be reported against in prospectuses on an "if not, why not" basis. However, GSI is no longer issuing debentures. The guidelines do not apply to managed investment schemes. Therefore Trust Company is seeking to impose an unnecessary requirement in the current circumstances. • GSI's solvency should be assessed by normal accounting concepts, not ASIC's benchmarks. The Recapitalisation Proposal will restore GSI's net tangible assets to a positive position, based on the net tangible asset deficiency calculation of $3.8 million in accordance with Appendix A Methodology. 141 Counsel for Local Investor Group further submitted: • The proposal for Local Investor Group in support of a two week adjournment protects the interests of Noteholders and ensures that they are no worse off pending the negotiation of the Implementation Agreement. It gives Noteholders an opportunity to consider the proposal (before incurring $1.2-$1.5 million of costs), which would be taken from them if a receiver is appointed. • Trust Company suggests that the Recapitalisation Proposal can be pursued with a receiver: the evidence is that that is not going to happen. Local Investor Group takes the view that the goodwill attaching to GSI will be destroyed by receivership and rescue efforts will irretrievably come to an end. • The appointment of a receiver will crystallise loss to Noteholders because GSI's impaired loan book would be sold at a discount; the Recapitalisation Proposal leaves open the prospect that Noteholders will receive full value in the fullness of time and that is a matter to which the Court must have regard under s 283HB(2). • The evidence demonstrates that Trust Company regards discussions with Local Investor Group to date to be genuine and have potential; Trust Company has clearly not determined to terminate all discussions with Local Investor Group. • Trust Company's position with respect to compliance with ASIC Regulatory Guide 69 is misguided: Noteholders should have the opportunity to make their views known, and Mr Smoker's evidence is that a meeting should be held, with proper disclosure and Local Investor Group embraces that position. • If the Second Proposed Meeting could not be held (with adequate disclosure) within the timeframe envisaged, Local Investor Group would either need to put more money in or the proposal would not proceed, but either way Noteholders would not be prejudiced. • Local Investor Group was not prepared to carry the cost of implementation of the Recapitalisation Proposal after the Second Proposed Meeting up until Noteholders voted on any scheme of arrangement, acknowledging that this may expose GSI to the risk of insolvent trading in that period.

[71]

GSI's financial position 144 Trust Company is concerned that GSI's financial position is precarious and there is a real probability that GSI would be unable to pay Noteholders in full as and when the Notes fall due. Trust Company points to: GSI's letter of 19 July 2013 acknowledges a potential deficiency in GSI's net tangible assets (at [64]); the First Revaluation Summary of 25 July shows a deficiency in net tangible assets of $2.609 million (at [71]); the First Directors' Certificate delivered on 31 July 2013 in which the GSI directors certify their belief that GSI's financial condition was such that it could repay each GSI Note as it falls due (at [81]); a week later, the Directors' Certificate of 6 August indicates that the GSI Directors are unable to form the view that the property of GSI will be sufficient for that purpose (at [87]); the Third Revaluation Summary given to Trust Company on 15 August shows a tangible asset deficiency of $3.8 million (at [99]) (with a deficiency of $253,330 if deferred tax assets were included). 145 As at 19 July 2013, when redemption of Notes was frozen by GSI, there were "at call" Notes in the amount of $19,985,210 (at [65]) and since then, Notes with a face value of a further $23,902,733 have matured (at 142). GSI's balance sheet at 31 July 2013 shows cash or cash equivalents of approximately $26.4 million. 146 Mr Smoker is concerned that the publicity about GSI since 19 July may, if the freeze on redemptions is lifted, have the result that Noteholders will seek to have their Notes redeemed and GSI would not have the cash assets to meet demand as the Notes fall due; its other assets are illiquid and could not readily be converted to cash to repay Notes as they fall due. As GSI has acknowledged a risk of deficiency in its net tangible assets publicly and to Trust Company, with Notes on issue exceeding GSI's cash assets, if GSI makes payment to Noteholders there is a risk of unequal treatment if GSI were to resume making payments when the suspension on redemptions is lifted and as GSI has disclosed a risk of net asset deficiency, all Notes on issue may not be able to be paid in full. 147 Mr Smoker says that Trust Company could not consent to the issue of a prospectus by GSI. Counsel for Trust Company submitted that Mr Sanford's statement in his 9 August Sanford Affidavit is a statement of insolvency: [I]n the absence of additional equity, GSI's projected cash needs over the next three months is dependent upon whether circumstances exist that would allow the Trustee to consent to the issue of a Replacement Prospectus. In the event those circumstances do not prevail and consent is not given, the company would not have on hand cash or cash equivalents sufficient to meet its projected cash needs over the next three months. 148 Trust Company submits that the evidence demonstrates that GSI is or will shortly be insolvent.

[73]

Recapitalisation Proposal 153 By its letter of 7 August 2013, Trust Company set out its concerns about GSI's net asset deficiency and its requirements that any binding recapitalisation proposal or equity contribution must meet: subordination of new equity to the rights of Noteholders to repayment; evidence of a deposit of cleared funds in a solicitors' trust account, and if Notes are to be converted to equity, evidence of the Noteholder's binding commitment to release GSI from liabilities in relation to the Notes: see [88] above. Counsel drew also attention to the Trust Company's letter of 14 August 2013 which provided commentary on the draft terms sheet of 12 August 2013: see [98] above. 154 The Recapitalisation Proposal is inadequate. $2.2 million (the "new" cash proposed to be contributed by Local Investor Group) is "entirely insufficient for any realistic scheme in which Debenture Holders are likely to receive the full amount of their investment and interest" in Mr Smoker's view. Trust Company believes that $10 million to $16 million in equity is required taking into account that compliance with ASIC's Benchmark 1 requirement of 8% of equity (based on assets of $150 million) would imply equity of $12 million, and the need to recover a total tangible asset deficiency of $3.8 million. 155 However, contrary to Local Investor Group's submissions, by Trust Company's lawyers' letter of 23 August 2013 (at [126] above) Local Investor Group were told that Trust Company required that the proposal be able to demonstrate that it would readdress the $3.8 million deficiency in GSI's net tangible assets, provide a 4% buffer (about $6 million) and a plan for getting to 8%. Counsel submitted that even if the Recapitalisation Proposal did address the $3.8 million deficiency, after implementation costs the "new money" was only $1 million and the proposal did not demonstrate how Open MIS would be able to meet likely demand when the freeze on redemptions is lifted in view of the "at call" Notes and Notes which have reached maturity with a face value in the order of $43 million. 156 The Recapitalisation Proposal is flawed: see Trust Company's written submissions of 22 August 2013 (at [118]) and Trust Company's letter of 23 August 2013 (see [126]). Trust Company has formed the view that, absent a proposal for recapitalisation satisfactory to it involving a sufficient contribution of new equity funding to GSI such that it can pay its obligation to Noteholders when they fall due, it is in the Noteholders' best interest that receivers be appointed by Trust Company under the Trust Deed. 157 Counsel for Trust Company submitted that the Term Sheet is not about saving GSI: it is about the creation of a new entity for commercial benefit, and that is outside Part 2L.8. Not only is the proposal beyond power, by saying that they will not deal with a receiver Local Investor Group is seeking to "self empower" and hold Trust Company "hostage". That has the effect of locking out potential competitors for the assets or GSI for the commercial benefit of Local Investor Group. Counsel for Trust Company pointed out that Mr Johnston is a director of a borrower from GSI. Neither that fact nor the loan status had been disclosed in his affidavits. Although Counsel for GSI submitted that the fact that Mr Johnston was a director of the borrower company was in evidence through an ASIC search which is an exhibit to Mr Olde's Affidavit, Mr Johnston should have made this clear to the Court so it can assess the interests at play.

[78]

GSI submissions 164 GSI's written submissions of 19 August 2013 and oral submissions presented in relation to Trust Company's s 283HB(1)(c) application bear on the adjournment application as well. 165 GSI accepts that s 283HB(1)(c) confers a broad remedial and protective jurisdiction on the Court. GSI agrees that once the interests of debenture holders are identified, it is open for the Court to make any order that appears calculated to safeguard those interests: see Bridgecorp at [18] per Barrett J. However, that Trust Company presses for orders under s 283HB(1)(c) with the stated intention of appointing a receiver fails to pay sufficient regard to the Recapitalisation Proposal and its merits. 166 It is not in Noteholders' interests that the Court make an order under s 283HB(1)(c). Mr Smoker's opinion that it is in Noteholders' interests should be given little weight: the Court is required to determine that question objectively. 167 GSI's potential inability to repay Noteholders is the beginning, not the end of the inquiry. It is, however, necessary for the Court's freezing order to be maintained currently to ensure that all Noteholders are treated equally and to permit the Recapitalisation Proposal to be implemented. If the freezing orders are maintained, the Court must then consider which of two options - appointment of a receiver or the Recapitalisation Proposal - is most likely to improve GSI's ability to repay Noteholders (and therefore be in the best interest of Noteholders). Even if it is true, as Mr Smoker opined in the 16 August Smoker Affidavit, that GSI has been unable to submit a recapitalisation proposal that is satisfactory to Trust Company and which ensures that GSI's obligations to Noteholders can be met in full, that does not mean that it is in their interests that a receiver be appointed. 168 GSI's ability to repay Notes as they fall due will not be enhanced by the Court making the order which Trust Company seeks. The Recapitalisation Proposal will increase GSI's net tangible assets and its stated objective is the payment of 100 cents in the dollar to Noteholders: "It provides a tangible and realistic plan to remedy GSI's financial difficulties and enhance noteholder returns". The appointment of a receiver (as Trust Company has said it will do if the Court makes an order under s 283HB(1)(c)) will not result in an increase in GSI's net tangible asset position, and its assets will be depleted by the receiver's remuneration; Trust Company has provided no evidence that the appointment of a receiver would result in full payment to Noteholders. 169 In exercising its powers under s 283HB, the Court should be mindful that the appointment of a receiver will have the result that the Company will lose "its title to control its assets and affairs": National Australia Bank Limited v Bond Brewing Holdings Limited (1990) 169 CLR 271 at 277. It is also likely to cause damage to the company concerned. The purpose of the powers that s 283HB confers on the Court is to enable it to make appropriate orders that it considers necessary to protect the interests reflected in Chapter 2L itself: see Provident Capital at [73]. In exercising its powers, the Court is entitled to have regard to the benefits to the Gippsland area of the Recapitalisation Proposal.

[80]

Solvency and status of $3.8 million deficiency 171 Counsel for GSI submitted that the Court was not in a position to make any finding about GSI's solvency because: (a) GSI does not admit that it is insolvent; (b) Notwithstanding Mr Smoker's evidence that GSI has on issue "at call" Notes of $19,985,260 as at 16 August 2013 and Notes which have matured between 19 July and 25 August of $23,902,733, it is not open to the Court to conclude that this was the amount which was currently due and payable under the Trust Deed. The basis for this argument is set out at [178]-[179] below; (c) The basis of the calculation of the deficiency of $3.8 million is in dispute. The alleged deficiency is calculated on valuations and provisioning complying with Trust Company's enforced Appendix A Methodology, which includes, for instance, discounts the need for which GSI has disputed: Local Investor Group takes a different view as to what might be the true value of GSI's assets. In that sense, any net tangible asset deficiency is not certain, in the way it might be if GSI had $100 million in the bank and liabilities of $103 million. Having said that, GSI accepts that for the purpose of these proceedings, based on the evidence the Court is entitled to make a finding that the net asset deficiency is $3.8 million; (d) The Court's order freezes redemptions; and (e) The existence of the Recapitalisation Proposal. 172 However, Counsel for GSI made no submission when queried by the Court as to the legal position of GSI directors in relation to incurring expenditure of an estimated $1.2 million in advisor and other fees in pursuing implementation of the scheme after the Implementation Agreement is agreed (with or without Noteholder or GSI member approval to that expenditure) where it remains open to Noteholders to not approve the scheme at the end of the process. The question was relevant to the utility of an order by the Court in relation to the Second Proposed Meeting, and the utility and propriety of the Court granting an adjournment rather than making an order under s 283HB(1)(c) if Local Investor Group was not willing to address this gap. Counsel indicated that his instructions were that the GSI directors have and will consider their duties regarding insolvent trading in connection with those costs and their position regarding Trust Company's application did not change.

[81]

Recapitalisation Proposal 173 Trust Company's written submissions of 22 August (see [118]) and Counsel's oral submissions about the Recapitalisation Proposal are misconceived in important respects because they failed to take account of the material differences between the draft terms sheet of 12 August 2013 and the Terms Sheet signed on 18 August 2013. 174 Mr Smoker's evidence that the "new unencumbered equity" of $2.2 million was "entirely insufficient for any realistic scheme in which the Debenture Holders are likely to receive the full amount of their investments and interest" fails to take into account that the total amount to be contributed under the Recapitalisation Proposal is $7.06 million: $2.21 million of "new money" and the proposed conversion of $4.85 million of Notes to equity in GSI ($1.5 million of Notes held by directors and shareholders of GSI and the balance by other exchanging Noteholders). 175 The Recapitalisation Proposal would therefore result in positive equity of $3.26 million ($7.06 million - $3.8 million), including $2.21 million of cash. Even after scheme costs of $1.2 million are taken into account, there would be a positive equity position of around $2 million. 176 Of the converting Notes, $1.5 million would be applied for 20% of the equity in GSI and the balance would be equal to 80% of GSI's capital with additional funds applied to support Open MIS and, if necessary, Closed MIS as a buffer to ensure that Noteholders obtain recovery. This is the conversion of debt to equity, not half debt and half equity as submitted by Trust Company in its written and oral submissions. Local Investor Group, as equity holders, will rank behind Noteholders, also contrary to Counsel for Trust Company's submissions. In relation to Closed MIS, Noteholders would be issued preference units, and it is only after they have been redeemed for 100 cents in the dollar that Local Investor Group would have any right to capital or income. 177 The fact that Trust Company was willing not to oppose an adjournment of four weeks, (subject to capping of advisor fees and operating expenses), indicates that Mr Smoker regarded Local Investor Group's proposal as worth pursuing in the interest of Noteholders, notwithstanding the written and oral submissions of Trust Company's Counsel. Trust Company's belief that comments by ASIC and the Court on 23 August (referred to at [121] and [123]) left it with no option but to pursue its application was misconceived.

[82]

When Notes due and payable 178 Upon a technical reading of clause 5.07(b), condition 3 of the First Schedule to the Trust Deed and section 7.4 of Prospectus 18 (see [41], [43] and [44] above), unless payment must be made to the Trustee, it is a condition precedent to the right of a Noteholder to receive payment that a Noteholder provides to GSI a written request for payment, its Note Certificate and evidence of identity. Counsel for GSI submitted that this was not a circumstance where payment was required to be made to the Trustee. As a consequence: (a) GSI has no obligation to repay a Note until its holder has made demand; (b) Exhibit D3 and the Second 26 August Sanford Affidavit indicate that very few demands in the form required by the Trust Deed had to date been made (20 for $1.4 million in aggregate of which $315,876 was for a Note not yet matured). Mr Sanford acknowledged that there had been informal requests for payment; and (c) The obligation imposed on GSI to pay "at call" Notes is subject to GSI having "sufficient liquidity" having regard to section 7.4 of Prospectus 18 and clause 5.07(b) and condition 3. Counsel conceded that this did not mean that GSI could simply do nothing if it had insufficient cash, but rather it had an obligation to take steps to obtain liquidity which might be achieved by issuing a new prospectus or obtaining an injection of equity. 179 Counsel further submitted that as a result of the Court's order freezing redemptions, moneys for redemption of Notes are not "due and payable" because for that to be the case, there must be an immediate and present obligation to pay. GSI relied on Helou v PD Mulligan Pty Ltd (2003) 57 NSWLR 74 at [26], albeit that in that case it was held that a moratorium on enforcement by reason of a deed of arrangement did not prevent a debt being due and payable for the purpose of triggering obligations under a guarantee: The appellant seeks to raise what is said to be an anterior question. It is submitted that the guarantee had ceased to engage the principal debt because that debt was no longer "payable" when the proceedings were commenced. To use the language of Rich J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 467, "the groundwork of the accessory obligation [had] disappeared". The particular steps in this argument are as follows: (1) The respondent's cause of action against the guarantor had to exist as at 1 November 2001, when the proceedings were commenced (Baldry v Jackson [1976] 2 NSWLR 415 at 417). I agree. (2) For money to be "payable", in a context where that word is used in distinction to "due" or "owing", there must generally be an immediate obligation to pay (A Delbridge, J R L Bernard, D Blair, S Butler, P Peters, C Yallops, eds, Macquarie Dictionary, 3rd ed (1997) Macquarie University, Macquarie Library Pty Ltd, at 1580). In the expression "due and payable", "payable" means required to be immediately or presently paid (Peacock v Commonwealth Trading Bank of Australia [1979] 2 NSWLR 412 at 416; Deputy Commissioner of Taxation v Peacock [1980] 2 NSWLR 130 at 134, 138, 141; Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at (15). Again, I agree with this proposition. (3) Belmore's debt was both due and payable between 22 June 2001 (at the latest) and 13 September 2001, when the scheme took effect. But the effect of the scheme was that the debt then ceased to be payable within the language of the guarantee. I do not agree with the latter statement, for the reasons which follow.

[83]

Management competence 180 Counsel for GSI submitted that the course of communications between GSI and Trust Company since January 2013 does not reveal mismanagement. Rather, what has occurred is a legitimate difference of opinion about how certain loans and assets should be valued and that has developed over time, in particular, as valuations were received. GSI did not fail to provide information to Trust Company. 181 Prospectus 18 discloses that GSI does not comply with Benchmark 1 (see [40] above). It is only in recent times that Trust Company has demonstrated concern about that issue; the Reporting Protocol required an Equity Improvement Report. Although the Equity Improvement Report was provided on 3 July (it was due on 1 July), GSI disputes that there was a failure to pursue it. Further, Mr Izzo has confirmed that the four year transition period required by ASIC's Regulatory Guide 69 for compliance with Benchmark 1 has not yet commenced. 182 Insofar as Trust Company has suggested that GSI has failed to provide information, GSI provided weekly liquidity reports. 183 In relation to provisions for the Riviera Loans, GSI relied on advice from FTI Consulting in relation to the appropriate level of impairment but FTI Consulting changed its view later after meeting with Ernst & Young on 15 July, affecting the assessment of the level of total tangible assets (see [48] and [57]-[58]). 184 Counsel drew attention to the material set out at [100] which summarises Mr Sanford's views on these issues; see also the extracts from Mr Sanford's letter of 6 August 2013 at [87] explaining that changes in the Revaluation Reports, Quarterly Report and balance sheet as at 30 June 2013 provided on 25 July, 31 July and 6 August and disclaiming any "confusion" or mismanagement on GSI's part. 185 Trust Company's concern about the failure to provide a Quarterly Report for 30 June despite numerous requests ignores the point that it was not due until 31 July and it was provided on that date. 186 The Recapitalisation Proposal is conditional on most of the current GSI directors resigning and GSI appointing new directors who are experienced business and property professionals nominated by Local Investor Group. So, if it is thought necessary to protect Noteholders' interest to change GSI management, that is an element of the Recapitalisation Proposal. Further, insofar as Mr Smoker has said that he has lost confidence in GSI management, and it is not acceptable to Trust Company that GSI's current directors continue until the scheme is implemented, this is illogical in light of Mr Smoker's basis for his lack of confidence: that GSI was not prompt enough in arranging new equity as required by the Reporting Protocol.

[88]

Receivership v Recapitalisation Proposal 196 ASIC's concerns about potential depletion of funds available to Noteholders if the scheme does not proceed (estimated at $1.2 million in fees and other expenses) are set out at [121]. There would also be costs incurred in operating GSI, at least for the four months necessary to effect a scheme. The prospect of those costs continuing to be incurred appears to neutralise any countervailing concern about the costs of receivership. 197 There would be an inevitable delay in Noteholders receiving any distribution during the implementation period of the Recapitalisation Proposal. The position may be contrasted with receivership, which carries the possibility of a more timely return in the form of an interim distribution. The long implementation period may have an impact on the way Noteholders vote at the scheme meeting as receivership may no longer be a realistic alternative. 198 The expectation that the Recapitalisation Proposal will return 100 cents in the dollar depends on an assumption that the two proposed MISs are able to meet redemptions in an orderly way. The negative publicity surrounding GSI, the continued role of some GSI management, the backlog of investor demand for redemptions as a result of the freeze may create a run on Open MIS with the result that restrictions on redemptions may need to be imposed to ensure equality between unit holders. That contrasts with receivership in which the pool of assets available to meet obligations to Noteholders is a known quantity and unlikely to diminish (except by reason of the costs of receivership) and pari passu distributions to Noteholders is guaranteed. 199 The Terms Sheet is silent as to who will be the new directors of GSI in the period between the execution of the Implementation Agreement and implementation of any scheme. This is significant, given the disclosure obligations that GSI will bear during this period, particularly in relation to preparation of a scheme booklet and the complexities involved in structuring a creditors scheme. 200 A receiver would have the ability to conduct investigations and pursue causes of action (if any) available to GSI to the benefit of Noteholders. 201 Insofar as GSI has emphasised the benefits to the Gippsland area of the Recapitalisation Proposal, the relevant interests for the Court to consider under s 283HB(2) are the interests of debenture holders in receiving payments due to them under their debentures as and when they fall due for payment: see Bridgecorp at [18] and Provident Capital at [77]-[78]. The ultimate question for the Court is whether the Recapitalisation Proposal provides sufficient certainty of achieving that goal.

[92]

Submissions 205 It was common ground between the parties that the principles governing such applications were appropriately summarised by Kenny J in Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 (Bradshaw) at [24]: The authorities indicate that, broadly speaking, there are four recognised classes of case in which a court may grant leave to re-open, although these classes overlap and are not exhaustive. These four classes are (1) fresh evidence (Hughes v Hill [1937] SASR 285 at 287; Smith v New South Wales Bar Association [No 2] (1992) 108 ALR 55 at 61-2); (2) inadvertent error (Brown v Petranker (1991) 22 NSWLR 717 at 728 (application to recall a witness); Murray v Figge (1974) 4 ALR 612 at 614 (application to tender answers to interrogatories); Henning v Lynch [1974] 2 NSWLR 254 at 259 (application to re-open); (3) mistaken apprehension of the facts (Urban Transport Authority of NSW v NWEISER (1992) 28 NSWLR 471 ("UTA") at 478; and (4) mistaken apprehension of the law (UTA at 478). … GSI stressed the last sentence of [24]: In every case the overriding principle to be applied is whether the interests of justice are better served by allowing or rejecting the application for leave to re-open: see UTA at 478; also The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust v Lenard's Pty Ltd (No 2) [2004] FCA 1310 ("Silver Fox") at [22] and [25]. 206 These principles were endorsed by the Victorian Court of Appeal in Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232. 207 GSI relied on this overriding principle and submitted that the 28 August Johnson Affidavit discloses new facts: Local Investor Group is prepared to fund an additional $1.5 million to cover the costs of the proposed scheme of arrangement in the period from the execution of the Implementation Agreement. This would be subject to the Court ordered freeze on redemptions remaining in place. The money would be paid into an account with Local Investor Group's solicitors immediately following execution of the Implementation Agreement. This would be in addition to the $300,000 which Local Investor Group has already committed to make available on account of expenses of GSI and Trust Company leading up to execution of the Implementation Agreement. Any recoupment of the aggregate $1.8 million (plus Local Investor Group's legal costs for preparation of the Implementation Agreement) would be agreed in the Implementation Agreement and subject to approval of the scheme of arrangement. If recoupment is approved by the scheme of arrangement, Local Investor Group's recoupment would be subordinated to payments to existing Noteholders. 208 Trust Company argued that this application should not have been advanced because it was inappropriate for Local Investor Group through its lawyers to communicate with Chambers with supplementary evidence after the Court had reserved its decision. In Bull v Lee (No 2) [2009] NSWCA 362 at [9], Allsop P (as his Honour then was), Campbell and Young JJA stressed the important principle that, save in the most exceptional circumstances, all arguments relating to an appeal should be put at the same time at the hearing otherwise there is the risk of waste of both the Court's time and the time and expense of opposing counsel. Comments to the same effect were made by the High Court in Carr v Finance Corporation of Australia Limited (No 1) (1981) 147 CLR 246 at 258. The Full Court of this Court in Singh v Secretary, Department of Employment and Workplace Relations [2009] FCAFC 59 at [65]-[71] stressed that the hearing of an appeal exhausted the parties' right to make submissions without leave; the purpose of a hearing is not to provide fertile ground for further written submissions. Leave is only granted sparingly: in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [772]-[773] (Grimaldi) the Full Court of this Court stressed the need for finality and avoiding unnecessary cost in litigation. Trust Company also relied on the discussion of principles in Granitgard Pty Ltd v Termicide Pest Control Pty Ltd (No 3) [2009] FCA 82 at [6]-[11] and in particular the reference to the comments of Goldberg J in Hawthorn Glen Pty Ltd v Aconex Pty Ltd (No 1) [2007] FCA 2010 at [48]: … The interests of justice require that commercial litigation of the type in this proceeding should be conducted expeditiously and that parties should only be able, after judgement has been reserved, to re-visit tactical decisions they have made in exceptional circumstances where injustice might otherwise result. No such exceptional circumstances exist in the present case. There needs to be a finality to the process of litigation and a limit on the number of times a party can re-visit issues which have arisen in the course of a trial and have been addressed. 209 Trust Company argued that this application does not fall within any of the four categories identified by Kenny J in Bradshaw. This is not a case of "new evidence": no new matter extraneous to the control of Local Investor Group has occurred which justifies the application to be re-opened. The Court raised the question of funding of GSI's expenses in the period after the Implementation Agreement is signed and before the scheme is considered and at page 47 of the transcript of 26 August 2013, Counsel for Local Investor Group said at line 39: "The fact is that my clients are not prepared to underwrite the cost of the scheme". A belated tactical desire to reformulate terms concerning the incurring of expenses is a matter entirely within the control of Local Investor Group; it is not a proper basis to cause the application to be re-opened after the Court has reserved its decision for judgment. No injustice would result if the Court does not permit re-opening because of the clear tactical decision taken by Local Investor Group. There is no satisfactory explanation for that and an explanation is required: Cement Australia Pty Ltd v Australian Competition and Consumer Commission (2010) 187 FCR 261 at [55]. 210 Trust Company submitted that clear prejudice to Noteholders would arise from re-opening this application. GSI continues to incur costs arising from the relisting of this matter in circumstances where it is potentially insolvent. This depletes funds available to Noteholders and that is not appropriate to advance the continued attempt of Local Investor Group to hold Trust Company hostage to their proposal. 211 GSI submitted that the authorities relating to unsolicited written submissions after the court has reserved on an appeal cited by Trust Company are inapt for this application: there is clear scope to re-open for the purpose of putting new evidence before a court at this stage of an application. In Grimaldi, in the first line of [772] cited by Trust Company, the Court said: There is no doubt, as Mr Bell SC correctly stressed, that the jurisdiction to re-open orders is sparingly used. 212 However in Smith v New South Wales Bar Association (1992) 176 CLR 256 (Smith) at 266-7, Brennan, Dawson, Toohey and Gaudron JJ recognised the importance of at what point in a proceeding an application to re-open is made: It is again necessary to distinguish between the considerations which may bear on a decision to re-open and the processes involved in reconsideration once a case has been re-opened. If an application is made to re-open on the basis that new or additional evidence is available, it will be relevant, at that stage, to inquire why the evidence was not called at the hearing. If there was a deliberate decision not to call it, ordinarily that will tell decisively against the application. But assuming that that hurdle is passed, different considerations may apply depending on whether the case is simply one in which the hearing is complete, or one in which reasons for judgment have been delivered. It is difficult to see why, in the former situation, the primary consideration should not be that of embarrassment or prejudice to the other side. In the latter situation the appeal rules relating to fresh evidence may provide a useful guide as to the manner in which the discretion to re-open should be exercised. But those considerations bearing on re-opening are not decisive of the question whether, a matter having been re-opened by reason of error, further evidence can be called. 213 GSI argued that the matters raised in the 28 August Johnston Affidavit are fresh evidence and that it is wrong to characterise this as a case in which Local Investor Group made a deliberate forensic decision, such as a choice not to call a witness. However, even if it could be characterised as the revisiting of a forensic choice, GSI relies on the comments of Clarke JA, with whom Mahoney and Meagher JJA agreed in Urban Transport Authority of NSW v NWEISER (1992) 28 NSWLR 471 at 478 (UTA) and quoted in Bradshaw at [26]: … No doubt it is relevant to take account of a number of matters such as likely prejudice to the party resisting the application and the reasons why the evidence was not led in the first place, but there is not, in my opinion, any hard and fast rule which requires the court to reject an application where the decision not to call the witness in the party's case was a deliberate one. Of course that does not mean that that is not a very relevant consideration. It is. Where, for instance, a decision was based on tactical grounds it may be difficult to resist the conclusion that the interests of justice were better served by the rejection of the application. But even in that circumstance there may be cases in which it is felt that the client whose application it is should not have to suffer for his or her counsel's deliberate decision. … 214 GSI last argued that Kenny J recognised in Bradshaw at [24] that the categories which her Honour identified are not closed, and that the primary consideration is what is in the interest of justice in the circumstances of the particular case. Counsel for GSI pointed to the jeopardy that the Court might, if the application to re-open was not successful, have decided the application for orders under s 283HB and the adjournment application on the basis that it was inappropriate that GSI be exposed to the costs of the implementation of the scheme after the Implementation Agreement is executed; a false basis when there are persons willing to provide funds and relieve GSI of that burden.

[93]

Consideration 215 Once a court has reserved judgement it is clearly inappropriate and inimical to efficient and cost effective administration of justice for lawyers representing parties (or anyone else) to provide unsolicited submissions to the Court to advance arguments raised at the hearing or to agitate arguments which could have been raised at the hearing but were not. However, I accept GSI's argument that an application for leave to re-open can be brought to the Court on appropriate grounds without impropriety and such an application is clearly different from unsolicited written submissions made after the end of the hearing of an appeal. To the extent that Trust Company has cited cases which deal with unsolicited submissions, they are not apposite. Counsel for Trust Company appeared to argue that it was inappropriate that the 28 August Johnston Affidavit be provided to the Court in support of the request. It is difficult to see how a court could determine an application to re-open without information about the new evidence which the application seeks to advance. In this case, recognising that the Court had indicated that it would decide Trust Company's application and the adjournment application imminently and that the evidence in the 28 August Johnston Affidavit was of narrow scope, I see no impropriety in the course taken to draw the application to the Court's attention. 216 As this application was made before judgment was delivered, I considered that the relevant principles for the decision whether to grant leave are those set out in Smith at 266 (referred to at [212] above) and by Kenny J in Bradshaw at [24] (referred to at [205] above). 217 I accept Trust Company's argument that Local Investor Group was on notice from 20 August 2013 of the Court's concerns about a company in GSI's position being exposed to substantial costs of negotiating and implementing a complex scheme of arrangement. Counsel for Local Investor Group made the statement referred to at [141] (last dot point) in that knowledge. However the decision by Local Investor Group to undertake to provide $1.5 million to fund GSI and Trust Company's advisor costs for the period between execution of the Implementation Agreement and the presentation of the scheme to Noteholders for approval is a significant change of circumstance which bears on the discretion which the Court exercises under s 283HB(1)(c). 218 This is not a case which deals with long established facts; circumstances have continued to change significantly since Trust Company made its application on 25 July 2013: for instance, Trust Company made an announcement on 26 July which may have had the effect of alienating potential buyers for GSI's loan book, GSI announced that there is a deficiency in its net tangible assets of $3.8 million on 15 August (having advised Trust Company of a deficiency of $2.06 million on 25 July), Local Investor Group and GSI signed the Terms Sheet on 18 August and over $20 million of "term" Notes have matured. 219 In relation to the decision which the Court is called upon to make on an application under s 283HB, I do not think much turns on whether or not that change of circumstance can be characterised as "new evidence" within the first category identified by Kenny J: it is a significant event relevant to the decisions the Court must make whether to adjourn Trust Company's application, grant the orders sought or deny them having regard to the interests of Noteholders and GSI's members and creditors. If Trust Company is successful in its application, GSI's status will change, receivers and managers will be appointed and GSI will "lose its title to control its assets and affairs" and likely be significantly damaged (see Provident Capital at [73]). I am also mindful that Noteholders, shareholders and borrowers are predominately from the Gippsland community, so the effect of such an order is likely to be substantial on Noteholders and shareholders as residents of that region, in addition to any impact on them as Noteholders or shareholders as such. 220 I also find it a barren argument as to whether the timing of this development can be regarded as tactical. Local Investor Group are individuals (albeit apparently wealthy and sophisticated) who have come together in a short time frame, they are strangers to GSI (even though some may be Noteholders) and they are undertaking to put at risk a substantial sum of money in relation to a decision to be made by Noteholders which they cannot control. While they would not be required to contribute $1.5 million until an Implementation Agreement is signed, it is a significant step to make the representation to the Court that they would contribute the money: as a practical matter it is likely to take time for the Group to make decisions. Even though Local Investor Group might have made their decision earlier, I do not think that what has occurred has the same character as a forensic decision usually made by lawyers, such as whether to call a witness. 221 I acknowledge that GSI and Trust Company's costs of this application will be borne by GSI and will therefore be a drain on the pool of money available to Noteholders. However, the bulk of those costs have likely already been incurred by the arguments on the leave application so granting leave is unlikely to result in additional material costs being incurred. 222 Given these factors, I considered that justice is best served by the Court being in a position to evaluate Local Investor Group's willingness to contribute an aggregate of $1.8 million to the costs of putting a scheme of arrangement to Noteholders as envisaged by the Terms Sheet in deciding whether to grant the adjournment sought by GSI or whether to make the orders sought by Trust Company under s 283HB.

[94]

How to proceed after leave is granted 223 In argument about how the re-opened hearing should proceed, Counsel for Trust Company indicated that he may wish to cross examine Mr Johnston on his 28 August Johnston Affidavit. The Court expressed concerns about whether the very short timeframe before the hearing that the parties had had to evaluate Local Investor Group's proposal in the 28 August Johnston Affidavit meant that there had been no time for commercial evaluation and discussion; it was also possible that Mr Smoker may be required to give evidence. 224 Trust Company argued: It was concerned about a company in GSI's financial position continuing to incur litigation costs and management costs when Trust Company has lost confidence in GSI's management. That is a prejudice to Noteholders; The membership of Local Investor Group should be ascertained and answers provided about whether the pledges obtained from its members had been lawfully obtained on the basis of accurate information about the Terms Sheet; While Trust Company had a demonstrated willingness to engage with Local Investor Group, its requirements had not been satisfied to date. Trust Company had responded in detail identifying substantive issues as soon as it received the Terms Sheet; Noteholders are being held out of any interim distribution which could take place with receivers appointed; Trust Company is "being held hostage to one party … to negotiate terms in circumstances where" Local Investor Group say that they will not treat with receivers; The Court should not facilitate or in effect supervise an ongoing negotiation of the Terms Sheet; Local Investor Group should pay costs since 20 August because of departures from the Terms Sheet which have occurred since that date. 225 GSI and Local Investor Group supported a brief adjournment for a commercial negotiation in light of the new commitment made by Local Investor Group in an effort to avoid unnecessary legal costs. Local Investor Group resisted the suggestion that it should be liable for the costs of GSI and Trust Company from 20 August or for 28 August on the basis that it is not acting out of self-interest but in order to rescue GSI in the interest of Noteholders and the wider Gippsland community. 226 Counsel for ASIC identified three concerns with the proposal in the 28 August Johnston Affidavit: It would be Local Investor Group which approved expenditure from the trust account into which the $1.5 million is contributed. That puts GSI at risk of incurring expenditure which Local Investor Group does not approve, potentially exposing it to insolvent trading. Local Investor Group suggests that it should not have to pay GSI's normal operating costs from the time the Implementation Agreement is signed because its normal revenue exceeds its normal expenditure. What is "normal" expenditure would need to be established. But if GSI's solvency is truly in question, it should not be incurring expenses of any kind. It is not clear who is covering GSI's litigation costs. 227 The proceedings were stood over to 2 September at which time the Court would hear the result of the commercial negotiation as a result of which either a course consistent with the negotiation would be adopted or the Court would determine Trust Company's application and the adjournment application.

[96]

30 August letter 229 Following the meeting, Mr Smoker sent a letter to Mr Sanford (30 August Letter). It advised that Trust Company had "carefully considered" the written responses and statements made at the meeting by GSI and Local Investor Group (which Trust Company acknowledged had been carefully prepared) and the offer made by Local Investor Group to provide further funding to GSI to support its operating expenses and some of the transaction costs which GSI had estimated that it could incur if the Recapitalisation Proposal was progressed beyond its present stage of an indicative, non-binding term sheet as set out in the Terms Sheet. The 30 August Letter advised that: In the present circumstances, and based on its careful and detailed review of GSI's books, records and affairs to date, the Trustee is unable to support an adjournment of the Proceedings or to further participate in development of the Rescue Group Proposal. The Trustee considers that the interests of debenture holders require the enforcement of the Trustee's security over GSI and the appointment of a receiver. 230 Mr Smoker set out Trust Company's continuing major concerns: GSI's apparent insolvency which the Recapitalisation Proposal does not redress; the inappropriateness of GSI management's continued involvement in controlling its assets preventing investigation of possible insolvent trading; the "new cash" to be provided in the Recapitalisation Proposal is inadequate to deal with the net tangible asset deficiency of $3.8 million which, for the purpose of the proceedings, has been acknowledged; the adequacy of the disclosure to Noteholders who have agreed to the conversion of their Notes as part of the Local Investor Group contribution; that Noteholders may not be treated equally because all Noteholders have not been offered the opportunity to convert their Note to equity in GSI; that Local Investor Group now does not propose to hold a meeting of Noteholders until the scheme meeting, which may be three to four months away on their calculation which the Trustee does not view as appropriate; Local Investor Group proposes Noteholders be entitled to receive an interim distribution from GSI up to the lesser of $2,500 or 25% of their unpaid balance after the Implementation Agreement is signed but that would potentially result in unequal treatment of Noteholders; it is more appropriate for GSI's available liquid assets to be distributed pari passu; and the estimate of transaction costs for the Recapitalisation Proposal is inadequate. Trust Company's estimate is in the order of $2.5 million to $3 million and the implementation period to a scheme of arrangement may be six months or more.

[97]

Local Investor Group submissions 231 Local Investor Group submitted that it was open to the Court, as an alternative to "putting the sword to [GSI] today", to adjourn or adopt the regime proposed by Mr Johnston in his affidavits and after a period of time assess the situation. Local Investor Group had further developed its proposal to address the issues identified at the 28 August hearing as set out in the 2 September Johnston Affidavit: $300,000 would be remitted to Local Investor Group's lawyers' trust account within 24 hours of a favourable court order, $1.975 million currently held in a Westpac account would be transferred to Local Investor Group's lawyers' trust account upon execution of the Implementation Agreement, and $5.3 million of current GSI Notes would be exchanged for equity capital in GSI (including $3.8 million referred to in the 20 August Johnston Affidavit plus an additional $1.5 million which had been committed verbally to Mr Johnston in relation to which commitment letters were being sought). This raises the total commitment, once the additional $1.5 million is formally committed to $8.56 million. The persons who have given or will give commitments are people to whom the disclosure requirements of Chapter 6D of the Corporations Act do not apply. In relation to ASIC's concern about who will authorise expenditure from the trust account, this would now be done by GSI. Local Investor Group would also pay the operating expenses of GSI from the time of execution of the Implementation Agreement: the $1.975 million would be available for this purpose as well as payment of transaction costs and this allowed $475,000 over and above the estimated costs of the transaction estimated by Local Investor Group and an allowance of $450,000 for Trust Company's costs. This should mitigate ASIC's concerns about GSI incurring expenditure as these costs would only be capable of recoupment by Local Investor Group if the scheme of arrangement is approved by Noteholders. Mr Johnston noted some efficiency in cost through the willingness of some service providers to mitigate their charges. The $3.8 million net tangible asset deficiency will be addressed by the agreement of the Converting Noteholders' Notes (previously referred to as Exchanging Noteholders) to release GSI from its obligation to repay those Notes in consideration of the issue of equity in GSI and the issue of interests in the MISs upon signing of the Implementation Agreement (to be achieved by deed poll or by those Noteholders executing the Implementation Agreement). Their interests under the MISs will be subordinated to other Noteholders. This will have the effect of reducing GSI's liabilities on a dollar for dollar basis without reducing its asset backing. The issue of unequal treatment of Noteholders should not arise as any difference in treatment will result from the unilateral act of the Noteholders. In Local Investor Group's view GSI is not insolvent as, if future income tax benefits and goodwill are not excluded from the calculation of any deficit (which it should not be unless GSI goes into receivership), GSI's balance sheet shows a deficit of $253,330, not $3.8 million. Three recent events arising from the sale at a greater value than book value of some assets and improvement in the security of others would result in an improvement in the GSI balance sheet of approximately $2.314 million. Net interest revenue in the order of $332,260 would cover GSI's ordinary day-to-day operations. Local Investor Group also relied on GSI's argument concerning the effect of the terms of the Trust Deed and Prospectus 18 on the obligation to repay Notes referred to at [178]. Noteholders will accrue interest until the scheme is approved and it will be reflected in the value of the MIS interests issued to them. The Open MIS will provide a value of 92 cents immediately and the Closed MIS will manage the impaired loans to provide a further 8 cents in the dollar (note the $2.314 million improvement referred to previously). The purpose of the First Proposed Meeting will not be able to be realised if the Court makes the order sought by Trust Company; despite the strong level of support from Noteholders, Trust Company has been "determined to continue with its current application". The Second Proposed Meeting is no longer necessary because of the commitment of Local Investor Group to fund GSI in the period from signing the Implementation Agreement to the time Noteholders consider the scheme of arrangement. Local Investor Group does not agree with Trust Company's view concerning an interim distribution to Noteholders. Local Investor Group queried whether Trust Company's estimate of costs was inclusive of initial due diligence. Messrs Richard Rijs, Ray Hack, Duncan Johnston and Bill Dahlsen will join the board of GSI after the Implementation Agreement is signed but until the scheme is approved the majority of the GSI board will comprise existing members of the board. Trust Company's responses to questions asked by Local Investor Group in relation to the Banksia and South East Secured Investments (SESI) receiverships disclosed that: (1) Trust Company did not think that the Banksia receivership was an accurate comparison to GSI however since the appointment of a receiver in October 2012, $0.65 in the dollar has been returned to debenture holders and it is expected that the ultimate return will be $0.80-$0.85 in the dollar but it will depend on future recoveries; and (2) receivers were appointed to SESI in February 2009, the aggregate of the 16 distributions to date is $0.879 in the dollar (all representing principal not interest) and the expected total return to debenture holders is $0.90 in the dollar.

[99]

Trust Company submissions 233 Counsel for Trust Company submitted that: The approach taken by Local Investor Group treats the proceedings as a negotiation process, supervised by the Court and that would not be an appropriate role for the Court to take: its role was to resolve the applications before it. There is no evidence of the agreement by those who contributed the $1.975 million to the Westpac account to the change in the way it is to be applied in accordance with the 2 September Johnston Affidavit. On the basis of the pledge forms exhibited to the 20 August Johnston Affidavit, the purpose was to support Local Investor Group in its efforts to secure the continuing lending services provided by GSI for which GSI needs further funding and has a "tick" box indicating whether the pledgor will contribute new funds to be invested or convert Notes. The commitment letters exhibited to the 20 August Johnston Affidavit contain a statement of intention to invest in the Recapitalisation Proposal to be documented in an Implementation Agreement and it references (without annexing) a Terms Sheet; some of these are in slightly different format. Similarly, the requisitions of meeting reference pledge forms. This material therefore should be rejected as being outside the scope for which the hearing was re-opened. The 2 September Sanford Affidavit should also be rejected as outside the scope of the re-opened hearing. Further, there is no basis established for the selection of the 2.3% interest rate proposed by GSI to be applied to matured "term" Notes. The so called "profit" derived by using this interest rate is illusory. 234 GSI read the 2 September Sanford Affidavit which indicated that, assuming an interest rate of 2.3% on Notes that have matured during the freeze, GSI's normal operating expenses are approximately $30,000, with revenue of approximate $190,000, leaving a profit of approximately $34,000 per week. Counsel for GSI could not explain the basis on which a rate of 2.3% had been calculated.

[101]

Local Investor Group further submissions 236 Counsel for Local Investor Group submitted: The relevant question is what is in the best interest of Noteholders: GSI's solvency is not finally determinative: the net needs to be cast wider for options available for the best return to Noteholders and the probability of the Recapitalisation Proposal proceeding and its outcome are relevant to that. The only evidence of Trust Company's attitude is the 30 August Letter, so it is impossible to draw out from Mr Smoker the reasons for his attitude. The 2 September Johnston Affidavit sets out rational and logical responses of Local Investor Group to the concerns raised by Trust Company. In relation to ASIC's concerns: The Local Investor Group members who have committed to fund GSI's expenses pending approval of the scheme of arrangement are high net worth individuals. If any issue arose in the future concerning fulfilment of their commitments, the matter could be brought back to Court. The 2 September Sanford Affidavit should deal adequately with the concerns about the level of GSI's operating expenses. Legal costs which have already accrued are in the past and should not be relevant to the consideration of the adjournment application: only prospective costs, which are covered by the Local Investor Group proposal, are the relevant issue. These issues could all be resolved during the proposed two week adjournment. The Court does not have to accept, just because Trust Company is not currently satisfied with the Recapitalisation Proposal, that an adjournment should not occur. Those matters can be addressed in the fullness of time and the Court might take the view that some of those concerns are misplaced. The Court must engage in a balancing exercise of what is likely to be in the best interests of Noteholders: there is no chance of Noteholders getting 100 cents in the dollar if a receiver is appointed but there is a chance of that under the Recapitalisation Proposal. Counsel for Local Investor Group's argument with respect to the adjournment is encapsulated in the following remarks: There is a real prospect, if this proposal goes forward, of those note holders obtaining that position. And, if the company and its note holders are protected in the interim, why wouldn't the court give it a chance? Now, if it's a matter of bringing the matter back in two weeks to see where the parties are at in relation to the execution of the deed, your Honour will be confronted with further facts and evidence and it can be dealt with on that occasion. That's why we embrace the notion that my friend puts forward of a two week adjournment to enable this thing to go forward. …[I]f, after two weeks, the evidence is that nothing has happened - the wheels are falling off, well then your Honour can take a particular view of the world on that occasion. But, my friend is asking you to cut this off at the knees before it has had a chance. And all the evidence is pointed towards that the Rescue Group [are] wanting to make this proposal work - yes it's true, they have changed their position from time to time to meet objections from the various parties, but that's the nature of the beast. … This is not the type of thing that can be wrapped up in a little parcel and made neat and tidy and presented from day one. These things change and develop. The only thing that is going to concern your Honour is "Is this all a waste of time so that after two weeks I'm going to be back here where I started from?" ... But there's $300,000 being put up as a sign of good will on the part of the Rescue Group that they are going to be working hard towards getting a solution within two weeks. Now, if all bases are covered during that period of time, what can possibly be the downside? Everything has got a risk attached to it. I understand that. Some risks are more than others. But if you look at the way in which it has been presented, much of the risk has been reduced and, with respect, for a short period of time it may well result in a significant beneficial outcome for note holders. Counsel for Local Investor Group submitted, without evidence, that the members of Local Investor Group who had contributed $1.975 million standing in the Westpac account had been consulted in relation to the change of utilisation to cover GSI's costs from the execution of the Implementation Agreement to the scheme meeting. This meets the argument raised by Trust Company at [233], second dot point. In any event, Local Investor Group could secure evidence of their consent in the two week adjournment period and in relation to the amounts pledged by Converting Noteholders. The $300,000 required to cover expenditure for the period to execution of the Implementation Agreement would be in a solicitors' trust account within 24 hours of the Court's order, and if necessary that could be GSI's solicitor's account. In response to a question from the Court about why the proposal was so complicated, Counsel for Local Investor Group submitted that the original proposal had been simple, a proposal to provide equity to GSI, however Trust Company had said that the proposed equity injection was insufficient and Local Investor Group had been advised by its advisers to adopt the course proposed in the Recapitalisation Proposal.

[102]

Trust Company further submissions 237 Counsel for Trust Company responded in reply: It is not for Local Investor Group to speculate about what return receivership could derive for Noteholders: there will be options available to a receiver and the Recapitalisation Proposal is not the only alternative. ASIC's concerns are not adequately addressed by the revised Recapitalisation Proposal as suggested by Local Investor Group. Local Investor Group is an investor group, not a rescue group as they have sought to characterise themselves, and the pursuit of the MISs which form part of the Recapitalisation Proposal is not within the scope of s 283HB or the purposes of Chapter 2L. The proposed adjournment is not for the benefit of Noteholders but to advance the MISs. The shareholders of GSI are substantially the directors of GSI. Their interests should be essentially disregarded under s 283HB(2) due to the conflict of their interests resulting from the insolvency of GSI. While GSI and Local Investor Group press the proposition that GSI's solvency should not be determinative and the relevant issue is whether immediate costs are being covered during the negotiation and implementation of the Recapitalisation Proposal, how can a trustee "facilitate and permit that to continue in those circumstances". Although much has been made by GSI of a supposed misunderstanding by Trust Company about the conversion of debt to equity under the Recapitalisation Proposal, there is no misunderstanding. There has been a change between the Terms Sheet and the proposed use of $1.975 million standing in the Westpac account; there must be concern about the disclosure to the proposed Local Investor Group investors relating to the proposed changed use of these funds. Local Investor Group's response to questions asked by Trust Company leading up to the meeting on 30 August indicate that Noteholders will accrue interest on their Notes during the implementation phase. That accrued interest will not be paid to Noteholders but units in the MISs will reflect accrued interests. The 2 September Sanford Affidavit indicates that interest is being accrued at 2.3%. Therefore there is some confusion but in a successful receivership, Noteholders would receive all principal and interest, not the artificial interest rate proposed by GSI for which GSI has not established any basis. However, Counsel for Trust Company could not say what interest rate a receiver would apply. The regime proposed by Local Investor Group to distribute $2,500 or 25% of an investors aggregate Notes following the execution of the Implementation Agreement is without Noteholders being consulted or the sanction of receivership; in that way it breaches the obligation to treat Noteholders equally. This is so, even though it is a common hardship regime.

[106]

Jeopardy to payment of Notes 243 The first question in relation to Trust Company's application is whether there is jeopardy to GSI's capacity to pay amounts which it is obliged to pay on Notes as they fall due. There is no need for the Court to make a finding that GSI is insolvent. I was satisfied that GSI's financial position is perilous and there is serious jeopardy to GSI's capacity to pay all Notes and interest in full when they fall due; it has not raised new capital and it is not in a position to issue a prospectus. 244 Even though GSI does not admit insolvency and challenges the Appendix A Methodology imposed by Trust Company for valuing its loan assets under the Reporting Protocol, GSI accepted that for the purpose of these proceedings it should be taken to have a net tangible asset deficiency of $3.8 million. GSI did not proffer evidence of a change in that position. While Local Investor Group (through the 2 September Johnston Affidavit) submitted that recent events have improved the position by over $2.3 million as a result GSI entering into a sale contract for a property and the security it holds on other properties had been improved (see [231] at the fourth dot point), Mr Johnston is not a party to any of the arrangements concerning which he made these statements and no basis was put forward for his evidence other than a submission from Counsel that such things are known in the Gippsland community. Accordingly even though Mr Johnston's evidence was unchallenged, I consider that it should be treated as a submission only. In any event, it would not change the outcome of a determination of Trust Company's application in the absence of the Recapitalisation Proposal. 245 Mr Sanford did not change his evidence as at 19 August 2013 that the GSI directors are unable to certify that GSI could pay the amount of each Note as it became payable. Mr Sanford recognised in his 9 August Sanford Affidavit that GSI required either new equity or the capacity to issue a prospectus to be able to meet its projected cash needs over the next few months. Mr Smoker has not changed his evidence that Trust Company will not consent to a new prospectus (see [147]) and the only apparent possibility of new equity being made available to GSI is the Recapitalisation Proposal. This is the basis on which the Court ordered a freeze of redemptions to prevent unequal treatment of Noteholders on 25 July 2013. In the absence of the Recapitalisation Proposal it would be untenable in the interest of Noteholders for that freeze to remain in place for an indeterminate period and it would be appropriate for the Court to make the order sought by Trust Company on this basis; no interest of GSI members or other creditors has been demonstrated which should prevent the order being made. That would make it unnecessary to deal with the other arguments raised by GSI, but it is convenient to make some comment on them.

[107]

When are Notes "due and payable" 246 As at 26 August 2013, there was $19,985,210 in "at call" Notes and approximately $23.9 million of "term" Notes had matured since 19 July 2013 (see [145]). I accept that it is a requirement of the Trust Deed that Noteholders make a written demand for payment of a Note (together with providing the Note Certificate and proof of identity) before it is payable. 247 However, it is highly likely that once Noteholders became generally aware of that requirement and the Court ordered freeze is lifted, the low level of formal demands which had been made as at 26 August 2013 ($1.4 million in aggregate, and over $300,000 of this related to a Note which had not matured (see 178)) would change. There is evidence that informal demands above the low level referred to in the Second 26 August Sanford Affidavit were made. The Weekly Liquidity Report provided by GSI to Trust Company on 21 August (see RCS 4 at Tab 6) shows that as at 16 August 2013, GSI had approximately $27.7 million in cash or cash equivalents and that since the week ended 19 July 2013 there had been an aggregate of 1,100 enquiries regarding the availability of redemptions (having fallen to 50 in each of the last two weeks) and the number of representations that Noteholders would be redeeming investments as soon as possible was 360 (tapering to 15 in each of the last two weeks). I accept the proposition put in argument that the likely cause of the tapering is the Court's freezing order. Mr Smoker's "floodgates" concern (see [146]) if the Court ordered freeze on redemptions were to be lifted, is well founded in my view. 248 Further, even if GSI's arguments summarised at [178] are correct that GSI is only obliged to pay "at call" Notes (in relation to which a demand for payment has been duly made) to the extent it has liquid funds to do so, GSI has made no similar argument in relation to "term" Notes and it would be difficult for it to do so in light of the terms of Prospectus 18 (see [42] above). GSI had cash or cash equivalent investments only in the order of $27.7 million as at 16 August 2013. GSI incurred substantial advisor costs connected with the Recapitalisation Proposal and the Court proceedings, as has Trust Company whose advisor costs GSI is liable for under the Trust Deed and Trust Company claims indemnity for higher management costs during this period (see [98] and [119]-[120] for references to these amounts). At the rate at which "term" Notes appeared to be falling due and GSI was incurring costs over and above usual expenditure, that cash would soon be inadequate to meet liabilities for "term" Notes and other creditors. Its assets were otherwise illiquid. In any event, an issue of unequal treatment of Noteholders would arise if GSI sought to choose between "at call" and "term" Notes for repayment out of available liquid funds. 249 Similarly, it is unnecessary for me to decide whether the impact of the Court ordered freeze on redemptions has the impact that "at call" and "term" Notes which have matured are not "payable" as argued by GSI (see [178]-[179]). I accept ASIC's submission summarised at [193] that it is necessary to look at the commercial realities in judging GSI's solvency, and for that purpose all of the "at call" notes and "term" Notes would need to be taken into account. Unless a transaction, such as a sale of assets or recapitalisation proposal, which would restore investor confidence and address deficiencies in GSI's financial position is in immediate prospect, it is not appropriate for the Court ordered freeze to endure long and it is more appropriate that control of the Company pass to an external administrator. This is especially so if Trust Company has lost confidence in GSI's management (as to which see [251]-[258] below) with the likely impact that any transaction proposed by GSI would be difficult to implement.

[109]

Trust Company's loss of confidence in GSI management 251 A trustee's loss of confidence in a borrower's management of its business is also a relevant factor where solvency is doubtful. This is because, as a practical matter, it is likely that the trustee will examine more closely any proposal put forward by the borrower. It is likely to result in protracted and more expensive execution of the steps required to address the issues which the borrower confronts. That is unlikely to be in the interest of securing timely payment of debentures. I do not think it necessary for Trust Company to prove definitively that GSI's business was not carried on and conducted in a "proper and efficient manner", to use the terminology of s 283BB(a), although it would be relevant if proved. It only needs to show that it had a reasonable basis for its loss of confidence. 252 Mr Smoker's concerns are summarised at [83] and [149]-[152]. In evaluating those concerns, I have taken into account that: (1) no evidence has been presented to the Court that GSI's current circumstances result from dishonesty or behaviour in conflict of interest by GSI's board or management; (2) the fact that the Appendix A Methodology for assessing the value of GSI's loan assets imposed by Trust Company reveals a net asset deficiency is not per se evidence of a failure of proper and efficient management although it may be a reasonable basis for Trust Company's concern; (3) GSI's responses to the EY Report (and its draft) set out at [32]-[34] are not cursory or clearly wrong at the time they were made and are understandable against a background of GSI having had a successful business for over 40 years; (4) I accept that Mr Sanford's views set out at [100] are genuinely held and provide explanations consistent with a difference of view between GSI's board and management and Trust Company and its advisors about whether the Appendix A Methodology is an appropriate basis for valuing GSI's assets; (5) serial receipt of updated valuations and differences in the methodology for reporting as between Appendix A and historical reports may reasonably explain differences in reported net tangible asset values in the reports produced in July/August 2013; (6) Trust Company's urgency about GSI moving to an 8% equity position regarding compliance with the benchmarks in ASIC's Regulatory Guide 69 may reasonably have appeared overblown when ASIC has not yet commenced the four year transition period for achievement of that guideline; (7) Mr Smoker's concerns have been admitted as evidence of his views only; and (8) I am not satisfied that there was deliberately misleading conduct in provision of the First Directors' Certificate. 253 However, it is clear that GSI's board and management either failed to understand or to demonstrate to Trust Company their understanding of the gravity of GSI's equity situation as it developed between April and July 2013. I do not consider unreasonable Trust Company's loss of confidence in GSI as a result the deficiencies in GSI's responses. Whatever GSI's skill in the day to day running of its business over 40 years, GSI's board and management failed to act quickly enough to address the emerging issues, and took an overly technical view of them; a lender's confidence is critical at a time when solvency may be in peril and that is rarely satisfied by technical argument. GSI's technical approach did not demonstrate a sense of urgency about ensuring that it had adequate capital. The best examples of this are GSI's approach to Trust Company's requests for the early production of the Quarterly Report for the period ended 30 June 2013, the way it addressed valuation of the Riviera Loans and the provision of the Equity Improvement Report. 254 Despite the increasing urgency of requests from Trust Company on 26 June (see [47]), 12 July (see [59]) and 23 July (see [69]) to provide its Quarterly Report for the quarter ended 30 June 2013 as soon as possible after 30 June, GSI complied with the letter of its obligation on 31 July 2013. Trust Company's requests were provided against the bad news contained in the valuations which were being received from 26 June onwards. While it would have been difficult to comply accurately with Trust Company's request because of the progressive delivery of revaluations, it would not be unreasonable for Trust Company to lose confidence in GSI's management's capacity to deal with the emerging situation by reason of its failure to provide a Quarterly Report until the last possible day. 255 GSI's reliance on FTI Consulting's advice in preference to Ernst & Young in relation to impairments in the value of the Riviera Loans, when ultimately significantly altered (see [58]) would also reasonably have affected Trust Company's confidence because of the adverse impact of the revaluation of a substantial loan (among other revaluations) on GSI's net tangible asset position. 256 Most importantly, GSI failed to act promptly or adequately in relation to the Equity Improvement Report. This is despite: (1) GSI was aware of Ernst & Young's view that GSI's equity of 5.1% as at February 2013 may be inadequate to be resilient in adverse market conditions; (2) it was aware of the steps Ernst & Young considered necessary to address the issue (see [30]); and (3) GSI had, on 3 April 2013, committed to the Reporting Protocol which contained an undertaking to provide the Equity Improvement Report by 1 July 2013. The report was provided after its due date on 3 July 2013. It was inadequate on any view and the "plan" in it was so generic and deficient in detail it could have been provided at any time from 3 April 2013: it is set out at [51] above. The inadequacy of this technical approach and the need to address the emerging bigger issue of capital adequacy (rather than possible changes to regulatory requirements) was conveyed to GSI on 9 July 2013 by Trust Company's letter which included the following: 4) Equity Levels We are not convinced that GSI's proposed plan to raise its level of equity, as outlined in your recent letter, adequately deals with the issues currently faced by GSI. Perhaps more acute than proposed regulatory changes is the possibility that increases in impairment provisions recognised by GSI will be necessary, which would decrease GSI's already low and declining equity position. 257 I acknowledge that much of Trust Company's correspondence with GSI (and for that matter, submissions to this Court) revolved around meeting Benchmark 1, which may have encouraged GSI in its technicality but this is a clear statement of the imminent danger. Even after this, however, GSI only appointed FTI Consulting to act as an advisor in connection with potential recapitalisation or sale of part of its loan book on 22 July 2013, after redemption of Notes had been suspended. It is reasonable for Trust Company to form the view that GSI has not acted efficiently in this regard. Perhaps fatally, it also means that GSI has no advanced proposal to put to Trust Company or Noteholders for their consideration. 258 The fact that Trust Company has lost confidence in GSI's management on some reasonable bases and the implications of that loss of confidence in the circumstances of GSI's doubtful solvency, is a factor which weighs in favour of the Court making an order under s 283HB(1)(c).

[111]

What is the impact of the Recapitalisation Proposal? 262 The Recapitalisation Proposal embodied in the Terms Sheet of 18 August 2013 (summarised at [101]) underwent some change at each hearing during argument on the adjournment application. There were key features of the Recapitalisation Proposal which remained to be settled as at 2 September 2013. Its salient features were: (a) The total of commitments (including $1.5 million yet to be formalised by pledges) was said to be $8.56 million, of which $5.3 million would be contributed by the conversion of Notes to equity in GSI. This money was designed to address GSI's net tangible asset deficiency and pay for the costs of the scheme. Converting Noteholders would agree to the conversion by deed poll or by executing the Implementation Agreement and conversion would be subject to the issue of shares in GSI and interests in the Closed MIS. (b) A scheme of arrangement would be proposed under which Noteholders would be asked to approve the separation of GSI's performing loan assets into Open MIS and non-performing assets into Closed MIS. In exchange, Noteholders would be issued units in Open MIS and Closed MIS in proportion to the principal and interest accrued on their Notes. GSI's debenture issuing business would be terminated and the Trust Deed terminated. To the extent Local Investor Group members held interests in Closed MIS by reason of their commitment they would be subordinated to Noteholders. To the extent that there are excess funds contributed by Local Investor Group, they would be issued interests in Open MIS. (c) Identified members of Local Investor Group would become directors of GSI at the time the Implementation Agreement is signed, intended to be within two weeks of an order by the Court adjourning Trust Company's application. $300,000 would be contributed to Local Investor Group's lawyers' trust account within 24 hours of that order to fund GSI's and Trust Company's advisor fees pending execution of the Implementation Agreement and a further $1.975 million would be released to the trust account when the Implementation Agreement is signed. GSI would have power to authorise expenditure from the trust account. (d) The responsible entities for the MISs have not yet been identified (though they would not be a company associated with Mr Johnston) and related issues including insurance remain to be addressed. (e) It is proposed that Noteholders be offered the opportunity to participate in an interim distribution of $2,500 or 25% of the unpaid balance, whichever is less (see [230]).

[116]

Trustee's powers and consultation with Noteholders 270 The tenor of many of the arguments put forward by Counsel for Trust Company was that whether receivership or the Recapitalisation Proposal should be pursued is a judgment that only Trust Company is competent to make as trustee to the exclusion of Noteholders: put that broadly, the submission is misplaced. 271 Even though clause 17.03 of the Trust Deed confers "absolute and uncontrolled discretion" in the exercise of powers, authorities and discretions conferred by the Trust Deed, both the Trust Deed and Part 2L.5 recognise that there is a place for consultation with Noteholders. Clause 17.03 is subject to clause 17.04, which allows Noteholders to give the trustee directions, subject to qualifications. Part 2L.5, and in particular s 283EB empowers a trustee to convene a meeting of debenture holders when a borrower fails to remedy a default for purposes of providing information to debenture holders, submitting a proposal for their protection to them and asking for directions. Similarly s 283EC permits the Court to convene a meeting of Noteholders for the same purposes. 272 It is difficult to maintain a proposition that a trustee is better placed than a legally competent properly informed beneficiary to make decisions which affect that beneficiary. While it is true that the regulatory purpose served by the requirement for a trustee and trust deed complying with the requirements of Chapter 2L is to make administration and enforcement of debenture holders' interests easier, it does not mean that the role of debenture holders as decision makers must be for all purposes displaced. Given the uncertainty as to the return to Noteholders under either receivership or some other proposal such as the Recapitalisation Proposal and the fact that it is Noteholders who will bear the consequences, it is highly desirable that, where it can appropriately be done, Noteholders be given the choice or at least be consulted. This is especially so because external administration notoriously affects the price at which assets of the borrower can be realised. 273 Further, Trust Company acts in a fiduciary capacity; its powers are conferred for a fiduciary purpose and are not "rights" (as occasionally submitted by Counsel for Trust Company). Submissions of this kind were concerning, particularly when Trust Company's submissions of 22 August 2013 (see [118]) and Counsel's submissions throughout appeared to fail to take account of important differences in the 12 August draft and the Terms Sheet signed on 18 August. Where the Court is called on to exercise discretions under s 283HB, its concern is with the interests of Noteholders, not vindicating the powers of the trustee; many of Trust Company's submissions had the latter colour. 274 Having said that, it is relevant that GSI was not in a position to propose a scheme of arrangement to its Noteholders imminently. The Recapitalisation Proposal evolved from the time it was first mentioned to the Court on 25 July, through the draft of 12 August, the Terms Sheet of 18 August, as a result of submissions made during the hearings on 22, 23, 26 and 28 August, and Local Investor Group and GSI recognise that the proposal is not yet fully formulated since they seek an adjournment of two weeks to reach the stage of an Implementation Agreement which can be signed. It is difficult to see how the First Proposed Meeting could have been properly informed at the time it was proposed and the proposal changed thereafter. It appears to be common ground between the parties now that that meeting has no utility and should not proceed. 275 The Second Proposed Meeting became irrelevant when Local Investor Group agreed to bear the risk of implementation costs if the scheme was not approved. It is therefore unnecessary for me to decide whether it is open to the Court to order a meeting under s 283EC (as proposed by Local Investor Group) ancillary to an application by Trust Company for the exercise of the power conferred by s 283HB(1)(c) (to declare the security for debenture holders enforceable), or whether the Court's power to order a meeting to be convened can only be exercised upon an application expressly for such an order by ASIC or Trust Company. 276 If it were necessary for me to decide, I note that Trust Company applied for directions under s 283HA. Section 283HA confers on the Court the power not only to give directions but also the power to make ancillary or consequential orders. I consider that the Court would have had power both to give directions to Trust Company and, ancillary to that, to order a meeting of Noteholders be convened under s 283EC even though the submission that such a meeting should be convened was not made by Trust Company. Further, s 283DA(i) requires a trustee to apply for orders under s 283HB at the instance of the borrower, so it may have been open for GSI to require the borrower to seek an order under s 283HB(1)(g).

[117]

How much new capital is enough? 277 Trust Company's submission that solvency is not just a balance sheet test is clearly correct. A significant issue of difference between Local Investor Group and Trust Company is the extent of equity required to ensure GSI's solvency over and above that needed to address the balance sheet deficiency of $3.8 million which has been identified to date. 278 Local Investor Group understood that $7 million would be sufficient having regard to: (1) after payment of costs of implementing the scheme (then estimated by them to be $1.2 million), GSI would have a positive equity of $2 million (see [175]); and (2) the Recapitalisation Proposal would have Noteholders exchange their Notes for interests in a managed investment scheme which would not be subject to the requirements of ASIC's Regulatory Guide 69 or Chapter 2L. The Terms Sheet does indicate that if more money were required, Local Investor Group may be able to find it and Local Investor Group have demonstrated willingness to do so in the course of these proceedings. 279 The amount of the costs of the implementation of the Recapitalisation Proposal is a matter of contention. Local Investor Group suggested that it may cost between $1.2 million and $1.5 million from the time an Implementation Agreement is signed, although it has allowed $1.975 million by agreeing to provide access to the funds in the Westpac account. Trust Company suggested it may be $2-$3 million: see [126] and [230]. Given Trust Company's experience in this arena, its view about the likely costs cannot be discounted. 280 Further, Local Investor Group's estimate of costs depends in part on a range of people being willing to provide assistance with the implementation of the Recapitalisation Proposal at low or reduced cost. It is my assessment that it also relies on Local Investor Group having a significant role in the implementation process. However, Local Investor Group is a "stranger" to the scheme and it may not be appropriate or efficient for Local Investor Group to assume such a large role: GSI as the scheme company and Trust Company as the trustee for debenture holders should have the carriage of most matters which might affect this estimate as they have duties to fulfil under the Corporations Act. 281 It may be that if the costs of implementation of the Recapitalisation Proposal were to prove greater than Local Investor Group envisaged, Local Investor Group would be willing to provide those funds as they have now agreed to provide $300,000 until the Implementation Agreement is signed and a further $1.975 million all of which would be at risk if the scheme were not approved. However, the greater the amount provided by Local Investor Group to implement the scheme, the harder it becomes to be assured that Local Investor Group contributions would in fact return GSI to a positive net tangible asset position as GSI would have an obligation to repay these amounts to Local Investor Group (and GSI's legal costs) if the scheme is approved. Of course, this issue could be dealt with if it arose, for instance, by agreement to capitalise any excess. 282 The fact is that the appropriate number to put GSI or the MISs into an appropriate capital position could not be known at 2 September 2013 because it would depend on factors such as whether Open MIS interests were redeemable and if so on what terms; if they are redeemable then the possibility of a "run" on Open MIS is a live issue. 283 Trust Company suggested in its lawyers' letter of 23 August 2013 that a buffer of 4% equity (or approximately $6 million) with a plan to get to ASIC's Benchmark of 8% (or approximately $12 million) is what would be required (see [126] and [155]) based on GSI having assets of $150 million. However, ASIC's Counsel confirmed that ASIC has not yet announced a start date for the four year transition to an 8% equity regime for debenture issuers (see [181]) and it is an "if not, why not" regime of disclosure. Accordingly, it may be that Trust Company's insistence on these levels is either unduly inflexible or addressing an irrelevancy in assessing the Recapitalisation Proposal. This is for two reasons. 284 First, perhaps inconsistently with Trust Company's letter of 23 August 2013, Trust Company's Counsel submitted that as solvency is not just a balance sheet test, the Recapitalisation Proposal is inadequate because GSI's available cash is less than the face value of matured "term" and "at call" Notes (see [131] above). If GSI remained within the Chapter 2L regime, it is possible that there would be a "run" on GSI so that it would indeed be insolvent and neither 4% capital nor 8% capital would be adequate once redemptions recommenced. That would be an issue of investor confidence having regard to any equity injection. But that is not the Recapitalisation Proposal. 285 Second, if Noteholders are willing to exchange their Notes for interests in Open MIS and Closed MIS, they would not be within the Chapter 2L regime and the Notes would be cancelled. Whether or not there could be a "run" on Open MIS because of pent up demand would depend on the terms of the Open MIS in relation to the redemption of interests under that managed investment scheme. It is unknown what regulatory requirements ASIC might impose or what would be acceptable to Noteholders; that is something which is likely to be established only after an Implementation Agreement is signed. Since Local Investor Group envisaged that Open MIS might perform a similar function to GSI it is likely that the regulator would seek to establish that Open MIS is in a position to meet any representations which might be made about the availability of redemptions of units issued by Open MIS or distributions (in the nature of interest payments) on those interests. 286 These unknown factors about solvency and capital requirements weigh against the conclusion that the Recapitalisation Proposal as it stood on 2 September 2013 would address the circumstances which are in favour of making an order under s 283HB(1)(c).

[118]

Time to elapse before a scheme can be put to Noteholders 287 Local Investor Group suggests that it will take around four months before a scheme can be put to Noteholders for consideration; Trust Company suggests that it could take longer than six months. 288 If this proposal were in a position to be put to Noteholders imminently, then it might well have been appropriate to allow Noteholders to decide between appointing a receiver or adopting the Recapitalisation Proposal, particularly if Local Investor Group were to cover GSI's external advisor costs as now proposed, and in circumstances where it is not clear that the Noteholders will be paid in full under either proposal. Trust Company appeared to advance the proposition in correspondence with GSI and before the Court that it would only consider a proposal appropriate to be put to Noteholders if it would result in their being paid in full: but what if that is not possible or likely on any contingency? I consider that GSI's current financial position need not have been determinative in favour of the appointment of a receiver. It may even be more appropriate that Noteholders be given the choice where it is not clear which path lies to repayment in full or what level of discount from that amount the Noteholders could tolerate. Under a scheme of arrangement Noteholders would have had the benefit of an independent expert's report in assessing the alternatives and the Noteholders would be in the best position to decide between the alternatives for their own reasons (which might or might not include the impact of GSI's failure on the Gippsland area balanced against their own interests as Noteholders). 289 Even though Mr Johnston sought to adduce evidence of the return to Noteholders and costs incurred in the receivership of a comparable company, and to compare it unfavourably to the amount which he assesses may ultimately be paid to Noteholders if the Recapitalisation Proposal proceeds, I do not consider that the Court was in a position to assess that the return would be better under either regime. This is because: (1) Mr Johnston's assessment of the return under the Recapitalisation Proposal is not disinterested (as he acts for Local Investor Group and a company associated with him is a borrower from GSI); (2) there is substantial execution risk in the Recapitalisation Proposal and the proposal is not yet finalised; (3) there can be no assurance about the impact of market factors on GSI's loan assets and property over the period of years which may have an impact on the return to debenture holders under the Recapitalisation Proposal; (4) the costs incurred in individual receiverships vary with the circumstances of each company; and (5) I have had regard to the evidence of Mr Olde about the adverse impact of receivership on the value attributed to the assets of a company in receivership.

[119]

Recapitalisation Proposal and Chapter 2L 290 Counsel for Trust Company suggested that such a proposal could not fall within s 283HB or be for the purposes of Chapter 2L because it related to the acquisition of interests under a managed investment scheme: see [237]; Counsel suggested that the Recapitalisation Proposal was designed for the benefit of Local Investor Group as investors, not as a community group rescuing GSI and that Local Investor Group was trying to hold Trust Company "hostage" to these commercial interests. I reject this submission. The proposal does not need to fall within s 283HB since it is only Trust Company which is seeking an order under s 283HB, not Local Investor Group. 291 However, s 283DA(g) clearly envisages that the Chapter 2L regime will operate with, not exclusively from, other regimes under the Corporations Act. For instance, s 283DA(g) requires the trustee to give debenture holders a statement explaining the effect of any proposed scheme of arrangement before any meeting ordered by the Court under s 411(1) or (1A). 292 I do not see any reason why it would not be open to Noteholders to approve a scheme of arrangement proposed by GSI which would have them exchange their Notes for other interests, whether or not Trust Company recommended it (although it is undoubtedly commercially more likely to be accepted if it were endorsed by the trustee). Certainly its proponents' interests would have to be well identified. However, if the Court is satisfied that Noteholders acting reasonably might consider approving such as scheme as in their interests, it would be open to the Court to adjourn Trust Company's application or refuse it so that Noteholders had that opportunity. Indeed, some of Trust Company's submissions about what its "rights" under the Trust Deed are and whether any proposition could be put to Noteholders of which it did not approve were misconceived. Trust Company's powers under the Trust Deed are to be exercised in a fiduciary capacity and it would certainly be open to Noteholders to approve a scheme of arrangement which might return them less than 100 cents in the dollar if they perceived that it might be a higher return than a receivership of GSI would or might deliver.

[123]

Adjournment application 297 One of the difficulties of considering the merits of the adjournment application and Trust Company's application under s 283HB(1)(c) is that many of Trust Company's written and oral submissions to the Court did not demonstrate a full appreciation of the Recapitalisation Proposal as represented by the Terms Sheet signed on 18 August 2013, as opposed to the draft of 12 August 2013. A number of the submissions were, surprisingly, simply technically wrong. The problem is epitomised in the written submissions of 22 August 2013 (see [118] which sets out Trust Company's view of the "Flaws in the terms sheet"), but this issue remained a feature of Trust Company's submissions throughout. For example: (a) Trust Company's written and oral submissions after 18 August referred to a 50% split of Local Investor Group's contribution between debt and equity, which was not a feature of the Terms Sheet although it was a feature of the 12 August draft; (b) Trust Company persisted in a view that conversion of Notes to equity did not address the net tangible asset deficiency, which was clearly wrong. Although another of Trust Company's submissions, that solvency is not just a balance sheet test, is clearly right, it is concerning that communications from Trust Company as late as 30 August 2013 make statements about the inadequacy of the proposed cash injection to address the balance sheet deficiency; (c) While Trust Company was right to be concerned about the possibility of a run once the Court ordered freeze was lifted, it appeared to fail to appreciate the potentially different regulatory treatment of debentures and interests in a managed investment scheme for which the ASIC Benchmarks may not have been relevant and which might allow a "run" to be avoided. The only time that Trust Company appeared to acknowledge that the ASIC Benchmarks might not be relevant was at point six of its letter of 23 August 2013 referred to at [126] which said: That said, we are mindful of the issues that you raised last night (through [Local Investor Group's lawyers]) regarding the applicability of RG 69 to the recapitalised GSI (if the Rescue Group's proposal can be implemented). Our initial reaction is that until any scheme is approved and has become effective, we believe that that the RG 69 regulatory policy should still apply unless expressly waived by ASIC. (d) Many of the submissions appeared overly committed to achieving compliance with ASIC Benchmarks, which is not mandated and for which the four year implementation period for transition to an 8% equity benchmark has not yet started. It was open to Trust Company to allow more flexibility than it appeared willing to do in its communications with GSI and Local Investor Group. 298 The nature of the arguments presented by Trust Company from 22 August 2013 was apt to a mind closed to the Recapitalisation Proposal (despite subsequent meetings) and the submissions of Counsel seemed overly concerned with vindicating Trust Company's "rights" or punishing GSI management. Exposure of the directors and management to investigation by an external administrator is not an end in itself: Trust Company did not provide any evidence to suggest that an investigation would be fruitful either because of actionable conduct of GSI directors or management or in realising funds to distribute to Noteholders. Although the Recapitalisation Proposal is undoubtedly complex and has substantial execution risks and issues to be addressed, it had persons of considerable commercial reputation and apparent wealth as its proponents. There was evidence of the commitment of Local Investor Group in its willingness (albeit demonstrated late in the proceedings) to put at risk over $2 million ($300,000 to the point of the Implementation Agreement being signed and $1.975 million thereafter). Even allowing that Trust Company's loss of confidence in GSI's management may have been reasonably based, it is difficult to understand why this matter has not been approached with greater willingness for commercial negotiation designed to shape a proposal with less complexity or execution risk. 299 Trust Company submitted that the Recapitalisation Proposal is just an "informal receivership" (see [118]), as though that is necessarily a bad thing. Counsel asserted that it was inappropriate for Trust Company to be "held hostage" to the Recapitalisation Proposal (see, for instance [157]). That is curious since informal work outs can avoid the opprobrium and therefore the value destruction inherent in external administration and they can often be executed at least as efficiently as an external administration. Further, Trust Company's own action in issuing the press release of 26 July is likely to have had the effect of discouraging alternative proposals for purchase of some or all of the loan book which alone or together with the Recapitalisation Proposal may have alleviated GSI's financial position to the benefit of Noteholders. If an informal work out has a realistic prospect of a better return to Noteholders than external administration, then a trustee should approach it with an open mind. Indeed, where a borrower's solvency is problematic but an informal workout has a realistic prospect of success, the trustee would be in a better position than the Court is in to supervise the negotiation and implementation of that arrangement. It was open to Trust Company to conclude that the complexity and execution risk attached to the Recapitalisation Proposal did not give it a realistic prospect of success within an acceptable timeframe, but whether that is a necessary conclusion has been clouded by Trust Company's apparent unwillingness or inability to come to terms with the technical detail of the Recapitalisation Proposal. 300 Having said that, Trust Company was entitled to be concerned about the complexity, execution risk and the time that the Recapitalisation Proposal would take to be implemented during which Noteholders would not have access to redemptions. Many of the major outstanding items referred to in Trust Company's letter to GSI of 20 August 2013 (see [113] above) remained to be addressed after the negotiation of the Implementation Agreement was completed. 301 Had GSI engaged with the seriousness of its situation earlier, the Recapitalisation Proposal, or some other arrangement necessary to deal with GSI's apparent net asset deficiency, may well have been more advanced. Trust Company may also not have lost confidence in GSI and its management, which it appears to me has coloured Trust Company's attitude to the possibility of sale of some or all of GSI's loan book and the Recapitalisation Proposal. 302 There are seven factors determinative of my decision not to grant a two week adjournment for the development of an Implementation Agreement. These factors have a cumulative effect. 303 The first factor is the complexity and execution risk attached to the Recapitalisation Proposal coupled with the long time frame of four to six months before Noteholders would get an opportunity to vote on the Recapitalisation Proposal. 304 The Recapitalisation Proposal was still evolving. The "pledges" made by members of Local Investor Group might be firmed into legally enforceable commitments within the two week time frame, but they were not at that point on 2 September 2013. No licensed responsible entity had been identified or agreed to act in relation to either of the MISs, and the terms of the MISs and underlying documentation had to be agreed. There would be new Board members of GSI. It is highly likely that the proposal would raise regulatory issues which would take time to address and they might include consideration by ASIC as to whether elements of Regulatory Guide 69 should be applied at least to Open MIS if it were contemplated that it would allow redemptions. It is also not clear how any "run" on Open MIS would be funded if it allowed redemption of interests. This is apart from the need to obtain an independent expert's report and other advice relevant to approval of a scheme of arrangement. 305 I was also not convinced that Local Investor Group correctly estimated the costs of implementing so complex an arrangement: it is possible that costs would blow out with the result that unless Local Investor Group were prepared to commit further funds, the process would stall after many months and a receiver would be appointed at that point. During all of this time, it may be that a process for making hardship payments to Noteholders could be agreed, but it is possible that Noteholders would not be willing to wait that time. There were many ways in which this proposal could fail before it came to the Noteholders for approval with the result that the appointment of a receiver was merely deferred, not avoided and this might also prejudice the pool of funds available to Noteholders. 306 The second factor is the fact that Trust Company does not support the development of the proposal in its role as trustee for Noteholders. While it was possible that that situation could change upon the Implementation Agreement being finalised, it appears unlikely if it did not change when Local Investor Group was willing to put approximately $2 million at risk to develop the proposal to the point of Noteholder vote on the scheme. Without Trust Company's support, the development of the Recapitalisation Proposal is substantially more difficult and likely to be more costly for reasons previously expressed. I regard Local Investor Group's willingness to put this amount of money at risk as a significant matter: if it was insufficient to result in Trust Company being willing to support an adjournment for two weeks, I consider that it would be futile to grant an adjournment to allow negotiation of the Implementation Agreement. 307 The third factor is that Trust Company must also explain the proposal to Noteholders in accordance with s 283DA(g) before a meeting to approve a scheme under s 411(1) or (1A) is held: if Trust Company opposed the proposal, then this may affect the likelihood of Noteholders approving the scheme of arrangement. In addition, Trust Company has not demonstrated full appreciation of the elements of the Terms Sheet, and that would have to change before it met its obligations under s 283DA(g). 308 The fourth factor is the need for ongoing Court supervision to facilitate progress of the proposal. That need was demonstrated during the passage of the many hearings in the proceedings. Local Investor Group made changes to the Recapitalisation Proposal having regard to matters addressed in the proceedings, not generally through a course of negotiation with GSI or Trust Company. Some of the issues, such as the necessity to deal with the fact that GSI has an apparent net tangible asset deficiency and therefore may be inhibited from expending money on development of the proposal, should have been apparent to Local Investor Group and it should have been in a position to propose a solution rather than only deal with the issue responsively when it emerged during the proceedings. It is not enough to say that this is a well-intentioned group of local investors: if the Recapitalisation Proposal was to get "legs", it needed momentum and a demonstrated appreciation of the issues. Further, it was not appropriate that Mr Johnston did not make plain to the Court his interests in the success of the Recapitalisation Proposal: I do not accept the submission by GSI's Counsel referred to at [157] that the fact that Mr Johnston was a director of a borrower from GSI was adequately addressed in the exhibit to the Olde Affidavit; the Court was not taken to this exhibit before this issue was raised by Trust Company: the Court should be in a position to understand the interests at play so that it can evaluate arguments appropriately. 309 If that is the only way the Recapitalisation Proposal could be progressed, it is likely that a two week adjournment to reach an Implementation Agreement will be only the first of many adjournments. I accept Counsel for Trust Company's argument that it is not appropriate for the Court to be the venue for such negotiations: it was my reason for the adjournment from 28 August 2013 to 2 September 2013 to allow commercial negotiation. 310 The fifth factor is the inappropriateness of adopting an ongoing process in which GSI would incur legal costs of dealing with the adjournment applications if that is the only way that the Recapitalisation Proposal could be developed. GSI would incur significant legal costs for itself and Trust Company in contested hearings. Those costs would not be met by Local Investor Group since it agreed to fund costs of implementation of the Recapitalisation Proposal but not the costs of these hearings. In circumstances where GSI's solvency is doubtful, I do not think it appropriate for the Court to support a regime in which that expenditure on contested court applications is a likely necessary component especially in a four to six month time frame. 311 Had Trust Company been more supportive of, or at least demonstrated more openness to, the Recapitalisation Proposal and had Noteholder consideration of it at a scheme meeting been more imminent, then I consider that an adjournment may have been appropriate if Local Investor Group funded GSI's abnormal costs during that period. Having said that, I did not consider persuasive the imputed interest rate for Notes set out in the 2 September Sanford Affidavit or the putative "profit" suggested. 312 The sixth factor is the need to resolve the impasse. If Trust Company will not support the development of the Recapitalisation Proposal, and as Mr Sanford has acknowledged that GSI will not be able to pay Notes as they fall due in a relatively short time frame unless Trust Company consents to a replacement prospectus, I consider that it is in the interests of Noteholders that the current impasse be resolved by the Court making the order for which Trust Company applied. Given the attitude of Trust Company to the Recapitalisation Proposal and GSI, it is likely that Trust Company's submission was right that receivers will be more efficient and effective in conducting negotiations with Local Investor Group (should they relent in their intention not to negotiate with a receiver) or negotiations with other parties. While it would be open to Trust Company to supervise an informal workout if it thought it likely to be most productive of optimal return to Noteholders, in the face of Trust Company's application the Court should act to resolve the impasse in the absence of a proposal which is imminently capable of consideration by Noteholders. 313 The seventh factor is that although Trust Company had not, to 2 September 2013, sought to exercise its powers under clause 12.01(a) of the Trust Deed, it remained open to it to do so, albeit that that might lead to a further contest between Trust Company and GSI. Such action by Trust Company would make any adjournment futile.

Parties

Applicant/Plaintiff:

Trust Company (Nominees) Limited

Respondent/Defendant:

Gippsland Secured Investments Limited, in the matter of Gippsland Secured Investments Limited

Legislation Cited (4)

Trust Deed, the Corporations Act 2001(Cth)

Corporations Act 2001(Cth)ss 9, 283AA, 283AB, 283AC, 283BB, 283BF, 283DA, 283EA, 283EB, 283EC, 283GA, 283HA, 283HB, 283HB(1)(b), 283HB(1)(c), 283HB(1)(g), 283HB(2), 411, Part

Federal Court of Australia Act 1976(Cth)ss 37AF(1), 37AG(1)(a)

Federal Court (Corporations) Rules 2000(Cth)r 2.13

Cases Cited (23)

v Chameleon Mining NL (No 2) (2012) 200 FCR 296 Hawthorn Glen Pty Ltd v Aconex Pty Ltd (No 1) [2007] FCA 2010 Helou v PD Mulligan Pty Ltd (2003) 57 NSWLR 74 Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 National Australia Bank Limited v Bond Brewing Holdings Limited (1990) 169 CLR 271 Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 Singh v Secretary, Department of Employment and Workplace Relations [2009] FCAFC 59 Smith v New South Wales Bar Association (1992) 176 CLR 256 Spotlight Pty Ltd v NCON Australia Ltd [2012] VSCA 232 The Trust Company (Nominees) Limited v Southern Finance Limited, in the matter of Southern Finance Limited [2012] FCA 1339 Urban Transport Authority of NSW v NWEISER (1992) 28 NSWLR 471

Case law 17 These provisions have not been the subject of extensive judicial consideration. The principles are generally not contentious between the parties. I will deal with the minor areas of difference later in this judgment. 18 The Court's jurisdiction in this area is usefully summarised in The Trust Company (Nominees) Limited v Southern Finance Limited, in the matter of Southern Finance Limited [2012] FCA 1339 at [16] per Yates J: 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. … This is a case in which orders were sought and made under s 283HB(1)(b), (f) and (g). 19 In Australian Securities and Investments Commission v Bridgecorp Finance Ltd (2006) 58 ACSR 499 (Bridgecorp), Barrett J at [14] identified two questions: whether the orders sought are orders that s 283HB(1) allows the court to make and whether in all of the circumstances (having regard in particular to s 283HB(2)), a beneficial purpose will be served by making the orders. At [18], Barrett J noted that s 283HB(1)(g) and similarly worded provisions are intended to confer a broad remedial and protective jurisdiction. 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. In Bridgecorp, orders were sought and made under s 283HB(1)(g) by consent to put on a formal footing an enhanced monitoring and reporting regime between the debenture issuing company and the trustee for debenture holders (and an embargo on the rolling over of debenture investments) in circumstances where there was no breach of the trust deed. 20 In Perpetual Trustees WA Limited v Elderslie Finance Corporation Limited [2008] FCA 1068 (Elderslie) at [31] Lindgren J commented on the scope of s 283HB(1)(c) as follows: The provision on which the plaintiff relies, s 283HB(1)(c), envisages that there may be circumstances in which a security is not yet immediately enforceable in accordance with the terms of the security and the general law, but it will be appropriate for the Court to make an order that the security be immediately enforceable. An obvious example is a situation in which debentures have not fallen due for payment but all the evidence shows that the borrower is insolvent and will not be able to pay the debentures when the time for payment arises. 21 These propositions in Bridgecorp and Elderslie were endorsed by Rares J in Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461 (Provident Capital) at [75] and [77]. 22 The subject matter, scope and purpose of Chapter 2L are relevant matters in considering the exercise of the discretion created by s 283HB(1) which is otherwise unconstrained except by s 283HB(2): Parliament intended, when it conferred power on the Court to make orders under s 283HB, to supplement the armoury of relief that the Court could otherwise give under the general law, the provisions of debenture trust deeds or other provisions in the legislation and are designed to provide protection to investors in debentures: Provident Capital at [78]. Provident Capital dealt with an application under s 283HB(1)(d) and (c). 23 In Provident Capital at [73], Rares J noted the relevance of the impact of receivership on the borrower corporation: Nonetheless, the power under s 283HB(1)(d) must be exercised in light of the fact that an incident of the appointment of a receiver will be that the company will lose "its title to control its assets and affairs": National Australia Bank Limited v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277 per Mason CJ, Brennan and Deane JJ, citing the phrase of Viscount Haldane LC in Parsons v Sovereign Bank of Canada [1913] AC 160 at 167. The appointment of a receiver is also likely to cause damage to the company concerned. The purpose of the powers that s 283HB confers on the Court is to enable it to make appropriate orders that it considers necessary to protect the interests reflected in Pt 2L itself.

[2012] VSCA 232

(2012) 203 FCR 461

(2011) 81 NSWLR 498

(1981) 147 CLR 246

(2010) 187 FCR 261

(2012) 200 FCR 296

(2003) 57 NSWLR 74

(1990) 169 CLR 271

(1992) 176 CLR 256

(1992) 28 NSWLR 471

(1933) 48 CLR 457

(1981) 150 CLR 1