Insolvent investments 9780409340174, 0409340170

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English Pages [580] Year 2015

Table of contents :
Full Title
Copyright
Foreword
List of Contributors
Preface
Acknowledgments
Table of Cases
Table of Statutes
Table of Contents
Chapter 1 Introduction
Chapter 2 How have Managed Investment Schemes Coped With the Challenges of Insolvency?
I. The importance of managed investment schemes in the Australian economy
II. Regulation of managed investment schemes
II.A. Important features of managed investment schemes
II.B. Forms of managed investment schemes
III. Winding up managed investment schemes
III.A. Relevant statutory provisions
III.B. Background to the winding up provisions
III.C. Application of the winding up provisions
IV. Practical issues
IV.A. Who should be appointed and with what powers
IV.B. Identifying ‘scheme property’
IV.C. Need for multiple applications to court
IV.D. ‘Growers’ groups’
IV.E. Allegations that PDSs are misleading
IV.F. Difficulty in restructuring
IV.G. Outcomes for investors
V. Conclusion
Chapter 3 Duties of Directors of Managed Investment Schemes
I. Introduction
II. Duties of the RE
III. Liability of the RE
IV. Corporate duties of the RE directors: s 180
V. Corporate duties of the RE directors: s 181
VI. Corporate duties of the RE directors: s 182
VII. Directors’ duties under Chapter 5C
VII.A. Section 601FD(1)(a) — Duty to act honestly
VII.B. Section 601FD(1)(b) — Duty of care and diligence
VII.C. Section 601FD(1)(c) — Duty to act in the best interest of members
VII.D. Section 601FD(1)(d) — Duty not to make improper use of information, and s 601FD(1)(e) — Duty not to make improper use of position
VII.E. Section 601FD(1)(f) — Duty to ensure the RE complies with the law etc
VIII. Can scheme members sue the directors?
VIII.A. Section 1324
VIII.B. Section 1325
Chapter 4 Advising the Directors and Management of an Entity in Financial Crisis
I. Introduction
II. Insolvent trading
II.A. Overview
II.B. General principles
II.C. Defences
II.D. Consequences of contravention
II.E. Relief from liability
III. Directors’ duties
III.A. Care and diligence: s 180(1)
III.B. Good faith and proper purpose: s 181(1)
IV. The need for reform
IV.A. Issues with the current regime
IV.B. Suggested reforms
IV.C. No reform necessary?
V. Conclusion
Chapter 5 Can Managed Investment Schemes be Restructured in the Context of Insolvency?
I. Introduction
II. Agribusiness managed investment schemes
III. Timbercorp — de facto winding up
IV. Great Southern — restructure by replacement responsible entity
V. Elders — de facto winding up
VI. Gunns — de facto winding up
VII. Willmott — disclaimer
VIII. FEA — formal and informal winding up
IX. Impact of ss 601FS and 601FT
X. Proposals for law reform
XI. Impediments to restructure
XII. Tricom
XII.A. The company
XII.B. The collapse
XII.C. The rescue
XIII. Centro
XIII.A. The company
XIII.B. The collapse
XIII.C. The collapse and restructure
XIV. Octaviar
XIV.A. The company and the collapse
XIV.B. The (failed) rescue
XV. Conclusion
Chapter 6 Role of the Courts in Restructuring Managed Investment Schemes
I. Introduction
II. Background to the proceeding
II.A. Schemes
II.B. Liquidators’ proposal and the restructure proposal
II.C. Injunction application
II.D. Next phase of the litigation
III. Commercial context — company takeovers and applications for injunctive relief
IV. Construction of s 601FS — the competing arguments
IV.A. Effect of s 601FS
IV.B. Effect of s 601FS — scheme leases
V. Implications of the decision — what is the role of the courts in restructures?
Chapter 7 Winding up Managed Investment Schemes — Conceputal and Practical Difficulties
I. Winding up managed investment schemes — what does it mean?
II. The hypothetical
III. The framework
IV. The perfect storm — winding up the schemes
IV.A. Who may be appointed to wind up the scheme?
IV.B. Potential conflicts
IV.C. Directions and extent of court supervision
IV.D. Liquidators’ remuneration
IV.E. The costs of the application to wind up
V. Conclusion
Chapter 8 The Competition for Assets in Insolvent Investment Vehicles
I. Introduction
II. The rights of creditors and investors in investment trusts
II.A. Nature of a trust
II.B. The position of secured creditors
II.C. The position of unsecured creditors
II.D. The role of the liquidator of a trustee company or RE
III. Managed investment schemes: scheme property
III.A. Why is it necessary to identify scheme property?
III.B. What is scheme property?
IV. Tracing and pooling in managed investment schemes and investment trusts
IV.A. Tracing into and distribution from a mixed fund
IV.B. Are there any proprietary claims or personal equities?
IV.C. Resolving investor/investor conflicts in the future
V. Corporate groups — pooling and substantive consolidation
V.A. Introduction
V.B. Pooling under Division 8 of Part 5.6
V.C. Substantive consolidation outside Division 8 of Part 5.6
V.D. A comparison of means of achieving substantive consolidation
VI. Conclusion
Chapter 9 Rights of Investors in Failed or Insolvent Managed Investment Schemes
I. Introduction
II. Legislative framework and investor protection philosophy
II.A Features of MISs
II.B. Pooled schemes and common enterprise schemes
II.C. Tax benefits
II.D. Registration and the responsible entity
II.E. Scheme property
II.F. Constitution and compliance plan
II.G. Disclosure requirements
II.H. Policy rationales underlying financial product disclosure
II.I. Defective PDSs
II.J. Concerns with agribusiness disclosure — ASIC Regulatory Guide 232
III. Rights arising from scheme documentation, limited liability, withdrawal rights and rights over scheme property
III.A. Rights arising from scheme documentation
III.B. Liability of members in insolvent schemes
III.C. Rights to withdraw
III.D. Rights over scheme property
IV. Right to appoint a new responsible entity
V. Rights against scheme operators for misleading representations and inadequate disclosure
V.A. Civil liability regime for defective PDSs
V.B. Power to set aside ancillary documents – s 1022C
V.C. Practical issues for investors in bringing claims for defective PDSs
VI. Conclusion
Chapter 10 Class Actions in a Managed Investment Scheme Context
I. Introduction
II. Common features of managed investment schemes of significance in the class action context
II.A. Commercial motivations
II.B. Applicability of the disclosure regime
III. The dual requirements of individual reliance and commonality: potential difficulties for class actions relating to failed managed investment schemes
IV. Applications for security for costs in open class actions
V. Conclusion
Chapter 11 Disclaimer and Related Issues
I. Background to the disclaimer provisions
II. Three questions not considered in Willmott
II.A. When does a liquidator require leave to disclaim property?
II.B. What considerations will inform the decision to grant or refuse leave?
II.C. In what circumstances will a court set aside a liquidator’s disclaimer?
III. A potential anomaly
Chapter 12 Directions Applications and the Rights of Third Parties
I. Introduction
II. Legislative powers
III. The traditional principle — GB Nathan
III.A. Authority in support
III.B. Preference cases
III.C. Reconstitution as inter partes proceeding
IV. Willmott Forests (No 2): third party rights determined without joinder
IV.A. Discretion, not power
IV.B. Cases said to be contrary to GB Nathan
IV.C. Doubts put to rest by Macedonian Orthodox?
V. Subsequent cases
VI. Reconstitution and representation: the safer course
VII. Conclusion
Chapter 13 Practitioner Remuneration, Costs and Security
I. Introduction
II. The statutory lacuna
III. Limited reliance on trustee’s own right of indemnity
IV. The Universal Distributing principle
IV.A. Origins and application
IV.B. Stewart v Atco Controls: signalling the demise of ‘exclusive purpose’?
V. Funding by way of equitable allowance: Berkeley Applegate
V.A. Work that is ‘necessary’ and for the ‘benefit’ of investors: Universal Distributing vs Berkeley Applegate
VI. House vs trust assets: categorising costs
VII. House vs trust assets: use of house assets in priority to trust assets
VIII. House vs trust assets: recourse to trust assets where house assets insufficient
IX. Allocation of expenses between MISs and trusts generally
X. Solvent and insolvent trusts: can solvent trusts be required to bear the costs associated with insolvent trusts?
XI. Recourse to trust assets for the costs of trust proceedings
XII. Process
XIII. Key risks for practitioners
XIII.A. Proper purpose
XIII.B. Reasonably incurred
XIII.C. Existence of fund
XIII.D. Priority
XIV. Mitigants
XIV.A. Third party funding
XIV.B. Use of directions as protection
XIV.C. Use of interim and pre-emptive orders
XIV.D. Cost recovery
XIV.E. Availability of interest in equity
XIV.F. Ability to monetise — assignments of indemnity secured by lien
XV. Reform
Index

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INSOLVENT INVESTMENTS

Stewart J Maiden EDITOR

LexisNexis Butterworths Australia 2015

LexisNexis AUSTRALIA LexisNexis Butterworths 475–495 Victoria Avenue, CHATSWOOD NSW 2067 On the internet at: www.lexisnexis.com.au ARGENTINA LexisNexis Argentina, BUENOS AIRES AUSTRIA LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA BRAZIL LexisNexis Latin America, SAO PAULO CANADA LexisNexis Canada, Markham, ONTARIO CHILE LexisNexis Chile, SANTIAGO CHINA LexisNexis China, BEIJING, SHANGHAI CZECH REPUBLIC Nakladatelství Orac sro, PRAGUE FRANCE LexisNexis SA, PARIS GERMANY LexisNexis Germany, FRANKFURT HONG KONG LexisNexis Hong Kong, HONG KONG HUNGARY HVG-Orac, BUDAPEST INDIA LexisNexis, NEW DELHI ITALY Dott A Giuffrè Editore SpA, MILAN JAPAN LexisNexis Japan KK, TOKYO KOREA LexisNexis, SEOUL MALAYSIA LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR NEW ZEALAND LexisNexis, WELLINGTON POLAND Wydawnictwo Prawnicze LexisNexis, WARSAW SINGAPORE LexisNexis, SINGAPORE SOUTH AFRICA LexisNexis Butterworths, DURBAN SWITZERLAND Staempfli Verlag AG, BERNE TAIWAN LexisNexis, TAIWAN UNITED KINGDOM LexisNexis UK, LONDON, EDINBURGH USA LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO National Library of Australia Cataloguing-in-Publication entry Author:

Maiden, Stewart.

Title: ISBN: Notes: Subjects:

Dewey Number:

Insolvent investments. 9780409340167 (hbk). 9780409340174 (ebk). Includes index. Investments — Australia. Investments — Law and legislation — Australia. Business failures — Australia. Bankruptcy — Australia. 332.6.

© 2015 Reed International Books Australia Pty Limited trading as LexisNexis. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in ITC Stone Sans and ITC Stone Serif. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

FOREWORD Managed investment schemes and related vehicles have triggered significant litigation in the Supreme and Federal Courts in recent times. Cases such as Timbercorp and Great Southern have dominated commercial lists in the courts. Relevantly, many of these cases have been litigated in Victoria. They have required extensive court resources yet, simultaneously, driven litigation reform through the application of advanced technology. The cases have seen the phenomenon emerge of the paper free trial. Managed investment scheme litigation has led to important procedural reform and the development of leading jurisprudence. It is most apposite, therefore, that the Commercial Bar Association of Victoria and the State’s judiciary, profession and academy combine to produce an excellent collection of analytical papers in this volume. The production is emblematic of the significance of commercial and corporate litigation in Australia. Relevantly the papers have been written by many of those who were directly involved in the recent managed investment scheme cases that have progressed through the courts. We need only reflect on the significance of the judgments of the High Court of Australia in Willmott Growers and, also, Korda. These and other judgments have revealed much development and learning of the managed investment scheme regime created by Chapter 5C of the Corporations Act 2001. The judgments filled in gaps left by the legislature such as the mechanisms that can be used to wind up a managed investment scheme (see Chapters 2 and 7 of this book) and clarified the operation of the provisions of Chapter 5C such as the meaning and effect of the concept of ‘scheme property’ (see Chapters 8 and 9) and the scope of the duties of officers of the scheme (see Chapter 3).

Indeed, the topics covered in the text range from directors’ duties to class actions to insolvency to third party rights and beyond, all in the specialised context of managed investment schemes. This volume will prove valuable to the judge, barrister, lawyer, academic or student who is confronted by a practical problem with managed investment schemes. It will also provide and stimulate learning and lead to the continued development of the jurisprudence. The quality of the analysis and writing in the book is laudable as to its intensity, accessibility and comprehensiveness. It will prove to be a welcome handbook for the practitioner. The Commercial Bar Association demonstrated excellent leadership in sponsoring the seminar series which led to the creation of this book. It will take its place rightly and proudly on the shelves of commercial and corporate judges and lawyers. The Hon. Marilyn Warren AC Chief Justice of the Supreme Court of Victoria May 2015

LIST OF CONTRIBUTORS Stewart Maiden, Editor BA LLB (Hons) (Qld), LLM (Melb), Fellow INSOL International Member of the Victorian Bar Paul Anastassiou QC BA LLB (Hons) (Melb) Queen’s Counsel in the State of Victoria Nick Anson, Minter Ellison BA (Hons), LLB (Hons) (Melb), BCL (Oxon) Solicitor of the Supreme Court of Victoria Garry Bigmore QC LLB Queen’s Counsel in the State of Victoria Dr Oren Bigos BCom LLB (Hons) (Monash), BCL DPhil (Oxon) Member of the Victorian Bar Catherine Button BA LLB (Hons) (Melb), BCL DPhil (Oxon) Member of the Victorian Bar Mark Costello LLB (QUT), LLM (ANU) Member of the Victorian Bar Philip Crutchfield QC B Comm LLB (Hons) (Melb), LLM (LSE) Queen’s Counsel in the State of Victoria

Kathleen Foley BA, LLB (Hons) (UWA), LLM (Harvard) Member of the Victoria Bar Sarah Kimpton, Ashurst Australia BA, LLB (Hons) (Monash) Solicitor of the Supreme Court of Victoria Samantha Kinsey, King & Wood Mallesons BA, LLB (Hons) (Monash) Solicitor of the Supreme Court of Victoria Christina Klemis BA BCom (Economics) (Melb), LLB (Monash), LLM (Melb) Member of the Victorian Bar Ian Martindale QC LLB (Hons) Queen’s Counsel in the State of Victoria Carl Möller BA (Hons) BA, LLB (Hons) (Tas), LLM (Melb), BCL (Oxon) Member of the Victorian Bar Jonathon Moore QC B Ec LLB (Hons) (Monash), BCL D Phil (Oxon) Queen’s Counsel in the State of Victoria Penny Neskovcin B Ec LLB (Hons) (UTas) Member of the Victorian Bar Norman O’Bryan AM SC BA (Hons) LLB (Hons) (Melb), BCL (Oxon) Senior Counsel, Victorian and NSW Bars Catherine Pierce BA LLB (Hons) (Melb) Member of the Victorian Bar

Simon Rubenstein BA (Hons) LLB (Hons) LLM (Melb) Member of the Victorian Bar Michael Sifris LLM (Melb) Justice of the Supreme Court of Victoria Michael Sloan, Ashurst Australia LLB (Hons) (Victoria University Wellington) Solicitor of the Supreme Court of Victoria Robert Strong BA (Hons) LLB (Hons) (Melb) Member of the Victorian Bar Tony Troiani, King & Wood Mallesons BA, LLB (Hons) (Melb) Solicitor of the Supreme Court of Victoria Justin Vaatstra, Arnold Bloch Liebler LLB (Otago University) LLM (Melb) Solicitor of the Supreme Court of Victoria Leon Zwier, Arnold Bloch Liebler LLB (Melb) Solicitor of the Supreme Court of Victoria

PREFACE In mid 2013 I was struck by the thought that much of the extensive litigation that had flowed from the collapse of the many large managed investment schemes that were then in the press was occurring in Victoria. At the helm of those cases were, of course, members of the Victorian Bar. It seemed that there was merit in attempting to harness and share some of the knowledge and insight that had developed at the Bar in the course of dealing with that litigation. From those ideas grew twelve seminars delivered under the auspices of the Commercial Bar Association of Victoria (Commbar). Those twelve seminars have developed into chapters of this book. I thank the Honourable Marilyn Warren AC, Chief Justice of the Supreme Court of Victoria, for doing the book the honour of providing its foreword. I owe a debt of gratitude to Commbar’s President, Philip Crutchfield QC, who supported, encouraged and assisted the project in every possible way. His energy and drive are greatly appreciated. I also owe particular thanks to the Honourable Justice Ferguson of the Court of Appeal of the Supreme Court of Victoria, and to Ian Carson, a senior partner at PPB Advisory, each of who delivered a seminar but was unable to contribute a chapter to the book. Those who attended their lectures have an inestimable advantage over other readers. The 24 authors whose names grace the chapters that follow all deserve thanks and praise for the valuable time, hard work and unwavering enthusiasm that they contributed. Thanks also go to the many barristers who so capably chaired the seminars: Fiona McLeod SC, David Denton QC, Helen Symon QC, Simon Marks QC, Kristine Hanscombe QC, Ray Finkelstein QC, Wendy Harris QC and Kim Knights.

I must also thank Eleanor O’Connor, Jennifer Burrows, Geraldine MacLurcan and Daisy Coles of LexisNexis for their advice and assistance in shepherding the book to publication, Eve Lillas for her help in transforming the papers into chapters, Julie Godenzi for her secretarial assistance, Commbar Treasurer Ian Percy for organising financial support, and Sally Bodman, Courtney Bow, Fiona Faulkner and James McGuire of the Victorian Bar office for providing marketing and logistics for the seminar series. My colleagues Tim Donaghey and Peter Agardy supplied valuable intelligence about the process of getting published. Most importantly, I thank my wonderful family: Brygyda, Madeleine, Fraser and Dominic. They are my everything, and I flatter myself with the thought that they might have had better ideas about how I could have spent the very many hours that this project has consumed. Stewart Maiden Melbourne March 2015

ACKNOWLEDGMENTS The publisher gratefully acknowledges the permissions granted to include extracts from the following texts: Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Other People’s Money, Report No 65 (June, 1993). Australian Law Reform Commission, Collective Investments (ALRC IP 10); and Collective Investment Schemes (ALRC DP 53). R I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper, Banking and Financial Services Law Association, Queenstown, New Zealand, 2008). R Baxt, I Renard, R Simkiss and J Webster, ‘CLERP’ Explained, CCH Australia Limited, Australia, 2000. Corporations and Markets Advisory Committee, Managed Investment Schemes (July 2012). Corporations and Markets Advisory Committee, The Establishment and Operation of Managed Investment Schemes (March 2014). S J Hepburn, Principles of Equity and Trusts, 4th ed, Federation Press, NSW, 2009. D Grave, K Adams and J Betts, Class Actions in Australia, 2nd ed, Thomas Reuters, NSW Pyrmont, 2012. Reproduced with permission of Thomson Reuters (Professional) Australia Limited, www.thomsonreuters.com.au. M Moore, ‘Ten Years Since King v GIO’ (2009) 32(3) University of New South Wales Law Review 883. Parliamentary Joint Committee on Corporations and Financial

Services, Report on the Managed Investments Bill 1977 (1998). Parliamentary Joint Committee on Corporations and Financial Services, Report on the Review of the Managed Investments Act 1998 (December, 2002). A Susskind, ‘Early Exit May Save Directors, but What of the Economy?’ (2010) 48(7) Law Society of New South Wales Journal 20. The following articles quoted in this book were first published by Thomson Reuters in the journals cited below. J Harris, ‘Adjusting Creditor Rights Against Third Parties During Debt Restructuring’ (2011) 19(1) Insolvency Law Journal 22. J Harris, ‘Corporate Group Insolvencies: Charting the Past, Present and Future of “Pooling” Arrangements’ (2007) 15(8) Insolvency Law Journal 78. D Loxton and N D’Angelo, ‘Trustees’ Limitation of Liability: Myths, Mysteries and a Model Clause’ (2013) 41(3) Australian Business Law Review 142. R Maslen-Stannage, ‘Directors’ Duties to Creditors: Walker v Wimborne Revisited’ (2013) 31(2) Company and Securities Law Journal 76. S Whelan, ‘Administration of Insolvent Groups — The Present State of “Pooling”’ (1998) 6(13) Insolvency Law Journal 107. For all subscription inquiries please phone, from Australia: 1300 304 195, from Overseas: +61 2 8587 7980 or online at www.thomsonreuters.com.au/catalogue. The official PDF version of these articles can also be purchased separately from Thomson Reuters.

TABLE OF CASES References are to paragraph numbers

A A Singer and Co, Re [1943] …. 12.24, 12.59 ABN AMRO Bank AV v Bathurst Regional Council (2014) …. 10.35 Aboriginal Connections Aboriginal Corp (in liq) and Guri Wa Ngundagar Aboriginal Corporation (in liq), Re (2012) …. 8.91, 8.107 AF & ME Pty Ltd v Aveling (Grosvenor Trust case) (1994) …. 9.76 AFS Group Ltd, Re [2013] …. 12.66, 12.121, 12.125 Agricultural Land Management Ltd v Jackson (No 2) (2014) …. 3.28, 3.134 Allen v Feather Products Pty Ltd (2008) …. 8.91, 8.107 Alpha Telecom (Aust) Pty Ltd; Dean Willcocks, Re (2004) …. 8.86, 8.132, 8.151, 8.153 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Company Ltd (2008) …. 3.219 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) …. 3.30 Anglican Insurance Ltd, Re (2008) …. 12.75, 12.93, 12.99 Ansett Australia Ltd v Ansett Australian Ground Staff Superannuation Plan Pty Ltd (2002) …. 5.42 Ansett Australia Ltd, Re (2001) …. 12.51 APT Projects Ltd, Re [2013] …. 5.32 Asea Brown Boveri Superannuation Fund 1 Pty Ltd v Asea Brown Boveri, McKeown, Gray & ABB Properties (Vic) Pty Ltd [1999] …. 3.157

Association for Visual Impairment The Homeless and The Destitute Inc, Re [2013] …. 12.108, 12.120 Astarra Asset Management Pty Ltd (in liq), Re [2011] …. 12.22, 12.75 Atco Controls Pty Ltd (in liq) v Stewart [2013] …. 13.19 Augusta Pty Ltd v Provident Capital Ltd (2012) …. 8.18 Austcorp Tiles Pty Ltd, Re (1991) …. 8.132 Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd (2008) …. 4.26 Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) …. 3.41, 3.88 Australian Hotel Acquisition (in liq), Re [2011] …. 8.94, 8.107 Australian Motor Finance Pty Ltd v Angeleri [2010] …. 3.57 Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2010) …. 6.36, 8.30 Australian Securities and Investments Commission v Adler (2002) …. 3.53, 3.99 — v Atlantic 3 Financial (Aust) Pty Ltd (2003) …. 2.71 —v Australian Property Custodian Holdings Ltd [2013] …. 3.95 —v— (No 3) [2013] …. 3.68, 3.120, 3.140, 3.149, 3.162, 3.163, 3.164, 3.165, 3.182 —v Cassimatis (2013) …. 3.30 —v— (No 2) (2013) …. 3.33, 3.36, 3.38 —v Chase Capital Management Pty Ltd (2001) …. 2.71 —v Citrofresh (Ltd) (No 2) (2010) …. 3.24, 3.26 —v Commercial Nominees of Australia Ltd (2002) …. 8.58 —v Edwards (2005) …. 4.25, 4.26 —v Enterprise Solutions 2000 Pty Ltd [2001] …. 8.63 —v GDK Financial Solutions Pty Ltd (2006) …. 2.55, 7.37 —v Great Northern Developments Pty Ltd (2010) …. 8.39 —v Healey (No 2) (2011) …. 3.99, 3.124, 3.125 —v Healey (2011) …. 3.118 —v HPL Financial Planning Pty Ltd (2007) …. 3.221 —v IP Product Management Group Pty Ltd (2002) …. 2.71

—v Letten (No 2) [2010] …. 13.65 —v— (No 7) (2010) …. 8.63, 8.64, 8.68, 8.69, 8.76, 8.165 —v— (No 9) [2010] …. 13.75 —v— (No 17) (2011) …. 8.25, 8.27, 8.28 —v— (No 19) [2012] …. 13.75 —v— (No 23) [2014] …. 13.66, 13.67 —v Letten (No 20) (2012) …. 8.77 —v Macdonald (No 11) (2009) …. 3.27, 3.57 —v— (No 12) (2009) …. 3.99 —v Maxwell (2006) …. 3.22, 3.24, 3.26, 3.39, 3.57 —v Mount Warren Park (Nominees) Pty Ltd (2005) …. 2.71 —v Nelson (2003) …. 8.63 —v Pegasus Leveraged Options Group Pty Ltd (2002) …. 2.71 —v Plymin (No 1) (2003) …. 4.32, 4.33 —v Plymin (No 2) (2003) …. 3.125 —v Rich (2003) …. 3.117 —v— (2009) …. 3.117 —v Rowena Nominees Pty Ltd (2003) …. 12.51 —v Somerville (2009) …. 3.58 —v Sydney Investment House Equities Pty Ltd (2008) …. 3.26 —v Takaran Pty Ltd (No 2) (2002) …. 2.71, 7.32 —v Tasman Investment Management Ltd (2004) …. 2.71 —v— (2006) …. 2.54, 8.63 —v Vines (2005) …. 3.99, 3.27, 3.127 —v Warrenmang Ltd (2007) …. 3.26 —v West (2008) …. 9.46 —v Whitlam (No 2) (2002) …. 3.125, 3.127 —v Young (2003) …. 2.71 Australian Securities Commission v AS Nominees (1995) …. 3.119 —v Gallagher (1993) …. 3.113 —v Melbourne Asset Management Nominees (1994) …. 12.75, 12.78, 12.83, 12.84, 12.85, 12.86, 12.87, 12.88, 12.89

AWA v Daniels (1992) …. 3.114 Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] …. 2.41

B Bank of Australasia v Hall (1907) …. 4.23, 4.26 Bans Pty Ltd v Ling (1995) …. 4.14 Barnes v Addy (1874) …. 12.20 Basic Inc v Levinson (1988) …. 10.23 Bastion v Gideon Investments Pty Ltd (2000) …. 12.49, 12.51 Batten v Wedgewood Coal & Iron Co (1886) …. 13.61 Beddoe, Downes v Cottam, Re [1893] …. 8.12, 13.64 Bell Group Ltd v Westpac (2008) …. 4.65, 4.66 —v Westpac Banking Corporation (No 9) (2008) …. 3.42, 3.43, 3.45, 3.134 Benjamin, Re [1902] …. 12.19 Benton, Mackay Rural Pty Ltd (recs and mgrs apptd), Re [2014] …. 13.13 Berkeley Applegate (Investment Consultants) Ltd (in liq), Re [1989] …. 13.1, 13.21, 13.22, 13.23, 13.24, 13.25, 13.32, 13.33, 13.37, 13.39, 13.50, 13.53, 13.64, 13.76 Black Stump Enterprise Pty Ltd, Re (2005) …. 8.86, 8.122, 8.138 Blackbird Pies (Management) Pty Ltd (No 2), Re [1970] …. 12.25, 12.27, 12.30, 12.32, 12.36, 12.38, 12.39, 12.43 Bluestone Global Ltd (in liq), Re (unreported, 2014) …. 8.88, 8.114, 8.119 Boardman v Phipps [1967] …. 3.136 BOSI Security Services Ltd v ANZ Bank (2011) …. 5.21, 5.40, 6.62, 6.63, 9.84 Boston Deep Sea Fishing and Ice Co v Ansell (1888) …. 3.54 Box Valley Pty Ltd v Kidd (2006) …. 4.19 BP Fowler Ltd, Re [1938] …. 12.59 Bray v F Hoffman-La Roche Ltd (2003) …. 10.52, 10.54, 10.60 Breen v Williams (1996) …. 9.39

Bridge, Franks v Worth, Re (1887) …. 12.21 Bright v Femcare Ltd (2002) …. 10.39 Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) …. 3.189 Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (2009) …. 2.6, 8.36, 8.52 Brown v Jam Factory Pty Ltd (1981) …. 10.36 Bruce v LM Investment Management Ltd (2013) …. 9.70, 13.64, 13.74, 13.85 —v— (No 2) [2013] …. 13.64 Buckton, Re [1907] …. 13.52, 13.78 Burdett-Baker, in the matter of AFS Group Ltd (in liq) v National Australia Bank Ltd [2013] …. 12.123 Byrne v Baker [1964] …. 3.41, 3.113, 3.115

C CA Pacific Finance Ltd (in liq), Re [2012] …. 13.57, 13.76 Caason Investments Pty Ltd v Cao [2014] …. 10.35 Cahill v Kenna [2014] …. 10.35 Campbell v Backoffice Investments Pty Ltd (2009) …. 10.27, 10.28, 10.35 Campomar Sociedad, Limitada v Nike International Ltd (2000) …. 10.19 Capelli v Shepard (2010) …. 2.69, 5.8, 7.25, 7.41, 8.51, 9.79, 9.81, 9.82 Carlyon, Re (1886) …. 12.21, 12.36 Casablanca Wine Bars Pty Ltd, Re (1978) …. 8.128 Cawthorn v Keira Constructions Pty Ltd (1994) …. 8.152 Centro Properties Ltd, Re (2011) …. 5.65, 5.66, 5.68, 8.37 Chan v Zacharia (1984) …. 3.134 Chandler v Director of Public Prosecutions [1964] …. 3.72 Charles v Federal Commissioner of Taxation (1954) …. 9.76 Charter Travel Co Ltd, Re (1997) …. 8.137, 8.139

Charterbridge v Lloyds Bank [1970] …. 3.60, 3.61, 3.63, 3.65, 3.66 Chemical Bank New York Trust Co v Kheel (1966) …. 8.83 Chew v R (1992) …. 3.70 Chief Commissioner of Stamp Duties v Buckle (1998) …. 8.16 Chubb Insurance Co of Australia Ltd v Moore (2013) …. 9.112 City Equitable Fire Insurance Co Ltd, Re [1925] …. 3.112, 3.113, 3.115 City of Swan v Lehman Brothers Australia Ltd (2009) …. 8.127 Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (receivers and managers appointed) (in liquidation) [2014] …. 2.94, 9.96 Clowes v Federal Commissioner of Taxation (1954) …. 6.47 Coad v Wellness Pursuit Pty Ltd (in liq) (2009) …. 13.60 Coats v Southern Cross Airlines Holdings Ltd (in liq) [2000] …. 12.36 Colorado Products Pty Ltd, Re (2014) …. 3.59, 3.190 Commonwealth Bank of Australia v Fernandez (2010) …. 2.84 —v Friedrich (1991) …. 3.99, 3.104, 3.113, 3.115 Conlan v Adams (2008) …. 13.54 —v Executor or Other Personal Representative as Executor of Estate of Croci (decd) [2009] …. 13.79 Contal Radio Ltd, Re [1932] …. 8.143, 8.147 Copeland v Stephens (1818) …. 11.7 Costa & Duppe Properties Pty Ltd v Duppe [1986] …. 9.76 Cowan v Scargill [1985] …. 3.144, 3.145, 3.148, 3.157 CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd (2005) …. 9.77 Crust ‘N’ Crumbs Bakers (Wholesale) Pty Ltd, Re [1992]; (1991) …. 2.40, 2.50 Cumulus Wines Pty Ltd v Huntley Management Ltd (2004) …. 2.71 Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) …. 8.12, 13.82

D Dalewon Pty Ltd (in liq), Re (2010) …. 13.60 Daniels v Anderson (1995) …. 3.117, 3.122 Davies, Re; Davies v Davies (1888) …. 12.21, 12.36 Dean-Willcocks v Nothintoohard Pty Ltd (in liq) (2007) …. 13.61 —v Soluble Solution Hydroponics Pty Ltd (1997) …. 8.86, 8.122, 8.125, 8.132, 8.135, 8.137, 8.139, 8.143, 8.144, 8.145, 8.146, 8.151, 8.153 Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) …. 11.27, 11.31 Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) …. 12.43, 12.88 —v Dick (2007) …. 3.123, 3.124 Derwinto Pty Ltd v Lewis (2002) …. 12.50 Devaynes v Noble [1814-23] …. 8.59 Digi-Tech (Australia) Pty Ltd v Brand (2005) …. 10.35 Directors of Central Railway Co of Venezuela v Kisch (1867) …. 9.38 Downer EDI Ltd v Gillies (2012) …. 3.54 Doyle v ASIC (2005) …. 3.54, 3.55, 3.70 Drax; Savile v Drax, Re [1903] …. 13.79, 13.80

E E & MH March v Stramare Pty Ltd (1991) …. 9.98 ED White Ltd, Re (1929) …. 8.143, 8.145, 8.151 Editions Tom Thompson Pty Ltd v Pilley (1997) …. 12.45, 12.46, 12.57, 12.65, 12.78, 12.91 Edwards v R (1992) …. 3.70 Elders Forestry Management Ltd, Re (2012) …. 5.31, 12.22 —, Re [2013] …. 5.32 Elders Forestry Management Ltd (No 2), Re [2012] …. 5.31 Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) …. 10.36

Enron Australia v TXU Electricity Ltd (2003) …. 11.43 Environinvest Ltd v Great Southern Property Managers (No. 2), Re [2010] …. 2.68, 2.91, 7.40, 7.47 —v Great Southern Property Managers Ltd, Re [2010] …. 8.29 Environinvest Ltd (No 3), Re [2010] …. 2.68, 2.80, 7.40, 7.41, 7.54, 8.40 Environinvest Ltd (No 4), Re (2010) …. 13.9 Environinvest Ltd, Shepard v Downey, Re (2009) …. 2.57, 2.68, 5.8, 7.10, 8.50 Equiticorp v Bank of New Zealand (1993) …. 3.64, 3.66 Equititrust v Members of Equititrust Income Fund (2011) …. 13.9 Equity Funds of Australia (in liq), Re (1976) …. 12.28 —, Re (1977-78) …. 12.28 Erlanger v New Sombrero Phosphate Co (1878) …. 9.39 Evers Motor Co, Re [1962] …. 12.59 Everything Australian Pty Ltd, Re (1992) …. 12.42, 12.43 Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) …. 3.190 Expo International Pty Ltd (in liq) v Chant [1979] …. 4.26

F Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) …. 11.35 Farmer’s Freehold Land Co Ltd, Re (1892) …. 8.144 Farrow Finance v Farrow Properties [1997] …. 3.65 Fine v American Solar King Corporation (1990) …. 10.23 First Strategic Development Corp Ltd (in liq) v Chan [2014] …. 4.79 Firth v Centrelink (2002) …. 13.80 Fitzsimmons v R (1997) …. 3.41, 3.134 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) …. 9.39 Flavel v Roget (1990) …. 3.41 Fowler v Lindholm, Re; Opes Prime Stockbroking Ltd (2009) …. 8.124, 8.127

Frazer v Macquarie Airports Management Ltd (2009) …. 6.18, 6.20 French Caledonia Travel Service Pty Ltd (in liq), Re (2003) …. 7.63, 8.59, 8.63, 8.73, 8.77, 13.17, 13.33, 13.35, 13.37, 13.50

G G Stanley and Co, Re [1925] …. 12.59 Gapes Interstate Transport Pty Ltd, Re [1970] …. 12.40, 12.62 Gardiner v Agricultural & Rural Finance Pty Ltd [2007] …. 10.21, 10.22 Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] …. 8.14, 8.15 Gaydon, Re [2001] …. 2.66 GB Nathan & Co Pty Ltd (in liq), Re (1991) …. 12.12–12.14, 12.36, 12.41, 12.42, 12.44, 12.49, 12.51, 12.57, 12.63, 12.69. 12.75, 12.77–12.79, 12.82, 12.83, 12.87, 12.93–12.95, 12.98, 12.100, 12.103, 12.105, 12.108, 12.125, 13.33, 13.39 GE Capital Australia v Davis (2002) …. 3.190 Georges v Seaborn International Pty Ltd (2012) …. 8.75 —v Seaborn International, Re (2012) …. 8.54 —v Seaborn International (Trustee), Sonray Capital Markets Pty Ltd (in liq), Re (2012) …. 8.63, 8.71, 8.72, 8.73, 8.74, 8.76, 13.53 Global Finance Group Pty Ltd (in liq) (supervisor apptd), Re; Ex parte Read (2002) …. 8.62 Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) …. 11.27, 11.30, 11.32, 11.55 Gonzales v Claridades (2003) …. 12.21 Gould v Vaggelas (1984) …. 9.99 —v— (1985) …. 10.28 Graf Holdings Pty Ltd, Re [1999] …. 12.75, 12.90, 12.91 Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd [1989] …. 9.76 Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] …. 10.30, 10.35 Great Southern Manager Australia Ltd (No 3), Re [2011] …. 12.75,

12.95, 12.96, 12.97 Great Southern Managers Australia Ltd, Re (2009) …. 13.17, 13.62, 13.73 Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq), Re (2009) …. 5.27, 5.29, 13.73 Greater West Insurance Brokers Pty Ltd, Re [2001]; (2001) …. 13.33 Green v Bramston [2010] …. 13.62 Green’s Will Trust, Re [1985] …. 12.19 Gunns Finance (No 2), Re (2013) …. 1.12, 6.1, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.21, 6.22, 6.30, 6.33, 6.34, 6.35, 6.36, 6.37, 6.38, 6.39, 6.41, 6.42, 6.43, 6.44, 6.45, 6.46, 6.47, 6.48, 6.49, 6.50, 6.51, 6.52, 6.53, 6.55, 6.56, 6.57, 6.58, 6.59, 6.62, 6.64, 6.67 Gunns Finance Ltd (in liq) v WA Blue Gum Ltd (2013) …. 9.92 Gunns Finance Ltd (in liq) (recs & mgrs apptd) and Gunns Plantations Ltd (in liq) (recs & mgrs apptd), Re (2013) …. 13.11 —(No 2), Re; sub nom Gunns Finance Ltd (in liq) v WA Blue Gum Ltd (2013) …. 5.38, 6.1, 8.30 Gunns Plantations Ltd v WA Blue Gum (unreported, 2013) …. 6.13 Gunns Plantations Ltd, Re [2012] …. 5.33 Gunns Plantations Ltd (in liq) (recs & mgrs apptd), Re [2014] …. 5.33, 13.58 — (No 3), Re [2014] …. 5.33, 8.40, 8.41 — (No 4), Re [2014] …. 5.33 Gunns Plantations Ltd (No 1), Re [2012] …. 5.33 — (No 4), Re [2013] …. 13.31

H Hall v Poolman (2007) …. 3.104, 4.38, 4.60, 4.79, 4.81 —v— (2009) …. 12.115 Hall v Richards [1961] …. 12.36 Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) …. 8.138

Hardoon v Belilios [1901] …. 9.62 Hargreaves, Re; Midgley v Tatley (1889) …. 12.21 Haselhurst v Wright (unreported, 1991) …. 6.18 Hawkins v Bank of China (1992) …. 4.13, 4.14, 4.17 Hazelton Air Charter Pty Ltd, Re [2002] …. 5.19 — Re; Humphris v Mentha (2002) …. 8.41 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) …. 10.35 Henville v Walker (2001) …. 10.36 Hewett v Court (1983) …. 13.53 HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) …. 3.53 Hillsdown Holdings plc v Pensions Ombudsman [1997] …. 3.147, 3.162 Hoddinott v Willmott Forests Ltd (recs and liqs apptd) (in liq) [2012] …. 7.40 Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd (2011) …. 3.57 Horwath Corporate Pty Ltd v Huie [1999]; (1999) …. 2.66 Hospital Products Ltd v United States Surgical Corporation (1984) …. 3.134 Hourigan v Trustees Executors & Agency Co Ltd (1934) …. 12.21 House of Spring Gardens Ltd v Waite [1991] …. 12.67 Hudson v Gray (1927) …. 12.21 Humphris, Re ACN 004 987 866 Pty Ltd (2003) …. 8.159 Hungerfords v Walker (1989) …. 13.81 Huntley Management Ltd v Australian Olives Ltd (2009) …. 3.219 —v Timbercorp Securities (2010) …. 5.38, 6.36, 6.62, 9.92 Hurst v Vestcorp Ltd (1988) …. 9.40 Hutton v West Cork Railway Co (1883) …. 3.53 Hymix Concrete Pty Ltd v Garritty (1977) …. 4.25, 4.26

I I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) …. 10.36 ICS Real Estate Pty Ltd, Re [2014] …. 12.57 Ide v Ide (2004) …. 13.56 Independent Insurance Co Ltd (No 2) [2004] …. 13.57 ING Funds Management Ltd v ANZ Nominees Ltd (2009) …. 5.14 Ingot Capital Investments v Macquarie Equity Capital Markets (No 6) (2007) …. 3.25 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) …. 10.35 Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) …. 4.23 International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) …. 9.109 Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) …. 3.156 Investa Funds Management Ltd, Re (2001) …. 3.9 Investa Properties Ltd, Re (2001) …. 2.74, 5.38, 6.31, 6.32, 6.33, 8.47

J James Roscoe (Bolton) Ltd v Winder [1915] …. 8.61 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) …. 10.35, 10.36 John Alexander’s Clubs Pty Ltd v White City Club Ltd (2010) …. 12.3, 12.4, 12.123 John Richard Cunningham and John Richard Park as liquidators of Econova Operations Pty Ltd (in liq.) ACN 106 240 019 and Econova IP Pty Ltd (in liq.) ACN 104 784 358 v Econova Operations Pty Ltd (in liq.) and Econova IP Pty Ltd (in liq.) (unreported, 2009) …. 8.119 Jovanovic v Commonwealth Bank of Australia (2004) …. 3.190 JS Mitchell, Re (1913) …. 12.36 JW Murphy and PC Allen, Re (1996) …. 12.44

K Kabwand Pty Ltd v National Australia Bank Ltd (1989) …. 10.36 Karl Suleman Enterprizes Pty Ltd v Pham [2011] …. 3.227 Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (2012) …. 3.227 —v— (No 2) (2013) …. 3.228, 3.230 Kassem v Sentinel Properties Ltd (2005) …. 8.163 Keech v Sandford (1726) …. 3.137 Kelly v Willmott Forests Ltd (in liq) (2012) …. 10.5 —v— (No 2) [2013] …. 10.9 —v— (No 3) [2014] …. 10.47, 10.48, 10.51, 10.52, 10.58, 10.59, 10.60, 10.62 Kenna & Brown Pty Ltd v Kenna (1999) …. 4.27 King v AG Australia Holdings Ltd [2002] …. 10.46, 10.60, 10.63, 10.67 —v— [2003] …. 10.19 Kirby Street (Holding) Pty Ltd, Re [2011] …. 8.88, 8.109, 8.113 Kirkegaard, Re [1950] …. 12.22, 12.36

L Lake Coogee Estate Management Pty Ltd v ASIC [2007] …. 2.71 Lart, Re; Wilkinson v Blades [1896] …. 12.67 Lawloan Mortgages Pty Ltd, Re [2003]; [2002] …. 2.71 Laymar Constructions Pty Ltd (in liq) & Companies Act, Re (1977) …. 12.36 Le Breton v Pacific Mirage Ltd [2012] …. 6.18 Lehman Bros Holdings Inc v City of Swan; Lehman Bros Asia Holding Ltd (in liq) v City of Swan (2010) …. 8.127, 8.158 Lehman Bros Securities Asia Ltd (in liq), Re [2011] …. 13.25, 13.26, 13.62, 13.64 Leslie v Howship Holdings Pty Ltd (1997) …. 4.26 Letten (No 5), Re (2010) …. 8.35, 8.36 Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005)

…. 4.24 Lofthouse v Environmental Consultants International Pty Ltd [2012] …. 8.88, 8.107, 8.109 Lombe, Kirby Street (Holding) Pty Ltd, Re (2011) …. 8.88, 8.91, 8.92, 8.93, 8.94, 8.107, 8.109, 8.113, 8.114 Lord Buddha Pty Ltd v Harpur [2013] …. 9.99 Lorenz’s Settlement, Re (1861) …. 12.17

M MacarthurCook Fund Management Ltd v TFML Ltd (2014) …. 6.67 —v Zhaofeng Funds Ltd [2012] …. 5.38 Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) …. 12.75, 12.105, 12.106, 12.107, 12.108, 12.110, 12.111, 12.113, 12.114, 12.115, 12.116, 12.118, 12.119 Madgwick v Kelly (2013) …. 10.5, 10.7, 10.12, 10.54, 10.55, 10.56, 10.70 Magarey Farlam Lawyers Trust Accounts (No 3), Re (2007) …. 8.58 Magic Aust Pty Ltd (in liq), Re (1992) …. 12.41, 12.50, 12.51 Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd (2011) …. 3.157 Manpac Industries Pty Ltd v Ceccattini (2002) …. 4.41 Marchesi v Barnes [1970] …. 3.41, 3.57 Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] …. 12.18 Matlic Pty Ltd (in liq), Re (2014) …. 4.79 Matter of Enviro Friendly Products Pty Ltd [2013] …. 12.55 Matthews v SPI Electricity and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 13) [2013] …. 10.64 —v SPI Electricity Pty Ltd (No 9) [2013] …. 10.47 McBride v Christie’s Australia Pty Ltd [2014] …. 10.35 McCracken v Phoenix Constructions Pty Ltd [2013]; [2012] …. 3.191,

3.192, 3.193, 3.218, 3.226 McLellan v Carroll (re The Stake Man Pty Ltd) (2009) …. 3.125 McLellan, Stake Man Pty Ltd v Carroll, Re (2009) …. 4.53, 4.54 McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) …. 10.62 Meaden v Bell Potter Securities Ltd (No 2) (2012) …. 10.43, 10.44 Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd (2007) …. 12.57, 12.75, 12.79, 12.80, 12.81, 12.82 Media World Communications Ltd, Re (2005) …. 12.52, 12.64 Medican Holdings Ltd, Re 2013 …. 13.46 Meinhard v Salmon (1928) …. 3.94 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) …. 4.23 Mentha v GE Capital Ltd (1997) …. 8.157 Mento Developments, Re (2009) …. 12.64, 12.118 Mercedes Holdings Pty Ltd v Waters (No 2) (2010) …. 3.219, 3.222, 3.223, 3.225 Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (2011) …. 3.59, 3.65, 3.68 Metalcorp Recyclers Pty Ltd v Metal Manufacturers [2003] …. 10.28, 10.29 —v— [2004] …. 10.35 MF Global Australia Ltd (in liq), Re (2012) …. 8.73 MF Global Australia Ltd (in liq) (No 2), Re [2012] …. 13.21, 13.32, 13.33, 13.34, 13.44, 13.52, 13.78 MF Global UK Ltd (No 3), Re [2013] …. 12.19 Mid Density Developments Pty Ltd v Rockdale Municipal Council (1993) …. 3.103 Middle Harbour Investments Ltd (in liq) (No 2), Re (1976) …. 11.53 Mier v FN Management Pty Ltd (2005) …. 2.50, 2.51, 2.52, 2.53, 2.54, 2.76, 7.10, 8.38, 8.46, 8.48, 8.49, 8.50, 9.77 MIG Trust Ltd, Re [1933] …. 12.59 Miles v Official Receiver (1963) …. 12.36 Mills v Mills (1938) …. 4.67, 4.68 Mirror Group Newspapers plc v Maxwell (No 1) [1998] …. 13.77

—v— (No 2) [1998] …. 13.66 Mirvac Ltd, Re (1999) …. 3.9 Mishme Enterprises Pty Ltd v Nticed Pty Ltd [2013] …. 6.18 MK Airlines Ltd, Re; Katz v Bradney [2012] …. 13.76 MK Airlines Ltd (in liq), Re [2012] …. 13.42, 13.60 Mobil Oil Australia Pty Ltd v Victoria (2002) …. 10.60 Mockett’s Will, Re (1860) …. 12.16 Moodmere Pty Ltd (in liq) v Waters [1988] …. 13.16 Morgan v Flavel (1983) …. 3.41 Morley v ASIC (No 2) (2011) …. 3.99 Murdoch v Crawford (1985) …. 12.35, 12.52 Murphy & Allen; Re BPTC (in liq), Re (1996) …. 12.51

N Neander Constructions Pty Ltd, Re (1988) …. 12.38, 12.39 New Brunswick & Canada Railway & Land Co v Muggeridge (1860) …. 9.37 New Cap Reinsurance (in liq) v Grant (2008) …. 4.19 New World Alliance Pty Ltd, Re; Sycotex Pty Ltd v Baseler (1994) …. 4.26, 4.61, 4.66 Newark Pty Ltd (in Liq), Re (1991) …. 4.26 News Ltd v Australian Rugby Football League Ltd (1996) …. 12.4 —v South Sydney Rugby Leagues Football Club Ltd (2003) …. 3.72 Nocton v Lord Ashburton [1914] …. 3.95 Nolan v Collie (2003) …. 8.12 —v— [2004] …. 8.12 Norcast S AR L v Bradken Ltd (No 2) (2013) …. 9.98 Norman, Re; FEA Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd) (2010) …. 5.36

O Octavo Investments Pty Ltd v Knight (1979) …. 8.12, 8.16

Odessa Promotions Pty Ltd (in liq), Re; Pescod v Harrison (1979) …. 12.43 Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] …. 11.27, 11.28, 11.32, 11.56, 11.58 Onefone Australia Pty Ltd v One.Tel Ltd (2010) …. 13.56

P P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) …. 10.23, 10.65 Pacific Projects Pty Ltd, Re; Geroff v National Westminster Finance Australia Ltd [1990] …. 4.26 Pasminco Ltd, Re (2004) …. 12.66, 12.67 Peat v Gresham Trust [1934] …. 12.59 Permanent Building Society (in liq) v Wheeler (1994) …. 3.53, 4.69 Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) …. 3.190 Permanent Trustee Australia Ltd, Re (1994) …. 12.10 Perpetual Nominees Ltd v Rytelle Pty Ltd [2012] …. 6.62 Peters v R (1988) …. 3.100 Petersen, Re [1920] …. 12.22, 12.36 Pilmer v Duke Group Ltd (in liq) (2001) …. 9.39 Pitts v Lehmann (1940) …. 12.59 PM Sulcs & Associates Pty Ltd (in liq), Re [2012] …. 13.80 Potts v Miller (1940) …. 10.33 Primary RE Ltd v Great Southern Property Holdings Ltd [2011] …. 5.38, 9.92 Project Blue Sky v Australian Broadcasting Authority (1998) …. 3.218 Public Trustee (QLD) v Octaviar Ltd (Subject to Deed of Company Arrangement) (Receivers and Managers Appointed) (2009) …. 5.74 Purchas (as liquidator of Astarra Asset Management Pty Ltd (in liq)), Re [2011] …. 12.98 Pyrenees Vineyard Management Ltd v Frajman (2008) …. 2.75

Q Quality Camera, Re [1965] …. 12.59 Queensland Bacon Pty Ltd v Rees (1966) …. 12.59

R R v Byrnes [1995] …. 3.54, 3.55, 3.70 Rees v Bank of NSW (1964) …. 12.59 Regal Hastings v Gulliver [1967] …. 3.94 Regent’s Canal Ironworks Co, Re (1876) …. 13.60 Reid Murray Holdings Ltd, Re [1969] …. 12.40, 12.59, 12.62 Reiter Brothers Exploratory Drilling Pty Ltd, Re (1994) …. 13.77 Retail Adventures Pty Ltd [2013] …. 12.56, 12.67 Rewards Projects Ltd, Re [2011] …. 12.75, 12.101, 12.103, 12.104 Riddle v Riddle (1952) …. 2.65 Riverside Nursing Care Pty Ltd, Re (2004) …. 12.17, 12.52, 12.65 Robinson and the Trustee Act 1925, Re [1983] …. 8.143, 8.147 Royle, Re; Royle v Hayes (1889) …. 12.21 Rubicon Asset Management Ltd, Re (2009) …. 13.7, 13.8, 13.9 Russell Halpern Nominees Pty Ltd v Martin (1986) …. 4.14 RWG Management Ltd v Commissioner for Corporate Affairs (Vic) [1985] …. 8.13, 8.21, 13.12

S S & D International Pty Ltd (No 4), Re (2010) …. 3.27, 3.57 S & N (Nominees) Pty Ltd, Re (1986) …. 12.40 S & N (Nominees) Pty Ltd (in liq), Re; Yeomans v Lease Industrial Finance Ltd (1986) …. 12.62 Saker, Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) (No 2), Re (2011) …. 13.11 Salfa Pty Ltd (in liq) (ACN 082 308 101), Re [2014] …. 4.79 Salmon v WA Blue Gum Ltd [2013] …. 6.48 Sanderson v Classic Car Insurances Pty Ltd (1985) …. 12.34

Saunders v Vautier [1841] …. 2.66 Securitibank Ltd, Re [1978] …. 12.40 Security Provident Fund Ltd (in liq), Re; Rodger v Gourlay (1984) …. 12.33, 12.35, 12.62 Sent v Jet Corporation (Aust) Pty Ltd (1986) …. 3.197, 3.198, 3.199, 3.201, 3.202, 3.203, 3.204, 3.207, 3.208, 3.213, 3.227 Setco Manufacturing Pty Ltd v Sifa Pty Ltd (1982) …. 8.147 Shek Kwan Lee v Gouger Centre Pty Ltd (unreported, 2013) …. 8.85, 8.119 Shepherd v ANZ Banking Corporation Ltd (1996) …. 4.17 Shirlaw v Taylor (1991) …. 13.14 Sidhu v Van Dyke (2014) …. 9.99 Silvia (admins apptd), FEA Plantations Ltd (subject to deed of company arrangement) (recs apptd), Re [2013] …. 5.36 Simpson v Rowe [2011] …. 13.80 Siromath Pty Ltd (No 2) (1991) …. 12.42, 12.43 Smartec Capital Pty Ltd v Centro Properties Ltd (2011) …. 5.66 Smith v Chadwick (1884) …. 10.28 —v Fawcett [1942] …. 3.93 —v Noss [2006] …. 10.28 Sneezum, Re; Ex parte Davis (1876) …. 11.7 Snelgrove v Great Southern Managers Australia Ltd (In Liq) (Receiver and Manager Appointed) [2011] …. 3.219 South Australia v Clark (1996) …. 3.101, 3.102 Southern Cross Airlines Holdings Ltd, Re [2000] …. 12.47, 12.57 Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) …. 3.41 Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) …. 8.5 Spies v R (2000) …. 4.61, 4.66 Sports Alive Pty Ltd, Re [2013] …. 12.117 Sportsman’s Leisure & Hobby Warehouse Pty Ltd (in liq), Re [1990] …. 12.39

Stacks Managed Investments Ltd, Re (2005) …. 2.43, 2.45, 2.46, 2.47, 2.48, 2.49, 2.54, 2.59, 9.61, 9.91, 12.54, 13.7, 13.9 Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) …. 4.14, 4.16, 4.17, 4.26, 4.44 Stewart v Atco Controls Pty Ltd (in liq) (2014) …. 13.28 —v— (No 2) (2014) …. 13.14, 13.16, 13.19, 13.24, 13.27, 13.29 Suco Gold Pty Ltd (in liq), Re (1983) …. 13.35, 13.43 Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] …. 3.224 Sutherland, Re, Application of (2004) …. 13.21, 13.23 Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) …. 8.132, 8.143, 8.144, 8.145, 8.147, 8.148 Syncap Management (Rural) Australia Ltd v Lyford (2004) …. 5.38, 6.62

T Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) …. 10.19 Tayeh, Re; Black Stump Enterprises Pty (2005) …. 8.132, 8.139, 8.140 Thackray v Gunns Plantations Ltd (2011) …. 7.66, 13.14–13.16, 13.18, 13.23, 13.41–13.45, 13.54, 13.55, 13.57, 13.58, 13.66 —v— (No 2) [2011] …. 13.17, 13.53, 13.55, 13.82 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) …. 7.63, 13.15, 13.38, 13.41, 13.43 360 Capital RE Ltd v Watts (2012) …. 5.15 Timbercorp Securities Ltd (Applications for the approval of compromises), Re [2012] …. 9.84 Timbercorp Securities Ltd (approval of compromises), Re [2012] …. 5.22 — (No 2), Re [2014] …. 5.22 Timbercorp Securities Ltd (in liq) v WA Chip & Pulp Co Pty Ltd [2009] …. 8.29 Timbercorp Securities Ltd (in liq), Re [2009] …. 2.80, 2.91, 5.20 —, Re [2011] …. 5.20, 7.40, 7.67

Timbercorp Securities Ltd (in liq) (No 3), Re (2009) …. 2.80, 2.91, 5.10, 5.12, 5.17, 5.19, 8.41, 9.84 — (No 4), Re [2009] …. 2.80, 2.91 Timbercorp Securities Ltd (No 2), Re [2009] …. 5.18 — (No 3), Re (2009) …. 7.40, 7.54 — (No 4), Re [2009] …. 5.20 Timbercorp Securities Ltd, Re [2009] …. 5.20, 5.23, 8.40 —, Re (2010) …. 5.20 —, Re [2011] …. 5.20 Tooth’s Trusts, Re (1877) …. 12.27, 12.36, 12.43 Traditional Values Management Ltd (in liq), Re [2012] …. 13.54, 13.56 Transmetro Corp Ltd v Real Investments Pty Ltd [2002] …. 11.29, 11.47, 11.48, 11.49, 11.55 Travel Compensation Fund v Tambree (2005) …. 10.36 Treecorp Australia Ltd (in liq) v Dwyer (2009) …. 2.76, 8.49, 8.50, 8.53 Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) …. 8.29, 13.21, 13.23, 13.39, 13.43, 13.48, 13.50, 13.53 TTC (SA) Pty Ltd (in liq), Re (1983) …. 12.29, 12.30, 12.31 Tulloch Ltd, Re (1977) …. 11.44, 11.45, 11.51, 11.53

U United States Trust Co of New York v Australia & New Zealand Banking Group Ltd (1995) …. 8.132 Universal Distributing Co Ltd (in liq), Re (1933) …. 7.59, 13.1, 13.14, 13.15, 13.18, 13.19, 13.21, 13.23, 13.24, 13.27, 13.28, 13.29, 13.32–13.34, 13.37, 13.53, 13.60, 13.64, 13.76

V Venetian Nominees Pty Ltd v Conlan (1998) …. 13.54 Vines v ASIC (2007) …. 3.23

Vrisakis v Australian Securities Commission (1993) …. 3.23, 3.27

W Walden Properties Ltd v Beaver Properties Pty Ltd [1973] …. 9.39 Walker v Wimborne (1976) …. 4.61, 5.69 Walker as liquidator of ZYX Learning Centres Ltd (formerly ABC Learning Centres Ltd) (recs and mgrs apptd) (in liq), Re [2015] …. 8.95, 8.107, 8.114 Wardley Australia Ltd v Western Australia (1992) …. 9.98 Washington Diamond Mining Coy, Re [1893] …. 12.59 Wellington Capital Ltd v ASIC (2014) …. 3.11 Westfield Holdings Ltd, Re (2004) …. 8.37 Westfield Queensland No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd (2008) …. 2.63, 2.65 Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) …. 3.44, 3.56, 3.59, 3.60, 3.61, 3.62, 3.63, 3.66 Whitehouse v Carlton Hotel Pty Ltd (1987) …. 4.67, 4.68 Whitgift Nominees Pty Ltd (in liq), Re (1983) …. 4.26 Whitton (as liquidator of Global Gossip Group of Companies), Application of (2006) …. 8.86 Willmott Forests Ltd (in liq) (No 2), Re (2012) …. 5.38, 8.35, 8.36, 8.40, 8.49, 8.53, 8.165, 12.5, 12.57, 12.69, 12.70, 12.74, 12.75, 12.77, 12.79, 12.83, 12.84, 12.90, 12.93, 12.95, 12.98, 12.101, 12.105, 12.111, 12.115, 12.117, 12.123 Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) …. 5.38, 6.46, 6.62, 8.30, 8.48, 8.49, 8.51, 9.92 Willmott Forests Ltd (recs and mgrs apptd) (in liq), Re (2012) …. 11.23 Willmott Growers Group Inc v Willmott Forests Ltd (rec & man app) (in liq) (2013) …. 1.17, 2.84, 5.34, 9.85, 11.4, 11.5, 11.6, 11.23, 11.24, 11.33, 11.34, 11.36, 11.37, 11.38, 11.41, 11.52, 11.55, 11.59, 11.60, 12.37 Wilson v Wallani (1880) …. 11.7

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In liq) (2012) …. 9.112 Wittingham, Re; Hunter Valley Gravel Supplies Pty Ltd (2006) …. 8.86, 8.132, 8.133, 8.134, 8.141, 8.143, 8.149, 8.150 Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) …. 2.94, 9.50, 9.51, 10.5, 10.15, 10.18, 10.20, 10.21, 10.40, 10.41 —v— (2013) …. 2.94, 10.42, 10.71

Y York (Stationers) Pty Ltd, Re [1965] …. 12.59

Z Zan Holdings Pty Ltd v Bay View Holdings Pty Ltd (1997) …. 4.30

TABLE OF STATUTES References are to paragraph numbers

Commonwealth Australian Consumer Law s 18 …. 6.13, 6.15, 6.21, 6.56, 6.58, 6.60, 6.61, 9.98 s 236 …. 9.97, 9.98 s 278 …. 9.104 Australian Securities and Investments Commission Act 2001 …. 2.5, 8.45 s 12BAB …. 9.112 s 12DA …. 9.112 s 12DA(1) …. 9.112 s 12GM …. 9.97 Bankruptcy Act 1924 s 104 …. 11.11 Bankruptcy Act 1966 …. 2.24, 11.13 s 133 …. 11.11 s 133(1A) …. 11.17, 11.39 s 133(5A) …. 11.17, 11.39 s 134(4) …. 12.36 Bankruptcy Amendment Act 1979 …. 11.11 Bankruptcy Amendment Act 1987 …. 11.11 Companies Act 1981 …. 3.189 s 379(3) …. 12.62 s 413 …. 12.62

Constitution …. 3.10 Corporate Law Economic Reform Program Act 1999 …. 3.47, 3.48, 3.85, 3.122, 9.33, 11.17 Sch 3 …. 3.209 Corporate Law Reform Act 1992 …. 3.46, 3.84, 3.111 Corporate Law Reform Act 1993 …. 11.18 Corporations Act 1989 …. 3.196, 3.206, 4.34, 6.27 s 1005 …. 3.205, 3.210, 3.215 Pt 7.11 …. 3.205, 3.209, 3.210, 3.215 Pt 7.11 Div 2A …. 3.215 Pt 7.12 …. 3.205, 3.209 Corporations Act 2001 …. 2.39, 2.78, 3.31, 3.105, 3.198, 3.201, 6.48, 7.6, 7.34, 7.35, 7.53, 8.37, 8.86, 9.73, 10.23, 10.30, 10.32, 12.101, 12.110, 12.116, 13.1, 13.5, 13.6, 13.84 s 9 …. 2.4, 2.5, 6.45, 6.47, 8.36, 8.45, 9.7, 9.8, 9.9, 9.18, 9.19, 9.22, 9.23, 9.74, 9.87 s 50 …. 8.91 s 58AA …. 2.12 s 79 …. 3.194 s 95A …. 4.19, 4.21, 4.24 s 113 …. 8.79 s 180 …. 3.17, 3.22, 3.27, 3.28, 3.29, 3.35, 3.38, 3.54, 3.117 ss 180–183 …. 3.1 ss 180–184 …. 3.47 s 180(1) …. 3.24, 3.26, 3.30, 3.36, 3.116, 3.118, 3.120, 3.129, 4.58 s 180(2) …. 3.25, 3.122, 4.46, 4.77 s 181 …. 3.22, 3.27, 3.39, 3.45, 3.47, 3.48, 3.49, 3.52, 3.53, 3.54, 3.57, 3.73, 3.131 s 181(1) …. 3.53, 3.54, 3.85, 3.87, 3.89, 3.90, 3.91, 3.93, 3.95, 3.131, 4.62, 5.69 s 181(1)(a) …. 3.39, 3.57, 3.59, 3.66, 3.67, 3.68, 4.65 s 181(1)(b) …. 3.39, 3.55, 3.56, 3.59, 3.67, 3.68, 4.65, 4.66 s 182 …. 3.22, 3.27, 3.28, 3.29, 3.54, 3.55, 3.69, 3.70, 3.71, 3.73,

3.191 s 183 …. 3.55 s 184 …. 3.48, 3.49 s 184(1) …. 3.53 s 185 …. 3.7 s 187 …. 4.63, 4.71 s 197 …. 8.28 s 197(1) …. 8.28 s 208(1) …. 3.29 s 208(1)(e) …. 3.172 s 210 …. 3.172 s 247A …. 9.60 s 286(1) …. 9.25 s 411 …. 8.157 s 419 …. 4.19 s 420(2) …. 7.52 s 435A …. 5.43, 8.153 s 439A …. 8.153 s 440B …. 5.43 s 443 …. 13.48 s 443A …. 4.19 s 444D …. 8.156 s 444DA …. 8.161 s 444DA(1) …. 8.161 s 444DA(5) …. 8.161 s 444G …. 8.156 s 446A …. 8.153, 8.154 s 447A …. 2.49, 5.42, 5.43, 5.47, 6.63, 8.89, 8.113, 8.152, 8.153, 8.154, 8.160, 8.161, 8.163 s 447D …. 8.160, 12.56 s 471A …. 2.46 s 471B …. 2.46

s 473 …. 2.46 s 475 …. 2.46 s 477 …. 7.52, 8.131, 8.142 s 477(1) …. 8.148 s 477(1)(c) …. 8.131, 8.133, 8.163 s 477(2A) …. 8.133 s 477(2B) …. 8.132, 12.115 s 479 …. 2.46, 8.135, 8.137, 8.163 s 479(3) …. 8.138, 12.7, 12.12, 12.13, 12.54, 12.57, 12.75, 12.115, 12.118, 13.52 s 483 …. 2.46 s 485 …. 2.46 s 494 …. 2.46 s 495 …. 2.46 s 503A …. 2.46 s 506 …. 8.132 s 506(1A) …. 12.115 s 508 …. 8.88 s 510 …. 8.134, 8.142, 8.143, 8.144, 8.147, 8.148, 8.149, 8.150, 8.155, 8.160, 8.163 s 510(1) …. 8.142 s 510(1)(a) …. 8.154 s 510(1)(b) …. 8.154 s 510(4) …. 8.142, 8.151 s 511 …. 8.72, 8.135, 8.137, 8.138, 8.139, 8.150, 8.163, 12.8, 12.37, 12.72, 12.74, 12.81, 12.82, 12.93, 12.99, 12.115, 12.117, 12.121, 12.123, 13.52 s 511(1) …. 12.75, 12.105, 12.115 s 511(1)(a) …. 8.139, 12.57, 12.69, 12.81 s 511(2) …. 8.138 s 516 …. 2.38 s 519E(10) …. 8.110

s 519E(12) …. 8.109 s 532 …. 2.46 s 533 …. 2.46 s 538 …. 2.46 s 539 …. 2.46, 8.88 s 540 …. 2.46 s 556 …. 4.19, 8.98, 8.161 s 560 …. 8.98, 8.161 s 561 …. 8.98, 8.161 s 568 …. 5.34, 11.29, 11.38 s 568(1) …. 9.85, 11.1, 11.34, 11.55 s 568(1)(a)–(f) …. 11.1 s 568(1)(f) …. 11.2, 11.3, 11.19, 11.34 s 568(1A) …. 11.3, 11.6, 11.19, 11.20, 11.26, 11.33, 11.34, 11.35, 11.37, 11.52 s 568(1B) …. 11.43 s 568(1D) …. 11.43 s 568B …. 11.4, 11.21, 11.46 s 568B(3) …. 11.21, 11.24, 11.47, 11.48 s 568C …. 11.21 s 568E …. 11.4, 11.46 s 568E(5) …. 11.21 s 571 …. 8.95, 8.96 s 571(1) …. 8.91, 8.101 s 571(2) …. 8.88, 8.97 s 571(2)–(7) …. 8.96, 8.111 s 571(3) …. 8.97 s 571(4) …. 8.97 s 571(5) …. 8.98 s 571(6) …. 8.99 s 571(7) …. 8.99 s 571(8) …. 8.96

s 571(9) …. 8.97 s 571(10) …. 8.100 s 572 …. 8.102 s 573(1) …. 8.118 s 574(2) …. 8.104 s 574(3) …. 8.103 s 575 …. 8.104 s 577(2) …. 8.105 s 577(3) …. 8.105 s 578 …. 8.105 s 579A …. 8.106 s 579A(1) …. 8.106 s 579B …. 8.106 s 579C …. 8.106 s 579D …. 8.106 s 579E …. 8.95 s 579E(1) …. 8.91, 8.108 s 579E(2) …. 8.111 s 579E(2)–(7) …. 8.111 s 579E(12) …. 8.101 s 579E(13) …. 8.118 s 579F …. 8.115 s 579G(1) …. 8.112 s 579G(1)(b) …. 8.88 s 579G(1)(d) …. 8.111, 8.113, 8.114 s 579G(4) …. 8.111 s 579G(7) …. 8.112 s 579J …. 8.117 s 579K …. 8.117 s 579L …. 8.88 s 579Q …. 8.103 s 588G …. 4.10, 4.17, 4.19, 4.20, 4.27, 4.50, 4.75, 5.69

s 588G(1A) …. 4.11, 4.12 s 588G(2) …. 4.31 s 588H(2) …. 4.37, 4.54 s 588H(3) …. 4.40, 4.54 s 588H(4) …. 4.43 s 588H(5) …. 4.45 s 588H(6) …. 4.45 s 588J …. 4.50 s 588K …. 4.50 s 596A …. 2.46 s 596B …. 2.46 s 601AH …. 12.91 s 601EA(4)(a) …. 9.26 s 601EB …. 9.19 s 601ED …. 2.14 s 601ED(1)–(2) …. 9.18 s 601ED(5) …. 3.187, 3.227 s 601EE …. 2.50, 8.35, 8.46, 13.7, 13.76 s 601EE(1) …. 2.14 s 601EE(2) …. 2.14, 2.44, 2.48, 8.38, 12.54 s 601FA …. 3.1, 9.20, 9.29 s 601FA(1)(c) …. 2.5 s 601FB …. 2.5, 3.1 s 601FB(1) …. 2.74, 9.20 s 601FB(2) …. 8.35, 9.20 s 601FB(3) …. 9.20 s 601FB(4)(a) …. 2.74 s 601FC …. 3.219 s 601FC(1) …. 3.6, 3.10, 3.12, 3.68, 3.77, 3.218, 8.36 s 601FC(1)(a) …. 3.82 s 601FC(1)(a)–(e) …. 3.6 s 601FC(1)(b) …. 3.109

s 601FC(1)(c) …. 3.91, 3.140, 3.141, 3.159, 3.165, 3.172, 13.22 s 601FC(1)(d) …. 6.67 s 601FC(1)(f) …. 3.7 s 601FC(1)(g) …. 3.7 s 601FC(1)(h) …. 3.7 s 601FC(1)(i) …. 2.74, 9.25, 9.28, 13.30 s 601FC(1)(i)–(k) …. 3.6 s 601FC(1)(j) …. 2.74 s 601FC(1)(l) …. 3.7 s 601FC(1)(m) …. 3.6 s 601FC(2) …. 2.5, 2.72, 2.74, 2.76, 3.1, 3.9, 3.10, 3.11, 5.9, 6.49, 8.5, 8.35, 8.36, 8.52, 9.21, 12.10, 13.22 s 601FC(3) …. 3.12, 3.13 s 601FD …. 1.11, 3.3, 3.79, 3.80, 3.96, 3.183, 3.224 s 601FD(1) …. 3.17, 3.71, 3.77, 3.78, 3.96, 3.97, 3.193, 3.194, 3.222, 3.229 s 601FD(1)(a) …. 3.81, 3.86, 3.87, 3.88, 3.89, 3.90, 3.91, 3.92, 3.94, 3.95, 3.106 s 601FD(1)(b) …. 3.108, 3.115, 3.118, 3.120, 3.121, 3.123, 3.129, 3.179 s 601FD(1)(c) …. 2.5, 3.76, 3.95, 3.130, 3.131, 3.132, 3.133, 3.138, 3.139, 3.140, 3.141, 3.168, 3.172 s 601FD(1)(d) …. 3.177 s 601FD(1)(d)(i) …. 3.91 s 601FD(1)(e) …. 3.91, 3.177, 3.178 s 601FD(1)(f) …. 3.18, 3.28, 3.29, 3.180 s 601FD(2) …. 3.80, 3.96 s 601FG …. 3.13 s 601FH …. 13.13 s 601FM …. 9.87 s 601FN …. 9.88 s 601FP …. 9.84, 9.88 s 601FS …. 2.92, 5.37, 5.39, 5.40, 5.41, 5.43, 6.1, 6.16, 6.22, 6.23,

6.24, 6.25, 6.26, 6.28, 6.29, 6.30, 6.31, 6.33, 6.34, 6.35, 6.36, 6.37, 6.38, 6.40, 6.42, 6.45, 6.51, 6.52, 6.53, 6.54, 6.55, 6.58, 6.62, 6.63, 6.64, 6.65, 6.69, 7.39, 8.30, 9.90 s 601FS(1) …. 6.31, 6.33, 6.37 s 601FS(2) …. 6.34, 6.37, 6.39 s 601FS(2)(d) …. 6.38, 6.43, 6.58, 9.91 s 601FT …. 5.37, 5.39, 5.40, 5.41, 6.24, 6.25, 6.40, 6.54, 6.55, 6.62, 6.63 s 601FT(1) …. 6.31, 6.33 s 601GA …. 2.5, 7.55, 13.64 s 601GA(1) …. 9.27, 9.28 s 601GA(1)(d) …. 13.6 s 601GA(2) …. 9.61, 13.11 s 601GB …. 3.7, 9.26 s 601GC(1)(a) …. 5.29 s 601GC(1)(b) …. 3.142, 5.13, 5.29 s 601HA(a) …. 2.74 s 601HA(c) …. 2.74 s 601KA(4) …. 9.66 s 601KB …. 9.67 s 601KE …. 9.67 s 601LA …. 3.166, 3.168 s 601LC …. 3.172 s 601MA …. 3.15, 3.20, 3.32, 3.183, 3.185, 3.212, 3.217, 3.218, 3.219, 3.222, 3.225 s 601MA(3) …. 3.223 s 601MB …. 3.212, 3.225 s 601NA …. 2.12 s 601NB …. 2.12 s 601NC …. 2.12 s 601ND …. 2.12, 5.8, 5.36, 7.27 s 601ND(1)(a) …. 2.13, 7.40

s 601ND(1)(b) …. 2.13 s 601ND(2) …. 2.13 s 601NE …. 7.50 s 601NE(1) …. 2.13 s 601NE(1)–(2) …. 7.32 s 601NF …. 7.29, 7.58, 12.9, 13.8, 13.9 s 601NF(1) …. 2.13, 12.54, 13.9 s 601NF(1)–(2) …. 7.32 s 601NF(2) …. 2.44, 2.48, 2.49, 7.32, 12.54, 13.7, 13.8, 13.9 s 601QA …. 5.42, 6.63 s 601QB …. 5.42 s 674 …. 10.35 s 674(2) …. 10.24 s 710 …. 9.52 s 711 …. 10.15 s 728 …. 3.211, 10.37 s 728(1) …. 10.25, 10.26 s 729 …. 3.211, 10.26, 10.36, 10.37, 10.38 s 729(1) …. 10.25 s 737 …. 3.211 s 745A …. 3.35 s 760A …. 9.45 s 761A …. 9.10, 9.29 s 761G(4)(a) …. 9.32 s 761G(7)(a) …. 9.32 s 761G(7)(b) …. 9.32 s 761G(7)(c) …. 9.32 s 761G(7)(d) …. 9.32 s 761G(9) …. 9.32 s 761G(12) …. 9.32 s 764A(1)(b)(i) …. 9.10, 9.29, 9.109 s 765A(1)(h)(i) …. 9.109

s 798H(1) …. 3.216 s 911A …. 9.29 s 945A …. 3.32, 3.33, 3.36 s 953B …. 3.32, 3.33 ss 961B–961G …. 3.32 s 981B …. 8.54 s 981H(1) …. 13.22 s 1012B …. 9.31 s 1013C …. 9.95 s 1013C(2) …. 9.51 s 1013D …. 9.51, 9.52, 10.15 ss 1013D–1013E …. 9.55 s 1013D(1) …. 9.50, 9.51 s 1013D(1)(c) …. 9.44, 9.49, 9.50, 9.51 s 1013D(1)(j) …. 9.49 s 1013E …. 9.44, 9.49, 9.51, 9.52, 10.15 s 1013F …. 9.51 s 1022(3) …. 9.107 s 1022(3)(b)(ii) …. 9.96 s 1022A …. 2.86, 9.48, 9.93, 9.112 s 1022B …. 2.86, 2.90, 9.100 s 1022B(2) …. 9.95, 9.97, 9.101, 9.106, 9.107, 9.109 s 1022B(3) …. 9.107 s 1022B(3)(b)(i) …. 9.95 s 1022C …. 9.100, 9.101, 9.102, 9.103, 9.104, 9.106, 9.107, 9.108, 9.109, 9.110 s 1022C(1)(a) …. 9.107 ss 1041A–1041D …. 3.215 s 1041H …. 3.24 s 1041H(1) …. 9.112 s 1041I …. 3.215 s 1070A(1)(a) …. 9.75

s 1074 …. 2.17 s 1074(1) …. 2.18 s 1074(4) …. 2.18 s 1074(5) …. 2.18 s 1101B …. 13.9 s 1101B(1) …. 13.9 s 1317DA …. 3.13, 3.46, 3.84 s 1317E …. 3.129 s 1317E(1)(e) …. 4.50 s 1317E(2) …. 3.125, 3.128 s 1317EA(2) …. 3.127 s 1317FA …. 3.46, 3.84 s 1317FA(1) …. 4.51 s 1317G(1) …. 3.14 s 1317H …. 3.13, 3.20, 3.121, 3.183, 3.191, 3.218 s 1317HA …. 10.35 s 1317J …. 3.13, 3.218, 3.229 s 1317S …. 3.52, 3.99, 3.106, 3.123, 3.124, 3.125, 3.126, 3.129, 4.52, 4.53, 4.55, 4.56, 4.78 s 1317S(2)(b)(i) …. 3.104 s 1317S(2)(b)(ii) …. 3.104 s 1318 …. 3.52, 3.99, 3.104, 3.106, 3.123, 3.124, 3.125, 3.129, 4.52, 4.53, 4.55, 4.78 s 1322 …. 8.160 s 1322(4) …. 8.147 s 1323 …. 3.228 s 1324 …. 3.188, 3.189, 3.191, 3.193, 3.228 s 1324(1) …. 3.192 s 1324(10) …. 3.188, 3.190, 3.191, 3.192, 3.193 s 1325 …. 3.194, 3.195, 3.196, 3.204, 3.205, 3.206, 3.207, 3.214, 3.216, 3.220, 3.221, 3.224, 3.225, 3.227, 3.228, 9.97, 10.35 s 1325(1) …. 3.195, 3.197, 3.199, 3.207, 3.209, 3.217, 3.219

s 1325(2) …. 3.195, 3.200, 3.204, 3.207, 3.208, 3.209, 3.213, 3.220, 3.222, 3.223, 3.224, 3.227, 3.229 s 1326 …. 3.228 Pt 2G.4 Div 1 …. 9.87 Pt 5 …. 2.59 Pt 5.1 …. 8.124, 8.126 Pt 5.2 Div 8 …. 8.125 Pt 5.3A …. 5.42, 5.43, 8.152, 8.153, 8.154, 8.156, 8.157 Pt 5.6 Div 6 …. 2.46 Pt 5.6 Div 7A …. 11.1, 11.4 Pt 5.6 Div 8 …. 8.87, 8.88, 8.89, 8.118, 8.120, 8.122, 8.124 Pt 5C …. 8.33, 8.35 Pt 5C.1 …. 9.18 Pt 5C.2 …. 9.20 Pt 5C.2 Div 2 …. 9.87 Pt 5C.3 …. 9.26 Pt 5C.4 …. 9.26 Pt 5C.6 …. 9.65, 9.66 Pt 5C.7 …. 3.166, 3.167 Pt 5C.9 …. 5.8, 7.17 Pt 7.1 Div 3 …. 9.112 Pt 7.1 Div 4 …. 9.112 Pt 7.6 …. 9.29 Pt 7.7A …. 9.112 Pt 7.8 Div 2 …. 8.72 Pt 7.8 Div 3 …. 8.72 Pt 7.9 …. 9.30, 9.33, 9.34, 9.43, 9.44, 9.47, 9.55, 9.93, 9.112, 10.14 Pt 7.9 Div 2 …. 2.86 Pt 7.9 Div 7 Subdiv B …. 2.86, 9.47 Pt 7.10 …. 3.215 Pt 7.10 Div 2 …. 3.215 Pt 9.4 …. 3.46, 3.84

Pt 9.4B …. 3.13, 3.192, 3.193, 3.229, 3.230 Chap 2D …. 1.9, 3.2, 3.3, 3.5, 3.18, 3.116, 3.121, 3.179 Chap 2D.1 …. 3.79, 3.80, 3.97 Chap 5C …. 1.3, 1.9, 2.4, 2.5, 2.90, 3.1, 3.3, 3.4, 3.5, 3.7, 3.8, 3.9, 3.12, 3.13, 3.15, 3.17, 3.18, 3.19, 3.32, 3.38, 3.68, 3.73, 3.74, 3.83, 3.85, 3.115, 3.120, 3.122, 3.166, 3.183, 3.186, 3.187, 3.194, 3.209, 3.210, 3.212, 3.217, 3.222, 3.225, 3.229, 5.2, 5.38, 5.42, 6.63, 8.1, 9.6, 9.12 Chap 6 …. 10.15 Chap 6CA …. 3.214 Chap 6D …. 3.209, 3.210, 3.210, 3.211, 9.33, 9.44 Chap 7 …. 9.10, 9.29, 9.45, 10.14, 10.15, 10.41 Chap 7.9 …. 2.5, 2.90 Corporations Law …. 2.24, 8.124, 8.157 s 232 …. 3.40, 3.41, 3.47, 3.75, 3.76, 3.83 s 232(2) …. 3.40, 3.41, 3.45, 3.46, 3.47, 3.48, 3.51, 3.75, 3.83, 3.84, 3.85, 3.88, 3.89, 3.92, 3.93, 3.95, 3.131 s 232(3) …. 3.46, 3.84 s 232(4) …. 3.75, 3.110, 3.111, 3.116, 3.117 s 232(5) …. 3.75 s 232(6) …. 3.75 s 232(11) …. 3.40 s 447D …. 12.45, 12.46, 12.52 s 479(1) …. 12.46 s 479(3) …. 12.44, 12.45, 12.49, 12.83 s 568(1)(d) …. 11.12, 11.17 s 568(6) …. 11.20, 11.39 s 1005 …. 3.205, 3.210, 3.215 Pt 5C.9 …. 2.66 Pt 7.11 …. 3.205, 3.209, 3.210, 3.215, 9.33 Pt 7.11 Div 2A …. 3.215 Pt 7.12 …. 2.16, 3.205, 3.209, 9.33 Pt 7.12 Div 5 …. 2.16

Pt 7.12 Div 5A …. 2.16 Corporations Regulations 2001 reg 5.6.73 …. 8.103 reg 7.1.06 …. 9.109 reg 7.1.19 …. 9.32 reg 7.12.15(f)(i) …. 3.163 Corporations Regulations (Amendment) 1998 …. 3.167 Family Law Act 1975 s 41 …. 2.12 s 41(2) …. 2.12 Federal Court of Australia Act 1976 s 33ZF …. 10.62 s 33ZB(b) …. 10.44 s 43(1A) …. 10.52, 10.54, 10.60 Pt IVA …. 10.1, 10.19, 10.44, 10.45, 10.51, 10.52, 10.56, 10.65 Financial Services Reform Act 2001 …. 5.52 Financial Services Reform Act 2002 …. 10.15 Income Tax Assessment Act 1936 …. 12.38, 12.42 Judiciary Act 1903 s 80 …. 3.10 Managed Investments Act 1998 …. 2.35, 2.37, 2.38, 3.184, 3.225, 5.2 Statute Law (Miscellaneous Provisions) Act 1986 …. 3.203 Superannuation Industry (Supervision) Act 1993 s 52 …. 3.154 s 52(2)(c) …. 3.157, 3.161, 3.163 s 153 …. 9.52 Trade Practices Act 1974 s 52 …. 9.112 s 52A …. 3.203 s 80 …. 3.197, 3.200 s 80A …. 3.197 s 82 …. 3.197, 3.201, 9.97, 9.98, 10.35

s 82(1) …. 10.35 s 83 …. 3.201, 3.206, 3.207 s 86 …. 3.201, 3.206 s 87 …. 3.196, 3.201, 3.204 s 87(1) …. 3.197, 3.198, 3.199, 3.201, 3.204 s 87(1A) …. 3.197, 3.200, 3.201, 3.202, 3.203, 3.204, 3.205, 3.207 s 87(1B) …. 3.204 s 87(1C) …. 3.203, 3.204, 3.208 s 87(1CA) …. 3.203, 3.204 Pt IV …. 3.197 Pt V …. 3.197, 3.200, 3.202 Pt VI …. 3.201, 3.202

Australian Capital Territory Games, Wagers and Betting-Houses Act 1901 s 13 …. 5.52

New South Wales Companies Act 1936 s 300 …. 11.11 Companies Act 1961 s 274 …. 12.28 s 279 …. 12.28 s 296 …. 11.11 Fair Trading Act 1987 s 42 …. 10.27 s 74(3) …. 9.97 s 159 …. 9.97 Law Reform (Miscellaneous Provisions) Act 1946 s 6 …. 9.112 s 6(1) …. 9.112

Partnership Act 1892 s 35 …. 2.61, 2.66 s 39 …. 2.62 Trustee Act 1925 …. 3.9 s 63 …. 12.10, 12.113, 12.116, 12.119 s 63(1) …. 12.107, 12.125 s 63(3)–(4) …. 12.111 s 63(4) …. 12.111 s 63(8) …. 12.109 s 63(8)–(10) …. 12.111 s 63(11) …. 12.6, 12.111 s 81 …. 2.65 Uniform Civil Procedure Rules 2005 Pt 54 …. 2.65 Unlawful Gambling Act 1998 s 56(1) …. 5.52

Northern Territory Racing and Betting Act 1983 s 135(1) …. 5.52 Unlawful Betting Act 1989 s 4 …. 5.52

Queensland Companies Act 1961 s 237(3) …. 12.25, 12.27 Racing Act 2002 s 341 …. 5.52 Trusts Act 1973 s 72 …. 8.12 s 96 …. 12.10

South Australia Companies Act 1962 s 237(3) …. 12.29 Lottery and Gaming Act 1936 s 50 …. 5.52 s 379(3) …. 12.33, 12.39, 12.44 State Bank of South Australia Act 1983 s 29 …. 3.101, 3.102 Trustee Act 1936 s 92 …. 12.10

Tasmania Racing Regulation Act 2004 s 103 …. 5.52 Trustee Act 1898 s 27(2) …. 8.12

Victoria Companies Act 1958 s 107 …. 3.41 Companies (Victoria) Code s 556 …. 3.113 Evidence Act 2008 s 50 …. 13.58 Fair Trading Act 1999 Gambling Regulation Act 2003 s 2.4.1 …. 5.52 Partnership Act 1958 s 39 …. 2.61 s 43 …. 2.62 Supreme Court Act 1986

Pt 4A …. 10.20, 10.64 Supreme Court (General Civil Procedure) Rules 2005 r 9.03(1) …. 12.11 r 16.01(2)(c) …. 12.125 r 18.03 …. 12.125 r 54.02 …. 12.10, 12.11, 12.21, 12.22 r 54.03 …. 12.11 O 9 …. 12.11 O 54 …. 2.65 Trustee Act 1958 s 7(2)(a) …. 3.152 s 36(2) …. 8.12 s 63 …. 2.65, 8.72 Uniform Company Acts 1961 Pt IV Div 5 …. 2.16

Western Australia Gaming and Betting (Contracts and Securities) Act 1985 s 4(1) …. 5.52 Trustee Act 1962 …. 12.101 s 92 …. 12.10

United Kingdom Bankruptcy Act 1869 …. 11.8 s 17 …. 11.8 s 23 …. 11.7, 11.8 s 31 …. 11.8 Bankruptcy Act 1883 s 55 …. 11.9 Bankruptcy Act 1914 s 54 …. 11.9

Companies Act 1862 …. 2.41 Companies Act 1929 s 267 …. 11.9 Companies Act 1948 s 323 …. 11.9 Insolvency Act 1986 …. 11.9 s 178 …. 11.10 Law of Property and Trustees Relief Amendment Act 1859 s 30 …. 12.15, 12.16, 12.65

New Zealand Insolvency Act 1967 …. 11.40

TABLE OF CONTENTS Preface Acknowledgments Table of Cases Table of Statutes Chapter 1

Introduction

Chapter 2

How have Managed Investment Schemes Coped with the Challenges of Insolvency?

Chapter 3

Duties of Directors of Managed Investment Schemes

Chapter 4

Advising the Directors and Management of an Entity in Financial Crisis

Chapter 5

Can Managed Investment Schemes be Restructured in the Context of Insolvency?

Chapter 6

Role of the Courts in Restructuring Managed Investment Schemes

Chapter 7

Winding up Managed Investment Schemes — Conceputal and Practical Difficulties

Chapter 8

The Competition for Assets in Insolvent Investment Vehicles

Chapter 9

Rights of Investors in Failed or Insolvent Managed Investment Schemes

Chapter 10 Class Actions in a Managed Investment Scheme Context Chapter 11 Disclaimer and Related Issues Chapter 12 Directions Applications and the Rights of Third Parties Chapter 13 Practitioner Remuneration, Costs and Security

Index

DETAILED TABLE OF CONTENTS Preface Acknowledgments Table of Cases Table of Statutes Chapter 1

Introduction

Chapter 2

How have Managed Investment Schemes Coped With the Challenges of Insolvency? I. The importance of managed investment schemes in the Australian economy II. Regulation of managed investment schemes II.A. Important features of managed investment schemes II.B. Forms of managed investment schemes III. Winding up managed investment schemes III.A. Relevant statutory provisions III.B. Background to the winding up provisions III.C. Application of the winding up provisions IV. Practical issues IV.A. Who should be appointed and with what powers IV.B. Identifying ‘scheme property’ IV.C. Need for multiple applications to court IV.D. ‘Growers’ groups’ IV.E. Allegations that PDSs are misleading IV.F. Difficulty in restructuring IV.G. Outcomes for investors

V. Conclusion Chapter 3

Duties of Directors of Managed Investment Schemes I. Introduction II. Duties of the RE III. Liability of the RE IV. Corporate duties of the RE directors: s 180 V. Corporate duties of the RE directors: s 181 VI. Corporate duties of the RE directors: s 182 VII. Directors’ duties under Chapter 5C VII.A. Section 601FD(1)(a) — Duty to act honestly VII.B. Section 601FD(1)(b) — Duty of care and diligence VII.C. Section 601FD(1)(c) — Duty to act in the best interest of members VII.D. Section 601FD(1)(d) — Duty not to make improper use of information, and s 601FD(1)(e) — Duty not to make improper use of position VII.E. Section 601FD(1)(f) — Duty to ensure the RE complies with the law etc VIII. Can scheme members sue the directors? VIII.A. Section 1324 VIII.B. Section 1325

Chapter 4

Advising the Directors and Management of an Entity in Financial Crisis I. Introduction II. Insolvent trading II.A. Overview II.B. General principles II.C. Defences II.D. Consequences of contravention II.E. Relief from liability III. Directors’ duties

III.A. Care and diligence: s 180(1) III.B. Good faith and proper purpose: s 181(1) IV. The need for reform IV.A. Issues with the current regime IV.B. Suggested reforms IV.C. No reform necessary? V. Conclusion Chapter 5

Can Managed Investment Schemes be Restructured in the Context of Insolvency? I. Introduction II. Agribusiness managed investment schemes III. Timbercorp — de facto winding up IV. Great Southern — restructure by replacement responsible entity V. Elders — de facto winding up VI. Gunns — de facto winding up VII. Willmott — disclaimer VIII. FEA — formal and informal winding up IX. Impact of ss 601FS and 601FT X. Proposals for law reform XI. Impediments to restructure XII. Tricom XII.A. The company XII.B. The collapse XII.C. The rescue XIII. Centro XIII.A. The company XIII.B. The collapse XIII.C. The collapse and restructure XIV. Octaviar XIV.A. The company and the collapse XIV.B. The (failed) rescue

XV. Conclusion Chapter 6

Role of the Courts in Restructuring Managed Investment Schemes I. Introduction II. Background to the proceeding II.A. Schemes II.B. Liquidators’ proposal and the restructure proposal II.C. Injunction application II.D. Next phase of the litigation III. Commercial context — company takeovers and applications for injunctive relief IV. Construction of s 601FS — the competing arguments IV.A. Effect of s 601FS IV.B. Effect of s 601FS — scheme leases V. Implications of the decision — what is the role of the courts in restructures?

Chapter 7

Winding up Managed Investment Schemes — Conceputal and Practical Difficulties I. Winding up managed investment schemes — what does it mean? II. The hypothetical III. The framework IV. The perfect storm — winding up the schemes IV.A. Who may be appointed to wind up the scheme? IV.B. Potential conflicts IV.C. Directions and extent of court supervision IV.D. Liquidators’ remuneration IV.E. The costs of the application to wind up V. Conclusion

Chapter 8

The Competition for Assets in Insolvent Investment Vehicles I. Introduction II. The rights of creditors and investors in investment trusts

II.A. Nature of a trust II.B. The position of secured creditors II.C. The position of unsecured creditors II.D. The role of the liquidator of a trustee company or RE III. Managed investment schemes: scheme property III.A. Why is it necessary to identify scheme property? III.B. What is scheme property? IV. Tracing and pooling in managed investment schemes and investment trusts IV.A. Tracing into and distribution from a mixed fund IV.B. Are there any proprietary claims or personal equities? IV.C. Resolving investor/investor conflicts in the future V. Corporate groups — pooling and substantive consolidation V.A. Introduction V.B. Pooling under Division 8 of Part 5.6 V.C. Substantive consolidation outside Division 8 of Part 5.6 V.D. A comparison of means of achieving substantive consolidation VI. Conclusion Chapter 9

Rights of Investors in Failed or Insolvent Managed Investment Schemes I. Introduction II. Legislative framework and investor protection philosophy II.A Features of MISs II.B. Pooled schemes and common enterprise schemes II.C. Tax benefits II.D. Registration and the responsible entity II.E. Scheme property II.F. Constitution and compliance plan

II.G. Disclosure requirements II.H. Policy rationales underlying financial product disclosure II.I. Defective PDSs II.J. Concerns with agribusiness disclosure — ASIC Regulatory Guide 232 III. Rights arising from scheme documentation, limited liability, withdrawal rights and rights over scheme property III.A. Rights arising from scheme documentation III.B. Liability of members in insolvent schemes III.C. Rights to withdraw III.D. Rights over scheme property IV. Right to appoint a new responsible entity V. Rights against scheme operators for misleading representations and inadequate disclosure V.A. Civil liability regime for defective PDSs V.B. Power to set aside ancillary documents – s 1022C V.C. Practical issues for investors in bringing claims for defective PDSs VI. Conclusion Chapter 10 Class Actions in a Managed Investment Scheme Context I. Introduction II. Common features of managed investment schemes of significance in the class action context II.A. Commercial motivations II.B. Applicability of the disclosure regime III. The dual requirements of individual reliance and commonality: potential difficulties for class actions relating to failed managed investment schemes IV. Applications for security for costs in open class actions V. Conclusion Chapter 11 Disclaimer and Related Issues I. Background to the disclaimer provisions

II. Three questions not considered in Willmott II.A. When does a liquidator require leave to disclaim property? II.B. What considerations will inform the decision to grant or refuse leave? II.C. In what circumstances will a court set aside a liquidator’s disclaimer? III. A potential anomaly Chapter 12 Directions Applications and the Rights of Third Parties I. Introduction II. Legislative powers III. The traditional principle — GB Nathan III.A. Authority in support III.B. Preference cases III.C. Reconstitution as inter partes proceeding IV. Willmott Forests (No 2): third party rights determined without joinder IV.A. Discretion, not power IV.B. Cases said to be contrary to GB Nathan IV.C. Doubts put to rest by Macedonian Orthodox? V. Subsequent cases VI. Reconstitution and representation: the safer course VII. Conclusion Chapter 13 Practitioner Remuneration, Costs and Security I. Introduction II. The statutory lacuna III. Limited reliance on trustee’s own right of indemnity IV. The Universal Distributing principle IV.A. Origins and application IV.B. Stewart v Atco Controls: signalling the demise of ‘exclusive purpose’? V. Funding by way of equitable allowance: Berkeley

Applegate V.A. Work that is ‘necessary’ and for the ‘benefit’ of investors: Universal Distributing vs Berkeley Applegate VI. House vs trust assets: categorising costs VII. House vs trust assets: use of house assets in priority to trust assets VIII. House vs trust assets: recourse to trust assets where house assets insufficient IX. Allocation of expenses between MISs and trusts generally X. Solvent and insolvent trusts: can solvent trusts be required to bear the costs associated with insolvent trusts? XI. Recourse to trust assets for the costs of trust proceedings XII. Process XIII. Key risks for practitioners XIII.A. Proper purpose XIII.B. Reasonably incurred XIII.C. Existence of fund XIII.D. Priority XIV. Mitigants XIV.A. Third party funding XIV.B. Use of directions as protection XIV.C. Use of interim and pre-emptive orders XIV.D. Cost recovery XIV.E. Availability of interest in equity XIV.F. Ability to monetise — assignments of indemnity secured by lien XV. Reform Index

[page 1]

1 INTRODUCTION Stewart Maiden Stewart Maiden is a barrister at the Victorian Bar. His practice focuses on insolvency, corporations, finance and commercial litigation. He is widely published in those fields, and several of his articles have been referred to in judgments of Australian superior courts. Stewart is a Fellow of INSOL International (first in class, 2009) and a member of the Australian Restructuring Insolvency and Turnaround Association and the Insolvency and Reconstruction Law Committee of the Law Council of Australia.

1.1 The practice of individuals combining their financial resources for the purpose of investment did not commence with the invention of the joint stock company by the Dutch in the 17th century, but that ingenious creation launched four centuries of financial innovation that shows no sign of abating.1 While limited liability corporations have proved a popular and largely successful mechanism for organising collective investments, they are not the only vehicles through which investors can pool their wealth with a view to accessing opportunities that might otherwise be out of reach. Ever more elaborate and sophisticated mechanisms for joint investment have been devised as time has worn on: human ingenuity and the lure of profit has caused constant evolution both of collective investment vehicles and the ways in which they are used. 1.2 In Australia, companies, various types of trusts, partnerships, and managed investment schemes can all provide investors with different combinations of control, limited liability, ownership of underlying assets, flexibility of taxation treatment, fundraising

capacity, transferability, and access to capital markets. From an investor’s perspective, perhaps the ideal vehicle for large scale public investment is one that can be large enough to allow it to invest in the most significant of opportunities, accessible enough [page 2] to allow investment even by those of modest means, flexible enough to be tailored to the individual needs of those for whom it is designed, and regulated well enough that the only significant risks faced by investors are those inherent in the underlying investment itself. 1.3 One form of collective investment vehicle that has become popular in Australia in recent times is the registered managed investment scheme (MIS).2 Managed investment schemes emerged at the end of the 20th century as the result of legislative reform of the prescribed interest regime that had operated since the 1950s.3 They are regulated by chapter 5C of the Corporations Act 2001 (Cth) (the Corporations Act). Any number of investors can become members of a managed investment scheme by purchasing interests (typically units in a unit trust) in a common venture which is operated by a corporation known as the responsible entity (RE) of the scheme. The responsible entity holds the assets and undertaking of the scheme on trust for the members, sometimes providing them taxation advantages that may not be available to shareholders in a company owning the same assets. Members’ liability is typically limited by the terms of the scheme documents.4 1.4 For so long as the investment is successful, the form of the chosen vehicle may be of little moment to the investors or to the managers and creditors of the venture. But under stress, the characteristics of the investment vehicle are thrown into relief. When investment vehicles become insolvent, their defining features become all important, because those features determine the answers to many salient questions: What are the duties and responsibilities of management? Who has first call on the assets? What becomes of the

venture’s contractual relationships? How, if at all, can it be restructured to stave off collapse? Can it be continued, sold off or wound up by external administrators — and if so, what are their powers and entitlements? And how are the affairs of all of the competing stakeholders to be regulated? 1.5 When collective investment vehicles become insolvent, they present issues of large scale and extraordinary complexity. The usual problems created by financial collapse are magnified by the amounts at stake, the intricacies of the structures and the number of parties with overlapping rights and conflicting interests. In a managed investment scheme context, those complexities are made all the more difficult to deal with by the uncertainties created by the relevant statutory regime and the general law that surrounds it. 1.6 The collapse of many managed investment schemes during the global financial crisis that began in 2007 led to rapid developments in a significant body of law specifically relating to insolvent schemes. From the litigation [page 3] spawned by the crisis have emerged many important developments in the laws relating to insolvency and reconstruction, not just in relation to managed investment schemes but in relation to collective investments generally. 1.7 The object of this book is to explore some of the more frequently encountered problems that arise when collective investment vehicles pass through the penumbra of financial trouble and into the darkness of insolvency. Drawing on the events of the last half decade or so, it sets out to explain, by reference both to the law reports and the authors’ personal experiences, some of the ingenious responses that have been formulated by clever lawyers and accountants in responding to those problems, many of which the law had not predicted adequately (if at all). Although it focuses

principally on registered managed investment schemes, it is not confined to that particular form of investment vehicle. 1.8 Chapter 2 considers the existing mechanisms that are available to effect the winding up of managed investment schemes. It traces their evolution, critiques their effectiveness and explores some practical issues that have been created by insolvent schemes. In concluding that managed investment schemes have not coped well with the challenges of insolvency, it notes gaps in the statutory regime caused by a failure properly to provide for the prospect of insolvency. 1.9 Chapter 3 describes the duties of officers of responsible entities. Those duties, imposed by Ch 5C of the Corporations Act, are hybrids of the duties imposed on officers by Ch 2D and the equitable duties of trustees. Officers of responsible entities straddle both roles: the responsible entity is always a corporate trustee. Its officers owe Ch 2D duties to the responsible entity and must have regard to its fiduciary duties to members. But more than that, the parliament has imposed trustee-like duties directly upon the officers of REs. The relative youth of the Ch 5C duties and the unsettled nature of some of the Ch 2D and equitable duties from which they are drawn means that they are works in progress. The chapter describes the trajectory of their development to date and identifies some of the questions that remain to be answered. 1.10 Chapter 4 extends the analysis of officers’ duties by exploring the potential liabilities of officers of entities in the ‘twilight zone’ of financial crisis. Difficult decisions need to be made by those officers, calling for difficult decisions on the part of their advisers. Under Australian law there is a particular danger in trying to trade out or restructure without appointing external administrators, against which the directors must balance the chance that stakeholders, particularly members, could accuse them of breaching their duties by appointing prematurely. 1.11 The peculiar challenges involved in attempting to restructure insolvent managed investment schemes — and particularly, although not exclusively, agribusiness managed investment schemes — are the

subject of chapter 5. That chapter describes some of the difficulties that have been experienced when complex schemes have become insolvent, and the creative responses that [page 4] have been adopted to deal with them. It considers the problems involved in attempting to replace a responsible entity, particularly the statutory novation of the rights and obligations of the outgoing responsible entity effected by the Corporations Act s 601FD. 1.12 That discussion is picked up in chapter 6, which deals with the role that the courts can play in the contested restructure of a managed investment scheme. It draws particularly from the experience of Re Gunns Finance (No 2) (2013) 281 FLR 121, where a restructuring plan was challenged in the Supreme Court of Victoria. Chapter 6 offers a different perspective on the statutory novation provision and the potential law reform responses to it, and there is value in reading it together with chapter 5. 1.13 Chapter 7 departs from the theme of restructuring to examine, by reference to a practical hypothetical, some of the difficulties that arise when a managed investment scheme is wound up. It provides a useful illustration of the concepts explored in chapters 2, 8, 12 and 13. 1.14 Chapter 8 considers the tension between the various parties who make claims against insolvent investment vehicles. The overlapping and often conflicting rights of the various stakeholder groups are brought into focus upon the onset of insolvency, and much of the courts’ time is consumed in attempting to determine the resulting disputes. The chapter discusses the conflict between the rights of creditors and those of investors, the meaning and importance of ‘scheme property’ in the context of managed investment schemes, the means by which claimants can trace into the assets of an insolvent entity, and how statutory pooling can offer a solution in the insolvency of complex groups of companies.

1.15 Chapter 9 analyses the regulatory regimes that are set up to protect investors in managed investment schemes and the recourse that investors have when those rights are infringed. In so doing, it examines some of the recent high-profile litigation that has been launched by disaffected investors following the collapse of several significant managed investment schemes. 1.16 Building on chapter 9, chapter 10 considers the effectiveness of the class action or representative proceeding as a vehicle for the agitation of the rights of investors in failed managed investment schemes. It explains several procedural issues that have arisen in such actions in recent years and concludes that while those issues create new challenges for claimants, the class action mechanism remains the most effective tool for the ventilation of such rights. 1.17 The final part of the book concerns the conduct of the external administration of insolvent investment vehicles. It commences with chapter 11, which explores the scope of the liquidator’s power to disclaim following the High Court’s decision in Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592. 1.18 One tool that insolvency practitioners have had frequent recourse to in the course of external administrations is the power to seek judicial directions. Chapter 12 explores the width of that power and considers in particular the [page 5] question of whether judicial directions can bind parties who are not joined to the proceeding in which those directions are sought. In the context of large-scale insolvencies, particularly those of managed investment schemes where thousands of people may be affected by external administrators’ actions, it is a particularly pertinent topic and one on which there has been no definitive word at appellate level. 1.19 Chapter 13 considers the rights of insolvency practitioners to

be paid their fees and expenses from the assets of insolvent investment vehicles. The complex nature of such vehicles, which commonly hold assets on trust, gives rise to particular challenges for insolvency practitioners who are understandably interested in having their expenses met and being paid for their work. 1.20 The legal principles and experiences that are described in the following pages provide answers to many of the practical questions that are raised by the insolvency of collective investment schemes. But they also give rise to further and perhaps more fundamental questions concerning such schemes (while at the same time going some way toward providing tools to assist in answering them). For example: Does any particular model appropriately allocate risk between investors and creditors? Is its structure transparent enough and are the laws that govern it predictable enough to enable investors and creditors properly to understand their risks? Does it adequately protect investors from the risk of underhanded or incompetent promoters, or do the regulations merely create complexity and expense? Is it flexible enough to allow the rescue of ventures that are capable of producing further wealth? Does it adequately protect professionals engaged to deal with any crises that it might encounter? And is it supported by adequate enforcement mechanisms to vindicate the rights of those who have been wronged? 1.21 Managed investment schemes may not be around forever, but collective investing will. It is only by asking questions of the type posed in this book that we can gain a proper understanding of the power and limits of different types of collective investment vehicles and the direction and urgency of any necessary reforms to them. For those reasons, the chapters that follow have utility for those who advise investors, creditors, promoters, officers, insolvency practitioners and law reformers. 1. 2. 3.

See generally Niall Ferguson, The Ascent of Money, Penguin Press, New York, 2008, Ch 3. Some indication of the popularity of managed investment schemes can be gleaned from section I of chapter 2 of this book. See generally Paul von Nessen, Sean Robertson and Tim Wiedman, A Practical Guide to

4.

Managed Investments (3rd ed), Thomson Lawbook Co, Sydney, 2008, Ch 1. The structure of managed investment schemes is dealt with in detail in section IIA.2 of chapter 2, and sections II and IV of chapter 9 of this book.

[page 7]

2 HOW HAVE MANAGED INVESTMENT SCHEMES COPED WITH THE CHALLENGES OF INSOLVENCY? Carl Möller Carl Möller is a member of the Victorian Bar. He practises in corporate and commercial law. He is a Senior Fellow at the Melbourne University Law School, where he teaches a postgraduate course in corporate insolvency, and is a member of the Law Council of Australia’s Insolvency and Reconstruction Law Committee. He has acted in many cases arising from collapses of managed investment schemes.

I. The importance of managed investment schemes in the Australian economy 2.1 Investments in managed investment schemes represent a significant part of the Australian economy. Large amounts of capital are raised by public offerings in them. Examples of schemes include: listed real property and infrastructure schemes; unlisted property trusts and syndicates, and mortgage funds; cash, bonds, equity and multi-sector managed funds; timeshare, horse-breeding or racing, serviced strata and film schemes; and (until recently, at least) various agribusiness schemes, including forestry schemes.1 2.2 Precise figures concerning funds in managed investment schemes are difficult to extract. In 2009, an overview by the Australian Securities and Investments Commission (ASIC), which was

cited in a report by a Parliamentary Joint Committee, estimated that funds in managed investment schemes totalled about $350 billion and that there were approximately 5200 registered managed investment schemes in Australia, operated by some 674 [page 8] responsible entities.2 Some 110 schemes, mostly invested in property or infrastructure, were listed.3 In recent years, listed schemes with a capitalisation of more than $100 million have constituted approximately 8% of the total market capitalisation of securities listed on the ASX, and some 80% of investment grade commercial real estate (office buildings, shopping centres and industrial facilities) have been held in such schemes.4 2.3 Growth in managed investment schemes has been enormous. In 1998, the same Parliamentary Joint Committee reported that ‘approximately $85 billion is invested in managed investment schemes at present and the amount continues to grow by about $20 billion a year’.5 Taking the figures for 2009 ($350 billion), growth was fourfold in only 11 years.

II. Regulation of managed investment schemes II.A. Important features of managed investment schemes 2.4 Managed investment schemes are dealt with in Ch 5C of the Corporations Act. A ‘managed investment scheme’ is (ignoring specific exceptions in the definition): (a) a scheme that has the following features: (i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme

(whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or (b) a time-sharing scheme …6

[page 9] 2.5 It is not necessary to consider in detail the elements of the definition, nor the requirements of Ch 5C. However, five features of the law concerning registered managed investment schemes should be noted at the outset: (a) First, a scheme must have a responsible entity, which is ‘to operate the scheme and perform the functions conferred on it by the scheme’s constitution and [the Corporations] Act’.7 (b) Second, a scheme must have a constitution that must provide, among other things, for winding up the scheme.8 (c) Third, the responsible entity and its officers owe statutory duties, including a duty to act in the best interests of the scheme’s members and, if there is a conflict between the members’ interests and interests of the responsible entity, to give priority to the members’ interests.9 (d) Fourth, the responsible entity holds ‘scheme property’ on trust for scheme members.10 ‘Scheme property’ includes: (i) contributions of money or money’s worth to the scheme; (ii) money that forms part of the scheme property under provisions of the Corporations Act or the Australian Securities and Investments Commission Act (ASIC Act); (iii) money borrowed or raised by the responsible entity for the purposes of the scheme; (iv) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to above; and (v) income and property derived, directly or indirectly, from contributions, money or property referred to above.11

(e) Finally, offers of interests in managed investment schemes are governed by Ch 7.9 of the Corporations Act. Such offers require disclosure by a product disclosure statement (PDS). 2.6 In Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11, the majority of the Full Federal Court noted with approval the observation in Ford’s Principles of Corporations Law that: Managed investment schemes are residual investment opportunities remaining after shares and debentures are considered. The concept of investment opportunity is elusive. In the present context the legislation is concerned only with those offerings of investment opportunities which are so similar to offerings of shares and debentures that regulation about them calls for regulatory techniques that developed in relation to offerings of shares and debentures.12

[page 10] 2.7 The reference to schemes as being investment opportunities ‘remaining after shares and debentures are considered’, and the observation that offerings in schemes are regulated by techniques developed in relation to shares and debentures, provide useful first insight into how their overall regulation has been approached by the legislature.

II.B. Forms of managed investment schemes 2.8 There is no prescribed structure for schemes, and they can take various legal forms. As Ford’s Principles of Corporations Law explains: Some are mere contracts under which the promoter gives a personal promise that under certain conditions the investor will receive benefits. Some offer the investor an interest as owner of property coupled with an offer of continuing services. Examples are unit trusts which may be property trusts holding land, equity trusts holding shares or cash management trusts enabling indirect investment by small-scale investors in high-yielding money market securities.13

2.9 It is not necessary to detail the variety of different forms and structures. But it is important to appreciate that the variety exists and that schemes can be structured in ways that involve an amalgam of legal relationships, including contracts, trusts, leases and

partnerships. The relevance of tax to these structures should not be underestimated. The ‘impetus for promoting novel forms of managed investments often comes from a change in income tax law’.14

III. Winding up managed investment schemes III.A. Relevant statutory provisions 2.10 The winding up of managed investment schemes is the subject of detailed consideration in chapter 7 of this book. However, it is necessary for present purposes to identify the relevant statutory provisions. 2.11 The Corporations Act contains different provisions for winding up registered and unregistered schemes. 2.12 A registered scheme may be wound up in several ways: pursuant to its constitution;15 at the direction of its members;16 by the responsible entity, if the scheme’s purpose has been — or cannot be — accomplished;17 or by the Court.18 [page 11] 2.13 The Court may order the responsible entity to wind up the scheme either where it thinks it ‘just and equitable’ to make the order,19 or where execution or other process on a judgment against the responsible entity (in its capacity as the responsible entity) has been returned unsatisfied.20 The Corporations Act contemplates that the responsible entity will conduct the winding up,21 but the Court may appoint another person to take responsibility for ensuring the scheme is wound up and may give directions about how the winding up should occur.22 2.14 The Court may wind up an unregistered scheme that should have been registered.23 The Court may make ‘any orders it considers appropriate for the winding up of the scheme’.24

III.B. Background to the winding up provisions 2.15 It is useful to consider the background to the winding up provisions.

III.B.1. ‘Prescribed interest’ schemes 2.16 The present ‘managed investment’ regime replaced the ‘prescribed interest’ regime in Pt 7.12 Divs 5 and 5A of the former Corporations Law.25 Division 5, which was based on predecessor legislation derived from Pt IV Div 5 of the Uniform Company Acts 1961 (Vic), required that each prescribed interest scheme be constituted under an approved deed containing prescribed covenants, be managed by a manager that was a public company holding a dealer’s license, and be supervised by an independent trustee or representative approved by the Commission (i.e., the predecessor to ASIC).26 2.17 The Corporations Law devoted a single section to the winding up of a ‘prescribed interest’ scheme — s 1074. It applied where: (a) the management company was being wound up or (b) in the opinion of the trustee or representative, the management company had ceased to carry on business or, to the prejudice of holders of interests, had failed to comply with the provisions of the deed. [page 12] 2.18 In those circumstances, the trustee or representative was to convene a meeting of holders of those interests: s 1074(1). If, at such a meeting, a majority of three-quarters (in value) of the holders of the prescribed interests present and voting resolved that the scheme be wound up, the trustee or representative was to apply to the Court for an order confirming the resolution: s 1074(4). On such an application, the Court could, if it was satisfied that it was in the interests of holders, confirm the resolution and ‘make such orders as it thinks just and reasonable for the effective winding up of the undertaking, scheme, enterprise, contract or arrangement’: s 1074(5).

2.19 At the time of writing there appears to be no decided case considering the provision.

III.B.2. ALRC/CASAC review 2.20 The 1980s saw ‘an era of unprecedented growth in managed investment schemes’: The trend overall was buoyed by the deregulation of financial markets in the 1980s, which saw a proliferation of collective investment vehicles — from the largest commercial property and management trusts to small one-off schemes such as pine forests, ostrich and yabby farms.27

2.21 In May 1991, following the collapse of several unlicensed property trusts in 1990, the Commonwealth Attorney General referred two issues to the Australian Law Reform Commission (ALRC) and the Companies and Securities Advisory Committee (CASAC): (a) whether the (then) present legal framework for collective investment schemes provided for the most efficient and effective legal framework for the operation of the various kinds of such schemes; and (b) whether there was a proper level of regulation of the various kinds of collective investment schemes.28 2.22 Initially, the review covered investment products offered to the public, including superannuation. However, superannuation became the subject of a separate report.29 2.23 In 1993, the ALRC and CASAC published a report, Collective Investments: Other People’s Money.30 The report found that the ‘dual entity’ structure, which [page 13] required that a prescribed interest scheme be administered by both a manager and an independent trustee or representative, created confusion over who was responsible to investors and was not an efficient way to ensure compliance. It recommended the adoption of

a regime by which a single ‘responsible entity’ would administer the scheme. 2.24 The report made recommendations concerning the winding up of insolvent schemes. It recognised that different insolvency regimes would apply, depending on the structure of the particular scheme: There are significant differences between companies and collective investment schemes which will increase the incentive for scheme creditors to move against the scheme operator rather than wind up the scheme. While a company is a separate legal person, a scheme is not. Where schemes are constituted as trusts, the scheme operator will be personally liable for debts of the scheme, but will have a right of indemnity out of the scheme property. Creditors will therefore generally take action to recover their debts, including insolvency proceedings, directly against the scheme operator. The Review endorses as equally applicable to collective investment schemes constituted as trusts the recommendations made in the ALRC’s report General Insolvency Inquiry (ALRC 45, 1988) concerning the right of indemnity of a trustee of a trading trust. … The insolvency provisions of the Corporations Law, including the provisions for increasing the assets available to creditors by recovery of preferences, will apply in proceedings against the operator. If the collective investment scheme is a partnership, creditors will have joint and several rights against each of the partners unless it is a limited partnership. Creditors will therefore take action for recovery of debts against the partners. Insolvency proceedings against the partners will be governed by the Bankruptcy Act 1966 (Cth) or the Corporations Law, depending whether the partners are individuals or companies. Creditors would therefore not usually be interested in taking action to wind up a collective investment scheme.31

2.25 However, the review still recommended that there should be a way to wind up a scheme in insolvency: Nevertheless, a procedure should be available for winding up a collective investment scheme in insolvency. The Review recommends that the court should have the power to terminate an insolvent scheme on application by a creditor, the scheme operator, a director of the scheme operator, a liquidator or provisional liquidator of the scheme operator or the ASC. The Review also recommends that an applicant should be required first to obtain leave of the court by establishing a prima facie case that the scheme is insolvent.32

[page 14] 2.26 The report recommended draft legislation to govern collective

investment schemes.33 Recognising that a ‘significant problem with the present law relating to prescribed interests is that there is insufficient provision governing the termination and winding up of prescribed interest schemes’,34 the draft made provision for winding up by the introduction of a new Pt 5.6A — ‘Termination and winding up collective investment schemes’. 2.27 Under the draft legislation, the Court would have had the power to wind up a scheme on the ground it was insolvent (proposed s 581AD). There would also have been a statutory winding up regime, including for the appointment of a registered liquidator to wind up the scheme (proposed s 581BB). The regime was modelled on that applying to the winding up of a company and several powers similar to a company liquidator’s would have been granted to the scheme liquidator (e.g., a power to conduct compulsory examinations concerning the ‘examinable affairs’ of the scheme, and an obligation on officers of the scheme to assist the liquidator). 2.28 The review also recommended that a procedure similar to voluntary administration should be available for insolvent schemes.35

III.B.3. Collective Investments Bill 1995 (Cth) 2.29 In September 1994, the government announced that it proposed to implement the basic recommendations of the Collective Investments: Other People’s Money report, but with some fundamental changes. In December 1995, a commentary and draft Bill was released — the Collective Investments Draft Bill 1995 (Cth).36 2.30 The draft Bill proposed the introduction of a new Ch 5C to the Corporations Law, the ‘pivotal feature’ of which was the requirement of a single responsible entity for the operation of a collective investment scheme.37 The commentary explained ‘where appropriate, provisions for the regulation of collective investments schemes will be integrated with the equivalent company provisions’.38 [page 15]

2.31 Under the draft Bill, an independent custodian would be appointed to hold the scheme property, so as to ensure that the assets of the fund were segregated from those of the responsible entity. The proposals were opposed by trustee companies and were controversial.39 2.32 The draft Bill did not contain the detailed winding up regime that the Collective Investments: Other People’s Money report had recommended. Instead, its provisions were more like those that appear in the present Act. The commentary does not explain why the legislation proposed by the report was not adopted. 2.33 The draft Bill was to have been introduced to Federal Parliament in early 1996.40 However, an election intervened. Following the change of government, several policy issues reflected in the Bill were reconsidered (for instance, the proposal to abolish the requirement for a separate trustee) and the ongoing debate delayed the legislation.

III.B.4. Wallis Inquiry, 1997 2.34 In March 1997, the final report of the Financial System Inquiry (Wallis Committee) recommended that the regulatory framework for public offer collective investments and superannuation should be harmonised, including by ‘bringing the structure of collective investments into line with that for superannuation funds, by introducing a requirement for a single responsible entity’.41

III.B.5. Managed Investments Act 1998 (Cth) 2.35 In August 1997, the government announced that it would implement the reforms recommended by the Collective Investments: Other People’s Money report but that the legislation would not require that a scheme’s assets be held by a custodian. Instead it would permit the responsible entity to appoint an agent to hold assets and specify that the responsible entity or its agent must hold the assets separately in trust for scheme members. 2.36 Subsequently, the government released proposed legislation

— the Managed Investments Bill 1997 (Cth). This was in substantially the same form as the 1995 Bill, but without the requirement for a separate custodian. The 1997 Bill was referred to the Joint Parliamentary Committee on Corporations and Securities, which recommended (by majority) the enactment of the Bill without amendment. Neither the majority nor the minority report gave any consideration to the proposed winding up regime.42 [page 16] 2.37 The Managed Investments Act 1998 was enacted and commenced on 1 July 1998.

III.B.6. Subsequent enquiries 2.38 After 1998, there were further enquiries into managed investment schemes. Until the recent high profile collapses of corporate groups operating agribusiness schemes, these were largely concerned either with discrete or operational issues. For instance: (a) In June 1999, the then Minister for Financial Services and Regulation, Joe Hockey, requested advice from the Corporations and Markets Advisory Committee (CAMAC) on the liability of members of managed investment schemes.43 CAMAC’s report was published in March 2000. (b) In August 2001, Mr Hockey announced that Malcolm Turnbull had been appointed to conduct a review of the Managed Investments Act.44 The terms of reference, although broad, focussed generally on the effects of the regime and whether it should be refined. Winding up was not identified as an issue for consideration. (c) Mr Turnbull’s report, Review of the Managed Investments Act 1998, was published in December 2001. It focussed on operational and technical implications of provisions in the Act. It gave no consideration to the winding up provisions. The government stated that the findings of his review indicated that ‘overall, the

regulatory arrangements for the managed investments industry were working effectively’ but that some issues required consultation which Treasury would undertake.45 (d) Some issues addressed in the Turnbull review were referred to Treasury for public consultation. In May 2002, Treasury released the Managed Investments Act 1998 Consultation Paper and invited responses.46 (e) In 2002, the Parliamentary Joint Committee on Corporations and Financial Services decided to inquire into the Turnbull Review. The Committee’s report did not consider the winding up provisions. On the issue of whether the Managed Investments Act was ‘working well’, it concluded: The Committee notes ASIC’s evidence that it is too early to draw any definite conclusions that the MIA regime is working well. Certainly, [page 17] on the basis of evidence provided during the inquiry, the Committee is not persuaded that market conditions, including the September 11 crisis, have exerted sufficient stresses on the managed investments industry to test the MIA’s effectiveness. 47 2.39 Following recent collapses, there have been further, more critical, inquiries and reviews: (a) In 2009, following the collapses of Timbercorp and Great Southern, the Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into agribusiness managed investment schemes.48 (b) In November 2010, the Parliamentary Secretary to the Treasurer referred various matters concerning the regulation of schemes to CAMAC. The reference referred to the lack of certainty in arrangements for dealing with unviable schemes, pointing particularly to collapses in the agribusiness market:

While the corporate insolvency provisions in the Corporations Act provide creditors and directors with certainty about their rights and obligations, the Corporations Act sets out very few specialised rules regarding the administration of insolvent trusts or trustees. Instead, the administrations of such are determined by a mix of legislation, common law and equitable principles. The lack of clarity has led liquidators to resort often to the Court in order to obtain advice about the legality of future actions. It is therefore not clear whether the legislative arrangements contained in the Corporations Act are adequate to maintain the confident participation of retail investors in [schemes] because of deficiencies in the way the Act deals with: resolving the consequence, for otherwise viable schemes, of the insolvency of their RE; and what is to occur when the RE is insolvent and the Scheme itself has failed.49 CAMAC was asked to: … examine whether the current statutory framework is adequate for the winding up of a [scheme], and agribusinesses in particular, and whether it provides the necessary guidance for liquidators, creditors, investors and growers; and to … advise what legislative amendments should be made if the current legislative framework does not provide the necessary legislative [page 18] tools with respect to the arrangements for dealing with nonviable [schemes].50 (c) CAMAC produced a discussion paper in June 2011 and, in July 2012, published a report, Managed Investment Schemes, recommending changes that should be made to the managed

investment scheme regime. (d) In May 2012, the Parliamentary Joint Committee on Corporations and Financial Services published a report on its inquiry into the collapse of Trio Capital.51 It considered, among other things, the need for better disclosure by managed investment schemes.

III.C. Application of the winding up provisions III.C.1. The winding up process 2.40 In Re Crust ‘N’ Crumbs Bakers (Wholesale) Pty Ltd [1992] 2 Qd R 76, McPherson SPJ described ‘winding up’ as follows: Winding up is a process that consists of collecting the assets, realising and reducing them to money, dealing with proofs of creditors by admitting or rejecting them, and distributing the net proceeds, after providing for costs and expenses, to the persons entitled. It is a process, comparable to an administration in equity, that begins or ‘starts’ with an order of the court.52

2.41 The concept of ‘winding up’ is well-known in company law and its essential characteristics have remained the same since the Companies Act 1862 (UK).53 Familiarity with the concept of winding up in the company context, however, should not mask two obvious but important features of that regime: first, it has a statutory basis; second, it is comprehensive and longstanding. 2.42 Those features cannot be said to apply to the regime for winding up a managed investment scheme.

III.C.2 Winding up a managed investment scheme 2.43 The juridical basis for winding up a registered scheme, and the limits on the Court’s powers, were considered in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466. 2.44 The case concerned a registered managed investment scheme. Its members had, among other things, resolved that the scheme be wound up. The responsible entity sought to have insolvency practitioners appointed to

[page 19] take responsibility for the winding up and to have conferred on them the types of powers that a receiver or liquidator would usually possess. In considering the scope of the Court’s power under s 601NF(2) of the Corporations Act (to give directions about how a registered scheme is to be wound up), White J considered cases where s 601EE(2) (the power for the Court to make any orders it considers appropriate for the winding up of an unregistered scheme) had been used to confer broad powers. In considering whether those cases could apply to s 601NF(2), he considered the nature of the winding up of a registered scheme. 2.45 Justice White observed that ‘[a]lthough the statutorily created process of winding up determines when the winding up commences, the nature of the winding-up process depends on what it is that is being wound up’.54 In this regard, he pointed out the difference between winding up a trust and winding up a company: Where the scheme is a trust, what is envisaged by the winding up of a scheme is the realisation of its property, the payment by the responsible entity of liabilities incurred on behalf of the scheme or the retention by it of funds with which to meet its liabilities, the ascertainment of the members’ entitlements, and the distribution of the trust assets to the members in accordance with their entitlements. The winding up of a trust involves the performance of the trust, by the trustee’s accounting to the beneficiaries for trust property in accordance with the terms of the trust, and its termination. … Winding up a trust is quite a different thing from winding up a company: Horwarth Corporate Pty Ltd v Huie (1999) 32 ACSR 43; [1999] NSWSC 583. Because the scheme, where it is a trust, is not a legal entity, the expression ‘scheme creditors’ is at best a shorthand expression for those creditors of the responsible entity in respect of whose debts the responsible entity is entitled to be indemnified out of the scheme assets. There can be no question of settling an order of priority of ‘scheme creditors’, or of precluding ‘scheme creditors’ from taking or continuing proceedings for the recovery of their debts, or requiring them to submit to a process of lodgment [sic] of proof of debts with consequent appeals to the court from a decision on the acceptance or rejection of proofs.55

2.46 He also pointed to the extent of the statutory provisions governing the winding up of a company, and compared them with those governing the winding up of a trust:

The liquidation of a company is a matter governed by statute. Among other things, the statutory provisions for the winding up of companies regulate who may be appointed as liquidator (s 532), suspend the powers of officers

[page 20] of the company on the appointment of the liquidator (ss 471A and 495), oblige the directors to provide a report as to the company’s affairs to the liquidator appointed by the court (s 475), or to attach a statement of affairs to a declaration of solvency on a voluntary winding up (s 494), oblige officers of a company to deliver to the liquidator all books in the officers’ possession that relate to the company, and to comply with reasonable requirements of the liquidator (s 503A), empower the court to make orders for delivery of property to the liquidator (s 483), oblige the liquidator to report suspected offences in relation to the company (s 533), empower the liquidator to conduct examinations (ss 596A and 596B), regulate the liquidator’s conduct (ss 473, 479, 538, 539, 540), regulate claims that are provable in winding up, the calling for proofs of debt, the ranking of debts and claims, and provide for the stay of proceedings brought against the company being wound up in insolvency or by the court (ss 471B and 485 and Pt 5.6 Div 6). The Corporations Act makes none of these provisions applicable to the winding up of a scheme. Presumably this is because of the differences between winding-up companies and winding-up trusts or partnerships …56

2.47 His Honour observed that the Collective Investments: Other People’s Money report had proposed that many of the provisions applicable to corporate windings up and voluntary administration should be made applicable to collective investment schemes: … However, parliament did not act on these recommendations. Neither the second reading speech upon the Managed Investments Bill 1987 [sic], nor the explanatory memorandum, explains the reasons for this omission.57

2.48 Ultimately, White J dismissed the application. As to the conferral of the additional powers, he said that s 601NF(2) could not be used in the manner sought: … [Section 601NF(2)] doubtless empowers the court to give directions, where it is necessary to do so, on how the responsible entity is to exercise its powers in winding up the scheme. It authorises the making of directions of a kind which would be made in an administration suit for the purpose of settling the entitlements of members. But in my view, and notwithstanding the authorities under s 601EE(2), the subsection does not authorise the court to confer additional powers upon a responsible entity to which third parties would be made subject, or to interfere with the rights which third parties would otherwise enjoy. The fact that the power is to give directions indicates that it is one to direct the responsible entity in how to perform its functions and

obligations, not that it be the source of new powers. In this respect it differs from s 601EE(2).58

[page 21] 2.49 The question was one of parliamentary intention: In my view, parliament deliberately did not apply the regime for the winding up of companies to the winding up of registered schemes. It could have, but it did not, provide for the appointment of a liquidator to the affairs of a registered scheme, who is independent of the responsible entity. It could have, but it did not, make the provisions which regulate the winding up of companies applicable to the winding up of registered schemes, including, for example, the power to apply to the court for the issue of examination summonses. It did not give the court powers of the kind described in s 447A in relation to administrations and deeds of company arrangement. I do not read the power to give directions in s 601NF(2) in the wide way for which the plaintiff contends as, in effect, permitting the court, by order, to impose a new legislative regime on the winding up of a particular scheme, and thereby affecting the rights of and imposing duties on third parties.59

2.50 In Mier v FN Management Pty Ltd [2006] 1 Qd R 339, Keane JA also observed the parallels between winding up a scheme and winding up companies, partnerships or trusts. In that case, the Court had ordered (under s 601EE) that an unregistered managed investment scheme be wound up. His Honour, having referred to the characteristics of ‘winding up’ which McPherson SPJ had described in Re Crust ‘N’ Crumbs Bakers, said that ‘where a statute makes reference, without more, to the “winding up” of an entity, it is referring to the application of a procedure containing these essential characteristics’.60 2.51 As to the parallels with winding up companies, partnerships or trusts, Keane JA said: While it is true that the Act does not explicitly lay down a method for the winding up of an unregistered scheme it must be assumed that, in general, a court would be guided by analogies with the law relating to the winding up of companies, partnerships and trusts when deciding on the appropriate procedure for the winding up of a scheme. The best analogy would suggest the procedure to be followed. In my opinion, good reason should be shown before a court would make an order in the winding up of a scheme that did not have a precedent or parallel in the Act, partnership legislation or the law relating to the winding up of trusts. Of course, the best analogy might be thought to be the winding-up procedure applicable to a

registered scheme. Unfortunately for present purposes, the Act, beyond directing that a registered scheme be wound up in accordance with its constitution, also leaves the detail of the winding up of a registered scheme in the hands of the court, which may make such orders as it ‘thinks necessary to do so’.61

[page 22] 2.52 However, his Honour made two other important observations. The first concerned the implications arising from the different forms that schemes can take and the importance of identifying the relevant ‘scheme property’: The first point is that a scheme, unlike a company, need not involve the existence of a legal identity separate from that of its members. As I have mentioned, a ‘scheme’ might also take the form of, among other things, a trust. Those categories are not necessarily closed. Nevertheless, the Act postulates the application of the winding-up process to ‘the scheme’ regardless of what form the scheme might take. This postulate directs attention to the necessity to recognise that it is the scheme which is to be wound up, and, to that end, to identify the ‘property of the scheme’ which is to be realised and applied in the winding up. It may be, though it is unnecessary to decide for the purposes of this appeal, that the scheme in the present instance, having no capital fund and with the manager holding rental payments on behalf of each of the lot holders, bears a stronger resemblance to a trust than to a company. There are important differences between winding up a trust and winding up a company but, even if one were to be guided by the law of trusts rather than the Act, the first step is still to determine what is the scheme property to be collected and realised.62

2.53 The second point was to emphasise the statutory basis of winding up and the limits imposed by that source, both on the ‘liquidator’ and the Court: The second point to be made here is that the function of a liquidator in a winding up in relation to the assets of the scheme is the collection and realisation of the assets of the scheme as at the commencement of the winding up. A liquidator of an entity has no power, unless it is otherwise expressly conferred by statute, to collect and realise, on behalf of that entity, assets which are not the property of the entity for the simple reason that there would be no legal right in existence entitling the liquidator to do so. It follows that, under the Act, the liquidator of a scheme cannot be given the power to collect and realise, on behalf of the scheme members, assets to which the members of the scheme, as such, have no title right or interest.63

2.54 Similar observations were made by Austin J in Australian Securities and Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113:

Care must be taken to avoid any unreflective application of company law ideas to enterprises organised as managed investment schemes, whether registered or unregistered. As White J pointed out in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [41], the nature of the winding-up process depends on what it is that is being wound up. Thus, the winding up of a trust is quite a different thing from the winding up of a company,

[page 23] in terms of such matters as the rights of ‘scheme creditors’ and investors: Stacks Managed Investments at [42]–[44]; see also Mier v FN Management Pty Ltd [2006] 1 Qd R 339; (2005) 56 ACSR 93; [2005] QCA 408 at [20] per Keane JA. Other analytical frameworks apply to the winding up of a scheme based on partnership, and a scheme based on contractual arrangements. Sometimes the person appointed to wind up a registered or unregistered scheme is described as a ‘liquidator’, a title accurate enough to designate the function to be performed, but not to be confused with the liquidator of a company whose appointment carries with it the statutory consequences identified by White J: Stacks Managed Investments at [45]; see also Mier v FN Management per Keane JA, a case where a ‘liquidator’ had been appointed.64

2.55 In Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699, a case concerning the winding up of an unregistered managed investment scheme, Finkelstein J said: Whenever it is necessary to work out how to effect the winding up of an unregistered managed investment scheme, several questions will arise, viz: Precisely what is being wound up? What assets are to be collected and dealt with, whether by realisation or otherwise? Which creditors (if any) are to be paid out? How are the persons entitled to share in the scheme assets to be identified?65

2.56 In that case, the Court wound up only part of the overall scheme, leaving other agreements in place. Further, because it was ‘not a case where the appropriate mechanisms, whatever they may be, can be worked out by the parties themselves, or by their representatives’, the winding up needed to be administered by the Court. That was achieved by appointing a receiver. 2.57 In Re Environinvest Ltd; Shepard v Downey (2009) 69 ACSR 530, Judd J observed the differences between winding up schemes, trusts and partnership, and pointed out the importance of the scheme documents:

A crucial consideration in any application to wind up a scheme is to identify what is to be wound up. It is the scheme, not merely scheme property, that is the subject of the order. The scheme is not an entity. Although there are similarities, it is not the same process as terminating a trust or winding up a partnership. The scheme is defined by the constitution and project documents, which create relationships between the parties. The project documents include the leases, management agreements, powers of attorney and ‘any other documents required to be entered into by a Grower to hold an interest in the Project’. Add to that mix the ‘project property’ or ‘scheme property’, as defined in the constitutions, and the scheme begins to take shape as a series

[page 24] of agreements, arrangements and undertakings with defined relationships, objectives, inputs and outcomes. Thus, the scheme to be wound up includes, but is not limited to, scheme property.66

III.C.3. Other types of winding up regimes 2.58 Given the references, in the authorities discussed above, to the winding up of companies, trusts and partnerships, it is useful briefly to identify the principles attending those forms of winding up. III.C.3.1 Winding up companies 2.59 Statutory provisions for winding up companies are well known. They are to be found in Pt 5 of the Corporations Act. An idea of their breadth may be gleaned from the passage from Re Stacks extracted in para 2.46 above. III.C.3.2 Winding up partnerships 2.60 The dissolution of a partnership by a court is provided for by statute. 2.61 A partnership may be dissolved by the court: (a) when a partner is found to be mentally ill; (b) when a partner otherwise becomes permanently incapable of performing his part of the partnership contract; (c) when a partner ‘has been guilty of such conduct as in the opinion of the court regard being had to the nature

of the business is calculated to prejudicially affect the carrying on of the business’; (d) when a partner ‘wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him’; (e) when the business of the partnership can only be carried on at a loss; or (f) whenever ‘circumstances have arisen which in the opinion of the court render it just and equitable that the partnership be dissolved’.67 2.62 The statute provides:68 On the dissolution of a partnership every partner is entitled as against the other partners in the firm and all persons claiming through them in respect of their interests as partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm, and for that purpose any partner or his representatives

[page 25] may on the termination of the partnership apply to the court to wind up the business and affairs of the firm.

III.C.3.3 Winding up companies 2.63 There is no general or inherent power for a court to wind up a trust. Writing extra-judicially, Barrett JA has stated: Under the general law, there is no such thing as the winding up of a trust — if, by winding up, we mean a compulsory process which sees assets collected, claims ascertained and paid and any surplus passed to beneficiaries. A court of equity has no jurisdiction to put an end to a trust. On the contrary, it must protect and uphold a trust pending vesting of trust property in beneficiaries. There is valuable discussion of these matters in the recent judgment of Einstein J in Westfield Queensland No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd [2008] NSWSC 516.69

2.64 His Honour pointed out that managed investment schemes were an exception to this principle: ‘The registered scheme provisions change this. They make specific provision for the winding up of such a scheme …’70

2.65 In Westfield Queensland No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd (2008) 1 ASTLR 525; [2008] NSWSC 516, Einstein J accepted that Pt 54 of the Uniform Civil Procedure Rules 2005 (NSW) (concerned with the administration of estates and execution of trusts)71 did not provide a source of jurisdiction for an order in terms of the termination and winding up of trusts. He also held that s 81 of the Trustee Act 1925 (NSW), and its Victorian equivalent, s 63 of the Trustee Act 1958 (Vic), did not authorise the winding up of a trust since the jurisdiction depended on there being an absence of power in the trust instrument (the trust deed in the case contained specific provisions giving the trustee the power to wind up the trust). In any event, in the circumstances of the case, winding up could not be said to be expedient ‘in the management or administration of property vested in trustees’.72 2.66 Justice Barrett put the issue squarely in Re Gaydon [2001] NSWSC 473. Referring to the plaintiff having sought an order that the trust be dissolved, he said: Order 4 is framed upon some implicit assumption that the Court may, by order, dissolve a trust in the same way as it may, for example, dissolve a partnership (Partnership Act 1892, s 35). Any such assumption is, of course,

[page 26] unwarranted. It is the duty of the Court to uphold and protect trusts, not to destroy them, although where the terms of the trust envisage, in certain circumstances, realisation of property, winding up of the trust’s affairs and final payments to beneficiaries, the Court will, naturally enough, give effect to those ‘winding-up’ provisions. There are no such provisions in the instrument governing the Crane Trust. Thinking of the kind which sees an application of this kind made is fostered by the growing assimilation of certain kinds of trusts to companies. I refer, of course, to trusts governed by the provisions of the Corporations Law dealing with managed investment schemes. Part 5C.9 of the Corporations Law allows managed investment schemes to be wound up in various circumstances and creates certain powers which may be exercised by the Court in relation to such a winding up. But those provisions are irrelevant here. I mention them only to emphasise that, in the absence of applicable statutory powers, it is no business of the Court to act so as to put an end to a trust. Further insights into these matters may be obtained from the judgment of Young J (as he then was) in Horwath Corporate Pty Ltd v Huie [1999] NSWSC 583; (1999) 32 ACSR 413.

Termination of the Crane Trust, if it is to occur, is something which lies within the power of the beneficiaries, Mrs Rodgers and Mrs Flynn. Being sui juris and absolutely entitled, they can invoke the rule in Saunders v Vautier [1841] EngR 765; [1841] Cr & Ph 240 to put an end to the trust so that it can be regarded as fully administered and the plaintiff can be regarded as discharged. The Court could, of course, make a declaration that action of the beneficiaries of a trust directed towards its termination had been effective to achieve that end, assuming that appropriate evidence had been adduced. That, however, is not a matter currently before the Court.73

IV. Practical issues 2.67 The law governing the winding up of managed investment schemes has had several practical consequences. Some of these are discussed below. Before that, however, it is important to note that, although there are provisions for winding up a scheme by the Court (identified above), those have been seldom used, at least in the major collapses (e.g., Timbercorp, Great Southern, Willmott Forests and Gunns). 2.68 In those collapses, the responsible entity, together with the other companies in the relevant corporate group, went into voluntary administration. Receivers were also appointed. In circumstances where the schemes were not viable and/or the responsible entities lacked the funds to continue to operate them (and no alternative funding sources being available), the schemes needed to be ‘wound up’, using that term in a functional or de facto sense, that is, that assets were to be sold and the net proceeds distributed [page 27] to those entitled to them. In relatively few cases were the schemes the subject of formal winding up orders.74 2.69 Therefore, it should be appreciated that references to ‘insolvency’ in the context of the collapses of managed investment schemes are usually references to the insolvency of the responsible entity, rather than the scheme itself.75

IV.A. Who should be appointed and with what powers 2.70 There is a body of case law concerning who should be appointed to conduct the winding up of an unregistered scheme. Various options are available. They include appointment of the responsible entity, its management, the liquidator or administrator (as the case may be) of the responsible entity or an independent insolvency practitioner. The selection can be controversial. 2.71 In some cases, the scheme’s management has been allowed to conduct the winding up;76 in others, an independent insolvency practitioner has [page 28] been appointed.77 If an independent insolvency practitioner is appointed, there will be questions as to what form the appointment should take (for instance, should the person be appointed as a ‘liquidator’ or a receiver?), the scope of the appointee’s powers and the ability of the court to confer those powers.

IV.B. Identifying ‘scheme property’ 2.72 Responsible entities hold scheme property on trust: s 601FC(2) of the Corporations Act. Determining what is ‘scheme property’ can be difficult. 2.73 Sometimes, the transaction documents pertaining to the scheme seek expressly to define scheme property. Often, the number and complexity of these ‘scheme documents’ and the legal relationships and rights between the various parties (e.g., responsible entity, investor(s), lessors, managers, agents etc) leaves room for argument about what is — and is not — scheme property. That complexity can be compounded by the operation of the statutory definition of scheme property, set out above. 2.74 In Re Investa Properties Ltd (2001) 40 ACSR 124, Barrett J said

concerning the scope and operation of section 601FC(2): Implicit in what I have just said is the proposition that s.601FC(2) does not just specify the manner or capacity in which the responsible entity holds property independently vested in it but is, rather, a provision which establishes and maintains the connection between all property within the definition of ‘scheme property’ and the responsible entity. This seems to follow from the definition of ‘managed investment scheme’ (which contemplates a relationship between participants and a ‘scheme’), read in conjunction with provisions such as ss 601FB(1), 601FB (4)(a), 601FC(1)(i) and (j) and 601HA(a) and (c) which envisage for the responsible entity functions which could not be performed unless it was the owner of scheme property. In particular, the responsible entity could not appoint an agent to hold scheme property on its behalf unless it was, in a real sense, the legal owner of the property. Section 601FC(2) produces a legal result when two circumstances coincide. One is that a particular entity is the ‘responsible entity’ of a particular registered managed investment scheme. The other is that particular property is ‘scheme property’ of that scheme. The legal result of the coincidence of circumstances is that the entity holds the property and does so as trustee. The section could have said that if scheme property is held by the responsible entity, that entity holds it on trust for scheme members; or that such scheme property as is held by the responsible entity is held on

[page 29] trust for scheme members. It says neither of these things. It expresses itself to apply indiscriminately to property having such a connection with the scheme of which the entity is responsible entity as to make the property scheme property of that scheme. It declares in unequivocal terms that that property is held by the responsible entity and that it is held on trust for scheme members.78

2.75 The consequence can be that particular property can be scheme property notwithstanding that, on the terms of the transaction documents, it is not. Thus, even if the property is owned by other parties, it can constitute scheme property.79 2.76 The converse can also be true. In Treecorp Australia Ltd (in liq) v Dwyer (2009) 175 FCR 373, Gordon J explained that s 601FC(2) ‘does not necessarily apply to all property held by a responsible entity or used in the operation of a scheme’.80 Her Honour referred to the statement of Keane JA in Mier: It follows that, if property is to be considered ‘scheme property’, the property in question must have been contributed to the scheme or must have been obtained in

connection with such contributions. The absence of any such connection would make it doubtful that the property was really part of, or subject to, the scheme.81

2.77 Determining whether property has been ‘contributed to the scheme’ or ‘obtained in connection with such contributions’ can be difficult, time-consuming and expensive.

IV.C. Need for multiple applications to court 2.78 Where a company goes into voluntary administration or liquidation, it is not unusual for the relevant administration to be conducted without the involvement of a court. That is so even where a winding up has been ordered by the Court, and is conducted by the liquidator as the Court’s officer.82 To some extent, this is likely due to the existence of a detailed winding up regime, which is comprehensive, of longstanding provenance and familiar to [page 30] practitioners (both insolvency practitioners and legal practitioners) who work in the field. 2.79 The same cannot be said in respect of a managed investment scheme in circumstances of insolvency. There, such applications are common. 2.80 Perhaps the best illustration of that point is provided by several applications concerning the sale of assets comprising the property of managed investment schemes. These might be described as a form of ‘ad hoc’ or de facto winding up in the sense described above. They entail a two-step process: (a) The first step involves the liquidators or receivers of the responsible entity applying to the Court for directions that they are justified in selling the assets.83 Such applications are often driven by concerns that the applicants are in a position of conflict as between their duties to the responsible entity and its creditors, and their duties (as officers of the responsible entity) to the members of the scheme. The applications are supported by

voluminous evidence about marketing, sales processes, valuations, prices, offers, etc. They are made on notice to interested parties — such as liquidators and receivers of the responsible entity (i.e., where the other is the moving party on the application), creditors (including secured creditors), and scheme members. Each is inevitably represented at the relevant hearing and arguments are advanced for and against the proposal. Material is often filed in opposition to the application. The judge writes a judgment. The usual outcome is that the Court makes the direction that the applicants are justified in selling the asset. Often, it requires the sale proceeds be set aside pending a determination of what parties are entitled to the proceeds, and in what proportion. (b) The second step involves the parties coming again before the Court, to make arguments as to how the proceeds should be apportioned. Most often, however, reasons of practicality have intervened and agreement reached as to apportionment, obviating the need for a second hearing. 2.81 The time, expense and effort involved in such applications are extraordinary. 2.82 There are other examples. In the absence of relevant statutory provisions, matters which would be mundane in a company winding up are often the subject of applications when they concern a managed investment scheme. Examples include matters as diverse as disclaimer of property and the approval of remuneration. In illustration, Gordon J has written more than 20 judgments on various aspects and applications concerning the winding up [page 31] of schemes associated with Mark Letten (dealt with further in chapters 8 and 13 of this book).

IV.D. ‘Growers’ groups’

2.83 In the context of applications to court, the phenomenon of ‘growers’ groups’ should be noted. 2.84 These are groups organised to represent the investors in schemes. Often, they are formally incorporated under associations incorporation legislation. Courts have given such groups standing to be heard in relation to various applications, and they have performed useful roles as contradictors.84 Usually, there is only one such group but sometimes there have been rival groups, appearing in the same proceeding but contending for opposite positions.85 2.85 There may be several reasons for the establishment of such groups. But their formation must be attributable, at least in part, to the absence in the statutory regime of mechanisms (such as creditors’ committees, committees of inspection, reporting obligations and requirements concerning meetings) concerned to achieve representation of stakeholders.

IV.E. Allegations that PDSs are misleading 2.86 An offer of an interest in a managed investment scheme is required to be the subject of disclosure. The relevant disclosure must take the form of a PDS. The requirements for the contents of PDSs are set out in Pt 7.9 Div 2 of the Corporations Act. Part 7.9 Div 7 Subdiv B is concerned with civil liability for such disclosure statements. Section 1022B gives a civil action for loss or damage, including where a person gives a disclosure statement that is ‘defective’. The meaning of ‘defective’ is given in s 1022A. 2.87 The collapse of managed investment schemes has seen a proliferation of litigation by investors claiming to have been misled by the PDS relating to the scheme. Because of the numbers of investors involved, such claims are often the subject of class actions or group proceedings (in respect of which see chapter 10 of this book). For present purposes, at least four features of such investor litigation call for remark. 2.88 First, the litigation is often ‘defensive’ in the sense that the investors’ principal objective is usually not to recover the investment

but to avoid the borrowing liabilities incurred in making it. Most often, and no doubt because [page 32] of the taxation advantages, investors had borrowed to invest. Borrowings were usually from an ‘in-house’ financier, that is, another member of the corporate group of which the responsible entity was a member, the sole business of which was to fund investment in schemes promoted by the group. Regularly, these loans were later assigned to third parties. Sometimes, the loans were from an external financier, which entered ‘origination’ arrangements with the inhouse financier. Following the collapse of the relevant scheme, the investors have been left with an investment having little or no value, but are still obliged to service the borrowings. This reality affects not only the purpose of the litigation but how it is conducted. Plaintiffs have found it difficult to obtain litigation funding for class actions because there is no ‘pot’ of money to recover if they succeed. Further, the involvement of financiers means that there are more defendants and increased complexity in the litigation, particularly as investors need to find ways of fixing liability for the promotion of the scheme to the financiers. 2.89 Second, investors’ claims are often raised by way of counterclaim or cross-claim in proceedings in which the particular investor has been sued by the financier. Accordingly, relatively simple debt recovery matters, often involving less than a few hundred thousand dollars, quickly become complicated pieces of commercial litigation. In a single case, that consequence may be unremarkable. However, when the number of debt recovery proceedings on foot is taken into account, the effects can be considerable. A financier’s ‘book’ may include hundreds of such loans, and each debtor seeks to raise similar — or, worse, slightly different — arguments about why he, she or it should not be liable to repay the loan. Where the relevant scheme is the subject of a class action, courts have stayed these individual recovery proceedings,

pending the outcome of the class action. Where there is no class action, there is no simple way to corral or consolidate the proceedings, resulting in duplication, increased costs and longer court lists. 2.90 Third, there are several unresolved issues concerning the interplay between Ch 5C of the Corporations Act, the disclosure provisions and other statutory provisions concerned with misleading and deceptive conduct. Chapter 5C is concerned with managed investment schemes. It imposes duties on responsible entities and their directors. PDSs are governed by Ch 7.9, which contains s 1022B governing liability for a defective disclosure statement. At the same time, the Corporations Act and the ASIC Act contain prohibitions on misleading and deceptive conduct. Investor litigation arising from the collapse of managed investment schemes has exposed tensions as to how these provisions interact. 2.91 Finally, there is the time necessary to hear and determine the class actions. The trial of the Timbercorp class action lasted some 24 sitting days. The trial of the 16 class actions (and several related individual proceedings) concerning Great Southern schemes took almost a full calendar year. [page 33]

IV.F. Difficulty in restructuring 2.92 Restructuring a managed investment scheme is notoriously difficult. There is no regime equivalent to the voluntary administration or scheme of arrangement regimes that applies to corporations. Restructuring is further complicated by difficulties in replacing a responsible entity, caused in part by s 601FS which imposes the liabilities and obligations of the former responsible entity on the new one. Those matters are dealt with in detail in chapters 5 and 6 of this book.

IV.G. Outcomes for investors

2.93 The rights of investors in insolvent managed investment schemes are dealt with in chapter 9 of this book. For the present, it can be observed that, on the whole, investors in managed investment schemes – at least ones in the agricultural sector – have not been well served by the various court proceedings that have accompanied collapses. 2.94 While several class actions still await determination or hearing,86 the early outcomes for investors are not encouraging. Investors lost the Timbercorp class action,87 and were unsuccessful on appeal.88 While the Great Southern actions were settled, it was clear that the investors would also have lost.89 Relief in the type of applications referred to in para 2.80 above is often granted over the objections of investors.

V. Conclusion 2.95 Managed investment schemes have not coped well with the challenges of insolvency. That is largely due to the absence of a comprehensive regime governing how schemes should be wound up. As one commentator has put it: [I]t has become clear that when a scheme has failed and needs to be wound up, there is considerable uncertainty relating to how this occurs and the courts have had to muddle through using a mixture of corporations law,

[page 34] trust law and the provisions of particular scheme constitutions in order to effect ad hoc windings up.90

2.96 The regime does not envisage circumstances of insolvency. The point has been made neatly by CAMAC: The procedures for the winding up of a scheme that were introduced in 1998 primarily envisage the winding up of solvent schemes, with the RE conducting the winding up, though the court has a power to order a winding up on the ‘just and equitable’ ground and to ‘appoint a person to take responsibility’ for the liquidation of a scheme if the court ‘thinks it necessary to do so’. Historically, little consideration was given to the winding up procedures for insolvent schemes, particularly when they were more in the nature of pooled schemes

involving securities or other investment portfolios, with no significant creditor involvement. Pooled schemes of this nature were more likely to lose value and be wound up for that reason, rather than be unable to meet the claims of creditors as they became due and payable. However, the approach in Australia over more recent years, driven in part by taxation considerations and the growth of superannuation funds under management, has been to expand the role of schemes, with some of them becoming significant commercial enterprises in their own right, with external financing or other creditors. There is no detailed procedure in the current law for the winding up of these types of schemes if they become insolvent.91

2.97 Not all the practical difficulties identified in this chapter stem from the absence of a winding up regime for managed investment schemes.92 However, almost all of them stem from the legislative regime that governs such schemes, its failure to anticipate the challenges of insolvency, and its consequent failure to provide for them. 1. 2. 3. 4.

5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16.

Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012), at para 2.1. The report is available at . Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes (2009) at [2.5]. ASIC’s overview, referred to in report cited in n 2 above. Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012). CAMAC reports, at para 2.1, that approximately 68% of listed schemes are real estate investment trusts (REITS), with the remainder being infrastructure trusts, exchange-traded funds and listed investments trusts. Joint Parliamentary Committee on Corporations and Financial Services, Report on the Managed Investments Bill 1977 (1998) at para 1.1. Definition of ‘managed investment scheme’, Corporations Act, s 9. Corporations Act, s 601FB. Corporations Act, s 601GA. Corporations Act, ss 601FA(1)(c), 601FD(1)(c). Corporations Act, s 601FC(2). Definition of ‘scheme property’, Corporations Act, s 9. H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporation Law, LexisNexis Butterworths Australia, 1995, looseleaf, at [22.470.3], quoted in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [24]. Ford, Austin and Ramsay, above n 12. Ford, Austin and Ramsay, above n 12. Corporations Act, s 601NA. Corporations Act, s 601NB

17. 18. 19.

20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

31. 32. 33.

34. 35.

36.

37. 38. 39. 40. 41.

Corporations Act, s 601NC Corporations Act, s 601ND. In this chapter, ‘Court’ has the meaning given to the capitalised expression by s 58AA of the Corporations Act. Corporations Act, s 601ND(1)(a). An order on the ‘just and equitable’ ground may be made on the application of the responsible entity, a director of the responsible entity, a member of the scheme, or ASIC: s 601ND(2). Corporations Act, s 601ND(1)(b). An order on the ‘unsatisfied execution or process’ ground may be made on the application of a creditor: s 601ND(2). Corporations Act, s 601NE(1). ‘The responsible entity of a registered scheme must ensure that the scheme is wound up in accordance with …’ Corporations Act, s 601NF(1). Corporations Act, s 601EE(1). The circumstances in which a scheme is required to be registered are set out in s 601ED. Corporations Act, s 601EE(2). Part 7.12 was concerned with offering securities for subscription or purchase. P Hanrahan, Managed Investments Law, Centre for Corporate Law & Securities Regulation and CCH Australia Ltd, 1998 at p 3. Parliamentary Joint Committee on Corporations and Financial Services, Report on the Review of the Managed Investments Act 1998 (December, 2002) at para 2.2. The terms of reference are set out on pp xv–xvi of the Collective Investments: Other People’s Money report, referred to in n 30 below. Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Superannuation, Report No 59 (April, 1992). Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Other People’s Money, Report No 65 (June, 1993). An issues paper and a discussion paper were released prior to the final report: Collective Investments (ALRC IP 10) and Collective Investment Schemes (ALRC DP 53). Above, n 30, at para 8.8. Above, n 30, at para 8.8. The draft Bill proposed the enactment of the ‘Collective Investment Schemes Act’. The draft was included in Vol 2 of Collective Investments: Other People’s Money report (June, 1993). Above, n 30, at para 14.1. Above n 30, at para 8.13. The proposed legislation would have inserted a Pt 5.3B into the Corporations Law — ‘Administration of the affairs of a collective investment scheme with a view to executing a deed of arrangement’ — closely modelled on the voluntary administration regime (Pt 5.3A). The draft Bill and commentary was published as a book by CCH: Collective Investments: Proposed Amendments to the Corporations Law for the Regulation of Collective Investment Schemes: Draft Bill and Commentary, CCH Australia Ltd, NSW, 1995. Above n 36, at p 2. Above n 36, at p 2. Ford, Austin and Ramsay, above n 12, at [22.470.9]. Hanrahan, above n 26, at p 5. Commonwealth Department of Treasury, Financial System Inquiry: Final Report, (March, 1997) at para 11.2.4.

42. 43.

44. 45. 46.

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67.

Joint Parliamentary Committee, Report on the Managed Investments Bill 1997 (1998). The request was prompted by an amendment to the Managed Investments Bill 1997 that the Australian Democrats had proposed during debate in June 1998. In August 1984, the Companies and Securities Law Review Committee had written to the Ministerial Council, requesting a legislative amendment to limit the liability of all unit holders in public unit trusts, similar to that which applies to the holder of unpaid shares (Corporations Act, s 516). The Hon Joe Hockey, Minister for Financial Services and Regulation, ‘Review of the Managed Investments Legislation’ (Media release, 6 August 2001). The Hon Ian Campbell, Parliamentary Secretary to the Treasurer, ‘Review of the Managed Investments Act 1998’ (Media release, 19 December 2001). Department of the Treasury, ‘Managed Investments Act 1998 Consultation Paper’ (2002). The author of this chapter has not been able to ascertain what became of the Treasury consultation process. Parliamentary Joint Committee on Corporations and Financial Services, Report on the Review of the Managed Investments Act 1998 (12 December 2002), para 3.33. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry on Aspects of Agribusiness Managed Investment Schemes (2009). See Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012) at p 2. Above n 49, at pp 3–4. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the collapse of Trio Capital (May, 2012). Re Crust ‘N’ Crumbs Bakers (Wholesale) Pty Ltd [1992] 2 Qd R 76; (1991) 5 ACSR 70 at 72. Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167 at 176–7 per Lord Diplock. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [41] (emphasis added). Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [42], [44]. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [45]–[46]. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [46]. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [52]. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [55]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [16]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [18]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [20]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [21] (citations omitted). Australian Securities and Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113; [2006] NSWSC 943 at [18]. Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699; 60 ACSR 447; [2006] FCA 1415 at [21]. Re Environinvest Ltd; Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33 at [76]–[77]. Partnership Act 1958 (Vic) s 39. The equivalent provision in New South Wales is Partnership Act 1892 (NSW) s 35.

68. 69. 70. 71. 72.

73. 74.

75.

76.

77.

78. 79. 80.

Partnership Act 1958 (Vic) s 43. The equivalent provision in New South Wales is Partnership Act 1892 (NSW) s 39. R I Barrett, ‘Insolvency of registered managed investment schemes’ (Paper, Banking and Financial Services Law Association, Queenstown, New Zealand, 2008) at p 3. Above n 69. The equivalent in Victoria is O 54 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic). Westfield Queensland No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd (2008) 1 ASTLR 525; [2008] NSWSC 516 at [56], citing, among other authorities, Riddle v Riddle (1952) 85 CLR 202 at 214 per Dixon J. Re Gaydon [2001] NSWSC 473 at [29]–[31] (emphasis added). One such case is Re Environinvest Ltd: Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33, where Judd J ordered, on the application of Environinvest’s receivers, that the scheme be wound up. His Honour proposed, at [33], that an independent insolvency practitioner be appointed to be the liquidator of the schemes. As it happened, there was great difficulty in finding an appropriate person. Eventually, Environinvest’s liquidator accepted the appointment as the person responsible to wind up the schemes, and he was appointed. Because his dual positions exposed him to risk of conflict, a committee of management was established and procedures implemented to ensure that, where necessary, the Court could supervise and, if necessary, approve his conduct: see Re Environinvest Ltd v Great Southern Property Managers (No. 2) [2010] VSC 323 and Re Environinvest Ltd (No. 3) [2010] VSC 301. Although that is not to say that schemes are not also ‘insolvent’ in the sense that the liabilities referable to them cannot be satisfied as they fall due from their income or readily realisable assets: see Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at [93]. See Re Lawloan Mortgages Pty Ltd [2003] 2 Qd R 200; [2002] QSC 302 (although the management was to be supervised by accountants); Australian Securities & Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd (2003) 47 ACSR 52; [2003] QSC 265; Australian Securities & Investments Commission v Young (2003) 173 FLR 441; 21 ACLC 655; [2003] QSC 29; Australian Securities & Investments Commission v Mount Warren Park (Nominees) Pty Ltd (2005) 56 ACSR 43; [2005] QSC 326; Lake Coogee Estate Management Pty Ltd v ASIC [2007] FCA 692. However, in Australian Securities and Investments Commission v Takaran Pty Ltd (No 2) (2002) 194 ALR 743; [2002] NSWSC 987, Barrett J, at [15], said this should occur only in ‘exceptional circumstances’. In Australian Securities & Investments Commission v Tasman Investment Management Ltd (2004) 50 ACSR 153; [2004] NSWSC 651 at [32], Barrett J identified the several factors relevant to deciding whether to allow management to undertake the winding up. See e.g. Australian Securities & Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778; [2001] WASC 27; Australian Securities & Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310; Australian Securities & Investments Commission v IP Product Management Group Pty Ltd (2002) 42 ACSR 343; [2002] VSC 255; Cumulus Wines Pty Ltd v Huntley Management Ltd (2004) 50 ACSR 58; [2004] NSWSC 609. Re Investa Properties Ltd (2001) 40 ACSR 124; [2001] NSWSC 1089 at [13]–[14] (emphasis added). See e.g. Pyrenees Vineyard Management Ltd v Frajman (2008) 69 ACSR 95; [2008] VSC 552 at [37]. Treecorp Australia Ltd (in liq) v Dwyer (2009) 175 FCR 373; 71 ACSR 127; [2009] FCA 278

81. 82.

83.

84.

85.

86.

87. 88. 89.

90. 91. 92.

at [42]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at [27]. That is not to say that the Court does not maintain a supervisory jurisdiction. To the contrary, the Corporations Act contains numerous provisions by which aspects of the external administration — whether complaints about the insolvency practitioner’s conduct, questions arising in the administration, or disputes between the insolvency practitioner and creditors or the like — may be brought before the Court. See, e.g., Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 per Robson J concerning Timbercorp almond schemes; Re Timbercorp Securities Ltd (in liq) (No 4) [2009] VSC 530 per Croft J concerning Timbercorp olive schemes; Re Timbercorp Securities Limited (in liq) [2009] VSC 590 per Davies J, also concerning Timbercorp almond schemes. In Re Environinvest Ltd (No 3) [2010] VSC 301, Judd J approved the asset sale deeds, and the apportionment for which it provided, in a single application. In the Willmott administration, Willmott Growers Group Inc was the (unsuccessful) appellant to the High Court: Willmott Growers Group Inc v Willmott Forests Ltd (rec & man app) (in liq) (2013) 251 CLR 592; 304 ALR 80; [2013] HCA 51. For example in Commonwealth Bank of Australia v Fernandez (2010) 81 ACSR 262; [2010] FCA 1487, an application to remove an administrator appointed to companies in the ‘Willmott Forests’ group, growers were represented by Willmott Growers’ Group Inc, which supported the removal, and Willmott Action Group Inc, which opposed it. Several class actions concerning the Willmott Forests schemes are pending in the Federal Court. At the time of writing, ‘in principle’ settlements had been agreed, but are yet to be documented, let alone approved by the Court. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011); 85 ACSR 354; [2011] VSC 427. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2013) 96 ACSR 307; [2013] VSCA 284. See Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (receivers and managers appointed) (in liquidation) [2014] VSC 516. Although that judgment was concerned with the approval of a settlement, Croft J (who heard the approval application and had been the judge who heard the trial of the class actions) made it clear that the plaintiffs would have lost the class actions. He annexed the reasons that he had completed and, but for the settlement, would have delivered in the class actions proceedings. P Hoser, ‘Managed investment schemes — the next big thing’ (2012) 13(2) Insolvency Law Bulletin 26 at 26. Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012) at para 2.6. For instance, the difficulties concerning identification of ‘scheme property’ and the difficulties concerning investor litigation.

[page 35]

3 DUTIES OF DIRECTORS OF MANAGED INVESTMENT SCHEMES Ian Martindale and Robert Strong Ian Martindale is a barrister at the Victorian Bar. He practises in commercial law. Robert Strong is a barrister at the Victorian Bar. He practises in commercial law.

I. Introduction 3.1 Chapter 5C of the Corporations Act imposes certain structural features on a registered managed investment scheme.1 The key feature is that the scheme must be operated by a public company with an Australian financial services licence.2 While it is not mandatory that a managed investment scheme be organised as a trust, it is likely that almost all of them are.3 In any event, every RE is a trustee of the scheme property by virtue of the Corporations Act.4 3.2 The Corporations Act imposes a collection of duties on the RE, many of which are derived from and give effect to the ordinary duties of a trustee in equity. The directors of the RE therefore have the management of a corporation which has a particular function and specific statutory duties, all of which must, as part of the legal environment in which they exercise their [page 36]

powers, inform the content of their duties under Chapter 2D (ss 180– 183) of the Corporations Act to the RE as a corporate entity.5 3.3 Those same directors are also charged with duties under Chapter 5C, which in a number of respects mirror the duties of the RE, and which prevail over any conflicting duty of the directors under Chapter 2D.6 3.4 This brief sketch of the legal landscape gives some indication of the complexities involved in an appreciation of the duties of the directors of an RE. The issues involved can arise in the case of insolvent investments where the RE has incurred liabilities to members that it is unable to satisfy arising from a breach of its statutory duties under Chapter 5C. In such a case, attention will most likely turn to whether the directors of the RE are liable to the RE for the consequences of the RE’s contraventions. 3.5 This chapter will first examine the impact of the Chapter 5C duties of the RE on the Chapter 2D duties of the directors. Secondly it will consider the scope of the duties of the directors under Chapter 5C. Finally the chapter will discuss the remedies (if any) which might be available to members of a scheme against directors of the RE.

II. Duties of the RE 3.6 The duties of the RE are set out in s 601FC(1) of the Corporations Act. At this stage it is sufficient to notice them, and their content will be dealt with in more detail later. They include a number of duties that might be described as traditional trustee duties — a duty of care and diligence, a duty to act honestly, a duty to act in the best interests of the members and to prefer their interests over its own, a duty to treat the members equally or fairly, a duty not to make improper use of information acquired as RE to gain an advantage for itself or for another person, a duty to keep the scheme property separate from other property and regularly valued and to ensure that all payments out of scheme property are made in accordance with the scheme constitution, and to comply with any other duties imposed by the constitution.7 3.7 The duties of the RE also include a number of obligations

arising out of the other provisions of Chapter 5C: a duty to ensure that the scheme’s constitution and compliance plan meet the requirements of the Corporations Act,8 a duty to comply with the compliance plan9 and a duty to report to ASIC any breaches which have a materially adverse effect on the interests of members.10 There is no explicit duty to comply with the [page 37] scheme constitution. The ALRC recommended against this because it was felt inappropriate to incorporate into statute law an obligation to comply with a private agreement.11 The scheme constitution is required to be in a document that is legally enforceable between the members and the RE,12 and this is one of the requirements of the Corporations Act that the RE must ensure is met by the scheme’s constitution. 3.8 In her analysis of the position of the RE as trustee, Professor Hanrahan commences with the assumption that the ordinary equitable duties of the RE co-exist with its statutory duties, except to the extent that they have been modified or excluded by the statute.13 The ordinary equitable duties of a trustee are neither expressly preserved or expressly overridden by Chapter 5C.14 The proposition that they co-exist with the statutory duties is neither obvious nor simple to analyse. 3.9 In Re Mirvac Ltd (1999) 32 ACSR 107, Austin J held that s 601FC(2) constituted the RE of the schemes before him a trustee within the meaning of the Trustee Act 1925 (NSW). His Honour saw ‘nothing in Ch 5C of the Corporations Law to suggest that it is intended to exclude the court’s jurisdiction to provide judicial advice to the responsible entity under general trustee legislation.’15 In Re Investa Funds Management Limited (2001) 40 ACSR 124, Barrett J regarded s 601FC(2) as a statutory vesting provision by which anything within the meaning of ‘scheme property’ vested in the RE by force of the section.16

3.10 If the issue of the extent of the RE’s duties arises in federal jurisdiction, either because the statutory duties are also invoked or because s 601FC(2) is the source of the obligations, then the law to be applied is determined in accordance with s 80 of the Judiciary Act 1903 (Cth), which calls for the common law (as modified by the statute law of the relevant state) to be applied in all cases in federal jurisdiction ‘so far as the laws of the Commonwealth are not applicable or so far as their provisions are insufficient to carry them into effect’, except to the extent that it is ‘inconsistent with the Constitution and the laws of the Commonwealth.’ It is beyond the scope of this chapter to investigate the meaning of s 80, but it must be arguable that the duties of REs prescribed by s 601FC(1) are intended to be an exhaustive statement on the subject. If so, then the common law may be inconsistent to the extent that it prescribes further or broader duties. [page 38] 3.11 To a large extent the point may be moot because, if the general equitable duties remain applicable, they can and frequently will be displaced by the constitution of the scheme. In Wellington Capital Ltd v ASIC (2014) 314 ALR 211, the plurality of the High Court noted that public unit trusts attracted the same caution as other ‘commercial trusts’ in that specialist rules developed in relation to traditional trusts, as distinct from basic principles of trust law, may have no application. Thus: To the extent that the relationship between the responsible entity and the members is governed by contract, the content of the powers and duties of the responsible entity will be determined by reference to the contract and its statutory setting.17

At the same time, the plurality pointed out that s 601FC(2) creates:18 … a layer of fiduciary protection for scheme members in addition to the express duties and protections otherwise created by the Corporations Act and the minimum statutory requirements of a scheme constitution.

III. Liability of the RE

3.12 There are two principal sources of liability for an RE arising from a contravention of Chapter 5C, including a breach of the duties in s 601FC(1).19 3.13 The first is a consequence of the fact that certain contraventions of Chapter 5C are ‘civil penalty provisions’.20 So far as the RE is concerned, these are s 601FC(3), dealing with a breach of the statutory duties, and 601FG, dealing with the way in which an RE can acquire and hold interests in the scheme. Each of these is defined in s 1317DA of the Corporations Act as a ‘corporation/scheme civil penalty provision.’ That classification engages the power to make a compensation order under s 1317H, by which a person may be ordered to compensate a scheme for damage resulting from the contravention. If the RE is the person so ordered, it must transfer the amount of the compensation to scheme property. Standing to make an application for a compensation order is limited to ASIC and the RE.21 3.14 In addition to the possibility of a compensation order, an RE in breach of these provisions may also be subject to a declaration of contravention and a civil penalty order of up to $200,000 per contravention.22 3.15 The second principal source of RE liability is s 601MA, which creates a cause of action for any member of a scheme to recover from the RE loss [page 39] or damage suffered because of the RE’s contravention of any provision of Chapter 5C. 3.16 The potential for exposure to these liabilities is part of the business environment in which a company operating a registered managed investment scheme conducts its business.

IV. Corporate duties of the RE directors: s 180

3.17 As will be seen later in this chapter, the officers of an RE have statutory duties under Chapter 5C23 which are no less onerous than the duties of the officers of an ordinary corporation and in many ways considerably more so. It is reasonable, then, to question whether their corporate duties as directors of the RE have any great part in this legal landscape. 3.18 If an RE has contravened a provision of Chapter 5C as a result of a breach by its directors of their Chapter 2D duties, it is most likely that the directors would also be in breach of their Chapter 5C duties to take all reasonable steps to ensure that the RE complied with the Act, the constitution or the compliance plan.24 3.19 The scheme of Chapter 5C, at least, is that the liability of the directors for the breach of their Chapter 5C duties is limited to the consequences of a breach of a civil penalty provision. That is, they may face a civil penalty order and/or an order to compensate the scheme.25 3.20 However, the RE may be ordered to pay a civil penalty; it may be ordered to compensate the members under s 601MA; or it may compensate the scheme for the breach (with or without an order). In each of these circumstances a compensation order against the directors under s 1317H would not provide the RE with a route to recovery from the directors. 3.21 It is in this area that the corporate duties of the directors may assume significance. 3.22 The intersection between a breach of the law by a company and the duties of directors of the company arose in ASIC v Maxwell (2006) 59 ACSR 373. In that case, Brereton J came to the following conclusions: There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark

[page 40] on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. … Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the more so since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors’ duties — and, in particular, of their duty of care and diligence — depends upon an analysis of whether and to what extent the corporation’s interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them.26

3.23 His Honour’s reasoning to this conclusion commenced with the observations of Ipp J in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 to the effect that it was a necessary but not a sufficient requirement of a breach of a director’s duty of care and diligence that the company was exposed to a foreseeable risk of harm: to constitute a breach, this risk must in fact outweigh the reasonably anticipated benefits to be gained.27 Later, in Vines v ASIC (2007) 73 NSWLR 451, each member of the New South Wales Court of Appeal agreed with this approach.28 3.24 In ASIC v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69, Goldberg J found that the defendant had contravened s 180(1) by causing the company to contravene s 1041H of the Corporations Act in making a misleading statement to the ASX. His Honour applied Brereton J’s analysis from Maxwell and said that the case before him was one of the cases within the first paragraph cited above, where there was no countervailing benefit of any significance to the company in what was done.29 3.25 Language of this kind begins to suggest that the court is to engage in weighing up the potential risks and potential rewards of decisions by directors. Where the business judgment rule in s 180(2) is engaged, a director could achieve some protection from the results of such a process by the court. But generally speaking, this is not an

approach that is likely to be applied to decisions about investments or other business ventures. As McDougall J said: It is necessary to balance risk and reward, or, more accurately, to be satisfied that the directors, acting reasonably and in the best interests of

[page 41] the company, and employing their individual knowledge and skills, and taking account of relevant circumstances, did so.30

3.26 In the case of rather more administrative/regulatory matters such as announcements to the ASX, (as in Citrofresh), it can be obvious that the risks outweigh the countervailing benefits. In cases where Maxwell has been applied, the court has found, like Goldberg J, that there was in fact no or an insufficient countervailing benefit in the breach of the Corporations Act and that the defendants had contravened s 180(1)31 by causing or permitting the company to contravene the Corporations Act. 3.27 The administrative/regulatory field of activity can be quite extensive for a company which is the RE of a scheme, or even an ordinary trustee. An example is provided by the decision of Robson J in Re S & D International Pty Ltd (No 4) (2010) 79 ACSR 595. The company was the trustee of a unit trust. One aspect of a very complicated dispute involved the company mortgaging a property that it held on trust and using the proceeds with some other funds to make a loan to one of the directors. Robson J found that the company entered into this transaction in breach of its duties as trustee. A number of claims were made against the other director (the son of the recipient of the loan) including a claim for breach of his duties under ss 180, 181 and 182 of the Corporations Act. The loss to the company occasioned by the breach was the amount which the company had come under a liability to restore to the trust fund because of the breach. In relation to s 180, Robson J applied ASIC v Vines (2005) 65 NSWLR 281 and Vrisakis v Australian Securities Commission (1993) 9 WAR 395, holding that: As indicated above, it is necessary to assess what were the reasonably foreseeable

benefits to S&D and what was the reasonably foreseeable risk of harm and to then ask the question — what could an ordinary person with the knowledge and experience of the defendant have been expected to do in the circumstances if he was acting on his own behalf? In this instance, S&D acted as a trustee of the Unit Trust and the best interests of the company were clearly to act properly in accordance with the Unit Trust. In other words, to ensure that the Trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust. … What prospective benefit was there to the company as trustee in entering into these transactions? What was the reasonably foreseeable risk of harm? Mr Tiwari contends the benefit to S&D of the mortgage was to borrow $200,000 to discharge the debt owed to Sheela Tiwari by S&D as trustee. As it was that debt was only $137,000 at the most. In my opinion a

[page 42] reasonable person acting on their own behalf would not have entered into the transaction. The benefits to the company were little, if any. The risks were not insignificant.32

3.28 In Agricultural Land Management Ltd v Jackson (No 2) (2014) 98 ACSR 615 the plaintiff company was the RE of a registered managed investment scheme. The directors caused it to enter into a related party transaction without obtaining member approval. The transaction proved to be unprofitable. Many claims were made as a result. One group of claims was that the directors of the RE had failed to take all reasonable steps to cause the RE to comply with the Corporations Act and the scheme’s compliance plan, and in consequence failed to perform the duty s 601FD(1)(f). This was also alleged to be a contravention of ss 180 and 182 of the Corporations Act and a breach of their equitable duties to the company. 3.29 The directors admitted that they had not performed the duty under s 601FD(1)(f). Edelman J dismissed the claims for breach of the equitable duties and contraventions of s 182 on the basis that there had been no detriment to the company (the subsequent losses not being causally connected to the breach) or profit to the directors. However, he considered that they were in contravention of s 180 for failing to take all steps that a reasonable person would take to ensure that Agricultural complied with s 208(1) of the Corporations Act.33 In

coming to this conclusion his Honour observed that loss was not an essential element of a contravention of s 180. He did not specifically consider the question of risk of harm and countervailing benefit. Perhaps it went without saying that there was no benefit to the RE in failing to comply with s 208(1). 3.30 Interesting questions remain as to how far the balancing exercise can be taken when considering a director’s responsibility for a breach of the Corporations Act. ASIC v Cassimatis (2013) 220 FCR 256 is a proceeding arising out of the collapse of Storm Financial Limited (Storm) in which ASIC is seeking declarations of contravention and other orders against Mr and Mrs Cassimatis who were the principals of Storm. ASIC has apparently made many allegations of such breaches founded on an unjustified exposure of Storm to the risk of harm flowing from breaches of the Corporations Act. In a summary judgment application before Reeves J, the defendants argued, inter alia, that the possible harm to Storm flowing from the breaches of the Corporations Act was offset by the significant revenue Storm derived from selling its advice. In dealing with this submission, Reeves J said: Whether financial benefits of this kind can be offset against a possible breach of the law seems to me to offend public policy. It would, for example, mean that a director that causes a company to infringe another’s copyright could point to the significant profit made from the infringement to avoid

[page 43] liability under s 180(1). Moreover, it raises the question whether a director of a director/shareholder company risking the property of the company (as, for example, in Angas[34]) can be treated in the same way as a director who engages in conduct which involves the risk of the company breaching the Corporations Act (as, for example, in Maxwell). If this distinction is valid, there may be much to be said for Mr Flanagan’s submissions that s 180(1) sets a minimum standard of conduct for directors in the latter situation quite divorced from any accessorial liability they may have for the company’s breaches of the Corporations Act.35

3.31 His Honour declined to decide the point on a summary judgment application. The point arises in any context where there is a capacity for a corporation to profit by a breach of the law. In the

context of managed investment schemes this context is often present because of the potential for the interests of the members and the RE to conflict so that, for example, the RE may well profit from a breach of its duty to prefer the interests of the members. But there are many other areas where it is difficult to see that there would be substantial countervailing benefits to an RE flowing from a failure to comply with the many requirements of the Corporations Act. 3.32 One of the risks to which an RE may be exposed if it contravenes any of the provisions of Chapter 5C is proceedings at the suit of a member or members pursuant to s 601MA. In the Cassimatis proceedings, ASIC’s pleading alleged that by providing certain recommendations in its statements of advice, Storm contravened the then s 945A of the Corporations Act,36 which required advice to be based on a proper consideration of the subject matter of the advice and to be appropriate to the investor. It was then pleaded that Storm was thereby exposed to a risk of civil proceedings being brought by the clients under s 953B of the Corporations Act. 3.33 In ASIC v Cassimatis (No 2) Reeves J struck out this pleading.37 His Honour identified the elements of the cause of action under s 953B of the Corporations Act as being (a) a contravention of s 945A; (b) loss by the Storm investor; and (c) the loss is suffered because of the contravention. Without elements (b) and (c), the Storm investor could not bring such proceedings. Therefore, his Honour reasoned: If no such civil proceedings could be commenced against Storm, it necessarily follows, in my view, that ASIC cannot maintain its allegations … that Storm was exposed to a risk of such civil proceedings.38

[page 44] 3.34 The pleading was therefore defective for failing to plead material facts about loss or damage and causation. 3.35 It would seem from this reasoning that his Honour considered that ASIC was required to plead and prove that, in the events that happened, the relevant investors did suffer a loss caused by Storm’s contravention of s 745A. If so, it is with respect difficult to

agree with this conclusion. Ex hypothesi, the foreseeable risk of harm to the company is to be assessed at the time of the alleged contravention of s 180, which is necessarily before the time when the investor’s loss may be suffered. Forensically, it might be helpful in demonstrating that something was foreseeable to prove that it did in fact happen. But it seems to go too far to require this in order to prove that there was a foreseeable risk of it happening. 3.36 In a later passage, Reeves J seems to qualify the position he had reached, saying: I should add that in making these observations … I am not expressing a view on whether, for the purposes of ultimately establishing that the Cassimatises breached s 180(1), it is necessary for ASIC to plead that the Pt E and/or Pt F investors actually suffered loss, as distinct from pleading that the Cassimatises knew at the time Storm allegedly contravened s 945A … that, as a result, there was a risk that the investors would suffer loss. That issue, in my view, is one that should be determined at the trial of the proceeding.39

3.37 It may be strictly correct to say that it should be pleaded that it was foreseeable that the advice would cause loss, rather than simply that there was exposure to the risk of litigation. But otherwise this statement seems somewhat inconsistent with the earlier finding. 3.38 The conclusion to be drawn from this discussion is that it will ordinarily be an aspect of the RE directors’ duty of care and diligence under s 180 to take reasonable care to avoid a breach by the RE of a Chapter 5C obligation. This will generally be so with the obligations that are civil penalty provisions because of the exposure to the risk of ASIC investigation and proceedings to impose penalties. With regard to the other Chapter 5C obligations, the main focus is on a contravention that could cause loss to the members. How certain it must be that the contravention will cause loss is the question left hanging by the decision in Cassimatis (No 2).

V. Corporate duties of the RE directors: s 181 3.39 In Maxwell, Brereton J thought that similar considerations of risk and benefit may affect the assessment of performance of the duty under s 181. The analysis here would seem to be that if there is no obvious benefit to the

[page 45] corporation flowing from a contravention of the Corporations Act, and clear detriments, then there will be a breach of one or both of s 181(1)(a) and (b). 3.40 Prior to 1999, directors’ duties were found in s 232 of the Corporations Law. Section 232(2) and s 232(11) provided as follows: (2) An officer of corporation shall at all times act honestly in the exercise of his or her powers and the discharge of the duties of his or her office. … (11) This section has effect in addition to, and not in derogation of, any rule of law relating to the duty or liability of a person by reason of the person’s office or employment in relation to a corporation and does not prevent the institution of any civil proceedings in respect of a breach of such a duty or in respect of such a liability.

3.41 It was generally accepted that s 232 and its predecessors40 restated aspects of the equitable duties of directors.41 Competing views developed as to what s 232(2) required:42 On one view, s 232(2) was contravened when a director exercised his or her powers for a purpose which the law would consider improper, notwithstanding any subjective belief by the director that he or she was acting honestly.43 The alternative view was that s 232(2) was not contravened unless the relevant director or officer knew that a particular act was not in the interests of the company, and undertook that act despite that knowledge.44

3.42 In Bell Group Ltd v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1, Owen J was concerned with the general law duties of directors although he drew on cases under the statutory duties in his analysis. Having noted that the general law duties included a duty to act bona fide in the interests of the [page 46] company and to exercise corporate powers for a proper purpose,45 his Honour found that, although closely related, these were separate duties.46

3.43 Owen J concluded his analysis with a summary of the relevant legal principles in eight propositions as follows:47 1.

2. 3.

4. 5.

6.

7.

8.

The test whether directors acted bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective. It is a factual question that focuses on the state of mind of the directors. The question is whether the directors (not the court) consider that the exercise of power is in the best interests of the company. Similar principles apply in ascertaining the real purpose for which a power has been exercised. It is the directors who make business decisions and courts have traditionally not pronounced on the commercial justification for those decisions. The courts do not substitute their own views about the commercial merits for the views of the directors on that subject. Statements by the directors about their subjective intention or belief are relevant but not conclusive of the bona fides of the directors. In ascertaining the state of mind of the directors the court is entitled to look at the surrounding circumstances and other materials that genuinely throw light upon the directors’ state of mind so as to show whether they were honestly acting in discharge of their powers in the interests of the company and the real purpose primarily motivating their actions. The directors must give real and actual consideration to the interests of the company. The degree of consideration that must be given will depend on the individual circumstances. But the consideration must be more than a mere token: it must actually occur. The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise of power. But it does so not for the purpose of deciding whether or not the there was commercial justification for the decision. Rather, the objective enquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs. In that event a court may intervene if the decision is such that no reasonable board of directors could think the decision to be in the interests of the company.

3.44 In the Western Australian Court of Appeal48 this analysis found broad acceptance but with some important qualifications: [page 47] (a) contra proposition 2, both Lee AJA and Drummond AJA49 held that the test for determining whether the duty to exercise powers for a proper purpose had been breached was an objective one; (b) as to propositions 5, 7 and 8, Lee AJA was clearly of the opinion

that the subjective beliefs of the directors would not prevent a finding of breach of duty if the conduct is unreasonable or irrational or fails to have any regard to obligations the company must meet.50 It is tolerably clear that Drummond AJA did not adopt this qualification51 and considered that the test was wholly subjective. Carr AJA said that he generally agreed with Owen J’s propositions, but later stated the law in terms indicating that he considered that the subjective test was subject to being overriden if the decision was one that no reasonable board of directors could have made,52 and was thus in agreement with Lee AJA on this point. 3.45 Therefore, Bell Group v Westpac stands as authority for Owen J’s propositions as to the general law duties, subject to the two qualifications mentioned. The question is whether the requirements of s 181, as reformulated in 1999, are the same as the general law as explained in that case, If so, then the former controversy over the scope of s 232(2) has no continuing relevance. 3.46 When first enacted, s 232(3) provided penalties for breach which varied according to whether the breach was committed with intent to deceive or defraud, or otherwise. Under the Corporate Law Reform Act 1992 (Cth), the concept of civil penalties was introduced in a new Part 9.4, and s 232(3) was repealed. The new provisions reflected a very similar concept so far as s 232(2) was concerned. Pursuant to s 1317DA, s 232(2) was a civil penalty provision and could be the subject of civil penalty proceedings with penalties of up to $200,000 and disqualification for contravention. Knowing, intentional or reckless breaches of the civil penalties provisions with intent to gain or intent to deceive or defraud attracted criminal liability under s 1317FA. 3.47 Section 232(2) was not amended prior to its repeal in 1999 by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act). At that time, the whole of s 232 was repealed and replaced by ss 180–184. Section 232(2) was replaced by s 181, which relevantly provided: (1) A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and (b) for a proper purpose.

[page 48] 3.48 Referring to the divergent authorities on the interpretation of s 232(2), the authors of ‘CLERP’ Explained stated that: The change from honesty to [s 181] was proposed to overcome difficulties in interpretation … Because of the distinction between criminal and civil penalties in this area it was felt that the law should be clarified to reinforce the distinction between those obligations. Section 184 of the Law (also a new provision) confirms that criminal penalties may be pursued if directors or other officers intentionally or recklessly fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose.53

3.49 When introduced in 1999, the new s 181 only carried civil penalty consequences for breach. Criminal contraventions with an express requirement of recklessness or ‘intentional dishonesty’ were contained in s 184. 3.50 Why was the ‘honestly’ test replaced with the reference to good faith in the best interests and proper purpose? The first version of the relevant bill provided (emphasis added): (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in what they believe to be in the best interests of the corporation; and (b) for a proper purpose.

3.51 The Explanatory Memorandum referred in the summary of key amendments section to the amendment of the ‘existing 232(2)’ as follows: Reformulating the existing duty to act honestly in subsection 232(2) to capture the fiduciary principles that a director or other officer of a corporation must exercise their powers and discharge their duties in good faith in what they believe to be in the best interests of the corporation and for a proper purpose. Breach of this will continue to attract both criminal and civil consequences.54

3.52 At this point the Explanatory Memorandum (and the bill it explained) reflected a plainly subjective version of the duty to act in

the best interests of the corporation. However, the drafting of s 181 was amended in the Senate to remove the words ‘in what they believe to be.’55 The clear intent to be deduced from the removal of those words before passage of the legislation was to remove the subjective element, making the test of best interests an [page 49] objective one.56 That intention is supported by the potential application of ss 1317S and 1318, which allow courts the leeway to make allowances for directors who breach the objective standard required by s 181 but acted in what they perceive to be the company’s best interests.57 3.53 The first case to consider s 181 in its new form was ASIC v Adler (2002) 41 ACSR 72. There, Santow J concluded that: I consider that the standard of behaviour required by s181(1) is not complied with by subjective good faith or by a mere subjective belief by a director that his purpose was proper, certainly if no reasonable director could have reached that conclusion. This is made clear by the new provisions in s184(1) which by contrast imposes the additional elements of being ‘intentionally dishonest’ or ‘reckless’ for the purpose of criminal sanctions. Thus, as was said by Bowen LJ in Hutton v West Cork Railway Co (1883) 23 ChD 654 at 671: Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying its money with both hands in a manner perfectly bona fide yet perfectly irrational. Where, as my findings indicate apply here, no reasonable board could consider a decision to be within the interests of the company, the making of the decision will be a breach of duty (Ford 6th Ed, para 8.060 at p313). Thus, whether a director has acted for a proper purpose, namely for the benefit of the company, is to be objectively determined (Permanent Building Society (In Liq) v Wheeler per Ipp J at 137; see also Ford, 6th Ed at para 8.200). The application of those principles in the circumstances that 1 have found lead to the conclusion that Mr Adler failed to act in good faith.58

3.54 This passage demonstrates how the two duties in 181(1) are intertwined: the purpose for which the directors have been given their powers is to exercise them for the benefit of the company. More

recently, in Downer EDI Ltd v Gillies (2012) 92 ACSR 373, in a judgment agreed in by Macfarlan JA, Allsop P said that: Section 180, in its terms, is to be analysed objectively. Both ss 181 and 182 are also to be determined objectively: R v Byrnes [1995] HCA 1; 183 CLR 501 at 514–515 and Doyle v Australian Securities and Investments Commission [2005] HCA 78; 227 CLR 18 at 28–29 [35]–[37]. By ‘objectively’ is meant the

[page 50] standards of conduct that would be expected of a person in the position by reasonable persons with knowledge of the duties, power and authority of the position, and the circumstances of the case, including the commercial context: Doyle at [35].59 … The dispute between the parties was as to the weight to be given to the subjective honesty of Mr Gillies. Some of Mr Gillies’ submissions appeared to place it as a determinative factor. To the extent that the submissions went that far they should not be accepted. Subjective honesty and motive may, no doubt, be relevant. Downer’s submissions recognised that. The relevance of subjective belief and motivation will depend, however, upon the nature and character of the acts in question. If, for instance, as in Blyth Chemicals, conduct was capable of an innocent construction compatible with the relationship, as well as being capable of a construction that was incompatible with the relationship, the ‘motives and intentions’ of the employee may become ‘all-important’: Blyth Chemicals at [82]. On the other hand, where the conduct is not capable of an innocent construction, such as an employee taking a secret commission, the court may be of the view that evidence of the belief of the employee that he saw nothing wrong with this would not be taken as relevant: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 at 369. As in the assessment of impropriety for the purposes of ss 181 and 182, the standard of conduct is imposed by the courts as that which would be reasonably expected in the relationship in all the circumstances. The place of subjective honesty will depend upon the nature of the conduct and all the circumstances. But there is no haven for the morally obtuse: Doyle at [37].60

3.55 In this passage, a majority of the NSW Court of Appeal has applied to s 181(1)(b) the learning about ‘improper’ as it appears in ss 182 and 183 and which has been established in decisions of the High Court such as R v Byrnes (1995) 183 CLR 501 and Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18. 3.56 As will be seen below, the Western Australian Court of Appeal’s decision in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 confirmed that the test of proper purpose

for the purposes of the general law was objective. It is clear that s 181(1)(b) and the general law are aligned on this point. 3.57 Judges subsequently considering s 181 before that decision have generally not considered that the 1999 reformulation of s 181(1)(a) represented a departure from the preceding provision.61 In Maxwell, Brereton J held that s 181 is contravened only when a director engages deliberately in conduct [page 51] knowing that it is not in the interests of the company.62 In ASIC v Macdonald (No 11) (2009) 71 ACSR 368, Gzell J agreed with this view.63 In Re S&D International Pty Ltd (No 4), Robson J adopted Owen J’s propositions and applied them to s 181.64 In Australian Motor Finance Pty Ltd v Angeleri [2010] FCA 1431 and also in Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd (2011) 86 ACSR 393, Tracey J clearly considered the earlier authorities applicable to 181 and said the weight of them favoured the ‘stricter view’ articulated in Marchesi v Barnes (2011) 86 ACSR 393.65 3.58 In 2009, in Australian Securities and Investments Commission v Somerville (2009) 77 NSWLR 110, Windeyer AJ noted the course of decisions and, while declining to add another single judge’s view, said, nevertheless: Whatever the position, I consider it clear first that unless the interests of the creditors are taken into account where objective circumstances require this, then if those interests are disregarded and only the interests of shareholders considered, the directors cannot be acting in good faith; and second, this really does not matter because it is clear the requirement to exercise powers for a proper purpose is an objective test.66

3.59 Recently, in Re Colorado Products Pty Ltd (2014) 101 ACSR 233, Black J said that the Western Australian Court of Appeal in Westpac v Bell Group had ‘unanimously held that the corresponding general law duty to act in good faith in the company’s best interests was subjective and would be complied with if directors honestly believed they acted in the company’s best interests.’67 As discussed above, we

respectfully disagree with this assessment of that decision. His Honour also referred to the decision of the Court of Appeal of Victoria in Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (2011) 86 ACSR 277 as authority for the proposition that a contravention of s 181(1)(b) can be established if the law objectively considers that what the director did was improper, even if the director subjectively believed that he or she was acting in the company’s best interests.68 The following analysis shows that the Court of Appeal was not adopting such a proposition generally about s 181(1)(b), but only in that class of cases where it is not shown that the directors gave any consideration to the interests of the company. 3.60 In Westpac v Bell Group, each of the three members of the Court considered the issue of directors having failed to advert at all to the interests of [page 52] the company, specifically in a corporate group context. Charterbridge v Lloyds Bank [1970] Ch 62 is a leading case on this issue, in which Pennycuick J said: The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.69

3.61 Lee AJA concluded that if it were established that the directors failed to give any consideration to the interests of an individual company, there was no need to apply the test in Charterbridge and a breach of the duty would be found if in fact the transaction was not in the best interests of the company.70 3.62 Drummond AJA agreed with Lee AJA on this point.71 3.63 Carr AJA considered that Charterbridge should be applied where there is either no evidence that the directors gave any

consideration to the interests of the company or the Court has found that they did not.72 3.64 The approach of Lee AJA (and Drummond AJA) seems to be derived from dicta in the New South Wales Court of Appeal in Equiticorp v Bank of New Zealand (1993) 32 NSWLR 50 where Clarke and Crisp JJA expressed the view that a preferable approach would be: … that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company, then no consequences would flow from the breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. On the contrary it would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach.73

3.65 Other, mainly first instance, authority seems to favour Carr AJA on this question. Charterbridge itself was a case where there was a finding that the directors had not considered the interests of the relevant company but rather a larger group. Another such case was Farrow Finance v Farrow Properties [1997] 1 VR 584 where Hansen J applied Charterbridge where he had no evidence before him that the directors had honestly thought that the transaction was [page 53] in the best interests of the company. The Victorian Court of Appeal in Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (2011) 86 ACSR 277 also adopted the Charterbridge approach.74 There was no evidence in that case of what consideration the director concerned gave to the interests of the plaintiff company. 3.66 There is thus intermediate appellate authority for both approaches. If it is established that the directors gave no consideration to the interests of the company, or there is no evidence that they did, and the Court finds that the transaction was not in the company’s best interests, then on the authority of Westpac v Bell Group and Equiticorp v Bank of New Zealand, the breach of the duty in

s 181(1)(a) is established. In Victoria it seems that there will be a breach of the duty if the Charterbridge test can be satisfied. 3.67 Overall, the course of authority since 1999 has not established that s 181(1)(a) has departed from the equivalent general law duty. The intentions of the senators who sought to delete the words ‘in what they consider to be’ in order to impose an objective requirement of best interests have not been fulfilled. There may still be residual debate about whether there is a breach where the directors hold a genuine but unreasonable belief that a particular exercise of power is in the company’s interests. However, in light of the clearly objective nature of s 181(1)(b), such debate is largely sterile. If no reasonable board would consider a decision to be in the company’s interests, then objectively it cannot have been taken for the purpose of advancing those interests. 3.68 The best interests of an RE operating a managed investment scheme are, like those of any trustee, heavily circumscribed. In Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd (2015) 104 ACSR 312, both Warren CJ and Garde AJA (Neave JA agreeing)75 approved the statement by Robson J in Re S & D International76 that: The basic common law duty of a director is that he or she must act bona fide in what he or she believes is the best interests of the company as a whole. This duty is encompassed in s 181 [of the Corporations Act 2001 (Cth)]. In this instance, S & D acted as a trustee of the unit trust and the best interests of the company were clearly to act properly in accordance with the trust deed and in the interests of the unit trust. In other words to ensure that the trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust.

Given its exposure to liability to the scheme for losses suffered due to a breach of its duties, and to members generally for losses flowing from any other breach of Chapter 5C, its best interests appear to lie in ensuring that it complies with all of its obligations. There will be many situations where [page 54]

there is no possible benefit to the RE in a breach. But even where a breach of Chapter 5C might seem to be for the benefit of the RE, the benefit may not be lasting. In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, for example, the RE stood to gain a substantial profit by amending the scheme constitution in breach of various duties imposed by s 601FC(1). In such a case, however, the RE becomes liable to compensate the scheme for a loss resulting from the breach. The ‘benefit’ in such cases depends on the RE not being called to account. In our view the court would be likely to find that no reasonable board would consider such action in the best interests of the RE, if that required such a board to make a judgment about the chances of the breach of the Corporations Act going undetected. It follows that most cases of a breach of Chapter 5C resulting from action of the directors would involve them in a breach of the duty in either s 181(1)(a) or s 181(1)(b), or both.

VI. Corporate duties of the RE directors: s 182 3.69 Section 182 requires a director not to make improper use of his or her position to gain directly or indirectly an advantage for herself or himself or another person or cause detriment to the company. 3.70 Several decisions of the High Court have marked out some clear boundaries for the operation of s 182: (a) the duty is breached if there is a purpose of advantage or detriment, regardless of whether the advantage was realised or the detriment incurred. The same state of mind with which an act is done can establish both purpose and impropriety;77 (b) it is not necessary to establish impropriety that there is evidence of a state of mind that detriment will be caused to the corporation;78 (c) the absence of purpose to cause detriment to the corporation does not negate a purpose to gain an advantage;79 (d) impropriety can include a deliberate use of position without giving any consideration at all to the interests of the company, but is not limited to that category of case;80

(e) impropriety also consists in a breach of the standards of conduct that would be expected of a person in the position of the director by reasonable persons with knowledge of the duties, powers and authorities of the position and the circumstances of the case,81 and which is to be judged objectively.82 In appropriate circumstances it may include: [page 55] (i) doing an act which a director knows or ought to know he has no authority to do;83 or (ii) a failure to comply with requirements associated with the act, such as a prohibition on being present or voting at a meeting where a conflict of interest exists, even if the interest is disclosed.84 3.71 In the context of the directors of an RE, as will be seen below, they are under an overriding duty under s 601FD(1) not to make improper use of their position to gain an advantage for themselves or others or to cause detriment to the members of the scheme. The focus of this aspect of their s 182 duty will therefore be on causing detriment to the RE. This is not determined objectively, but having regard to the state of mind of the director. The fact that the corporation suffered a detriment from the act is neither necessary or sufficient to establish purpose. 3.72 The purpose of an act is usually defined in terms of the ‘end sought to be achieved’ by it. As McHugh J said in News Ltd v South Sydney Rugby League Football Club Ltd (2003) 215 CLR 563:85 It is true that only persons can have a purpose, for the notion of purpose involves the intention of a person to achieve an object. That is to say, it involves an examination of the mental state of a person. Thus, in Chandler v Director of Public Prosecutions [1964] AC 763 at 804-5), Lord Devlin said: A purpose must exist in the mind. It cannot exist anywhere else. The word can be used to designate either the main object which a man wants or hopes to achieve by the contemplated act, or it can be used to designate those objects which he knows will probably be achieved by the act, whether he wants them or not.

3.73 In conclusion, where a director of an RE has exercised his or her powers so as to cause the RE to contravene Chapter 5C, and incur penalties or other liabilities as a result, the element of improper use of his or her position will usually be present — this flows from the conclusion that a breach of one or both of the duties in s 181 will normally be involved in such a case. For s 182 to provide an alternative route to compensation available to the RE will depend on whether the subjective purpose of the director was to cause the detriment. At least on the second formulation of ‘purpose’ framed by Lord Devlin in the passage quoted above, if the directors knew that the detriment would probably result, the purpose will be found. And it may be that it is so obvious that detriment will result that knowledge of that consequence will be inferred.

VII. Directors’ duties under Chapter 5C 3.74 The express intent of the Australian Law Reform Commission and the Companies and Securities Advisory Committee’s Collective Investments: [page 56] Other People’s Money report (ALRC 65)86 was that investors should have obligations owed to them by the officers of the RE and be able to take action against officers to enforce these rights directly, without first proceeding against the company. The enforceability issue is discussed later in this chapter. The concepts of duties being owed to the investors direct87 and that these duties would override the concurrent duties owed to the RE88 are important. 3.75 The ALRC said that the precise form of the recommendations as to the duties imposed on directors of an RE would follow the provisions in former s 232 of the Corporations Law so that officers would not face additional kinds of liability under the proposal.89 In discussing proposed duties of honesty,90 care and diligence,91 and no improper use of information or position,92 the ALRC noted the corresponding duties in former s 232(2), (4), (5) and (6).

3.76 It is significant that there was no corresponding duty in the former s 232 to which the proposed duty to act in the best interests of investors could be cross-referenced.93 This duty, found in s 601FD(1)(c), was new and, in requiring the directors of an RE to act with undivided loyalty to the members of the scheme, imposed a significant new kind of liability on directors having no precedent in the former s 232. 3.77 The difference in the chapeau to each of s 601FC(1) and s 601FD(1) is worth noticing. The chapeau to s 601FC(1) is: (1) In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must: …

The chapeau to s 601FD(1) is: (1) An officer of the responsible entity of a registered scheme must: …

3.78 The s 601FD(1) duties are imposed on officers of an RE and are concerned with the officer’s conduct in that capacity. The directors of the RE must manage the affairs of the RE in both its personal capacity and in its capacity as RE. 3.79 The duties imposed by Chapter 2D.1 control the directors in the exercise of their powers and in carrying out their duties as directors of the RE. As noted below, the s 601FD duties are not directed to this relationship. They are imposed as proxies for the RE’s own duties to the members of the scheme, so as to bring the directors of the RE into a relationship with the scheme members that is not present in the case of the directors of a trustee company other than an RE. [page 57] 3.80 That this may give rise to a conflict of duty is recognised by s 601FD(2) which, as already noted, provides that a duty of an officer of the responsible entity under subsection s 601FD(1) overrides any conflicting duty the officer has.94

VII.A. Section 601FD(1)(a) — Duty to act honestly 3.81 Section 601FD(1)(a) provides: (1) An officer of the responsible entity of a registered scheme must: (a) act honestly; …

3.82 This mirrors the duty of an RE under s 601FC(1)(a). The ALRC described the duty to act honestly as fundamental and recommended such a duty be imposed on REs95 and officers of REs.96 3.83 Chapter 5C commenced on 1 July 1998. Then, directors’ duties were found in s 232 of the Corporations Law. Section 232(2) required that: … an officer of a corporation shall at all times act honestly in the exercise of his or her powers and the discharge of the duties of his or her office.

3.84 The ALRC noted the imposition of a duty of honesty on officers by s 232(2).97 The duty to act honestly imposed by former s 232(2) was a statutory equivalent to the fiduciary duty owed by a director to the corporation when exercising powers conferred by the corporation. As Ford notes:98 [A] fundamental question about s. 232(2), made more difficult by the existence of differential penalties, was whether the section applied to subjectively honest conduct which nevertheless contravened the strict duty of loyalty.99

3.85 Section 232(2) remained in the form set out above until its repeal in 1999 (after the commencement of Chapter 5C) by the CLERP Act when as [page 58] already noted, s 232(2) was replaced by s 181(1), which has been set out above and no longer used the words act honestly. 3.86 No change was made to s 601FD(1)(a), which retained its requirement to act honestly.

3.87 Do s 181(1) and s 601FD(1)(a) mean the same thing despite using different words? 3.88 The requirements of the duty to act honestly in s 601FD(1)(a), when enacted, and the duty to act honestly in former s 232(2) were not the same.100 The requirements for satisfying s 232(2) were influenced by the character of the person exercising the power, ie a fiduciary officer. The proper exercise of a power in a fiduciary relation requires attention to be given to the purpose for which the power was granted and the interests of the person served by its exercise. Honest exercise of such a power called for an examination of the purpose and intended effect of the exercise. Subjective honesty might not be sufficient: Australian Growth Resources Corporation Pty Ltd (Recs and Mgrs apptd) v Van Reesema (1988) 13 ACLR 261. 3.89 As between the director of an RE and the members of the scheme, the fiduciary relationship is either absent or indirect. When s 181(1) was introduced to respond to the difficulties in interpretation that had arisen in the decided cases on former s 232(2), the requirements for satisfying s 601FD(1)(a) were not in any way affected. Generally, as discussed below,101 more is required of a director to act in good faith than mere honesty. 3.90 The deliberate retention of s 601FD(1)(a) in its original form after the introduction of s 181(1) was a recognition of the difference in the content of each duty. 3.91 Consider how s 601FD(1)(a) would have been amended in order to make it correspond with s 181(1). The words in good faith in the best interests of the corporation in s 181(1) would need to have been modified to read in good faith in the best interests of the members. It can be seen immediately how this would have overlapped with s 601FC(1)(c) and also why this was not done. In our view the drafter recognised that acting honestly as required by s 601FD(1)(a) and acting in the best interests of the members as required by s 601FC(1)(c), combined with s 601FD(1)(d)(i) and (e), which deal with impropriety, were all separate subject matters requiring distinct treatment. 3.92 Despite the cross-referencing by the ALRC of s 232(2) when discussing the duty to act honestly, s 601FD(1)(a) was not intended

to be a requirement to exercise powers for a proper purpose in the interests of others (members of the scheme). It was and remains a requirement to act honestly and nothing else. 3.93 The introduction of s 181(1) confirmed that the duty, owed to the corporation, was a statutory formulation of the fiduciary duty at general law. As already noticed, case law on the directors’ duty to act honestly in s 232(2) [page 59] drew on the common law in directing attention to the purpose of exercise and the best interests of the company.102 Where a corporation acts as a trustee but not as an RE, it would be incorrect to speak of the directors owing duties to the beneficiaries of the trust, whether at general law or under the Corporations Act.103 The relationship between a director of a trustee corporation and the beneficiaries and that between a director of an RE and the members of the scheme, is not considered to be fiduciary despite the vulnerability of members.104 3.94 The imposition of a duty of honesty by s 601FD(1)(a) did not therefore, without more, import the equitable notions of fiduciary loyalty. It was imposed in an apparently non-fiduciary relationship. Fiduciary loyalty involves a great deal more than acting honestly. Fiduciary loyalty is ‘[n]ot honesty alone but the punctilio of an honour the most sensitive ….’105 3.95 A duty of undivided loyalty is imposed on the officers of an RE by s 601FD(1)(c).106 This is not duplicated by s 601FD(1)(a), in which honesty means honesty alone. The concept of fraud on a power,107 which had been applied to the duty in s 232(2) and then given expression in s 181(1), is sufficiently dealt with by governing the relation between the RE and its officer and is not readily accommodated within the relationship of director and beneficiary (still less that of officer other than director and beneficiary). 3.96 The director of an RE is exercising powers derived by

delegation from the corporation. The powers must be exercised for a proper purpose in the interests of the corporation. When the exercise of powers affects members of the scheme of which the corporation is the RE, the powers are still powers derived by delegation from the corporation: they are not powers derived from the members by delegation. The reason why s 601FD(1) imposes duties on the director or officer of an RE is to control the exercise of powers delegated by the corporation, because their exercise may harm the members, and so as to provide remedies that will compensate the members by compensating the scheme. The s 601FD duty is not concerned with the purpose of the exercise of the power but with the effect of such exercise on members. Hence the overriding effect of s 601FD(2), which controls the exercise of concurrent duties that may be in conflict. [page 60] 3.97 Within the suite of duties in s 601FD(1), the content of the duty to act honestly is not about the exercise of delegated power per se but is a general command about acting honestly. It is not about acting for a proper purpose — that is already controlled by Chapter 2D.1. Likewise it is not about acting in the best interests of members or acting without impropriety (controlled elsewhere in s 601FD(1)). It requires honesty alone. 3.98 The correct test for honesty needs to be found. 3.99 A person acts honestly for the purposes of the exoneration provisions now found in ss 1317S and 1318 if the person’s conduct is ‘without moral turpitude’108 in the sense that it is: (a) without deceit or conscious impropriety; (b) without intent to gain an improper benefit or advantage; (c) without carelessness or imprudence that negates the performance of the duty in question.109

3.100 It is not obvious what ‘moral turpitude’ actually means as a synonym for dishonesty. Moral turpitude might be thought to

connote some serious departure from community standards amounting to baseness, depravity or wickedness, whereas dishonesty is conduct that does not meet community standards of honesty.110 It may be undesirable to equate honesty with absence of moral turpitude, even in some modified sense as set out above. The third requirement of absence of moral turpitude, acting without carelessness or imprudence that negates the performance of the duty in question, is not something that would indicate dishonesty by ordinary community standards. Its origins are in cases on good faith. 3.101 In State of South Australia and South Australian Asset Management Corporation v Timothy Marcus Clark (1996) 66 SASR 199, Perry J had to consider s 29 of the State Bank of South Australia Act 1983 (SA), which provided that no liability attached to a director for an act or omission done or made, in good [page 61] faith, and in carrying out, or purporting to carry out, the duties of his office — such liability attaching instead to the bank. Perry J said that in their statutory context the words ‘good faith’ normally entail more than ‘honesty’111 and that something could be done in good faith if the person was honest, albeit careless. Good faith may require that exercise of caution and diligence to be expected of an honest person of ordinary prudence, and may go beyond personal honesty and the absence of malice, and may require some other quality.112 3.102 In considering the circumstances in which a director of the bank might lose the protection of s 29, Perry J said: If it is necessary to formulate a test or particular form of words, I would prefer to say that such a circumstance will arise where the director has failed to make a genuine attempt to answer to the standard of care required of him or her.113

and: Here, I do not think that it could be said that Mr Marcus Clark made a genuine attempt to discharge his role.114

3.103 His Honour adopted the no genuine attempt formula from

Mid Density Developments Pty Ltd v Rockdale Municipal Council (1993) 44 FCR 290 (Full Federal Court, Gummow, Hill and Drummond JJ). 3.104 In Hall v Poolman (2007) 65 ACSR 123, Palmer J said: In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s.1317S(2)(b)(i) or s.1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, i.e., whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high

[page 62] degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s.1317S(2) (b)(ii) and s.1318.115

His Honour said that his conclusions were supported by Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115.116 3.105 A requirement that a person must make a genuine attempt to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law may be appropriate if the question is whether the person acted in good faith in the sense that has been developed in this area of law. Where the requirement is that a person act honestly without the added requirement of good faith, the genuine attempt requirement seems to go too far. 3.106 It would be an unusual case in which a director could seek relief under ss 1317S and 1318 in respect of a breach of the duty to act honestly: it would only be possible if honesty in s 601FD(1)(a) has a different meaning than in the exoneration provisions. 3.107 Where a person seeks exoneration from a failure to act in

good faith, the requirement of having acted honestly should not be wholly or partly the same as the test for having acted in good faith.

VII.B. Section 601FD(1)(b) — Duty of care and diligence 3.108 Section 601FD(1)(b) provides: (1) An officer of the responsible entity of a registered scheme must: (b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; …

3.109 This mirrors the duty of an RE under s 601FC(1)(b). 3.110 Until 1 February 1993 the director’s duty of care and diligence was found in s 232(4) of the Corporations Law. It provided: (4) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties.

3.111 On 1 February 1993 the Corporate Law Reform Act 1992 (Cth) replaced s 232(4) with a new formulation of the duty as follows: [page 63] (1) In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances.

3.112 The Explanatory Memorandum for the Corporate Law Reform Bill 1992 stated that the intent of the amendment was to introduce an objective standard117 and to require the Court to place the reasonable person in the position of a director in the corporation’s circumstances.118 The principal significance of this change was that the subjective test, based on Romer J’s judgment in Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407, was discarded in favour of an objective assessment. The reference to the corporation’s

circumstances was added to ensure that the reasonable person was placed in those circumstances. It was not intended to change the law. 3.113 The explanatory memorandum stated that this would recognise that what constitutes the proper performance of the duties of a director of a particular company will be dictated by a host of circumstances including no doubt the type of the company, the size and nature of its enterprise, the provisions of its articles of association, the composition of its board and the distribution of work between the Board and other officers.119 In this regard the explanatory paper120 cited Tadgell J in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, who was speaking in respect of s 556 of the Companies (Victoria) Code. Tadgell J was in turn referring to what the Full Court had said in Byrne v Baker [1964] VR 443, which in turn had based its judgment on what Romer J said in Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407.121 So there was nothing new in what circumstances might be relevant to take into account. 3.114 The explanatory memorandum went on to state that the court would not be required to have regard to the director’s own circumstances, such as whether he or she was an executive or nonexecutive, paid or honorary director.122 On this point the decision in AWA v Daniels (1992) 7 ACSR 759 says that the distinction between executive and non-executive directors is relevant to the assessment123 and this was confirmed in the Explanatory Memorandum to the Corporations Law Economic Reform Program [page 64] Bill 1998.124 It stated that the court will have regard to the corporation’s circumstances and the officer’s position and responsibilities. ALRC 65 noted the distinction.125 3.115 This was how things stood when Chapter 5C commenced. Section 601FD(1)(b) makes no reference to the scheme’s circumstances. Professor Hanrahan offered the view126 that the

absence of reference to the scheme’s circumstances suggests that matters such as those mentioned by Tadgell J in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 (echoing, as noted above, Byrne v Baker [1964] VR 443 and Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407) are not to be taken into account. This seems quite unlikely to be correct. A reasonable person in the officer’s position would be a director of the RE of a particular scheme. An objective assessment of the standard of care and diligence required of a director of that RE ought to have regard to the circumstances of the scheme, and this was always the law. 3.116 On 13 March 2000 s 232(4) was repealed and replaced with s 180(1) in Chapter 2D which provides that: (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

3.117 Austin J in ASIC v Rich (2009) 75 ACSR 1 said this of s 180: Section 180, like s 232(4), lays down a statutory duty of care and diligence for directors and other officers of a corporation in the exercise of their powers and discharge of their duties. In both cases the standard is the degree of care and diligence that a reasonable person would exercise in stated circumstances. Whereas s 232(4) referred to the degree of care and diligence that a reasonable person would exercise ‘in a like position in a corporation … in the corporation’s circumstances’, s 180 now hypothesises that the reasonable person is a director or officer of a corporation in the corporation’s circumstances and occupies the office held by, with the same responsibilities within the corporation as, the defendant director or officer. It appears that the change of wording was partly intended to make it clear, after Daniels v Anderson, that non-executive directors are not subject to the same (higher) standard as executive directors, and partly to affirm that the

[page 65] statutory standard, while related to the office held and the responsibilities of that office, was intended to be an objective standard: see ASIC v Rich (2003) 44 ACSR 341 at [44]–[48]; [2003] NSWSC 85. The change of wording was confined to those issues, and therefore did not affect the proposition found to be applicable to s 232(4), namely

that while a contravention of the section could be established without proving damage to the corporation, a necessary element of the statutory standard of care and diligence was that it was reasonably foreseeable that harm to the interests of the company might be caused by the defendant’s act or omission.127

3.118 There appear to be no differences of substance between s 180(1) and s 601FD(1)(b), despite their different language. In Australian Securities and Investments Commission v Healey (2011) 196 FCR 291, Middleton J said that the duty in s 601FD(1)(b) corresponds with the duty in s 180(1).128 3.119 The important difference is in their effect. This comes about because a director of a trustee company must have regard to: (a) the terms of the trust, its objectives and the investment expectations of investors in the trust generated by the product disclosure statements issued to induce investment in the trust by members of the public; (b) the ‘requirement of caution’,129 tempered if at all by such investment expectations — in the case of a managed investment scheme established for the purpose of engaging in high risk activity, the requirement of caution must of necessity be attenuated by the terms and objectives of the trust. 3.120 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, Murphy J stated: … while the duty of care under s 601FD(1)(b) and s 180(1) correspond, the standard of care under s 601FD(1)(b) will often be higher. This is so because: (a) the relevant director will be the director of an RE acting as a trustee, (and usually holding itself out and being paid as a professional trustee); and (b) the scheme members will be vulnerable to: (i) conflicts of interest between the RE’s interests in obtaining fees and the interests of the members, and/or (ii) conflicts between the RE’s interest in obtaining fees and its duty to act in the members’ best interests and give their interests priority. These factors, common in managed investment schemes under Part 5C, will often require that the directors of such an RE exercise heightened care

[page 66]

and caution and be scrupulous in dealing with any conflict of interests and conflict of interest and duty.130

3.121 An order under s 1317H for the payment of compensation to the scheme is perhaps the most significant consequence of the s 610FD(1)(b) duty as opposed to its Chapter 2D counterpart. 3.122 Reference has already been made to the business judgment rule in s 180(2). Its operation is limited as set out in the note to the duty of care and diligence.131 The business judgment rule was introduced by the CLERP Act and came into force on 13 March 2000. No change was made to Chapter 5C. The government had been reluctant to introduce a statutory business judgment rule, as is evident from the Explanatory Memorandum to the Corporate Law Reform Bill132 and did so following the appeal in Daniels v Anderson (1995) 37 NSWLR 438.133 3.123 The directors can seek relief from liability for a contravention of the duty of care under s 601FD(1)(b) by application under ss 1317S and 1318. These provisions operate concurrently.134 3.124 These provisions do not operate to remove the breach; rather, they operate as a dispensing power to excuse the contravener.135 3.125 There is, however, an unresolved debate as to whether the power to relieve under ss 1317S and 1318 goes so far as to allow the court to decline to make a declaration of contravention. The question is whether the making of a declaration of contravention (for which s 1317E(2) provides in mandatory terms) is itself a liability to which a person would otherwise be subject. There have been cases in which the Court has made a declaration of contravention but also made orders under s 1317S relieving an applicant wholly from liability. In none is the question agitated.136 In remarks upon the operation of s 1317S in ASIC v Plymin & Ors (No 2) (2003) 21 ACLC 1237, Mandie J said that it: … may operate in relation to all or any of the orders which the Court may make, including a declaration, a prohibition order, a pecuniary penalty order and an order for compensation. If it appears to the Court having regard to all the circumstances of the case that the person ought fairly to be

[page 67] excused for the contravention, the Court is empowered not to subject the person to any liability or to subject the person to some only of the available orders, or perhaps, in some cases, to part only of some liability.137

3.126 Mandie J did not, however, determine that the defendants in that case should be relieved, and there has not yet been any decision in which the Court has in fact exercised the power in s 1317S so as to relieve an applicant from a declaration of contravention. 3.127 In ASIC v Vines (2005) 65 NSWLR 281, Austin J noted that there was an issue as to whether it would be necessary, in a case where the Court decided to grant relief in full, to subject a defendant to the enduring stigma of a declaration of contravention. His Honour commented as follows: In ASIC v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515, Gzell J granted relief in respect of one of the contraventions found against the defendant. It appears from the law report (at [4]) that his Honour made a declaration of contravention under s. 1317EA(2) (a provision that also applies in the present case), but then made an order relieving the defendant from liability for the declared contravention. Unquestionably the legislation authorises the procedure adopted by his Honour, but there is an issue whether it is necessary, in a case where the court decides to grant relief in full, to subject the defendant to the enduring stigma of a declaration of contravention, which may prove to have consequences in other proceedings. Both parties submitted that in an appropriate case, the court would be able to grant relief in a manner that would avoid the need to make a declaration, notwithstanding the duty imposed on the court by s 1317EA(2) to make a declaration when it is satisfied that a contravention has occurred. In view of the conclusions I have reached, it is unnecessary for me to resolve this question.138

3.128 Save for its status as conclusive evidence of the matters referred to in s 1317E(2) stated in it, a declaration of contravention subjects the person to no consequence, as a matter of law, other than the declaration itself. Of itself it gives rise to no damages, disqualification, fine or liability to compensate any person. Certainly it is a stigma, but no more of a stigma than the finding of the court that there has been a contravention as a matter of fact and law, a matter that has already been decided. 3.129 Theoretically a director could escape the stigma of a

declaration of contravention of s 180(1) by successful invocation of the business judgment rule but a director who contravenes s 601FD(1)(b) and is able to be wholly excused from liability under ss 1317S and 1318 might yet be subjected to the mandatory declaration of contravention under s 1317E. [page 68]

VII.C. Section 601FD(1)(c) — Duty to act in the best interest of members 3.130 Section 601FD(1)(c) provides: (1) An officer of the responsible entity of a registered scheme must: (c) act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; …

3.131 It has already been seen how the duty of honesty in s 232(2) was replaced with a duty to act in good faith in s 181. It would be a mistake to assume that the s 601FD(1)(c) duty is equivalent to the s 181(1) duty. It is not at all. 3.132 The starting point is the duty in s 601FD(1)(c) which is the product of the recommendation in ALRC 65: Duty to act in the interests of investors. Investors in collective investment schemes rely heavily on the operator to act in their best interests. Nevertheless, there will often be a potential for conflict between their interests and those of the operator. This may arise over the fees and charges payable to the operator or the use of scheme property for dealings with parties related to the operator. DP 53 proposed that the law should impose on operators a duty to avoid conflicts of interest. A number of submissions argued that this proposal was neither realistic nor desirable. Conflicts of interest between scheme operators and investors are inevitable. The Review has concluded that the appropriate formulation of the test is that operators must prefer the interests of investors over their own interests where any conflicts arise. The Review recommends that the Corporations Law should impose an obligation on the operator of a collective investment scheme to exercise its powers and perform its duties as operator in the best interests of investors rather than in its own, or anyone else’s, interest, if that interest is not identical to the interests of the scheme investors. This duty should be complemented by specific rules for related party transactions.139

3.133 Professor Hanrahan observes that the corresponding RE duty in s 601FC(1)(c) expressly contemplates a situation where the interests of the responsible entity and the members conflict.140 It may also be observed that these provisions assume that acting in the best interests of members may lead to a position of conflict. There is no statutory duty to avoid situations of conflict but there is an obligation to deal with them in a particular way. 3.134 Until recently it may have been assumed that what the law concerned itself with was the consequences of a conflict rather than the mere presence of [page 69] conflict.141 In Agricultural Land Management Ltd v Jackson (No 2) (2014) 98 ACSR 615 Edelman J appears to say that the mere presence of a conflict without more has consequences at general law.142 The context of this is all important, and for present purposes the proposition that ‘equity is interested in the pursuit rather than the existence of conflicting duties’143 can be adopted. However, it is clearly established that an account of profits will be ordered whether or not advantage was taken of the conflict and a conflicted transaction can be set aside as of right, however beneficial to the beneficiaries — these are consequences of the no further enquiry or sole interest rule that is prophylactic.144 3.135 In any event, it seems clear that the statutory duty requires the RE to act in the best interests of members, which may lead to conflicts, provided that the conflict is resolved in the interests of the members. 3.136 Professor Langbein has shown how the equitable rules require the trustee to act in the sole interests of the beneficiaries as well as their best interests, with the consequence that, if what is in the best interests of the beneficiaries also confers a benefit on the trustee, the trustee is accountable for any benefit received, subject only to the rule as to just allowance.145 The problem is exemplified

by Boardman v Phipps [1967] 2 AC 46, where it was (apparently) impossible to have obtained the fully informed consent of all beneficiaries for the plan that would enhance the value of the trust estate, but from which the trust’s solicitor would benefit personally; a conflict that was potentially capable of resolution by judicial advice, assuming it could have been obtained in advance.146 3.137 Langbein gives some extreme examples from American case law in which entirely honest fiduciaries have entered into transactions in the best interests of beneficiaries, only to see them set aside because they were not in their sole interests, regardless of the opportunism explicit in some of the [page 70] cases. All of this is consistent with the unbending rule in Keech v Sandford (1726) 2 Sel Cas Ch 61 (25 ER 223)147 but Professor Langbein contests the continued relevance of its rigour in modern times and advocates for enquiry into the circumstances and benefits of conflicted transactions in place of the rigid no further enquiry rule. 3.138 Section 601FD(1)(c) imposes a duty of loyalty to members on each director of the RE. 3.139 There are two important enquiries required by s 601FD(1)(c). The first is to determine what is meant by acting in the best interests of members and how is that tested. The second is to determine whether there is a conflict between the interests of the RE and the members’ interests and whether it has been resolved in favour of the members.

VII.C.1. Best interests 3.140 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, Murphy J described the duty in s 601FC(1)(c) as requiring compliance by an RE with the duty of undivided loyalty.148 His Honour went on to say: I conclude that the imposition of a duty to act in the best interests of the members in

ss 601FC(1)(c) and 601FD(1)(c) does not extend its content beyond previously understood general law boundaries. I see the best interest duty as foundational and operating in combination with other duties. It encompasses the fundamental duty of undivided loyalty which in the present case required APCHL and the Directors to use their best efforts to pursue solely the members’ interests, to act honestly and to exercise care, competence and prudence in doing so, and to eschew any conflict of interests between the members’ interests and its own. If any conflict of interests arose they were required to prefer the interests of the members to APCHL’s own interests.149

3.141 That case did not really test the boundaries of ss 601FC(1)(c) and 601FD(1)(c). The directors of the RE had purported to amend the constitution of the scheme so as to gift to the RE a fee of 2.5% of the gross asset value of the trust fund in the event of a listing of the scheme on the ASX. When the RE listed the scheme on the ASX a year later, a fee of $33 million became payable out of the trust fund. [page 71] 3.142 The introduction of this fee without member approval was held to be illegal. The constitution of the scheme prohibited amendments in favour of, or which conferred a benefit on, the RE, and the directors had not satisfied the conditions of s 601GC(1)(b), namely that the responsible entity reasonably considers the change will not adversely affect members’ rights. 3.143 Conflicts are discussed further below. 3.144 The authors of Principles of the Law of Trusts state that equity sets for trustees demanding standards of duty with respect to the rights of beneficiaries of the trust,150 citing Megarry V-C in Cowan v Scargill [1985] Ch 270, who stated that: The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries.151

3.145 That dictum has spawned much debate and some controversy as to its meaning and provenance, with some commentators saying it was both novel and wrong in law.152 There is no consensus among commentators about what Megarry V-C meant, but some agreement that the best interests duty is overarching and

conditions the exercise of any one or more of the established trustee duties or trustee powers, as the case requires. Sir Robert’s own 1989 paper on Cowan v Scargill equates the duty of trustees to exercise their powers in the best interests of beneficiaries with the duty of undivided loyalty.153 3.146 Both Mr Donald and Professor Thomas consider the possibility that the best interest duty at common law implies that trustees must apply their best efforts in pursuit of the optimum result for their beneficiaries.154 3.147 Both Mr Donald and Mr Mendoza-Jones conclude that the test of whether a course of action is in the best interests of beneficiaries is an objective one.155 [page 72] 3.148 On the other hand, Justice Stone writing extracurially156 makes the point that Cowan v Scargill is no more than a description of the duty of undivided loyalty, requiring trustees to act in their beneficiaries’ (best) interests and avoid conflicts of interest. Her Honour said the word ‘best’ added little if anything at all, and was apt to divert attention to outcomes rather than decisions. Her Honour does not thereby exclude the comparison of alternative or multiple courses of action at the point of decision, only at the point of outcome. 3.149 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 Murphy J wrote: ‘A trustee is not required to be prescient.’157 3.150 The common law therefore suggests that what is referred to in the statutory text is that a trustee’s overriding duty is to serve the interests of the beneficiaries, subordinating all other interests to them. 3.151 There are some statutory provisions that may shed light on the best interests requirement.

VII.C.1.1 Trustee Acts 3.152 Section 7(2)(a) of the Trustee Act 1958 (Vic) and its counterparts in all other Australian jurisdictions provides: (1) Any rules and principles of law or equity that impose a duty on a trustee exercising a power of investment continue to apply except to the extent that they are inconsistent with this or any other Act or the instrument creating the trust. (2) Without limiting the generality of subsection (1), a duty imposed by any rules and principles of law or equity includes — (a) a duty to exercise the powers of a trustee in the best interests of all present and future beneficiaries of the trust; …

3.153 There is no additional guidance as to what is meant by this provision. VII.C.1.2 Superannuation Industry (Supervision) Act 1993 (Cth) 3.154 Section 52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) provides as follows: (1) If the governing rules of a registrable superannuation entity do not contain covenants to the effect of the covenants set out in this section, those governing rules are taken to contain covenants to that effect. General covenants (2) The covenants referred to in subsection (1) include the following covenants by each trustee of the entity: …

[page 73] (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries; …

3.155 There are two cases that have considered this provision. 3.156 In Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87, Byrne J, referring to the second reading debate in which it was said that the provision was intended to codify the common law, said that it was not altogether clear what was being codified.158 3.157 In Manglicmot v Commonwealth Bank Officers Superannuation

Corporation Pty Ltd (2011) 292 ALR 167, the New South Wales Court of Appeal reviewed ALRC 59 (described at section VII.C.1.4 below) and the parliamentary materials, concluding that s 52(2)(c) did not materially add to the general law duty to act in the best interests of members.159 The authors of Jacob’s Law of Trusts160 state that s 52(2) (c) corresponds with the general law, citing Asea Brown Boveri Superannuation Fund 1 Pty Ltd v Asea Brown Boveri, McKeown, Gray & ABB Properties (Vic) Pty Ltd [1999] 1 VR 144, in which Beach J adopted the views of Megarry V-C in Cowan v Scargill.161 VII.C.1.3 ALRC 65 3.158 Two propositions emerge from para 10.8 of ALRC 65. First, that members rely on the operator of a managed investment scheme, the RE, to look after the economic wellbeing of their collective investment. This reliance requires the RE to do its best to enhance their economic wellbeing. Secondly, that the RE must eschew conflicts of interest and if they arise must give priority to the interests of members over its own interests. Where this is achieved and a transaction is to be entered into that benefits the RE or a related party, then member approval is required subject to exceptions under the related party benefit rules. 3.159 Read in light of the ALRC recommendation, the duty in s 601FC(1)(c) is an expression of the undivided loyalty and the no conflicts duties. It may be intensified by the word ‘best’ but the duty is to serve the members and subordinate self-interest. VII.C.1.4 ALRC 59 Collective Investments: Superannuation 3.160 Paragraph 9.22 of the Australian Law Reform Commission’s report Collective Investments Superannuation (ALRC 59) reads as follows: [page 74] Ford & Lee describe this duty [to act in the best interests] as the duty which ‘marshalls’ the trustee’s duty of loyalty to the service of the economic wellbeing of the trust fund and of the personal welfare of the beneficiaries. This is a general duty that

complements the more specific obligations to act honestly and to exercise care, diligence and skill.162

3.161 This makes clear what underlies the cognate provision in s 52(2)(c), namely directing the duty of loyalty to the service of the economic wellbeing of the members.

VII.C.2. Best interests subjective or objective enquiry 3.162 In Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862, Knox J found that the trustees of a pension fund had acted honestly in what they thought to be in the best interests of the members of the fund. However, he also found that what they did was in breach of trust and damaging to the interests of members, even although they intended to act in the interests of members.163 3.163 In a 1995 article,164 J R F Lehane considered s 52(2)(c) of the SIS Act and former reg 7.12.15(f)(i) of the Corporations Regulations 2001 (Cth), the provision on which s 52(2)(c) was based,165 and concluded that a requirement to act in members’ best interests did not look like an obligation to act in a way which the trustee honestly considered to be in their interests; it looked much more like a positive obligation to act in what are, objectively, their interests and raised the question of what if anything ‘best’ added to ‘interests.’166 3.164 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, Murphy J accepted that the enquiry as to whether the directors have acted in the best interests of the members is an objective one.167

VII.C.3. Test for breach of s 601FC(1)(c) 3.165 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, Murphy J adopted the following tests: [page 75] (a) for the first limb of s 601FC(1)(c): has APCHL, as responsible entity of the Prime Trust acted with undivided loyalty solely in

the interests of unitholders?168 (b) for the second limb: is there a conflict between the interests of APCHL in being paid the new package of fees and the interests of the unitholders in paying only the existing fees? If so, has APCHL, as responsible entity of the Prime Trust preferred the interests of members to its own interests?169

VII.C.4. Conflicts 3.166 In the case of a managed investment scheme, most conflicts may be mediated via the related party transaction provisions adapted for Chapter 5C through s 601LA in Part 5C.7. 3.167 This regime exempts benefits given to a related party on arms’ length terms. Benefits other than on arms’ length terms require member approval, given by simple majority vote. The circumstances in which the majority rule provisions of Part 5C.7 may not override dissentient members need to be worked out. It may be that dissentient members will be able to challenge transactions on the basis that full disclosure has not been made.170 The full implications of related party transaction approval under Part 5C.7 are beyond the scope of this chapter. 3.168 What is of present interest is the relationship between s 601FD(1)(c) and s 601LA. To what extent will the obligation to prefer the interests of members over the RE’s interests override the permission apparently given for related party benefits provided on arms’ length terms or with member approval? 3.169 This can be considered in the context of routine conflicts. For example, where the RE wants to lease a property for use as the scheme’s headquarters. A property is available for the purpose. It is owned by the RE other than as scheme property, or it is owned by a subsidiary of, or a company associated with, the RE, or it is owned by a director of the RE or by an associate of a director of the RE (including a family member of the owners of the RE). Another routine example might be where the RE needs management services. A subsidiary of, or a company associated with, the RE can provide them, or a company owned by a director of the RE or by an associate

of a director of the RE (including a family member of the owners of the RE) can provide them. Such examples can easily be multiplied. [page 76] 3.170 The issue here is not just establishing that the financial benefit to be given to the related party171 would be reasonable in the circumstances if the RE and the related party were dealing at arm’s length. 3.171 Equity would, applying its prophylactic no further enquiry or sole interest rule, overturn even an arms’ length transaction at full value, however beneficial to the beneficiaries, unless fully informed consent or judicial approval was first obtained for it.172 3.172 Proof by ordinary evidentiary processes that the transaction is at arms’ length may allow an RE to operate without needing unanimous fully informed consent or judicial approval in many cases of related party transactions.173 It may nevertheless not be permissible to proceed with a related party transaction where the transaction creates a conflict between the interests of the RE and the interests of the members. Where such a conflict is present s 601FC(1) (c) and s 601FD(1)(c) require the interests of the members to be preferred. This would seem to mean that the RE itself cannot lease its own building as the scheme’s headquarters. In that situation the members’ interest is in getting the best property and facilities at the lowest rent. The RE’s interest is in getting the best rent for its property, whatever its condition or suitability. How are the interests of the members to be preferred? 3.173 The position is just as problematic where there is a proposal for the provision of services. While the RE and its owners or controllers will argue that there is a market price for the services in question and that they will be provided at arms’ length, how is that to be verified? The same conflict is present — the RE’s interest is in giving less and charging more while the members have the opposite interest. The answer is not supplied by putting out the services to

tender, as the auction cases show.174 Tenders are notoriously subject to probity issues and, to put it bluntly, can be rigged. 3.174 This is a problem because setting up an RE and promoting and operating a managed investment scheme is done for profit by those who own the RE and promote the scheme. Particularly where an RE is a close corporation and its fees have not been internalised, the RE has an interest in promoting the supply of services by and for the profit of the family and associates of the RE’s owners and promoters at the expense of the scheme. 3.175 Being an RE and doing business with an RE can be very lucrative indeed and a strong incentive exists to keep that business tightly held for the benefit of the owners of the RE and their family. 3.176 Whenever there is a conflict between the interests of the RE and the interests of the members, the RE and its directors should be required to resolve the conflict by not taking the fee or making the profit from the self-dealing. In this context, self-dealing exists whenever the RE has an interest either directly [page 77] or through an associated entity or the family of those who own the RE. The conflict can be readily identified and easily avoided. A strict duty of undivided loyalty is a necessary protection for members.

VII.D. Section 601FD(1)(d) — Duty not to make improper use of information, and s 601FD(1)(e) — Duty not to make improper use of position 3.177 Section 601FD(1)(d) provides: (1) An officer of the responsible entity of a registered scheme must: (a) not make use of information acquired through being an officer of the responsible entity in order to: (i) gain an improper advantage for the officer or another person; or (ii) cause detriment to the members of the scheme; …

3.178 Section 601FD(1)(e) provides: (1) An officer of the responsible entity of a registered scheme must: … (e) not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; …

3.179 These duties essentially mirror their counterparts in Chapter 2D. The same comments made about the duty of care in s 601FD(1) (b) probably all apply to these duties. That is to say, the standard of care may be higher and breach may lead to an order for compensation to be paid to the scheme.

VII.E. Section 601FD(1)(f) — Duty to ensure the RE complies with the law etc 3.180 Section 601FD(1)(f) provides: (1) An officer of the responsible entity of a registered scheme must: … (f) take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the responsible entity complies with — (i) this Act; and (ii) any conditions imposed on the responsible entity’s Australian financial services licence; and (iii) the scheme’s constitution; and (iv) the scheme’s compliance plan.

3.181 Professor Hanrahan writes that ‘the significance of the potential for harm to investors from non-compliance will be a factor to be considered in deciding what is reasonable to prevent it.’175 That contention is adopted. [page 78] 3.182 In ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, a breach of this duty was found against the directors because the scheme’s constitution prohibited any amendment that conferred a benefit on the RE.

VIII. Can scheme members sue the directors? 3.183 Paragraph 3.74 above adverted to the intent of the authors of ALRC 65 that members should be able to take action directly against the officers of the operator. The scheme of Chapter 5C does not provide for this. Compensation for a breach of the duties owed by officers of the RE under s 610FD is available to the scheme at the suit of ASIC or the RE under s 1317H. Section 601MA provides a direct claim for damages suffered as a result of a breach by the RE of any provision of Chapter 5C, but only against the RE. 3.184 When the bill for what became the Managed Investments Act 1998 was introduced, the explanatory memorandum stated that: The right to bring a statutory action will not extend to actions against other persons involved in the operation of the scheme (such as directors, compliance committee members or any entity engaged by the responsible entity to have custody of the scheme property). A member’s right to bring an action against these persons will depend on the general law and will not be set out in the Law. This will preserve the concept of a single responsible entity responsible to members for the operation of the scheme.176

3.185 When the bill was under consideration in the Senate, amendments were proposed that would extend liability under s 601MA to the directors and officers of the RE, but the amendments were defeated, and s 601MA was enacted in the form that it takes today.177 3.186 The question then becomes what (if any) are the rights of a member to bring an action against officers of the RE under the ‘general law’ referred to in the Explanatory Memorandum? This chapter does not seek to answer this question fully, but considers below the operation of two provisions of the Corporations Act, outside Chapter 5C, which have been or might be thought to provide a relevant remedy. 3.187 It should be noted here that, whilst outside the scope of this chapter, the largest sources of potential claims not provided for in Chapter 5C are losses suffered by investors in schemes that were required to be but were not registered. It is a contravention of s 601ED(5) to operate an unregistered scheme which is required to be

registered, but it is not a civil penalty provision and no specific remedy is provided in Chapter 5C. [page 79]

VIII.A. Section 1324 3.188 Section 1324 is the well known provision of the Corporations Act that empowers the court to grant an injunction relating to past, present or future conduct in contravention of any provision of the Corporations Act on the application of a person whose ‘interests have been are or would be prejudiced’ by the conduct. It includes s 1324(10), which provides that: Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.

3.189 The predecessor to s 1324 first emerged in the Companies Act 1981 (Cth) and a generous application was soon given to the range of persons who have standing to apply.178 3.190 There were some differences of opinion at first instance as to whether it was necessary that the Court have before it an actual application for an injunction, or whether it was sufficient merely that it had power to grant one.179 On that question the weight of authority is now clearly that not only is it necessary that there be an application for an injunction, but it must be a viable or substantial application, in the sense that the circumstances must show that there is a real basis for the grant of the injunction and not just an artifice to create a basis for an application under s 1324(10).180 3.191 The decision of the Queensland Court of Appeal in McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27 has illustrated a number of other limitations on s 1324. The case involved a claim by a creditor for damages based on a breach of s 182 by a director. The breach of s 182 was ultimately not in contest in the appeal. The ratio decidendi of the case is that a claim for damages

under s 1324(10) is not maintainable where the Corporations Act (e.g., under s 1317H) provides for compensation for the corporation, to the exclusion of any other persons, for contravention of a provision which protects the corporation’s interests (e.g., s 182), where the damages are merely derivative of the corporation’s loss.181 3.192 In the course of reaching that conclusion, Fraser JA made some interesting broader observations: [page 80] (a) the construction of s 1324(10) that was contended for by the creditor would render nugatory the provisions of the Corporations Act that create and regulate compensation rights, such as Part 9.4B;182 (b) where a shareholder’s or creditor’s claim for loss is derivative of the company’s loss, the conventional view is that the shareholder or creditor is not entitled to damages. To allow such claims under s 1324(10) would produce one of the following surprising results: (i) double recovery against the defaulting officer by both the corporation and the shareholder/creditor; (ii) recovery by the shareholder/creditor at the expense of the corporation’s claim and therefore to the prejudice of the other creditors and/or contributories;183 (c) there is no necessary correlation between standing to apply for an injunction under s 1324(1) and an entitlement to recover damages under s 1324(10);184 and (d) the power to award damages should be seen as a substitute or supplementary remedy in aid of the protection of the interests to which the substantive provision of the Corporations Act involved is directed. If the substantive provision was directed to the protection of the company’s interests then damages payable to a creditor or shareholder (as opposed to the company itself) would not be a substitute or supplementary remedy in that way.185

3.193 McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27 is a strong intermediate appellate authority against the proposition that members of a scheme can claim damages from officers under s 1324(10) for losses said to be suffered as a result of a beach of a duty under s 601FD(1), claims of that nature being regulated under Part 9.4B. Taken with the other recent decisions on standing to apply for such relief, the utility of s 1324 in relation to many breaches of the Corporations Act is probably questionable. But in the world of managed investment schemes, s 601FD(1) is the only provision directed to the conduct of officers of an RE, and the door appears to be firmly closed against such claims under s 1324 at this stage.

VIII.B. Section 1325 3.194 Section 1325 is a provision which, on its face, appears to open up the possibility of claims by investors against directors not only for direct contraventions by them of s 601FD(1) but also as accessories186 to a contravention of any provision of Chapter 5C by the RE. It authorises the court to make a range of remedial orders that it thinks appropriate, including [page 81] payment of money, if it considers that the order will prevent, reduce or compensate for loss and damage suffered by a person because of conduct that was engaged in in contravention of a number of specified chapters, parts or provisions of the Corporations Act, including Chapter 5C (relevant s 1325 provisions). Such an order may be made against the person who engaged in the conduct or a person who was involved in the contravention. 3.195 So much is clear from a reading of the provision. The difficult question is: in what circumstances can such an order be made? Two situations may arise: (a) in a proceeding instituted under, or for a contravention of, a relevant 1325 provision, the court finds that a party to the

proceeding has suffered or is likely to suffer loss or damage because of conduct of another person that was in contravention of a relevant s 1325 provision: s 1325(1); and (b) a person who has suffered or is likely to suffer loss or damage because of conduct of another person that was in contravention of a relevant s 1325 provision applies for the order: s 1325(2). 3.196 An appreciation of the meaning of s 1325 requires an understanding of its provenance and history. It first appeared in the Corporations Act 1989 (Cth). In the explanatory memorandum to the bill for that Act it was said to be ‘a new provision. It finds a parallel in TPA s 87.’187 3.197 This leads back to High Court’s decision in Sent v Jet Corporation (Aust) Pty Ltd (1986) 160 CLR 540 in which the High Court considered the construction of s 87(1) and (1A) of the Trade Practices Act 1974 (TPA) as they stood prior to 1986. At that time the text of s 87(1) was as follows (abbreviated and emphasised to focus on the critical words and to show the link with s 1325(1)): Without limiting the generality of section 80, where, in a proceeding instituted under, or for an offence against, this Part, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this sub-section) in contravention of a provision of Part IV or V, the Court may, whether or not it grants an injunction under section 80 or makes an order under section 80A or 82, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention …

3.198 The Court held that the relief which might be granted to a party under this provision was ancillary or additional to the relief which the Court might grant in the proceeding under other provisions of the Corporations Act, although the power to grant it was not dependent on the granting of relief under those other provisions. The basis of the Court’s reasoning on this point was that the requirement that the person who has suffered the loss [page 82]

and damage be a ‘party to a proceeding’ under the Corporations Act would be devoid of content if the right to seek relief under s 87(1) were acquired simply by making an application under that section.188 3.199 Section 1325(1) is relevantly indistinguishable from s 87(1) of the TPA as it was when Sent v Jet Corporation was decided, and the powers that it confers are likewise ancillary to the relief that the Court might grant in an existing proceeding. 3.200 The TPA s 87(1A) then provided that (again abbreviated and with emphasis to show the link with s 1325(2)): Without limiting the generality of section 80, the Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this sub-section) in contravention of a provision of Part V, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention …

3.201 The Court held189 that despite that, as a matter or ordinary construction, there was much to be said for the view that an application under s 87(1A) could stand on its own feet and was not required to be founded on some other proceeding, in fact such an application was required to be ancillary to some other proceeding under the TPA due to the combined effect of three indicia: (a) the fact that the relief was discretionary. It would be curious to provide a right to damages under s 82 and quite independently a right to a discretionary grant of compensation under s 87(1A), especially where the former was subject to a limitation period whereas the latter was not. The discretionary power was more understandable if seen as something that a person not a party may seek incidentally to some other proceeding instituted by and against other persons under other provisions of the TPA; (b) the place of s 87 in the Corporations Act, coming immediately after the provision which conferred jurisdiction on the Federal Court to hear and determine ‘actions, prosecutions and other proceedings’ under Part VI of the TPA whereas all other provisions providing for such proceedings came before s 86, and in s 83 a distinction was made between those ‘proceedings’ and

‘an application’ under s 87(1A). In addition, the fact that s 83 provided evidentiary assistance to applicants under s 87(1A) but not parties under s 87(1) suggested that s 87(1A) was directed to applications in an existing proceeding by persons not a party; and (c) the complementary nature of the language in s 87(1) and 87(1A). [page 83] 3.202 The Court therefore found that compensatory relief under s 87(1A) could only be applied for and granted in another proceeding instituted under or for an offence against a provision of Part VI in respect of a contravention of Part V. Such an application could be made by a person who was not a party to the original proceeding.190 3.203 After the judgment in Sent v Jet Corporation was handed down, there was a further amendment to the TPA to insert a new s 87(1C) and s 87(1CA).191 The first new subsection provided that a free-standing application under s 87(1A) could be brought. The second new sub-section provided for a general limitation period for applications under s 87(1A) of 3 years except for a breach of s 52A which remained at 2 years. 3.204 When s 1325 was enacted it closely followed s 87(1), (1A), (1B) and (1CA) of the TPA. However, it did not include any parallel to s 87(1C). In other words, whilst deliberately modelling s 1325 on s 87, Parliament failed to include in it the additional provision that overcame the decision in Sent to explicitly create a free-standing right to make an application under s 1325(2). 3.205 Originally s 1325 was confined to matters involving contraventions of Parts 7.11 and 7.12, which were the prospectus and fund raising provisions of the 1989 Act and the Corporations Law. In s 1005 of the 1989 Act, and the Corporations Law, there was a general damages provision in relation to any contraventions of Parts 7.11 and 7.12. So, as with s 87(1A), there was at the same time a right to

damages under s 1005 and a right to discretionary relief under s 1325(2). 3.206 The last point to be made about s 1325, as enacted in 1989, is that the legislative scheme did not include any provision equivalent to s 83 of the TPA, nor was there anywhere in the 1989 Act any provision equivalent to the then s 86 of the TPA (see para 3.201(b) above). 3.207 The result was, at the time that s 1325 was first enacted, the language of subss (1) and (2) was in most respects the same as the two provisions considered in Sent v Jet Corporation, but: (a) one of the three indicia referred to by the High Court was not available, namely that the position of s 1325 in the legislation did not give rise to the second indicium; (b) nor was there any equivalent provision to s 83 to add weight to the distinction so observed; (c) in addition, such additional weight as the first indicium gained by the fact that s 87(1A) did not have a limitation period attached was not present in s 1325(2). 3.208 Clearly, on the basis of what is said in the preceding paragraphs, Sent v Jet Corporation could have been distinguished and found not to control the [page 84] construction of s 1325(2). Whether that would lead to a different construction is not so clear. The failure to include in s 1325 the enabling provision put into the TPA in response to Sent v Jet Corporation (subs (1C)) must carry a considerable weight in determining Parliament’s intention. 3.209 In the CLERP Act, s 1325(1) and (2) were amended to refer to contraventions of ‘Chapter 5C or 6D or Part 7.11.’192 At that stage: (a) chapter 5C was, as it now is, the legislative scheme dealing with managed investment schemes;

(b) chapter 6D dealt with fundraising, being the subject-matter of the previous Part 7.12; and (c) part 7.11 was, as it had been in 1989, the collection of provisions dealing with market conduct and misconduct. 3.210 Although, in relation to Part 7.11, s 1005 still provided a right to recover loss or damage suffered by conduct in contravention of that part, in Chapters 5C and 6D there was no such general provision. 3.211 The remedies in Chapter 6D arose under ss 729 (loss or damage by misleading statements or omissions in breach of s 728) and 737 (a right to recover certain subscription monies), but did not extend to every contravention of that Chapter. 3.212 The remedies under Chapter 5C arose under s 601MA (available to members of a scheme against the responsible entity for any contravention of Chapter 5C) and s 601MB (a right to avoid contracts for subscription for interests in an unregistered scheme and recover monies paid). In addition to that there were 5 civil penalty provisions in Chapter 5C. 3.213 As a result, s 1325(2) ceased to exhibit in any coherent way the first indicium relied upon by the High Court in Sent v Jet Corporation. Its language now extended to many provisions where there was not a right to compensation provided elsewhere in the Corporations Act. 3.214 Subsequently, Chapter 6CA (continuous disclosure) was added to the list of provisions mentioned in s 1325. That chapter contains no provision for civil liability for a contravention of its requirements, but includes two financial services civil penalty provisions. 3.215 The subject-matter of the former part 7.11 is now included in Division 2 of Part 7.10. Civil liability for contravention of these provisions is divided between the civil penalty regime for ss 1041A– 1041D (all of which are financial services civil penalty provisions) and general civil liability under s 1041I (of the kind found in the former s 1005 but modified by the proportionate liability provisions

of Div 2A) for ss 1041E–1041H. The remainder of Part 7.10 (being the insider trading provisions) establishes two further financial services civil penalty provisions. [page 85] 3.216 The last addition to s 1325 as it presently stands is a reference to s 798H(1). That is a civil penalty provision relating to compliance with market integrity rules by, mainly, operators and participants in licensed securities markets. 3.217 In the context of the rights of members of a registered scheme to sue directors of the RE, the first possible application of s 1325(1) is in proceedings brought against the RE under s 601MA where it is alleged that the directors were involved in the contravention. That prospect immediately directs attention to a possible tension between the two provisions. As stated above, s 601MA does not provide for any right to relief against officers of the RE, and proposed amendments to include such a right were rejected in the Senate. But it seems indisputable that a member who brings a proceeding under s 601MA against the RE for loss resulting from the RE’s contravention of any provision of Chapter 5C can make an application for relief under s 1325(1) against any person involved in that contravention. Of course, this extends beyond the directors and officers of the RE, but they are the most likely candidates. There is no basis to read s 1325(1) down to prevent such claims. 3.218 A more difficult question might arise in the case of conflict between the generality of s 601MA and the restrictions in s 1317J on who may bring claims for compensation under s 1317H if a member seeks to bring a proceeding against the RE under s 601MA for a contravention of s 601FC(1). It would seem arguable under the principles of Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 that the achievement of harmonious goals within the Corporations Act would require that s 601MA be read down to exclude actions for a breach of s 601FC(1).193 In addition, the reasoning of Fraser JA in McCracken v Phoenix Constructions Pty Ltd, discussed at

paras 3.191–3.193 above, might well be applied to resolve such a question and lead to the same conclusion. 3.219 In the few authorities that there are in this area, the point does not appear to have been taken, and it has been assumed that a proceeding under s 601MA will lie where it is alleged that the RE has breached a duty in s 601FC.194 If so, then relief under s 1325(1) can be sought against directors and persons involved in the breach of duty. 3.220 The critical question about the construction of s 1325(2) is whether it confers a stand-alone right of action. There are two branches to this question. The first is whether action under s 1325(2) can be brought against a contravener where the Corporations Act does not elsewhere create a cause [page 86] of action to recover loss or damage. The second is whether s 1325 enables an order to be made against a person involved in a contravention when no other provision of the Corporations Act makes them so liable. 3.221 Authority dealing with these issues is scant. If one puts aside passing references which indicate a judicial assumption that s 1325 does create causes of action,195 there are three decisions where the problem or something approaching it was addressed in detail. 3.222 The first is the judgment of Perram J in Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450. In that case, members of a registered managed investment scheme sued directors of the responsible entity of a registered scheme under s 1325(2) for contraventions of a provision of Chapter 5C, namely s 601FD(1), which imposes duties on the officers of a responsible entity. In a strike-out application, the directors argued, inter alia, that s 1325(2) was a general provision, and was displaced by the specific provisions of s 601MA which imposed liability for contraventions of Chapter 5C solely on the responsible entity.

3.223 The argument was rejected on the grounds that the negative implication about s 1325(2) was inconsistent with the express words of that section, and also inconsistent with s 601MA(3) which expressly preserved any liability which a person had under other provisions of the Act or under other laws. The suggested negative implication could not be supported in the face of this by the other extra-statutory matters referred to by counsel for the directors.196 3.224 In Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19, Corboy J determined an application for security for costs where some of the plaintiff’s claims were made under s 1325(2) against the directors of the responsible entity as contravenors of s 601FD as officers of the entity. His Honour said, with respect to the merits of the claim: An investor’s standing to bring a claim under s 1325 of the Corporations Act for loss allegedly caused by a contravention of s 601FD (or other provisions of the Corporations Act) would appear, on the face of s 1325, to be clear (s 1325(2) confers a power in the court to make orders ‘on the application of a person who has suffered, or is likely to suffer, loss or damage because of the conduct of another person’). However, there is an argument that a more limited view should be taken of s 1325: see Hanrahan, PF Funds Management in Australia (Lexis Nexis Butterworths 2007) at 14.52 and following. Nevertheless, for the purpose of this interlocutory application, I accept that there is a good argument that Sugarloaf can maintain a claim against the Directors under s 1325 for any loss or damage that it can

[page 87] establish was caused by their alleged contraventions of the Corporations Act and, in particular, s 601FD.197

3.225 In the relevant part of the work of Professor Hanrahan referred to, the learned author relates the same history of the enactment of Chapter 5C discussed in Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450. The first part of the argument suggested was that at the time the Managed Investments Act 1998 was enacted, it was not intended that there be any rights of action on the part of investors except under s 601MA (and possibly 601MB).198 Professor Hanrahan concedes, however, that if this were the position,

it was reversed by the legislation in 1999. The second part of the argument was that: [T]he procedural restrictions that apply to claims at general law (which operate to reduce the risk of multiple suits and double recovery) should be applied to actions under s 1325 …199

3.226 This is possibly a reference to the sort of arguments which were influential in Fraser JA’s decision in McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27. 3.227 In Karl Suleman Enterprizes Pty Ltd v Pham [2011] NSWSC 1405, Harrison AsJ permitted a pleading amendment relying on s 1325(2) to claim relief against a person alleged to be involved in a contravention of s 601ED(5). His Honour said simply that ‘s 1325(2) makes a person who has engaged in conduct in contravention of certain parts of the Act liable to pay damages.’200 On an appeal against this decision, Beech-Jones J noted that none of the parties had referred to the legislative history of s 1325 or the decision in Sent v Jet Corporation. His Honour said that the different legislative contexts and histories provided some scope for argument that the reasoning in Sent v Jet Corporation may not be applicable, but, as he had not heard the parties on the point, took the issue no further.201 3.228 However, in a further application in the same proceeding, the issue was fully argued, and Beech-Jones J accepted the construction of s 1325 which permitted a stand-alone action.202 Of significance in his Honour’s reasoning was s 1326, which provides that: [page 88] Nothing in any of sections 1323, 1324 and 1325 limits the generality of anything else in any of those sections.

3.229 There is thus now a fully reasoned and persuasive first instance decision in support of s 1325(2) as creating a stand aloneright of action against any persons contravening Chapter 5C or involved in such a contravention. If the law remains to that effect,

then scheme members do have a right to sue directors of the RE for damages flowing from their contravention of s 601FD(1), notwithstanding the restrictions otherwise imposed by s 1317J on compensation claims under Part 9.4B for the same contravention. 3.230 In the light of the progress of authority set out above, it is likely that Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (No 2) (2013) 92 ACSR 691 will be followed by other first-instance judges. It remains to be seen whether the possible disharmony between this result and the compensation regime in Part 9.4B is taken up and if so whether there will be a change in approach from that perspective. 1. 2. 3.

4. 5. 6. 7. 8. 9. 10. 11.

12. 13.

14. 15. 16. 17. 18.

Unregistered schemes may exist which may or may not be required to be registered, but in any case are outside the scope of this chapter. Corporations Act ss 601FA, 601FB. M Grant, I Ramsay, ‘Managed Investment Schemes: An Industry Report,’ Centre for Corporate Law and Securities Regulations, The University of Melbourne, 2003 noted that the overwhelming majority of schemes were public unit trusts. The most recent ABS statistics show that public unit trusts and cash management trusts had unconsolidated assets of approximately $317 bn while other managed funds institutions (which may include trusts) had $36 bn (ABS, 2014). Corporations Act s 601FC(2). For example, directors may often be required to take care not to cause the company harm flowing from a breach of the Corporations Act. Corporations Act s 601FD. Corporations Act s 601FC(1)(a)–(e), (i)–(k), (m). Corporations Act s 601FC(1)(f) and (g). Corporations Act s 601FC(1)(h). Corporations Act s 601FC(1)(l). Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Other People’s Money, Report No 65 (June, 1993), at [10.14]. Corporations Act s 601GB. P Hanrahan, ‘The Responsible Entity as Trustee’ in I M Ramsay, Key Developments in Corporate Law and Trusts Law: Essays in Honour of Professor Harold Ford, LexisNexis Butterworths, Australia, 2002. Cf Corporations Act s 185 in relation to the duties of directors. (1999) 32 ACSR 107; [1999] NSWSC 457 at [41]. (2001) 40 ACSR 124; [2001] NSWSC 1089 at [13]–[14]. Wellington Capital Ltd v ASIC (2014) 314 ALR 211; [2014] HCA 43 at [13] (citations omitted). Wellington Capital Ltd v ASIC (2014) 314 ALR 211; [2014] HCA 43 at [14].

19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

44.

45. 46.

Corporations Act s 601FC(3) makes such a breach a contravention. See Corporations Act Part 9.4B. Corporations Act s 1317J. Corporations Act s 1317G(1). Corporations Act s 601FD(1). Corporations Act s 601FD(1)(f). The question whether they thereby also have a liability to compensate the members or the RE is taken up in the last section of this chapter. ASIC v Maxwell (2006) 59 ACSR 373; [2009] NSWSC 1052 at [104], [110]. Vrisakis v Australian Securities Commission (1993) 9 WAR 395; (1993) 11 ACSR 162 at [449]–[550]. Vines v ASIC (2007) 73 NSWLR 451; [2007] NSWCA 75 at [310], [539] (Spigelman CJ), [596]–[600] (Santow JA), [814] (Ipp JA). ASIC v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69; [2010] FCA 27 at [50]. Ingot Capital Investments v Macquarie Equity Capital Markets (No 6) (2007) 63 ACSR 1; [2007] NSWSC 124 at [1437]. See, eg, ASIC v Warrenmang Ltd (2007) 63 ACSR 623; [2007] FCA 973 at [16]–[28]; ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 at [49]–[51]; ASIC v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287 at [259]. Re S & D International Pty Ltd (No 4) (2010) 79 ACSR 595; [2010] VSC 388 at [276]–[277]. Agricultural Land Management Ltd v Jackson (No 2) (2014) 98 ACSR 615 at [248]–[252]. Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507; 53 ACSR 208; [2005] HCA 23. ASIC v Cassimatis (2013) 220 FCR 256; (2013) 94 ACSR 623; [2013] FCA 641 at [172]. This section was repealed by the FOFA legislation and replaced with the ‘best interests’ obligations now in ss 961B–961G of the Corporations Act. ASIC v Cassimatis (No 2) (2013) 96 ACSR 272; [2013] FCA 1008 at [66]–[87]. ASIC v Cassimatis (No 2) (2013) 96 ACSR 272; [2013] FCA 1008 at [80]. ASIC v Cassimatis (No 2) (2013) 96 ACSR 272; [2013] FCA 1008 at [87]. A duty to ‘act honestly’ first appeared in the Companies Act 1958 (Vic) s 107. Byrne v Baker [1964] VR 443 at 450; Marchesi v Barnes [1974] VR 434 at 437. A Black, T Bostock, G Golding & D Healey, CLERP and the New Corporations Law, 2nd ed, LexisNexis Butterworths, 2000 at 142–3. (Citations preserved). Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261 at 271 (King CJ with whom Case J agreed). In Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) 56 SASR 455; (1990) 3 ACSR 207, the Full Court also followed Australian Growth Resources but expressly indicated that it did so reluctantly. Marchesi v Barnes [1970] VR 434 at 438 (Gowans J). A similar view was adopted in: Morgan v Flavel (1983) 1 ACLC 831; Flavel v Roget (1990) 1 ACSR 595. In Fitzsimmons v R (1997) 23 ACSR 355, Parker J assumed, without deciding, the correctness of this approach. Bell Group Ltd v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1; [2008] WASC 239 at [4374]–[4376]. Bell Group Ltd v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1; [2008] WASC 239 at [4456].

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

Bell Group Ltd v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1; [2008] WASC 239 at [4619]. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1; [2012] WASCA 157. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1; [2012] WASCA 157 at [993] (Lee AJA), [1988] (Drummond AJA). Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1; [2012] WASCA 157at [923]. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1; [2012] WASCA 157at [1988], [1995]. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1; [2012] WASCA 157 at [2736]; see also [2772], [2796]. R Baxt, I Renard, R Simkiss and J Webster, ‘CLERP’ Explained, CCH Australia Limited, Australia, 2000 at 32. Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998, para 4.2. Black, Bostock, Golding and Healey, above n 42, at 143. At least, that is what appears to have been the belief in the Senate. See Commonwealth Hansard, Senate, 13 October 1999, p 9625–6. Baxt, Renard, Simkiss and Webster, above n 53, at 34. Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [738]–[740]. Downer EDI Ltd v Gillies (2012) 92 ACSR 373; [2012] NSWCA 333 at [76]. Downer EDI Ltd v Gillies (2012) 92 ACSR 373; [2012] NSWCA 333 at [84]. In many cases the relevant passages have not distinguished between the two limbs of s 181. ASIC v Maxwell (2006) 59 ACSR 373 at [109]. ASIC v Macdonald (No 11) (2009) 71 ACSR 368 at [663]. Re S & D International Pty Ltd (No 4) (2010) 79 ACSR 595; [2010] VSC 388 at [283]. Australian Motor Finance Pty Ltd v Angeleri [2010] FCA 1431 at [51]–[52]; Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd (2011) 86 ACSR 393 at [150]. Australian Securities and Investments Commission v Somerville (2009) 77 NSWLR 110; [2009] NSWSC 934 at 123–4 (citations omitted). Re Colorado Products Pty Ltd (2014) 101 ACSR 233; [2014] NSWSC 789 at [420]. Re Colorado Products Pty Ltd (2014) 101 ACSR 233; [2014] NSWSC 789 at [420]. Charterbridge v Lloyds Bank [1970] Ch 62 at 74. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 at [1009]– [1012]. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 at [2079]. Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 at [2896]– [2898]. Equiticorp v Bank of New Zealand (1993) 32 NSWLR 50 at 147–8. Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (2011) 86 ACSR 277; [2011] VSCA 392 at [33]. Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd (2015) 104 ACSR 312; [2015] VSCA 9.

76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.

100. 101. 102. 103.

104. 105.

Re S & D International Pty Ltd (2010) 79 ACSR 595; [2010] VSC 388 at [283]. Chew v R (1992) 173 CLR 626; (1992) ALR 171 at 633. R v Byrnes (1995) 183 CLR 501; (1995) 130 ALR 529; [1995] HCA 1 at 512. Edwards v R (1992) 173 CLR 653; (1992) 107 ALR 190 at 659; R v Byrnes (1995) 183 CLR 501; (1995) 130 ALR 529; [1995] HCA 1 at 513. R v Byrnes (1995) 183 CLR 501; (1995) 130 ALR 529; [1995] HCA 1 at 513. R v Byrnes (1995) 183 CLR 501; (1995) 130 ALR 529; [1995] HCA 1 at 514–15. Doyle v ASIC (2005) 227 CLR 18; (2005) 223 ALR 218; [2005] HCA 78 at [29]. R v Byrnes (1995) 183 CLR 501; (1995) 130 ALR 529; [1995] HCA 1 at 515. Doyle v ASIC (2005) 227 CLR 18; (2005) 223 ALR 218; [2005] HCA 78 at [37]. News Ltd v South Sydney Rugby League Football Club Ltd (2003) 215 CLR 563; (2003) 200 ALR 157; [2003] HCA 45 at [39]. Above n 11. Above n 11 at [10.16]. Above n 11 at [10.17]. Above n 11 at [10.6]. Above n 11 at [10.18]. Above n 11 at [10.19]. Above n 11 at [10.21]. Above n 11 at [10.20]. Corporations Act s 610FD(2). Above n 11 at [10.7]. Above n 11 at [10.18]. Above n 11 at [10.7], [10.18], fn 13 and fn 42. H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporation Law, LexisNexis Butterworths (online edition), Australia at [8.065.6]. When first enacted, s 232(3) provided penalties for breach and those penalties varied according to whether or not the breach was committed with intent to deceive or defraud. Under the Corporate Law Reform Act 1992, the concept of civil penalties was introduced in a new Part 9.4, and s 232(3) was repealed. Pursuant to s 1317DA, s 232(2) was a civil penalty provision and could be the subject of civil penalty proceedings with penalties of up to $200,000 and disqualification for contravention. Knowing, intentional or reckless breaches of the civil penalties provisions with intent to gain or intent to deceive or defraud attracted criminal liability under s 1317FA. Despite what was said in ALRC 65 at [10.6]; see para [3.75] above. See paras 3.101–103 below. Cases such as Smith v Fawcett [1942] Ch 304. Above n 98 at [8.110]; H A J Ford, R P Austin and I M Ramsay, Company Directors: Principles of Law and Corporate Governance Austin, LexisNexis Butterworths, 2005 at [7.11]; see Corporations Act s 197. While a director owes a duty to exercise care at general law, there is no suggestion that the director of a corporate trustee owes such a general law duty to the beneficiaries. Above n 98 at [8.070] citing the dictum of Cardozo J from Meinhard v Salmon (1928) 249 NY 458; (1928) 62 ALR 1; (1928) 164 NE 545. This is the basis for cases like Regal Hastings v Gulliver [1967] 2 AC 134.

106. Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited [2013] FCA 74 at [484]. 107. Nocton v Lord Ashburton [1914] AC 932 at 954 (Lord Haldane). 108. Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 196–8 (Tadgell J) accepting the submission for Mr Eise that that ‘there are but two areas of inquiry: whether the defendant has acted honestly, ie without moral turpitude, and whether, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused’ and then applying that test ‘If Mr Eise’s conduct at and immediately before the annual general meeting was not dishonest — involving some moral turpitude — it was surely conduct of the utmost folly; and it involved clear and flagrant breaches of both the letter and the intent of the Code’: ASIC v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [166] (Santow J); ASIC v Vines (2005) 65 NSWLR 281; [2005] NSWSC 1349 at [43] (Austin J). 109. ASIC v Macdonald (No 12) (2009) 259 ALR 116; [2009] NSWSC 714 at [11]–[22] (Gzell J); adopted in Morley v ASIC (No 2) (2011) 83 ACSR 620; [2011] NSWCA 110 at [9] and ASIC v Healey (No 2) (2011) 196 FCR 430; (2011) 284 ALR 734; [2011] FCA 1003 at [88]. 110. Peters v R (1988) 192 CLR 493. 111. State of South Australia and South Australian Asset Management Corporation v Timothy Marcus Clark (1996) 66 SASR 199; (1996) 19 ACSR 606 at [215]. 112. State of South Australia and South Australian Asset Management Corporation v Timothy Marcus Clark (1996) 66 SASR 199; (1996) 19 ACSR 606 at [219]. 113. State of South Australia and South Australian Asset Management Corporation v Timothy Marcus Clark (1996) 66 SASR 199; (1996) 19 ACSR 606at [232]. 114. State of South Australia and South Australian Asset Management Corporation v Timothy Marcus Clark (1996) 66 SASR 199; (1996) 19 ACSR 606at [235]. 115. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [325] (emphasis added); see also ASIC v Macdonald (No 12) (2009) 259 ALR 116; (2009) 73 ACSR 638; [2009] NSWSC 714 at [26]; Gillfillan v ASIC (2012) 92 ACSR 460; [2012] NSWCA 370 at [293] and [295]; Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1; 292 ALR 382; 90 ACSR 288; [2012] FCA 634 at [661]. 116. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [326]. 117. Explanatory Memorandum, Corporate Law Reform Bill 1992 at para 84. 118. Above n 117 at para 84. 119. Above n 117 at para 86. 120. Corporate Law Reform Bill 1992: Public Exposure Draft and Explanatory Paper at para 100. 121. Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407 at 427. See also Australian Securities Commission v Gallagher (1993) 11 WAR 105; (1993) 10 ACSR 43 at 53. 122. Above n 117 at para 101. 123. AWA v Daniels (1992) 7 ACSR 759 at 867. 124. Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 at para 6.25. See Ford, Austin and Ramsay, above n 103 at 229. 125. ALRC 65 at [10.19] and fn 43. 126. P Hanrahan, ‘Managed Investment Schemes: The Position of Directors Under Chapter 5C of the Corporations Law’ (1999) 17(2) Companies and Securites Law Journal 67 at 72, fn 28. 127. ASIC v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 at [7196].

128. Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; (2011) 83 ACSR 484; [2011] FCA 717 at [191]. 129. See ASC v AS Nominees (1995) 62 FCR 504; (1995) 18 ACSR 459 at 470. 130. Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [543]. 131. See section VII.B of this chapter. 132. Above n 117 at para 89. 133. Baxt, Renard, Simkiss and Webster, above n 53, at [2.30]. 134. See Deputy Commissioner of Taxation v Dick (2007) 64 ACSR 61; [2007] NSWCA 190. 135. Deputy Commissioner of Taxation v Dick (2007) 64 ACSR 61; [2007] NSWCA 190 at [78]; ASIC v Healey (No 2) (2011) 196 FCR 430; (2011) 85 ACSR 654; (2011) at [86], where Middleton J refers to s 1317S as well as s 1318. 136. See for example ASIC v Whitlam (No 2) (2002) 42 ACSR 515; [2002] NSWSC 718 (Gzell J); McLellan v Carroll (re The Stake Man Pty Ltd) (2009) 76 ACSR 67; [2009] FCA 1415 (Goldberg J). 137. ASIC v Plymin (No 2) (2003) 21 ACLC 1237; [2003] VSC 230 at [7]. See also ASIC v Healey (No 2) (2011) 196 FCR 430; (2011) 85 ACSR 654; [2011] FCA 1003 at [96]. 138. ASIC v Vines (2005) 65 NSWLR 281; [2005] NSWSC 1349 at [9]. 139. Above n 11 at para 10.8 (citations omitted). 140. Above n 13 at 248. 141. See Bell Group v Westpac Banking Corp (No 9) (2008) 225 FLR 1; (2008) 70 ACSR 1; [2008] WASC 239 at [4501]–[4503] (Owen J); Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; (1984) 55 ALR 417; [1984] HCA 64 at 104 (Mason J); Chan v Zacharia (1984) 154 CLR 178; (1984) 53 ALR 417; [1984] HCA 36 at 198 (Deane J), see n 141 below. 142. Agricultural Land Management Ltd v Jackson (No 2) (2014) 98 ACSR 615; [2014] WASC 102 at [266]–[274]. 143. A J Myers AO QC and E Boros, ‘Company Directors’ and Officers’ Conflicts of Interest’(Paper presented at the Supreme Court of Victoria Inaugural Commercial Law Conference — Current Issues in Commercial Law, 12 November 2009), citing Deane J in Chan v Zacharia (1984) 154 CLR 178; (1984) 53 ALR 417; [1984] HCA 36 at 198. See also Fitzsimmons v R (1997) 23 ACSR 355 at 357–9. See also M Bryan, ‘Boardman v Phipps (1967)’ in C Mitchell, Landmark Cases in Equity, Hart Publishing, Australia, 2012. 144. See generally J H Langbein, ‘Questioning the Trust Law Duty of Loyalty — Sole Interest or Best Interest’ (2005) 114 Yale LJ 929. See also Bryan, above n 143. 145. Langbein, above n 144. 146. The issues and problems in the litigation are fully examined in Bryan, above n 143. 147. See R Austin, Company Directors: Principles of Law and Corporate Governance, LexisNexis Butterworths, 2005 at [9.10]. 148. Australian Securities and Investments Commission v Australian Property Custodian Holdings (No 3) [2013] FCA 1342 at [479]. 149. Australian Securities and Investments Commission v Australian Property Custodian Holdings (No 3) [2013] FCA 1342 at [484]. 150. H Ford, W A Lee, M Bryan, I G Fullerton and J Glover, Thomson Reuters, Principles of the Law of Trusts (14 November 2012) at [9.710].

151. Cowan v Scargill [1985] Ch 270 at 286–7. 152. M S Donald, ‘“Best” Interests?’ (2008) 2 Journal of Equity 245 at 247. 153. R Megarry, ‘Investing Pension Funds: The Mineworkers Case’, in T G Youdan (ed), Equity, Fiduciaries and Trusts, Carswell, 1989, at pp 152–3 and 158–9; see also G W Thomas, ‘The duty of trustees to act in the “best interests” of their beneficiaries’ (2008) 2 Journal of Equity 177 at 184. 154. Thomas, above n 153, at 184; Donald, above n 152, at 255–7. 155. Donald, above n 152 at 267; D Mendoza-Jones, ‘Superannuation Trustees: Governance, best interests, conflicts of interest and the proposed reforms’ (2012) 30(5) Company and Securities Law Journal 297 at 301, both citing Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862. 156. M Stone, ‘The Superannuation trustee: Are fiduciary obligations and standards Appropriate?’ (2007) 3(1) Journal of Equity 167 at 172. 157. Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [488]. 158. Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87; [2006] VSC 112 at [102], [107]. 159. Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd (2011) 292 ALR 167, [2011] NSWCA 204 at [121]. 160. Jacob’s Law of Trusts in Australia, 7th ed, LexisNexis, NSW, 2006, at [2922]. 161. Asea Brown Boveri Superannuation Fund 1 Pty Ltd v Asea Brown Boveri, McKeown, Gray & ABB Properties (Vic) Pty Ltd [1999] 1 VR 144 at [57]–[59]. 162. Australian Law Reform Commission, Collective Investments: Superannuation, Report No 59 (1992) para 9.22. 163. Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 at 885; see also Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [486]. 164. J R F Lehane, ‘Delegation of Trustees’ Powers and Current Developments in Investment Funds Management’ (1995) 7(1) Bond Law Review 36. 165. See ALRC 59 para 9.15. 166. Above n 164 at 37. See Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [487]. 167. ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [481]. 168. ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at [489]. 169. ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 at at [490]. 170. See Hanrahan, above n 126, at 78. That article referred to reg 5C.11.07 introduced by the Corporations Regulations (Amendment) 1998 (Cth) No. 186 — REG 13 since repealed. 171. Which can be the RE itself. 172. See Langbein, above n 144, at 952–4. 173. By virtue of s 208(1)(e), as modified by s 601LC, and s 210. 174. See Langbein, above n 144, at 952. 175. P Hanrahan, Funds Management in Australia: Officers’ Duties and Liabilities, 1st ed, LexisNexis Butterworths, NSW, 2007 at 267. 176. Explanatory Memorandum, Managed Investments Bill 1997, para 14.2. 177. P Hanrahan, ‘Managed Investment Schemes: The Position of Directors Under Chapter

178. 179. 180.

181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194.

195. 196. 197. 198.

199. 200. 201.

5C of the Corporations Law’ (1999) 17(2) Companies and Securites Law Journal 67 at 75– 7 discusses the debate in some detail. Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609. See Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722. Cf Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 22 ACSR 270. GE Capital Australia v Davis (2002) 11 BPR 20, 529; [2002] NSWSC 1146; Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570; [2004] SASC 61 at [115]; Re Colorado Products Pty Ltd (2014) 101 ACSR 233; [2014] NSWSC 789 at [401]–[402]. McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27; [2012] QCA 129 at [33]. McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27; [2012] QCA 129 at [27]. McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27; [2012] QCA 129 at [28]– [29]. McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27; [2012] QCA 129 at [30]. McCracken v Phoenix Constructions Pty Ltd [2013] 2 Qd R 27; [2012] QCA 129 at [30]. Viz., persons ‘involved’ in the contravention under s 79 of the Corporations Act. Explanatory Memorandum, Corporations Bill 1988 (Cth) at [3956]. Sent v Jet Corporation (Aust) Pty Ltd (1986) 160 CLR 540; (1986) 66 ALR 73; [1986] HCA 35 at 543. Sent v Jet Corporation (Aust) Pty Ltd (1986) 160 CLR 540; (1986) 66 ALR 73; [1986] HCA 35 at 544–5. Sent v Jet Corporation (Aust) Pty Ltd (1986) 160 CLR 540; (1986) 66 ALR 73; [1986] HCA 35 at 545. Statute Law (Miscellaneous Provisions) Act 1986 (Cth). CLERP Act Sch 3, Items 71, 72. Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355; (1998) 153 ALR 490; [1998] HCA 28 at [69]–[71]. See Huntley Management Ltd v Australian Olives Ltd (2009) 74 ACSR 266; [2009] FCA 1081; Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Company Ltd (2008) 66 ACSR 594; [2008] WASCA 119; Mercedes Holdings v Waters (No 2) (2010) 186 FCR 450; (2010) 78 ACSR 118; [2010] FCA 472; Snelgrove v Great Southern Managers Australia Ltd (In Liq) (Receiver and Manager Appointed) [2011] WASC 103. See, eg, ASIC v HPL Financial Planning Pty Ltd (2007) 164 FCR 487; (2007) 245 ALR 29; [2007] FCA 1868 at [48] (Finkelstein J). Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450; (2010) 78 ACSR 118; [2010] FCA 472 at [33]. Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 at [62]. Above n 175 at [14.52]. The Explanatory Memorandum for the Bill said as much at [14.2] and a Greens amendment to change this position was defeated in the Senate. As noted, the Managed Investments Act 1998 did not insert the reference to Chapter 5C in s 1325. Hanrahan, above n 175, at 482. Karl Suleman Enterprizes Pty Ltd (in liq) v Philip Viet Dzung Pham [2011] NSWSC 1405 at [38]. Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (2012) 90 ACSR 554; [2012] NSWSC 645 at [23].

202. Karl Suleman Enterprizes Pty Ltd (in liq) v Pham (No 2) (2013) 92 ACSR 691; [2013] NSWSC 110 at [70] - [109].

[page 89]

4 ADVISING THE DIRECTORS AND MANAGEMENT OF AN ENTITY IN FINANCIAL CRISIS Michael Sloan, Sarah Kimpton and Mark Costello1 Michael Sloan is a partner in the Restructuring and Special Situations Group at Ashurst Australia in Melbourne. He acts for clients on complex restructurings and insolvency administrations, both in Australia and internationally. Michael has acted for numerous corporations on restructurings in the property, agribusiness, retail, telecommunications, managed investment scheme and energy and resources sectors. Michael is also a senior lecturer for Monash University’s corporate insolvency post-graduate course and is the Chairman of the Australian Turnaround Management Association. Sarah Kimpton is a lawyer in the Restructuring and Special Situations Group at Ashurst Australia in Melbourne. She works on a range of insolvency related matters, including formal appointments and restructurings. Sarah holds degrees in Law (Hons) and Arts from Monash University. Mark Costello is a barrister at the Victorian Bar practising in commercial and public law and a Senior Fellow of the Faculty of Law at Monash University.

I. Introduction 4.1 The directors of a company in financial distress are faced with numerous hurdles to overcome and pitfalls to avoid. In the Australian legal landscape, the risk of liability for insolvent trading casts a long shadow. It is, however, only one issue that the board will have to contend with: adherence to statutory and common law

duties, whether and when to appoint administrators, how to engage with financiers, staff reduction strategies, the need to retain key [page 90] staff, media management and government liaison all commonly arise in a crisis situation. 4.2 This chapter attempts to identify some of the more common technical issues faced by those called upon to advise the directors and management of an entity in financial crisis. 4.3 The mindsets of directors and senior management are also important intangible factors in any financial crisis. Notwithstanding that the voluntary administration regime has been in place for nearly 25 years, Australian insolvency law is more often than not viewed as a means of creditor protection rather than of corporate restructuring. As one prominent United States bankruptcy lawyer has explained, in that jurisdiction ‘[t]here is a recognition that financial distress is not tantamount to wrongdoing, but a possible outcome in any business investment.’2 The same cannot be said of Australia: directors and executives (and, indeed, some advisors) often approach financial crises with a defensive mindset that does not always assist in preserving enterprise value. 4.4 To an extent that mindset is understandable. The panoply of Australian corporate laws that may affect a director of a distressed company have undoubtedly punitive elements, as well as aspects that do not properly address themselves to the broader community benefits that arise from corporate rehabilitation. Nevertheless, when properly managed with appropriate advice, the Australian regulatory framework does not usually present intractable hurdles for company directors attempting to reorganise a company. Of course, that is not to say that sensible reform ought not be considered. 4.5 We start our consideration with the area of the law most commonly criticised by company directors — insolvent trading.

II. Insolvent trading II.A. Overview 4.6 In any situation of serious financial distress, one of the early questions that diligent directors will put to their advisors will concern the personal risks they face if the company is trading, or starts to trade, whilst insolvent. 4.7 Australia’s insolvent trading regime is arguably one of the most stringent in the world.3 The law imposes a strict duty upon directors not to permit a company to incur debts whilst it is insolvent. Personal liability can be imposed upon directors who breach this duty unless they are able to rely upon one of the available defences. [page 91] 4.8 A subsequently appointed liquidator (or a creditor who has received consent from the company’s liquidator) may seek compensation from the director personally for losses suffered where debts were incurred in breach of the duty to prevent insolvent trading. Further, a director who dishonestly fails to prevent a debt being incurred in such circumstances may commit a criminal offence. 4.9 In section II.B below, we consider the constituent elements of the statutory prohibition on insolvent trading. Defences and relief from liability are considered in section II.C.

II.B. General principles 4.10 Section 588G of the Corporations Act provides that a director will engage in insolvent trading if the following elements are satisfied: Element Incurs a debt Insolvent

Description The company incurs a debt. The company is insolvent at the time of incurring the debt or

Reasonable grounds

Director aware of reasonable grounds Director fails to prevent

becomes insolvent by incurring the debt. At the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent or will become insolvent. The director is aware of such grounds or a reasonable person in a like position in a company in the circumstances of the company would be so aware. The director fails to prevent the company from incurring the debt.

II.B.1. Element 1: incurs a debt 4.11 For the purpose of the insolvent trading provisions, s 588G(1A) of the Corporations Act provides that a company is taken to have incurred a debt by: (a) (b) (c) (d) (e)

paying a dividend; making a reduction in share capital; buying back shares; redeeming or issuing redeemable preference shares; financially assisting a person to acquire shares in itself or its holding company; or (f) entering into an unauthorised uncommercial transaction. 4.12 If the conduct in question does not fall within the scope of deemed debts in s 588G(1A), it will be necessary to examine the nature of the relationship between the parties (including any contractual or relevant statutory provisions) to determine whether or not a ‘debt’ has been ‘incurred’ for the purpose of the insolvent trading regime and, if so, when that debt is incurred. [page 92] 4.13 The simplicity of the statutory phrase ‘incurs a debt’ masks the complexity of circumstances that it encompasses. As Gleeson CJ noted in Hawkins v Bank of China (1992) 26 NSWLR 562, the ‘words “incurs” and “debt” are not words of precise and inflexible

denotation … they are to be applied in a practical and common sense fashion consistent with the context and with statutory purposes.’4 4.14 For common debts, the position is usually straightforward. Robson’s Annotated Corporations Legislation5 gives the following examples of common situations: (a) Leases: the debt is incurred at the time the lease is executed;6 (b) Penalty interest: the debt is incurred at the time the company engages in conduct that gives rise to the obligation to pay interest;7 (c) Bill facilities: the debt is incurred when the facility is entered into;8 and (d) Guarantees: the debt is incurred when the contract of guarantee is executed (even if it is uncertain as to whether the guarantor will need to pay anything under the guarantee).9 4.15 However, the courts have cautioned against a view that a contractual debt will invariably be incurred at the time the contract is made and have pointed to the relevance of inaction on the part of directors in preventing a debt from arising. 4.16 In Standard Chartered Bank v Antico (Nos 1 and 2) (1995) 38 NSWLR 290, Hodgson J explained the operation of the statutory phrase in the following terms: … a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; secondly, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and thirdly as to whether the company would otherwise (in any event) have been liable for the debt.10

4.17 In Shepherd v ANZ Banking Corporation Ltd (1996) 20 ACSR 81, Bryson J considered whether it was relevant that a debt could be avoided [page 93]

for the purposes of one of the statutory predecessors to s 588G. His Honour referred to Hawkins and noted that there was no action available to the director that, if taken, would have avoided the liability (which arose under a guarantee).11 His Honour, however, did not agree with Hodgson J’s suggestion in Antico that ‘choice’ was a relevant, let alone determinative, consideration when deciding whether a debt was incurred for the purpose of the section. 4.18 Though diverging on the relevance of ‘choice’, both Bryson J and Hodgson J acknowledged that, although a particular debt may appear to be incurred at any early date (for example, the date a contract is entered into), there may be circumstances where a subsequent omission renders the whole or part of the debt to be incurred (for the purposes of the section) at a later date. 4.19 Furthermore, it should be noted that what constitutes a debt for the purpose of s 588G may differ from what constitutes a debt for other sections of the Corporations Act, particularly ss 95A, 419, 443A and 556. Cases on the generic concept of ‘debt’ within the context of the Corporations Act should therefore be approached with caution. There is an ongoing debate, for example, as to whether unliquidated damages for breach of contract are ‘debts’ for the purpose of s 95A. In Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471, the New South Wales Court of Appeal held that such a claim was not a debt for the relevant purpose. However, in New Cap Reinsurance v Grant (2008) 68 ACSR 176,12 White J (although bound by Box Valley) pointed to matters of significance to the question that had not been adverted to by the Court of Appeal.

II.B.2. Element 2: the company is insolvent 4.20 Liability under s 588G arises if debts are incurred by the company when it is insolvent. II.B.2.1. The test for insolvency 4.21 Section 95A of the Corporations Act sets out the test for insolvency: (1) A person is solvent if, and only if, the person is able to pay all the person’s debts,

as and when they become due and payable. (2) A person who is not solvent is insolvent.

4.22 The test is a forward-looking test, in the sense that directors are required to consider debts that have been incurred or will become due at least in the near future against the assets or resources available or likely to be available to meet those debts. 4.23 Unlike the accounting concept of ‘going concern’, which looks at a 12 month period into the future,13 applying the forward looking test of [page 94] insolvency is not limited by a specified time period. Rather, it is ultimately dependent upon the circumstances. For example: (a) in Bank of Australasia v Hall (1907) 4 CLR 1514, the High Court, in considering whether a debtor was bankrupt at a particular point in time, held that a judgment debt entered against the debtor one month later, and which was, at the relevant time, an anticipated debt that the debtor had no ability to pay, was a relevant factor in determining the issue of the debtor’s solvency; (b) in Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78, Fullagar J held that, despite the fact that a company had not failed to meet any of its current liabilities and was expected to be able to continue to do so for the next seven years, the fact that it had a large prospective liability, which it was ‘highly probable — practically certain’ it would not be able to meet, meant that it was presently insolvent; and (c) in Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, Lindgren J was prepared to take into account a very substantial debt that was to become due and payable between two and three months later. 4.24 The centrality of the company’s particular circumstances to the s 95A analysis was emphasised in Lewis (as liquidator of Doran

Constructions Pty Ltd) v Doran (2005) 54 ACSR 410, where Giles JA said: Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight. There must of course be ‘consideration … given to the immediate future’ … and how far into the future will depend on the circumstances including the nature of the company’s business and, if it is known, of the future liabilities.14

4.25 A company’s ‘circumstances’ will include its ability to raise funds from external sources, judged in a practical and business-like way having reference to the commercial realities of the case.15 Vague expectations and prospects about the company having sufficient cash available at some indeterminate point in the future cannot be relied upon to avoid concluding that the company is insolvent.16 [page 95] II.B.2.2. Relevant factors 4.26 In determining the question of solvency, the company’s financial condition must be considered in its entirety. The following factors are therefore useful when determining the solvency or insolvency of a company: Factor Company’s cash flow

As and when due, not some time in the future

Description Directors should have careful regard to the company’s cash flow forecast and routinely test the robustness of the assumptions on which these are based. A business must be able to return to a positive net cash flow position to be sustainable over the long term in order to be solvent. A company is not solvent simply because it may be able to pay all of its debts if granted sufficient time to do so by its creditors.17 The position of a debtor who is able to pay all its debts as and when they become due is to be distinguished from that of a debtor who will only be able to pay debts presently due at some future time. Only the former can be said to be solvent.18 In this context, a debt is not always to be regarded as having become ‘due’ upon the date originally stipulated for its payment. If there is a course of dealings under which the debt

is not payable, nor expected by the parties to be payable, until a future time, it is not to be regarded as due at an earlier time.19 Temporary lack of A temporary lack of liquidity, which may be overcome through liquidity v endemic debt or capital equity injections, or the sale of assets, must be shortage of working distinguished from an endemic shortage of working capital capital where liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed.20 The relative insignificance A company’s balance sheet is of lesser importance when of the balance sheet test compared to its cash position. The statutory test is focused upon the company’s ability to meet debts currently and prospectively due,21 having regard to the company’s ability to pay rather than the fact of payment.22

[page 96] Factor

Ability to raise money

Description The real relevance of the asset side of a balance sheet is the realisation value of the assets and the time in which they can be realised. Illiquid assets, even of a high value, play little, if any, role in the section 95A calculus. A company’s capacity to raise funds from external sources must be judged in a practical and business-like way by reference to the commercial realities of the case.23

II.B.3. Element 3: reasonable grounds for suspecting insolvency 4.27 In establishing insolvent trading under s 588G, there must also be reasonable grounds for suspecting that the company: (a) was insolvent when a debt was incurred; or (b) would become insolvent by incurring the debt. 4.28 This is an objective test, requiring an assessment of whether the director took steps to become sufficiently familiar with the company’s affairs so as to be able to make a proper judgment about its financial position.24 4.29 Each director must therefore examine a number of factors, including: (a) the cash reserves the company currently holds and those

expected to be on hand at the time each debt becomes due; (b) the company’s ability to borrow; (c) other available sources of funding; and (d) the likelihood of obtaining creditors’ consent to reschedule payment dates or deferring payments. 4.30 The courts have recognised three particularly useful sources of financial information used to objectively assess a company’s financial circumstances: Source of information Financial statements

Description Properly drawn financial statements are a minimum requirement in assessing solvency.30 A liquidator attempting to prove insolvency would normally be expected to restate the balance sheet in terms of realisable values rather than historical or book values. This gives effect to the ‘cash flow’ concept of insolvency. However, insofar as the balance sheet and profit and loss statements give a ‘snapshot’ of the company’s position, they must be augmented with further evidence.

[page 97] Source of information Future cash flows

Aged creditor listing

Description An analysis of the company’s future cash flows should include a review of debts falling due, the times at which they will fall due and the company’s then resources available to meet those debts. A creditor listing must indicate the time at which creditors’ debts are due and payable and state the actual days outstanding as against the credit terms.

II.B.4. Element 4: awareness of grounds for suspecting insolvency 4.31 In order to impose liability on the directors for insolvent trading, the court must find that:26 (a) the director was aware that there were reasonable grounds for suspecting that the company was insolvent; or

(b) if actual knowledge cannot be proved, that a reasonable person in a like position in a company in the same circumstances as the company would be so aware. 4.32 This element does not require proof of actual suspicion, nor proof of an awareness that the facts within the director’s knowledge constituted grounds for suspecting insolvency. Rather, it requires proof of a subjective awareness of grounds that are objectively reasonable grounds for suspecting insolvency.27

II.B.5. Element 5: failing to prevent 4.33 Finally, inactivity or failing to attempt to prevent the company from trading or incurring the debt is sufficient proof. There is no onus to prove that the director failed to take any particular step. Nor is there any onus to examine each debt individually.28 4.34 As the statutory prohibition is directed to directors failing to prevent the incurring of debts once a reasonable director would have suspected insolvency, directors will not be personally liable for debts already incurred to that point. It is the incurring of additional debts once the financial position of the company has become unstable that is prohibited by the Corporations Act.

II.C. Defences 4.35 As this chapter is directed to the issues confronting directors and senior management during a period of financial crisis, the technical aspects [page 98] of defences to insolvent trading and the related topic of seeking relief from liability for an established contravention (which will ordinarily only become relevant if attempts to salvage the company’s position are ineffective) are not strictly within the scope of the topic. 4.36 However, no lawyer can properly advise those charged with

the governance of a company in financial distress without some appreciation of the scope of the available defences and the principles that guide the exercise of the statutory power to relief against liability.

II.C.1. Reasonable expectation: s 588H(2) 4.37 It is a defence to an insolvent trading claim that the director had reasonable grounds to expect that the company was solvent at the time the relevant debt was incurred. That is a more difficult test to satisfy than the liquidator’s burden of proving that there were reasonable grounds to suspect insolvency. 4.38 For example, if the expectation of the company’s solvency is based upon asset sales providing cash flow, the director must prove a belief held on reasonable grounds that recourse to the assets would enable debts to be paid, not at some indefinite time in the future, but in sufficient time to keep the company solvent according to the statutory definition.29 4.39 Similarly, an expectation of solvency cannot be based upon the prospect that the company might trade profitably in the future. Rather, ‘[t]he question is whether the company at the relevant time is able to pay its debts as they become due.’30

II.C.2. Information supplied by another: s 588H(3) 4.40 A director may rely upon information provided by a competent and reliable person responsible for providing the director with information about whether the company was solvent if the director had reasonable grounds to believe and had an actual belief that the other person was fulfilling that responsibility. 4.41 The principal application of the defence is in circumstances of large corporations with complex accounts and an appropriate financial management system that provides information to the directors.31 4.42 For the defence to succeed, the director must have reason to

believe that the person responsible for providing the information had access to all necessary information.32 [page 99]

II.C.3. Ill health or other good reason: s 588H(4) 4.43 It is a defence if, because of illness (or for some other good reason), the director did not take part at that time in the management of the company. 4.44 In such a case, it is necessary for the director to prove that the illness (or other good reason) prevented the director from being involved in the governance of the company at the relevant time and that the particular debt was incurred without the director’s authority (express or implied).33

II.C.4. Reasonable steps to prevent incurring of debt: s 588H(5) and (6) 4.45 A director who takes reasonable steps to prevent the particular debt from being incurred will have the benefit of a defence. The most obvious step is the proposed appointment of an administrator. Another might include putting a resolution to the board that a particular transaction not be proceeded with.

II.C.5. No business judgment defence 4.46 There is no defence analogous to the business judgment rule provided by s 180(2) of the Corporations Act in connection with a director’s duty of care and diligence. The absence of such a defence has been widely commented on.34 4.47 In 2010, the Treasury released a consultation paper entitled Insolvent Trading: a Safe Harbour for Reorganisation Attempts Outside of External Administration. It was thought by many that reform would allow for what are commonly referred to as pre-pack reorganisations

— that is, employing the statutory insolvency regime to implement a pre-agreed restructuring — to become a viable option. 4.48 Unfortunately, the work of the Treasury in producing the paper and of the legal and accounting professionals who took the time to make submissions did not result in legislative change, or even a formal response from the government. 4.49 We discuss the two options canvassed in the discussion paper in section IV.B below.

II.D. Consequences of contravention 4.50 A liquidator may bring a proceeding seeking compensation for a director’s contravention of s 588G. The section is also a civil penalty provision, which allows ASIC to bring proceedings seeking a declaration [page 100] of contravention35 and/or the imposition of a penalty. The court may also order the director to pay compensation if ASIC commences civil penalty or criminal proceedings. The compensation is measured by the loss suffered by the company.36 4.51 Criminal liability will only attach where the director has acted dishonestly or fraudulently. That is, where he or she has allowed the company to continue to trade, with dishonest intent.37

II.E. Relief from liability 4.52 Sections 1317S and 1318 of the Corporations Act provide a general relief from liability to a director where the director has acted reasonably and honestly and, having regard to all the circumstances of the case, the director ought fairly to be excused. 4.53 The decision of Goldberg J of the Federal Court of Australia in Re McLellan, Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67

demonstrates that the courts may be willing to relieve a director from liability for insolvent trading under ss 1317S and 1318. 4.54 In McLellan, the liquidator brought proceedings against the former sole director of the company. The director denied that the company was insolvent during the relevant period and contended that he: (a) had reasonable grounds to expect the company was solvent during the relevant period, in reliance on s 588H(2); and (b) had relied on the company’s accountant to provide information on the company’s solvency, for the purpose of s 588H(3).38 4.55 In the alternative, the director relied on ss 1317S and 1318 to be relieved from liability. 4.56 Goldberg J found that, although there were reasonable grounds for suspecting solvency and the director was aware that the company was insolvent or close to insolvency, the director was relieved of liability for his actions under s 1317S because he had acted honestly and had reasonable grounds to rely on the company’s accountant.39

III. Directors’ duties 4.57 Insolvent trading is not the only risk to company directors in a situation of corporate crisis. All of the usual obligations owed to the company (as set out below) are also thrown into sharper relief. [page 101]

III.A. Care and diligence: s 180(1) 4.58 The well-understood duty to act with care and skill is applied to the particular circumstances of the particular company. It follows that the fact or prospect of insolvency will potentially give rise to questions connected with this duty. 4.59 Traditionally in Australia, the appointment of administrators

by a company’s director has been considered an effective risk mitigation strategy. The risk of criticism was perceived to arise from a failure to appoint administrators. However, in more recent times, directors of significant companies facing difficult decisions as to the company’s solvency have been warned by the representatives of one or more parties financially interested in the company’s continuation that litigation may ensue from a premature appointment of administrators. 4.60 Such warnings should not come as any particular surprise. Indeed Hall v Poolman (2007) 65 ACSR 123 is authority for the following propositions: (a) experienced commercial directors should not appoint administrators prematurely as soon as a liquidity crisis occurs; and (b) in appropriate cases, a reasonable time must be allowed to assess whether a company’s difficulties are remediable or fatal.40 4.61 Accordingly, it may be in the interests of all interested parties to explore options to address a company’s short-term liquidity issues. Creditors, who rank ahead of shareholders or other holders of equity, have the most significant financial interest in the company when insolvency approaches.41 Therefore, if it appears that there will be no urgent improvement in the company’s cash flow situation, in determining what steps to next take, the company will also need to have regard to its obligation to act in the interests of creditors, and to act to minimise losses to creditors.

III.B. Good faith and proper purpose: s 181(1) 4.62 Anyone retained to advise the directors will need to carefully scrutinise all options put to the board so as to understand how each proposal, if adopted, will assist the company and whether the approval of the proposal could present subsequent difficulties for the directors. 4.63 For example, consider three common aspects of corporate groups:

(a)

deeds of cross-guarantee are common instruments in corporate groups;42 [page 102]

(b) it is common for company constitutions to contain a provision authorising the directors of a subsidiary to act in the best interests of its holding or ultimate holding company;43 and (c) ordinarily, each subsidiary company will have at least some common directors with the ultimate holding company. 4.64 The use of deeds of cross-guarantee necessarily means that the ultimate holding company is exposed to the financial predicaments of its subsidiaries. Suppose then that one particular subsidiary faces a potential financial misfortune. A natural reaction of the directors of the holding company may be to isolate the infected subsidiary by taking certain actions, including revoking the deed of crossguarantee. 4.65 The authorisation of the revocation of the deed by the directors of the affected subsidiary could be in the parent company’s best interests and therefore satisfy the duty imposed by s 181(1)(a) of the Corporations Act. It is arguable, however, whether the directors would be acting for a proper purpose as required by s 181(1)(b) by authorising the revocation.44 Although the good faith and proper purpose duties are often considered jointly, they are separate and distinct duties requiring separate satisfaction.45 4.66 Furthermore, irrespective of the financial position of the subsidiary: (a) the duty to act for a proper purpose is one owed to the company alone;46 (b) there is no independent duty owed to creditors;47 and (c) insofar as there is an obligation to creditors, it is an incident of the duty to act in good faith.48 4.67 As to the question of proper purpose, in Mills v Mills (1938) 60

CLR 150, Dixon J explained the test for assessing the appropriateness of an exercise of power in terms not dissimilar to the ‘but for’ test of factual causation: [if the reason that] formed the real ground of the board’s action … is within the scope of the power, then the power has been validly exercised. But if, except for some ulterior and illegitimate object, the power would

[page 103] not have been exercised, that which has been attempted as an ostensible exercise of the power will be void,49 notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable.

4.68 In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, Mason CJ, Deane and Dawson JJ said the following in respect of decisions made to effect more than one purpose: In such cases of competing purposes, practical considerations have prevented the law from treating the mere existence of the impermissible purpose as sufficient to render voidable the exercise of the fiduciary power … As a matter of logic and principle, the preferable view would seem to be that regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [exercise of the power] will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, ‘the power would not have been exercised’: per Dixon J, Mills v Mills.50

4.69 The various statements of principle were summarised into the following four points in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187: (a) fiduciary powers granted to directors are to be exercised for the purpose for which they were given, not collateral purposes; (b) it must be shown that the substantial purpose of directors was improper or collateral to their duties as directors; the issue is not whether business decisions were good or bad but whether the directors have acted in breach of their fiduciary duties; (c) honest or altruistic behaviour does not prevent a finding of improper conduct; however, evidence as to the subjective intentions or beliefs is nevertheless relevant; and

(d) the court must determine whether, but for the improper or collateral purpose, the directors would have performed the act in dispute.51 4.70 Applying that law to the example above, there is a risk that subsidiary directors will be in breach of at least their obligation to act for a proper purpose if the decision to revoke the cross-guarantee is taken solely for the purpose of [page 104] protecting the parent company (or the other subsidiaries). Any ‘purpose’ must be internal to the affected subsidiary. 4.71 In assessing the directors’ motives for revoking the deed, the analysis will arguably be similar to that undertaken in order to determine whether the duty to act in good faith has been complied with. The central difference is that the subsidiary’s directors will not have the benefit of s 187. Accordingly, the purpose must be considered by reference to the subsidiary’s interests only as the power exercised in authorising the revocation could only have been conferred to advance the subsidiary’s interests. 4.72 It would seem doubtful that if the purpose of the revocation is to limit the exposure of the parent company to creditors of the affected subsidiary, and there is a prospect of the affected subsidiary becoming insolvent, the purpose would be a proper one. 4.73 However, if the purpose was to effect a broader restructure of the corporate group, including the troubled subsidiary, and resulted in benefits otherwise unavailable to the subsidiary that materially improved its prospects of avoiding insolvency, the purpose may well be a proper one.

IV. The need for reform IV.A. Issues with the current regime

4.74 Over the past decade (and particularly, since the global financial crisis), there has been much debate about Australia’s insolvency laws and whether there is need for reform. 4.75 Issues that commentators have identified with the current insolvent trading regime include:52 (a) Threshold too low: the threshold for finding directors liable under s 588G is arguably too low, given that a director may be liable: (i) if there are reasonable grounds merely for suspecting that the company is insolvent; and (ii) even if the director did not participate in the relevant transaction, if he or she did not stop the company from incurring the debt when insolvency was, or should reasonably have been, suspected. [page 105] (b) Reluctance to trade out: the fear of personal liability and prosecution has arguably led to a reluctance by directors to take actions which may ultimately trade a company out of financial difficulty. (c) Premature administration: as a result of (a) and (b), it is difficult for directors to strike the appropriate balance between their own personal interests and those of the company and those with an interest in it, which arguably results in directors placing companies with potential solvency issues into premature external administration. (d) Reduction in company’s value: premature administration may adversely affect the company’s value by: (i) damaging the company’s reputation as the market becomes aware that the company has solvency issues, which may result in the company losing consumer and creditor confidence; (ii) enabling a third party (for example, a supplier) to rely on

ipso facto clauses in order to terminate agreements on the basis that the company has been placed into administration; (iii) causing inflated employee uncertainty and loss of key staff as employees become concerned about their future livelihood; and (iv) decreasing the likelihood of the company being able to resume normal trading following the administration period.53

IV.B. Suggested reforms 4.76 As noted in section II.C.5 above, formal acknowledgment of the possible need for reform came in 2010 when the Treasury published its consultation paper. 4.77 The paper raised two options for the creation of a safe harbour for directors attempting a reorganisation of their company outside of external administration:54 Option Modified business judgment rule

Description This option proposed to extend the operation of the business judgment rule in s 180(2) of the Corporations Act (referred to at section III.C.5 above) so that it provides a defence for directors who have decided to continue trading despite their company approaching insolvency.

[page 106] Option

Moratorium

Description It is arguable that allowing directors to justify their business decisions in a modified business judgment rule may overcome directors’ hesitance in attempting to restructure their company out of debt. Provided that there is a significant onus on directors to provide adequate evidence to support their decisions, a business judgment rule could be an attractive supplement to the current insolvent trading regime. Under this option, directors would be able to expressly invoke a moratorium from the duty not to trade whilst insolvent for the purpose of attempting a reorganisation of the company outside of external administration.

The moratorium would apply for a limited period and would be subject to termination by creditors.

IV.C. No reform necessary? 4.78 Notwithstanding the above suggested reforms, it has been submitted by some commentators that a reform is unwarranted.55 That view holds that the current defences, together with the general relief provided under ss 1317S and 1318 of the Corporations Act (see Section II.E above), protect directors from being prosecuted for insolvent trading.56 4.79 Furthermore, recent studies57 have indicated that whilst there are approximately 20,000 to 25,000 insolvencies in Australia each year (approximately 100 million insolvencies over the past 50 years): (a) since the introduction of insolvent trading provisions in Australia, very few insolvent trading cases have proceeded to trial (approximately 0.0120% of insolvencies) (see Figure 1);58 and (b) even in those cases that were prosecuted, the directors have rarely been reprimanded with harsh penalties.59 [page 107]

Figure 1: Insolvent trading cases (1961–2014) (Source: See n 58)

4.80 Indeed, the authors contend that Australia should focus on

developing a ‘business rescue culture’ whereby greater attention is given to improving the voluntary administration process and encouraging the implementation of alternative restructuring options, such as the implementation of deeds of company arrangement and the use of informal workout strategies. 4.81 In advising directors of a company in distress, one of the most important pieces of advice that can be given is that the company should not necessarily enter into early administration. As Palmer J in Hall v Poolman said: In some cases a reasonable time must be allowed to a director to assess whether the company’s difficulty is temporary and remediable or endemic and fatal. The commercial reality is that creditors will usually allow some time for payment beyond normal trading terms, if there are worthwhile prospects of an improvement in the company’s position.60

4.82 Obviously, if problems are fatal, then an appointment should be made immediately, but generally there is at least some prospect of achieving a sensible and informal workout outside of the formal insolvency regime. That option, if available, must be explored by well-advised directors. 4.83 Furthermore, given recent trends that favour informal workouts (including the development of the secondary debt market, the preparedness of major financial institutions to support debtors through restructure by forbearance and further funding, debt for equity swaps, and pre-packaged insolvency administrations), there is now a much greater range of options available to a company in financial distress. Success stories such as Centro, Channel 9, Billabong and Boart Longyear provide good examples of financially [page 108] distressed companies being navigated by sensible and well-advised directors with the cooperation and investment of their lenders and investors.

V. Conclusion

4.84 This chapter has identified some of the more common issues faced by those persons engaged to appropriately advise directors and management of a company in financial crisis. 4.85 Although directors have a duty not to permit a company to trade whilst insolvent, placing a company into early administration as soon as it teeters on the brink of insolvency should be discouraged. Rather, advisors should encourage directors of companies in financial distress to consider the appropriateness of other informal workout regimes. 4.86 Ultimately, if a company is facing financial distress, directors should be advised to, among other things: (a) (b) (c) (d)

act quickly to create early momentum; give proper attention to ‘stakeholder management’; appoint restructuring and legal advisers as early as possible; keep records of all deliberations and actions taken during the company’s financial distress; (e) ensure that the company has appropriate information and reporting systems in place; and (f) appropriately manage risks and continue to monitor the company’s financial position and cash flow projections. 1. 2. 3.

4. 5. 6. 7. 8. 9. 10.

The authors thank Ian Carson (PPB Corporate Advisory) for his time and practical thoughts on advising directors and management of an entity in financial crisis. A Susskind, ‘Early Exit May Save Directors, but what of the Economy?’ (2010) 48(7) Law Society of New South Wales Journal 20 at p 22. So much has been publicly acknowledged by the Chief Justice of Western Australia: W Martin, ‘Official Opening Address’ (Speech delivered at the Insolvency Practitioners’ Association of Australia 16th National Congress, Perth, 28 May 2009). Hawkins v Bank of China (1992) 26 NSWLR 562; (1992) 7 ACSR 349 at 567. R I Barrett, Robson’s Annotated Corporations Legislation (2015) at [588G.30]. Citing Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150; (1986) 10 ACLR 539. Citing Bans Pty Ltd v Ling (1995) 16 ACSR 404. Citing Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; (1995) 18 ACSR 1. Citing Hawkins v Bank of China (1992) 26 NSWLR 562; (1992) 7 ACSR 349. Standard Chartered Bank of Australia v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; (1995) 18 ACSR 1 at 314.

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

35. 36. 37. 38. 39. 40.

Shepherd v ANZ Banking Group Ltd (1996) 20 ACSR 81 at 89. New Cap Reinsurance (in liq) v Grant (2008) 68 ACSR 176; [2008] NSWSC 1015. Compiled Auditing Standard ASA 570, Going Concern (1 July 2013). Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410; [2005] NSWCA 243 at [103]. ASIC v Edwards (2005) 220 ALR 148; (2005) 54 ACSR 583; [2005] NSWSC 831 at 176. Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559. Re Whitgift Nominees Pty Ltd (in liq) (1983) 7 ACLR 680. Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 839; Bank of Australasia v Hall (1907) 4 CLR 1514; [1907] HCA 78 at 1528. Re Newark Pty Ltd (in Liq) [1993] 1 Qd R 409; (1991) 6 ACSR 255 at 414. Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 at 328; Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd (2008) 26 ACLC 74; [2008] NSWSC 3. Re Pacific Projects Pty Ltd, Geroff v National Westminster Finance Australia Ltd [1990] 2 Qd R 541 at 546; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 465. Standard Chartered Bank of Australia v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; (1995) 18 ACSR 1 at 329D. ASIC v Edwards (2005) 54 ACSR 583; [2005] NSWSC 831 at 176; Re New World Alliance Pty Ltd, Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; (1994) 13 ACSR 766. Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430; [1999] NSWSC 533. Zan Holdings Pty Ltd v Bay View Holdings Pty Ltd (1997) 15 ACLC 1238. Corporations Act 2001 (Cth), s 588G(2). R I Barrett, Robson’s Annotated Corporations Legislation (2015) at [588G.70]; ASIC v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123. Barrett, above n 27 at [588G.60]; ASIC v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [265] (Palmer J). Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [265] (Palmer J). Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304; [2002] NSWSC 330 at [54]. Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304; [2002] NSWSC 330 at [52]. Standard Chartered Bank of Australia v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; (1995) 18 ACSR 1. See, eg, R Baxt, ‘Directors’ Duties and Corporate Governance. Insolvency Law Reform and the Business Judgement Rule: Some Mixed Messages from the Government’ (2010) 28(2) Companies and Securities Law Journal 147; P Lewis, ‘Insolvent trading defences after Hall v Poolman’ (2010) 28(6) Companies and Securities Law Journal 396; R Purslowe, ‘Decisions in the Twilight Zone of Insolvency — Should Directors be Afforded a New Safe Harbour?’ (2011) 13 University of Notre Dame Australia Law Review 113. Corporations Act 2001 (Cth), s 1317E(1)(e). Corporations Act 2001 (Cth), ss 588J, 588K. Corporations Act 2001 (Cth), s 1317FA(1). Re McLellan, Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 at [14]. Re McLellan, Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 at [180], [193]. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [331].

41.

42. 43. 44.

45. 46.

47. 48. 49.

50. 51.

52.

53.

54.

55. 56. 57.

See Spies v R (2000) 201 CLR 603; [2003] HCA 43 at [93]–[95]; In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; 1994 FCA 332 at [66]; Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7 at [13]. ASIC Class Order CO/1418 facilitates and regulates their use. Clauses of that type are given effect by s 187 of the Corporations Act. The terms of the pro-forma ASIC deed present no difficulty to a financially distressed subsidiary removing itself from the operation of the deed notwithstanding grave financial circumstances. Indeed, c1 4.6 provides that a revocation deed can be executed ‘even if the winding-up of a Group Company has commenced’. See, eg, Bell Group Ltd v Westpac (2008) 39 WAR 1; (2008) 70 ACSR 1; [2008] WASC 239 at [4456]. See Corporations Act 2001 (Cth), s 181(1)(b) and In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; 1994 FCA 332 at [66]; Bell Group Ltd v Westpac (2008) 39 WAR 1; (2008) 70 ACSR 1; [2008] WASC 239 at [4435]. Spies v The Queen (2000) 201 CLR 603; [2003] HCA 43 at [93]–[95]; Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; 1994 FCA 332 at [66]. Bell Group Ltd v Westpac (2008) 39 WAR 1; (2008) 70 ACSR 1; [2008] WASC 239 at [4426] and [4435]. Although, as explained in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; (1987) 70 ALR 251; [1987] HCA 11, the true position is that the exercise of power is voidable, not void. Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; (1987) 70 ALR 251; [1987] HCA 11294. Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; (1994) 14 ACSR 109 at 137. The case has caused much debate for its reasoning in respect of fiduciary duties: see, eg, J D Heydon, ‘Are the duties of company directors to exercise care and skill fiduciary?’ in S Degeling and J Edelman (eds), Equity in Commercial Law, Lawbook Co, Australia, 2005. See, eg, I Ramsay, ‘An Overview of the Insolvent Trading Debate’ in I Ramsay (ed), Company Directors’ Liability for Insolvent Trading, CCH Australia Limited and Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2000 at p 9; D Oesterle, ‘Corporate Directors’ Personal Liability for “Insolvent Trading” in Australia, “Reckless Trading” in New Zealand and “Wrongful Trading” in England: A Recipe for Timid Directors, Hamstrung Controlling Shareholders and Skittish Lenders’ in Ramsay, Company Directors’ Liability for Insolvent Trading at 25, 35–37; Purslowe, above n 34. Studies have shown the resumption of normal trading post voluntary administration only occurs approximately 10% of the time: Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Corporate Insolvency Laws: A Stocktake (2004) at [5.12]. The third option set out in the discussion paper was to maintain the status quo. We note that the submissions in response to the discussion paper were varied, with preference for the modified business judgment rule being adopted. See, eg, S Wong, Insolvent Trading: A safe harbour for reorganisation attempts outside of external administration (Submission to the Treasury, January 2010) at pp 7–8. Wong, above n 55. P James, I Ramsey and P Siva, ‘Insolvent Trading — An Empirical Study’ (2004) 12(4) Insolvency Law Journal 210; O Paige, ‘Australia’s insolvent trading regime is a “toothless

58.

59.

60.

tiger”’ (2013) (Unpublished, Monash University). There have only been a total of approximately 120 cases since the inception of insolvent trading legislation in 1961. Specifically: (a) according to James, Ramsey and Siva above n 57, there have been 103 cases between 1961 and 2004; (b) according to Paige above n 57, there have been 14 cases since 2004 to September 2013; and (c) based on our own study, there have been three cases from September 2013 to December 2014 (Re Salfa Pty Ltd (in liq) (ACN 082 308 101) [2014] NSWSC 1493; Re Matlic Pty Ltd (in liq) (2014) 102 ACSR 602; [2014] NSWSC 1342; First Strategic Development Corp Ltd (in liq) v Chan [2014] QSC 60). For example, see Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 where Palmer J demonstrates the capacity of courts to excuse directors from liability when they make honest mistakes. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [331].

[page 109]

5 CAN MANAGED INVESTMENT SCHEMES BE RESTRUCTURED IN THE CONTEXT OF INSOLVENCY? By Leon Zwier, Justin Vaatstra and Oren Bigos1 Leon Zwier is a litigation and corporate recovery services lawyer. He has been a partner of Arnold Bloch Leibler since 1991 and is head of the firm’s litigation & dispute resolution and reconstruction and insolvency practices. Leon has been extensively involved in large, complicated and difficult commercial disputes. Leon is regularly identified as a leading lawyer by various international guides to lawyers and legal firms. Legal Profiles, an independent review of Australian legal firms, has described him as ‘the pre-eminent insolvency lawyer, achieving outstanding commercial solutions and providing strong, solid advice’. Chambers Global 2015 states Leon ‘is widely acclaimed as one of Australia’s leading litigators, with sources regularly highlighting his “very high profile across a wide range of matters”’. Justin Vaatstra is an experienced commercial litigator and a partner of Arnold Bloch Leibler’s litigation and insolvency and reconstruction practices. His practice focus has an emphasis on corporate insolvency, complex commercial disputes and intellectual property litigation. Justin was also a contributing author to World Insolvency Systems: A Comparative Study (2009, Thomson Reuters). Dr Oren Bigos is a barrister admitted to the Victorian Bar and holds degrees from Monash University and Oxford University. He practises primarily in corporate and commercial law. He has particular experience in corporations, equity and trusts, property, class actions, banking and finance and insolvency, and has appeared in many cases on collapsed managed investment schemes.

[page 110]

I. Introduction 5.1 Among the casualties of the Global Financial Crisis, as it affected Australia, were a number of high profile managed investment schemes. Many of the collapses were in agribusiness; these included Timbercorp, Great Southern, Gunns, and Forest Enterprises Australia. Others were in other fields; for example, Octaviar (property), Banksia (finance) and Trio Capital (finance). 5.2 In Australia, managed investment schemes are regulated under Ch 5C of the Corporations Act. That regime was introduced by the enactment of the Managed Investments Act 1998 (Cth), which, in turn, had its genesis in the 1993 joint report by the ALRC and CASAC, Collective Investments: Other People’s Money.2 5.3 The regime is unique. In many respects, managed investment schemes are regulated in a similar way to companies; for example, a scheme must be registered (if it has more than 20 members) with the corporate regulator (ASIC), a scheme must have a constitution, and the scheme’s responsible entity and its directors owe duties to the members of the scheme which, in some respects, resemble the duties that company directors owe the company. 5.4 One difficulty is dealing with managed investment schemes in financial distress. Unlike companies, experience has shown that attempts to restructure schemes have been largely unsuccessful. In this chapter we discuss restructuring, and how attempts to restructure managed investment schemes have generally failed. The latter part of the chapter discusses recent attempts at restructuring investment vehicles, and the legal and commercial issues that they have raised. 5.5 As with companies, the stakeholders in a managed investment scheme that approaches collapse, or that has collapsed, seek to explore a restructure. A restructure before the appointment of an external administrator avoids the stigma attached to such an appointment. A restructure may preserve the business, and avoid the sale of assets at what may be fire-sale prices. 5.6 As Barrett JA (writing extra-judicially) has explained,3 the truth is that a managed investment scheme — which has no legal

personality — cannot become insolvent. However, it has become commonplace to describe a scheme as viable or unviable, usually in terms of net present value. Where a scheme is viable, there is an incentive for a new solvent responsible entity to take over and operate the scheme. Sometimes, with some modifications (for example, to the constituent documents and the fee structures) a scheme which appears to be unviable may be viable. [page 111] 5.7 Where the scheme is unviable, there is no such incentive for a new responsible entity to operate the scheme. The only practical option is to wind up the scheme. The responsible entity is no longer able to operate the scheme, and the other companies in the corporate group – which may have previously supported the responsible entity – are no longer able to do so. The scheme cannot continue to operate without funding. 5.8 A regime for the formal winding up of registered schemes is provided in Pt 5C.9 of the Corporations Act.4 One example of a winding up by the court under s 601ND is Re Environinvest Ltd, Shepard v Downey (2009) 69 ACSR 530, in which the Court acceded to the application of the responsible entity’s receivers, and ordered the winding up of managed investment schemes which were unviable.5

II. Agribusiness managed investment schemes 5.9 The following features are typical in the collapse of the agribusiness managed investment schemes: (a) (b) (c) (d)

the responsible entity is insolvent; the responsible entity is part of a corporate group; the corporate group is insolvent; the responsible entity operates a number of managed investment schemes, some of which are viable and others of which are unviable; (e) each scheme is governed by a constitution, as well as grower

(f) (g)

(h)

(i) (j)

agreements, usually a lease, profit-à-prendre or licence in respect of a parcel of land, as well as a management agreement under which the responsible entity agrees to provide maintenance and harvesting services to the grower; the corporate group conducted other business which is ancillary to the schemes, such as land operations or harvesting operations; in order to fund its activities the corporate group borrowed funds from financiers, and granted security interests (for example, fixed and floating charges, now known as general security interests) over all the property of the group companies — often with the exception of any scheme property, because that is held by the responsible entity on trust for the scheme members;6 where the corporate group was the owner of land, it granted real property mortgages to the financiers, and the mortgages are enforceable and the financiers have appointed receivers and managers; the companies within the corporate group cross-guarantee each other’s obligations to the financiers; and apart from the (secured) financiers and the scheme members, there are many other stakeholders in the collapsed group, including shareholders [page 112] (which may be retail investors, where the shares in the holding company are listed), employees, lessors, suppliers, other creditors and customers.

III. Timbercorp — de facto winding up 5.10 Timbercorp is a useful case study in the difficulties faced in the restructure of managed investment schemes, and the development of what has come to be known as ‘de facto winding up’. 5.11 Timbercorp Securities Ltd (Timbercorp) went into administration in April 2009 and liquidation in June 2009. Its

liquidators applied to the Court for the winding up of the olive and almond schemes of which Timbercorp was the RE. In order for the schemes to continue, there was a need for maintenance, and there was no source of funding. As time went on, more members of the schemes defaulted on their obligations to pay management fees and rent, and the continuing defaults resulted in the inability of the responsible entity to operate the schemes. At the hearing, a number of parties opposed the winding up of the schemes. The Timbercorp Growers Group was concerned about the effects that the winding up would have on the growers’ interests. There were suggestions that a replacement responsible entity could be found, but none was willing to provide its unconditional consent to take over the role. 5.12 Ultimately the winding up applications were adjourned by consent, with orders that the liquidators convene meetings of the members of the almond and olive schemes.7 At the meetings of the almond and olive schemes, the respective growers passed resolutions in substance that the schemes continue and not be wound up, and that the responsible entity be given constitutional powers to restructure the schemes and seek working capital for their operation. Obviously those resolutions were of little utility in circumstances where there was no source of funding to operate the schemes, financiers were not interested in advancing fresh funds to the insolvent responsible entity, and a replacement responsible entity could not be found. 5.13 In the meantime, an informal meeting of growers in the forestry schemes was held, at which a non-binding resolution was passed for the liquidators to seek a power of sale of the forestry assets. Following the meeting, the liquidators applied to the Court for directions that they were justified in unilaterally amending the scheme constitutions under s 601GC(1)(b) of the Corporations Act so as to give the responsible entity power to terminate or otherwise deal with the growers’ interests, in order to facilitate the sale of the assets used in the forestry schemes. 5.14 The unilateral amendment power can be used where the responsible entity ‘reasonably considers the change will not adversely affect members’

[page 113] rights.’ In ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444, Barrett J (as his Honour then was) stated that that analysis involves three steps: (a) an assessment of how the responsible entity viewed members’ rights before the modification and the impact that the modification would have on those rights; (b) whether the responsible entity considered that, according to a comparison of members’ rights before the modification with the changed rights that would exist after the event, there would be no adverse affectation of those rights; and (c) whether the opinion formed by the responsible entity as to the absence of adverse affectation was something that the responsible entity reasonably considered.8 5.15 Although ING Funds Management was later disapproved by the Victorian Court of Appeal,9 this three-step analysis was left undisturbed. 5.16 The Court gave the directions to the liquidators of Timbercorp, as the termination of the growers’ interests in the schemes would merely convert them into interests in the fund realised as a result of the sale of the scheme assets. That analysis has been applied in subsequent cases. 5.17 In a similar vein, the liquidators then sought the ‘informal winding up’ of the almond and olives schemes, whereby the responsible entity was given power to unencumber the land of grower interests. The Court gave such a direction on the condition that the power to extinguish the grower interests in a sale or recapitalisation process would not be exercised without first seeking directions from the Court.10 5.18 The liquidators of Timbercorp engaged an experienced liquidator from another firm, to act as a facilitator in relation to the sale process. The Court gave the liquidators directions that they were justified in engaging that liquidator.11

5.19 The liquidators negotiated a deal for the sale of the land used in the almond schemes. The land was encumbered by mortgages held by financiers. The financiers offered the growers $6 million in return for the extinguishment of the growers’ rights. The liquidators sought directions that they were justified in entering into an agreement on behalf of growers to accept that sum in return for extinguishment of the growers’ interests. However, the Court refused those directions. Rather, the Court gave a direction that the [page 114] liquidators were justified in selling the assets on the basis that the proceeds of sale be placed into a common fund which was not to be allocated between the property owners on the basis of bargaining power, but rather on the basis of well recognised legal principles.12 The authorities provide for the division of a common fund by reference to the proportionate share of the fund measured by the extent and value of the claims or rights given up in exchange for an interest in the fund.13 5.20 In relation to the other assets used in the various schemes, when a contract of sale of relevant land was about to be entered into or had just been entered into, prior to causing the responsible entity to exercise its constitutional powers to terminate or surrender the growers’ licences or subleases, the liquidators applied for directions, and the Court gave directions that they were justified in causing the responsible entity to exercise its constitutional power to extinguish the growers’ rights, on the basis that the proceeds of sale would be held by the liquidators in trust pending the Court’s determination as to how they should be apportioned between stakeholders.14 5.21 An apportionment proceeding was brought in relation to the sale of the assets used in the almond schemes. The contest was between the banks, who held security over the assets, and the growers, who held interests in the schemes. Ultimately the decision was unfavourable to the growers.15 The Court rejected the growers’

counterfactual that the schemes would have continued to term if the growers’ rights had not been extinguished: [A]ny prospect that the projects would have been continued was wishful thinking and unfounded in the reality of the situation that the growers found themselves in, regrettable as it was. I could not conclude on the state of the evidence that there was any possibility, other than a theoretical possibility, that the projects would have continued, if the growers’ rights had not been extinguished. Accordingly, in my view no value can or should be attributed to the rights given up.16

5.22 The growers appealed. Before the appeal was heard, a settlement was reached between the banks and the growers in relation to the apportionment of the proceeds of sale of the almond, olive and citrus schemes.17 [page 115] 5.23 Apart from apportionment between growers and external stakeholders, the Court has also given directions in relation to the apportionment of sale proceeds among scheme members of different schemes.18

IV. Great Southern — restructure by replacement responsible entity 5.24 Unlike the Timbercorp schemes, the Great Southern forestry schemes were successfully restructured — for a limited time. 5.25 After Great Southern went into receivership, its receivers and managers sought expressions of interest for a replacement responsible entity of the managed investment schemes of which it was then the RE. Gunns Plantations Ltd, which operated its own managed investment schemes, expressed an interest in operating a number of the Great Southern forestry schemes, and put forward a restructure proposal. 5.26 Under the Gunns proposal, Gunns Plantations would assume the role of responsible entity of the target schemes and would fund the costs of management and maintenance. In return, Gunns

Plantations required an additional fee to be paid to it over and above the existing fees payable to the responsible entity under the scheme constitutions. The additional fee was to be made payable by growers out of their net proceeds of sale from the harvesting of their timber. Gunns Plantations also required some other changes to the way that the schemes were managed, including when the trees may be harvested. 5.27 In order to be implemented, the restructure proposal had to be approved by meetings of members of the schemes. The receivers sought and were given directions in relation to the voting at the meetings (specifically whether other companies in the Great Southern group, which had acquired interests in the schemes, were eligible to vote and the valuation of members’ interests for voting purposes).19 At the meetings, the resolutions were passed by the requisite majorities. 5.28 The Gunns proposal required constitutional amendments and amendments to the individual grower agreements between each grower and the responsible entity. Each grower agreement was a separate contract which could not be amended merely by a constitutional amendment. Gunns Plantations did not seek to obtain the individual approval of each member for the variation of that member’s grower’s agreement. That would have been impractical. Instead, Gunns Plantations sought to exercise a grant of power as agent and attorney, inserted into the constitutions of the target schemes by the constitutional amendments, in order to amend the growers’ agreements in accordance with the terms of the Gunns proposal voted on by the members. [page 116] 5.29 The receivers sought the Court’s directions about the amendments.20 The Court was satisfied that the constitutional amendments (namely the agency/power of attorney; the remuneration of the responsible entity; the fees on sale of plantation/forest produce prior to harvest; and the harvesting of

growers’ forest produce) were within the scope of their power, as members, to pass by special resolution for the purposes of s 601GC(1) (a) of the Corporations Act.21 The Court held that it was within the power of the members to insert a power of attorney into the constitution, which bound all members and could be used to amend their grower agreements, whether or not an individual member voted in favour, abstained or voted against the creation of that agency.22 There were some additional, minor, amendments to the constitution which the responsible entity intended to make unilaterally, under s 601GC(1)(b), and the Court was of the view that they were within the responsible entity’s power.23

V. Elders — de facto winding up 5.30 Elders was the operator of a number of schemes which were unviable. Although the responsible entity was not in external administration, it faced funding shortages in that there was a real risk that funding from its parent — on which it had relied to operate the schemes — would cease. 5.31 There were mature schemes (which were ready to be harvested) and immature schemes (which still had some time to run before the trees were ready). The responsible entity had reached a deal to sell assets used in the schemes (essentially land in Albany, Bunbury and the Green Triangle regions) — unencumbered by grower interests — to a third party. It applied for directions that it was justified in unilaterally amending the constitutions of the mature schemes, and in convening meetings of growers to consider amendments to the constitutions of the immature schemes and giving effect to those amendments. The Court gave the directions sought.24 There was evidence before the Court of the likely return to growers in each scheme. There was no need to make the directions conditional on a later apportionment proceeding, because there was no priority dispute between secured creditors and growers as there had been in Timbercorp. [page 117]

5.32 In later applications in relation to residual schemes, the Court gave similar directions as to the unilateral amendment of the constitution,25 and, in relation to one scheme, made an order winding up the scheme.26

VI. Gunns — de facto winding up 5.33 Gunns, having taken over some of the Great Southern schemes, itself went into external administration in September 2012. The liquidators of Gunns attempted to restructure the schemes for many months — and to preserve any grower rights in the meantime by preventing lessors from taking possession27 — but ultimately the restructure attempts proved to be unsuccessful.28 The only practical alternative was a sale of the scheme assets. The liquidators sold the assets used in the Great Southern schemes, and distributed the net proceeds among growers of those schemes.29 They also undertook, together with the receivers and managers, a joint sale process in relation to the assets used in the Gunns Woodlot schemes, and are in the process of distributing a portion of the net proceeds of sale among growers of those schemes.30

VII. Willmott — disclaimer 5.34 The liquidators of Willmott took a different approach to unencumbering the land of grower interests, by disclaiming the grower interests under s 568 of the Corporations Act, an issue that ultimately went to the High Court.31

VIII. FEA — formal and informal winding up 5.35 In Forest Enterprises Australia (FEA), receivers and managers were appointed over the land-owning entities, and sought to sell the land, unencumbered by grower interests. The interests of growers in the schemes were represented by the responsible entity, which was in the control of the administrators, later deed administrators. The responsible entity, FEAP, was not able to continue to act as the responsible entity. Due to a lack of funds, it was unable to continue to operate the schemes. No viable proposal was obtained from any

willing and able replacement responsible entity. Each scheme was unviable and its purpose could not be accomplished. [page 118] 5.36 There was litigation relating to the receivers’ attempts to terminate the head leases from which the grower interests were derived.32 Ultimately a compromise was reached under which the responsible entity agreed that it would terminate the leases and remove the growers’ rights under the schemes, and replace them with a monetary return per woodlot to be distributed under the deed of company arrangement. The administrators estimated that absent the compromise, the return to growers would be nil. The Court made orders giving effect to the compromise, by ordering that the schemes be wound up under the Corporations Act s 601ND, and giving the responsible entity (under the relevant trustee legislation, and also by way of a unilateral constitutional amendment) a power to terminate rights and interests in connection with the schemes, which the responsible entity was authorised to exercise in order to enable the land to be sold unencumbered.33

IX. Impact of ss 601FS and 601FT 5.37 Section 601FS of the Corporations Act relevantly provides that if the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme become rights, obligations and liabilities of the new responsible entity. Section 601FT relevantly provides that upon a change of responsible entity, a document to which the former responsible entity is a party or which makes reference to it, or under which it acquires a right, obligation or liability, has effect as if the new responsible entity were a party, were referred to, or had the relevant right, obligation or liability. 5.38 These provisions, which were introduced with the enactment of Ch 5C, are sometimes described as the ‘statutory novation’ provisions. There is a growing body of case law on their effect.34

[page 119] 5.39 Sections 601FS and 601FT are a disincentive to the restructure of a managed investment scheme where the responsible entity is insolvent. As Barrett JA explained in his paper: When a new responsible entity takes office, it becomes, under s 601FS, the statutory inheritor of the rights, obligations and liabilities of the old responsible entity in relation to the scheme … the successor will come to owe the debts that brought the old responsible entity undone and to have the rights of recoupment that were insufficient to allow it to continue. Simple replacement of the responsible entity in liquidation therefore does not seem a practical possibility. The automatic vesting of the non-viable combination of liabilities and inadequate rights of recoupment must mean that, in the real world, there will never be a new responsible entity.35

5.40 The difficulties created by ss 601FS and 601FT can be observed in the rejection of the growers’ counterfactual in the apportionment proceeding relating to the proceeds of sale of the Timbercorp almond assets.36 A new responsible entity would not want to take on the operation of a scheme only to find itself exposed to greater scheme-related liabilities than the available scheme assets, a likely situation in an insolvency context. Sections 601FS and 601FT appear to apply indiscriminately to a new responsible entity, as well as a temporary responsible entity.

X. Proposals for law reform 5.41 One possible way to reduce the restructure disincentive inherent in ss 601FS and 601FT is to place a cap on the liabilities and obligations assumed by the incoming responsible entity, so that they cannot exceed the scheme property of the scheme. Such an amendment could be achieved quite easily. That way a responsible entity contemplating taking over a scheme can be confident at least that it will be no worse off than its present position by taking over the scheme. The appointment will not harm the responsible entity’s own (personal) financial position, because it will have a right of indemnity in respect of the assumed liabilities and obligations out of the scheme property. 5.42 Another possible amendment is to give the court a power to

make such order as it thinks appropriate about how Ch 5C is to operate in relation to a particular scheme. This would reflect the power of the court under s 447A to make such order as it thinks appropriate about how Pt 5.3A (which deals with voluntary administration) is to operate in relation to a particular company. Section 447A has been described as a ‘magical provision’.37 The insertion of such a provision in Ch 5C would give the court flexibility to give effect to restructures of schemes, tailored as appropriate for the particular circumstances [page 120] which present themselves. A power already exists for modification of Ch 5C by ASIC and by regulations,38 though we are unaware of its use in restructuring managed investment schemes. Giving the court power is a sensible additional means of achieving restructures. 5.43 In chapter 6 of this book, Anastassiou and Foley doubt the justification for such a court power, as modifying the effect of s 601FS would essentially amount to a ‘greater good’ argument.39 However, it is submitted that the modification power has much to commend it. Section 447A has served well in the context of corporate insolvency, with the courts’ discretion being guided by the objects of Part 5.3A40 of seeking to maximise the chances of the company, or as much as possible of its business, continuing in existence; and if that is not possible, seeking to achieve a better return for the company’s creditors and members than would result from an immediate winding up of the company. The court’s power in relation to managed investment schemes could have similar guiding principles, so that, for example, the power would be exercised in a way that maximises the chances of the scheme, or as much as possible of its business, continuing in existence, though not so as to prop up an unviable business model which may have been the downfall of the scheme in the first place. Anastassiou and Foley suggest that the result of the modification may be to prefer the interests of scheme members over the interests of third party landowners. However, in

the context of companies, there are existing provisions in Pt 5.3A, for example the moratorium on recovering property in s 440B, which seek to further the legislature’s aims of encouraging restructures, and there is no obvious reason why this should not extend to managed investment schemes. 5.44 CAMAC’s Managed Investment Schemes report, published in July 2012,41 recommended the introduction of a voluntary administration regime for managed investment schemes.42 Such a recommendation had been made in the Other People’s Money report. The CAMAC report also made a proposal for a separate legal entity (SLE),43 under which a registered scheme would be given the status of a separate legal entity, distinct from its responsible entity or the members, for limited purposes – to own scheme property, to enter into agreements, and to sue and be sued. CAMAC recommends the adoption of a voluntary administration regime, whether or not the SLE proposal is adopted. The structure of the regime differs depending on whether the SLE proposal is adopted. 5.45 If the SLE proposal is adopted, such that the scheme has a limited separate legal personality, CAMAC’s recommendation is that the responsible [page 121] entity, or a creditor holding security over all or substantially all the scheme property, would have power to appoint an administrator if the scheme is, or is likely to become, insolvent (i.e. the scheme property is insufficient to meet all claims against it, as and when they become due and payable), or the scheme’s purpose cannot be accomplished in its current form.44 The administrator (being a registered liquidator) would operate the scheme, and the responsible entity would remain in place, thereby not triggering the provisions on change of responsible entity.45 The scheme’s separate legal personality would mean that counterparties to agreements would have rights only against the scheme property, not against the

personal assets of the responsible entity, so the responsible entity’s solvency would be irrelevant to the scheme’s prospects. 5.46 If the SLE proposal is not adopted, then CAMAC’s recommendation differs depending on whether the responsible entity is solvent or insolvent. If it is solvent, the recommendation is similar to that in respect of the voluntary administration regime in the context of the SLE proposal.46 If the responsible entity is insolvent, the recommendation is that each scheme operated by that responsible entity would form part of that external administration, with a view to determining which schemes should be dealt with separately, including through their own administration.47 An additional trigger for administration would be where the interests of affected parties would be better served by a separate scheme voluntary administration. 5.47 The effect of the administration of the scheme would be a wide moratorium on actions, proceedings and claims; such a freeze would stabilise the scheme and enable stakeholders to consider the likelihood of rehabilitation and future viability.48 The scheme creditors (and perhaps also other stakeholders) would vote, at a meeting, as to whether a scheme deed (similar to a deed of company arrangement) ought be executed;49 whether the scheme should be wound up; or whether the administration should end.50 The administrator would have flexibility in formulating scheme deeds, and deciding who would vote on a particular deed.51 Where a scheme deed has been accepted, but the existing responsible entity is no longer able to perform that role, and no other party is willing to become the responsible entity, there may be a need to wind up the scheme, or else appoint a temporary responsible entity.52 The court would be given a general discretionary power, similar to s 447A.53 [page 122] 5.48 It is worthwhile considering whether, apart from any introduction of a voluntary administration regime, there ought be a regime for schemes of arrangement of managed investment

schemes.54 That would provide a means for a majority of members of the managed investment scheme to bind a minority, so as to achieve a restructure, under a court-supervised process. 5.49 Finally, on 25 June 2014 the Senate referred to the Senate Economics References Committee an inquiry into the structure and development of forestry managed investment schemes.55

XI. Impediments to restructure 5.50 In the following sections, we explore successful restructures of investment vehicles, and how practitioners have attempted to overcome impediments to achieve them. We will focus on the following examples: Centro, Tricom and Octaviar, by analysing the company, the collapse, and the rescue.

XII. Tricom XII.A. The company 5.51 Tricom was a stockbroker with a large securities lending portfolio. Securities lending involves providing cash advances to retail clients in return for the client transferring title in securities to the broker as collateral. These transactions were similar to margin loans, in that if the value of securities fell below the value of the cash advance, Tricom was able to make a margin call to require the investor to deposit additional securities or cash to maintain the ‘loan to value’ ratio. However, they were different to traditional margin loans as the title in the securities was transferred to Tricom.56 Simultaneously, Tricom entered into similar agreements with institutional counterparties, including ANZ, Merrill Lynch and Credit Suisse, through which Tricom financed its securities lending portfolio.57 5.52 Securities lending to retail clients only became commonplace in Australia in around 2002, although it had become popular in London in 1999.58 This occurred in part due to the reforms implemented by the Financial Services Reform Act 2001 (Cth).59 For example, before those reforms, such transactions

[page 123] would likely have been held void under the gaming and wagering legislation of the states and territories.60 Also important was the booming Australian equities market. Between April 2002 and September 2007, the market capitalisation of Australian listed entities grew from $724 billion to $1,643 billion.61 This allowed for growth in the securities lending market because, in a booming equities market, the mismatch between the value of the securities and the value of the loan with the institutional counterparties created a large pool of excess funds for Tricom.62 In the 2007–2008 financial year, Tricom’s securities lending business grew from $776 million to $2.7 billion, largely funded by ANZ.63 According to the firm’s founder, Lance Rosenberg, at its height the securities lending business accounted for between 15 and 20% of revenue and between 20 and 25% of Tricom’s profits.64

XII.B. The collapse 5.53 While a booming equities market created excess funds for Tricom, a weaker equities market exposed it to liquidity issues if margin calls were made by institutional counterparties. This fear was realised in January 2008 when the All Ordinaries Index suffered its largest losses in approximately 18 years. At this time, Tricom failed to settle margin call trades on the ASX, the first time this had happened to a broker in the electronic era. 5.54 There were two features of the securities lending business that led to the near collapse of Tricom in early 2008. The first of these was the inherent risk of making loans to a large number of retail investors. This was risky for operational reasons, as it required Tricom to manage a large number of loans, and because it increased Tricom’s credit risk by providing a significant number of loans to relatively unknown retail investors. These risks were compounded by the existence of very similar agreements with a small number of institutional counterparties. The mismatch in the back-to-back agreements meant that a margin call by an institutional counterparty

had to be met with hundreds of margin calls by Tricom to retail clients. 5.55 The second feature that led to the near collapse of Tricom was its inability to quickly liquidate the assets in which it had invested, particularly in a volatile share market. The inability of Tricom to meet any potential margin calls by institutional counterparties was exacerbated by the fact that, [page 124] as the ASX subsequently found, Tricom had been trading without adequate capital for 21 of 27 months from January 2006.65

XII.C. The rescue 5.56 Tricom and its advisers needed to ensure that the institutional counterparties, whose margin calls could have caused Tricom to become insolvent, were satisfied that their interests would be better protected through an informal restructure rather than through formal insolvency procedures. In subsequent court proceedings regarding similar corporate collapses, email communications have come to light showing that the chief risk officer of ANZ, David Stephen, stated that ANZ’s fundamental approach to Tricom was to ‘keep [it] operational to facilitate a reduction in exposures and exit of the relationship.’66 5.57 In a period of market instability and fear, the key was to provide sufficient comfort to the institutional counterparties that their interests would be best served through this informal process. In order to achieve this, Tricom appointed an independent investigative accountant to oversee the sale of its securities lending portfolio, which was seen by all stakeholders as too significant a risk in the then market conditions. Daily meetings were held with the institutional counterparties to report on the progress of the sales, the financial position of Tricom and the repayment of the debt owed to the institutional counterparties. On condition of these daily

meetings, the institutional counterparties entered into informal standstill agreements with Tricom by which the institutional counterparties agreed to not make any claim or demand on Tricom. 5.58 The attempted and failed restructure of Opes Prime is an informative comparison with the restructure of Tricom. Both Opes Prime and Tricom were in the securities lending business and both had large loan portfolios funded by institutional counterparties, and in particular, ANZ. However, in the case of Opes Prime, unlike Tricom, the institutional counterparties did not enter into standstill agreements and, on 27 March 2008, ANZ appointed receivers and managers to Opes Prime. One of the reasons that ANZ gave for appointing receivers and managers, rather than negotiating a restructure, was the irregularities in Opes Prime’s business. For example, ANZ discovered an irregularity whereby it appeared that Opes Prime had manipulated its records to make it seem as though a customer was within margin, whereas this was not the case. The key to restructuring Tricom was to ensure that the institutional counterparties trusted Tricom and its advisers. The absence of any irregularities such as these assisted in that process, as did the procedures put in place to provide comfort to the institutional counterparties. 5.59 The restructure of Tricom also hinged on the reaction of the regulators, and in particular the ASX. Because of the capacity of the ASX to prevent any [page 125] restructured Tricom from participating in the equities market, it was vital that Tricom and its advisers carefully managed any interactions with the regulator. In 2009, the ASX took punitive action against Tricom for various reasons, including in relation to the tactics employed by the company to avoid collapse. However, in the Disciplinary Circular that the ASX published in relation to Tricom, it stated that the following factors were taken into consideration in

determining the level of penalties, which did not include preventing Tricom from participating in the equities market in the future: (a) since February 2008, Tricom frequently met with the ASX regarding the restructure and future compliance issues; (b) Tricom appointed an independent auditor to advise on compliance procedures; and (c) Tricom demonstrated that it was implementing the conditions imposed on it by the ASX, ACH and ASTC to allow for Tricom’s continued participation.67 5.60 In 2009, after clearing its stock lending portfolio and paying down its debts to the institutional counterparties, Tricom was restructured and rebranded as StoneBridge Group, which ran a Melbourne-based private client operation with a significant derivatives business. In 2011, StoneBridge Group was acquired by BBY.68

XIII. Centro XIII.A. The company 5.61 Centro was a large Australian owner and manager of shopping centres in Australia, New Zealand and the United States. It generated income by providing a range of services related to property management and investment and by developing wholesale and retail property investment funds that were listed on the ASX through stapled securities.69 In June 2007, Centro had $26 billion in funds under management and an ASX market capitalisation of over $7 billion.70 Centro was able to acquire such a significant property portfolio due to its ability to access cheap debt in the pre-GFC era. As a result, the debt of the Centro Group exceeded $10 billion in 2007.

XIII.B. The collapse 5.62 In 2007, as the credit markets were tightening in the face of a growing subprime mortgage crisis, Centro’s business model came

unstuck. Centro had acquired an American property trust in early 2007 using a bridging finance [page 126] facility. As with prior acquisitions, the board intended to refinance the interim loan with longer-term financing.71 However, due to the emerging credit crisis, Centro was not able to refinance part of that debt and, in December 2007, announced that it had misclassified over $1 billion in debt as non-current when it was in fact current. As a result of the changing financial landscape, its high debt levels and the relative illiquidity of its assets,72 Centro could not pay its senior lenders as and when the relevant debts fell due for payment. 5.63 After the announcement in December 2007, Centro’s share market capitalisation plummeted. In the two days following the announcement, the share price lost 86% of its value.73 As the share price remained severely depressed into 2008, Centro was the subject of three shareholder class actions, with reported claims of over $1 billion against the company.

XIII.C. The collapse and restructure 5.64 From 2007 to 2009, Centro and its advisers engaged in extensive negotiations with Centro’s senior lenders to grant time extensions and to refrain from enforcing their rights under financing agreements. In January 2009, Centro and its lenders signed revised finance documents in which all of the bilateral debt was converted into new three-year senior facilities. 5.65 By 2012, with the revised debt facilities becoming near term, Centro achieved a comprehensive restructure. At a basic level, this involved: (a) selling a large portion of its United States property portfolio to allow for significant deleveraging of the group; (b) stapling key property owning entities to overcome the difficulties posed by its complex corporate structure (which made it more

difficult to conduct asset sales); (c) distributing these stapled securities to senior lenders in return for a forgiveness of debt through a scheme of arrangement; and (d) placing money into escrow to satisfy junior stakeholders on the basis that they voted in favour of the restructure.74 5.66 The most significant impediment to achieving a successful restructure of Centro was the number and variety of stakeholders involved. In order to restructure the group, Centro required 16 separate votes, in many cases from investors who had lost significant amounts of money.75 Throughout the process, every junior stakeholder had threatened not to support the restructure at different times. For example, a Centro shareholder commenced [page 127] proceedings seeking documents to challenge the sale of the United States assets.76 Similarly, the class action parties, including the auditor of Centro in 2007, PwC, sought to oppose the scheme of arrangement.77 5.67 The key to overcoming stakeholder opposition was to ensure that it was common ground between all stakeholders that a formal insolvency appointment would be value destructive. This was made easier by the involvement of investor hedge funds and distressed debt lenders. By 2011, the composition of the senior secured debt register transitioned from traditional financial institutions to ‘loan to own’ investors. Such investors purchased the debt substantially below face value, and therefore were not ‘looking for dollar-for-dollar recovery on their debt,’ but rather ‘aim[ed] to become the owners of the company or its business in a restructured form, later to sell that interest for a profit.’78 5.68 The remainder of the junior stakeholders were convinced to support the restructure through various features of the restructure. This included a consent fee of $100 million provided by the senior lenders, which was divided among hybrid lenders, convertible

bondholders and CNP equityholders (being the holders of the stapled securities which consisted of a share in the capital of Centro Properties Ltd and a unit in the Centro Property Trust, a registered managed investment scheme) on the condition that they voted in favour of the scheme of arrangement. This was important as many of the junior stakeholders (such as JP Morgan, a significant holder of the hybrid debt, and disgruntled CNP equityholders which included class action litigants) had threatened to block the scheme. In order to achieve this, Centro and its advisers had to convince the senior lenders that it was a necessary and worthwhile investment, particularly as the junior stakeholders would have been unlikely to receive any funds in insolvency procedures in the United States. Another aspect of the restructure was the creation of ‘Class Action True-up Securities’ which would convert into ordinary securities once Centro’s exposure to the class action litigation was known and therefore provided comfort to the class action litigants that their claims would be met. At the same time, a back-up plan was formed in which the transactions would have been completed either through a solvent restructure, with the support of all stakeholders, or through formal insolvency processes, without the support of all stakeholders.79 5.69 Another impediment to the successful restructure was the risk posed to the directors in continuing to trade and incur debts during a period in which, at times, it was clear that the company was insolvent. The directors were therefore in the invidious position of being exposed to the serious ramifications of breaching their duty to ensure that the company was not [page 128] trading while insolvent, while also attempting to balance the sometimes competing and always uncertain duties to act in the best interests of the company and to act in the interests of the company’s creditors.80 There were a number of reasons that the directors continued to work towards an informal restructure rather than

placing Centro into administration. Not least of these was that the board recognised that a formal insolvency process would have been value destructive. The restructure was also structured to provide comfort to the directors that they were satisfying their duties, such as placing a fully funded budget for the winding up of CNP into escrow, ensuring that CNP would be able to continue to meet its debts as and when they fell due. 5.70 Although the class actions were not settled prior to the restructure, the subsequent settlement unlocked value for the restructured Centro Group. The immediate reaction was positive, with the closing price of the shares up by 5.3 cents (a value uplift in excess of $75 million). As stated by UBS in a subsequent press release, the ‘earning upside story can now start.’

XIV. Octaviar XIV.A. The company and the collapse 5.71 Octaviar (previously MFS), was a group of companies involved in hospitality, tourism, finance and property development. Octaviar operated a network of hotels and offered funds management and financial services to investors. At its peak, Octaviar had a market capitalisation of $2.4 billion. Similarly to Centro, Octaviar was a highly complex and leveraged company. In late 2007 and early 2008, with the tightening of the credit market, Octaviar faced serious difficulties in securing funding and disposing of assets.

XIV.B. The (failed) rescue 5.72 On 18 January 2008, facing a liquidity crisis, MFS announced that it intended to split the financial services business and the tourism business into two separately listed entities through a scheme of arrangement. In response to the announcement, the MFS share price fell by 70% from $3.18 to $0.99. Within days, Octaviar appointed Mark Mentha, a restructuring partner of the professional services firm KordaMentha, and 333 Capital, a specialist corporate advisory firm, to advise the company on how it should proceed.

5.73 Various systems were established to analyse and report to the board on Octaviar’s cash position and its ability to meet debts as and when they fell due. Octaviar deferred redemptions from MFS Premium Income Fund, a managed investment scheme within the Octaviar Group, which controlled the funds of over 10,000 investors worth $770 million.81 From early 2008 to [page 129] late 2009, Octaviar and its advisers met and negotiated with creditors and financiers, including Fortress Investment Group, JP Morgan, Citigroup and NAB, to attempt to negotiate standstill agreements. Octaviar also attempted to sell many of its assets and the financially viable parts of its business in order to deleverage. For example, on 4 February 2008, Octaviar announced the sale of a 65% interest in its hospitality and tourism business to private equity firm CVC Asia.82 The company did this in order to deleverage, and in particular to repay approximately $200 million in debt owing to Fortress Investment Group.83 5.74 Despite these attempts to solvently restructure Octaviar, due to the inability of the company to assuage various stakeholders, including ASIC, shareholders and various creditors (particularly the Public Trustee of Queensland which persistently sought to wind up the company from June 2008), Octaviar was placed into voluntary administration in September 2008 and liquidation in September 2009.84 5.75 Octaviar demonstrates the risks involved for directors, creditors and advisers in attempting to informally restructure insolvent or near insolvent companies if the restructure is not successful. In late 2009, ASIC commenced civil proceedings against the former operator of the MFS Premium Income Fund and a number of its directors relating to the use by the operator of $147.5 million belonging to the MFS Premium Income Fund in order to repay debts owed by another company within the Octaviar group.85 ASIC alleged that such conduct was contrary to the directors’ duties to operate the

fund with care and diligence and in the best interests of the fund’s members. 5.76 The liquidators of Octaviar have brought proceedings against Fortress Investment Group, alleging that the repayment of debt in February 2008 occurred at a time where Octaviar was insolvent and was therefore a preferential payment. Most recently, and perhaps most surprisingly, the liquidators of Octaviar commenced proceedings against Mark Mentha and 333 Capital. The liquidators allege that, but for Mentha’s failure to advise that Octaviar was insolvent in early 2008, the company would have been placed into administration earlier. A spokesman for 333 Capital has stated: ‘to suggest that creditors would have been better off if the company was [page 130] placed into administration is to stretch logic, common sense and statutory responsibilities beyond breaking point.’86

XV. Conclusion 5.77 The difficulties faced in the restructuring of managed investment schemes makes this area ripe for law reform. While it is lamentable that any reforms may be too late for the schemes that failed in the aftermath of the GFC, those failures have exposed the complexities in restructuring and, through the wisdom of hindsight, may ultimately generate potential solutions. 1. 2. 3. 4. 5. 6. 7.

The authors thank Sam Flynn for his valuable contribution to this chapter. Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Other People’s Money, Report No 65 (June, 1993). R I Barrett, ‘Insolvency of registered managed investment schemes,’ (Paper, Banking and Financial Services Law Association, Queenstown, New Zealand, 2008). The winding up of registered schemes is the subject of Chapter 7 of this book. Re Environinvest Ltd, Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33 (appeal dismissed: Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2). Corporations Act s 601FC(2). Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 at [14].

8. 9. 10. 11. 12. 13.

14.

15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

32.

ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444; [2009] NSWSC 243 at [86]–[88]. 360 Capital RE Ltd v Watts (2012) 36 VR 507; [2012] VSCA 234. Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 at [19]. Re Timbercorp Securities Ltd (No 2) [2009] VSC 411. Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 at [80]. Re Hazelton Air Charter Pty Ltd [2002] FCA 529; (2002) 41 ACSR 472 at [47] (Goldberg J), quoted with approval by Robson J in Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 at [80]. Re Timbercorp Securities Limited (in liq) [2009] VSC 590; Re Timbercorp Securities Ltd [2009] VSC 597; Re Timbercorp Securities Ltd (No 4) [2009] VSC 530; Re Timbercorp Securities Ltd (2010) 77 ACSR 291; [2010] VSC 50; Re Timbercorp Securities Ltd (in liq) [2011] VSC 24; Re Timbercorp Securities Ltd [2011] VSC 83. BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255. BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255 at 343. Re Timbercorp Securities Ltd (approval of compromises) [2012] VSC 590; see also Re Timbercorp Securities Ltd (approval of compromises) (No 2) [2014] VSC 246. Re Timbercorp Securities Ltd [2009] VSC 608. Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) (2009) 76 ACSR 146; [2009] VSC 557. Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) [2009] VSC 627. Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) [2009] VSC 627 at [9]. Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) [2009] VSC 627 at [11]. Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) [2009] VSC 627 at [17]–[22]. Re Elders Forestry Management Ltd (2012) 90 ACSR 573; [2012] VSC 287; Re Elders Forestry Management Ltd (No 2) [2012] VSC 373. Re Elders Forestry Management Ltd [2013] VSC 747. Re APT Projects Ltd [2013] VSC 471. Re Gunns Plantations Ltd [2012] VSC 513; Re Gunns Plantations Ltd (No 1) [2012] VSC 655. See Chapter 6 of this book. Re Gunns Plantations Ltd (in liq) (recs & mgrs. apptd) [2014] VSC 239; Re Gunns Plantations Ltd (in liq) (recs & mgrs apptd) (No 3) [2014] VSC 267. Re Gunns Plantations Ltd (in liq) (recs & mgrs. apptd) (No 4) [2014] VSC 369. Willmott Growers Group Inc v Willmott Forests Ltd (rec & man app) (in liq) (2013) 251 CLR 592; (2013) 304 ALR 80; [2013] HCA 51. The disclaimer issues raised in Willmott are described in detail in Chapter 11 of this book. Re Norman; FEA Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd) (2010) 191 FCR 39; (2010) 80 ACSR 517; [2010] FCA 1274; Re Norman; FEA Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd) [2010] FCA 1444; on appeal, Re Norman; FEA Ltd v FEA Plantation Ltd (2011) 195 FCR 97; (2011) 85 ACSR 117; [2011] FCAFC 99.

33. 34.

35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

57. 58. 59. 60.

Re Silvia (admins apptd), FEA Plantations Ltd (subject to deed of company arrangement) (recs apptd) [2013] FCA 1331. See, e.g., Re Investa Properties Ltd (2001) 40 ACSR 124; [2001] NSWSC 1089; Syncap Management (Rural) Australia Ltd v Lyford (2004) 51 ACSR 223; [2004] FCA 1352; Huntley Management Ltd v Timbercorp Securities (2010) 187 FCR 151; (2010) 79 ACSR 143; [2010] FCA 576; Primary RE Ltd v Great Southern Property Holdings Ltd [2011] VSC 242; Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125; MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911; Gunns Finance Ltd (in liq) (recs and mgrs apptd) and Gunns Plantations Ltd (in liq) (recs and mgrs apptd) (No 2), Re; sub nom Gunns Finance Ltd (in liq) v WA Blue Gum Ltd (2013) 281 FLR 121; [2013] VSC 365; Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574. Above n 3. BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255. Ansett Australia Ltd v Ansett Australian Ground Staff Superannuation Plan Pty Ltd (2002) 41 ACSR 598; [2002] VSC 114 at [21]. Corporations Act ss 601QA and 601QB. See paras [6.64]–[6.65] below. Corporations Act s 435A. Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012). Above n 41, at p 6. Above n 41, at p 3. Above n 41, at para 6.4. Above n 41, at para 6.8. Above n 41, at para 6.3.3. Above n 41, at para 6.3.4. Above n 41, at para 6.5.1. Above n 41, at para 6.6. Above n 41, at para 6.7. Above n 41, at para 6.6. Above n 41, at para 6.10. Above n 41, at para 6.9. An idea suggested by Ray Finkelstein QC while chairing the seminar that gave rise to this chapter. The Committee is to report by 25 June 2015. S Palmer, ‘Contracts for difference, spread bets and over the counter derivatives: Through a lawyer’s looking glass’ (2007) 25(4) Company and Securities Law Journal 246 at p 251. J Milner et al, ‘Casualties of securities lending — sending brokers broke’ in Financial Fallout, LexisNexis Butterworths, Australia, 2008 at p 17. C Davey, Contracts for Difference — Master the Trading Revolution, Wrightbooks, 2003, at p 17. Above n 56, at p 252. Unlawful Gambling Act 1998 (NSW) s 56(1); Gambling Regulation Act 2003 (Vic) s 2.4.1;

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

83.

84. 85. 86.

Racing Act 2002 (Qld) s 341; Lottery and Gaming Act 1936 (SA) s 50; Gaming and Betting (Contracts and Securities) Act 1985 (WA) s 4(1); Racing Regulation Act 2004 (Tas) s 103; Games, Wagers and Betting-Houses Act 1901 (ACT) s 13; Racing and Betting Act 1983 (NT) s 135(1); Unlawful Betting Act 1989 (NT) s 4. ASX, End of Month Values (18 August 2014) ASX Above n 57. J Chessell, ‘Rosenberg’s appetite for risk finally catches up with him’, Australian Financial Review, 2 February 2008 at p 12. J Durie, ‘Bowen dines out on hub plan’, Weekend Australian, 2 February 2008 at p 37. Australian Securities Exchange, Disciplinary Circular No 230/09, 10 July 2009. L Wood, ‘Bank’s “secret agenda”’, The Age, 26 October 2011 at p 8. Australian Securities Exchange, Disciplinary Circular No: 230/09, 10 July 2009. A Main, ‘Rosewall nets former Tricom brokers’, The Australian, 14 June 2011 at p 17. J Harris and M Legg, ‘What price investor protection? Class actions vs Corporate rescue’ (2009) 17(4) Insolvency Law Journal 185 at 199. Centro Properties Group Annual Report 2007, at p 3. Above n 69, at p 200. M Moncrief, ‘Centro Properties turmoil shaves more from superannuation fund returns’, The Age, 21 December 2007 at p 1. Above n 72, at p 1. Re Centro Properties Ltd (2011) 87 ACSR 131. R Maslen-Stannage, ‘Directors’ duties to creditors: Walker v Wimborne revisited’ (2013) 31(2) Company and Securities Law Journal 76 at 81. Smartec Capital Pty Ltd v Centro Properties Ltd (2011) 83 ACSR 461; [2011] NSWSC 495. Re Centro Properties Ltd (2011) 86 ACSR 584; [2011] NSWSC 1465. Above n 75, at p 81. Re Centro Properties Ltd (2011) 86 ACSR 584 at [4]–[15]. Corporations Act 2001 (Cth) ss 181(1) and 588G; Walker v Wimborne (1976) 137 CLR 1; (1976) 3 ACLR 529. P Hanrahan, ‘ASIC and managed investments’ (2011) 29(5) Company and Securities Law Journal 287. MFS Limited, ASX and Media Announcement, Sale of 65% of Stella Group (4 February 2008) . The transaction has subsequently been challenged by Octaviar’s liquidators: see L Shanahan, ‘MFS Liquidators pursue Fortress in US court to recoup $210m ‘siphoned’ from company’ The Australian, 12 March 2014. See Public Trustee (QLD) v Octaviar Ltd (Subject to Deed of Company Arrangement) (Receivers and Managers Appointed) (2009) 73 ACSR 139 at [10]–[34]. ASIC, ‘ASIC Commences Civil Proceedings Against Former Officers of MFS Group’ (Media Release, 09-214AD, 2 November 2009). B Butler, ‘Insolvency guru KordaMentha’s Mark Korda under fire on advice’, The Sydney Morning Herald, 31 May 2014 at p 11.

[page 131]

6 ROLE OF THE COURTS IN RESTRUCTURING MANAGED INVESTMENT SCHEMES Paul Anastassiou QC and Kathleen Foley Paul Anastassiou QC is a barrister at the Victorian Bar. He is Senior Vice President of the Victorian Bar and a former Chairman of Barristers’ Chambers Limited. He practises in a broad area of commercial litigation, including banking, insolvency, corporations, trade practices, class actions and professional negligence. He has appeared in several cases arising from the collapse of major forestry and horticultural managed investment schemes. Kathleen Foley is a member of the Victorian Bar. She practises primarily in commercial law and public law. A former associate to Justice Hayne of the High Court of Australia, she completed a Master of Laws at Harvard and practised as an attorney in New York before coming to the Bar in 2009.

I. Introduction 6.1 In 2013, in the aftermath of the collapse of the Gunns group of companies, Macquarie Forestry Services Pty Ltd (Macquarie) (part of the Macquarie Group) and WA Blue Gum Ltd (WABG) put forward a proposal for the restructure of six Gunns managed investment schemes. The receivers of Gunns Ltd and its wholly owned subsidiaries successfully challenged the proposal in the Supreme Court of Victoria, and it is the subject of Robson J’s decision in Re Gunns Finance (No 2) (2013) 281 FLR 121. In this chapter, we use this

proceeding1 as a springboard to discuss the role played by the courts when restructure proposals are challenged. We also consider what the decision has to say about an important aspect of the law concerning managed investment schemes — namely, s 601FS of the Corporations Act. [page 132]

II. Background to the proceeding II.A. Schemes 6.2 The six schemes at issue in the proceeding involved hardwood plantations of Eucalyptus Nitens in Tasmania and (to a much lesser extent) in New South Wales. 6.3 The RE of the schemes was Gunns Plantations Ltd (GPL), a wholly owned subsidiary of Gunns Ltd. Investors in the schemes were known as ‘growers’. 6.4 The land on which the schemes were operated by GPL was leased land.2 A proportion of the leases, referred to as ‘peppercorn leases,’ were between GPL and land-owning entities of Gunns at a non-commercial rental amount.3 Other leases were made on a commercial basis (the commercial-rate leases).4 There were approximately 837 scheme leases. Of these, 408 were leases made with farmers and other private landowners. 6.5 Administrators were appointed to Gunns and each of its wholly owned subsidiaries on 25 September 2012.5 On the same day, receivers and managers (the receivers) were appointed to Gunns.6 The receivers were appointed by the security trustee for the Gunns Financing Security Trust, which held a registered security interest over the assets of the Gunns companies.7 The administrators became liquidators on 5 March 2013.8

II.B. Liquidators’ proposal and the restructure

proposal 6.6 The liquidators sought expressions of interest to replace GPL as the RE between 15 October 2012 and 5 April 2013.9 A proposal was received from Macquarie, but the liquidators had ‘serious concerns’ about it and did not convene a meeting of growers to consider it.10 6.7 On 6 April 2013, the liquidators wrote to the growers and advised that they had determined it was in the growers’ best interests to sell the trees, and that they intended to apply to the Court for directions that they were justified in doing so.11 Further correspondence was sent to the growers explaining the liquidators’ decision.12 The liquidators proposed to ‘sell all of the scheme [page 133] assets on land owned by the Gunns group companies in a joint marketing process with the receivers.’13 6.8 Against this background, Macquarie put forward its own proposal. It proposed a restructure, with WABG to be the new RE of the schemes and Macquarie to be the new manager.14 6.9 Notices of meeting were issued on 29 April 2013.15 The purpose of the meetings, to be held on 28 May 2013, was to vote on the proposed restructure. As well as the relevant notice, growers were provided with an explanatory memorandum (EM) concerning the restructure proposal. The EM was a detailed document of some 59 pages. Its content was central to the claims in the proceeding. 6.10 The notices set out the four resolutions to be voted on by members. Broadly speaking, the four resolutions provide for the restructure in the following way:16 (a) Resolution 1: Approval of the restructure proposal. (b) Resolution 2: Approval of amendments to the scheme constitutions to implement the restructure. (c) Resolution 3: Removal of the current RE.

(d) Resolution 4: Appointment of the new RE. 6.11 The following aspects of the restructure proposal, as described to growers in the EM, should be noted: (a) Growers were told that the aim of the restructure was to ‘improve [their] investment return prospects.’17 The reference to ‘improvement’ referred to a comparison with the plan put forward by the liquidators. Growers were told that ‘without a restructure, [they] may receive little or no return from their Scheme.’18 The restructure was put forward to growers on the basis it aimed to ‘improve value’ for them.19 (b) The proposed restructure was to happen in several stages. After appointing the new RE and manager (described as ‘stabilising the scheme’), the manager would improve ‘saleability’ by ‘cleaning up’ scheme assets in order to ‘test the market.’ The purpose of this was said to source a cash bid for all of the scheme assets. Growers were told this would ideally be achieved in calendar year 2013. If such an offer were received, the next stage involved holding a second vote to give growers the choice of accepting the cash offer or taking the schemes to harvest. The EM emphasised to growers that [page 134] giving them the choice of either a cash offer or continuing the schemes to harvest put them in a ‘far stronger commercial position’.20 (c) Importantly, growers were told that the restructure proposal did ‘not envisage carrying forward all existing leases’ held by GPL.21 Essentially, Macquarie proposed to excise the commercial-rate leases from the schemes. The excised area was said to amount to about 10% of the total leased land.22 As to why this would occur, growers were told that it was ‘not practical’ or in some cases ‘advantageous’ to continue growing timber for harvest, and that only ‘economically attractive’ leases would form the ‘Continued Area’ of the schemes. The significance of this for growers was

that there would be no ongoing liability for rent in relation to the commercial-rate leases. Only the peppercorn leases that were to be part of the Continued Area would continue.23 (d) The restructure proposal also involved offering growers two investment options.24 Under Option A, growers were required to make an upfront payment and annual contribution payments. Under Option B, growers were not required to make any cash payments but would have fees deferred and deducted from gross harvest or sale proceeds.

II.C. Injunction application 6.12 On 27 May 2013, an urgent interlocutory injunction was brought to restrain the meetings.25 The application was made by Gunns Finance Limited (in liquidation) (receivers and managers appointed) (Gunns Finance) and the receivers. Gunns Finance held a substantial interest in the schemes as a grower.26 The defendants included WABG and Macquarie. 6.13 The application, which was heard and determined that day in the Practice Court of the Supreme Court of Victoria, was made on the basis that the material provided to the growers was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law (ACL).27 The application was resisted by Macquarie and WABG. Justice Pagone, in determining the application, considered that the plaintiffs had a ‘strong case that [the] information memorandum in its present form is false and misleading.’28 However, on the basis of an undertaking given by senior counsel for Macquarie and WABG, Pagone J concluded that the balance of [page 135] convenience favoured a refusal of the application.29 That undertaking was to the effect that, if it were later held that the resolutions had been adopted upon material found to be false and

misleading in contravention of s 18 of the ACL, the defendants would not contend that the resolutions were nevertheless valid.

II.D. Next phase of the litigation 6.14 Having succeeded in resisting the application to restrain the meetings (albeit by the giving of the undertaking), Macquarie and WABG proceeded to hold the meetings as planned. They did, however, make some changes to the amending deeds in response to some of the allegations made by the plaintiffs in the course of the hearing of the interlocutory injunction application.30 The four resolutions providing for the restructure were passed. 6.15 Just a few days later, on 31 May 2013, Gunns Finance and the receivers commenced the next stage of the litigation: a new proceeding (2774 of 2013) seeking declaratory relief in relation to various matters arising from the meetings including that the resolutions passed by the growers were invalid because material made available to them prior to the meetings was in contravention of s 18 of the ACL.31 WABG and Macquarie were the first and second defendants, respectively. GPL, in its capacity as RE, was the third defendant. The liquidators were the fourth defendants. 6.16 The proceeding was heard and determined by Robson J on an expedited basis32 together with another proceeding (3272 of 2013), brought by several land owners against WABG and GPL. In that proceeding, a declaration was sought (inter alia) that upon WABG becoming the RE of any of the schemes, the forestry fees (i.e., rent) owed to the farmer landowners would be liabilities of WABG pursuant to s 601FS of the Corporation Act.33

III. Commercial context — company takeovers and applications for injunctive relief 6.17 Before turning to the litigation in more detail, it is useful to pause and consider the commercial and legal context at a higher level. The proceeding involved the use of legal process to prevent a move by Macquarie in a commercial setting to restructure the

schemes. The first step in preventing Macquarie’s play was the seeking of urgent injunctive relief to try and halt the holding of the meetings at which the resolutions would be considered. [page 136] As stated above, the application was made a day before the meetings were to be held. 6.18 A review of the authorities demonstrates that the seeking of injunctive relief to try and scuttle a corporate play (whether a takeover or something else) can take various forms. An injunction might be sought to restrain the directors from convening a meeting of members,34 or to restrain the company, its officers and agents, from arranging to hold or holding a meeting of the company.35 An injunction might be sought in a more targeted way to restrain the company from proceeding with any business at the scheduled meetings in relation to specified resolutions.36 6.19 In the present case, the plaintiffs sought to restrain the meetings themselves, as well as to restrain the putting of the resolutions the subject of the notices of meeting to the members. 6.20 The authorities make clear that successfully restraining the holding of a company meeting is not an easy thing to do. Undoubtedly, this is as it should be. Adjourning and reconvening meetings is a costly exercise,37 and, apart from such costs, there might be other substantial losses associated with delay of the meetings, including the risk that a third party relying on the meeting being held at a particular point in time might change its plans (for example, pull out of a deal) if the meeting does not go ahead as scheduled.38 6.21 A unique feature of this proceeding is that although the plaintiffs did not succeed in restraining the meetings, the undertaking given in the course of the injunction application was critically important to the way in which the next stage of the litigation was conducted. As Robson J observed,39 the effect of the

undertaking was that if he were to find that the material put to the growers was in contravention of s 18 of the ACL (or related provisions), a declaration that the resolutions were invalid must follow. Thus, the proceeding before Robson J was largely confined to the question of whether the material provided to the growers was misleading or deceptive, and there was no need for any further argument on the validity of the resolutions. 6.22 Having considered the context, we now turn to the principal proceeding itself. The plaintiffs’ case that Macquarie had engaged in misleading or [page 137] deceptive conduct had several components.40 In this chapter, we focus on one of those arguments, namely, the contention that Macquarie had engaged in misleading conduct in various ways by failing to represent to growers an accurate picture of the effect of s 601FS of the Corporations Act.41 In this regard, we are principally concerned with the competing arguments concerning the construction of s 601FS.

IV. Construction of s 601FS — the competing arguments 6.23 Section 601FS operates where the RE of a registered scheme changes. It is concerned with whether (and how) the ‘rights, obligations and liabilities’ of the former RE become rights, obligations and liabilities of the new RE. It provides: 601FS Rights, obligations and liabilities of former responsible entity (1) If the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme become rights, obligations and liabilities of the new responsible entity. (2) Despite subsection (1), the following rights and liabilities remain rights and liabilities of the former responsible entity: (a) any right of the former responsible entity to be paid fees for the performance of its functions before it ceased to be the responsible entity;

and (b) any right of the former responsible entity to be indemnified for expenses it incurred before it ceased to be the responsible entity; and (c) any right, obligation or liability that the former responsible entity had as a member of the scheme; and (d) any liability for which the former responsible entity could not have been indemnified out of the scheme property if it had remained the scheme’s responsible entity.

6.24 Section 601FS must be read together with s 601FT. It provides: 601FT Effect of change of responsible entity on documents etc to which former responsible entity is party (1) If the responsible entity of a registered scheme changes, a document: (a) to which the former responsible entity is a party, in which a reference is made to the former responsible entity, or under which the former responsible entity has acquired or incurred a right, obligation or liability, or might have acquired or incurred a right, obligation or liability if it had remained the responsible entity; and (b) that is capable of having effect after the change;

[page 138] has effect as if the new responsible entity (and not the former responsible entity) were a party to it, were referred to in it or had or might have acquired or incurred the right, obligation or liability under it. (2) Subsection (1) does not apply to a right, obligation or liability that remains a right, obligation or liability of the former responsible entity because of subsection 601FS(2).

6.25 Questions about the scope of s 601FS (and, to a lesser extent, s 601FT) are of real significance for several reasons, including the fact that, in circumstances where a scheme is in financial difficulty, a broad construction of s 610FS has the clear potential to limit the pool of willing replacement REs because the incoming RE would find it difficult to extricate itself from the financial difficulties of the former RE. 6.26 For this reason, the information provided to growers in the EM about s 601FS was critically important when determining if they were provided with an accurate picture of the merits of the restructure proposal.

6.27 In a part of the EM dealing with ‘[r]isk of additional liabilities’, the following statement was made:42 Under the Corporations Act, if the RE of a registered scheme changes, some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new RE.

6.28 Although not expressly referred to, this was a reference to s 601FS of the Corporations Act. 6.29 The plaintiffs contended that the EM did not accurately state the effect of s 601FS, and did not accurately inform growers of the risks associated with s 601FS. Both of these issues are considered in detail below.

IV.A. Effect of s 601FS 6.30 Looking to the first issue, the plaintiffs contended that the EM misstated the effect of s 601FS by stating that ‘some of the rights, obligations and liabilities of the former [RE] in relation to the Scheme may become rights, obligations and liabilities of the new RE.’43 The focus of the argument was on the word ‘may’ — it was submitted that the EM should have said that ‘some’ of the rights, obligations and liabilities of the former RE ‘will’ become rights, obligations and liabilities of the new RE.44 6.31 Resolution of this issue did not raise any factual issues – it was a legal question directed to the effect of s 601FS. In this regard, one of the decisions considered by Robson J was Re Investa Properties Ltd (2001) 40 [page 139] ACSR 124. In the relevant passage from Re Investa, Barrett J (as his Honour then was) said: Sections 601FS(1) and 601FT(1) are drafted in a particularly economical way. They appear intended to cause an incoming responsible entity to step into the shoes of its predecessor … Yet nowhere does one find in those two sections any reference to property. There is a reference to ‘rights’, being rights ‘in relation to the scheme’, and

there can be no doubt that certain ‘rights’ (although not all) are property. [But] the sections do not seem to effect a form of statutory vesting or assignment of property generally …45

6.32 Justice Barrett went on to say that the words ‘in relation to the scheme’ are ‘perhaps intended to cover only rights vis à vis parties such as members of the scheme, being rights arising from or forming part of the matrix of legal relationships making up the scheme, including rights derived from the scheme’s constitutional documents.’46 6.33 Although the relevant passage from Re Investa may be viewed as highlighting ambiguity in the drafting of s 601FS(1) and s 601FT(1), the ‘stepping into the shoes’ characterisation of the effect of s 601FS gained traction in several subsequent cases,47 and was relied upon by GPL and the liquidators in their argument concerning the effect of s 601FS. Consistently with this approach, the plaintiffs submitted that ‘s 601FS leaves no room for an incoming responsible entity to pick and choose their obligations, liabilities or relationships which it is prepared to take on.’48 6.34 Macquarie advanced a different construction of s 601FS. It focused on subs (2), which provides that certain rights and liabilities remain rights and liabilities of the former RE. The argument turned, in particular, on subpara (d), which operates in relation to ‘any liability for which the former [RE] could not have been indemnified out of the scheme property if it had remained the scheme’s [RE].’ Macquarie argued that the purpose of subpara (d) was to ‘quarantine liabilities (and obligations) that are incurred by the [RE] alone and that do not create a lien over the scheme property.’49 As such, Macquarie sought to draw a ‘dividing line’ between liabilities incurred by the RE alone, and liabilities assigned to scheme members.50 In making this argument, Macquarie said there was no distinction in the drafting of s 601FS between ‘liabilities’ and ‘obligations.’51 [page 140]

6.35 It was said that the effect of Macquarie’s argument (if accepted) in relation to the third party leases was that the estate in land would novate to WABG, but the obligation or liability to pay rent would remain with GPL.52 The effect of s 601FS in relation to leases was a matter of particular importance in the proceeding, and in proceeding 3272, and is considered in detail in the next section of this chapter. 6.36 Consistently with the approach taken in several earlier decisions,53 Robson J accepted the ‘stepping into the shoes’ characterisation of the purpose of s 601FS, stating: In my opinion, the purpose of s 601FS is clear. The Act seeks to achieve a seamless takeover, where the new responsible entity steps into the shoes of the old responsible entity.54

6.37 His Honour rejected Macquarie’s contention that there was no meaningful distinction between ‘rights,’ ‘liabilities’ and ‘obligations’ under s 601FS.55 His Honour saw it as significant that s 601FS(1) provides that the ‘rights, obligations and liabilities’ novate to the new RE, whereas the exceptions in s 601FS(2) operate only in relation to ‘rights and liabilities.’56 6.38 Importantly, however, Robson J did not conclusively reject Macquarie’s argument that s 601FS(2)(d) operated to carve out liabilities and obligations incurred by the RE alone. Because the issue was whether Macquarie’s statements in the EM in relation to s 601FS were misleading, his Honour did not need to go further than to find that Macquarie’s argument that s 601FS(2)(d) ‘would allow the new [RE] to avoid liability for the leases it would take over was untested and involved a significant risk’ and that the failure of the EM to inform the growers of this fact was misleading or deceptive or likely to mislead or deceive.57 6.39 In the result, Robson J found that the EM was misleading in its statement that ‘some’ of the rights, obligations and liabilities of the former RE ‘may’ become rights, obligations and liabilities of the new RE.58 His Honour considered the EM should have said that, subject to exceptions in s 601FS(2),

[page 141] the rights, liabilities and obligations of the former RE become rights, obligations and liabilities of the new RE.59

IV.B. Effect of s 601FS — scheme leases 6.40 As stated above, a significant issue in both proceedings concerned the effect of s 601FS (and s 601FT) in relation to the scheme leases — in particular, in relation to accrued and ongoing rent liabilities. 6.41 As noted above, all of the land on which the schemes were operated by GPL was leased. From at least July 2012, default notices had been sent by multiple third party landowners to GPL in respect of unpaid rental amounts under the scheme leases.60 6.42 In proceeding 3272, the plaintiffs (the Land Owners) sought declarations to the effect that upon WABG becoming the new RE, the rights, obligations and liabilities of GPL (including the arrears of forestry fees owed by GPL to the ‘farmer grantors’) would become rights, obligations and liabilities of WABG.61 There was no dispute in this proceeding that, pursuant to s 601FS, all the scheme leases would novate to WABG in the event it became the new RE.62 The dispute concerned whether WABG would be liable for accrued rent or for future rental obligations under those leases. 6.43 The contest between the Land Owners and WABG in this regard revolved around whether s 601FS(2)(d) applied — i.e., whether or not GPL had the right to be indemnified out of scheme property for accrued rent or future rental obligations.63 6.44 GPL made submissions in relation to this issue, and these submissions found favour with the Court. It should be noted that GPL, accepting it had a conflict of interest in the proceeding, did not make submissions concerning the merits of Robson J’s decision, although his Honour noted that the arguments advanced supported the position of the Land Owners.64 6.45 On the basis of GPL’s submissions, Robson J resolved the issue

of the effect of s 601FS on the scheme leases by focusing on the question whether the head leases formed part of ‘scheme property’ for the purposes of s 601FS. Scheme property is defined in s 9 of the Corporations Act, and relevantly includes ‘contributions of money or money’s worth to the [page 142] scheme.’65 His Honour observed that the note to para (a) in the definition states: ‘if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property.’66 In his Honour’s view, the note made clear that ‘money’s worth’ in para (a) of the definition must include rights over property.67 6.46 Justice Robson found that under the schemes, GPL contributed rights over leasehold land.68 Briefly described, GPL obtained ‘forestry rights’ from the head lessors, and made those rights available to the growers.69 This contribution was ‘an essential element of the scheme.’70 In return, GPL received a share of the wood sale proceeds.71 On this basis, his Honour concluded that GPL made a contribution of ‘money’s worth’ to the scheme for the purposes of the definition of scheme property ‘by providing the forestry rights under the scheme whereby the growers do not have to pay a rental fee until the trees are harvested.’72 6.47 A question arose, however, whether the definition of scheme property required the contribution to be made by a grower member of the scheme.73 In this regard, Robson J noted that the definition referred only to a ‘scheme,’ not a ‘managed investment scheme.’74 ‘Scheme’ is not a defined term in the Corporations Act, but his Honour accepted that all that was required in order to be characterised as a scheme was that ‘there should be some program or plan of action.’75 Applying this meaning of the word, GPL was found to be a participant in the scheme.76 But, was it a ‘member’? Section 9 defines a ‘member’ in relation to a managed investment scheme to mean ‘a person who holds an interest in the scheme.’ Justice Robson found

that GPL was a member of the scheme because it held an interest in it, by virtue of the fact it was entitled to a percentage share of the proceeds of the trees.77 [page 143] 6.48 For these reasons, his Honour found that the head leases were ‘scheme property’ within the meaning of the Corporations Act.78 6.49 The significance of this finding lay in the fact that Robson J then accepted a series of propositions advanced by GPL.79 On the basis of those propositions and the conclusions that followed from them, his Honour reasoned as follows: (a) Applying s 601FC(2), the head leases, as scheme property, were held on trust by GPL for scheme members.80 (b) At general law trustees have a right of indemnity from trust assets.81 Thus, at general law, GPL ‘would be entitled to be indemnified out of the trust assets for the costs and expenses that it incurs in holding the head leases.’82 (c) GPL’s right of indemnity at general law was not extinguished by the Act or the scheme constitution.83 6.50 His Honour accepted that GPL’s right of indemnity, although not extinguished, may have been modified by the fact that it had a right to 6.5% of the wood sale proceeds for the rental fee.84 It would be ‘unfair to the growers and inconsistent with the scheme’ for GPL to receive both a full right of indemnity and the 6.5% amount.85 However, his Honour did not consider it appropriate to finally resolve this issue, in view of the fact there had been no argument on the point.86 6.51 For the purposes of the proceeding, the significant finding was that GPL did have a right of indemnity over the scheme property for liabilities (past and future) in relation to the forestry rights deeds.87 This meant that, applying s 601FS, WABG (if it became the new RE) would take on these obligations and liabilities.88

6.52 This result was, his Honour explained, consistent with the purpose of s 601FS: If the responsible entity was entitled to indemnify itself out of the scheme property, there is every reason the liability should become the liability of

[page 144] the new responsible entity which is now the trustee of the scheme property. As to the future obligations in respect of scheme property, the purpose of the Act is achieved by these obligations becoming the obligations of the responsible entity.89

6.53 It should be noted that in relation to this question as it arose in proceeding 3272, Robson J considered an argument made by the plaintiffs in proceeding 2744 that there was an important distinction in s 601FS between ‘liabilities’ and ‘obligations.’90 Although his Honour described the argument as ‘powerful,’91 and although his conclusion on the issue maintains a distinction between the concepts,92 his Honour did not expressly decide the point. In our opinion, the meaning of ‘liability’ for the purposes of s 601FS (and the difference, if any, between a ‘liability’ and an ‘obligation’ in that context) remain important (and as yet unanswered) questions of construction. 6.54 Justice Robson’s findings on this issue in proceeding 3272 had ramifications for the misleading and deceptive conduct case in proceeding 2744. Among other things, the plaintiffs took issue with the fact that the EM failed to disclose to growers the effect of s 601FS and/or s 601FT in relation to accrued and ongoing rent obligations. 6.55 In this regard, growers were told that neither the incoming RE nor the new manager ‘proposed’ to fund the commercial-rate lease rental.93 Growers were also told that the new RE and manager ‘may seek to reach commercial agreement with the third party landlords on various matters in relation to the Third Party leases.’94 Significantly, however, at no stage were growers told that if a commercial agreement could not be reached with those third party landlords, the effect of s 601FS and/or s 601FT would be that the new RE would incur accrued and ongoing rental obligations.

6.56 Justice Robson held that the EM contravened s 18 of the ACL by failing to inform growers that all the leases would novate to the new RE.95 His Honour said: ‘it is settled law that all the leases (both peppercorn and commercial rent leases) would novate to the new responsible entity.’96 His Honour accepted the plaintiffs’ submission that the new RE could not ‘pick and choose’ the leases it wanted to continue.97 Moreover, consistently with [page 145] his findings in relation to the effect of s 601FS in relation to the scheme leases from proceeding 3272, his Honour found that ‘the argument that s 601FS(2)(d) would allow the new responsible entity to avoid liability for the leases it would take over was untested and involved a significant risk.’98 Failing to inform the growers of this fact was conduct in contravention of s 18 of the ACL.99 6.57 These matters went to the heart of Robson J’s conclusion that the restructure proposal put to growers created a ‘false impression’ that the proposal was ‘a viable method for the schemes to continue unburdened by the outstanding rent obligations to the third party landlords and the ongoing rental obligations to those landlords, subject to possible risks.’100 6.58 As a result, and consistently with the undertaking given to the Court in the course of the injunction application, Robson J declared that the resolutions were invalid and of no effect.101

V. Implications of the decision — what is the role of the courts in restructures? 6.59 The Re Gunns Finance (No 2) decision is instructive when considering the role of the courts in the restructure of managed investment schemes. 6.60 The litigation was essentially a contest between two rivals (or, two groups of rivals) seeking to do very different things with the

schemes subsequent to the collapse of Gunns. The plaintiffs in proceeding 2774, despite not having been misled or deceived themselves by Macquarie’s conduct, were able to harness the powers of s 18 of the ACL to halt the proposed restructure. 6.61 As discussed, although the plaintiffs were unsuccessful in obtaining the injunctive relief sought, the undertaking given by Macquarie in the course of the injunction hearing had a major impact on the next phase of the litigation, and meant that the question of whether the EM was misleading or deceptive or likely to mislead or deceive became the decisive issue. As a result of the undertaking, if the plaintiffs could establish a contravention of s 18 of the ACL, it followed that the Court would declare the resolutions giving effect to the restructure to be invalid. No other issue needed to be resolved. This was, really, quite a remarkable situation. The Court was given a confined but crucially important task — to determine if the material put to the growers contravened s 18 of the ACL. Although a narrow point in the grand scheme of the restructure proposal, the Court’s decision would determine the validity of the restructure resolutions passed by members of the schemes. Because the [page 146] ACL was the vehicle for the litigation, the focus of the Court’s attention was whether or not the members had been provided with an accurate picture by those proposing the restructure, rather than directly examining the merits of one proposal over another. 6.62 The decision has something else to say about the role of the courts in the restructure of managed investment schemes, however. Justice Robson’s construction of s 601FS — in particular, his Honour’s acceptance of the ‘stepping into the shoes’ analogy of its statutory purpose, is significant in and of itself. Justice Robson’s approach confirmed the broad construction of s 601FS adopted in earlier decisions102 and that has been applied since.103 Undoubtedly, a broad construction of s 601FS makes it more difficult for managed

investment schemes in financial distress to find a way out through a restructure. As recognised by Zwier, Vaatstra and Bigos in chapter 5 of this book, ss 601FS and 601FT ‘are a disincentive to the restructure of a managed investment scheme where the responsible entity is insolvent.’104 Looked at in this way, Re Gunns Finance (No 2) is one of a number of decisions now confirming the correct approach to s 601FS, and, in so doing, compounding the difficulties faced by those wanting to restructure struggling schemes. 6.63 In chapter 5, Zwier, Vaatstra and Bigos discuss law reform proposals directed to remedying this perceived problem, including, for example, capping the liabilities and obligations assumed by the incoming RE so they cannot exceed the scheme property.105 The authors also discuss the option of amending the Corporations Act to confer on the courts an equivalent to s 447A, which would empower the courts to make such orders as considered appropriate in relation to the operation of Ch 5C in relation to a particular scheme.106 Such an amendment, the authors argue, would ‘give the court [page 147] flexibility to give effect to restructures of schemes, tailored as appropriate for the particular circumstances.’107 6.64 In considering the merit of this proposal, it is useful to apply it to the facts of Re Gunns Finance (No 2). Had Robson J exercised a power to declare that s 601FS would not operate to novate the third party leases, on the face of it the landlords’ interests would have been adversely affected as they would have been left to recover accrued rent from the old RE and otherwise terminate the leases. However, if one assumes that without that modification the restructure would not have gone ahead, then in reality the landlords would not be worse off, because a failure to restructure the schemes would have left them in the same position. Thus, it may be said that it would be justified to treat the third party landlords in this way. 6.65 It seems to us that, in any given case, an argument that the

court should modify the effect of s 601FS would essentially amount to a ‘greater good’ argument — i.e., that the interests of the growers should be preferred over the interests of other parties, in this case the interests of the third party land owners. 6.66 But is such a result really justified? Why are the interests of growers to be preferred to those of arms-length third parties who have contracted with the scheme in circumstances where the growers have studiously invested in the scheme without taking any propriety interest or security? Plainly the reason the growers take no proprietary interest is because of the imperative that the scheme be structured to ensure that the growers’ expenditure can be characterised as an expense on the revenue account in order to accelerate deductions and thereby defer income. Viewed in this way, it is not so plain that the interests of growers should be preferred over the interests of third parties to the scheme contracting at armslength. 6.67 Another wrinkle that emerges on the facts of Re Gunns Finance (No 2) is that even if the interests of the growers were to be preferred such that the third party leases would not novate, how would the Court deal with the interests of the hapless growers whose plantations happened to be located on land owned by a third party land owner rather than a company related to the insolvent RE? Surely the growers should be treated equally inter se.108 [page 148] 6.68 More broadly, if the guiding principle for the exercise of any such power were to be that the interests of the growers is paramount, what commercial impact would that have on the preparedness of third parties, including banks, to contract with an MIS? It is likely that it would be in many cases an insuperable disincentive. 6.69 But, if the ‘growers’ interests’ is not to be the guiding principle, what is? Perhaps there is no better answer than that

already provided by s 601FS, and we should embrace it rather than trying to craft solutions on a case-by-case basis. 1.

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

As will be discussed, there were two related proceedings heard and determined at the same time: proceeding 2774 of 2013, and proceeding 3272 of 2013. Proceeding 2774 is ‘the proceeding’ for the purposes of this chapter. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [14]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [224]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [222]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [8]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [8], [12]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [6]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [9]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [18]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [18]–[20]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [24]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [25]–[26]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [29]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [40]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [34]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [40]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [43]. EM at p 3. EM at p 3. EM at p 9. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [45]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [47]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [45]. EM at p 6. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [37]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [14]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [37]. Other provisions were relied upon, but the principal basis for the application was s 18 of the ACL. Gunns Plantations Ltd v WA Blue Gum (unreported, 27 May 2013) at [21]. Gunns Plantations Ltd v WA Blue Gum (unreported, 27 May 2013) at [22]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [39]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [7]. Oral argument was heard on 1 July 2013, and Robson J delivered judgment on 16 July 2013. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [2]. See, eg, Haselhurst v Wright (unreported decision of Supreme Court of Western Australia, 22 March 1991).

35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.

54. 55. 56. 57. 58. 59.

60. 61. 62. 63. 64. 65.

See, eg, Mishme Enterprises Pty Ltd v Nticed Pty Ltd [2013] VSC 187. See also Le Breton v Pacific Mirage Ltd [2012] FCA 505. See, eg, Frazer v Macquarie Airports Management Ltd (2009) 74 ACSR 312; [2009] NSWSC 1057 at [18]. Frazer v Macquarie Airports Management Ltd (2009) 74 ACSR 312; [2009] NSWSC 1057 at [34]. Frazer v Macquarie Airports Management Ltd (2009) 74 ACSR 312; [2009] NSWSC 1057 at [34]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [38]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [47]–[53]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [47]–[52]. EM at p 27. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [198], [238]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [244]. Re Investa Properties Ltd (2001) 187 ALR 462; (2001) 40 ACSR 124; [2001] NSWSC 1089 at [11]. Re Investa Properties Ltd (2001) 187 ALR 462; (2001) 40 ACSR 124; [2001] NSWSC 1089 at [11]. See the cases cited in Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at n 62. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [248]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [253]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [259]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [252]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [249]. See e.g. Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; (2010) 79 ACSR 143; [2010] FCA 576 at [44] (Rares J); Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2010) 185 FCR 97; (2010) 79 ACSR 40; [2010] FCAFC 76 at [80] (Jacobson, Gilmour and Foster JJ). Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [191]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [274]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [274]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [279]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [274]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [274]. His Honour also found the EM should have expressly informed growers that it is only liabilities for which the RE could not have been indemnified out of the scheme property if it had remained RE which do not become liabilities of the new RE. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [21]. The declarations sought are set out in full in Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [54]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [61]–[62]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [63], [100], [110]–[111]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [64]–[65]. See para (a) of the definition. Scheme property is discussed at length in chapter 8 of

66. 67. 68. 69. 70. 71. 72.

73. 74. 75. 76. 77. 78.

79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.

this book. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [135]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [135]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [135]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [136]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [136]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [136]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [142]. It should be noted that Ferguson J rejected a similar argument in Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574, distinguishing Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 on the basis it involved head leases granted in favour of the RE, rather than the freehold interest in land (at [132]). Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [142]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [142]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [139], citing Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209; [1954] ALR 293, 225. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [142]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [145]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [148]. WABG subsequently sought an order that Robson J re-open his resaons for judgment so that it could argue that this finding should be withdrawn. The application was refused. See Salmon v WA Blue Gum Ltd [2013] VSC 430. The propositions are summarised by Robson J in Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [122]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [150]–[151], [168]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [152]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [168]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [170]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [169]–[170]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [171]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [173]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [176]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [177]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [191]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [180]–[191]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [180]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [191]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [229]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [229]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [272], [279]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [272]. See also at [279]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [272]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [279].

99. 100. 101. 102.

103.

104. 105. 106. 107.

108.

Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [279]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [280]. Re Gunns Finance (No 2) (2013) 281 FLR 121; [2013] VSC 365 at [283]. See, eg, Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; (2010) 79 ACSR 143; [2010] FCA 576 at [44]–[45], [69]; Syncap Management (Rural) Australia Ltd v Lyford (2004) 51 ACSR 223; [2004] FCA 1352 at [43]–[48]. See, eg, Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574 at [147]. It should be noted, however, that Ferguson J did not agree with the characterisation of s 601FS as effecting a statutory ‘novation’, noting that the provision does not speak of novation or transfer (at [149]). See also Perpetual Nominees Ltd v Rytelle Pty Ltd [2012] VSC 209 at [11] (citing Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; (2010) 79 ACSR 143; [2010] FCA 576). Chapter 5 at para 5.38. See also a similar observation of Davies J in BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255 at [133]. Chapter 5 at para 5.41. Chapter 5 at para 5.42. Chapter 5 at para 5.42. It should be noted that pursuant to s 601QA of the Corporations Act, ASIC has power to make exemption and modification orders in relation to Ch 5C. An application to ASIC for modification of ss 601FS and 601FT was made by a prospective replacement RE in relation to the schemes at issue in the BOSI proceeding. However, the application was refused: BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255 at [128]–[129] (Davies J). In this regard, we note the requirement imposed on REs by s 601FC(1)(d) of the Corporations Act to treat members holding interests of the same class equally and to treat members holding interests of different classes fairly: see MacarthurCook Fund Management Ltd v TFML Ltd (2014) 308 ALR 202; [2014] HCA 17 at [32] (French CJ, Crennan, Kiefel, Bell and Gageler JJ).

[page 149]

7 WINDING UP MANAGED INVESTMENT SCHEMES — CONCEPTUAL AND PRACTICAL DIFFICULTIES The Honourable Justice Michael Sifris and Penny Neskovcin Michael Sifris is a Justice of the Supreme Court of Victoria and has extensive experience in corporations and insolvency law. Penny Neskovcin is a barrister admitted to the Victorian Bar and holds a Bachelor of Economics and Law (Hons) from the University of Tasmania. She practises in commercial law in a variety of areas, including insolvency, corporations and securities, banking and finance, contract and competition law.

I. Winding up managed investment schemes — what does it mean? 7.1 This chapter identifies, by reference to an example, some of the complex issues that arise in the winding up of managed investment schemes. The legislative framework, its operation, shortcomings and inadequacies and proposals for reform have been considered in other chapters of this book. This chapter is more practical. 7.2 The enormous growth in managed investment schemes over the last decade, often used by aggressive and ambitious entrepreneurs

as a means of accessing capital, has created enormous difficulties in many cases where it is necessary to wind up an MIS. 7.3 This immediately begs the question. What does it mean to wind up a scheme? What exactly is a scheme? Is it a legal entity? What is being wound up? The answers to these central questions require an analysis of the way in which a registered managed investment scheme operates. Of course such schemes vary in nature and complexity. [page 150]

II. The hypothetical 7.4 To illustrate the factual and legal complexity, we have used a hypothetical residential property scheme as represented below:

7.5 The following facts and matters should be noted: Investors — both sophisticated and unsophisticated — have contributed to one or both of a Capital Fund and an Income Fund. Each fund is a separate registered MIS. The Capital Fund buys or constructs apartments. There is a sub-fund for each acquisition or development. The Income Fund operates as a contributory mortgage scheme. It advances funds (sourced from investors) for the acquisition of inner city residential property secured by first mortgages and manages the apartments together with its own portfolio of apartments. There are also a number of sub-funds. Inner City Residential Properties Ltd (ICRP) is the RE of each fund. It holds the necessary Australian Financial Services Licence. It is a wholly owned subsidiary of Inner City Developments Pty Ltd (ICD). Both ICD and the RE have their own projects on foot and there are crossguarantees in every direction. The various entities and funds all operate from the same address. Staff, computers and all facilities are shared. Most contracts in this regard are made with ICRP without any particular capacity being indicated. ICRP operates in effect as a central treasury. [page 151]

III. The framework 7.6 Despite extensive reference to schemes in the Corporations Act, a scheme or fund is not a legal entity. It is a theoretical or statutory construct. It is a convenient commercial label or vehicle used to refer to the pooling of funds to be managed for the benefit of contributors or investors. 7.7 As the chart shows, there are numerous inter-related rights and obligations on the part of the various ‘parties’ to a managed

investment scheme. These factual and legal relationships arise out of various contracts and documents that regulate these matters. They are often very complex and usually tax driven. 7.8 In order to understand and appreciate the complexities of the winding up process, it is necessary to understand the basic legal framework within which managed investment schemes operate. What is the framework and what precisely are the various rights and obligations that underpin a managed investment scheme? 7.9 Once these concepts are understood, it will be readily apparent that winding up a managed investment scheme is not like winding up a company. Recourse must be had to principles of contract, trust, property and corporations law. Often there is some tension in the application of those principles. 7.10 Let us start with the Capital Fund. In commercial terms it is a fund or in legal (fiction) terms a scheme. However, it is not a legal entity as such. It is not a separate and independent (albeit abstract) entity or body.1 It can, however, be wound up, and we will see shortly what this means in terms of the underlying rights and obligations that represent or underpin what is called the fund or scheme. 7.11 The assets of the fund are held by ICRP as RE. It is a trustee and holds legal title to all of the assets. Beneficial ownership resides with the investors. To the extent that ICRP (as RE) incurs liabilities in respect of the operation of the fund or scheme, it is entitled to an indemnity out of the assets of the fund or scheme.2 The substantial overlay of trust law is of much importance. Trust law requires the RE and its directors to look after the interests of the beneficiaries and avoid conflicts of interest.3 7.12 The RE model has been criticised. It replaces the former model that divided responsibility between manager and trustee. A level of checks and balances was removed with the single entity RE model.4 As the example exposes, this can create great difficulties. 7.13 Investors of all kinds acquire interests in schemes, usually via a unit trust type arrangement. Subscription is usually made pursuant to a PDS which

[page 152] is required to contain much information in order to enable an investor to make an informed decision. 7.14 Each fund or scheme is required to have a constitution. 7.15 The same analysis applies in relation to the Income Fund. 7.16 It is obvious enough from this very short analysis that the winding up of a managed investment scheme is far more complex than the winding up of a company. Constitutions, PDSs, trust deeds and numerous other documents need to be examined in order to understand and disentangle the various relationships created and evidenced by the documents. As pointed out, this requires consideration of corporations, property, contract and trust law. No one size fits all and courts are often required, depending on the circumstances, to craft particular orders and directions appropriate to the particular MIS. 7.17 The Corporations Act does endeavour to deal with the winding up of managed investment schemes (as opposed to the RE) notwithstanding the fact that the concept is foreign to the law of trusts. Trusts are not wound up under the general law. However, having created the theoretical or statutory construct, the Corporations Act endeavours to deal with the winding up of managed investment schemes.5 The relevant provisions are far from a code and are at best perfunctory. The Corporations Act does not prescribe a method of winding up and does not specify what a winding up entails. There is obviously much room for improvement.6

IV. The perfect storm — winding up the schemes 7.18 Assume there is a downturn in the economy, and as a result a number of things happen: (a) ICRP, as RE, and with extensive offices and staff, is unable to continue funding its substantial and recurrent expenditure.

(b) Construction is put on hold, casual and permanent tenants vacate the apartments, tourism is substantially reduced and guaranteed returns to investors are not paid. (c) Receivers and managers are appointed to ICD, the holding company of ICRP in respect of a guarantee executed by ICD for the indebtedness of ICRP not directly related to the schemes. A consequential effect is that receivers and managers are appointed to the RE. [page 153] 7.19 How do we disentangle or deal with the rights, interests and obligations of the various parties? What level of protection or priority do (or should) investors have? What does a winding up mean in this context? How do we wind up a theoretical or statutory construct based on contractual and fiduciary relationships? 7.20 Of course the court has very wide powers and the nature and extent of its orders will vary and very much depend on the particular facts and circumstances. 7.21 If the RE (ICRP in the example) is unable to continue operating because it cannot pay its debts as and when they fall due — the usual scenario — some form of external administration is usually inevitable. The RE may go into voluntary administration or be wound up. Or, receivers and managers may be appointed as the example suggests. In many cases it is not entirely clear on whose behalf the expense has been incurred and the extent of any right of indemnity. 7.22 The immediate question is how does this affect the schemes? The schemes themselves (as explained below) may be solvent and viable. However, often they are not as in the example given. The fate or solvency of a scheme and its ability to continue to operate is often (but not always) inextricably linked to the fate and solvency of the RE. 7.23 The financial position of the RE needs to be assessed having

due regard to its various capacities. Acting in its own right — which is not prohibited and is often the cause of the difficulties and complexities — it will have assets and liabilities apart from the schemes. More importantly, the insolvency of the RE does not necessarily mean the insolvency of the scheme or the inability of the scheme to continue operating through a new or substitute RE, although as the legislation presently stands that may create difficulties. 7.24 As the scheme is not an entity as such, it will be necessary to isolate, assess and examine the assets and liabilities of the RE insofar as the RE acted in the capacity of RE of the scheme. The assets of the scheme are held by the RE on trust. However, it will be necessary to consider precisely what the scheme property is. Any liability incurred in relation to the scheme is a liability of the RE with a right of indemnity or exoneration against the assets of the scheme or trust assets.7 7.25 If the scheme is not viable in the sense that its purpose cannot be achieved or the RE does not have the resources to continue funding the operating costs associated with the scheme — in the example, rates and taxes, insurance, staff and other running costs — the scheme itself may be wound up. Although in a strict and technical sense a scheme cannot be insolvent, it may colloquially be regarded as insolvent ‘in the sense that … the liabilities referable to it cannot be satisfied as they fall due from its income or readily realisable assets.’8 [page 154] 7.26 If the scheme is wound up, the court will make appropriate orders depending on the nature of the scheme. In this regard the words ‘wound up’ are not entirely apt. It is a term borrowed from corporations law and is intended to refer to the complex process of dismantling or disentangling the various relationships in an orderly way. Needless to say, as the example illustrates, there are many parties or stakeholders with an interest in the process.

7.27 The winding up of a scheme is usually done on the just and equitable ground under s 601ND of the Corporations Act. 7.28 It is not uncommon for the court to order that the RE wind up the scheme. 7.29 Pursuant to s 601NF of the Corporations Act, the court may give any direction it considers appropriate in order to facilitate the winding up of the scheme in the most cost effective and timely manner. 7.30 The example given raises interesting and potentially complex issues in relation to the following matters: (a) (b) (c) (d) (e)

Who may be appointed to wind up the scheme? Potential conflicts. Directions and extent of court supervision. Liquidators’ remuneration. The costs of the application to wind up.

7.31 Each will now be dealt with in turn.

IV.A. Who may be appointed to wind up the scheme? 7.32 As discussed above, it is not uncommon for the court to order that the RE wind up the scheme.9 Although parts of the Corporations Act contemplate that the RE will conduct the winding up,10 the court has power to appoint a person other than the RE to take responsibility for ensuring the scheme is wound up and may give directions about how the winding up should occur.11 7.33 If the scheme is insolvent, the RE might not be the appropriate person to wind up the scheme. In some cases, it may be desirable to appoint a person with special skills or qualifications to realise the property of the scheme or to investigate a reorganisation or reconstruction of the scheme, or the relationships that make up the scheme.

[page 155] 7.34 Depending on whether the RE is a sole-function or multifunction RE and/or the scheme is solvent or insolvent, different considerations are likely to arise in determining whether the RE is the appropriate person to conduct the winding up. Using the example given, assume the Capital Fund is solvent but the Income Fund is insolvent. The schemes are separate and distinct. ICRP is the RE of both schemes. The fact that one scheme is insolvent might not (of itself) mean ICRP should not be appointed to wind up the Income Fund. However, there may be other reasons why it might not be appropriate for ICRP to wind up the Income Fund and continue as RE of the Capital Fund at the same time. The person appointed to wind up the Income Fund may need to investigate the reasons for the insolvency of the Income Fund and whether there are any causes of action available to scheme members or the RE in respect of contraventions of the Corporations Act in relation to the conduct of the Income Fund. Further, there may have been some mingling of the assets of the two funds. 7.35 The Corporations Act does not appear to contemplate the winding up of part of a scheme or the appointment of more than one person to wind up a scheme. If part of the scheme is viable, the RE may not be the appropriate person to wind up the scheme due to the potential conflict in the RE’s duties and interests. 7.36 In an appropriate case, the Court might appoint a ‘special purpose liquidator’ to wind up part of a scheme or to assist the RE (or other person) in winding up the scheme. A special purpose liquidator would be able to investigate potential causes of action which may be available to scheme members or the RE, free from the constraints or conflicts that might apply if the RE were appointed to wind up the scheme or part of the scheme. 7.37 A similar approach was applied in ASIC v GDK Financial Solutions Pty Ltd (2006) 60 ACSR 447, which was an unregistered scheme. A receiver and manager was appointed to take possession of certain scheme assets and dispose of those assets. Finkelstein J

considered that the Court had power to order an inquiry into matters that needed to be investigated to complete the accounts for the scheme and asked the parties to submit proposed directions. This approach would have permitted an inquiry to be made into the assets of the scheme, including potential causes of action, and contemplated that any further steps arising out of the inquiry would be the subject of further directions by the Court. 7.38 The provisions of the Corporations Act that apply to the winding up of a registered scheme are wide and general in nature and would enable the court to adopt a similar approach in winding up a scheme or part of a scheme.12 [page 156] 7.39 If the RE is insolvent, but the scheme is solvent, the scheme does not have to be wound up. If the liquidator of the RE does not wish to continue as RE of the scheme, the liquidator cannot simply cause the RE to retire. The liquidator can try to find a replacement RE; however, it may be difficult to find a replacement RE willing to accept the appointment because s 601FS imposes the liabilities and obligations of the former RE on the replacement RE.13 7.40 If the liquidator of the RE cannot find a replacement RE or considers that the scheme is unviable, the liquidator of the RE may apply to wind up the scheme.14 This occurred following the collapse of some of the agribusiness schemes, such as Environinvest,15 Timbercorp16 and Wilmott,17 where the liquidator of the RE was appointed to wind up certain schemes. Subsequently, applications for directions were made to resolve actual or perceived conflicts that arose from the liquidator’s position.18 Conflicts or perceived conflicts that arise from the RE’s appointment as the scheme liquidator are discussed further below.

IV.B. Potential conflicts 7.41 The matters discussed above demonstrate how potential

conflicts and problems can arise that impact on the issue of who is the appropriate person to wind up the scheme. The winding up of the Environinvest19 agribusiness schemes provides some practical guidance for dealing with potential conflicts that may arise when the RE or liquidator of the RE is appointed to wind up the scheme. 7.42 The Commonwealth Bank of Australia (CBA) had entered into possession of the assets and undertaking of Environinvest Ltd. Justice Judd made an order winding up the various schemes of which Environinvest Ltd was the RE. There were allegations the schemes had been mismanaged by the RE and were in disarray. 7.43 The receivers and managers appointed by CBA conceded that it would not be appropriate for them to undertake the winding up of the schemes, which would expose the receivers to an unacceptable conflict between their duties to CBA on the one hand and to the ultimate beneficiaries of any distribution from the schemes, namely the growers, on the other. [page 157] 7.44 Environinvest Ltd was insolvent, in liquidation, and did not have funds available to it to continue to manage the schemes. Judd J considered that the liquidator of Environinvest Ltd would be in a position of potential conflict should he be appointed to take responsibility for winding up the schemes. On the one hand, the RE had a right of indemnity from scheme property and, on the other hand, the growers contended that the RE had breached its duties as RE, with the potential consequence that the RE may have been disqualified from relying on any right of indemnity. 7.45 In the circumstances, Judd J made a direction for the appointment of an independent liquidator from the roll of official liquidators, referred to as the ‘scheme liquidator’. However, no official liquidator was willing to act (at least in part due to an order made by Judd J that the costs of the application to wind up the

schemes be paid in priority to the costs of the winding up and the scheme liquidator’s costs). 7.46 Subsequently, the liquidator of Environinvest Ltd agreed to act as liquidator of the schemes, provided the priority costs order was varied. Judd J varied the orders so that the costs of the RE and others, instead of enjoying priority, would rank equally with the costs of the winding up. 7.47 It was commonly understood that the liquidator’s appointment would expose him to a perceived conflict of interest, and the risk of an actual conflict, when discharging his various functions as liquidator of Environinvest Ltd and as the person responsible to wind up the schemes. Accordingly, a committee of management was formed with the object of dealing with any question of actual or perceived conflict of interest or duty, and the liquidator undertook to comply with any direction of the committee to apply to the court for directions in that event.20 7.48 Thus, the court created a mechanism to deal with potential conflicts where the liquidator of the RE was required to make decisions in circumstances where such a conflict was anticipated. By applying to the court for directions, the liquidator could be excused from a potential conflict. In the absence of this mechanism for dealing with the conflict, the liquidator might have been compelled to resign as liquidator of the RE or as scheme liquidator. 7.49 Another option, where the RE is appointed to wind up the scheme and is in a position of potential conflict, may be for the court to make directions that the RE report to or be supervised by a person, such as a registered liquidator, who also has a reporting function to the court. The appropriate option may depend on the size and complexity of the winding up.

IV.C. Directions and extent of court supervision 7.50 The Corporations Act simply refers to winding up a scheme and the court making directions about how a scheme is to be wound up.21 This may be contrasted to the comprehensive regime for winding up companies.

[page 158] 7.51 An order that a scheme be wound up, of itself, is of little utility. An order that a scheme be wound up can only sensibly be made if fleshed out with ancillary orders as to the manner in which the winding up is to be conducted. 7.52 The winding up application should be accompanied with proposed directions. The directions sought will no doubt depend on the assets of the scheme and the matters that need to be investigated in winding up the scheme. As a guide, applicants seeking directions often craft the directions in a similar form to the Corporations Act s 420(2), which sets out the powers of receivers, and s 477, which sets out the powers of liquidators. 7.53 Although the Corporations Act suggests the court may have an ongoing role in the winding up of a scheme, the courts have disavowed any notion of courts having a ‘hands on’ role in the mechanics of the winding up. The role of the court is more to facilitate what needs to occur in the winding up. 7.54 Applications for directions may be brought at any time. Applications approving the sale of assets comprising the property of the scheme are relatively common.22 Such applications may be motivated by concerns to avoid claims of conflict or breach of duties. There may also be cases where very real and controversial questions need to be decided in the course of winding up a scheme. The court has a great deal of flexibility in making directions. To some extent, the lack of a detailed regime for winding up schemes may explain the seemingly frequent nature of such applications.23

IV.D. Liquidators’ remuneration24 7.55 Section 601GA provides that the constitution of the scheme must make adequate provision for the winding up of the scheme. There is no guidance as to what constitutes ‘adequate provision,’ including whether the constitution should make provision for remuneration and expenses in relation to the winding up.

7.56 As a result, the constitution may make provision for remuneration and expenses in a winding up. 7.57 There is no legislative provision dealing with remuneration and expenses in relation to winding up a scheme. 7.58 The court may deal with the remuneration and expenses in the winding up of the scheme when it makes directions for winding up the scheme (under s 601NF). In that case, the directions may provide for the liquidator’s right to be indemnified out of the scheme’s assets for proper expenses and remuneration in connection with the winding up of the scheme. [page 159] 7.59 Assuming no orders or directions are made, which would be unusual, the scheme liquidator may rely on trust law principles including the principle of salvage in Re Universal Distributing Company Ltd (in liq) (1933) 48 CLR 171. The difficulty with the salvage principle, and other general law rules in relation to the entitlement to recover remuneration and expenses for work done in conducting the winding up, is that it does not give persons charged with winding up a scheme sufficient certainty about recovering these amounts. 7.60 If the RE is the person appointed to wind up the scheme, the RE may rely on its right to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties as RE. However, if the RE is insolvent or is the RE of multiple schemes, the issue becomes complicated. 7.61 If the liquidator of the RE is appointed to wind up the scheme, a distinction must be drawn between the liquidator’s remuneration and expenses in: (a) administering the scheme; and (b) conducting the liquidation of the RE. 7.62 The liquidator of the RE can only claim indemnity from scheme property (as distinct from the personal assets of the RE) for

remuneration and expenses in relation to work done in administering the scheme. This might include remuneration and expenses in relation to identifying, recovering, realising and distributing scheme property. 7.63 There may be issues in determining what expenses and remuneration the liquidator is entitled to recover for winding up the scheme, as distinct from the winding up of the RE. This process may be relatively straightforward for the liquidator of a sole-function RE, but not a multi-function RE. A liquidator of a multi-function RE is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other trust. It will be necessary for the liquidator to isolate (preferably, or estimate if necessary) the costs and expenses incurred as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed.25 7.64 Uncertainty regarding the scheme liquidator’s remuneration and expenses is likely to dissuade a person from accepting an appointment. It would appear that the only way to overcome the problems identified above is to give a scheme liquidator a clear right to their remuneration and expenses in the winding up. [page 160]

IV.E. The costs of the application to wind up 7.65 Ordinarily, on an application to wind up a scheme, costs will be granted on an indemnity basis. 7.66 The courts recognise that contradictors play an important role in winding up applications. In many cases, the contradictors’ costs will be granted on an indemnity basis and an order will be made that costs be paid out of the scheme property.26 Such an order is important to ensure the court obtains the benefit and assistance of contradictors. 7.67 However, the costs of the winding up are ultimately borne by

the scheme, which affects members’ and creditors’ rights. It is therefore important to strike an appropriate balance between compensating parties for their costs and preserving the assets of the scheme.27 7.68 As a result, any party appearing in a winding up application should not assume the court will automatically make an order in respect of their costs. In considering whether to make such an order, the Court may take into account: (a) whether a contradictor or party appearing made a valid contribution to the debate concerning whether the scheme should be wound up; (b) whether a contradictor merely opposed the application for the sake of it, without providing any alternative when the scheme is clearly insolvent or not viable; or (c) whether a contributor or other party prolonged the length of the application unnecessarily.

V. Conclusion 7.69 The issues that arise in the winding up of schemes can be complex. This is no doubt due to the myriad of factual and legal relationships that may arise and that principles of corporations, trust, property and contract law may all be relevant. It remains to be seen whether CAMAC’s recommendations for the introduction of a voluntary administration regime for MISs, or more comprehensive provisions for winding up an insolvent scheme, will be adopted. In the meantime, the courts have demonstrated a willingness to be flexible and to adapt to the features of the case at hand which makes the winding up unique. 1. 2. 3. 4. 5.

Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408; Re Environinvest Ltd, Shepherd v Downey (2009) 69 ACSR 530; [2009] VSC 33 at 545. See chapter 8 of this book. See chapter 3 of this book. See chapter 2 of this book. Corporations Act Part 5C.9. The relevant provisions are summarised in Part III of chapter 2 of this book.

6.

7. 8. 9.

10. 11. 12.

13. 14. 15. 16.

17. 18. 19. 20. 21. 22. 23. 24. 25.

26. 27.

The Corporations and Markets Advisory Committee in its report Managed Investment Schemes (July, 2012) made a number of recommendations relevant to schemes or REs in financial distress. Among other things, the CAMAC paper recommended the introduction of a voluntary administration regime for MISs (s 6) and more comprehensive provisions for winding up an insolvent scheme, comparable to those in the Corporations Act for winding up companies (s 7): see chapter 5 of this book for more detail. Scheme property is discussed at length in chapter 8 of this book. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at 264. This section deals with registered MISs. In relation to an unregistered MIS, the RE should be allowed to conduct the winding up only in exceptional circumstances: Australian Securities and Investments Commission v Takaran Pty Ltd (No 2) (2002) 194 ALR 743; [2002] NSWSC 987 at [15]. Corporations Act s 601NE(1)–(2). Corporations Act s 601NF(1)–(2). Section 601NF(2) provides: ‘the court may, by order, give directions about how a registered scheme is to be wound up if the court thinks it necessary to do so (including for the reason that the provisions in the scheme’s constitution are inadequate or impracticable).’ See chapter 5 of this book, and particularly section XI of that chapter, for a further discussion of this problem. See also chapter 6 part V of this book. For example, on a ‘just and equitable’ basis under s 601ND(1)(a). Re Environinvest Ltd (No 3) [2010] VSC 301. See e.g. Re Timbercorp Securities Ltd (No 3) (2009) 74 ACSR 626; [2009] VSC 510 (olive and almond schemes); Re Timbercorp Securities Ltd (In liq) [2011] VSC 24 (grape schemes). Hoddinott v Willmott Forests Ltd (recs and liqs apptd) (in liq) [2012] VSC 282. See, e.g., Re Environinvest Ltd v Great Southern Property Managers Ltd (No 2) [2010] VSC 323 and Re Environinvest Ltd (No 3) [2010] VSC 301. The relevant history is summarised in Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at [5]–[7], [154]–[159]; Re Environinvest Ltd (No 3) [2010] VSC 301 at [1]–[4]. The liquidator made such an application, at the direction of the committee, in Re Environinvest Ltd v Great Southern Property Managers Ltd (No 2) [2010] VSC 323. Corporations Act s 601NF. Re Timbercorp Securities Ltd (No 3) (2009) 74 ACSR 626; [2009] VSC 510; Re Environinvest Ltd (No 3) [2010] VSC 301. See further chapter 12 of this book. The topic of officeholders’ remuneration and expenses is dealt with in further detail in chapter 13 of this book. 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144; Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [213], [217]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [182], [195] and [199]. Re Timbercorp Securities Ltd (in liquidation) [2011] VSC 83 at [61]–[67].

[page 161]

8 THE COMPETITION FOR ASSETS IN INSOLVENT INVESTMENT VEHICLES Tony Troiani, Samantha Kinsey and Stewart Maiden Tony Troiani is a partner in the Melbourne office of King & Wood Mallesons where he specialises in insolvency and commercial dispute resolution, particularly in the areas of banking, insolvency, contract disputes and professional negligence. His work involves all forms of commercial dispute resolution including litigation in all court jurisdictions, negotiation and mediation. Tony’s work in the area of insolvency has included: workout advice and documentation involving complex insolvency issues; all forms of administration appointments (liquidators, receivers and managers, agents for mortgagee, voluntary administrators); advice to administrators regarding conduct of administration; liquidator recovery actions (e.g. ‘voidable transactions’ and attacks on ‘phoenix’ structures); advice to creditors regarding possible recovery actions; advice to debtors; asset tracing; constructive trust claims; priority disputes; urgent applications (injunctions, provisional liquidator appointments); corporations law applications; and contract disputes. Samantha Kinsey is a partner in the Melbourne office of King & Wood Mallesons where she specialises in advising on banking and finance related matters, restructuring and insolvency, debt recovery, debt acquisition and general commercial dispute resolution. Samantha’s work involves all forms of commercial dispute resolution including litigation in all court jurisdictions, negotiation and mediation. Samantha has acted for major banking clients and insolvency practitioners in relation to various highprofile insolvencies. Stewart Maiden is a barrister at the Victorian Bar. His practice focuses on insolvency, corporations, finance and commercial litigation. He is widely published in those fields, and several of his articles have been referred to in judgments of Australian superior courts. Stewart is a Fellow of INSOL International (first in class, 2009) and a member of the Australian Restructuring Insolvency and Turnaround Association and the Insolvency and Reconstruction Law Committee of the Law Council of Australia.

[page 162]

I. Introduction 8.1 The title of this book, ‘Insolvent Investments’, eschews the identification of any particular kind of investment, in recognition of the wide variety of structures now available for use as investment vehicles. Managed investment schemes registered under Ch 5C of the Corporations Act are now common,1 but many other structures predate Ch 5C. Companies and unregistered managed investment trusts remain popular. 8.2 All going well, the structure chosen should make little difference to its stakeholders: trade creditors will be paid, lenders will be repaid with interest, and investors will receive returns. Nobody need be concerned about the structure itself (save perhaps for the purpose of claiming tax benefits). But when investments fail, structures are tested. The kind of vehicle chosen can have a significant impact on the resolution of that ubiquitous problem of insolvency: prioritising between the many claims to a pool of assets that is inadequate to meet them all. 8.3 In insolvency, conflicts arise between creditors and investors, between different classes of creditors, and between different classes of investors. External administrators have a range of powers and responsibilities related to the resolution of those conflicts. All of those things are affected by the structure of the investment vehicle itself. The traditional paradigm of debt being satisfied ahead of equity may be disturbed. Trust creditors may find themselves deprived of access to trust assets because of previously unknown breaches of trust by the trustee with which they had dealt. Property that MIS investors had assumed belonged to them may be made available to creditors of the RE, or vice versa. The value of secured property may be adversely affected by investors’ property that is affixed to it. Investors in one scheme may find that the funds they contributed to that scheme were used for the benefit of other schemes promoted by a common RE. And creditors may find their claims, and the assets available to meet them, pooled with the claims and assets of other companies in

the debtor group. Such problems have all come to light in recent times, many of them in the context of a raft of failed agricultural MISs. 8.4 This chapter seeks to explore the implications that structuring decisions can have on the rights of the various stakeholders in several different forms of investment vehicles when they enter insolvency. Part II describes the rights of creditors and investors in investment trusts. Part III introduces the concept of ‘scheme property’ in a managed investment context, and describes its implications. Part IV explores the processes involved in tracing and pooling assets in investment trusts and MISs. Part V describes the different mechanisms that can allow the assets and liabilities of corporate groups to be substantively consolidated. [page 163] In concluding, we comment that the many uncertainties in this area of law makes a proper understanding of the structure of an investment vehicle essential not only for those contemplating investment, but also for those who contract with or expose themselves to risk from REs, trustees and investment companies.

II. The rights of creditors and investors in investment trusts 8.5 In any collapse of an investment scheme or a trading trust where the trustee or responsible entity2 is insolvent, a tension will invariably arise between investors or members of the scheme (who will usually be beneficiaries of the trust) and creditors of the trustee. This tension raises some complex but fascinating legal issues that various commentators have described as uncertainties, flaws and lacunae in the law.3 These matters frequently result in costly legal

proceedings, further depleting the limited fund available to creditors and investors.

II.A. Nature of a trust 8.6 Many of these issues stem from the fact that neither a trust nor a managed investment scheme is a legal entity. A trust can essentially be described as: … an equitable relationship arising where the creator (settlor) confers an enforceable equitable interest upon a person or a charitable institution (who may be called the beneficiary or the charitable purpose) in property (known as the trust property), against the legal owner of that property (known as the trustee).4

8.7 The trustee is the beneficiaries’ fiduciary. It is the trustee who holds the trust property and who is responsible for managing the trust property on behalf of the beneficiaries in accordance with equitable and statutory duties and powers.5 Importantly, the creation of a trust delineates between the legal and equitable estates in the trust property.6 [page 164] 8.8 Typically, a trustee is entitled to incur debts in the carrying out of the trust business and the trustee will be personally liable to creditors in respect of those debts unless the trustee’s liability is limited pursuant to the contract with the creditor. The difficulty for creditors is that if the trustee or responsible entity becomes insolvent, it is not necessarily the case that creditors will be entitled to have recourse to the trust property (either on a pari passu basis in the winding up of the trustee or otherwise) to satisfy their debts. If the trustee does not hold any assets of its own (i.e. assets that are not trust property) this means that there may not be any assets available for creditors in the winding up of the trustee. 8.9 There are principally two circumstances in which creditors may gain access to the trust assets for repayment of their debts: (a) where the creditors have taken security over those assets; or

(b) where the trustee has a right of indemnity from, and a lien over, the trust assets.

II.B. The position of secured creditors 8.10 If the granting of security over the trust assets or scheme property is authorised by the terms of the trust or scheme, then secured creditors ought to be entitled to enforce their security over the trust or scheme assets in the usual ways (subject, of course, to any stay which applies during external administration). However, the experience of the recent agricultural scheme collapses demonstrates that the position of secured creditors is not so straightforward. In the collapses of each of the Environinvest, Great Southern, Timbercorp, Willmott and Gunns managed investment schemes, the secured creditors held security over the land upon which the various plantations were situated, but not the trees (which were scheme property). Following the sale of the major assets used in those schemes (principally the land and the trees), disputes arose between the receivers appointed by the secured creditors on the one side and the liquidators of the RE and the growers on the other as to how the purchase price for those assets ought to be allocated between the secured creditor(s) and the growers. The approach which has been adopted by the courts in most such cases is to resolve this question by way of applications for directions from the liquidators of the responsible entity in reliance upon detailed expert evidence.7 The allocation exercise is explored further in section IV.A, below.

II.C. The position of unsecured creditors 8.11 An unsecured creditor will only be able to have recourse to the trust assets to satisfy a debt incurred by the trustee if it is able to access the trustee’s right of indemnity and lien over the trust assets. [page 165]

II.C.1. The right of indemnity

8.12 While a trustee is personally liable for debts properly incurred in the discharge of the trust, prima facie the trustee is entitled to be indemnified against those liabilities from trust assets.8 The right of indemnity can be enforced via exoneration (using trust assets to pay the debts) or reimbursement (using trust assets to make good payments made from the trustee’s own assets).9 The scope and nature of a trustee’s right of indemnity has been the subject of judicial comment and academic debate.10 At the core of the debate is identifying when a trustee’s liability has been ‘properly incurred’. It seems that the test is framed in the negative, such as to allow indemnification for all debts that have not been shown to have been improperly incurred.11 8.13 Expenses that are, on their face, properly incurred include those authorised by the trust deed, statute or the general law, such as general outgoings associated with land held in trust (e.g., rates and taxes), and the expenses of carrying on a business where this is authorised.12 8.14 While the authorities provide that a trustee can have a right of indemnity for a damages claim made against it, such damages must have been incurred in the course of carrying on the trust business.13 The claim for indemnity is also subject to the overarching consideration of whether the liability was properly incurred. 8.15 The trustee’s right of indemnity against trust assets is, however, qualified. In general terms, it depends on whether the trustee has strictly adhered to the terms of its mandate. The trustee’s right of indemnity is not available in respect of a given liability if the activity which generated the liability involved a breach of trust, was beyond the powers given to the trustee or was criminal or fraudulent in nature.14 Other limits and qualifications to the indemnity are set out below. [page 166]

II.C.2. Lien over the trust assets

8.16 For the purposes of enforcing the indemnity, the trustee possesses a charge or right of lien over the trust assets, which is in the nature of an equitable interest in those assets. The trustee’s lien is a proprietary right in the trust property.15 In the context of a trustee seeking an indemnity for expenses incurred in carrying on the trust business, the High Court in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 explained: In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the [beneficiaries], those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the [beneficiaries] are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied.16

8.17 In short, the trustee holds both legal ownership and an equitable interest in the trust assets to the extent of the amount of the indemnity. Obviously, a consequence of the trustee’s lien is to reduce the assets held for the benefit of beneficiaries of the trust.

II.C.3. Subrogation 8.18 Where the trustee has become insolvent, the unsecured creditors may be subrogated to the rights of indemnification enjoyed by the trustee in order to pursue recoupment.17 However, as subrogation is wholly derivative, if the trustee never had a right to indemnity (because it was excluded by the terms of the trust deed, for example), or if the trustee has exhausted the right of indemnity, or has lost that right (by reason of breach of trust, for example), then the creditors will also lose any right of subrogation. In this situation, creditors are limited to proceeding directly against the trustee’s own property.18

II.C.4. Loss of the trustee’s rights: tension between investors and creditors 8.19 The real tension between unsecured creditors and investors is borne out in circumstances where a trustee has properly incurred trust debts but has otherwise lost its right of indemnity.

[page 167] 8.20 A trustee’s right of indemnification is subject to the condition precedent that the trustee makes good any loss that it has caused to the estate (the clear accounts rule). 8.21 The rule was described and analysed by Brooking J in RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 where his Honour said: … a balance is to be struck between what is due by way of compensation and what is due by way of indemnity and … if the balance is in favour of the trustee he may recover from the estate to that extent.19

8.22 The ‘clear accounts rule’ is essentially a mathematical exercise setting off the trustee’s right to the indemnity against any liability with respect to previous breaches of trust. In other words, the quantum of the trustee’s right to indemnity may be diminished by breaches unrelated to the liabilities for which the right of indemnity is claimed. 8.23 As Loxton and D’Angelo point out, the clear accounts rule is particularly problematic for unsecured creditors, because: … it can operate to subordinate them to the interests of beneficiaries by derogating from the exoneration right. If the rule operates, a trust creditor with a perfectly good claim for a liability properly incurred by the trustee may be denied access to the trust assets, wholly or partially, as a result of misconduct of the trustee of which the creditor may be both innocent and ignorant.20

8.24 That result can cause significant detriment to creditors, to the benefit of beneficiaries of the trust, particularly as creditors can do little to protect themselves against the trustee’s misconduct and its repercussions.21 8.25 Justice Gordon’s decision in ASIC v Letten (No 17) (2011) 87 ACSR 15522 illustrates the tension that can be created between a trustee’s creditors and the beneficiaries of the trust (in this case investors) when the trustee is insolvent. In that case it was held that breaches by the trustee, though unrelated to the incurring of debts in the management of the trust, gave rise to extensive losses to the trust that the trustee was required to make good before being entitled to

exercise its right of indemnity. One such breach included a failure to ‘get in’ or secure surplus trust funds that were advanced by investors but which were not applied to the trust. The monetary effect of the breaches was such that it exceeded the extent of the trustee’s right of indemnity. Therefore, the practical consequence of Gordon J’s decision was that there were no assets available for distribution to the creditors to pay properly incurred trust debts. [page 168] 8.26 Several commentators have criticised the clear accounts rule on the basis that: (a) it operates unfairly from the perspective of unsecured creditors who will not be in a position to know whether a trustee has committed breaches of trust which are unrelated to the transaction at hand; and (b) in many cases, an unsecured creditor may not even know that the company to which it is advancing credit is acting in the capacity as trustee or responsible entity.23 8.27 At least the first of those criticisms is illustrated by ASIC v Letten (No 17), which demonstrates that the law can, in some circumstances, favour the interests of beneficiaries over the interests of creditors. This may be considered to be unfair in circumstances where the goods or services provided by creditors have enhanced the value of the trust assets. 8.28 However, as a practical matter, despite the number of trading trusts and managed investment schemes operating in the market, cases such as ASIC v Letten (No 17) are relatively rare (i.e. it is unusual for trustees or responsible entities to have committed such significant breaches of trust that their rights of indemnity from the trust assets have effectively been lost). This result may be explained by the operation of s 197 of the Corporations Act. Pursuant to that section, a director of a company that incurs a debt or other obligation while acting as a trustee is personally liable for that debt or other obligation

if the company has not or cannot discharge the liability and the company is not entitled to be fully indemnified against the liability out of the trust assets solely because of one or more of the following: (a) a breach of trust by the corporation; (b) the corporation’s acting outside the scope of its powers as trustee; and (c) a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability.24

II.D. The role of the liquidator of a trustee company or RE 8.29 The tension between investors and creditors which has been particularly problematic from a practical perspective in the recent agricultural scheme collapses has arisen in relation to the competing duties owed by liquidators of responsible entities. Liquidators of responsible entities are in a very difficult position. A liquidator’s first duty is owed to the creditors of the responsible entity.25 However, the liquidators of a managed investment scheme also owe duties to investors in the scheme.26 Where (as is common) one trustee is the responsible entity of several schemes in the same group, the responsible [page 169] entity owes separate duties to each group of investors.27 Often, these duties conflict: for example, in relation to questions of whether the liquidator of the responsible entity should disclaim onerous scheme assets in circumstances where to do so would be in the interests of creditors but could adversely affect the rights and entitlements of members of the managed investment scheme.28 Invariably, as a consequence of these competing duties, numerous costly directions applications are made by liquidators of insolvent responsible entities in the context of the winding up of the responsible entities and the managed investment schemes.29

8.30 The obvious solution to this problem would be to replace the insolvent responsible entity with a new solvent responsible entity. While this does sometimes occur (for instance, Primary Securities Limited was appointed as a replacement responsible entity of the 2000 and 2001 woodlot schemes previously operated by companies in the Gunns Plantations group) it is usually difficult to secure the appointment of a replacement responsible entity. Prospective responsible entities are reluctant to take on the role because of the operation of s 601FS, which provides that the new responsible entity takes on certain rights, obligations and liabilities of the former responsible entity.30 8.31 A number of commentators have called for legislative change to resolve this issue and to improve the efficiency of the winding up of MISs.31

III. Managed investment schemes: scheme property 8.32 Where the investment vehicle is a registered MIS, specific issues arise in relation to ‘scheme property.’

III.A. Why is it necessary to identify scheme property? 8.33 Where property is ‘scheme property’, Pt 5C of the Corporations Act creates rules beyond those applicable to general trading trusts that may impact [page 170] on the availability of that property to creditors and investors. The reason for those rules was identified by the Explanatory Memorandum to the Managed Investments Bill 2007 (Cth) as follows: These duties are designed to ensure that scheme assets are not applied, either

unintentionally or fraudulently, to the responsible entity’s own purposes rather than those of the scheme. In the event of the failure of the responsible entity, the fact that scheme assets are identifiable as such and kept separate from the responsible entity’s own assets will help to ensure that those assets are not applied to meet outstanding debts of the responsible entity, but are returned to the investors in the scheme.32

8.34 Those rules can create tensions between classes of creditors and between creditors and investors, in addition to those created by the fact that the scheme is a trust and the responsible entity a trustee. It is useful to identify the rules and explain the tensions that they can create before turning to the question of how scheme property can be identified. 8.35 A responsible entity can hold scheme property itself or via a custodian.33 However it is held, scheme property is the subject of a statutory trust in favour of scheme members imposed by s 601FC(2).34 Only scheme property is the subject of that statutory trust, but the responsible entity can hold other property that is not scheme property on trust if the scheme documents create such a trust or equity implies one.35 8.36 In Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11,36 the Full Federal Court held that ‘[i]f a particular arrangement is within the s 9 definition, and if it is required to be registered, then by force of the legislation, scheme property is to be held on trust by the responsible entity.’37 While that suggests that unregistered managed investment schemes are the subject of s 601FC(2), subsequent first instance decisions are to contrary effect.38 Those decisions are supported by the text [page 171] of s 601FC itself. Section 601FC(1) refers to ‘the responsible entity of a registered scheme.’ Section 601FC(2) then goes on, using the definite article: ‘The responsible entity holds scheme property on trust for scheme members,’ suggesting that the responsible entity referred to is that referred to in the previous subsection (i.e. the responsible entity of the registered scheme in question). It follows

that, while the property of an unregistered scheme may be held on trust by the responsible entity by virtue of the provisions of the scheme documents or by implication of law,39 no statutory trust is created without registration. 8.37 As the Corporations Act requires the scheme property to be held on trust, the general law rights, duties and powers of trustees described above will apply to the responsible entity.40 The extent of their application may be affected by the structure of individual schemes. Among the rights so applied is the right to seek directions of the court under trustee legislation,41 in addition to the rights of liquidators to seek directions under the Corporations Act. 8.38 Where the scheme itself (as opposed to the responsible entity of the scheme) is wound up, only scheme property will be available to the person attending to the winding up of the scheme: However broad an operation is given to the word ‘appropriate’ in s. 601EE(2) of the Act, the limits on the power conferred on the Court are fixed by the consideration that the power is concerned with the getting in, realisation and distribution of the property of the scheme.42

8.39 The importance of the scope of ‘scheme property’ was recognised by White J in ASIC v Great Northern Developments Pty Ltd (2010) 242 FLR 444 as follows: To treat moneys raised by [the contravening company] by way of unsecured loan and the property acquired through the use of such moneys as property held on trust for all such lenders, and hence scheme property available to be collected by a receiver, is to fashion new interests in property. If such steps could be taken, they would operate to the disadvantage of other creditors of the operator of the scheme.43

[page 172] 8.40 Its importance is further highlighted by several recent cases involving the sale of scheme property and other property together. Where property used in a registered scheme is sold, tensions can arise between those entitled to the scheme property and those entitled to the remainder. Pertinent examples can be found in the recent external administrations of several agricultural registered managed

investment schemes. The land on which the schemes were conducted was owned by the responsible entity in its own right (or by a third party) and mortgaged. Trees grown on the land (or certain rights in those trees) were scheme property. In each case, the land and trees were sold together, and questions arose as to how the proceeds should be apportioned as between the liquidator of the scheme (entitled to the proceeds of scheme property) and receivers appointed over the land (entitled to the proceeds of the realisation of the land).44 At least one such case required the apportionment to distinguish between several different schemes conducted on the land sold, raising further questions regarding apportionment between various classes of members.45 8.41 It is perhaps trite to observe that apportionment decisions cannot be dictated by questions of general fairness and must be based on established principles.46 In the analogous case of Re Hazelton Air Charter Pty Ltd (2002) 41 ACSR 472,47 Goldberg J was faced with the problem of how to divide a settlement fund that had been paid to two related groups of companies under terms that did not provide for apportionment of the fund. His Honour applied the ‘principle of proportion’ in holding that the fund should be divided in proportions representing the relative value of the causes of action compromised by each group in consideration for the payment of the fund. 8.42 Such a procedure represents a principled approach to the division of proceeds where scheme and non-scheme property is sold together, but raises further questions of its own related to the valuation of the respective stakeholders’ interests in the property sold. In agricultural schemes, for example, land may be worth less with the scheme property in place, the buyer may only be willing to purchase the land if it is freed of the scheme property or all obligations related to the scheme, or the scheme property may be worthless without ongoing access to the land. The relationships between [page 173]

the various aspects of the property (whether epiphytic, parasitic or otherwise) and the value that the market places on the various aspects when sold, may both play a role in the determination of the appropriate division. No single rule can be devised that will apply to all cases. 8.43 The apportionment exercise undertaken by the courts in respect of the proceeds of sale of scheme and non-scheme property should be distinguished from the tracing approach that the court has used to resolve competing proprietary claims in respect of a mixed fund (discussed in section IV.A below).

III.B. What is scheme property? 8.44 Not surprisingly, in the context of the agricultural scheme collapses, growers have argued in favour of expansive definitions of what constitutes the ‘scheme property’ of the relevant scheme (i.e. to include the land owed by the RE or a third party and the trees) in order to increase the growers’ allocation of the proceeds of sale. 8.45 Not all property in relation to a scheme is scheme property.48 Section 9 of the Corporations Act provides that: ‘scheme property’ of a registered scheme means: (a) contributions of money or money’s worth to the scheme; and (b) money that forms part of the scheme property under the provisions of this Act or the ASIC Act; and (c) money borrowed or raised by the responsible entity for the purposes of the scheme; and (d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and (e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d). Note 1: Paragraph (a) — if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property.

8.46 Although the definition of ‘scheme property’ has no application to unregistered schemes, the Full Federal Court has held that the property available in the liquidation of an unregistered scheme is identified in much the same way as is the ‘scheme

property’ of a registered scheme: that is, ‘by reference to the terms of the scheme in relation to the contribution of assets to the enterprise involved in the scheme.’49 That is because: (a) according to the definition of ‘managed investment scheme’ which involves the contribution of money or money’s worth, scheme property must have been contributed to the scheme or obtained in connection with such contributions; (b) the only difference between a registered and unregistered MIS is registration; deregistration does not end the scheme’s existence; and so the definition [page 174] of scheme property for registered schemes guides the meaning of ‘scheme property’ for unregistered schemes; and (c) s 601EE (the section that provides for the winding up of unregistered schemes) proceeds on the postulate that there is scheme property to be realised through a process of winding up.50 8.47 The definition of scheme property: … expresses itself to apply indiscriminately to property having such a connection with the scheme of which the entity is responsible entity as to make the property scheme property of that scheme. It declares in unequivocal terms that that property is held by the responsible entity and that it is held on trust for scheme members.51

8.48 ‘It is of primary importance to consider closely the legal incidents of the association between persons and property created by the scheme’ in order to determine whether particular property is scheme property, or an asset of the scheme available in winding up.52 In Willmott Forests Ltd v Primary Securities Ltd (2013) 96 ACSR 527, Ferguson J described two steps: (a) understand the scheme by reference to the original scheme documents and any alterations; and (b) consider whether the property in question is a contribution to the scheme or property acquired with contributions or the

proceeds of contributions to the scheme.53 8.49 Identifying scheme property is not, in the first instance, a tracing exercise: A forensic examination that traces where the funds went is of no assistance in identifying scheme property. The correct approach, as explained by Keane JA in Mier and exemplified in Treecorp Australia, is one of objective characterisation having regard to the constituent documents of a scheme. It is the scheme itself, not a forensic tracing of the funds, which provides the connection between the ‘contribution’ of funds by investors and any property that ‘acquired’ or ‘derived’ from those contributions.54 … It is necessary to look at what the documents provided was to happen rather than initially engaging in a forensic tracing of the funds. If having satisfied oneself that the documents provided that the funds were to be used

[page 175] to acquire the property in question, then it may be appropriate to examine whether that is how the funds were expended to confirm the position.55

8.50 Even though property may be excluded from the definition of scheme property by the terms of the scheme, the statutory definition has primary force.56 On the other hand, the mere fact that property is used in a scheme, even if necessary for the carrying on of the scheme, does not make it scheme property.57 8.51 It is possible to have rights that are part of a scheme (and form ‘scheme property’) that are less than rights of ownership.58 For example, in Capelli v Shepard (2010) 29 VR 242, investors were found to have rights to cultivate and harvest trees, and rights to require a landlord to purchase those rights, but not ownership of the trees themselves.59 8.52 The mere fact that the characterisation of particular property as scheme property may cause difficulty in giving effect to the trust provisions in s 601FC(2) does not justify narrowing the definition of ‘scheme property’.60 8.53 One of the primary difficulties for growers in arguing for an expansive definition of ‘scheme property’, to include land owned by the RE or third parties and the trees on that land, has been that funds

paid to the RE on account of management fees, out of money that would otherwise be scheme property, cease to have the character of scheme property upon payment.61 In Re Willmott Forests (No 2) (2012) 88 ACSR 18, Davies J held that the scheme documents put beyond doubt that the application fees paid by growers to the schemes were management fees.62 Indeed, it was this very feature of the schemes that gave rise to the up-front tax deductions. In such circumstances, Davies J did not permit growers to trace their application fees into any land which may have been acquired by the RE for the purposes of the scheme using those moneys. [page 176]

IV. Tracing and pooling in managed investment schemes and investment trusts 8.54 Promoters and operators of various different types of investment schemes, in order to achieve economies of scale, typically offer a number of different investment schemes or products to investors. In the agricultural space, Timbercorp offered various timber and other agricultural schemes (including olive and almond schemes) to investors over the years. Willmott and Great Southern offered various different timber schemes. In the property space, the Letten managed investment schemes63 offered investors interests in various real property schemes including hotels, golf courses, caravan parks and retail property developments. At the conclusion of each investment, investors were encouraged to roll-over their investments from one project to another. The Westpoint investment schemes were similar in this regard. In financial services markets, retail investors have been offered the use of online trading platforms to invest and trade in various products including shares, futures, options, foreign currencies, contracts for difference and other financial products. In each of these cases, the operators of the investment schemes have used centralised treasury bank accounts into which the funds contributed by investors in each of the different schemes or products have been paid before being distributed

amongst the various schemes or products.64 This centralised treasury function has, in several cases, resulted in the creation of a mixed trust fund comprising the funds credited to the relevant treasury bank account and the assets acquired with those funds. 8.55 The failure of one or more of the investment projects or the insolvency of the promoter or operator of the schemes will invariably result in a deficiency in the mixed fund. The recent financial collapse of a number of investment schemes has demonstrated the potential for this deficiency to create all manner of tensions between investors in the various different schemes or products, including between: (a) investors in ‘profitable’ schemes and investors in ‘unprofitable’ schemes — where the profits may have been used by the scheme operator to subsidise ‘unprofitable’ schemes; (b) investors in earlier schemes and investors in later schemes — where the funds contributed by investors in later schemes may have been used by the scheme operator to repay the capital contributed by investors in the earlier schemes; and (c) investors in schemes from which funds have been misappropriated and investors in schemes which have not suffered from any misappropriation. [page 177] 8.56 In these instances, the courts have used tracing principles to resolve the tensions between investors in the different schemes.

IV.A. Tracing into and distribution from a mixed fund 8.57 The courts have developed a number of different approaches for tracing into and distribution from a mixed fund. Those approaches sometimes conflict and it is not always clear which approach should be applied in a given circumstance. These approaches are set out in the following sections.

IV.A.1. The intention-based approach 8.58 Under this approach, the court will allocate funds deposited into a mixed fund, insofar as is possible, in accordance with the parties’ mutual intentions (for example, as evidenced by an investment contract).65 In some instances, the court will also allocate funds in accordance with the intentions of the trustee even where those intentions were not shared by the investors who contributed the funds.66

IV.A.2. The ‘first in, first out’ rule 8.59 First in first out (FIFO) derives from Devaynes v Noble [181423] All ER Rep 1. Pursuant to FIFO, the first payment made into an account is appropriated to the earliest payment made out of that account. The rule was derived from what the court found to be the express or presumed intention of the parties.67 Applied in the mixed fund context, any withdrawal from a mixed fund would be regarded as a withdrawal of all or part of the first or first few contributions (depending on the values of the withdrawal and contributions) made into the fund. The consequence of the application of FIFO in the context of a mixed fund is that losses from the fund inevitably fall on those who made earlier deposits.68 [page 178]

IV.A.3. Rateable distribution 8.60 Another approach is for a deficient mixed fund to be distributed rateably to those who contributed to the fund. The proprietary analysis underpinning this approach is that, upon the deposit of a claimant’s contribution into a mixed fund or upon the mixing of a claimant’s contribution into a fund that was not mixed at the time of deposit, the claimant’s property in that contribution transforms into a charge on the entire mixed fund for the amount of the claimant’s contribution. Under this approach, the time at which a claimant’s contribution is mixed (either by deposit into a mixed

fund or mixing after deposit) is disregarded, as the equitable charge is held jointly with all of the other contributors to the mixed fund.

IV.A.4. Lowest intermediate balance rule 8.61 The lowest intermediate balance rule (LIBR) provides that tracing into a mixed fund cannot occur for any sum that exceeds the lowest balance in the fund during the interval between the time of the original contribution and the time of a claim to that contribution.69 On that basis, the amount of an investor’s claim against the mixed fund is reduced to the lowest intermediate balance and the investor will then have a charge over the entire balance of the fund, as at the time of the claim, for that amount only.

IV.A.5. The rolling charge model 8.62 The rolling charge model, also known as the ‘North American model’, provides that a withdrawal from a mixed fund is allocated in the same proportions as the different beneficiaries bear to each other at the moment before the withdrawal is made.70 In other words, each debit to the fund is attributed to all existing claimants at the relevant time on a pro rata basis.

IV.A.6. The modern Australian approach71 8.63 In recent Australian cases in relation to mixed funds, the courts have generally adopted the rateable approach in resolving the competing claims of [page 179] investors to the mixed fund.72 This approach has been particularly favoured where no other method of tracing investor contributions was practically feasible by reason of the complexity of the mixing of the fund and the poor quality of record keeping. Two recent examples of this approach are Australian Securities and Investments

Commission v Letten (No 7) (2010) 190 FCR 59 and Georges v Seaborn International (2012) 288 ALR 240 (Re Sonray). 8.64 The facts underlying Letten (No 7) were that receivers were appointed by the Court to the property of 21 separate unregistered managed investment schemes which had been operated by the Letten group. Although all of the schemes were essentially managed by a central entity, the Court concluded that separate unregistered managed investment schemes existed in respect of each of the separate property developments in Australia or New Zealand, presumably because (for the most part) investors intended to invest in particular property developments. The nature and scale of the property developments varied enormously and included a resort in Palm Cove in Queensland, a caravan park in the Tamar Valley in Tasmania, a group of three shops on Chapel Street in Melbourne and a golf and hotel development in the Yarra Valley in Victoria. Investors paid money to the central entity, but were taken to have contributed that money to individual schemes which were established as trusts (with the various properties to be held on trust for the investors in the relevant schemes). Investors typically received monthly distributions in respect of their investments and investors were also entitled to a share of the assets and profits of the relevant scheme. 8.65 The difficulty for the receivers in attempting to wind up the schemes and to distribute the assets of the schemes was that the receivers could not identify the ‘scheme property’ of the individual schemes. The moneys contributed by investors to the various schemes and all other payments in respect of the various properties ought to have been properly allocated to the relevant scheme and accounted for. In fact, the funds and properties of the schemes were irretrievably intermingled. 8.66 The receivers made some attempt to unravel the mess and to trace investor funds to particular assets, but were unable to do so because: (a) Receipts and payments in relation to each of the schemes were made through common bank accounts and payments were

commingled. (b) The common bank accounts were often in overdraft. (c) A number of the schemes were oversubscribed (in that the amount of investor contributions in relation to a particular scheme exceeded the [page 180]

(d)

(e)

(f) (g)

(h)

funding requirements for that scheme) and the oversubscriptions were used for the benefit of other schemes (including to make distributions to other investors). There were numerous inter-scheme transactions, with the consequence that contributions made by investors for the purpose of a particular scheme were appropriated to other schemes. A significant proportion of investor contributions to schemes (up to $38 million) appeared to have been used to pay distributions to investors in other schemes. The accounting records were unreliable, incomplete and unable to be reconciled. The receivers estimated that the costs associated with reconstructing the Letten accounts and conducting a full tracing exercise in relation to the schemes would be $18 million and that it was not clear whether this tracing exercise could ever be completed. On that basis, the receivers sought directions from the Court that they were justified in pooling the assets of the various schemes and distributing the funds rateably to investors in each of the schemes.

8.67 Certain investors objected to the receivers’ proposed rateable distribution of the assets of the schemes on a pooled basis, as to do so would undermine the deliberate investment decisions made by the investors in various schemes. In most cases, investors intended to invest in a particular property development rather than in all of the

Letten projects generally. Certain of the developments were profitable and made significant capital gains whereas others incurred substantial losses. Overall, over 90% of the funds invested were thought to be lost. 8.68 The Court rejected the intention based approach on the basis that it was not possible to say what were the net assets of any scheme, and there appeared to have been so many inter-scheme transactions that it was not possible to say what assets were acquired by what scheme using whose money.73 The Court also held that it would be manifestly unjust to hold investors to a regime based on their ‘original intention’ in circumstances where investors had a limited understanding, awareness or appreciation of the investments they were making.74 8.69 Ultimately, the Court accepted that no further tracing of investor contributions should be conducted by the receivers. Due to the exceptional circumstances of the case, the Court accepted that the receivers were justified in pooling the surplus assets of the schemes and distributing them rateably to investors with the distributions to be made proportionally to the claims assessed by the receivers. Here, there was a mixed fund that had been conducted for a period of at least 12 years during which time there was in excess of 110,000 transactions through the relevant bank accounts. In such [page 181] circumstances, the Court held that ‘it is to no-one’s advantage that a very long time and very large costs be spent in working out the entitlements and liabilities on a scheme by scheme basis.’75 On the basis of these largely pragmatic considerations, the Court concluded that the assets of the various schemes ought to be pooled and distributed to investors on a pro-rata basis. 8.70 However, while the Court directed that the assets of the schemes may be distributed rateably to the investors in all of the schemes, the Court also ordered that nothing in the directions

granted was to affect the rights of any person to claim that the person had, or any other person had, an entitlement to distribution from an asset of a scheme or a corporate defendant (or the proceeds of sale of such asset) which differed from the distribution to which the person would otherwise have been entitled under the directions granted. 8.71 In relation to Re Sonray, Sonray’s business involved providing its clients with access to online trading platforms to trade in shares, futures, options, foreign currencies, contracts for difference and other financial products. The different platforms were operated by various counterparties; in most cases it was Interactive Brokers LLC (Interactive Brokers) or Saxo Bank A/S (Saxo). Upon Sonray’s collapse, the segregated accounts held by Sonray, which contained moneys held on trust for approximately 4000 Sonray clients, were deficient to the tune of $45.6 million. This was the result of substantial unauthorised withdrawals, dealings and trading, which largely took place in relation to Sonray’s Australian dollar denominated segregated account (AUD Account). The client moneys in Sonray’s other segregated accounts had been mixed and commingled from the outset with the AUD Account and were also the subject of thousands of authorised and unauthorised deposits, withdrawals, transfers and other dealings.76 As a result of the authorised and unauthorised transactions involving the segregated accounts, including numerous transactions between several of the segregated accounts, the accounts had become so thoroughly mixed that it was practically impossible to ascertain entitlements to several of the segregated accounts. Matters were further complicated as Sonray’s records were materially incomplete. 8.72 The liquidators of Sonray applied to the Court for directions77 as to how the remaining funds in the segregated accounts (and various other funds and assets held by or on behalf of Sonray) ought to be distributed. Gordon J held that the principles applicable to trusts, and, in particular, to deficient mixed trust accounts, applied to Sonray’s segregated accounts by reason of the operation of the statutory trust by which client moneys are taken to be held on trust

by a licensee for the benefit of the client.78 Her Honour held that the effect of the client moneys rules is to create one [page 182] or more mixed trust funds with special characteristics.79 On that basis, the Court held that Sonray’s clients were entitled to an equitable joint charge over the whole balance of the relevant segregated account in respect of their claims against the relevant segregated account.80 Owing to the substantial number of unauthorised and authorised transactions affecting the funds held in the AUD Account, that account could not practically or economically be the subject of a cash tracing exercise.81 Furthermore, as Sonray client money was transferred from the AUD Account into other Sonray segregated accounts or was used for trading by Sonray clients who had deposited money into another segregated account for that purpose, several other segregated accounts became ‘tainted’ with both the deficiency in the AUD Account and the equitable joint charge held by clients in respect of the AUD Account. As a consequence, several other segregated accounts became deficient and mixed and could no longer practically or economically be the subject of a cash tracing exercise.82 8.73 Therefore, the Court adopted a pragmatic approach in concluding that the moneys in the various ‘tainted’ segregated accounts should be pooled with a view to their proportionate distribution on the basis of the principles applicable to deficient mixed trust accounts.83 As a consequence, all contributors to the deficient mixed fund held an equitable charge over the entire fund and its traceable proceeds to the value of their respective contributions, subject to any dealings and costs.84 8.74 The most controversial aspect of Re Sonray is that the Court held that particular shares purchased on the instructions of one of the contradictors, Efax Pty Ltd (Efax) (a Sonray client), on the platform operated by Saxo, were held on trust solely for Efax and excluded from the pool, even though Efax had deposited its funds

into the ‘tainted’ AUD Account as the purchase price for the shares and it was not possible to trace those funds into the relevant shares. In fact, the shares in question were paid for by Saxo (or Saxo’s agent) [page 183] which acquired and held the shares as part of the credit arrangements between Saxo and Sonray, rather than by way of a transfer of funds from the ‘tainted’ segregated accounts.85 In reaching the conclusion that the shares held by Saxo were held on trust for Efax,86 Gordon J held that the shares in question were purchased by Sonray on instructions from Efax as agent for Efax. The court held that the relevant shares could be identified in Sonray’s business records as referable only to Efax, and Sonray subsequently debited Efax’s account with the purchase price for the shares which had been paid by Efax into the ‘tainted’ AUD Account.87 It appears that her Honour, in effect, adopted an intention-based tracing approach in finding that the amount paid by Efax into the ‘tainted’ AUD Account, as consideration for the shares, satisfied Efax’s obligation to pay Sonray (as purchasing agent) for the shares. The parties’ intention had been made good by Sonray’s appropriation of the purchase price from the ‘tainted’ AUD Account by way of a deduction of the purchase price from Efax’s account balance. 8.75 The Efax aspect of Re Sonray was overturned on appeal by a majority of the Full Federal Court in Georges v Seaborn International Pty Ltd (2012) 206 FCR 408. Jacobson J stated that the ‘flaw’ in the approach adopted by the primary judge was ‘that it fails to grapple with the way in which any right of appropriation may have been exercised’ and that ‘the proper approach to this question must take into account the fact that the appropriation had its source in moneys that were originally paid into the tainted ANZ AUD segregated account.’88 Each of Jacobson and Jagot JJ held that, as Sonray was a defaulting trustee, the rateable approach should be applied89 and that the court is not invariably bound by a defaulting trustee’s intentional allocation of losses to some investors for the benefit of

others (such as Efax).90 Efax was refused special leave to appeal to the High Court of Australia. 8.76 Letten (No 7) and Re Sonray provide an interesting contrast to the approaches adopted by the courts in identifying scheme property in the agricultural scheme context (refer to section III of this chapter) in which the courts declined to trace growers’ application fees in identifying scheme property by reason of the clear intention expressed in the relevant constitutions that the application fees would be management fees. In these cases, the records of the schemes have generally been reliable and the courts have seen no reason to depart from the objective intention of the parties as expressed in the scheme constitutions. [page 184]

IV.B. Are there any proprietary claims or personal equities? 8.77 In applying the rateable approach, the courts have held that there is always a preliminary question when considering whether to order a rateable distribution of a mixed fund; that is, whether the claimants on the fund have claims which are equal.91 To the extent that one or more claimants have a proprietary or priority claim to the asset(s), or ‘personal equities’ exist between the claimants, certain claimants may be postponed to others.92 In Australian Securities and Investments Commission v Letten (No 20) (2012) 92 ACSR 630, Gordon J held that such personal equities arose between those investors who received distributions on their investments prior to the appointment of receivers (which were, to a significant extent, funded by the contributions of later investors and not out of profits of the schemes) and those investors who did not receive distributions. On that basis, her Honour held that those investors who had received the distributions and other payments prior to the appointment of the receivers were required to bring the payments into hotchpot before participating rateably in what remained of the mixed fund.93

IV.C. Resolving investor/investor conflicts in the future 8.78 The best way to resolve conflicts between investors in different schemes to a deficient mixed fund will always turn on the facts. In circumstances where the reason for the deficiency in the mixed fund is misappropriation, fairness would usually dictate that the misappropriation be borne equally by investors. However, in circumstances where the reason for the misappropriation is the failure of a particular project or scheme in circumstances where other projects or schemes have been successful, fairness would usually dictate that those investors in the failed projects should be held to their bargain at least insofar as investors’ bargains were the result of full and accurate disclosure by the operators of the schemes and the accounting records enable the separate winding up of the schemes.

V. Corporate groups — pooling and substantive consolidation V.A. Introduction 8.79 Where the means of investment is the purchase of shares in a company94 it is rare for the organisation in which the investment has been made to consist of a single corporation. Typically, an enterprise will be comprised of a [page 185] number of companies, usually related to one another. The assets and liabilities of the structure may be held in different companies within that enterprise. It is common, for example, for a trading company, and another company that owns the assets utilised by that trading company, both to be subsidiaries of a holding company in which investors own shares. The decisions that lead to such structures are usually made for legitimate economic reasons.

8.80 Despite the ‘enterprise’ nature of the group of companies during their operation, in insolvency the separate and individual nature of each company is strictly observed. As Professor Henry Peter observes, the fact that a significant part of the assets of insolvent corporate groups is frequently consumed by inter-company claims has led stakeholders increasingly to attempt to consolidate insolvent companies in much the same way as they would solvent groups.95 8.81 Unlike the tools for tracing described in section IV above, consolidation cannot be pursued by stakeholders outside an external administration: it must be initiated by the external administrators themselves. 8.82 Two forms of consolidation can be utilised in the insolvent administration of corporate groups. ‘Procedural consolidation’ refers to the parallel administration of several insolvent companies.96 It is a common practice that requires no special formality or court order (although it can raise questions of conflict that must be dealt with). In contrast, ‘substantive consolidation’ (also called ‘pooling’) involves a significant rearrangement of rights and obligations: most commonly, the combination of all assets and liabilities of a group of companies and the termination of all inter-company debts. 8.83 Substantive consolidation has several advantages: it may reflect the reality of creditors’ dealings with the corporate group; it can streamline and simplify external administrations, reducing costs and therefore increasing the total pool of assets available to all stakeholders;97 it provides a solution where the separation of estates is impracticable (for reasons that might include poor corporate governance, inadequate record keeping and document destruction);98 and it can reduce the legal costs incurred by creditors in prosecuting claims against the group.99 Thus, it has been said that ‘the maxim: equality is equity, has been used to justify pooling and pro-rata distributions where separate [page 186]

funds have been hopelessly intermingled.’100 However, there is a competing philosophy: ‘equality among creditors who have lawfully bargained for different treatment is not equity but its opposite …’.101 Consolidation may work to the detriment of creditors who extended credit to group members with stronger asset to debt ratios.102 Further, properly-informed creditors and investors may have weighed their risks and arranged their affairs in full consciousness of the circumstances of the company with which they dealt. Pooling the assets and liabilities of that company with others in a corporate group may defeat the expectations, or otherwise operate to the disadvantage, of such stakeholders. 8.84 Thus: The courts have also stated that the costs savings to be gained through the pooling must be balanced against any prejudice accruing to particular creditors, with the former not necessarily more important than the latter as the basis of the bankruptcy rule is to attempt to provide a result that is in the best interests of the creditors as a whole, not merely the majority of creditors.103

8.85 For these reasons, substantive consolidation is an extreme and rarely-invoked procedure. Nevertheless, it is useful in particular circumstances. In an investment context, its usefulness is illustrated by a real world example. A block of land in the central business district of a city was comprised of six separate titles. For the purpose of developing the land, five companies purchased the six titles, but not as joint owners: each company had a different interest in one or more titles. The five companies were owned by two ‘camps’ of promoters. Many other investors contributed funds toward the purchase and development of the land. Further funds were borrowed from a bank, which took a mortgage over all of the land. The two camps of promoters fell out, and complex litigation resulted. The bank appointed a receiver, which sold the land and paid the surplus into court. Liquidators were appointed to the companies. The books and records were in disarray. While ownership of the land was easily established via the titles register, the liquidators were unable to identify to which entity and on what basis many of the investors [page 187]

had contributed the funds that had been used in the project. The liquidators sought and were granted a pooling order.104 8.86 While there is no general discretion to consolidate the assets and liabilities of a group of companies absent specific statutory power,105 the Corporations Act provides several such powers.

V.B. Pooling under Division 8 of Part 5.6 8.87 Amendments to the Corporations Act that commenced on 31 December 2007 introduced formal mechanisms for the pooling of groups of companies in liquidation. Those mechanisms are found in Division 8 of Part 5.6 of the Corporations Act. Their introduction followed a series of law reform recommendations in Australia reaching back at least as far as the Harmer Report in 1988.106 8.88 When a group of companies is pooled under Division 8, the companies retain their separate existences and identities. However, each company becomes jointly liable for all debts and claims that are provable in the liquidation of each of the other companies,107 and all inter-company debts and claims are extinguished.108 The liquidator(s) need not convene separate meetings of the [page 188] group companies, but may convene consolidated meetings of all creditors of the companies, and any resolution passed at such a meeting is taken to have been passed by the creditors of each group company.109 Curiously, the pooling provisions provide no relief from the requirement to lodge individual accounts for each company in the pooled group.110 8.89 The pooling provisions apply only to companies in liquidation. Although pooling in voluntary administration was proposed in the draft bill that introduced Division 8, no provisions to that effect were enacted. Our research has not disclosed any reason for that change.111 One might speculate that the reasons for its omission include the transient nature of the voluntary

administration process and the availability of pooling under two of the three most common means by which voluntary administration ends, namely liquidation and deeds of company arrangement. Further, experience has shown that the flexibility of deeds of company arrangement and the power given to courts by the Corporations Act s 447A has made pooling within the framework of voluntary administration a realistic possibility even absent the Division 8 powers.112 8.90 Pooling can be effected in one of two ways: by a determination of the liquidator(s) of the group companies, or by order of a court. 8.91 Each mechanism requires identification of a ‘group’ of two or more companies. The term ‘group’ is not defined in the Act; the only criteria for membership are found in s 571(1) and s 579E(1), respectively. So long as those criteria are satisfied, there need not be any connection or shared characteristic between the companies in question.113 Each of s 571(1) and s 579E(1) requires: (a) that each company in the group is being wound up;114 and [page 189] (b) that any of the following applies: (i) Each company in the group is a related body corporate of each other company in the group.115 (ii) The companies in the group are jointly liable for one or more debts or claims.116 (iii) The companies in the group jointly own or operate particular property that is or was used, or for use, in connection with a business, scheme, or undertaking, carried on jointly by the companies in the group. (iv) One or more companies in the group owns particular property that is or was used, or for use, by any or all of the companies in the group in connection with the business, scheme, or an undertaking, carried on jointly by the

companies in the group. 8.92 The reference in criteria (iii) and (iv) to an undertaking carried on jointly by companies does not require action in unison, but extends to circumstances ‘in which there is coordinated or cooperative action, with the separate acts of each participant complementing or supplementing acts of the others.’117 The carrying on of a ‘scheme’ is ‘nothing more than the habitual pursuit of a course of conduct’ in accordance with a ‘program or plan of action.’118 8.93 The property referred to in subparas (iii) and (iv) need not be tangible property. In Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84 the court accepted an innovative submission that some but not all of the 40 companies in the relevant group owned property, because each owned a chose in action under a deed of crossguarantee entered to enable the group companies to obtain relief under a class order. Each of the companies ‘used’ that property simply by holding it, because the subsistence of the cross-guarantee gave them the benefit of relief flowing from the class order. The property was used ‘in connection with’ the joint enterprise conducted by all 40 group companies, because it was a necessary component of the financial [page 190] efficiencies that flowed from the class order.119 The decision in Re Lombe, Kirby Street (Holding) suggests that all groups of companies that have the benefit of such class orders produced by means of crossguarantees entered by some or all of the group companies, will satisfy the preconditions for pooling, so long as the class orders produce efficiencies that can legitimately be said to be conducted with the group’s business. 8.94 Save insofar as criteria (iii) and (iv) refer to property that ‘was used,’ each of the four criteria is expressed in the present tense. It is therefore necessary for each to be satisfied at the time of the

determination or application in question; past satisfaction is inadequate.120 8.95 The requirement that each company in the group must be one that is being wound up has been called a weakness in the regime.121 However, close examination of ss 571 and 579E reveals no such weakness: there is no requirement that every possible company that might satisfy the definition of a group be included in the group122 and, therefore, the presence of a solvent company in what might otherwise be defined as a group for the purposes of the pooling provisions is no obstacle to pooling being attempted. Further, if participation of a solvent company in the group is seen as desirable, that company could enter a members’ voluntary winding up for the purposes of participating in a pooling.

V.B.1. Pooling by determination 8.96 Under s 571, the liquidator(s) of the companies in a group may by writing determine that the group is a pooled group for the purposes of the section and, if they consider that it is just and equitable as between the various creditors of the companies, determine that any one or more of subss (2)–(7) of s 571 are modified in their application to the companies in that group. Each subsection otherwise has unmodified effect.123 8.97 Section 571(2) renders each company in a pooled group jointly and severally liable for each debt payable by, and each claim against, each other company and extinguishes every inter-company debt in the group. Section 571(3) states that subs (2) applies to a debt or claim whether present or future, certain or contingent and whether ascertained or sounding only [page 191] in damages. Section 571(4) provides that subs (2) does not apply to a debt payable by or a claim against a group company unless that debt or claim is admissible to proof against the company. Section 571(9)

provides that subs (2) does not apply in relation to a secured creditor unless the secured debt is an intra-group debt. 8.98 Section 571(5) states that the order of priorities applicable under ss 556, 560 and 561 is not altered for a company in the group. 8.99 Section 571(6) allows a secured creditor of a company in the group to surrender its security and recover its debt as a liability jointly and severally payable by the group companies. Section 571(7) provides that if a secured creditor of a group company realises its security, so much of the debt as remains after deducting the net amount realised may be recovered as a debt jointly and severally payable by the companies. 8.100 Section 571(10) provides that eligible employee creditors of group companies are entitled to a priority at least equal to that to which they would have been entitled if the pooling determination had not been made. 8.101 Notably, in determining whether it is just and equitable to make a modifying determination under s 571(1), liquidators are not explicitly given the same guidance or subjected to the same constraints as are set out in s 579E(12) relating to the determination of whether it is just and equitable for a court to make a pooling order (dealt with below). 8.102 Pooling determinations may be varied by the liquidator(s) pursuant to s 572. 8.103 Before a pooling determination or variation comes into force, it must be approved by separate meetings of the ‘eligible unsecured creditors’ of each of the group companies.124 The notice convening the meeting must be accompanied by a copy of the pooling determination or variation, and a written statement setting out prescribed information concerning the mechanics, effects, advantages and disadvantages of the pooling, in order to enable creditors to make informed decisions about it.125 8.104 A copy of the notice must be given to every eligible unsecured creditor of each group company,126 and to each member

of every group company that is in a members’ voluntary winding up (save for members that are also group companies).127 [page 192] 8.105 The resolution approving the determination or variation must be passed by a majority in number of the eligible unsecured creditors present and voting whose debts or claims against the company in question amount to at least 75% of the total amount of the debts and claims of the eligible unsecured creditors present and voting.128 A determination or variation comes into effect immediately after the last of the resolutions of the meetings is passed.129 If a requisite majority at one of the meetings does not approve the determination or variation, the determination or variation is cancelled at the end of that meeting, and all subsequent meetings are cancelled.130 8.106 The court has the power to vary or terminate a pooling determination under s 579A on the application of a creditor of a group company or a member of a group company that is being wound up under a members voluntary winding up (so long as that member is not itself a group company) or any other interested person. Section 579A(1) sets out a number of criteria of which the court must be satisfied before an order terminating the determination may be made. There is a similar power in the court to cancel or confirm the variation under s 579B, although that section does not specify the criteria on which the court may act in so doing. The court also has the power to void or validate the pooling determination on the grounds of noncompliance or compliance with the division under s 579C. A pooling determination is valid until such time as it is terminated or cancelled.131

V.B.2. Pooling by order of the court 8.107 At the time of writing, reasons have been published in respect of only six pooling applications: Re Lombe, Kirby Street (Holding); Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597; Re

Australian Hotel Acquisition (in liq) [2011] NSWSC 1374; Re Aboriginal Connections Aboriginal Corp (in liq) and Guri Wa Ngundagar Aboriginal Corporation (in liq) (2012) 263 FLR 121; Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416; and Re Walker as liquidator of ZYX Learning Centres Ltd (formerly ABC Learning Centres Ltd) (recs and mgrs apptd) (in liq) [2015] FCA 146. Only five sets of published reasons provide insight as to the reason for the application. In both of Aboriginal Connections and Environmental Consultants, the absence or inadequacy of individual financial records for group companies, difficulties in determining and reconciling inter-company debts, and the impossibility of reconstituting accurate accounts (at least without disproportionate expense) led the liquidators to seek pooling orders.132 In Re Lombe, Kirby Street (Holding), the report contains no suggestion of inadequacies in group accounts, but [page 193] it appears that pooling orders were sought for the purpose of achieving efficiencies and savings in the liquidations that would be beneficial to the creditors of the group companies.133 Both sets of factors were found in ZYX Learning Centres: receiverships over the group companies’ assets had been conducted on a pooled basis and it would have been difficult and expensive for the liquidators accurately to apportion the group’s assets; and pooling would have led to significant cost savings by avoiding substantial further liquidators’ fees.134 8.108 If a court is satisfied that a group of companies satisfies the criteria under s 579E(1) and that it is just and equitable to do so, the court can by order determine that the group is a pooled group. 8.109 In determining whether it is just and equitable to make a pooling order, the court must have regard to the matters set out in s 519E(12).135 The section confers a wide discretion on the court, which must be exercised judicially having regard to the factors set

out in paras (a)–(e) and, pursuant to para (f), ‘any other relevant matters’.136 The enumerated factors are: (a) the extent to which a company in the group and the officers or employees of a company in the group were involved in the management or operations of any of the other companies in the group; (b) the conduct of a company in the group and the officers or employees of a company in the group towards the creditors of any of the other companies in the group; (c) the extent to which the circumstances that gave rise to the winding up of any of the companies in the group are directly or indirectly attributable to the acts or omissions of any of the other companies in the group or the officers or employees of any of the other companies in the group; (d) the extent to which the activities and business of the companies in the group have been intermingled; and (e) the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order. 8.110 The court must not make a pooling order if it is satisfied that: (a) the order would materially disadvantage an eligible unsecured creditor of a company in the group, and that creditor has not consented to the making of the order; or (b) a company in the group is in a members’ voluntary liquidation, and the order would materially disadvantage a member of that company (other [page 194] than a member that is a company in the group) and the member has not consented to the making of the order.137 In Re Lombe, Kirby Street (Holding), Barrett J held that if such ‘material disadvantage’ were found, the court could not come to a positive

conclusion on the ‘just and equitable’ ground question.138 His Honour must be taken to have been referring to material disadvantage coupled with the absence of consent, because if he were not, on his construction the question of consent of the disadvantaged company would be otiose. 8.111 The effects of a pooling order on the group of companies are the same as the effects of a pooling determination. In much the same way as liquidators have the power to vary those effects by declaration, the court has the power to make an ancillary order varying them.139 Other ancillary orders that may be made include: (a) orders exempting a debt from the operation of the pooling or extinguishment under s 579E(2); (b) orders transferring or directing the transfer of specified property or liabilities between group companies; (c) orders providing for the subordination of debts or claims of specified creditors to those of other creditors; (d) orders providing for different returns to different creditors or classes of creditors: s 579G(4); and (e) such other orders and directions in relation to the winding up of the companies in the group as the court thinks fit. 8.112 An order or direction made under s 579G(1) does not affect the rights of a secured creditor unless the relevant debt is payable by a company or companies in the group to any other company or companies in the group.140 8.113 Section 579G(1)(d) provides for the court to make orders modifying the application of the Corporations Act in relation to the winding up of the companies in the group. That power is one of extraordinary width: it is wider even than the power granted by s 447A in relation to voluntary administration. Like orders under s 447A, orders made under s 579G(1)(d) should be expressed in a form that identifies the relevant provision of the Corporations Act and sets out the altered application that it is to have.141 [page 195]

8.114 In Re Lombe, Kirby Street (Holding), ancillary orders were made under s 579G(1)(d) allowing the liquidators to file consolidated accounts of the group, and appointing the existing committee of inspection of the ‘head’ company in the group as the committee for the entire group.142 In ZYX Learning Centres, ancillary orders were made consolidating the committees of inspection of the group companies. 8.115 The court may vary pooling orders: s 579F. 8.116 Ancillary orders and varying orders may only be made if the court considers it just and equitable to do so, but the determination of whether it would be just and equitable is not subject to the same set of explicit criteria as must be considered when determining whether or not to make a pooling order. 8.117 The liquidator(s) must give notice of an application for and the making of a pooling order, ancillary order or a variation order to each eligible unsecured creditor of each company in the group, and, where any such company is in a members’ voluntary liquidation, to each member of that company (other than members that are group companies).143

V.B.3. The use of Div 8 of Part 5.6 since its enactment 8.118 All pooling orders must be lodged with ASIC.144 Pooling declarations must only be lodged with ASIC after they come into force.145 8.119 Since the pooling provisions commenced, notices of only 35 pooling determinations and seven pooling orders have been filed with ASIC. No notices of pooling variations have been filed. The seven successful pooling applications were: Kirby Street, Aboriginal Connections, Environmental Consultants, the Econova Group,146 the Gouger Centre Group,147 the Bluestone Global Group148 and ZYX Learning Centres. [page 196]

8.120 The use of the pooling powers from commencement until the time of writing is summarised in the following table:149 Year

Notices of pooling determinations filed 2008 2 2009 4 2010 3 2011 5 2012 10 2013 4 2014 5 2015 (to date) 2 Total 35

Notices of pooling orders filed

Total pooled groups created

0 0 1 1 1 2 0 2 7

2 4 4 6 11 6 5 4 42

8.121 Given the utility of the pooling provisions, the conclusion that can be drawn from the small number of pooled groups created in the seven years that Division 8 has been operating is that the requirements to achieve pooling are so onerous — and are in fact more onerous than the requirements for pooling by way of interlocking deeds of company arrangement150 — that they are rarely sought or achieved. That is not an argument for relaxation: the onerous requirements are consonant with the significant effect that pooling can have on commercial expectations, given how well entrenched and well understood are the doctrines of limited liability and individual corporate personality.

V.B.4. The effect of Div 8 of Part 5.6 on pre-existing means of consolidation 8.122 The introduction of formal pooling provisions did not replace the existing mechanisms made available for substantive consolidation by the Corporations Act. In Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209, Young J surveyed the means of substantive consolidation available under the then

Corporations Law. His Honour identified six potential means. Since then, that spectrum of options has been the subject of significant academic and professional commentary.151 Several of them have been used to [page 197] effect pooling arrangements. In Re The Black Stump Enterprises Pty Ltd (2005) 228 ALR 591, his Honour stated: … one needs to look closely at those decisions and see the very limited basis on which they were decided. Each case appears to have been decided using one of the limited gateways available … and by a sort of cooperation between the advocate for the liquidator and the judge as to finding a cheap and viable route through the maze of the provisions of the corporations law.152

8.123 Those provisions should not be ignored by practitioners who are seeking practical solutions to difficult problems in group insolvency. Each of the six potential mechanisms will be considered in turn to demonstrate its availability and utility as a pooling mechanism and to isolate some defining characteristics of the various mechanisms so as to allow a ready means of comparing them. However, it is beyond the scope of this chapter to attempt a full exploration of the intricacies and mechanics of each.

V.C. Substantive consolidation outside Division 8 of Part 5.6 V.C.1. Schemes of arrangement under Part 5.1 8.124 A scheme of arrangement is a mechanism capable of binding the companies’ members and creditors to a compromise or arrangement. In the words of the Full Federal Court: A scheme of arrangement between a company and its creditors or a class of creditors is no more than a proposal to vary or modify the company’s obligations in relation to its debts and liabilities owed to the creditors or class of creditors.153

8.125 Prior to the enactment of Division 8 of Part 5.2, the scheme

of arrangement was generally considered to be the most appropriate means of achieving substantive consolidation in insolvency.154 8.126 A scheme is effected under Part 5.1 of the Corporations Act. It requires: (a) an application to the court for the making of orders convening meetings of creditors and members (sometimes including meetings of defined classes of creditors); (b) the passage of resolutions to approve the scheme at each of those meetings by requisite majorities in number and value; and (c) an application to the court for approval of the scheme approved by the meetings. [page 198] 8.127 Schemes of arrangement can involve the release of creditors’ rights against third parties (for example, guarantors of the corporate debt) provided there is sufficient nexus between the release and the relationship between the creditor and the scheme company.155 The ability to release third party claims, enabling an en globo settlement of multifaceted corporate collapses, has been recognised as a useful and attractive feature of schemes of arrangement.156 8.128 The use of a scheme to effect the insolvent administration of a group of companies was considered in Re Casablanca Wine Bars Pty Ltd (1978) 3 ACLR 318. Instrol Limited was a publicly listed company with six subsidiaries, some of which carried on independent businesses. Instrol itself was the banker for the subsidiaries. A liquidator had been appointed provisionally to Instrol and had ascertained that Instrol was insolvent, and that the group’s books and records were ‘inextricably mixed.’ If Instrol were wound up it was the liquidator’s view that all of the subsidiaries would need to be wound up notwithstanding that some of them were trading profitably. The liquidator had formed the view that the interests of the group’s unsecured creditors might be better served if the group were given a moratorium of up to five years to enable it to trade on,

with the income of the group to be pooled and distributed on a prorata basis to the group’s creditors. The liquidator proposed effecting a scheme of arrangement for that purpose. Powell J considered that the proposed scheme had both advantages and disadvantages. On the one hand, it offered the prospect of a greater dividend than might be the case were there an immediate winding up and might avoid or minimise the ‘formidable administrative problems’ in reconciling the accounts. On the other hand, the proposed moratorium was for a five year period and would not likely result in all creditors being paid in full. Further, his Honour commented that ‘the concept of pooling of income, and pro-rata distribution to creditors across the group is, to say the least, unusual.’157 8.129 Despite his Honour’s reservations, he found that it was not one that no creditor acting honestly in its own interests could possibly approve, and [page 199] made orders for the summoning of meetings to allow the creditors to vote on the scheme. The law reports do not disclose the fate of the proposed scheme. 8.130 A scheme of arrangement is extremely flexible and enables dissentient creditors and members to be bound, and provides for the interests of objectors to be considered by meetings of creditors and members and by the court. Schemes have been used to effect compromises in several high-profile recent cases.158 But despite their flexibility and power, it seems that such schemes are not a popular means of achieving the pooling of insolvent companies. Finnane calls them ‘undoubtedly the most onerous route to pooling.’159 Difficulties include the need for court orders, the need to hold numerous meetings of creditors, the chance of rejection by the court, and difficulty in formulating classes of creditors (particularly where the companies’ records are poor). Those requirements can consume significant time and expense.

V.C.2. Compromises under s 477(1)(c) 8.131 The powers of a liquidator granted by the Corporations Act include the power to: … make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable …

8.132 The power is available to liquidators in court-appointed liquidations and, pursuant to s 506, in voluntary liquidations.160 In a pooling situation, the section adds nothing to the common law rights of creditors and liquidators to contract concerning the insolvent companies’ debts.161 Indeed, it has been held (consistently with the plain words of the section) that it cannot bind [page 200] non-consenting creditors.162 For that reason, there would be no controversy in using the section in aid of obtaining releases from creditors of their rights against third parties or altering the application of the pari passu principle. 8.133 Some commentators have suggested that the power under s 477(1)(c) is limited by the requirement under s 477(2A) prohibiting a liquidator from compromising debts greater than $20,000 without court or creditor approval.163 However, subs (2A) applies only where the debt is one owed to, not by, the company. It is unlikely that a pooling arrangement that effected the novation of a debt of a group company to all group companies would amount to a ‘compromise’ of that debt sufficient to invoke subs (2A).164 But where a pooling involved the extinguishment of inter-company debts greater than $20,000, subs (2A) would apply. And where the companies’ accounts were inadequate, it would be prudent to seek approval under subs (2A) as a matter of caution. Further, if the pooling compromise may end, or require the performance of obligations, more than three

months after it was entered, court or creditor approval would be required under s 477(2B) in any event. 8.134 Reaching a compromise or arrangement with a creditor requires some form of ‘consensual compact’ beyond a mere vote by the creditor at a meeting.165 Contrast s 510 (see below) which, in referring to an ‘arrangement’ between a company and its creditors, can be reached via the process of a creditors’ meeting.166

V.C.3. Directions under s 479 or s 511 8.135 A liquidator can obtain directions of the court in a compulsory winding up (under s 479) and in a voluntary winding up (under s 511). In Soluble Solution, Young J stated: It would be possible for the court to advise a liquidator in a court winding up that he should consolidate debts, but it would be unlikely that the court

[page 201] would do so unless every creditor agreed or a regime was put in place for creditors to object.167

8.136 In Re Charter Travel Co Ltd (1997) 25 ACSR 337, Young J referred to Soluble Solution and said: … if no creditor objects and it is impracticable to keep the assets and liabilities of different companies separate, and the consolidation is for the benefit of creditors generally, then the court might advise the liquidators concerned that they would be justified in consolidating the administration.168

8.137 In Soluble Solution, Young J appears to have been suggesting that s 479 could be used to direct a liquidator that it was appropriate to pool, whereas s 511 might not, because: … [a]lthough the court may under s. 479 direct its officer to commit a breach of trust or to do something which it is arguable he has no power to do, under s 511 the court is only given power to avoid expensive procedures but must act according to law …169

8.138 Warren CJ cast doubt on that analysis when, in Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373, her Honour suggested

that it may not be necessary to draw any distinction between the two situations.170 And in Black Stump, Young CJ in Eq posed but did not answer the question as to whether s 511(2) would allow the liquidator in a voluntary liquidation to have recourse to s 479(3) (on the implicit premise that there is a material difference between the power to give directions under that section and the power under s 511).171 8.139 Whether or not the distinction is relevant, subsequent decisions have thrown into doubt the utility of the directions power as a source of power to achieve a pooling. In Re Tayeh; Black Stump Enterprises Pty Ltd (2005) 53 ACSR 684, Barrett J explained the two passages set out above in the following terms: These statements, to my mind, represent no more than a recognition that a version of the unanimous assent principle which can, at shareholder level, override the need for particular procedures … is also capable of operating at creditor level in a winding up where … creditors’ participation rights by way of distribution are in the nature of private rights that the creditors may waive or vary by contract. Central to the possibility referred to by Young J is unanimous assent, express or implied. Section 511 would then

[page 202] be potentially of relevance as a means by which the court might, by way of determination of the question of the efficacy of the assent to achieve that legal result, re-assure the liquidator that creditors had effectively modified their rights in such a way as to make it appropriate for the liquidators to recognise the results of their unanimous assent. It is important to emphasise that s 511(1)(a) is not — and can never be — a source of jurisdiction for the court to alter the incidence of statutory provisions or the rights of creditors or contributories in a winding up. Nor was it so treated in either the Soluble Solution case or the Charter Travel case.172

8.140 His Honour’s judgment was upheld on appeal by a bench including Young CJ in Eq.173 8.141 Following that line of authorities, it seems that the power to give directions might be used to resolve ambiguities or give protection to liquidators against allegations of a breach of duty in entering pooling arrangements; but it does not provide an

independent source of power to effect a pooling. An example of its use in a pooling situation can be found in Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559, described below.

V.C.4. Arrangements under s 510 8.142 Section 510(1) of the Corporations Act provides: An arrangement entered into between a company about to be, or in the course of being, wound up and its creditors is, subject to subsection (4): (a) binding on the company if sanctioned by a special resolution; and (b) binding on the creditors if sanctioned by a resolution of the creditors.

8.143 Unlike s 477, s 510 refers only to an ‘arrangement’, not a ‘compromise or arrangement.’ However, s 510 is flexible enough to include an arrangement that involves a compromise.174 The section is silent as to the prospect of such a compromise being used to discharge creditors’ rights against third parties, and the text of the section carries no necessary implication one way or the other. While Jason Harris suggests (without detailed reasoning) that ‘it is possible that s 510 arrangements could be used to adjust creditor rights against third [page 203] parties,’175 it is by no means certain that such a use would survive attack by a dissenting creditor — particularly given the controversy over the ability of deeds of company arrangement to achieve the same goal (for which see below). For the moment, that question remains unanswered. 8.144 The use of s 510 to achieve pooling is referred to in Soluble Solution and is illustrated by Re Switch Telecommunications Pty Ltd (in liq); ex parte Sherman (2000) 35 ACSR 172. As Santow J pointed out in the latter case, the advantage of an arrangement under s 510 is that it is binding on dissentient creditors and contributories.176 8.145 While commentators and recent authorities suggest that, in order to bind dissentient or non-voting creditors, those creditors

must be paid pari passu with the consenting creditors,177 the question is the subject of competing first instance authority and no appellate determination. In Re Farmer’s Freehold Land Co Ltd (1892) 3 BC (NSW) 39, the Supreme Court of New South Wales overturned an arrangement because the appellant creditor was not treated pari passu with the other creditors and did not consent to the arrangement. Thirty-seven years later, in Re E D White Ltd (1929) 29 SR (NSW) 389, a differently constituted bench of the same court refused to disallow or vary an arrangement that involved the payment in full of debts incurred after the date of the arrangement (on which date the creditors had been informed of the companies’ parlous finances). Even though that arrangement resulted in different returns to different creditors, Harvey CJ in Eq found that the agreement was not unfair to the applicants.178 The Chief Judge does not appear to have been taken to Re Farmer’s Freehold. More recent obiter dicta suggest that the Re Farmer’s Freehold approach is favoured by modern courts.179 8.146 In Soluble Solution, Young J pointed out that it may be difficult to hold meetings of creditors of each group company if the companies’ records do not allow for the identification of creditors or their proper allocation. In an appropriate case, that difficulty can be avoided by convening a joint meeting of creditors and obtaining remedial orders under s 1322(4).180 [page 204] 8.147 Section 510 provides for an arrangement to be entered into with creditors before any resolution for winding up is passed, but a winding up is essential to the process, and so any such arrangement would be ineffective unless a winding up resolution were subsequently passed.181 8.148 One undecided question concerning s 510 is whether members’ approval is required where the company in question is in insolvent liquidation. While the section requires a special resolution of the company in order to bind it to the resolution, in Switch

Telecommunications, Santow J pointed out that such a requirement (effectively providing the members with a veto) is anomalous where the company is in insolvent liquidation and the members no longer have any economic interest in the outcome.182 In such circumstances, Santow J left open the prospect of the liquidator using the powers under s 477(1) to bind the company, leaving only the resolution of creditors required.183 8.149 In Wittingham the group consisted of three companies. The sole director of all three companies was the sole member of two of them. He and his wife were the only shareholders of the third. No resolution of creditors of any of the companies was obtained, but the director had sent the liquidator a letter consenting to the pooling arrangement in his capacity as the sole shareholder of one of the companies — the only company in which there was any prospect of a surplus in liquidation. Barrett J gave the liquidator a direction that he was justified in pooling the liquidations of the three companies because: … there has been, at creditor level, active and unanimous assent within each company (a greater measure of approval than is envisaged by s 510) and because, at shareholder level, either the sole shareholder has assented … or it is so clear that there will be no surplus for contributories and that the interests of shareholders may properly be regarded as non-existent …184

8.150 In so doing, his Honour made clear that he was not proceeding under s 510,185 but was exercising a power allowing the liquidator to pool on the basis that there was unanimous assent to the proposal by all ‘relevant persons’ — i.e., those with an economic interest in the liquidations.186 While [page 205] it is not explicit in the reasons or orders, the power to make the direction in question was that granted by s 511. 8.151 A creditor or contributory has the power to appeal to the court in respect of such an arrangement within three weeks after it is completed, and the court may confirm, set aside or modify the

arrangement and make such orders as it sees fit: s 510(4). In Re E D White Ltd, Harvey CJ in Eq held that on such an appeal, the task of the court is ‘to see that the minority of creditors who do not approve of the scheme have not been treated unfairly.’187 An alternative approach was taken by Barrett J in Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 50 ACSR 15, where his Honour stated that such an appeal should be approached in the same way as is a creditor’s objection to the approval of a scheme of arrangement.188

V.C.5. Use of s 447A to achieve pooling 8.152 Section 447A of the Corporations Act provides that ‘[t]he Court may make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company.’ Part 5.3A deals with voluntary administration. The power of the provision has been realised in countless decisions. In Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607, Young J held that under s 447A: … the Court is to have plenary powers to do whatever it thinks is just in all the circumstances, but the court is to bear in mind when exercising those powers the rights of the various groups of people that are affected by voluntary administration.189

8.153 Alpha Telecom concerned two companies whose creditors had, at separate meetings convened in voluntary administrations under s 439A, resolved that the relevant company be wound up and that, subject to the passage of a like resolution at the other meeting, the assets and liabilities of the two companies be consolidated. Barrett J held that: … the fact that this winding up is a creditors’ voluntary winding up resulting from s 446A, in consequence of Pt 5.3A administration, means that the comprehensive jurisdiction created by s 447A … is available to alter statutory incidents of the winding up … the alteration might be effected by modifying the way in which s 446A itself (being a provision within Pt 5.3A) is to apply in the particular case.190

8.154 His Honour examined the facts and found that the requirements of s 510(1)(b) would have been satisfied had an application been brought under [page 206]

that section, but that nothing of the equivalent of s 510(1)(a) was present. His Honour made orders under s 447A that Part 5.3A of the Corporations Act was to have effect in relation to the companies as if s 446A were modified so as to allow the windings up of the two companies to proceed in accordance with the consolidation resolutions and otherwise as if they were the winding up of a single company — provided that the liquidator first received the written consent of every member of both companies. 8.155 It is apparent that the same result could have been obtained by the liquidators using s 510 themselves.

V.C.6. Deeds of company arrangement under Part 5.3A 8.156 One of the three possible outcomes of a voluntary administration is the entry into a deed of company arrangement. A deed is a flexible instrument that binds the company, its officers, members and administrator(s) and all creditors whose claims arose on or before a date specified in the deed.191 8.157 In Mentha v GE Capital (1997) 27 ACSR 696, a deed of company arrangement was used to effect a pooling arrangement whereby all property of a group of companies, including charged assets but excluding real property, was transferred to the ultimate parent company, which by deed poll assumed all liabilities of the group. Secured creditors stood outside the pooling arrangement. On the application of the administrators for orders authorising the disposition of the charged assets, Finkelstein J held that: … the power to enter into a deed of company arrangement under Pt 5.3A is sufficiently broad to permit an arrangement binding on two or more insolvent companies pursuant to which their respective assets and creditors will be consolidated. There is no justification for a construction of this part of the Corporations Law that would lead to the conclusion that arrangements made pursuant to Pt 5.3A must be more narrowly confined than arrangements made under s 411.192

8.158 The latter sentence can no longer be read literally. While schemes of arrangement can be used to effect a release of third party liabilities by creditors bound by the scheme,193 such liabilities cannot

be released by a deed of company arrangement without the consent of the releasing creditors.194 8.159 The capacity to use deeds of company arrangement to achieve a pooling was recognised again by Goldberg J in Humphris, Re ACN 004 987 866 Pty Ltd (2003) 21 ACLC 1474. Since that time, deeds of company arrangement have commonly been used to effect pooling. [page 207] 8.160 The advantages of the deed of company arrangement include the fact that there is no need for a special resolution of creditors. However, as with s 510, there may be difficulties if the group’s financial records do not allow for the accurate determination of which group company is indebted to a particular creditor.195 Recourse might be had to one or more of ss 447A, 447D196 or 1322 to overcome such problems. 8.161 Complications may also arise from the operation of s 444DA, which requires deeds of company arrangement to contain provisions that eligible employee creditors will be entitled to ‘a priority at least equal to what they would have been entitled if the property were applied in accordance with sections 556, 560 and 561.’ As the effect of a pooling arrangement may be to alter the extent of the recourse to which an eligible employee creditor would have to the assets of the company of which he or she was a creditor (as opposed to the assets of the pooled group), it might be argued that a pooling deed breaches s 444DA. Section 444DA(5) allows the court to make orders avoiding the requirements of s 444DA(1) if the court is satisfied that non-inclusion of the provision would be likely to result in the same or a better outcome for such creditors as a whole than would result from immediate winding up of the individual company: a result more likely than not if pooling is being considered. Alternatively, s 447A might be used to avoid the operation of s 444DA.

V.D. A comparison of means of achieving substantive consolidation 8.162 The table on the following page compares the various means of pooling considered above, by reference to nine factors likely to be of relevance to practitioners in considering how a pooling might be achieved in a particular set of circumstances.

VI. Conclusion 8.163 The purpose of insolvency law is to resolve the conflicts that are the inevitable result of a debtor being unable to satisfy all of its debts. Two fundamental principles of corporate insolvency law are (1) that the members of an insolvent company receive nothing until its creditors have been paid in full; and (2) that only the assets of the insolvent entity are available to satisfy its debts. Those principles are so well-entrenched as to have become instinctive. But the analysis above demonstrates that the use of modern investment structures and relatively new uses of older structures have the potential to disturb those well-settled paradigms. [page 208]

[page 209] 8.164 In recent investment scheme collapses, tensions between (and within) various stakeholder groups have raised some complex

and difficult legal questions, challenging the traditional rankings of debt and equity, and requiring the judicial development of principles for the allocation of resources in insolvency where the statutes fall silent. 8.165 Many of those questions have been answered in the context of liquidators’ or administrators’ applications for directions, which provide a less-than-ideal mechanism for the resolution of what are, in essence, inter partes disputes.198 Attempts to balance flexibility and pragmatism against the preservation of the rights of those not before the court has a price in time and expense.199 In terms of efficiency and certainty of outcome, this process stands in stark contrast to the usual process of liquidation in Australia which does not necessarily require any involvement of the Court beyond an initial winding-up order (and even that order is not always required). Having said that, cases like Willmott (No 2) and Letten (No 7) demonstrate that the courts understand the difficulties that the framework throws up and have been willing and able to find a balance between the strict application of proprietary rights and the practical realities of the winding up of schemes and trusts. Further, as a result of the jurisprudence arising out of the recent investment scheme collapses, some established principles and practices have emerged in resolving these stakeholder tensions (as set out in this chapter) which are increasing the efficiency of these directions applications and the predictability of the outcomes. 8.166 At the same time, practitioners have begun to take advantage of new statutory rules that recognise the ubiquity of corporate groups and the disconnection between the theory of the individual entity and the practices of modern commerce. The statutory tools made available to liquidators and courts attempt to strike their own balances between practicality and fairness, and between certainty and flexibility. They include powers to tailor the operation of the Corporations Act, the scope of which is unparalleled. 8.167 However, while there are some real advantages associated with the bespoke resolution of stakeholder tensions under the regimes described above in terms of flexibility and fairness, this approach makes it difficult for investors, creditors and other

stakeholders in investment schemes to make their initial investment or credit decisions on a properly-informed basis, as they would be able to if there were a fulsome legislated regime to resolve these tensions. 8.168 Is further predictability required? UNCITRAL points out that transparency and predictability are normative goals for insolvency systems. Those two characteristics assist potential creditors to assess the likely consequences of a debtor’s insolvency, encouraging lending and lowering [page 210] risk premiums. Predictability reduces the likelihood of disputes.200 However, the introduction of legislated predictability to the resolution of competing proprietary claims may run the risk of creating arbitrary and unfair outcomes. Indeed, after examining the cases discussed in this chapter, it appears that it would be difficult to craft a series of rules which could apply flexibly and fairly to all of the cases discussed in this chapter and achieve the balance which has been achieved by the courts in those cases. 8.169 Several of the issues raised above concerning MISs are dealt with in the recent CAMAC report.201 No doubt others will be considered by the forthcoming Senate Economics References Committee report into failed managed investment schemes. Whether or not those enquiries lead to any reforms, the only certainty is that all potential stakeholders in investment schemes, whether as investors or creditors, require a proper understanding of the mechanics of the scheme and the potential implications of its insolvency before they can make informed decisions about the real risk they are taking on. Any risk calculations must make appropriate allowances for the uncertainties created by the applicable structure. 1. 2.

See chapter 2 of this book. A responsible entity is a trustee: Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162; [2005] WASCA 236, and a managed investment

3.

4. 5. 6. 7. 8.

9. 10.

11. 12. 13. 14. 15.

16. 17.

18. 19. 20. 21. 22. 23. 24. 25.

scheme will usually be a trust by reason of the operation of s 601FC(2) of the Corporations Act and/or the constitution of the scheme. See generally chapter 2 of this book. On that basis, the term ‘trustee’ is used in this chapter also to refer to responsible entities. ‘Scheme property’ is also trust property. N D’Angelo, ‘When is a trustee or responsible entity insolvent? Can a trust or managed investment scheme be “insolvent”?’ (2011) 39(2) Australian Business Law Review 95; P Agardy, ‘Aspects of Trading Trusts’ (2006) 14(1) Insolvency Law Journal 7. S J Hepburn, Principles of Equity and Trusts, 4th ed, Federation Press, NSW, 2009 at p 358. Above n 4 at p 361. P Radan, C Stewart and I Vickovich, Principles of Australian Equity and Trusts, 2nd ed, LexisNexis Butterworths, Chatswood, NSW, 2013 at p 312. Directions applications are dealt with in detail in chapter 12 of this book. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; (1979) 27 ALR 129 at 367. This right arises in equity and is also enshrined in legislation (Trustee Act 1958 (Vic) s 36(2); Trusts Act 1973 (Qld) s 72; Trustee Act 1898 (Tas) s 27(2)) and may also arise under the terms of the trust deed. Custom Credit Corp Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 52–3. See e.g., Nolan v Collie [2004] HCA Trans 22, discussed in L Aitken, ‘A liability “properly incurred”? — The trustee’s right to indemnity, and exemption from liability for breach of trust’ (2011) 35(1) Australian Bar Review 53 at 54. Nolan v Collie (2003) 7 VR 287; [2003] VSCA 39 at [51]–[53] citing Lindley LJ in Re Beddoe, Downes v Cottam [1893] 1 Ch 547. RWG Management Ltd v Commissioner for Corporate Affairs (Vic) [1985] VR 385 at 393– 400. Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] ATPR 41–864; [2002] NSWCA 29 at [46]. See Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] ATPR 41–864; [2002] NSWCA 29. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; (1979) 27 ALR 129 at 144; Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226; (1998) 151 ALR 1; [1998] HCA 4 at 247. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; (1979) 27 ALR 129 at 367. The right was pithily described by Barrett JA (Campbell JA, Sackville AJA agreeing) in Augusta Pty Ltd v Provident Capital Ltd (2012) 16 BPR 30,397; [2012] NSWCA 26 at [70]– [75]. G Dal Pont and T Cockburn, Equity and Trusts in Principle, Lawbook Co, Pyrmont, NSW, 2005 at p 334. RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 397. D Loxton and N D’Angelo, ‘Trustees’ limitation of liability: Myths, mysteries and a model clause’ (2013) 41(3) Australian Business Law Review 142 at p 145. Above n 20. ASIC v Letten (No 17) (2011) 87 ACSR 155; [2011] FCA 1420. D’Angelo, above n 3. Corporations Act s 197(1). Timbercorp Securities Ltd (in liq) v WA Chip & Pulp Co Pty Ltd [2009] FCA 901 at [11].

26. 27. 28. 29. 30.

31. 32. 33. 34. 35.

36. 37. 38. 39. 40. 41. 42.

43. 44.

45.

Re Environinvest Ltd v Great Southern Property Managers Ltd [2010] VSC 323. Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at 434–5. For a more detailed discussion, refer to J Ball and J Moutsopoulos, ‘Insolvent managed investment schemes: uncertainty and conflicts’ (2010) 11(3) Insolvency Law Bulletin 38. Directions applications are dealt with in detail in chapter 12 of this book. For a detailed discussion of the operation of s 601FS, see chapters 5 and 6 of this book. See generally Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2010) 185 FCR 97; (2010) 79 ACSR 40; [2010] FCAFC 76; Re Gunns Finance Ltd (in liq) (recs and mgrs apptd) and Gunns Plantations Ltd (in liq) (recs and mgrs apptd) (No 2), sub nom Gunns Finance Ltd (in liq) v WA Blue Gum Ltd (2013) 281 FLR 121; [2013] VSC 365; Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574. See e.g., G Bigmore QC and N Hannan, ‘Issues arising out of winding up managed investment schemes’ (2010) 13(11) Insolvency Law Bulletin 42. Explanatory Memorandum, Managed Investments Bill 2007 (Cth) at [8.10]. Corporations Act s 601FB(2). Corporations Act s 601FC(2). In Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [60], Davies J held that ‘The definition of “scheme property” does not apply to unregistered schemes, so that the question of whether any of the land used in the operations of the unregistered schemes is property held on trust for the growers in those schemes is not answered by s 601FC(2) of the Act.’ In Re Letten (No 5) (2010) 273 ALR 264; [2010] FCA 1047 at [53], Gordon J held that the only provision of Part 5C that applied to unregistered managed investment schemes was s 601EE. Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11; (2009) 74 ACSR 447; [2009] FCAFC 147 at [64]. Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11; (2009) 74 ACSR 447; [2009] FCAFC 147 at [64]. Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125; Re Letten (No 5) (2010) 273 ALR 264; [2010] FCA 1047 at [10]. See e.g., ASIC v Letten (No 7) (2010) 190 FCR 59; (2010) 80 ACSR 401; [2010] FCA 1231 at [248]. Re Centro Properties Ltd (2011) 86 ACSR 584; [2011] NSWSC 1465 at [60]–[63]. Re Westfield Holdings Ltd (2004) 49 ACSR 734; [2004] NSWSC 458. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at 350 [42] (Keane JA, McMurdo P, Douglas J agreeing). Although his Honour was there referring to the winding up of an unregistered scheme, the same principle applies by analogy to registered schemes. ASIC v Great Northern Developments Pty Ltd (2010) 242 FLR 444; (2010) 79 ACSR 684; [2010] NSWSC 1087 at [119]. See e.g., Re Timbercorp Securities Ltd [2009] VSC 608; Re Environinvest Ltd (No 3) [2010] VSC 301; Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125; Re Gunns Plantations Limited (in liquidation) (receivers and managers appointed) (No 3) [2014] VSC 267. Re Gunns Plantations Limited (in liquidation) (receivers and managers appointed) (No 3)

46.

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

58. 59. 60. 61. 62. 63. 64.

65. 66. 67.

68.

69.

[2014] VSC 267. Re Gunns Plantations Limited (in liquidation) (receivers and managers appointed) (No 3) [2014] VSC 267 at [6], citing Re Hazelton Air Charter Pty Ltd; Humphris v Mentha (2002) 41 ACSR 472; [2002] FCA 529 at [35], [50]–[51]; Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 at [80]. Re Hazelton Air Charter Pty Ltd; Humphris v Mentha (2002) 41 ACSR 472; [2002] FCA 529. A Jessup, Managed Investment Schemes, Federation Press, NSW, 2012, at p 87. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [26]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at 350–1. Re Investa Properties Ltd (2001) 187 ALR 462; [2001] NSWSC 1089 at [14]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [23]. Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574 at 558 ff. Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [84]. Willmott Forests Ltd (recs and mgrs. apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574 at [141]. Re Environinvest Ltd, Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33 at [97]. Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [43]; Treecorp Australia Ltd (in liq) v Dwyer (2009) 175 FCR 373; (2009) 71 ACSR 127; [2009] FCA 278 at [42]. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2; Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574 at [92]. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at [148]. Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11; (2009) ALR 643; [2009] FCAFC 147 at [64]. Treecorp Australia Ltd (in liq) v Dwyer (2009) 175 FCR 373; (2009) 71 ACSR 127; [2009] FCA 278. Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [83]. Described further at paras 8.64–8.70 below. To the extent that the funds contributed by investors constitute ‘client moneys’, the funds are required to be pooled in a segregated client account for the purposes of s 981B of the Corporations Act. See e.g., ASIC v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240; [2002] NSWSC 576. See e.g., Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337; [2007] SASC 9. The court held that the parties, being banker and customer, intended for the first payment made into the account to be appropriated to the earliest payment made out of that account because the transactions were recorded as a running account balance where all the sums paid in formed one blended fund. The court found that, in such a case, there was no room for any other appropriation than that which arises from the order in which the receipts and payments take place. It is now clear after Campbell J’s comprehensive review of the authorities in Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 that, at least in New South Wales, FIFO has no application in the context of a mixed fund. James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62.

70. 71.

72.

73. 74. 75. 76. 77. 78. 79.

80. 81. 82. 83. 84.

85. 86. 87. 88. 89.

Re Global Finance Group Pty Ltd (in liq) (supervisor apptd); Ex parte Read (2002) 26 WAR 385. A detailed discussion of the different approaches to tracing through a mixed fund and an analysis as to the impact which each of these different approaches has on the outcome for various investors is set out in S Kinsey and L Papaelia, ‘Distribution of a mixed fund — pragmatism prevails over esoteric tracing principles’ (2012) 20(4) Insolvency Law Journal 26. See Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008; ASIC v Nelson (2003) 44 ACSR 719; [2003] NSWSC 129; ASIC v Enterprise Solutions 2000 Pty Ltd [2001] QSC 82 and ASIC v Tasman Investment Management Ltd (2006) 202 FLR 343; (2006) 59 ACSR 113; [2006] NSWSC 943. In ASIC v Nelson (2003) 44 ACSR 719; [2003] NSWSC 129, Austin J of the New South Wales Supreme Court held that ‘it seems to me that Australian authority has reached the point that the rateable solution is to be preferred to the first in first out approach where trust funds are mixed, without qualification’ at [24]. ASIC v Letten (No 7) (2010) 190 FCR 59; (2010) 80 ACSR 401; [2010] FCA 1231 at [332]. ASIC v Letten (No 7) (2010) 190 FCR 59; (2010) 80 ACSR 401; [2010] FCA 1231 at [310]. ASIC v Letten (No 7) (2010) 190 FCR 59; (2010) 80 ACSR 401; [2010] FCA 1231 at [332]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [3]. The application was made pursuant to s 511 of the Corporations Act and s 63 of the Trustee Act 1958 (Vic). Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [82]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [77]. The ‘special characteristics’ derive from the client moneys rules contained in Divisions 2 and 3 of Part 7.8 of the Corporations Act. Pursuant to these rules, client moneys are intended to be used specifically for the provision of financial services and for the holding of and dealing in financial products for clients; they can be used to meet margin calls and to act as security for dealings in derivatives (including dealings on behalf of clients other than the depositing client). However, client moneys cannot be used to satisfy creditors of the licensee. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [79]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [91]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [92]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [84]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [83]. Her Honour relied on Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008. The ‘pooling’ aspect of the Sonray Decision was followed by the Supreme Court of New South Wales in Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [268]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [284]. Georges v Seaborn International (2012) 288 ALR 240; 87 ACSR 442 at [270]–[274]. Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; (2012) 294 ALR 468; [2012] FCAFC 140 at [59]. Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; (2012) 294 ALR 468; [2012] FCAFC 140 at [69], [199].

90. 91. 92. 93. 94. 95.

96. 97. 98. 99. 100. 101. 102. 103. 104.

105.

106.

Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; (2012) 294 ALR 468; [2012] FCAFC 140 at [69], [70]. Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [176]. Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [176]–[185]. Australian Securities and Investments Commission v Letten (No 20) (2012) 92 ACSR 630; [2012] FCA 1283 at [82]. Typically a limited company given the restrictions imposed by s 113 of the Corporations Act. H Peter, ‘Insolvency in a Group of Companies, Substantive and Procedural Consolidation; When and How?’ in N Jeandin and J Kilborn (eds) The Challenges of Insolvency Law Reform in the 21st Century, Schulthess, Zurich, 2006 at 201–203. Above n 95 at 201–2. J Harris, ‘Corporate Group Insolvencies: Charting the Past, Present and Future of “Pooling” Arrangements’ (2007) 15(8) Insolvency Law Journal 78 at 80. Above n 97 at 91. See M Ross, ‘Tangled Webs: Unravelling the Strands after a Corporate Group Collapses’ (1992) 3(11) International Company and Commercial Law Review 385 at 387. Above n 99. Chemical Bank New York Trust Co v Kheel (1966) 369 F. 2d 845 at 846 (Friendly J). D A Skeel, ‘Groups of Companies: Substantive Consolidation in the U.S.’ in Jeandin and Kilborn (eds) The Challenges of Insolvency Law Reform in the 21st Century at p 230. Above n 97 at 80. The authors thank James Neate of Lynch Meyer Lawyers for information concerning the Gouger Centre Group pooling application: Shek Kwan Lee v Gouger Centre Pty Ltd (unreported, Supreme Court of South Australia, Withers J, 565/2009, 22 October 2013). Written reasons were not delivered. Any errors in the above description are the authors’. Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209; Re Alpha Telecom (Aust) Pty Ltd; Dean Willcocks (2004) 50 ACSR 15; [2004] NSWSC 738 at [18]; Re The Black Stump Enterprises Pty Ltd (2005) 228 ALR 591; [2005] NSWCA 480 at [16]–[17] (Young CJ in Eq., with whom Santow JA agreed); cf Bryson JA at [41]; Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070; Application of Whitton (as liquidator of Global Gossip Group of Companies) (2006) 230 ALR 323; [2006] NSWSC 163 at [24]–[33]. Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988). The recommendations of the various reports are digested in M Wyburn, ‘Pooling as a Response to the Competing Interests in Corporate Group Collapse in Australia’ (2010) 19(1) International Insolvency Review 65 at 83–90. Previously, in the United Kingdom, the Cork Committee had raised the prospect of reforming insolvency laws to recognise grouping but, recognising the controversial effect on the individual corporate entity that pooling provisions can have, the Cork Committee ‘drew back from making formal recommendations because it believed such reforms could not be made in the absence of an extensive review of corporate law, not just a review of insolvency’: S Whelan, ‘Administration of Insolvent Groups — The Present State of “Pooling”’ (1998) 6(13) Insolvency Law Journal 107 at 108.

107. Including certain claims that arose after liquidation commenced, including liquidators’ claims to remuneration and expenses: Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416 at [47]. 108. Subject to declarations under the Corporations Act s 571(2) or s 579G(1)(b). 109. Corporations Act s 579L. 110. In Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536, ancillary orders were made modifying the operation of s 539 of the Act so as to allow the lodgement of a pooled group account for each company, rather than an individual account for each company: Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [101]; Re Kirby Street (Holding) Pty Ltd [2011] NSWSC 1576. Similarly, in Re Bluestone Global Limited (in liq) (unreported, Supreme Court of Victoria, Gardiner AsJ, S CI 2014 04318, 12 December 2014), orders were made for the liquidators’ reports under Corporations Act ss 508 and 539 to be prepared on a consolidated basis. There were 54 companies in that pooled group. 111. And see Carl Möller, ‘Of Pooling, Priorities, Policing and Penalties: the Corporations Amendment (Insolvency) Bill 2007’, Paper delivered to the Victorian Bar Compulsory Continuing Legal Education Program, 23 July 2007 at [79]. 112. Deeds of company arrangement and the use of s 447A in a pooling context are explored below. 113. Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597; [2008] NSWSC 259 at [9]; Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [8]; Re Aboriginal Connections Aboriginal Corp (in liq) and Guri Wa Ngundagar Aboriginal Corporation (in liq) (2012) 263 FLR 121; [2012] NSWSC 491 at [7]. 114. There is no requirement that the company be wound up in insolvency. See s 579E(10) (b). 115. The concept of related bodies corporate is dealt with in s 50. 116. The joint liability may be found in any number of sources. For example, it is not uncommon for all companies in a group to be jointly liable to a single financier pursuant to cross-collateralisation arrangements. Joint liability may also arise from the group having the benefit of an ASIC class order which allows for group audited accounts, dispenses with the need for individual audited accounts and requires all companies within the group to enter into an approved deed of cross-guarantee: see M Wyburn, ‘Pooling as a Response to the Competing Interests in Corporate Group Collapse in Australia’ (2010) 19(1) International Insolvency Review 65 at 79–83. Such a prospect was considered but not determined in Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [8]. 117. Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [26]. 118. Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [28]. 119. Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [48]– [67]. 120. Re Australian Hotel Acquisition (in liq) [2011] NSWSC 1374 at [43]. That contention was challenged but accepted in Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [47]. 121. See e.g. M Gronow, McPherson’s Law of Company Liquidation (online edition), 2012 at [13.1700] and Harris, above n 97 at 94. 122. Indeed, in Re Walker as liquidator of ZYX Learning Centres Ltd (formerly ABC Learning Centres Ltd) (recs and mgrs apptd) (in liq) [2015] FCA 146, only two of 39 companies in a

123. 124.

125. 126. 127. 128. 129. 130. 131. 132.

133. 134. 135. 136. 137. 138. 139.

140. 141. 142.

143. 144. 145. 146.

147.

group were the subject of a successful pooling application. Corporations Act s 571(8). ‘Eligible unsecured creditors’ is defined by s 579Q as a creditor that is not a company in the group, and the debt or claim of which is unsecured. It also provides that the regulations may specify creditors that are or are not eligible unsecured creditors. Corporations Regulation 5.6.73 specifies further categories of eligible and non-eligible unsecured creditors. Corporations Act s 574(3). Corporations Act s 574(2). Corporations Act s 575. Corporations Act s 577(2). Corporations Act s 578. Corporations Act s 577(3). Corporations Act s 579D. Re Aboriginal Connections Aboriginal Corp (in liq) and Guri Wa Ngundagar Aboriginal Corporation (in liq) (2012) 263 FLR 121; [2012] NSWSC 491 at [29]–[35]; Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416 at [4]–[5], [11]. Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [79]. Re Walker as liquidator of ZYX Learning Centres Ltd (formerly ABC Learning Centres Ltd) (recs and mgrs apptd) (in liq) [2015] FCA 146 at [6], [30], [48]–[51]. The means by which the ‘just and equitable’ enquiry should be undertaken was addressed in Re Kirby Street (Holding) Pty Ltd [2011] NSWSC 1576 at [77]–[78]. Re Kirby Street (Holding) Pty Ltd [2011] NSWSC 1576 at [78]; Lofthouse v Environmental Consultants International Pty Ltd [2012] VSC 416 at [18]. Corporations Act s 579E(10). Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [82]. Section 579G(1)(d) allows the Court to make an order varying the operation of (among other sections) subss (2)–(7) of s 579E — the analogues of subss (2)–(7) of s 571, dealt with above. Corporations Act s 579G(7). Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [126]. Re Lombe, Kirby Street (Holding) Pty Ltd (2011) 87 ACSR 84; [2011] NSWSC 1536 at [95]– [105]. The form of the order made is set out in Re Kirby Street (Holding) Pty Ltd [2011] NSWSC 1576. Similar orders were made in Re Bluestone Global Limited (in liq) (unreported, Supreme Court of Victoria, Gardiner AsJ, S CI 2014 04318, 12 December 2014). Corporations Act ss 579J and 579K. Corporations Act s 579E(13). Corporations Act s 573(1). Cunningham and Park as liquidators of Econova Operations Pty Ltd (in liq) ACN 106 240 019 and Econova IP Pty Ltd (in liq) ACN 104 784 358 v Econova Operations Pty Ltd (in liq) (unreported, Supreme Court of Queensland, Chesterman JA, 12975/2009, 14 December 2009). The authors were unable to obtain written reasons for the order. Lee v Gouger Centre Pty Ltd (unreported, Supreme Court of South Australia, Withers J, 565/2009, 22 October 2013). Written reasons were not delivered.

148. Re Bluestone Global Limited (in liq) (unreported, Supreme Court of Victoria, Gardiner AsJ, S CI 2014 04318, 12 December 2014). Written reasons were not delivered. 149. Source: compiled by the authors from data supplied by the Australian Securities and Investments Commission current to 16 March 2015 and court records. 150. Refer to section V.C.6 below. 151. See e.g., S Whelan, above n 106; R Hinton and M Charlton, ‘Pooling Assets and Liabilities of Corporate Groups’ (2005) 5(8) Insolvency Law Bulletin 113; E Finnane, ‘Pooling in Corporate Insolvency’ (2005) 19(3) Commercial Law Quarterly at 30; Harris, above n 97; J Dickfos, C Anderson and D Morrison, ‘The Insolvency Implications for Corporate Groups in Australia — Recent Events and Initiatives’ (2007) 16 International Insolvency Review at 103; J Harris, ‘The Revised Statutory Pooling Provisions’ (2007) 19(3) Australian Insolvency Journal 28; Wyburn, above n 106 at 79–83; J Harris, ‘Adjusting creditor rights against third parties during debt restructuring’ (2011) 19(1) Insolvency Law Journal 22. 152. Re The Black Stump Enterprises Pty Ltd (2005) 228 ALR 591; [2005] NSWCA 480 at [15]. 153. Re Fowler v Lindholm; Opes Prime Stockbroking Ltd (2009) 178 FCR 563; (2009) 74 ACSR 298; [2009] FCAFC 125 at [68]. 154. See generally Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209. 155. Re Fowler v Lindholm; Opes Prime Stockbroking Ltd (2009) 178 FCR 563; (2009) 74 ACSR 298; [2009] FCAFC 125 at 579, but note the criticism of that decision in obiter dicta by a differently constituted court in City of Swan v Lehman Brothers Australia Ltd (2009) 179 FCR 243; (2009) 260 ALR 199; [2009] FCAFC 130. On appeal from that decision, the High Court did not enter into the debate in so far as it concerned schemes of arrangement: Lehman Bros Holdings Inc v City of Swan; Lehman Bros Asia Holding Ltd (in liq) v City of Swan (2010) 240 CLR 509; (2010) 74 ACSR 191; [2010] HCA 11 at [54]. See Harris, above n 151 at 29–32; R Douglas, ‘Legal Solutions to Commercial Concerns — Creditors’ Schemes of Arrangement’, in K Dharmananda, A Papamatheos and J Koshy (eds), Schemes of Arrangement, Federation Press, NSW, 2010 at 71–3. 156. A Saker, ‘Commercial Considerations and Approaches to Successful Reconstructions and Creditors Schemes’ in Dharmananda, Papamatheos and Koshy, above n 155 at 65– 6. 157. Re Casablanca Wine Bars Pty Ltd (1978) 3 ACLR 318 at 320. 158. See generally R Douglas, ‘Legal Solutions to Commercial Concerns — Creditors’ Schemes of Arrangement’, in Dharmananda, Papamatheos and Koshy (eds), above n 155. 159. Finnane, above n 151 at 31. See also Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) at [50]. 160. Re Tayeh; Black Stump Enterprises Pty (2005) 53 ACSR 684; [2005] NSWSC 475 at [7]. 161. Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at 566 [26]; see also Re Tayeh; Black Stump Enterprises Pty (2005) 53 ACSR 684; [2005] NSWSC 475 at [13]. The claims of creditors are personal claims that may be compromised or abandoned even in liquidation: United States Trust Co of New York v Australia & New Zealand Banking Group Ltd (1995) 37 NSWLR 131. 162. In Re Austcorp Tiles Pty Ltd (1991) 10 ACLC 62 at 64, Shanahan AJ stated that he would require evidence of the creditors’ consent before sanctioning a compromise under s 477. See also Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 157 FLR

163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173.

174.

175. 176. 177. 178. 179.

180.

181. 182.

158; (2000) 35 ACSR 172; [2000] NSWSC 794 at [20]–[25]; Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209; Re Alpha Telecom (Aust) Pty Ltd; Dean Willcocks (2004) 50 ACSR 15; [2004] NSWSC 738 at [19]–[21]. Harris, above n 97 at 85; Dickfos, Anderson and Morrison, above n 151 at 107. Cf Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [30]. Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [27]–[29]. Cf Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [33]. Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 216–17. Re Charter Travel Co Ltd (1997) 25 ACSR 337 at 338. Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212. Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373; [2010] VSC 336 at [7]–[16]. Re The Black Stump Enterprises Pty Ltd (2005) 228 ALR 591; [2005] NSWCA 480 at [27]. Re The Tayeh; Black Stump Enterprises Pty Ltd (2005) 53 ACSR 684; [2005] NSWSC 475 at [13]–[14] (citations omitted). Re The Black Stump Enterprises Pty Ltd (2005) 228 ALR 591; [2005] NSWCA 480. For further discussion of the capacity of directions orders to bind non-parties, see chapter 12 of this book. Re E D White Ltd (1929) 29 SR (NSW) 389 at 391. See also Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 215; Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 157 FLR 158; (2000) 35 ACSR 172; [2000] NSWSC 794 at 1801 [34]. But cf Re Contal Radio Ltd [1932] 2 Ch 66 and note Re Robinson and the Trustee Act 1925 [1983] 1 NSWLR 154 at 157. Barrett J described the difference between a compromise and an arrangement in the context of s 477(1)(d) in Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [27]– [28]. Harris, above n 151 at 35. Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 35 ACSR 172; [2000] NSWSC 794 at [29]. See e.g. Harris, above n 97 at 87, and cases there cited. Re E D White Ltd (1929) 29 SR (NSW) 389 at 392. Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 215; Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 35 ACSR 172; [2000] NSWSC 794 at [34]. Such an order was made in Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 35 ACSR 172; [2000] NSWSC 794. Whether such orders would be available in the event that there were dissenting creditors was left open: Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 157 FLR 158; (2000) 35 ACSR 172; [2000] NSWSC 794 at [45]. Re Contal Radio Ltd [1932] 2 Ch 66; Setco Manufacturing Pty Ltd v Sifa Pty Ltd (1982) 7 ACLR 327 at 328; Re Robinson and the Trustee Act 1925 [1983] 1 NSWLR 154. Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 35 ACSR 172; [2000] NSWSC 794 at [30]–[31].

183. Switch Telecommunications Pty Ltd (in liq); Ex parte Sherman (2000) 35 ACSR 172; [2000] NSWSC 794 at [31]. 184. Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [38] (citations omitted). 185. Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [39]. 186. Re Wittingham; Hunter Valley Gravel Supplies Pty Ltd (2006) 59 ACSR 559; [2006] NSWSC 1070 at [40]. 187. Re E D White Ltd (1929) 29 SR (NSW) 389 at 392. 188. Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 50 ACSR 15; [2004] NSWSC 738 at [29]. 189. Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611. 190. Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 50 ACSR 15; [2004] NSWSC 738 at [23] (citations omitted). 191. Corporations Act ss 444D and 444G. 192. Mentha v GE Capital Ltd (1997) 27 ACSR 696 at 571–2. 193. See para 8.127 above. 194. Lehman Bros Holdings Inc v City of Swan; Lehman Bros Asia Holding Ltd (in liq) v City of Swan (2010) 240 CLR 509; (2010) 74 ACSR 191; [2010] HCA 11 at [53]. 195. See Harris, above n 97 at 90. 196. Harris, above n 97. 197. ‘Pari passu’ is used here to refer to the proportionate relationship between the creditors of each group company as between themselves. As was described by Barrett J in Kassem v Sentinel Properties Ltd (2005) 53 ACSR 724; [2005] NSWSC 403 at [19]: ‘Under the pooling proposal, each creditor of a particular company will maintain his or her appropriate relativity to the other creditors of that company according to the pari passu principle that pays attention to the amounts of the respective debts and claims. But the several groups of creditors, thus constituted and participating, will share in one consolidated fund made up of the totality of the distributable assets of all companies combined. The departure from the ordinary course of administration thus envisaged will not have any impact that upsets the normal relativities, by way of pari passu entitlement, within the body of creditors of any one company. The impact will be as among the several bodies of creditors, in that there may become divisible among the members of any one such body, on the pari passu basis applicable within the body, an aggregate that is greater or less than that which would have been so divisible had the arrangement not been implemented.’ 198. See chapter 12 of this book. 199. See chapters 2 and 7 of this book. 200. United Nations Commission on International Trade Law (UNCITRAL), UNCITRAL Legislative Guide on Insolvency Law (2005) at 9. 201. Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012).

[page 211]

9 RIGHTS OF INVESTORS IN FAILED OR INSOLVENT MANAGED INVESTMENT SCHEMES Garry T Bigmore QC and Simon Rubenstein Garry Bigmore QC was articled to the Deputy Commonwealth Crown Solicitor, admitted in 1973, joined a small CBD firm in 1976, spent the 1980s as a solicitor in sole practice and merged with J M Smith & Emmerton in 1990. He was appointed Queen’s Counsel in 1994 (the first solicitor to be so appointed since the establishment of the Victorian Bar) and came to the Bar in March 1998. Garry was a founding member of the Insolvency and Reconstruction Law Committee of the Business Law Section of the Law Council of Australia, and has been the Reviewing Editor (since its inception) of LexisNexis’ Bankruptcy Law & Practice. Simon Rubenstein is a barrister at the Victorian Bar. He practises in the areas of corporations, financial services and insolvency law. He has had extensive experience in managed investment scheme cases. Before coming to the Bar, he was a legal consultant at the Australian Securities and Investments Commission where he provided legal advice for large-scale corporate and financial market investigations including market misconduct, continuous disclosure and insider trading investigations. He was the senior lawyer on the successful investigation and prosecution of Rene Rivkin for insider trading. Simon has published articles on insider trading, director’s duties and the enforcement powers of ASIC.

I. Introduction 9.1 In recent years a number of high profile managed investment and analogous common enterprise schemes have failed. These have included schemes operating in the agribusiness space — Timbercorp,

Great Southern, Environinvest and Willmott Forests; in the mortgage fund space — City Pacific First Mortgage Fund and LM First Mortgage Income Fund; in the land and property development space — Westpoint, Bridgecorp and the Letten Property Schemes; and in the aged care space — Prime Retirement and Aged Care Property Trust. [page 212] 9.2 These cases have highlighted the problems that arise when MISs and their operators suffer financial stress or fail completely. One key problem is that investors may be left holding worthless interests and may be deprived of their rights while suffering significant financial loss including loss of initial capital; liability to repay associated loans entered into to fund the investment; and losing the potential for future income they may have been relying upon in their retirement. 9.3 This is significant because of the substantial role that MISs perform in the Australian economy and in particular in investment and retirement savings. According to the Australian Bureau of Statistics, as at 31 December 2013, approximately $2.28 billion was pooled for investment purposes in the managed funds industry covering superannuation, life insurance and listed and unlisted MISs.1 Therefore, failure or insolvency of MISs has the potential to impact significantly on the financial wellbeing of many Australians. 9.4 This chapter considers the rights of investors in failed or insolvent MISs. The topic is broad and the chapter does not cover every issue that may arise. Instead, it focuses on the following matters: (a) consideration of the existing legislative framework including the investor protection underpinnings; (b) rights arising from scheme documentation, limited liability and rights over scheme property; (c) the right to appoint a new responsible entity; and (d) rights against scheme operators for misleading representations,

inadequate disclosure and breach of duty. 9.5 The underlying theme of the chapter is that while there is a complex legislative framework for the operation and regulation of MISs in which investor protection is a guiding principle, the legislative framework provides minimal meaningful protection for investors in failed or insolvent schemes. In such circumstances, the rights of investors are often difficult to enforce or are illusory or worthless, and investors more often than not bear the brunt of losses arising when a scheme or its responsible entity fails or becomes insolvent. In the experience of the authors, this results in a disproportionate risk of loss to investors when a scheme becomes insolvent.

II. Legislative framework and investor protection philosophy II.A Features of MISs 9.6 The legislative framework regulating MISs is found in Ch 5C of the Corporations Act. [page 213] 9.7 Relevantly, an MIS is a scheme that has the following features: (a) people contribute money or money’s worth as consideration to acquire rights (‘interests’) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (b) any of the contributions are to be pooled or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the ‘members’) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); and

the members do not have day-to-day control over the operation (c) of the scheme (whether or not they have the right to be consulted or to give directions).2 9.8 An ‘interest’ in an MIS means a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not).3 9.9 A ‘member’ in an MIS is a person who holds an interest in the scheme.4 9.10 Importantly, interests in registered MISs are regarded as ‘financial products’ and are regulated under Ch 7 of the Corporations Act.5 This means that the process of offering interests in MISs to members of the public usually requires a high level of disclosure about the nature of and risks associated with the investment. Disclosure requirements and remedies for misleading statements and inadequate disclosure are considered further below.

II.B. Pooled schemes and common enterprise schemes 9.11 MISs are generally used as a means of pooling or using, in a common enterprise, funds raised from investors for commercial projects including: (a) (b) (c) (d) (e)

listed and unlisted property and infrastructure schemes; mortgage schemes; equity funds; timeshare and serviced strata schemes; and agricultural schemes including horticultural and forestry schemes.

9.12 Chapter 5C does not mandate a particular legal structure for MISs. They have no separate legal status. Instead they operate by adopting various existing legal structures or relationships such as trusts, contracts, partnerships or corporations.

[page 214] 9.13 Schemes where contributions of members are pooled to hold real estate or infrastructure assets usually operate as trust based arrangements. The trust structure legally owns the real estate or infrastructure, while the scheme members hold shares in the corporate part of the structure and have a beneficial interest in the whole of the property of the trust.6 9.14 By contrast, common enterprise schemes are often structured as a series of agreements between the scheme member, the responsible entity and various other external parties (such as land owners on which the scheme operates). The scheme is not a pool of assets under management but rather is the common enterprise carried out over time in accordance with the agreements. By way of example, agribusiness common enterprise schemes are often structured so that scheme members (otherwise known as growers) operate their agribusiness investments in their own right, but enter into agreements with the scheme operator or external parties to perform cultivation and management activities associated with the members’ enterprise.7 Scheme members hold various forms of proprietary and contractual interests in allocated parcels of land, which may be owned by a third party. This gives rise to a distinction between the property of the scheme (for example, the crops or harvest produced in the scheme) and the property of the scheme members used in the common enterprise (for example, the lease or licence over the land on which the crops or trees are grown and the management agreement entered into with the scheme operator to manage the crops or forests on behalf of the scheme members).

II.C. Tax benefits 9.15 MISs commonly provide significant taxation benefits for investors. According to the CAMAC Report, schemes that utilise trust structures, such as pooled funds, are tax efficient vehicles in that investors with different tax profiles can invest together without adversely affecting their respective tax positions. Further, the

taxation regime for passive trusts in Australia allows them to be used as vehicles for a wide range of collective investments without restriction on the nature of the investment.8 9.16 Further, MISs operating as common enterprise agricultural schemes usually enjoy beneficial product rulings from the Australian Taxation Office (ATO) that allow the members the benefit of upfront deductions for prepaid management fees, rent and other expenses incurred in carrying on their business of primary production as participants in the scheme. These fees and expenses are often paid for from funds that are borrowed from linked or associated lenders. Members also receive tax deductions for the interest paid on those associated loans. [page 215] 9.17 The Federal Government has supported agribusinesses by providing concessional tax treatment through the product ruling process.9 Part of the reason for favourable tax treatment appears to be policy based. Government has sought to encourage investment, job and wealth creation, regional development and positive environmental outcomes by supporting agribusiness through, among other things, favourable tax treatment. This is apparent from policies such as ‘Plantations for Australia: The 2020 Vision: An industry/government initiative for plantation forestry in Australia.’10

II.D. Registration and the responsible entity 9.18 Schemes within the definition of ‘managed investment scheme’ in s 9 of the Corporations Act and that have issued interests in circumstances requiring disclosure to investors must be registered with ASIC in accordance with Pt 5C.1 of the Corporations Act. There are some exceptions where registration is not required, such as schemes with fewer than 20 members.11 9.19 A ‘registered scheme’ means an MIS that is registered under s 601EB of the Corporations Act.12

9.20 Part 5C.2 of the Corporations Act requires that registered schemes have a responsible entity. A responsible entity of a registered scheme must be a public company holding an Australian Financial Services Licence authorising it to operate an MIS.13 As the scheme has no legal identity itself, it operates through the responsible entity. The responsible entity operates the scheme and performs the functions conferred on it by the scheme’s constitution and by the Corporations Act.14 The responsible entity may appoint agents to perform its functions.15

II.E. Scheme property16 9.21 The responsible entity holds the property of the scheme on trust for scheme members.17 [page 216] 9.22 ‘Scheme property’ of a registered scheme means: (a) contributions of money or money’s worth to the scheme; and (b) money that forms part of the scheme property under provisions of the Corporations Act or the ASIC Act; and (c) money borrowed or raised by the responsible entity for the purposes of the scheme; and (d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in subparas (a)– (c); and (e) income and property derived, directly or indirectly, from contributions or money or property referred to in subparas (a)– (c).18 9.23 However, if a member contributes rights over property to a scheme, the rights over the property that a member retains do not form part of the scheme property.19 9.24 The responsible entity therefore holds the legal title to the scheme property. Ordinarily, and subject to the scheme’s

constitution, the equitable or beneficial title is held by scheme members in proportion to their share of the undivided assets of the scheme. Constitutions of schemes ordinarily provide that members do not have legal interest in any identifiable part of the scheme property.20 Issues relating to the characterisation and nature of interests in a scheme are considered further below. 9.25 The responsible entity must hold scheme property separately from the personal assets of the responsible entity and the property of any other scheme for which it is also the responsible entity.21 The responsible entity must also keep financial records that correctly explain transactions and the financial position and performance of the scheme, for the purposes of preparing true and fair financial statements.22

II.F. Constitution and compliance plan 9.26 MISs must also have a series of framework documents including a scheme constitution23 and a compliance plan.24 The constitution of a registered scheme must be contained in a document that is legally enforceable as between the members and the responsible entity.25 [page 217] 9.27 The constitution must among other things make adequate provision for the consideration to be paid to acquire an interest in the scheme and the powers of the responsible entity to deal with scheme property.26 9.28 The compliance plan must: … set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with this Act and the scheme’s constitution, including arrangements for: (a) ensuring that all scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme (see paragraph 601FC(1)(i); and …

(e) ensuring adequate records of the scheme operations are kept;27

II.G. Disclosure requirements 9.29 An interest in a registered scheme is a ‘financial product’ for the purposes of Ch 7 of the Corporations Act.28 The responsible entity is required to hold an Australian financial service licence under Pt 7.6 of the Corporations Act.29 9.30 Importantly, the offer of an interest in a registered scheme is subject to the disclosure requirements in Pt 7.9 of the Corporations Act. This ordinarily requires that an issuer of interests in a registered scheme prepare and give to prospective investors a PDS. 9.31 A PDS must be given in situations where an offer relating to the issue of a financial product is made, or where there is an issue of a financial product, in connection with a retail client, and in respect of offers and recommendations received in Australia or issues made in Australia. The PDS must be given at or before the time when the financial product is issued or offered.30 9.32 Investors are presumed to be retail clients31 unless it can be shown that: (a) the price for the provision of the interests or value of the interests exceeds $500,000;32 or

[page 218] (b) the interests are provided for use in connection with a business that is not a ‘small business’;33 or (c) the interests are not provided for use in connection with a business and the person acquiring the interests has provided certification from a qualified accountant within the preceding 6 months that they have certain net assets or gross income;34 or (d) the person is a ‘professional investor’.35

II.H. Policy rationales underlying financial product disclosure

9.33 The disclosure regime in Pt 7.9 of the Corporations Act, in so far as it relates to the offer of interests in registered schemes, has it origins in the earlier disclosure regime for ‘prescribed interest schemes’ in Pts 7.11 and 7.12 of the former Corporations Law, and the subsequent fundraising regime in Ch 6D of the Corporations Act introduced by the Corporate Law Economic Reform Program Act 1999 (Cth). 9.34 Those regimes were based on an investor protection philosophy. The investor protection philosophy also underpins the disclosure regime in Pt 7.9 of the Corporations Act. 9.35 The central theme underlying the regulatory framework is that of disclosure; in particular the principle that prospective investors are entitled to receive comprehensive and accurate information about an investment opportunity so that they may make an informed decision about whether or not to invest. 9.36 Persons seeking to raise funds are required to disclose all material information so that investors are properly informed and are able to assess the risks inherent in the investment that is offered. They are obliged to act with utmost candour and honesty. In short, the regulatory framework imposes a positive obligation to disclose information to investors. 9.37 As indicated by Kindersley VC in New Brunswick & Canada Railway & Land Co v Muggeridge (1860) 1 Drew & Sm 363; (1860) 62 ER 418: … those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as facts that which is not so, but to omit no one fact within their knowledge the existence of which might in any degree affect the nature or extent, or quality of the privileges and advantages which the prospectus holds out as inducements to take shares …36

[page 219]

9.38 In Directors of Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99, Lord Chelmsford LC held: It cannot be too frequently or too strongly impressed upon those who, having projected any undertaking, are desirous of obtaining the cooperation of persons who have no other information on the subject than that which they choose to convey, that the utmost candour and honesty ought to characterize their published statements.37

9.39 In Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566, Finkelstein J was required to determine whether an information memorandum made sufficient disclosure to potential investors of a management fee. His Honour stated that the relevant legal principles could be traced back to cases concerning the duties of promoters of companies and to those concerning company prospectuses issued to the public. His Honour cited with approval the two authorities referred to above. His Honour then considered the nature of the duty of candour and honesty in the context of offers to potential investors. The obligation of ‘utmost candour and honesty’ is not one that requires the promoter to disclose every aspect of the proposed dealing that is within his knowledge. That is to place too great a burden on the already onerous obligations of a fiduciary. The extent of the obligation is that the fiduciary must disclose material information. But what information is material? It is, I think, information that will influence a prospective participant in the venture to decide whether or not to become an actual participant: Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 at 837–8. The conclusion that equity will impose a positive duty requiring a fiduciary to act in the interests of another person by disclosing information to that other person, appears to be at odds with principle. It is widely accepted that fiduciary obligations are only proscriptive: Breen v Williams (1996) 186 CLR 71; 138 ALR 259; Pilmer v Duke Group Ltd (in liq) (2001) 180 ALR 249; 75 ALJR 1067. So, that which is often regarded as a fiduciary obligation of disclosure should not be seen as a positive duty resting on a fiduciary, but a means by which the fiduciary obtains the release or forgiveness of a negative duty; such as the duty to avoid a conflict of interest, or the duty not to make a secret profit: R Nolan ‘A Fiduciary Duty to Disclose’ (1997) 113 Law Quarterly Review 220 at 224. I do not propose to recast the nature of the fiduciary obligation here under consideration from a prescriptive obligation to disclose to, say, a proscriptive duty of loyalty or to avoid conflicts of interest. I accept that it might sometimes be necessary to be precise in the description of a fiduciary’s obligation. But the equitable obligation that is presently being discussed has been spoken of as a positive duty for well over 100 years: for example, Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at

[page 220] 1229. The law will not be seriously injured if I continue to adopt the same language.38

9.40 In Hurst v Vestcorp Ltd (1988) 12 NSWLR 394, Kirby P (as he then was) was required to consider whether a deed for the issue of interests in a prescribed interest scheme complied with the law. His Honour stated as follows: From the earliest times of legislative regulation of corporations, a distinction was drawn between the treatment of public and private companies. In the case of public companies two requirements were common, namely the disclosure to members of the investing public, by a statement called a prospectus, of the information deemed necessary for informed investment decisions to be made and the compliance with certain minimum standards by those raising funds from the investing public. These dual requirements of information and minimum standards have long been considered the minimal protections necessary for informed investment decisions to be made and investments effected with proper protection.39

9.41 The availability of information is central to ensuring that investors are able to make informed decisions.40 Disclosure of material information places investors in a position to make a more confident assessment about the investment opportunity and the risks involved with that opportunity.41 9.42 This is of course balanced against the fact that investment decisions have a degree of risk, and that disclosure does not eliminate risk. Rather, it is a process by which investors can manage their risk and make informed decisions about the appropriateness of an investment. Disclosure is not designed to stop retail investors taking investment risks, but to help them understand the risks involved in any particular investment or type of investment. This enables them to make an informed decision about whether the potential reward (the return on their investment) matches the level of risk involved, and whether they are prepared to take on that risk.42

9.43 A further policy rationale of the disclosure regime in Pt 7.9 of the Corporations Act is that of consumer protection; that is, appropriate protection and remedies for those who acquire financial products.

[page 221] 9.44 While Pt 7.9 of the Corporations Act borrows heavily from the former Ch 6D, it also introduces consumer protection philosophies through the notion of a ‘retail client’ in respect of which a greater degree of disclosure, than that previously required by Ch 6D, is required. There are requirements for the disclosure of significant risks associated with holding the financial product43 as well as any other information that might reasonably be expected to have a material influence on a reasonable person as a retail client whether to acquire the financial product.44 9.45 Further, the consumer protection philosophy underlying Ch 7 is clear from s 760A of the Corporations Act which provides that: The main object of this Chapter is to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

9.46 The investor protection and consumer protection philosophies in respect of the disclosure regime for interests in registered schemes were highlighted by Gray J in ASIC v West (2008) 100 SASR 496 when he noted specifically that product disclosure statements are ‘designed to facilitate informed investment decisions and investments effected with proper protection.’45

II.I. Defective PDSs 9.47 It is beyond the scope of this paper to deal in detail with the highly prescriptive content requirements for PDSs. However, it is relevant to note that Pt 7.9 of t he Corporations Act provides for a civil liability regime for ‘defective’ PDSs.46 9.48 Relevantly, a PDS is ‘defective’ if:

(a) it contains a misleading or deceptive statement; or (b) there is an omission from the PDS of certain mandatory information (to the extent that the information is actually known to the product issuer).47 9.49 The mandatory information that must be disclosed includes: [page 222] (a) information about any ‘significant risks’ associated with holding the product;48 (b) information about any other significant characteristics or features of the product or the rights, terms, conditions and obligations attaching to the product;49 and (c) any other information that might reasonably be expected to have a material influence on the decision of a reasonable retail client whether to acquire the product.50 9.50 In Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354, Judd J considered the expression ‘significant risk’ in the context of s 1013D(1)(c) and held that: The Act does not contain a definition of significant risk. That is understandable because the identification and nature of risks as significant will vary from product to product. The plaintiff’s characterisation of significant risk was a risk to which a reasonable investor would be likely to attach significance. The plaintiff submitted that the question should be framed as to whether an investor’s decision might reasonably [be] (sic) influenced by the information. He submitted that such an approach was consistent with Timbercorp’s own definition of materiality in its due diligence planning documents. As a generalisation, I am inclined to agree with the plaintiff’s formulation, so far as it goes, because of the relationship between what an investor would reasonably require, or not reasonably expect as the case may be, and the particular categories of information required to be included in the product disclosure statements … … plainly, the risks required to be disclosed must be real in the sense that there is a probability of occurrence and a consequence that is measurably significant. On the other hand, the bookends to the disclosure obligation, found in the prefatory words of s 1013D(1), require a consideration of the decision-making process by a retail client to acquire the financial product. Thus, the degree of probability of occurrence and the level of possible consequence are to be adjusted by reference to what a person would reasonably require to make a decision, and what would not be reasonable for such a person to expect to find in the product disclosure statement.51

9.51 In Woodcroft-Brown, the defendants submitted that s 1013E and s 1013D operated in such a way that s 1013D operated exclusively and covered the field in terms of the obligation to disclose risk, while section 1013E related to any other information that might have a material influence on the client. Judd J rejected this argument. His Honour held that: [page 223] …[sections] 1013D(1) and 1013E are complimentary in that 1013E is designed to enhance the disclosure obligation by approaching disclosure from a different perspective. The prefatory words in s 1013D(1) limit the information required to be given to such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to require the financial product. It seems tolerably clear that the requirement to include information about any significant risks associated with holding product, is intended to describe a category of information whose character and conduct is qualified by the prefatory words. Plainly, the information must be about any significant risks, but the description of a category of information should not be confused with the qualitative requirement. In my view, it is not appropriate to examine the concept of significant risks in a theoretical vacuum, divorced from the prefatory words. The prefatory words in s 1013D commenced by making the operation of the section subject to ss 1013C(2) and 1013F. These provisions further qualify or limit the information to be provided, and may inform the question of what is a significant risk. These qualifying provisions are replicated in s 1013E, which invites a different analysis to be undertaken when examining the scope of a disclosure obligation, in the absence of categories. Section 1013E directs attention to information that might reasonably be expected to have a material influence on the decision. The absence of categories and the refocus on material influence, reveals a legislative intention to inform the decision-making process. The identification of categories in s 1013D(1) should not be analysed as if a self-contained expression of any obligation to disclose risks. It is possible that information about a risk may not be properly characterised as significant, according to the defendants’ criteria, but nevertheless be information that might reasonably be expected to have a material influence on a decision. Thus, even where the issue is whether particular information about a risk should be disclosed, both provisions have scope to operate. They have different work to ensure that investors are given sufficient information. Just because it is unlikely that, where disclosure of risks are concerned, s 1013E will not add anything to the requirements of s 1013D(1)(c), does not in my view limit the scope of its potential operation.52

9.52 This finding is consistent with extrinsic materials that assist in the interpretation of ss 1013D and 1013E. In the Revised Explanatory Memorandum to the Financial Services Reform Bill 2001

(Cth), the fact that s 1013E has a role to play in the disclosure of information about risk is explained as follows: Often there are tensions between the desire to give consumers all the information they require to make a decision and the need to ensure that consumers can, and do, read and understand the information given to them. This debate is reflected in the range of existing point of sale disclosure requirements. At one end of the spectrum is the due diligence approach adopted in section 710 of the existing Corporations Act … At the other end

[page 224] of the spectrum is the Key Features Statement approach adopted in relation to superannuation reflected in a determination under section 153 of the SIS Act which requires disclosure under specific headings. The provisions adopt a mid-way approach between these two extremes requiring disclosure in a PDS against a specific list of items in so far as those items are relevant to the particular product being offered to aid comparability of products. Disclosure is also required of any other material information known to the product issuer and not required to be disclosed under a specific head which might reasonably influence a client’s decision to acquire the product to ensure as far as possible that consumers have all relevant information to assist their decision making. Unlike section 710 of the existing Corporations Act, this is not intended to require product issuers to undertake a due diligence exercise to discover all material information.53

9.53 Remedies available to investors for defective PDSs are considered in section V.A below.

II.J. Concerns with agribusiness disclosure — ASIC Regulatory Guide 232 9.54 In January 2012, in response to collapses in the agribusiness sector and in light of concerns over inadequate disclosure to investors, ASIC released Regulatory Guide 232 Agribusiness Managed Investment Schemes: Improving disclosure for retail investors (RG 232). RG 232 sets out a series of benchmarks and disclosure principles for improved disclosure to retail investors to better understand and assess agribusiness schemes, while maintaining the flexibility of the public fundraising process. 9.55 RG 232 is illuminating and is an ex post facto aid in

understanding ASIC’s earlier attitude to the disclosure requirements in Pt 7.9, particularly insofar as it applies to agribusiness disclosure. ASIC’s approach in issuing RG 232 was that the position expressed by the guide in relation to disclosure principles was already the existing law. That is, they were matters required to be disclosed under the existing ss 1013D to 1013E. In that regard, RG 232 clarified ASIC’s position on existing law.54 9.56 Of particular importance is the significance placed on disclosure of ‘track record.’ According to ASIC: Disclosure Principle 2: Track record of the responsible entity in operating agribusiness schemes

RG 232.85

The responsible entity of an agribusiness scheme should disclose the experience and resources it has available to operate the agribusiness scheme and the agribusiness enterprise. [page 225]

RG 232.86

Where the responsible entity has operated other agribusiness schemes, it should disclose:

(a) (b) (c) (d)

the number of agribusiness schemes it currently operates; the types of agribusiness scheme being operated; the period of time that it has been operating the agribusiness schemes; and whether any of the agribusiness schemes operated by the responsible entity have produced, or are producing, positive returns net of contributions for the investors in those agribusiness schemes. Explanation

RG 232.87

Investors need to know about the experience and ability of the responsible entity in operating agribusiness schemes and the results for investors (if any) to date because this information provides a guide to investors about the responsible entity’s experience and ability to operate agribusiness schemes. If a responsible entity has no past experience in operating agribusiness schemes, then this should also be disclosed.

Note: Responsible entities should be careful to ensure that statements about past performance are accompanied by a warning that this information should not be relied on as indicative of future performance.55

9.57 Consequently, according to ASIC, a responsible entity of an agricultural scheme is required to disclose a summary of the information about its track record in the first few pages of any PDS with cross-references to where further information can be found in the PDS. This will allow retail investors to compare the relative risk and return of investment in the agribusiness scheme.56

III. Rights arising from scheme documentation, limited liability, withdrawal rights and rights over scheme property III.A. Rights arising from scheme documentation 9.58 For the most part, the rights of investors in MISs arise from the framework documents — scheme constitution and compliance plan — and from any bilateral or multilateral agreements between investors, the responsible entity and any relevant third parties. These might include management agreements between investors and the responsible entity, and leases or licences between investors, the responsible entity and third parties. 9.59 The scheme constitution and compliance plan will provide for a range of often legislatively mandated rights and obligations. These will relate among other things to the issue of interests in the schemes, rights associated with those interests, rights of investors to call meetings and to vote at those meetings, duties of the responsible entity and its officers, approval [page 226] mechanisms for related party transactions, entitlement to remuneration for the proper performance of duties, and powers and procedures to wind up the scheme.

9.60 Investors do not have an automatic right to inspect scheme accounts and financial records unless that right is provided for in the scheme constitution. However, there is power for the court to order that a member be entitled to have access to the books of the scheme if the court is satisfied that an applicant is acting in good faith and that the inspection is for a proper purpose.57 9.61 The scheme constitution will also provide for powers of the responsible entity to enter into contracts and agreements on behalf of the scheme, and for the responsible entity to be able to apply trust property in discharging liabilities incurred in the operation of the scheme or have a right of indemnification from trust assets for liabilities incurred personally in the performance of its duties.58

III.B. Liability of members in insolvent schemes 9.62 Importantly, the legislative framework does not provide for limited liability for investors (members) in an MIS. Theoretically, it is possible that members may be held liable for outstanding liabilities of the scheme’s responsible entity where the scheme property is insufficient to meet those liabilities. This will depend on the structure of the particular scheme and the specific scheme documents entered into between members and the responsible entity. For example, member liability may arise under contract by reason of an obligation to pay ongoing fees or special levies raised by the responsible entity, or by obligation to indemnify the responsible entity where the scheme property is insufficient to do so. If trust principles apply, member liability may also arise by operation of the principle in Hardoon v Belilios [1901] AC 118 — whereby a trustee (responsible entity) has the right to be indemnified by beneficiaries (members), who are of full legal capacity and absolutely entitled, for liabilities properly incurred by the trustee, and this liability of beneficiaries is personal in that it extends to the personal property of the beneficiaries. 9.63 In practice, however, most scheme constitutions deal with the issue of personal liability of scheme members. It is usual and current commercial practice for scheme constitutions to expressly limit the

personal liability of members to any amount that remains unpaid in respect of the member’s subscription for interests in the scheme. It is also usual for scheme constitutions to expressly provide that members do not need to indemnify the responsible entity or creditors of the responsible entity against liabilities of the responsible entity incurred by it in the course of operating the scheme. Further, the limitation of liability is usually disclosed in the PDS (sometimes subject to a [page 227] condition indicating that the courts have not yet definitely determined the efficacy of this claim).59 9.64 Thus, liability of members if a scheme fails or is insolvent is usually limited to their initial investment and any ongoing management fees. One important exception is where members have borrowed to fund their investment in the scheme — which is often the case with schemes that are marketed as ‘tax effective’ and where interest on associated loans is deductible. In such cases, investors are often left to repay the loans in circumstances where their interests in the scheme are illiquid, locked in and valueless.

III.C. Rights to withdraw 9.65 The right of an investor to withdraw from a scheme is regulated by Pt 5C.6 of the Corporations Act and by the terms of the scheme constitution. Rights of withdrawal are more likely when the scheme is a pooled scheme rather than a common enterprise scheme. This is because common enterprise schemes usually involve complex management and/or lease agreements for fixed periods that may be difficult to terminate. 9.66 Part 5C.6 of the Corporations Act distinguishes between withdrawal rights from schemes that are liquid and illiquid. Scheme constitutions may allow a member to withdraw from a scheme that is liquid — where liquid assets account for 80% or more of the scheme

property.60 Liquid assets include money, bank bills, marketable securities and certain property. 9.67 However, there are restrictions on withdrawal rights from schemes that are illiquid. Responsible entities of illiquid schemes may allow withdrawal only to the extent that particular assets are available and able to be converted to money.61 Further, the responsible entity must cancel a withdrawal offer if it considers that it is in the best interests of members to do so.62 9.68 There have been many instances of responsible entities restricting and/or cancelling withdrawal rights particularly since the advent of the Global Financial Crisis (GFC). 9.69 In about February 2008, investment was suspended in the Centro Direct Property Fund. Investors were unable to redeem their interests. This had a flow-on effect upon a large number of associated or feeder property funds. The Fund was subsequently reopened in December 2011 following the restructuring of the Centro Property Group.63 [page 228] 9.70 In March 2009, the Queensland-based LM Mortgage Income Fund was closed to new investment. Redemption of interests in the Fund was suspended in October 2009. The Fund had been adversely affected by the GFC with estimated assets of $700 million in early 2008 shrinking to $320 million by December 2012. In March 2013, voluntary administrators were appointed to the responsible entity, LM Investment Management Ltd. In July 2013, the secured creditor, Deutsche Bank, appointed BDO as receivers and managers. In an application to the Supreme Court of Queensland, BDO has since been appointed receivers and managers of the Fund. They are required to wind up the Fund in accordance with the terms of its constitution.64 The receivers operate a website at which they post information about the winding up of the Fund. The latest report of the receivers is dated 31 January 2015 and provides a summary of the

process undertaken for the realisation of assets and the estimated return to investors (currently between 15 and 17 cents in the dollar).65 9.71 In summary, it is evident that schemes facing financial stress may limit or cancel the rights of members to withdraw their interests. This will lock investors into the scheme and is likely to have a significant impact on the value of the interests when or if redeemed.

III.D. Rights over scheme property 9.72 A further issue that arises, particularly in the case of common enterprise schemes, is the question of the rights of members to scheme property when a scheme faces financial hardship or is insolvent. A related question is whether those rights take priority over the rights of other stakeholders such as secured and unsecured creditors and landlords of leased premises upon which a scheme may be operating. 9.73 A preliminary issue is the identification and characterisation of an interest in a scheme. This is often difficult to determine with certainty. It will usually turn on consideration of the scheme constitution. However, the provisions of the Corporations Act, general law principles in respect of property rights and interests, trust law and consideration of contractual arrangements in other scheme documents may all be relevant in determining the nature and extent of a member’s interest in a scheme. 9.74 Section 9 of the Corporations Act includes a definition of a member’s interest as being a right to benefits produced by the scheme. Section 9 also includes a definition of scheme property (see section II.E of this chapter). 9.75 Section 1070A(1)(a) of the Corporations Act provides that a person’s interest in a registered scheme is personal property. [page 229]

9.76 Under general law, an interest in a unit trust holding scheme property gives rise to a proprietary interest in all the scheme property and, in particular, gives rise to a beneficial interest in scheme property to the extent of the amount of units held in proportion to the total number of units issued.66 This is distinct from the interest of a shareholder in relation to the assets of a company or the interest of an unsecured creditor in relation to the assets of a debtor company where no proprietary interest arises in the assets or undertaking of the company.67 9.77 However, the courts have cautioned that the correct characterisation of an interest in a scheme depends on the proper construction of the trust deed or constitution of the scheme. Further, a court may look not only to the express provisions in the trust deed or constitution but also on what effect the law will give to the instrument as a whole in the light of applicable legal principles.68 Importantly, the disclosure document issued to applicants for the purchase of interests in the scheme might also be of relevance to the court in determining the nature and extent of interests in the scheme.69 9.78 The characterisation of a member’s rights as enforceable proprietary rights in respect of scheme property assumes added importance when assessing the rights of scheme members against the rights of others such as creditors of the responsible entity.70 This is particularly relevant when a responsible entity becomes insolvent and there is a contest over rights to remaining assets. 9.79 In Capelli v Shepard (2010) 29 VR 242, the Victorian Court of Appeal was required to determine whether members had individual entitlements to trees in a forestry scheme or whether the trees were part of scheme property and therefore came under the control of the liquidator appointed to wind up the schemes. The Court of Appeal held that: … [the] scheme is more than its constitution. It is a broader concept defined by the scheme documents, the constitution, and the management agreements. In terms of the statutory definition, it includes the contributions which the growers have made and which are to be pooled and used to produce financial or proprietary benefits.71

[page 230] 9.80 The Court of Appeal preferred the broad definition of scheme property contained in the Act over the narrower definition of scheme property found in the constitution. 9.81 However, the Court of Appeal then identified a difficulty in determining that the trees themselves were scheme property. As the trees had been planted on leased land, at law they became part of the land. Accordingly: … the rights of the investors and, indeed, those of the scheme liquidator in respect of the trees, must accommodate the fact that, when planted, these rights were less than the rights of ownership.72

9.82 The Court of Appeal resolved this difficulty by holding that the scheme property did not include actual ownership of the trees but instead the bundle of rights with respect to the trees that arose under the various scheme agreements. The Court of Appeal also held that scheme property included the rights with respect to the leases over the land on which the trees were growing.73 9.83 It follows that those rights will depend upon the actual scheme documents themselves and will therefore differ from scheme to scheme. What is required is a close consideration of the actual rights and obligations that arise in relation to documents such as management agreements and documents creating the land interests. 9.84 A further issue arises with regard to scheme members obtaining fair compensation for their interests when an insolvent scheme is wound up. This is particularly problematic where the scheme is a common enterprise scheme and the enterprise is years away from completion — for example, in the case of timber plantations that have not yet reached maturity or horticultural schemes where the crops are not yet profitable. After Timbercorp failed in about April 2009, the liquidators of the RE, Timbercorp Securities Ltd (TSL), sought orders for the winding up of certain of its almond and olive MISs. Growers countered by applying for the appointment of a ‘temporary RE’.74 A stand-off ensued. A special purpose liquidator was appointed; but Robson J did not accept that

liquidator’s report because of factors that constrained the liquidator’s investigation into and evaluation of the growers’ rights. In October 2009, Robson J ‘froze’ the legal positions of growers and creditors with security over property on which the schemes were operated. Robson J’s ‘protocol’ became the norm for similar orders in respect of other Timbercorp schemes. In the end, something in the order of half a billion dollars was so frozen. A test case resulted in a finding that only growers with proprietary interests (i.e. with leases rather than licences and other contractual rights, e.g. in respect of water supply) were protected by Robson J’s orders (a point taken [page 231] confidently on appeal, but not resolved because of settlement of a number of related proceedings and the appeal); but more significantly a finding that, despite enthusiasm on the part of a potential replacement RE, there was no real prospect of growers procuring appointment of an RE to replace TSL because the schemes were not viable. Ultimately, all the apportionment proceedings arising out of the many ‘freezing’ orders including and following those of Robson J have been settled and the settlements approved — the last was an approval in respect of two grape and two citrus schemes by Dixon J on 19 May 2014.75 Growers received 5% of the total pool (which was reduced in the first place by the substantial legal costs of all parties); the balance has gone to the secured creditors. Many growers would have enjoyed the significant tax advantage afforded at the time of their initial investment; but they have received very little of the return they hoped to receive from the agribusiness operations. The banks have also lost significantly. It has been suggested in the media that, as a result of the concessions made to all the agribusiness MISs, the Commonwealth of Australia has foregone taxation revenue approximating $5 billion, while great tracts of agricultural land (of varying quality and purpose) have been acquired at ‘fire sale’ prices, often by overseas interests. 9.85 Finally, in a decision with serious consequences for members

of insolvent schemes, the High Court of Australia held in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers appointed) (in liq) (2013) 251 CLR 592 that liquidators appointed to a responsible entity of various forestry managed investment schemes could disclaim leases that had been granted to investors over land on which the scheme plantations were situated. Disclaimer of the leases under s 568(1) of the Corporations Act resulted in the investors losing their rights to maintain and harvest trees that had been planted on the leased property. This allowed the liquidators to sell the land free from the leases and the interests of the investors. Instead, the investors had a right to prove for their losses in the winding up of the responsible entity.76 That decision opens the door to further erosion of investor interests over scheme property. It undermines their proprietary interests in a scheme, and replaces those interests with less valuable rights to prove as unsecured creditors in the winding up.

IV. Right to appoint a new responsible entity 9.86 In some instances, a responsible entity may be insolvent but the scheme itself may remain financially sound. In such circumstances, the responsible entity is no longer able to operate the scheme. A replacement responsible entity may be required to continue to operate the scheme. There may also be [page 232] other reasons why members decide to remove an existing responsible entity and appoint a new responsible entity in its place. Members may become disillusioned with the management direction and decision making of the responsible entity. There may be questions over corporate governance, or related party transactions or remuneration. 9.87 Part 5C.2 Division 2 of the Corporations Act provides for procedures for replacing a responsible entity. Members may call a meeting under Pt 2G.4 Div 1 of the Corporations Act to consider and

vote on a resolution to remove the existing responsible entity and replace it with a new responsible entity. In the case of an unlisted MIS, an extraordinary resolution is required — that is, one passed by at least 50% of the total votes that may be cast by members entitled to vote on the resolution (including members who are not present in person or by proxy).77 The new responsible entity must consent in writing to be appointed. 9.88 In certain instances, ASIC or the scheme members may also apply to the court for the appointment of a temporary responsible entity to operate the scheme in an interim capacity.78 The court may appoint a temporary responsible entity if it is satisfied that the appointment is in the interests of members. However, the temporary appointment procedure has rarely been used in practice. 9.89 There are several practical limitations on the appointment of replacement and temporary responsible entities. The first is that there is often a shortage of appropriate and suitable entities willing to take on the role of replacement responsible entity. Coupled with this is the reality that there is often urgency in the need to find a replacement responsible entity, while a prospective replacement would ordinarily wish to conduct due diligence on the financial and compliance position of the scheme before accepting the appointment. 9.90 Secondly, the rights, obligations and liabilities of an outgoing responsible entity are transferred to the incoming responsible entity through a statutory novation process provided for by s 601FS of the Corporations Act (although certain rights including the right of indemnification for liabilities incurred before being replaced remains with the former responsible entity).79 The purpose of this provision is to ensure that the rights of creditors of the scheme are not affected where the responsible entity is replaced. 9.91 However, the practical effect is that a potential replacement responsible entity may have concerns that the indemnity rights that it will have against the assets of the scheme may be insufficient to cover the obligations and liabilities that it inherits. Further, there may be uncertainty over the rights and liabilities that remain with

the former responsible entity and those that pass to the replacement responsible entity. This was identified by the Court in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466: [page 233] The effect of [ss 601FS(2)(d)] is that the former responsible entity is discharged from its liability to a creditor unless it ‘could not have been indemnified out of the scheme property if it had remained the scheme’s responsible entity’. … the section appears to mean that the creditor will not know whether he should sue the former responsible entity or the new responsible entity for his debt, unless he can determine whether the former responsible entity is entitled to an indemnity. A court will not be able to determine which entity is liable for the debt without resolving the question whether it was properly incurred by the former responsible entity, and the new responsible entity has to make the same assessment.80

9.92 There is now a substantial body of authority considering instances of whether, on the appointment of a replacement responsible entity, particular property remains with the former responsible entity or is novated to the replacement responsible entity.81 This serves to illustrate that this is a fertile area of dispute often between receivers, liquidators and replacement responsible entities, the cost of which is likely to be borne in the end by scheme members.

V. Rights against scheme operators for misleading representations and inadequate disclosure V.A. Civil liability regime for defective PDSs 9.93 Section II.I above highlighted the obligation of a responsible entity to ensure that PDSs are free from misleading or deceptive statements and contain the disclosures mandated by Pt 7.9, including information about ‘significant risks’ in holding the interests and any other information that might reasonably be expected to have a material influence on the decision of a reasonable retail client

whether to acquire the product. A PDS that fails to comply is ‘defective’.82 9.94 Civil liability arises for certain persons who give a ‘defective’ PDS. Those persons are referred to as ‘liable persons’. 9.95 Relevantly, s 1022B(2) of the Corporations Act provides that if a person suffers loss or damage ‘because’ a disclosure document that they were given was ‘defective’, that person may recover the amount of the loss or damage by action against liable persons including: (a) each person involved in the preparation of the PDS who directly or indirectly caused it to be defective or contributed to it being defective; and [page 234] (b) the person by whom or on whose behalf a defective PDS was prepared, namely the responsible entity of a scheme. Knowledge of or intention to contravene is not required. In the case of a misleading or deceptive statement in the PDS, upon such a finding, the responsible entity is liable. In the case of an omission from the PDS of material required by s 1013C, once it is established that the responsible entity (by its officers, servants or agents) had knowledge, either directly or indirectly, of the omitted matters, it will be liable by reason of Corporations Act para 1022B(3)(b)(i). 9.96 The writers are unaware of any current authority dealing with the scope and extent of liability under s 1022(3)(b)(ii) of the Corporations Act. This was a matter that was in issue in the Great Southern Group Proceedings. However, the proceedings were settled prior to the scheduled date for delivery of judgment. Croft J has since published reasons for decision as an annexure to the decision approving the settlement.83 9.97 The language of s 1022B(2) is similar to that used in the Australian Consumer Law,84 which uses the formulation ‘suffers loss and damage because of’ the conduct of others in contravention,

rather than the expression ‘suffers loss and damage by conduct of’ which was previously used in s 82 of the TPA and is currently used in s 1325 of the Corporations Act and s 12GM of the ASIC Act. 9.98 Notwithstanding the difference, there is unlikely to be any real or practical distinction arising from the different wording. The principles relating to reliance and causation arising under these statutory regimes are likely to be the same. This was recently confirmed in Norcast S AR L v Bradken Ltd (No 2) (2013) 219 FCR 14 in which Gordon J helpfully considered and summarised the principles applying to reliance and causation in a case of misleading and deceptive conduct by both act and by omission.85 Her Honour stated: In order to recover damages, Norcast must establish that it suffered loss or damage ‘because of’ Bradken’s or Castle Harlan’s conduct in breach of s 18 of the ACL: s 236 of the ACL. The use of the words ‘because of’, as with the use of the word ‘by’ in s 82 of the TPA, should be understood to import the traditional notion of causation as a question of fact to be determined by reference to common sense and experience into which policy considerations and value judgments necessarily enter: Wardley

[page 235] Australia Limited v Western Australia (1992) 175 CLR 514; E & MH March v Stramare Pty Limited (1991) 171 CLR 506.86

9.99 Importantly, where a representation is made which is calculated to induce the investor to enter into the investment, and that person in fact enters into the investment, the courts are often prepared to infer that the investor was induced to do so by the representation. This is referred to as the principle in Gould v Vaggelas (1984) 157 CLR 215.87

V.B. Power to set aside ancillary documents – s 1022C 9.100 While s 1022B provides for a regime to compensate investors who have relied on a defective PDS, the Court also has power under s 1022C to make additional orders if it thinks that it is necessary to do justice between the parties. Such orders may include declaring void a

contract entered into by the investor for or relating to a financial product. 9.101 Section 1022C provides that: 1022C Additional powers of court to make orders (1) The court dealing with an action under subsection 1022B(2) may, in addition to awarding loss or damage under that subsection and if it thinks it necessary in order to do justice between the parties: (a) make an order declaring void a contract entered into by the client referred to in that subsection for or relating to a financial product or a financial service; and (b) if it makes an order under paragraph (a)—make such other order or orders as it thinks are necessary or desirable because of that order. (2) Without limiting paragraph (1)(b), the orders that may be made under that paragraph include (but are not limited to) an order for the return of money paid by a person, and/or an order for payment of an amount of interest specified in, or calculated in accordance with, the order.

9.102 The Revised Explanatory Memorandum to the Financial Services Reform Bill 2001 (Cth) provides, in respect of s 1022C, that: In addition to the power to being [sic] able to recover loss or damage under these provisions, proposed section 1022C also gives the court the power to make additional orders where it thinks these are necessary to do justice between the parties. These orders include declaring a contract void and any additional orders that are necessary or desirable because of that order. These additional orders can include but are not limited to an order for the return of money or payment of an amount of interest.88

[page 236] 9.103 There are several questions as to the scope of s 1022C particularly insofar as it may impact upon contractual rights and obligations to third parties. 9.104 A clear illustration of this arises with loan agreements entered into between an investor and lender that advances money for the investment in the scheme.89 Can those loan agreements be declared void under s 1022C? 9.105 The answer to this is unclear. It was the subject of debate in the Great Southern Group proceedings. In those cases, investors entered into a range of borrowing arrangements including with Great

Southern Finance (GSF) (which was part of the Great Southern Group) and with the Bendigo and Adelaide Bank (BAB) (and related entities) directly. Further, loans that had been entered into with GSF were assigned to BAB under a securitisation program. BAB paid GSF for those loans. 9.106 BAB argued among other things that the Court could not make orders under s 1022C to avoid the loan agreements that had been entered into with GSF and assigned to the BAB and loans that had been entered into directly with BAB. This was because it was not a ‘party’ to the action under s 1022B(2) — it was not involved in the preparation of the PDS — and therefore orders could not be made under s 1022C because it was not necessary in order to justice between the ‘parties’. Further, BAB argued that the loan deeds were not in respect of a financial product — as credit facilities were excluded from the definition of financial product in the Corporations Act. Therefore, they were not contracts that could be avoided. BAB also argued in the alternative that the setting aside of the loan deed was not in all the circumstances necessary to do justice between the parties. 9.107 On the jurisdictional point, the investors argued, among other things, that while an award of damages can only be made against a ‘liable person’ as provided for in s 1022B(2), an order declaring void a contract entered into by a client referred to in subs 1022B(2) is not so limited. The express words of s 1022C of the Corporations Act do not limit the application of subs (1)(a) to ‘liable persons’ within the meaning of s 1022B(3). The order that may be made is one declaring void a contract entered into by the ‘client’ referred to in subs 1022B(2) for or relating to a financial product or a financial service. If the type of order that might be made was to be limited to the ‘client’ and a ‘liable person’ within the meaning of subs 1022(3) of the Corporations Act, then the section might have expressly provided so. There is no such limitation in subs 1022C(1)(a) or in s 1022C more broadly. The court ought not read words into the provision, which would have a limiting effect, which are not there. This is particularly so where a purposive approach would suggest that

a broad and flexible interpretation is preferable so as to achieve the legislative objectives of investor and consumer protection. 9.108 The investors also argued that the term ‘necessary to do justice between the parties’ suggests principles of equity and fairness play a role in determining whether an order should be made under s 1022C. This may require the court [page 237] to balance the interests of parties with varying degrees of responsibility for wrongdoing (from no responsibility to complete responsibility) to achieve an outcome that is practically just in the circumstances. Further, and relevantly, determining what is practically just between the parties requires the court to have regard to the circumstances as a whole or the wider picture. It was relevant to consider the totality of events to ascertain what may be just between the parties. That is, in determining whether to grant relief from the loans, it is relevant and appropriate to consider the conduct of the responsible entity, GSF, the investors/borrowers and the BAB as a whole. It was not appropriate to view the position of the BAB devoid of, or excised from, the role played by and the effect of the actions of the responsible entity GSF on the investors/borrowers. 9.109 Further, it was argued that there is a restorative element or aspect to s 1022C. It recognises that justice between the parties may necessitate orders avoiding a contract, unwinding a transaction and returning money paid under that contract. It provides a statutory mechanism to give effect to the doctrine of restitutio in integrum or, if a return to the former position is not possible, for the court to order what is practically just between the parties to return them substantially to the former position. In a case of the giving of a misleading PDS, not only may a court award damages under s 1022B(2) but it may also, if necessary to do justice between the parties, make orders to restore an investor in the scheme to the position that the investor was in prior to applying for and being issued with interests in the scheme.90 It also allows the court to make

an order to restore the investor with respect to any associated loan arrangements, which are not financial products themselves91 but are contracts entered into by the investor ‘relating to’ the interests in the scheme or the offer of interests in the scheme. 9.110 Again, these were matters that were not ultimately decided due to the settlement of the Great Southern Group Proceedings prior to judgment. That said, Croft J has indicated that he would have construed s 1022C narrowly.92

V.C. Practical issues for investors in bringing claims for defective PDSs 9.111 There are already a number of practical difficulties for investors who bring claims for relief for defective PDSs. 9.112 These include but are not limited to: (a) An overly prescriptive, complex and poorly drafted liability regime in Pt 7.9 of the Corporations Act. The regime relies on and incorporates definitions [page 238] within definitions and exceptions within exceptions. It is difficult for lawyers to get their head around — let alone investors lacking in legal training. It is a prime illustration of confusing legislative drafting. Part of the problem arises from the fact that it seeks to apply a single liability regime to a range of disparate conduct arising in respect of financial product disclosure. It is no surprise that there is very little case law dealing with the liability regime — despite the fact that it has been in operation since 2003. This probably reflects the fact that disgruntled investors rarely use it. These criticisms are also reflected in recent authority on similar liability regimes. In particular, Rares J in the summary accompanying his judgment

in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In liq) (2012) 301 ALR 1 stated: The Councils also alleged that Grange had engaged in misleading and deceptive conduct contrary to what is now a plethora of pointlessly technical and befuddling statutory provisions scattered over many Acts in defined situations. The repealed, simple and comprehensive s 52 of the Trade Practices Act 1974 (Cth) that prohibited corporations engaging in misleading or deceptive conduct in trade or commerce has been done away with by a morass of dense, difficult to understand legislation. Those Acts, that now deal with misleading and deceptive conduct, apply differently depending on distinctions such as whether the alleged misleading conduct is in relation to ‘a financial product or a financial service’ (s 1041H(1) of the Corporations Act 2001 (Cth)) or ‘financial services’ (s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth)). Those apparently simple terms are nothing of the sort. A ‘financial product’ is defined in mind-boggling detail in 7 pages of small type in Div 3 of Pt 7.1 of the Corporations Act while a ‘financial service’ takes another 6 pages to be defined in Div 4 of Pt 7.1. The ASIC Act only takes about 4 pages to define ‘financial service’ in s 12BAB. Obviously, there are differences in what each of these Acts and definitions cover — but why? The cost to the community, business, the parties and their lawyers, and the time for courts to work out which law applies have no rational or legal justification. The Parliament should consider returning to a simple clear two line long universal norm of conduct, as was contained in s 52, if it considers that misleading and deceptive conduct in trade or commerce ought be prohibited.

(b) Following from this, there are a series of carve-outs from s 12DA of the ASIC Act in respect of conduct in relation to a disclosure document within the meaning of s 1022A of the Corporations Act. The effect of this is that where a disclosure document under Pt 7.9 is required, the more traditional misleading and deceptive conduct liability regime found in s 12DA of the ASIC Act does not apply. The reason for this is that the legislature intended to create a closed liability regime for defective PDSs. However, this gives rise to debate over what type of conduct is excluded and what is not. For example, are misrepresentations made in accompanying promotional [page 239] material excluded? Are misrepresentations made in respect of

(c)

(d)

(e)

(f)

associated loans excluded? Is there a lacuna between the differing liability regimes? There are also issues with respect to the conduct of proceedings on behalf of investors as class actions. This gives rise to both substantive issues and difficult procedural issues.93 A further issue arises in respect of claims against companies in liquidation. In some instances, the responsible entities and related lenders are in liquidation. Applications for leave to proceed are required. Leave has not always been granted. Problems often arise in respect of obtaining discovery from a company in liquidation particularly where there are no funds and no insurer required to fund the responsible entity. Courts are increasingly likely to limit discovery or impose very strict discovery regimes. This is a serious concern for investors who are unlikely to have much information at all about the circumstances in which representations came to be made in PDSs. They may become informed as a result of eventual publication of any investigations by ASIC or liquidators, but such disclosure cannot be relied upon and is likely to be too late to help borrowers under pressure from lenders linked to their failed managed investment products. A further issue arises in relation to the scope and management of proceedings particularly where claims are made against company officers and orders sought against related lenders. Ordinarily, the defendants make a series of cross-contribution claims. This adds further complexity to the proceedings. A further layer may exist where claims are made against financial advisers in negligence and for failure to act in the best interests of investors.94 Defendants may also make cross-claims against financial advisers. Finally, there are a number of issues in respect of the availability of insurance proceeds when claims are made under D&O policies for misleading PDS statements and breach of officers’ duties. One issue is the effect of s 6(1) Law Reform (Miscellaneous Provisions) Act 1946 (NSW) which relevantly provides that the ‘amount of the liability to pay damages … is to be a charge on all insurance

moneys that may become payable in respect of that liability.’ This raises the question of whether the section operates to create a charge on insurance proceeds in favour of a claimant to the exclusion of defence costs. The effect of s 6 was considered in Chubb Insurance Co of Australia Ltd v Moore (2013) 302 ALR 101, which arose in the context of Great Southern litigation. Plaintiffs in group proceedings in Victoria and proceedings in Western Australia put Great Southern’s insurers on notice that they would seek to apply s 6 to any compensation ordered. The insurers sought an urgent determination from the New South Wales Court of Appeal, which convened a five-judge bench that held (among other things) that s 6 only applied to claims brought in courts in [page 240] New South Wales. The Court held that there was not sufficient nexus to the Great Southern proceedings brought in courts in Victoria and Western Australia and therefore s 6 would not apply to create a charge over any proceeds ordered in those proceedings. However, the Court cautioned as to whether this was correct. It noted that it did not need to decide other questions in the application but did say that even if s 6 applied then the charge would not apply to insurance money payable for defence costs paid before judgment was entered.

VI. Conclusion 9.113 There is a complex legislative framework for the operation and regulation of MISs. An investor protection rationale underlies the framework. There are prescriptive requirements for responsible entitles to ensure that they operate and manage MISs in the best interests of their members. This includes making appropriate disclosure to investors when offering interests in the schemes. It also includes a liability regime that makes responsible entities and those who are involved in the preparation of PDSs liable when those

documents contain misleading statements or fail to disclose ‘significant risks’ and any other information that might reasonably be expected to have a material influence on the decision of an investor to apply for an interest in the scheme. 9.114 However, this chapter illustrates that the legislative framework provides only limited protection for investors particularly in failing or insolvent schemes. In such circumstances, investors compete with receivers and managers, liquidators, secured creditors, unsecured creditors and other interested parties. Their interests in the scheme property — particularly where they are locked in to illiquid schemes — may be eroded or subject to disclaimer and lost entirely. Their rights are often difficult to enforce. Investors often bear the brunt of the loss that arises when a scheme or its responsible entity fails or becomes insolvent. Perhaps the recitation of investor rights in the legislation does more harm than good — investors must nonetheless bear in mind that if an investment looks too good to be true, it almost certainly is. 1.

2. 3. 4. 5. 6.

7. 8. 9.

10.

11.

Australian Bureau of Statistics, Managed Funds, Australia, September 2014 (27 November 2014), Australian Bureau of Statistics

See definition of ‘managed investment scheme’ in s 9 of the Corporations Act. See definition of ‘interest’ in s 9 of the Corporations Act. See definition of ‘member’ in s 9 of the Corporations Act. See s 764A(1)(b)(i) of the Corporations Act; and see definition of ‘managed investment product’ in s 761A. See Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012) at p 27; P Hanrahan ‘ASIC and managed investments’ (2011) 29(5) Companies and Securities Law Journal 287 at 288. See n 6 above. Corporations and Markets Advisory Committee, Managed Investment Schemes (July, 2012) at p 24. See Australian Taxation Office, Product Ruling 1999/95, Income tax and fringe benefits tax: Products Ruling System (17 January 2007) Australian Taxation Office ; Carey v Field (2002) 122 FCR 538; [2002] FCA 1173. See http://www.agriculture.gov.au/forestry/policies/2020vision; see also M J Duffy, ‘Barely Managing? Troubles with Agricultural Managed Investment Schemes’ (2012) 27(1) Australian Journal of Corporate Law 91. Corporations Act s 601ED(1)–(2).

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

33. 34. 35. 36. 37. 38. 39. 40. 41.

42.

See definition of ‘registered scheme’ in Corporations Act s 9. Corporations Act s 601FA. Corporations Act s 601FB(1). Corporations Act s 601FB(2) and (3). Scheme property is dealt with further at length in chapter 8, section III of this book. Corporations Act s 601FC(2). See definition of ‘scheme property’ in Corporations Act s 9. See Note 1 to definition of ‘scheme property’ in Corporations Act s 9. See V Battaglia, ‘The liability of members of managed investment schemes in Australia: An unresolved issue’ (2009) 23(2) Australian Journal of Corporate Law 122. Corporations Act s 601FC(1)(i). Corporations Act s 286(1). See Corporations Act s 601EA(4)(a), Pt 5C.3. See Corporations Act Pt 5C.4. See Corporations Act s 601GB. See Corporations Act s 601GA(1). See Corporations Act s 601GA(1). See Corporations Act s 764A(1)(b)(i); see definition of ‘managed investment product’ in Corporations Act s 761A. Corporations Act ss 601FA and 911A. See Corporations Act s 1012B. See Corporations Act s 761G(9). See Corporations Act s 761G(7)(a). Also see r 7.1.19 of the Corporations Regulations 2001 (Cth), para (4)(a) of which provides that, in calculating the value of an investment based financial product, disregard any amount standing to the client’s credit in relation to the investment based financial product to the extent that it is to be paid or was paid out of money lent by the person offering the investment or any associate of that person. See Corporations Act s 761G(7)(b) and (12). See Corporations Act s 761G(7)(c). See Corporations Act s 761G(7)(d). New Brunswick & Canada Railway & Land Co v Muggeridge (1860) 1 Drew & Sm 363; (1860) 62 ER 418 at 381–2. Directors of Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99 at 113. Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566 at [31]–[33]. Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 at 402. Corporations Law Simplification Program, Fundraising, Trade Practices Act, s 52 and securities dealings (November 1995) at p 19. Corporate Law Economic Reform Program, ‘Fundraising, Capital raising initiatives to rebuild enterprise and employment’ (Research Paper No 2, Parliamentary Library, Treasury, 1997) at p 9. See Australian Securities and Investment Commission, Regulatory Guide 232: Agribusiness managed investment schemes: Improving disclosure for retail investors (2012) at [232.28].

43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.

64. 65. 66. 67. 68.

69. 70. 71. 72. 73. 74.

Corporations Act s 1013D(1)(c). Corporations Act s 1013E. ASIC v West (2008) 100 SASR 496; (2008) 66 ACSR 143; [2008] SASC 111 at [187]. See Corporations Act, Pt 7.9, div 7 sub-div B. Corporations Act s 1022A. Corporations Act s 1013D(1)(c). Corporations Act s 1013D(1)(j). Corporations Act s 1013E. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [262]–[263]. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [119]–[120]. Revised Explanatory Memorandum, Financial Services Reform Bill 2001 (Cth) at [14.19]– [14.20] (emphasis added). See above n 42 at paras RG 232.115–RG 232.117. See above n 42 at paras RG 232.85–RG 232.87. See above n 42 at para RG 232.15. See Corporations Act s 247A. See Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [43]; See also Corporations Act s 601GA(2). See Battaglia, above n 20, at 124. See Corporations Act s 601KA(4). See Corporations Act s 601KB. See Corporations Act s 601KE. As to the ultimate return to investors, see for example: http://www.clmr.unsw.edu.au/article/deterrence/public-v-private-enforcement/price-settlement-centro-class-action-and-divide-between-private-and-public-enforcement. See Bruce v LM Investment Management Ltd (2013) 94 ACSR 684; [2013] QSC 192. See http://www.lmfmif.com/wp-content/uploads/Receiver/Reports/2015-01-30-FMIF-Eighth-Report-to-Investors.pdf See Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 and Costa & Duppe Properties Pty Ltd v Duppe [1986] VR 90 at 95–6; see also Battaglia, above n 20. See AF & ME Pty Ltd v Aveling (Grosvenor Trust case) (1994) 14 ACSR 499 at 521 and GraHam Australia Pty Ltd v Perpetual Trustees WA Ltd [1989] 1 WAR 65 at 77–8. See CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98; (2005) 221 ALR 196; [2005] HCA 53 at [52]. See Mier v FN Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 at [35]–[36]. See Battaglia, above n 20. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at 270. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at 270. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at 271. See Corporations Act s 601FP, and particularly see Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510.

75.

76. 77. 78. 79. 80. 81.

82. 83. 84. 85.

86. 87. 88. 89. 90. 91.

92. 93. 94.

See in relation to Timbercorp: Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510; BOSI Security Services Ltd v ANZ Bank (2011) 84 ACSR 341; [2011] VSC 255 and Re Timbercorp Securities Ltd (Applications for the approval of compromises) [2012] VSC 590. The case is described and analysed at length in chapter 11 of this book. See Corporations Act s 601FM and the definition of ‘extraordinary resolution’ in s 9. See Corporations Act ss 601FN, 601FP. Section 601FS is discussed and critiqued in chapters 5 and 6 of this book. Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [15]. See e.g. Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; (2010) 79 ACSR 143; [2010] FCA 576; Primary RE Ltd v Great Southern Property Holdings Ltd [2011] VSC 242; Willmott Forests Ltd (recs and mgrs apptd) (in liq) v Primary Securities Ltd (2013) 96 ACSR 527; [2013] VSC 574; and Gunns Finance Ltd (in liq) v WA Blue Gum Ltd (2013) 281 FLR 121; [2013] VSC 365. See Corporations Act s 1022A. Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (Receivers and Managers Appointed) (in liq) [2014] VSC 516. See Australian Consumer Law (ACL) (Competition and Consumer Act 2010 (Cth), sch 2), s 236. Among other things, her Honour extensively considers and applies the principles of reliance and causation in cases of misleading and deceptive conduct both by act and by omission. Norcast S AR L v Bradken Ltd (No 2) (2013) 219 FCR 14; (2013) 302 ALR 486; [2013] FCA 235 at [326]. See also Lord Buddha Pty Ltd v Harpur [2013] VSCA 101 and, in the context of equitable estoppel, Sidhu v Van Dyke (2014) 251 CLR 505; (2014) 308 ALR 232; [2014] HCA 19. Revised Explanatory Memorandum, Financial Services Reform Bill 2001 (Cth) at para 14.204. Cf ACL s 278. (Being financial products within the meaning of s 764A(1)(b)(i) of the Corporations Act.) They are ‘credit facilities’ within the meaning of s 765A(1)(h)(i) of the Corporations Act and reg 7.1.06 of the Corporations Regulations 2001 (Cth); see also International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455; (2012) 292 ALR 233; [2012] HCA 45. See para 9.96 above. Issues regarding class actions in a managed investment scheme context are dealt with in chapter 10 of this book. See Corporations Act Pt 7.7A.

[page 241]

10 CLASS ACTIONS IN A MANAGED INVESTMENT SCHEME CONTEXT Norman O’Bryan SC and Catherine Pierce Norman O’Bryan AM SC is a senior counsel at the Victorian Bar, practising principally in commercial, investments and insolvency law. He has appeared in many class actions in various Australian courts during the past 20 years. Catherine Pierce is a member of the Victorian Bar. She practises in commercial and tax law. Catherine practised as a solicitor in Melbourne and Hong Kong prior to coming to the Bar.

I. Introduction 10.1 Claims relating to financial products and investments, including managed investment schemes, comprise a large proportion of the class actions commenced since the introduction 22 years ago of Pt IVA of the Federal Court of Australia Act 1976 (Cth).1 Part IVA (and its equivalent state legislation) enables class actions (or ‘representative proceedings’) to be brought where seven or more people share claims against the same person and where at least one substantial issue of law or fact is common to the claims. 10.2 In this chapter we consider class actions as a vehicle for the prosecution of the claims of members of managed investment schemes. A starting point for that consideration is chapter 9 of this book, in which Garry Bigmore QC and Simon Rubenstein contend

that investors in managed investment schemes derive little meaningful protection from the existing legislative framework. [page 242] 10.3 For the purposes of our discussion, we seek to identify some features of managed investment schemes and the civil liability regime that applies to them which are especially relevant in the class action context. 10.4 We take as case studies two recent class actions which arose out of the failure of forestry managed investment schemes, namely the Timbercorp and Willmott Forests schemes, and consider two discrete issues raised by those case studies. 10.5 First, we consider how, in the case of Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354, some of the features that we identify have proven critical to the assessment of investors’ reliance evidence and the disposition of their claims. Next we consider how, in light of the interlocutory decisions in Kelly v Willmott Forests Ltd (in liq) (2012) 300 ALR 675 and Madgwick v Kelly (2013) 212 FCR 1 concerning security for costs, some of those features might prove important to the constitution of the class both before and after a class action is commenced. 10.6 Questions which arise in the context of a managed investment scheme about the effect and content of a PDS would normally concern most investors, so as to warrant the pursuit of such claims by a class action. A test of the efficiency of the class action procedure used to pursue misleading representation claims arises at the point of having to prove each group member’s causation case on an individual basis, especially where reliance is an element of causation. 10.7 While an ‘open class’ may be preferable where claims arise from the failure of large managed investment schemes, special care must be taken when defining the class, including by identifying and then canvassing the attitudes of its members about collective funding

arrangements, in light of the decision of the Full Federal Court in Madgwick v Kelly.

II. Common features of managed investment schemes of significance in the class action context II.A. Commercial motivations 10.8 Managed investment schemes may take various legal structures: no particular legal structure is necessary in order to qualify a scheme as a managed investment scheme. For instance, members may contribute funds to a trust which holds real and/or other property, and the members’ interests take the form of units in the trust. By contrast, agricultural and forestry schemes commonly involve the acquisition of bundles of rights and interests relating to the management and cultivation of land owned by third parties. 10.9 One consequence of this is that the identity of all members of a scheme may not be (and need not be) ascertainable when a class action is commenced. (After all, a representative plaintiff may, though need not, sue for all persons who are known to or who might share his or her claim.) For instance, in the three class actions constituting the Willmott Forests litigation, there [page 243] were thought to be 3,191 potential group members, based on the number of people shown on registers of members as having acquired interests in the relevant managed investment schemes. Of those potential group members, the number who claimed to have suffered losses as a result of the respondents’ alleged wrongful conduct was unknown.2 10.10 Importantly in the class action context, despite the absence of a common legal structure characterising a managed investment

scheme, the purpose of such schemes is avowedly commercial. That is, managed investment schemes involve arrangements between investors and scheme operators structured to deliver, for instance, relief from taxation by deferring income or giving rise to deductible interest payments on loans procured to fund the investments. 10.11 The failure of managed investment schemes often leaves investors not merely deprived of expected returns but also exposed to obligations to repay loans procured in order to finance their investments. (For example, the majority of investments in the Timbercorp managed investment schemes were funded by a company within the Timbercorp group known as Timbercorp Finance. When the managed investment schemes collapsed, Timbercorp Finance was owed around $480 million in outstanding loans to investors). Those loans are usually sold to third-party financiers, making it difficult if not impossible to offset the debt obligations against any claims against the trustee or responsible entity of the scheme. In such cases, even where declarations are sought that group members are not liable for repayment of such loans, the readiness and ability of investors to contribute to the costs of running a class action is doubtful. 10.12 When describing the failed forestry plantation schemes the subject of the Willmott Forests class actions, Allsop CJ and Middleton J referred to their commercial aspect: ‘The schemes were attractive to investors interested in planning their taxation affairs. That is not said pejoratively, but rather with a view to characterising the group members.’3 Tax-related motivations for investing are common, particularly in agricultural MISs. 10.13 That characterisation of the group members was ultimately relevant to their Honours’ decision to require them to provide security for costs. This was the first time that the Federal Court had made an order for the payment of security for costs in an open class action. We discuss this aspect of the Willmott Forests litigation in Part IV of this chapter.

II.B. Applicability of the disclosure regime

10.14 An interest in a managed investment scheme is a ‘financial product’ within the meaning of Ch 7 of the Corporations Act. Consequently, an offer of an interest in a managed investment scheme is subject to the disclosure provisions of Pt 7.9 of the Corporations Act. [page 244] 10.15 Those disclosure provisions are the means of achieving what Parliament deemed to be the appropriate level of investor protection (by the provision of relevant information) required of the issuer of interests in a managed investment scheme when promoting a scheme to prospective investors. The legislative history of the disclosure regime was discussed by Judd J in Woodcroft-Brown: Prior to the Financial Services Reform Act 2002 (Cth), which introduced ss 1013D and 1013E, the type of disclosure document applicable to an interest in a managed investment scheme was, as with corporate securities, a prospectus. Following the Financial Services Reform Act, the traditional prospectus requirements continue to apply to corporate securities under Chapter 6 of the Corporations Act, but disclosure in respect of financial products, such as interests in managed investments schemes, became subject to the Product Disclosure Statement regime in Chapter 7. … Before the Financial Services Reform Act amended this section, it required, in the case of an offer to issue (or transfer) shares, debentures or interests in a managed investment scheme, that the disclosures include the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue (or issued) the shares, debentures or interests. Section 711 required certain specific disclosure. Those are a range of basic matters which are not presently relevant. But there is no express requirement that risks be disclosed. The only provisions that directed risk disclosure were those referable to profile statements and offer information statements, which applied to specific types of offers, not presently relevant. Until the Financial Services Reform Act, those general and specific requirements applied to interests in managed investments schemes. The Revised Explanatory Memorandum to the Financial Services Reform Bill 2001 set out an extensive explanation of the intentions and policy considerations guiding the new regime for disclosure in relation to financial products including interests in managed investment schemes: Content of Product Disclosure Statement 14.71 As noted above, a directed disclosure approach to point of sale disclosure is outlined in the provisions. That approach seeks to balance the need for the purchaser to have sufficient information to make an informed decision and

compare products against the concern that they may be provided with more information than they can comprehend. In doing so, it takes a middle ground between the full due diligence approach in the fundraising provisions of the Corporations Law and the Key Features Statement approach taken in relation to superannuation. That is, the provisions take a directed disclosure approach supplemented by other information known to the issuer or seller that might materially influence a retail client’s decision to acquire the product. …4

[page 245] 10.16 In class actions, as in any proceeding involving allegations of loss due to breaches of the disclosure provisions, it is usually argued by the defendant that, in order to make out a non-disclosure case, the plaintiff must show reliance on the non-disclosure when making the investment. In other words, reliance is said to be a criterion of causation. Grave, Adams and Betts contend that policy considerations support this view. The authors state: If the purpose of implementing the continuous disclosure regime was to assist people to evaluate their alternatives and encourage greater research by investors, dispensing with the need to prove reliance is a step away from these objectives.5

10.17 The need to establish individual reliance is not a bar to constituting a non-disclosure case as a class action, the threshold question for that purpose being whether there is a common question or questions appearing from the claims made by the applicant and group members. However, the logistical difficulties and expense involved in doing so are obvious. 10.18 In the next part of this chapter, we will discuss issues created by the dual requirements of commonality and proof of individual reliance in light of the decisions of the Supreme Court of Victoria at first instance and on appeal in Woodcroft-Brown.

III. The dual requirements of individual reliance and commonality: potential difficulties for class actions relating to failed managed investment schemes

10.19 In a non-disclosure or misrepresentation case, it is often contended that a plaintiff must prove his or her reliance on the nondisclosure or misleading representation such that it caused him or her to make the investment. On that premise, reliance must be proven on an individual basis. In King v AG Australia Holdings Ltd [2003] FCA 212 (often referred to as King v GIO), Moore J contemplated that the reliance cases of individual group members would each need to be tested. His Honour was asked to consider a proposal that he hear, at the trial, evidence from the applicant and a small ‘sample’ group of individual shareholders, and determine whether any respondent would be liable to all or any of them. His Honour said: It is for the Court to determine whether conduct is misleading and deceptive, assessed objectively: Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202. In certain circumstances evidence of people said to have been misled or deceived might be relevant to that determination though in other circumstances the matter can be determined without such evidence being led. This general issue was discussed by the High Court in Campomar Sociedad, Limitada v Nike International Limited (2000) 202 CLR 45 at [98] and following. In the present matter, the fact that the proceeding is a

[page 246] representative proceeding is significant. More than twenty thousand group members are represented by the solicitors appearing for the applicant and the entire group may be somewhere in the vicinity of fifty thousand. The proposal of the fifth respondent was made without any particulars concerning the manner in which the sample might be selected. The manner in which the sample was to be selected could have a critical bearing on the nature of the evidence given and, on the fifth respondent’s thesis, a potentially critical influence on the determination of the question of whether the impugned conduct was misleading or deceptive. Indeed it is not a large step to say that the import of the submissions of the fifth respondent (and other respondents who took a similar position) is that the proceeding should not be a representative proceeding. That is, whether the conduct of the respondents was misleading or deceptive would have to be determined by reference to its effect on each member of the representative group as well as the applicant. However, the proceeding is a representative proceeding, and it was not suggested that the Court is bound to hear evidence from individuals as part of determining whether the impugned conduct was misleading or deceptive. I am not aware of any authority which would indicate I am. The course I propose to follow is consistent with what I understand to be the scheme of Part IVA of the Act where, at least ordinarily, the Court would address common issues before moving to determine the claims of any particular individual including the representative

party. It is not correct to say, as counsel for some respondents submitted (whose submissions were adopted by the solicitor for the fifth respondent) that if the applicant cannot prove reliance and damage the whole of the proceeding must fail.6

10.20 In Woodcroft-Brown, a class action commenced pursuant to Pt 4A of the Supreme Court Act 1986 (Vic), the Supreme Court of Victoria heard reliance evidence from the named plaintiff, who represented people who between February 2007 and April 2009 had acquired an interest in a scheme of which Timbercorp was the responsible entity. The Court also heard evidence related to allegations of breach, causation and reliance from a Mr van Hoff, the representative of a sub-group of members who had also made investments in such schemes prior to February 2007. Both Mr Woodcroft-Brown and Mr van Hoff argued that had certain matters (or risks) been disclosed to them in the Timbercorp PDS they would not have invested in the schemes or borrowed money from Timbercorp Finance in order to fund their investments. 10.21 Once again the commercial context and tax-driven character of investments in managed investment schemes became of relevance to the assessment of group members’ claims. Justice Judd found: This case contains representations made in Product Disclosure Statements or information omitted from such documents, or information that was required to be given because of what was said in such a document. In such circumstances, the document should be read and considered as a whole.

[page 247] In Gardner [sic] v Agricultural and Rural Finance, Spigelman CJ expressed skepticism about ex post facto protestations of reliance on financial representations with an investment in a tax driven scheme. While each case must be assessed on its own facts the evidence advanced by the plaintiff and Mr van Hoff was such as to excite like skepticism.7

10.22 Spigelman CJ’s scepticism was forcefully expressed in his reasons for judgment in Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235, and so bears quoting. His Honour said: I find it almost impossible to accept ex post facto protestations of reliance on financial representations or of hypothetical responses to omissions in such a context, particularly with respect to specific details of an overall commercial assessment. The

hindsight bias of an investor who has made a loss in a tax driven scheme is such that disbelief rather than mere scepticism is generally the appropriate response.8

10.23 In P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 242 ALR 111, with reference to United States authorities, Finkelstein J explored the role of the efficient market hypothesis and the existence of a rebuttable presumption of reliance in ‘fraud-on-the-market’ cases: It seems the way the case will be put is based on the hypothesis (in some quarters an article of faith) that had the Corporations Act and ASX listing rules been complied with the market in Multiplex securities would have been open and efficient and the price of the securities would be determined on the basis that all material information regarding the company was publicly available. The consequence of this hypothesis is the premise that the market price of the securities would have been negatively affected if there had been proper and not misleading disclosure about the Wembley Stadium project. It may also be argued that there is a rebuttable presumption of reliance (if it is necessary to establish reliance) on the existence of an open and efficient market for Multiplex securities. In the United States this is referred to as the fraud-on-the-market theory. In Basic Inc v Levinson (1988) 485 US 224 the Supreme Court of the United States held that securities class action plaintiffs are entitled to a presumption of reliance that the market for the securities in question was efficient and that the plaintiffs traded in reliance on the integrity of the market price for those securities. The fraud-on-the-market presumption is rebuttable. The defendant bears the burden of establishing that the presumption should not apply. There are usually three ways a defendant can rebut the presumption. They are: (1) that the non-disclosures did not affect the market price; (2) that the plaintiffs would have purchased a stock at the same price had they known

[page 248] the information that was not disclosed; and (3) that the plaintiffs actually knew the information that was not disclosed to the market: Fine v American Solar King Corporation 919 F 2d 290 at 299 (5th cir, 1990).9

10.24 If Australian courts were to adopt indirect theories of causation, whether, for instance, based on the inflationary effect of allegedly wrongful conduct or a ‘fraud-on-the-market’ theory, the availability of a cause of action based on breach of s 674(2) of the Corporations Act (continuous disclosure obligations) may not depend on the plaintiff or any member of the group having had representations made specifically to them.

10.25 In prospectus cases, s 729(1) of the Corporations Act provides as follows: (1) A person who suffers loss or damage because an offer of securities under a disclosure document contravenes subsection 728(1) may recover the amount of the loss or damage from a person referred to in the following table if the loss or damage is one that the table makes the person liable for. This is so even if the person did not commit, and was not involved in, the contravention.

1

2

3

4

5

6

People liable on disclosure document These people… are liable for loss or damage caused by … the person making the offer any contravention of subsection 728(1) in relation to the disclosure document each director of the body any contravention of making the offer if the offer is subsection 728(1) in relation made by a body to the disclosure document a person named in the any contravention of disclosure document with subsection 728(1) in relation their consent as a proposed to the disclosure document director of the body whose securities are being offered an underwriter (but not a sub- any contravention of underwriter) to the issue or subsection 728(1) in relation sale named in the disclosure to the disclosure document document with their consent a person named in the the inclusion of the statement disclosure document with in the disclosure document their consent as having made a statement: (a) that is included in the disclosure document; or (b) on which a statement made in the disclosure document is based a person who contravenes, or that contravention is involved in the

contravention of, subsection 728(1) [page 249] 10.26 In relation to causation of loss or damage, s 729 is formulated in very broad terms. This is evident in the table extracted above, where it is repeatedly provided that the different categories of defendants will be liable for loss or damage ‘caused by any contravention of subsection 728(1) in relation to the disclosure document.’ The words ‘caused by’ are broad and general and mean what they say. They are not the same as, and they are not to be limited by, different expressions such as ‘relied upon’ or ‘read by’ or any other narrower causation test (as is often propounded by defendants). 10.27 For the purposes of a claim for damages brought for contravention of the analogous misleading or deceptive conduct statutes, such as s 42 of the Fair Trading Act 1987 (NSW), the High Court has stated that proof of reliance by the plaintiff on the impugned representation is not a necessary condition for legal causation of loss. In Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, Gummow, Hayne, Heydon and Kiefel JJ relevantly stated: Giles JA [below] was right to point out that reliance is not a substitute in the context of the Fair Trading Act for the essential question of causation. Moreover, it is also right to observe, as Giles JA said, that ‘[i]t may be artificial to speak of reliance in determining what action or inaction would have occurred if the true position had been known.’10

10.28 Giles JA, whose judgment in Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359 was expressly approved by the High Court in the passage quoted above, has reasoned in the same way on questions of causation in several misleading or deceptive conduct cases decided in the New South Wales Court of Appeal. For example, in his judgment in Smith v Noss [2006] NSWCA 37, Giles JA stated:

27 Secondly and more fundamentally, specific evidence of reliance is not essential for proof of causation. Such evidence may be one strand, perhaps an important one, in the factual skein, but causation may be found without it. So Wilson J said in Gould v Vaggelas (1985) 157 CLR 215 at 238 — ‘Where a plaintiff shows that a defendant has made false statements to him intending thereby to induce him to enter into a contract and those statements are of such a nature as would be likely to provide such inducement and the plaintiff did in fact enter into that contract and thereby suffered damage and nothing more appears, common sense would demand the conclusion that the false representations played at least some part in inducing the plaintiff to enter into the contract. However, it is open to the defendant to obstruct the drawing of that natural inference of fact by showing that there were other relevant circumstances. Examples commonly given of such circumstances are that the plaintiff not only actually knew the true facts but knew them to

[page 250] be the truth or that the plaintiff either by his words or conduct disavowed any reliance on the fraudulent representations. It is entirely accurate to speak of an onus resting on a defendant to draw attention to the presence of circumstances such as those I have described in order to show that the inference of the fact of inducement which would ordinarily be drawn from the fraudulent making of a false statement calculated to induce a person to enter into a contract followed by entry into that contract should not in all the circumstances be drawn. But it is no more than an evidentiary onus — an obligation to point to the existence of circumstances which tend to rebut the inference which would ordinarily be drawn from the primary facts. When all the facts are in, the fact-finding tribunal must determine whether or not it is satisfied on the balance of probabilities that the misrepresentations in question contributed to the plaintiff’s entry into the contract.’ 28 This was preceded by the much earlier statement by Lord Blackburn in Smith v Chadwick (1884) 9 App Cas 187 at 196–7 — ‘I do not think it is necessary, in order to prove this, that the plaintiff always should be called as a witness to swear that he acted upon the inducement. At the time when Pasley v Freeman was decided, and for many years afterwards, he could not be so called. I think that if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement. In Redgrave v Hurd the late Master of the Rolls is reported to have said it was an inference of law. If he really meant this he retracts it in his observations in the present case. I think it not possible to maintain that it is an inference of law. Its weight as evidence must greatly depend upon the degree to which the

action of the plaintiff was likely, and on the absence of all other grounds on which the plaintiff might act.’ See also Metalcorp Recyclers Pty Ltd v Metal Manufacturers [2003] NSWCA 213 at [50]–[52].11

10.29 In Metalcorp Recyclers, Handley JA, giving the judgment of the New South Wales Court of Appeal (Hodgson JA and Gzell J agreeing), reasoned along precisely the same lines as Giles JA in the passage quoted above, citing the same authorities. 10.30 In Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149, Perram J considered the issue of causation in the context of alleged breaches of the continuous disclosure provisions of the Corporations Act. [page 251] 10.31 The plaintiffs were persons who purchased shares in Babcock & Brown Limited (BBL) between 21 February 2008 and 13 March 2009. Those shares had first been quoted on the ASX in October 2004. Between 2004 and the middle of 2007 the shares steadily increased in value to $34.63 per share on 19 June 2007. On 21 February 2008, when the first of the plaintiffs acquired their shares in BBL, the shares were trading at $16.76. The BBL shares were last traded on 7 January 2009 at $0.33 when trading was suspended. 10.32 The shareholder plaintiffs sued BBL, alleging that it had failed to disclose important information to the market in breach of its obligations of continuous disclosure under the Corporations Act. 10.33 The plaintiffs claimed that BBL’s failure to disclose the information caused them to acquire the shares at an overvalue and so to be entitled, in accordance with the rule in Potts v Miller (1940) 64 CLR 282, to recover the difference between what they paid for the shares and what the shares were worth when they had acquired them. 10.34 Perram J noted a reference by counsel for the plaintiffs to the United States doctrine of fraud on the market, not to suggest that

it was to be applied in the case, but to show the plausibility of the outcome for which the plaintiffs contended. 10.35 Having found that the plaintiffs suffered no loss due to the alleged non-disclosures, and instead lost money because of the global financial crisis in 2008, there was no need for Perram J to consider the question of causation. Nonetheless, his Honour said that, had it been necessary for him to decide the question, he would have been inclined to agree with the plaintiffs. He stated his reasons for that as follows: (i) (ii) (iii)

(iv)

(v)

the relevant statutory questions appear in s 1317HA (‘the damage resulted from the contravention’) and s 1325 (‘loss or damage because of conduct’) of the Act; provisions of this kind import a notion of causation; whilst reliance is a sufficient condition for establishing causation it is not a necessary one. Cases involving diversion of customers from one trader to another caused by misleading conduct are one obvious example of this: Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 per Lockhart J; it is relevant to take into account the underlying context of the alleged infringement. Here s 674 requires disclosure of market sensitive information where it would be expected to affect price (and where the listing rules also require disclosure). The provision assumes the existence of a price effect on the market in general; a plaintiff may not recover where it knows of the misleading nature of the alleged conduct: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 at 661–662 [19]–[22] and 731–732 [612]– [619] (CA); Digi-Tech (Australia) Pty Ltd v Brand (2005) 62 IPR 184 at 212 [159] (CA). But those observations by the Court of Appeal do not preclude a case brought by a council against a ratings agency where the agency

[page 252]

(vi) (vii)

had communicated information to the financial services arm of a Council association about particular financial instruments and the council had then relied on what the financial services arm had said. The Full Court held that such a case could be maintained: ABN AMRO Bank AV v Bathurst Regional Council (2014) 309 ALR 445 at 727 [1376] (FC) (‘ABN AMRO’). See also Cahill v Kenna [2014] NSWSC 1763 at [264]–[265] per McDougall J; McBride v Christie’s Australia Pty Ltd [2014] NSWSC 1729 at [258]–[266] per Bergin CJ in Eq; Caason Investments Pty Ltd v Cao [2014] FCA 1410 at [87]–[92] per Farrell J. ABN AMRO establishes that, at least in principle, where A misleads B and B in consequence misleads C, C is not necessarily precluded from recovering from A; the facts on this case are different to those in ABN AMRO to this extent: here it

is alleged A misled the market (i.e. many B’s) which then bid up the price which then caused loss to C. This is not the same factual situation as arose in ABN AMRO but I do not think it relevantly differs; (viii) whilst I accept that generally a plaintiff must show in a misleading conduct case that they would have acted in a particular way but for the conduct (see, e.g., Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 559 (FC); Metalcorp Recyclers Pty Ltd v Metal Manufactures Ltd [2004] ATPR (Digest) 46–243 at [50] (CA)) it is artificial to speak of reliance in non-disclosure cases such as the present: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 351–352 [143].12

10.36 The following additional principles concerning the issue of causation can be distilled from the authorities. As the leading authorities concerned the former s 82 of the TPA, we will refer to that section, but the principles apply equally to the many statutory provisions that have adopted or adapted its wording: (a) For the purposes of the analogous TPA s 82(1) (which used the word ‘by’ as a causal connector) there must be a sufficient causal link between the respondent’s conduct and the loss or damage suffered ‘by’ that conduct.13 (b) The conduct complained of need be only one cause of the loss. It need not be the sole cause of loss; it is enough that it be a cause of the loss or damage sustained,14 provided that it has materially contributed to the loss.15 [page 253] (c) The defendant’s wrongdoing will be regarded in law as having ‘materially contributed’ to the loss or damage suffered, even if other factors or conditions played an even more significant role in producing the loss or damage. As long as the breach materially contributed to the loss, the causal connection will exist even though the breach without more would not have brought about the damage.16 (d) There is nothing in the language of the misleading or deceptive conduct provisions of the TPA or their legislative purpose to warrant the suggestion that the right of an applicant for damages under s 82 is confined to the case where he or she has relied

upon or personally been influenced by the conduct of the respondent which contravenes those provisions.17 (e) ‘By’ in s 82 of the TPA (the legislative equivalent of ‘because’ in s 729 of the Corporations Act) invokes the common law concept of causation without defining it, but that concept is not to be applied rigidly or without regard to the objects of the legislation.18 (f) The answer to a question of causation may differ according to the purpose for which the question is asked. It is doubtful whether there is any ‘common sense’ notion of causation which can provide a useful, still less universal, legal norm and there are, therefore, cases in which the answer to a question of causation will require examination of the purpose of a particular cause of action, or the nature and scope of the defendant’s obligation in the particular circumstances.19 10.37 Accordingly, in order to establish causation in prospectus liability proceedings, at trial the plaintiff need only establish that, on the balance of probabilities, any of the alleged contraventions by the defendant of Corporations Act ss 728 or 729 materially contributed to the loss. 10.38 There is no universal legal norm that applies to the issue of causation in these cases. It is a matter of applying the legislative policy of the cause of action under the Corporations Act s 729, taking into account the nature and scope of the defendants’ obligations in all of the factual circumstances. Questions of causation are quintessentially matters of fact which are to be determined at trial. 10.39 As we have noted, class actions must, as a threshold matter, disclose a substantial common issue arising from the claims of the representative plaintiff and the group members. An issue can be common even if the respondents intend to adduce different evidence from claim to claim in dealing with the whole of that issue.20 [page 254]

10.40 One would expect that, as in Woodcroft-Brown, the existence of underlying questions which might arise in the context of a managed investment scheme — for example, about the effect and content of a PDS — could amply justify the claims proceeding as a class action. However, Woodcroft-Brown also serves as a cautionary tale relating to the preparation of evidence of the representative plaintiff. 10.41 In Woodcroft-Brown, Judd J extracted identical passages from the witness statements of Mr Woodcroft-Brown and Mr van Hoff, which stood as their evidence-in-chief, and made adverse remarks regarding the credibility of that evidence.21 His Honour ultimately found that, contrary to their evidence in chief, Mr Woodcroft-Brown and Mr van Hoff had not relied on the PDS and that, in any event, the PDS did not breach the disclosure requirements of Ch 7 of the Corporations Act. 10.42 The Court of Appeal dismissed Mr Woodcroft-Brown’s appeal from the decision of Judd J. The Court of Appeal rejected as beyond the appellant’s pleaded case an argument based on indirect reliance, that is, of reliance by investors on their financial advisors, who could be presumed to have read and relied on the PDS when counseling investment in the schemes, although the Court did not suggest that such an argument was in itself problematic.22 10.43 In relation to the question of commonality, we also note the more recent decision of Edmonds J in another case concerning allegations of reliance by investors on misleading and deceptive representations: Meaden v Bell Potter Securities Ltd (No 2) (2012) 291 ALR 482. In that case, a stockbroking firm was sued by clients alleging misleading representations related to the valuation modelling by the firm and related forecasts as to the expected performance of listed biotech shares. The representations were allegedly made in written analyst reports and in statements made to clients by the firm’s employee stockbrokers. 10.44 Justice Edmonds ordered that the proceeding not continue as a class action. His Honour held that a trial of the issues raised by the individual claim of the applicant, Mrs Meaden (even including

issues then pleaded as to consequent behaviour of the market for the particular biotech shares) would not enable the determination of common questions: The entire theory of Pt IVA representative proceedings is that the trial of one representative action will determine for all group members the common question or questions. The efficacy of that process depends upon true commonality of issues. Any determination will ordinarily bind all group members, other than those opting out, see: s 33ZB(b). … [T]he fundamental problem with this case is that it is impossible to see how the trial of an action based on evidence from and concerning only Ms Meaden will

[page 255] determine any issue of sufficient significance to render it a process that has any real utility. There is such a lack of commonality that any determination of Ms Meaden’s claim would offer no real guide as to how the balance of the claims by the Claimants would be determined were they to proceed to be determined individually.23

10.45 The existence of underlying questions about the effect and content of representations contained in the analyst reports and similar oral representations common to the applicants’ claims was thus implicitly found by Edmonds J not to justify the claims continuing as a class action under Pt IVA of the Federal Court Act 1974 (Cth). 10.46 In his article written a decade after his judgment in King v GIO, Moore J observed that: [i]f a case did proceed to trial one would expect, as the law presently stands, that each shareholder would have to demonstrate that they relied on the conduct and the conduct caused loss. The difficulty in undertaking that task in a case such as King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) in which approximately 67,000 shareholders were potentially involved, is readily apparent. It is not a task that Australian courts have to date been required to manage.24

IV. Applications for security for costs in open class actions 10.47 The class actions commenced following the failure of the Willmott Forests managed investment schemes gave rise to what Murphy J described as a new problem in the Australian class action

jurisprudence, as it was the first time security for costs had been ordered in an open class action.25 The group members in the three related class actions were people who had acquired interests in the forestry schemes, and, in two of the class actions, people who had obtained loans to finance the acquisition of their interests in the schemes. 10.48 In Kelly v Willmott the respondents applied for security for costs in the amount of $6.58 million, being the sum of their recoverable party–party costs of the class action. 10.49 MacPherson & Kelley were solicitors for 409 group members, including the named plaintiffs. By MacPherson & Kelley’s calculation, those [page 256] 409 clients accounted for only 12.8% of those who had acquired interests in the schemes. 10.50 MacPherson & Kelley provided evidence of their calculations of the averages of the investments by their group member clients in the relevant schemes. They also provided evidence of a random sample that they had conducted of 50 known group members. The survey indicated that most of the known group members were unable to pay security in such amounts (about 80% of the known group members said that they were unable to afford to pay either $20,000 or $30,000 by way of security, and also said that they were unwilling to do so). About 65% of the known group members in the random sample indicated that they would not continue to participate in the class action if required to pay security in such amounts. 10.51 Murphy J held: The question is whether the arguable claims of the applicants and group members are likely to be stifled by an order for security. The fact that in a random survey about 80% of known group members said that they could not afford to pay security, and about 65% said they would no longer participate in the actions, is good evidence of this. As against this there is no evidence that the known group members of more substantial means are prepared to shoulder the burden of security …

The risk of stifling the proceedings requires careful consideration in the context of class actions. They are notoriously expensive both to conduct and defend. Most natural persons who bring a class action will be relevantly impecunious and there are very few Australian citizens that could afford to meet security for costs in the amounts involved. Care must be taken in these circumstances to ensure that this does not unfairly deprive people of their fundamental right of access to the courts through the Part IVA mechanism.26

10.52 While acknowledging that he was bound to follow the decision of the Full Federal Court in Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317, Murphy J noted the difficulty to which the decision gave rise: that in practice it eroded the immunity from costs exposure afforded to group members by s 43(1A) of the Federal Court Act.27 That section expresses the general rule that the court may not make costs orders against group members in a Pt IVA proceeding. 10.53 Justice Murphy proceeded to dismiss the respondents’ applications for security for costs. That decision was appealed to the Full Court of the Federal Court, constituted by Allsop CJ and Middleton J (in the majority) and Jessup J. 10.54 Allsop CJ and Middleton J referred to the decision in Bray, holding that it stood as authority for the propositions that s 43(1A) of the Federal Court [page 257] Act does not, as a matter of policy, stand in the way of applications for security for costs in representative proceedings; that the financial circumstances of the group are relevant to such applications; and that the named plaintiff bears the onus of proving that an order for security would stultify the litigation. Their Honours accepted the defendants’ submission that, in taking the view he did about the practical erosion of a group member’s immunity from security for costs orders, Murphy J’s approach was inconsistent with Bray.28 10.55 Allsop CJ and Middleton J also held that by confining himself to evidence about existing funding arrangements, without requiring additional evidence from the plaintiffs as to the financial position of known and unknown group members and their

preparedness to contribute funds by way of security for costs, Murphy J could not be satisfied that the litigation would be stultified. In other words, the onus on the plaintiffs of proving stultification had been reversed.29 10.56 Their Honours went on to describe the kind of evaluation necessary in an application for security for costs in a class action context, entailing both care not to undermine the availability of the procedure of Pt IVA that was intended by Parliament to provide broad access to justice for the common aspects of multiple claims, and care to manage the risk of impecunious applicants being the only source of financial solace should a respondent be successful. In this context, their Honours revisited their earlier characterisation of the investors as commercial actors, observing: Here, as we have already said, the applicants and group members entered commercial transactions for their own reasons. They had sufficient assets or income to warrant the decision to enter the arrangements and receive the hoped for commercial and fiscal advantages. The commercial or other advantages of the investments have not materialised. The applicants on behalf of themselves and the group members wish to engage in commercial litigation to repair the position they find themselves in. Some of those group members are persons of significant means. Some invested a lot; some invested little. All made a choice of a commercial character to enter arrangements to advance their asset or income position. It seems entirely fair that those standing to benefit from such litigation make a real, but not oppressive, contribution to a fund to secure the costs of the respondents. The most obviously fair and appropriate approach would be rateable by reference to the investments. There would be a need, in setting the amount, not to risk stifling the action. Given, however, the nature of the underlying

[page 258] claims and proved ability of at least a not insignificant number of group members to contribute, an order for some security is appropriate.30

10.57 The Full Court remitted the matter to Murphy J, as the docket judge, to determine the quantum, form and terms of the security to be provided. 10.58 At the first hearing of the remitted application in July 2013, the applicants sought leave to implement a regime enabling them to request a contribution pro rata from all group members to a pool of

funds. From the starting point that security in the amount sought should be ordered, Murphy J nonetheless permitted the applicants to request those contributions. His Honour noted that this approach would have the benefit of addressing the likely unfairness that would result if only a small proportion of the group members were called upon to contribute funds by way of security.31 10.59 On 14 February 2014, Murphy J made an order for payment of security for costs in the amount of $1.73 million, being the amount that a subset of the group members had agreed to provide.32 His Honour took the view that to order security in the amount sought ($6.58 million) would work injustice on the group members who had agreed to contribute to the pool of funds and on those who had established that they were either unable or reasonably unwilling to contribute security. His Honour observed: If the respondents’ approach is correct the disinterest of the bulk of the unknown group members will operate to curtail the rights of the other group members.33

10.60 After citing two very significant, early Australian class actions characterised by disinterest on the part of large numbers of group members — Bray and King v GIO — his Honour added: If security for costs must be assessed by reference to the failure of unidentified group members to respond, then it will be very difficult, perhaps impossible, for an applicant to avoid the action being stayed. As the applicants contend, such an approach sets the bar too high. It is important to remember that these disinterested group members are not parties and are not required to take any step, and cannot be ordered to provide security except in special circumstances: see Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1 at [6], [50] and [192]; s 43(1A) of the FCA.34

10.61 Murphy J described a possible solution to the new problem he identified in Australian class action jurisprudence. In order to balance a [page 259] desire to receive some security for costs against the risk of stultification of proceedings, his Honour envisaged a ‘winnowing’ of the class as a precursor to making orders for its closure. The

winnowing process would reduce the class so as to remove group members who had refused to respond to requests for security or information and group members who had not either made a real but not oppressive contribution to security or demonstrated their inability or reasonable unwillingness to make any contribution. 10.62 Orders of the kind contemplated by Murphy J, setting a deadline by which as yet unidentified group members must come forward and show willingness to contribute to some extent, are, as his Honour noted, different from the opt-out procedure, which sets the deadline for group members to remove themselves from the proceeding.35 10.63 In King v GIO, amendments to the group definition were ordered to facilitate possible settlements, by enabling a respondent to estimate its total potential exposure.36 Justice Moore, who made that order, wrote about it extra-curially in an article entitled ‘Ten Years Since King v GIO’: In June 2003, the applicant (supported by GIO) applied for orders intended to crystallise the number of shareholders who wished to continue to participate in the proceedings by asserting a claim of the type alleged by the applicant (on behalf of each member of the representative group) at the commencement of the proceeding and to whom GIO (and other respondents) might be liable. The orders had the effect of redefining the representative group. I made those orders on 19 June 2003. I did so because a point had been reached where I thought it was appropriate and fair to attempt to identify with precision the shareholders (and their identity) on whose behalf the proceedings were being maintained in substance and not merely in form.37

10.64 In the context of Pt 4A of the Supreme Court Act 1986 (Vic), J Forrest J considered class closure by registration in Matthews v SPI Electricity Pty Ltd (Ruling No 13) [2013] VSC 17. His Honour extracted principles regarding class closure orders, which would enable courts to give effect to the kind of ‘winnowing’ contemplated by Murphy J, including that: It is within the Court’s power to order class closure in the sense that a member of the class must take a positive step such as identifying himself or herself after receiving notice of class closure. It is also within the Court’s power to terminate the entitlement to compensation of any group member

[page 260]

who does not come forward and indicate a willingness to participate in a distribution (putative or real) — pursuant to either a settlement or judgment. One of the fundamental bases for the class action provisions is achieving finality not only for the group members but also for the defendants to the proceeding. It may be appropriate, to make orders for class closure prior to a settlement or judgment. Such a course may be warranted, notwithstanding that there is no prospective settlement but on the material available it is considered to be in the interests of the class as a whole to require such a step to be taken. Relevant considerations include: (i) the point at which the case has reached; (ii) the attitude of the parties to such a step; and (iii) the complexity and likely duration of the case.38

10.65 The authors of the LexisNexis Butterworths commentary on Pt IVA of the Federal Court Act describe the question of what criteria might be adopted to confine a group as one of critical importance, especially where the litigation is likely to be so expensive that a collective funding arrangement is necessary in order to sustain it. They say: By confining the group the need for expensive advertising can be eliminated or reduced; instructions can be more easily obtained, especially for the purposes of estimating the total claim value for the purposes of settlement discussions or insurance provision; and costs of distributing any recovered sums can be reduced … Some benefits, however, cannot be achieved by merely passive group definitions. Even after the passive criteria have confined the claim group, the particular litigation might involve such expense that no representative plaintiff is prepared to bear the costs on its own. If some kind of collective funding arrangement is required — whether in the form of contribution agreements between group members, concessional arrangements from the legal representatives or third party litigation funding — then it becomes critical that the group be able to be confined to those persons who commit to the collective funding arrangement. If a person is entitled to be a group member whether they commit to sharing the costs of the litigation or not then the problem of the ‘free rider’ arises: see P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 25 ACLC 1192 …39

10.66 Litigation funder IMF has described the economic benefits of closed classes as follows: … in order for funding to be made available on an equitable basis, the funders’ outlays and fees must be spread across all members of the represented group. Accordingly, funding is likely to be made available

[page 261]

only when each person seeking to litigate has agreed contractually with the funder to pay the costs of the funding (including the funder’s fees) from the sums recovered. This highlights the free rider issue which, if left unaddressed, will diminish the willingness of class members to agree to share in the cost of the proceeding and limit the capital available to fund litigation.40

10.67 In his article about the King v GIO class action, Moore J observed that in more recent times there has been a greater focus on limiting the group at the beginning rather than at the end of proceedings, and speculated that this trend might be partly attributable to the greater involvement of litigation funders.41 There is reason to suppose that, in the context of unfunded open class actions concerning managed investment schemes, in which group members may be presumed in the commercial context of their investments to have the means to make some contribution to the costs, the ‘winnowing’ process will also commence at an relatively early stage, including as a measure of pre-emption of applications for security for costs.

V. Conclusion 10.68 Where questions arise about the effect and content of disclosure documents in relation to any given managed investment scheme, those questions will normally concern most investors in the scheme. For that reason, class actions (with their capacity to allow for the binding resolution of common issues without the need to join or even to identify all claimants) are an appropriate vehicle for the prosecution of investors’ claims. 10.69 Some recent cases illustrate the emergence of difficulties in running class actions in a managed investments context. 10.70 In light of the recent decisions arising out of the failure of the Timbercorp and Willmott Forests managed investment schemes, careful consideration must be given to the constitution of an open class, given the precedent created by the Full Court’s decision in Madgwick v Kelly. That case illustrates the potential complications arising from requests for security for costs of such actions where the class is open. It also highlights the relevance to such applications of

common financial features of, and motivations for, managed investment schemes. 10.71 Further, in the assessment and preparation of evidence of reliance in non-disclosure and misleading representation cases, remarks made in recent decisions such as Woodcroft-Brown about the nature of and usual commercial motivations underlying managed investment schemes should be borne in mind. Careful consideration should also be given to the question of how [page 262] individual reliance by or on behalf of each member might be proved to the extent necessary to establish causation pursuant to the relevant statutory test. 10.72 Data from recent years about new class actions filed in relation to financial products suggest that considerations of security for costs and the onus of proving reliance in cases arising from managed investment schemes are not a disincentive to litigants wishing to avail themselves of the representative procedures.42 That suggestion supports our conclusion that class actions remain the most efficient available means of pursuing claims on behalf of a large, possibly indeterminate, number of managed investment scheme participants. 1.

2. 3. 4. 5. 6. 7.

See, for example, the first and second reports of Professor Vincent Morabito entitled ‘An Empirical Study of Australia’s Class Action Regime’ cited in D Grave, K Adams and J Betts, Class Actions in Australia, 2nd ed, Thomson Reuters, NSW Pyrmont, 2012 at para 19.300; King & Wood Mallesons, The Review: Class Actions in Australia 2013/2014, 2014. Kelly v Willmott Forests Ltd (in liq) (No 2) [2013] FCA 732 at [4]. Madgwick v Kelly (2013) 212 FCR 1; (2013) 299 ALR 188; [2013] FCAFC 61 at [3]. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [121]–[124] (emphasis in original). Grave, Adams and Betts, above n 1 at para 19.700. King v AG Australia Holdings Ltd [2003] FCA 212 at [7]–[9] (emphasis added). Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [566]–[567].

8. 9. 10. 11. 12. 13.

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

26. 27. 28. 29.

30. 31. 32. 33. 34. 35.

Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235 at [140]. P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 242 ALR 111; [2007] FCA 1061 at [10]– [11]. Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; (2009) 257 ALR 610; (2009) 73 ACSR 1; [2009] HCA 25 at [143] (emphasis in original). Smith v Noss [2006] NSWCA 37 at [27]–[28]. Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149 at [219] (emphasis added). Brown v Jam Factory Pty Ltd (1981) 35 ALR 79 at 350–1; Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410; (1987) 75 ALR 271 at 418. I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; (2002) 192 ALR 1; [2002] HCA 41 at [57], [62]. Henville v Walker (2001) 206 CLR 459; (2001) 182 ALR 37; [2001] HCA 52. Henville v Walker (2001) 206 CLR 459; (2001) 182 ALR 37; [2001] HCA 52 at [106]. Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526; (1992) 109 ALR 638 at 529; Kabwand Pty Ltd v National Australia Bank Ltd (1989) ASC 55-718 at 50,378. Henville v Walker (2001) 206 CLR 459; (2001) 182 ALR 37; [2001] HCA 52. Travel Compensation Fund v Tambree (2005) 224 CLR 627; (2005) 222 ALR 263; [2005] HCA 69 at [45] (Gummow and Hayne JJ). Bright v Femcare Ltd (2002) 195 ALR 574; [2002] FCAFC 243. Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [569]–[571]. Woodcroft-Brown v Timbercorp Securities Ltd (in liqIn Liquidation) (2013) 96 ACSR 307; [2013] VSCA 284 at [85]. Meaden v Bell Potter Securities Ltd (No 2) (2012) 291 ALR 482; [2012] FCA 418 at [65]. M Moore, ‘Ten Years Since King v GIO’ (2009) 32(3) University of New South Wales Law Review 883 at 887. Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [91]. Subsequently, SPI Electricity Pty Ltd, a defendant to the Kilmore East Bushfire class action, unsuccessfully applied for security for costs against both the named plaintiff and her insurers: Matthews v SPI Electricity Pty Ltd (No 9) [2013] VSC 671. Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [128]–[129] (emphasis added). Kelly v Willmott Forests Ltd (in liq) (2012) 300 ALR 675; [2012] FCA 1446 at [81]. Madgwick v Kelly (2013) 212 FCR 1; (2013) 299 ALR 188; [2013] FCAFC 61 at [70]–[71]. Madgwick v Kelly (2013) 212 FCR 1; (2013) 299 ALR 188; [2013] FCAFC 61 at [76]–[78]. See also the discussion by Allsop CJ and Middleton J at [77], and the discussion of this point by Jessup J at [150] regarding the desirability of evidence concerning attempts made to secure litigation funding. Madgwick v Kelly (2013) 212 FCR 1; (2013) 299 ALR 188; [2013] FCAFC 61 at [98]–[99]. Kelly v Willmott Forests Ltd (in liq) (No 2) [2013] FCA 732 at [29]. Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78. Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [88]. Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [90]. See Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [93]. The court retains

36. 37. 38. 39. 40. 41. 42.

broad discretion under s 33ZF of the Federal Court Act to make ‘appropriate orders’ including orders closing a class: McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1; (1998) 156 ALR 257. King v AG Australia Holdings Ltd [2002] FCA 1560 at [23] (Moore J). M Moore, ‘Ten Years Since King v GIO’ (2009) University of New South Wales Law Review 32(3) 883 at 891. Matthews v SPI Electricity and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 13) [2013] VSC 17 at [79(d)–(e)]. LexisNexis Butterworths, Practice & Procedure High Court & Federal Court of Australia at para 34,820.51. IMF (Australia) Limited, Submission No 8 to Victorian Law Reform Commission, Civil Justice Review, 26 July 2007, p 10. Above n 37 at p 895. King & Wood Mallesons, The Review: Class Actions in Australia 2013/2014, 2014, at p 6.

[page 263]

11 DISCLAIMER AND RELATED ISSUES Philip Crutchfield QC and Christina Klemis Philip Crutchfield QC is a barrister at the Victorian Bar. He is the President of the Commercial Bar Association of Victoria. Philip was the author of the first two editions of Annotated Corporate Voluntary Administration Law (which is now a looseleaf service entitled Crutchfield’s Voluntary Administration and authored by Colin Anderson and David Morrison) and has published articles in various professional journals. He is a past reporter for the Commonwealth Law Reports, and is on the Editorial Committee for the Federal Court of Australia Case Management Handbook. He has taught company law and insolvency and reconstruction law in the University of Melbourne Law School at both undergraduate and graduate level. Christina Klemis is a barrister admitted to the Victorian Bar. In addition to an LLB (Monash), she holds an LLM, BCom (Economics) and BA from the University of Melbourne. Prior to joining the Bar, she worked as a Senior Lawyer at the Australian Securities and Investments Commission, during which time she was engaged on high profile scheme-related matters. Since joining the Bar in 2013, she has continued to practise in insolvency and commercial law.

11.1 Division 7A of Pt 5.6 of the Corporations Act is headed ‘Disclaimer of onerous property’. It contains a regime for the disclaimer of certain property. Section 568(1) confers upon a liquidator of a company power to ‘disclaim property of the company that consists of’ the various species of property itemised in subparas (a)–(f). 11.2 Those species of property include land burdened with onerous covenants, shares, property that is unsaleable or is not readily saleable, property that may give rise to a liability to pay

money or some other onerous obligation, and property realisable for less than the expense of realisation. The last species of property in subpara (f) is ‘a contract’. [page 264] 11.3 In 1993, property that could be disclaimed by a liquidator was expanded from an ‘unprofitable contract’ to a ‘contract’. However, unless the contract is an unprofitable contract (being a traditional category of onerous property) or a ‘lease of land’, disclaimer of the contract required (and still requires) leave of the court: s 568(1)(f) and s 568(1A). 11.4 While traditionally, div 7A of Pt 5.6 of the Corporations Act has been considered a regime for the disclaimer of onerous property (as the heading to the division suggests), the decision of Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592 illustrates that the liquidator’s power to disclaim is not confined to ‘onerous property’. While a liquidator’s power to disclaim contracts other than unprofitable contracts remains subject to the leave of the Court, following Willmott, it is possible that a liquidator can now, without leave of the Court, disclaim a lease, irrespective of whether the company is the lessor or lessee, and irrespective of whether the lease itself is onerous or otherwise unprofitable. The exercise of the disclaimer remains subject to the Court’s discretion to set aside the disclaimer on the application of a person with an interest in the disclaimed property: Corporations Act ss 568B and 568E. 11.5 Part I of this chapter traces the legislative departure from ‘onerous property’. Part II considers three questions not considered in Willmott: When does a liquidator require leave to disclaim property? What considerations will inform the decision whether to grant leave? And in what circumstances will a Court set aside a liquidator’s disclaimer? 11.6 This chapter concludes that, following Willmott, a ‘lease of

land’ in s 568(1A) of the Corporations Act is not confined to leases where the company is the tenant. As a result, a potential anomaly arises. A liquidator requires leave to disclaim any contract that is not unprofitable, but can without leave disclaim a lease of land irrespective of whether the contract is unprofitable. There seems to be no logical reason why Parliament would have intended to afford less protection to a party who stands to lose a proprietary right than a party that stands to lose a mere contractual right. Consequently, amendment may be necessary to cure the anomaly.

I. Background to the disclaimer provisions 11.7 Legislative provisions, similar to the current provisions for disclaimer, first appeared at s 23 of the Bankruptcy Act 1869 (UK). Before then, there was no statutory provision authorising the trustee to disclaim onerous property, with the effect that a bankrupt remained liable to perform onerous contracts. In response to that problem, courts developed the rule that the trustee could either adopt and perform beneficial contracts or abandon burdensome contracts.1 [page 265] 11.8 Following the introduction of the Bankruptcy Act 1869 (UK), the bankrupt was no longer liable in relation to his contracts, and the bankrupt’s property vested in the trustee simultaneously with the trustee’s appointment: s 31 and s 17. Under s 23, the trustee was given a right of disclaimer of: … land of any tenure burdened with onerous covenants, or unmarketable shares in companies, of unprofitable contracts, or of any other property that is unsaleable, or not readily saleable, by reasons of its binding the possessor thereof to the performance of any onerous act, or to the payment of any sum of money.

11.9 In England the section was re-enacted in successive Bankruptcy Acts, appearing as s 55 of the 1883 Act and as s 54 of the 1914 Act. The provision was first adopted in similar terms in company legislation in 1929, when it appeared as s 267 of the

Companies Act 1929 (UK). It was re-enacted as s 323 of the Companies Act 1948 (UK). The description of onerous property remained substantially unchanged until the introduction of the Insolvency Act 1986 (UK). 11.10 Pursuant to s 178 of the Insolvency Act 1986 (UK), a liquidator may disclaim any ‘onerous property’, which for the purpose of the section is defined as any unprofitable contract and any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. 11.11 In Australia, the disclaimer provisions in both the applicable bankruptcy and companies statutes generally followed England up until the reforms enacted in the Bankruptcy Amendment Acts of 1979 and 1987 (Cth).2 Following these enactments, the provisions for disclaimer relevant to personal bankruptcy varied not only from the position in England but also from the Australian disclaimer provisions applicable to corporate insolvency. 11.12 In relation to the issue of property that may be disclaimed, one of the main differences between personal bankruptcy and corporate insolvency in Australia was that a trustee in bankruptcy could disclaim any contract, although leave of the Court was required for contracts other than unprofitable contracts. However, under the former s 568(1)(d) of the Corporations Law, a liquidator could only disclaim unprofitable contracts. 11.13 The rationale for the position adopted in the Bankruptcy Act 1966 (Cth) appears in the Explanatory Memorandum to the Bankruptcy Amendment Bill 1979 (Cth). There it was said: The type of property which may be disclaimed is redefined so that it includes contracts the profitability of which may be in doubt because the property is unsaleable or not readily saleable, even if those contracts are not actually unprofitable at the time of the disclaimer … This will assist the Trustee

[page 266] (subject to the control of the Court) in dealing with contracts which involve

difficulties and risks that would render their completion inadvisable.3

11.14 In 1983, the Attorney-General tasked the ALRC with a broad reference to examine and report on Australia’s insolvency laws. The ensuing inquiry took five years. The ALRC issued its final report in late 1988 (the Harmer Report).4 The Harmer Report considered it desirable that the provisions for disclaimer be the same where possible in personal bankruptcy and corporate insolvency.5 11.15 Specific recommendations contained in the Harmer Report included: (a) That liquidators should have a power to disclaim contracts similar to that exercisable by trustees in bankruptcy.6 (b) That the definition of property which may be disclaimed include property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.7 (c) That no time limit should apply to the exercise of the power of disclaimer.8 (d) That notice should be given to a person affected by a disclaimer.9 (e) That no distinction should be drawn between the disclaimer of a lease and disclaimer of other onerous property.10 11.16 The ALRC considered that its recommendation for notice to be given to a person affected by a disclaimer would provide adequate protection to a person affected by the disclaimer of a lease. Implementing these recommendations would have the effect that affected persons would still be able to protect their interests, but the trustee or liquidator would not be required to apply for leave to disclaim.11 11.17 The Harmer Report informed much of the Corporate Law Reform Bill 1992 (Cth), which ultimately became the Corporate Law Reform Act 1992 (Cth). The Explanatory Memorandum to the Corporate Law Reform Bill 1992 states: The Harmer Report considered it desirable that the provisions for disclaimer of property that is of no benefit to an insolvent estate be the same where possible in personal bankruptcy and corporate insolvency. The three issues in relation to which it considered a greater degree of uniformity could be achieved were:

[page 267] property which may be disclaimed time limits for disclaiming property; and the time from which a disclaimer operates. In relation to the issue of property which may be disclaimed, one of the main differences between personal bankruptcy and corporate insolvency identified by the Harmer Report is that, under s 133(1A) of the Bankruptcy Act, a trustee in bankruptcy could disclaim any contract (although, under section 133(5A) of the Bankruptcy Act leave of the Court was required other than in respect of an unprofitable contract). However, under the former s 568(1)(d) of the Corporations Law a liquidator could only disclaim unprofitable contracts.12

11.18 The amendments made by the Corporate Law Reform Act 1992 (the Harmer amendments) commenced on 23 June 1993. The current disclaimer provisions remain largely unchanged since the Harmer amendments. 11.19 Since the Harmer amendments, liquidators have continued to be able to disclaim unprofitable contracts, but can in addition disclaim any contract (including a lease of land): s 568(1)(f) and (1A). 11.20 Liquidators no longer require leave to disclaim ‘a lease of land’: s 568(1A). Immediately prior to the Harmer amendments, a liquidator was not entitled to disclaim a lease without leave unless the lessor or any sub-lessee did not require the liquidator to seek leave: former s 568(6). Consistent with the position prior to the Harmer amendments, liquidators do not require leave to disclaim unprofitable contracts. However, in respect of disclaimer of all other contracts (other than a lease of land), leave is required: s 568(1A). 11.21 The Harmer amendments provide that a court may set aside a disclaimer of a contract when satisfied that the disclaimer would cause prejudice grossly out of proportion to the prejudice that setting aside the disclaimer would cause the company’s creditors: s 568B(3) and s 568E(5). The disclaimer is effective if, and only if, an application to set it aside either is not made or is unsuccessful: s 568B and s 568C. The disclaimer is treated as having taken effect from the day after the date the liquidator gave or lodged the notice of disclaimer: s 568C.

II. Three questions not considered in Willmott 11.22 Willmott Forests Limited (WFL) managed a number of forestry investment schemes. It leased portions of land to scheme members (growers) to grow and harvest trees. The leases were generally for a term of 25 years and in some cases the whole of the rent was paid up front. Liquidators appointed to WFL entered into contracts with a purchaser, providing that title to WFL’s [page 268] land was to pass to the purchaser free from encumbrances arising out of the WFL schemes. 11.23 The liquidators applied to the Supreme Court of Victoria for directions. At first instance, Davies J held that a disclaimer of the leases by the liquidators of WFL would not have the effect of extinguishing the growers’ leasehold estates.13 On appeal, the Victorian Court of Appeal (Warren CJ, Redlich JA and Sifris AJA) set aside that decision and held that the liquidators could disclaim the growers’ leases, with the effect that the growers’ leasehold interests were also extinguished.14 The growers appealed to the High Court. French CJ, Hayne J and Kiefel J concluded that the liquidators had the power to disclaim leases with the effect of terminating the growers’ leasehold estates or interests in land.15 Gageler J reached the same conclusion.16 Keane J dissented. 11.24 Under the heading of ‘Questions not considered’, the majority, having recognised that a tenant whose lease has been disclaimed may consider that being left to prove in the winding up gives little effective compensation, noted that there had been no occasion in the case before them to consider: (a) whether the liquidators require the leave of the Court before disclaiming the investors’ leases; (b) if they do require leave, what considerations would inform the decision to grant or refuse leave; and

(c) whether or how the Court’s power to set aside a disclaimer provided expressly in s 568B (3) would apply in the case.17 11.25 These three issues are now considered in turn.

II.A. When does a liquidator require leave to disclaim property? 11.26 A liquidator requires leave to disclaim a contract (other than an unprofitable contract or a lease of land): s 568(1A). Thus to determine whether leave is required in respect of a contract, it is necessary to consider: (a) whether the contract is an unprofitable contract; or (b) whether the contract is for a lease of land. [page 269]

II.A.1. When is a contract an unprofitable contract? 11.27 Unprofitable contracts are those which impose on the company continuing obligations which are inconsistent with the timely administration of the liquidation.18 11.28 In Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457, Hayne J found it unnecessary to consider whether the 1993 amendments ‘extend the property which may be disclaimed beyond onerous or burdensome property.’19 The case was one in which the liquidator purported to disclaim a contract without leave on the basis it was an unprofitable contract. Pursuant to the contract, the company had granted a licence to use a machine for manufacturing ice-cream cones. The liquidator’s object was to bring to an end a situation in which the licence fee for the machine was not paid in cash but was applied, by set off, to reduce a debt owed by the company to the licensee. If the contract were disclaimed, the liquidator could sell the machine or grant a licence that would produce actual cash payments. Hayne J held:

It is said that the contract is ‘unprofitable’ because a better return could be obtained if the machine were to be sold (or perhaps its use licensed) to another. Assuming that that is so, I consider that demonstrating that a better commercial bargain could be made than the bargain struck by the company before it went into liquidation falls well short of showing that the contract is unprofitable or onerous.20

11.29 In Re Real Investments Pty Ltd [2000] 2 Qd R 555, Chesterman J considered whether a ‘Management Agreement and Sub-lease’ was an unprofitable contract. His Honour concluded the contract was an unprofitable contract in circumstances where the contract could not satisfactorily be carried out by the liquidator, the contract was extremely long, the company did not have the financial or human resources to perform it and its continued existence would result in further obligations which the company could not begin to discharge. He summarised the following relevant principles: A contract is unprofitable for the purpose of s 568 if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit. Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities.

[page 270] Contracts which will delay the winding-up of the company’s affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable. No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus upon the nature and cause of the disadvantage. A contract is not unprofitable merely because the company could have made or could make a better bargain.21

11.30 In Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 484, Santow J accepted Chesterman J’s summary of these principles as correct.22 Having regard to these principles, Santow J concluded that a contract which required the liquidator to assume a continuing obligation for three years to make payments under a take or pay arrangement for a service from a supplier, which the company no longer required and could no longer use, was unprofitable. He considered the contract incompatible with the

company’s beneficial winding up and that it would delay any dividend. 11.31 In so holding, Santow J expressly adopted the approach of Young J in Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664. There, Young J considered that an unprofitable contract is a contract which cannot satisfactorily be carried out by a liquidator compatibly with the liquidator’s duty to realise the company’s property and to pay a dividend at the earliest possible time.23 On that basis Young J concluded that a contract which ‘would involve the liquidator in at least eight months of work and in taking the chance the purchaser would obtain finance on terms and conditions … satisfactory to it’24 was an unprofitable contract. 11.32 In Global Television, Santow J stated: What is important in that context is whether the contract could be satisfactorily carried by a liquidator or trustee in bankruptcy, compatibly with the liquidator’s duty to realise the company’s property and pay a dividend at the earliest possible time. Consistent with that approach a contract must be more than merely financially disadvantageous as Hayne J concluded in Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466–7; (1994) 15 ACSR 191. Thus if a liquidator could perform a contract without prejudicing his obligation to realize the company’s property and pay a dividend to creditors at the earliest possible time, he could not turn around and disclaim that contract merely on the expedient ground that he substitute a more profitable one. Such a notion of comparative financial disadvantage is not the applicable test.25

[page 271]

II.A.2. When is a contract a lease of land within the meaning of s 568 (1A)? 11.33 As noted by the majority in Willmott, it is now firmly established that a lease is a species of contract: It is then important to recognise that it is now firmly established that a lease is a species of contract. As Deane J said in Progressive Mailing House Pty Ltd v Tabali Pty Ltd, ‘[a] lease for a term of years ordinarily possesses a duality of character which can give rise to conceptual difficulties. It is both an executory contract and an executed demise’ (emphasis added). Hence, as Mason J said, ‘the ordinary principles of contract

law, including that of termination for repudiation or fundamental breach, apply to leases’. The rights and duties which a landlord and tenant have under a lease are bundles of rights and duties which together can be identified as species of property. The origins of those rights and duties lie in the contract which the landlord and tenant or their predecessors in title made. In every case, the rights and duties of the landlord and tenant, whether as an original party to the lease or as a successor in title, stem from the contract of lease and any later contract made in relation to that lease. When a company is the landlord, the rights and duties which that company has in respect of the lease are properly described as ‘property of the company that consists of … a contract’. The landlord’s rights and duties are a form of property; those rights and duties ‘consist of’, in the sense of derive from, the contract of lease.26

11.34 For the majority, the central question of construction of s 568(1) was whether a lease granted by the company to a tenant is ‘a contract’ within the meaning of s 568(1)(f). In answering that question, the majority considered the meaning of ‘lease of land’ in the leave provision, s 568(1A), stating: The central question of construction of s 568(1) is whether a lease granted by the company to a tenant is ‘a contract’ within the meaning of s 568(1)(f). Section 568(1A) of the Act provides that ‘[a] liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the court’ (emphasis added). Evidently, ‘a contract’ in s 568(1)(f) includes a lease of land. Should the reference to ‘a lease of land’ in s 568(1A) be read as referring to any lease to which the company is a party, or only to leases of land in which the company is the tenant? These reasons will show that s 568(1) should be construed as giving the liquidator of a company power to disclaim a lease granted by the company to a tenant. A lease granted by the company to a tenant is ‘a contract’ within the meaning of s 568(1)(f). This conclusion follows both from the relevant attributes of a lease and from the reference in s 568(1A) to ‘a lease

[page 272] of land’, an expression which cannot be read as confined to leases in which the company is the tenant.27 Nothing in the extrinsic material suggests, however, that the otherwise general words of what is now s 568(1) of the Act, or the reference in s 568(1A) to ‘a lease of land’, should be confined to leases to the relevant company. There is no textual foundation for limiting the words in that way.28

11.35 It was not necessary for the Court to decide the meaning of the words ‘lease of land’ in s 568(1A) in order to resolve the questions before the Court. Nevertheless, the plain dicta of the majority is that

leave is not required to disclaim a lease, even where the company is the lessor rather than the lessee. Given what was said in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, the statement of the majority should be regarded as ‘seriously considered dicta’ that a later court is bound to follow. 11.36 However, it is noted that the majority expressly stated that there had been no occasion to consider in Willmott ‘whether the liquidators require the leave of the “Court” before disclaiming the investors’ leases or, if they do require leave, what considerations would inform the decision to grant or refuse leave’.29 Because the question was expressly not considered, some may attempt to argue that the dicta at [4]–[5] and [41] should not be regarded as foreclosing any argument on the issue of whether leave is required to disclaim such a lease. 11.37 Keane J (dissenting) concluded that the liquidators did require leave: While a liquidator of a lessor may disclaim the lessor’s property consisting of a contract to lease land, that would not be a disclaimer of the lessor’s property consisting of ‘a lease of land’. By virtue of s 568(1A) of the Act, it would be necessary for a liquidator to seek leave of the court to disclaim the lessor’s contract to lease land. The liquidators have not sought leave of the court in that regard.30

11.38 Keane J considered that the text, context, policy and legislative history of s 568 as well as authority considering s 568 supported the view that the power to disclaim property of the company consisting of ‘a lease of land’ is concerned with the property of the lessee.31 [page 273] 11.39 Prior to the Harmer amendments, liquidators were not entitled to disclaim a lease without leave unless the lessor, or any sublessee did not require the liquidator to seek leave: former s 568(6). It is clear from the former disclaimer provisions that the words ‘disclaim a lease’ for the purposes of s 568(6) were confined to leases in which the company was the lessee. The Bankruptcy Act 1966 included (and

still includes) a like provision, pursuant to which the words ‘disclaim a lease’ were also confined to leases in which the bankrupt was the lessee. The relevant difference between the two Acts was that pursuant to s 133(1A) and s 133(5A) of the Bankruptcy Act a trustee could disclaim a contract (other than an unprofitable contract) with leave of the court and there was no like power for a liquidator in the Corporations Act. 11.40 The Harmer Report considered the existing law in relation to disclaimer of leases (where that term was confined by the Act to mean disclaimer by or on behalf of the lessee), stating: Existing law. Special provision is made in both individual and corporate insolvency for disclaimer of a lease. A trustee in bankruptcy or a liquidator is not entitled to disclaim a lease without the leave of the court unless 28 days’ notice of the intention to disclaim has been given to the lessor and any sub-lessee, and such person has not within that time required the trustee or the liquidator to apply for leave. It is difficult to discover why those affected by the disclaimer of a lease are placed in a more favourable position than others. Any person who suffers damage by reason of a disclaimer may have an admissible claim in the insolvency. Although it is essential that persons affected by the disclaimer of a lease, such as the lessor, a sub-lessee or a mortgagee of a lease be entitled to notice that the lease is being disclaimed, it does not appear justifiable to permit such persons alone to be able to require the insolvency administrator to seek the leave of the court before disclaiming. The Insolvency Act 1967 (NZ) does not place leases in a special category. Recommendation. The Commission recommends that no distinction should be drawn between the disclaimer of a lease and disclaimer of other onerous property. The Commission’s recommendation for notice to be given to a person affected by a disclaimer should provide adequate protection to a person affected by the disclaimer of a lease. Such persons would still be able to protect their interests, but the trustee or liquidator would not be obliged to apply for leave as a matter of course.32

11.41 As observed by Keane J: These aspects of the legislative history are of some significance in relation to both aspects of the question presented to the Court. In relation to the first issue in the appeal, the first paragraph of the last passage cited above tends to confirm that, as a matter of ordinary language, to speak of ‘disclaiming a lease’ is to speak of disclaiming a contract which is the property of the

[page 274] lessee. Further, in the discussion in the Explanatory Memorandum and the Harmer

Report there is no revision of the basic understanding of disclaimer as a renunciation by a trustee in bankruptcy or liquidator of property as an asset of the insolvent estate to be administered by the trustee or liquidator.33

11.42 The Harmer Report considered it desirable that the provisions for disclaimer be the same where possible in personal bankruptcy and corporate insolvency.34 Nothing in the Harmer Report or the Explanatory Memorandum to the Corporate Law Reform Bill 1992 suggested an intention to redefine the meaning of ‘disclaim a lease’ to include a disclaimer by or on behalf of the lessor. Rather, the Explanatory Memorandum suggests the purpose of the amendment was to provide that a liquidator was no longer obliged to apply for leave as a matter of course in relation to a disclaimer of lease in respect of which the company was the lessee.

II.B. What considerations will inform the decision to grant or refuse leave? 11.43 There are no legislative criteria to control or guide the exercise of the court’s discretion whether to grant or refuse leave to disclaim a contract. Leave may be given subject to such conditions as the court considers just and equitable: s 568(1B). The power to impose conditions is to be read subject to the restriction that any effect on another person’s rights or liabilities should go no further than what is necessary to release the company or its property from liability.35 11.44 In deciding whether to grant leave to disclaim property, the court may consider the prejudice to unsecured creditors against the prejudice to be suffered by those who oppose the disclaimer. In so doing, the court may bear in mind that any person aggrieved by the operation of a disclaimer is taken to be a creditor of the company to the extent of any loss suffered by the person because of the disclaimer, and may prove for such a loss as a debt in the winding up and the amount of assets available for distribution.36 11.45 In Re Tulloch Ltd (1978) 3 ACLR 808, Needham J considered that the prejudice to creditors failed to equal the prejudice the other parties would suffer on disclaimer. In those circumstances, his

Honour decided the proper exercise of discretion lay in the refusal of the application for leave.37 [page 275]

II.C. In what circumstances will a court set aside a liquidator’s disclaimer? 11.46 Pursuant to s 568B and s 568E, the Court may set aside a disclaimer before or after the disclaimer has taken effect. The precondition to enliven the court’s discretion is in similar terms in each section — namely that the disclaimer has caused or would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors. 11.47 In Real Investments, Chesterman J considered the precondition to enliven the court’s discretion to set aside the disclaimers: Section 568B(3) demands a comparison between the position of the person who will lose if the disclaimer is not set aside and that of the person who will lose if it is. Only if the prejudice to the former is ‘grossly out of proportion’ to the prejudice of the latter will the court be authorised to set the disclaimer aside. ‘Prejudice’ is a wide term, no doubt chosen deliberately. In most, if not all, cases one would expect prejudice to manifest itself in financial disadvantage. In fact two sets of comparisons are called for. The first is an examination of the relative positions of Transmetro and the creditors, on the supposition that the agreement is ended by disclaimer. The second is the same examination on the supposition that the agreement remains in force. The contrast in position between those comparisons allows the court to make the assessment described by the section. The pre-condition is satisfied only if the alteration in Transmetro’s position between the first and second comparisons is to its disadvantage, and is grossly out of proportion to the prejudice suffered by the creditors as shown by the two comparative positions. What is meant by ‘grossly out of proportion’ is, I think, that the change in Transmetro’s position between comparison one and comparison two must be much greater than the alteration in the creditors’ position.38

11.48 He went on to state that s 568B(3): … does not look to what subservient advantage may be wrought from the consequences of the disclaimer. It compels examination of what the primary

consequence will be to those interested in the property or contract and the creditors should there be a disclaimer. Anything beyond direct consequences is to be ignored. The language of the section suggests this approach. It talks of prejudice that the disclaimer ‘would’ cause, not that it ‘might’ cause. Any comparison beyond the immediate and direct effect of the disclaimer is too hard to evaluate with the necessary certainty to arrive at a conclusion that disproportionate prejudice ‘would’ occur.39

[page 276] 11.49 Chesterman J decided that, on the facts before him, the discretion was enlivened but that he would not exercise the discretion to set aside the disclaimer of the contract.40 In reaching this conclusion, Chesterman J had regard to the circumstances, which were that: the agreement could not in any event operate according to its terms; one party would not and the other could not perform the agreement; and the party sought to have the disclaimer set aside so that it could terminate the agreement at a time and in a manner in which it chooses.

III. A potential anomaly 11.50 The Court’s discretion to set aside a disclaimer is only enlivened if it is satisfied that the disclaimer would cause prejudice to persons who have, or claim to have, interests in the property that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors. 11.51 There is no like restriction on the discretion to grant leave to disclaim. In circumstances where the prejudice to the creditors does not equal the prejudice to the party opposing the leave application, leave may be refused.41 Thus on an application for leave to disclaim, the scales are far more finely balanced than on an application to set aside a disclaimer, where the scales are tipped more heavily in favour of the liquidator. 11.52 The majority in Willmott stated that the reference in s 568(1A) to ‘a lease of land’ is an expression which cannot be read as

confined to leases in which the company is the tenant.42 What follows from this is that: (a) in respect of a lease of land, a liquidator has power without leave of the court to disclaim any lease of land, irrespective of whether the lease is onerous or unprofitable; and (b) the Court has no discretion to set aside a disclaimer of a lease unless it is satisfied that the prejudice to the persons interested in the lease is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors. 11.53 This is to be contrasted with the position in respect of a contract that is not a lease. For such a contract, a liquidator must obtain leave in order to disclaim the contract unless the contract is an unprofitable one. When the Court is faced with an application for leave, Re Tulloch suggests the prejudice to the creditors if leave is refused is to be balanced against the prejudice to the other contracting party if leave is granted. In order for the other contracting party to protect its position, it appears not to be necessary [page 277] for that party to establish prejudice grossly out of proportion to the prejudice to creditors.43 11.54 It might be thought to be anomalous if the Act affords less protection to a tenant under a lease contract than it does to parties to other types of contracts. It would seem odd that parties with proprietary rights are in a weaker position than those with mere contractual rights. Why should a party who stands to lose a proprietary right be afforded less protection than a party that stands to lose a mere contractual right? 11.55 The policy which informs s 568(1) is to expedite the realisation of the money value of the company’s assets in the course of the efficient administration of the insolvent estate.44

11.56 The disclaimer provisions are not designed to allow disclaimer of contracts merely because they are financially disadvantageous or because disclaimer will facilitate a better bargain.45 Hence, the Court remains the gatekeeper in relation to contracts, save for unprofitable contracts, being a long established category of onerous property. But why should the position be any different with respect to the disclaimer of the lessor’s contract to lease land? 11.57 Historically, the disclaimer provisions contained a separate power pursuant to which a liquidator could disclaim a lease under which the company was the tenant. Like unprofitable contracts, a tenant’s lease has similarly been a long recognised category of onerous property that a liquidator may disclaim. Where the tenant becomes insolvent and is being wound up, the lease may readily be seen akin to an unprofitable contract and onerous in nature; ordinarily it would impose an obligation on the company to pay rent over an extended term in circumstances where the premises may no longer be required. 11.58 Conversely where the landlord becomes insolvent and is being wound up, assuming the leased property can be readily realised for more than the realisation costs, and the new registered proprietor will replace the company as lessor, how is the lease considered onerous property? A lease will normally be beneficial to the lessor by reason of the rent which it generates. The liquidator is at liberty to sell the reversion for whatever it may bring. That may not be much, and indeed the lease may significantly reduce the value obtained, but in such circumstances can it really be said that the lease is an unprofitable contract? Old Style Confections seems to decide that the answer is no. [page 278] 11.59 As observed by Keane J in Wilmott, ‘since the introduction of the statutory power of disclaimer in 1869, neither judicial exegesis nor academic commentary has attributed to the power of disclaimer

the potential to enhance the value of the estate of a company in liquidation.’46 However, this may be the effect following Willmott. 11.60 The result in Willmott appears to lead to the conclusion that tenants are afforded less protection in liquidation than those who have mere contractual rights. Legislative reform may be appropriate to address that apparent anomaly. 1. 2.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

19. 20. 21. 22.

Copeland v Stephens (1818) 1 B & Ald 593; Re Sneezum; Ex parte Davis (1876) 3 Ch D 463; Wilson v Wallani (1880) 5 Ex D 155. A similar provision was in force in s 104 of the Bankruptcy Act 1924 (Cth) and s 133 Bankruptcy Act 1966 (Cth). Equivalent provisions appeared in, for example, s 300 of the Companies Act 1936 (NSW) and s 296 of the Companies Act 1961 (NSW). Explanatory Memorandum to the Bankruptcy Amendment Bill 1979 (Cth), para 152. Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988). Above n 4, para 31. Above n 4, para 613. Above n 4, para 614. Above n 4, para 616. Above n 4, para 618. Above n 4, para 620. Above n 4, para 620. Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth), paras 971–972. Re Willmott Forests Ltd (2012) 258 FLR 160; [2012] VSC 29 at [17]. Re Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2012) 36 VR 472; [2012] VSCA 202 at [58] and [82]–[83]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [57]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [79]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [56]. Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 at 667; Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 484; [2000] NSWSC 960 at [62]; Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466. Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466. Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466–7. Re Real Investments Pty Ltd [2000] 2 Qd R 555; [1999] QSC 089 at [21]. Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 484 at [62].

23. 24. 25. 26.

27.

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

45. 46.

Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 at 667. Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 at 667. Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 484; [2000] NSWSC 960 at [60]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [39]–[41] (French CJ, Hayne and Kiefel JJ) (citations omitted). See also Gageler J at [62]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [4]–[5] (French CJ, Hayne and Kiefel JJ) (italics in original; bold emphasis added). Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [41]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [56]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [116]. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [108]. Above n 4, para 619–20 (footnotes omitted). Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [129]. Above n 4, paras 613–20. Corporations Act s 568D(1) and Sims v TXU Electricity Ltd (2005) 53 ACSR 295; [2005] NSWCA 12 at [25]–[27]. Re Tulloch Ltd (1978) 3 ACLR 808 at 816–17. Re Tulloch Ltd (1978) 3 ACLR 808 at 817. Re Real Investments Pty Ltd [2000] 2 Qd R 555; [1999] QSC 089 at [29]–[31] (emphasis added). Re Real Investments Pty Ltd [2000] 2 Qd R 555; [1999] QSC 089 at [39]–[40]. Re Real Investments Pty Ltd [2000] 2 Qd R 555; [1999] QSC 089 at [61]–[62]. Re Tulloch Ltd (1978) 3 ACLR 808. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [5]. Re Tulloch Ltd (1978) 3 ACLR 808. See also Re Middle Harbour Investments Ltd (in liq) (No 2) [1977] 2 NSWLR 652; (1976) 2 ACLR 303. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [124]; Re Real Investments Pty Ltd [2000] 2 Qd R 555; [1999] QSC 89 at [15]; Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 484 at [65]. Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466–7. Willmott Growers Group Inc v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2013) 251 CLR 592; (2013) 96 ACSR 604; [2013] HCA 51 at [125].

[page 279]

12 DIRECTIONS APPLICATIONS AND THE RIGHTS OF THIRD PARTIES Jonathon Moore Jonathon Moore QC is a barrister admitted to the Victorian Bar. He holds degrees in Economics and Law (Hons) from Monash University, a Bachelor of Civil Law (1st) from the University of Oxford, and a D Phil in law also from the University of Oxford. He has been practising at the Bar since 2000, and has appeared in a number of cases involving managed investment schemes.

I. Introduction 12.1 When a managed investment scheme fails, doubts often exist about the rights of third parties. Commonly, the third parties involved are secured creditors and the members of the scheme or related schemes. Often, the doubts concern competing claims of proprietary rights. The doubts may stand in the way of the orderly wind up of the scheme by the liquidator of the responsible entity. 12.2 The response of liquidators has been to approach a court for directions. But can a liquidator in such an application obtain the court’s determination of the questions giving rise to the doubts the liquidator faces, without joining all of the third parties affected by the outcome? More importantly, can any such directions given to the liquidator bind the third parties, so as to substantively affect their claimed proprietary rights, even though those third parties are not joined as parties to the proceeding?

12.3 On first principles, the answer to the latter question would seem to be no. It is a fundamental tenet that: … where a court is invited to make, or proposes to make, orders directly affecting the rights or liabilities of a non-party, the non-party is a necessary party and ought to be joined.1

[page 280] 12.4 Or, in the words of the Full Federal Court, in a decision approved by the High Court in John Alexander’s Clubs:2 An order which directly affects a third person’s rights against or liabilities to a party should not be made unless the person is also joined as a party. If made, the order will be set aside.3

12.5 The question whether a court can determine a matter of substantive law affecting the rights of third parties on an application for directions by a liquidator, without those third parties being joined to the application, has arisen in the recent windings up of several managed investment schemes. The answer to that question remains controversial. Until recently, the predominant view was that it was not open to a court to make binding orders on a liquidator’s application for directions, without the proceeding being converted into an inter partes proceeding in which all affected persons were joined, usually through the appointment of one or more representative parties. More recently, however, it has been suggested that it is not necessary to either convert the proceeding or join all affected parties before a court is able to make orders binding third parties. A line of first instance decisions, most notably the decision in Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18, supports that view. 12.6 This chapter reviews the relevant authorities. The ultimate conclusion is that courts do not have power in an application for directions to determine a question involving the pre-existing rights of third parties without all affected third parties being joined to the proceeding. Absent legislative reform making directions binding on persons to whom notice of the application is given,4 courts and

parties should proceed on the basis that, if a binding determination is sought, affected third parties should be joined, either personally or as representative parties, and declarations of rights sought.

II. Legislative powers 12.7 Section 479(3) of the Corporations Act applies only to court appointed liquidators. It provides: (3) The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.

12.8 Section 511 of the Corporations Act applies only to voluntary liquidations. That section relevantly provides: (1) The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company; or

[page 281] (b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. … (2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

12.9 Section 601NF of the Corporations Act applies to the winding up of a registered managed investment scheme. It provides as follows: Other orders about winding up (1) The Court may, by order, appoint a person to take responsibility for ensuring a registered scheme is wound up in accordance with its constitution and any orders under subsection (2) if the Court thinks it necessary to do so (including for the reason that the responsible entity has ceased to exist or is not properly discharging its obligations in relation to the winding up). (2) The Court may, by order, give directions about how a registered scheme is to be wound up if the Court thinks it necessary to do so (including for the reason that the provisions in the scheme’s constitution are inadequate or impracticable).

(3) An order under subsection (1) or (2) may be made on the application of: (a) the responsible entity; or (b) a director of the responsible entity; or (c) a member of the scheme; or (d) ASIC.

12.10 Registered managed investment schemes take the form of (or, by reason of s 601FC(2) of the Corporations Act, take effect as) trusts, with the responsible entity as the trustee. Courts have an inherent,5 and now a legislative, jurisdiction to give ‘judicial advice’ directions to a trustee. For example, r 54.02 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic)6 confers on the court jurisdiction to give judicial advice to trustees.7 That rule provides as follows: 54.02 Relief without general administration (1) A proceeding may be brought for any relief which could be granted in an administration proceeding and a claim need not be made for the administration or execution under the direction of the Court of the estate or trust in respect of which the relief is sought.

[page 282] (2) Without limiting paragraph (1), a proceeding may be brought for — (a) the determination of any question which could be determined in an administration proceeding, including any question — (i) arising in the administration of an estate or in the execution of a trust; (ii) as to the composition of any class of persons having a claim against an estate or a beneficial interest in an estate or in property subject to a trust; or (iii) as to the rights or interests of a person claiming to be a creditor of an estate or to be entitled under the will or on the intestacy of a deceased person or to be beneficially entitled under a trust; (b) an order directing an executor, administrator or trustee to — (i) furnish and, if necessary, verify accounts; (ii) pay funds of the estate or trust into court; or (iii) do or abstain from doing any act; (c) an order — (i) approving any sale, purchase, compromise or other transaction by an executor, administrator or trustee; or

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

12.11 In the context of third party beneficiaries, r 54.03 may be important. It provides: 54.03 Parties In an administration proceeding or a proceeding within Rule 54.02 — … (c) notwithstanding anything in Rule 9.03(1), and without limiting the powers of the Court under Order 9, all persons having a beneficial interest in or claim against the estate or having a beneficial interest under the trust, as the case may be, need not be parties, and the plaintiff may make such of those persons parties as the plaintiff thinks fit.

III. The traditional principle — GB Nathan 12.12 Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 is the case most often cited in Australia for the traditional view that directions given to a liquidator do not affect substantive third party rights. In that case, McLelland J (as his Honour then was) held that s 479(3) of the Corporations Act8 did not permit the Court to make orders that were binding on third parties. His Honour said: [page 283] The protection of the official administrator, acting under a direction of the court, from personal liability would not however affect the rights of creditors and beneficiaries as between themselves.9

12.13 His Honour also held: Modern Australian authority confirms the view that s 479(3) ‘does not enable the court to make binding orders in the nature of judgments’ and that the function of a liquidator’s application for directions ‘is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation.’10

12.14 That statement of principle is supported by considerable authority, and has been followed many times since. Some of the

cases before and after GB Nathan supporting its principles are reviewed below.

III.A. Authority in support 12.15 It was long ago settled in England that applications by trustees for judicial directions were effective only to protect trustees, and did not determine third party rights. That was the position in relation to s 30 of the Law of Property and Trustees Relief Amendment Act 1859, also known as Lord St. Leonards’ Act. Section 30 of the Act provided: Any Trustee, Executor, or Administrator shall be at liberty, without the Institution of a Suit, to apply by Petition to any Judge of the High Court of Chancery, or by Summons upon a written Statement to any such Judge at Chambers, for the Opinion, Advice, or Direction of such Judge on any Question respecting the Management or Administration of the Trust Property or the Assets of any Testator or Intestate …

12.16 In Re Mockett’s Will (1860) Johns 628, questions were raised concerning the construction of a will and the proper administration of assets. Sir William Page Wood VC said: Upon a petition under [s 30] I cannot really determine anything, and the only effect of my opinion would be to indemnify the trustees.11

12.17 In Re Lorenz’s Settlement (1861) 1 Dr & Sm 401, an application by a trustee for directions concerned the question whether, according to the true construction of a settlement, the trustee was bound to make an advance out of the trust funds to a particular beneficiary, or whether there was only a discretionary power to make such an advance. Sir R T Kindersley VC said: [page 284] I am asked to put a construction upon this instrument, and so decide a question materially affecting the rights of the parties. Now, my understanding of that section of the Act is that it was intended by the Legislature that the Court should have the power to advise a trustee or executor as to the management and administration of the trust property in the manner which will be most for the advantage of the parties beneficially interested, but not to decide any question affecting the rights of those parties inter se, otherwise the effect would be that a deed or will involving the most difficult

questions, and relating to property to an amount however large, might be construed, and most important rights of parties, decided, by a single Judge, without any power of appeal whatever. This I am satisfied the Legislature never intended.12

12.18 This remains the position in England today. In Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] 3 All ER 198, the Privy Council remarked that: … in exercising the jurisdiction to give directions on a trustee’s application the court is essentially engaged solely in determining what ought to be done in the best interests of the trust estate and not in determining the rights of adversarial parties.13

12.19 And in Re MF Global UK Ltd (No 3) [2013] All ER (D) 139, Richards J said: In those cases where the trustees are faced with a practical difficulty in establishing the existence of possible beneficiaries or other claimants, the court will give a direction to the trustees enabling them to distribute the trust property on an assumption of fact that there is no such beneficiary or claimant. As Nourse J explained in In re Green’s Will Trust [1985] 3 All ER 455, 462, an In re Benjamin [[1902] 1 Ch 723] order does not vary or destroy beneficial interests but merely enables trust property to be distributed according to the practical probabilities. It protects trustees but it equally preserves the right of any person who establishes a beneficial interest to pursue such remedies as may be available to them.14

12.20 That last sentence reveals the importance of the present question. If third party rights are not affected by a judicial direction to a liquidator, [page 285] a third party can later establish a beneficial interest in property, even if the direction given to the liquidator assumed, implicitly, that the third party had no such interest. One remedy that would not be available to a beneficiary who is later able to establish a subsisting beneficial interest is a claim for equitable compensation from the trustee for improperly dealing with trust assets. Nor, presumably, could the beneficiary later mount a Barnes v Addy (1874) LR 9 Ch App 244 action against a third party on the basis (e.g.) that it had knowingly received property dealt with in breach of trust. But the beneficiary may be able to follow or trace his or her property into the

hands of someone else and vindicate a subsisting proprietary right, unaffected by the fact that a liquidator had been given a direction to transfer the property to that other person. 12.21 The same general approach to rights of third parties applies in administration cases. Absent consent, r 54.02 does not enable the court to determine a question between a legal representative of an estate and persons claiming adversely to the estate, or between persons claiming under a will and a person claiming adversely to the will.15 12.22 Accordingly, an application for directions under r 54.02 cannot finally determine third party rights. That was acknowledged by Robson J in Re Elders Forestry Management Ltd (2012) 90 ACSR 573 (a managed investment scheme case). There his Honour said that giving judicial advice to trustees under r 54.02 ‘does not finally determine the rights and liabilities of parties arising out of the subject-matter of the application for directions.’16 Similarly in Re Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91, Ward J said: As a general rule (see Jacobs’ Law of Trusts in Australia (7th edn) [at 2134]), however, where the question concerns the respective rights of beneficiaries or their identity, it is not considered appropriate to give a trustee opinion or advice under s 63; rather the proper procedure is by way of originating summons where all parties are served and have the opportunity to be heard (the authors there referring to Re Kirkegaard [1950] St R Qd 144; Re Petersen [1920] St R Qd 42).17

[page 286] 12.23 Immediately after the passage in Jacobs’ Law of Trusts in Australia to which Ward J referred, the authors state: Even less will [the judge] give advice on matters in controversy between parties to a trust.18

12.24 The same approach applied, at least historically before legislative amendment, to applications made in a winding up. In Re A Singer and Co [1943] Ch 121, Greene MR LJ (with whom the other members of the Court of Appeal agreed) said that:

… the winding-up court has no jurisdiction to settle disputes between persons who are for the purpose of those disputes altogether outside the winding-up. 19

12.25 In Australia, many courts dealing with liquidators’ application for directions adopted the English approach in relation to trustees. Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14 is a stark (and possibly incorrect) example of the non-binding nature of a direction given to a liquidator. In an earlier proceeding,20 a liquidator sought directions as to whether the proceeds of sale of plant and equipment were payable to a third party (the Bank of NSW) under a bill of sale entered into by directors of the company in their personal capacities. The application was made under s 237(3) of the Companies Act 1961 (Qld), which provided that ‘[t]he liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.’ The section provided that the court could accede to the application in whole or in part or make such other order as the court thinks just. 12.26 The application for directions was served on the bank. The bank appeared by counsel and submitted that the proceeds were payable to it. The bank contended that the company had allowed the directors to represent that they owned the equipment personally, and the company was thus estopped from asserting that the equipment was its property. There was no agreement by the bank and the liquidator that the decision would or would not be binding, although there was an agreement that costs of the application would follow the event. The judge held that the company was not estopped from asserting ownership, and in his reasons said that he would ‘advise the liquidator that the proceeds of the realisation … are the property of the company.’ The bank was ordered to pay the liquidator’s costs, but no other order was made. 12.27 In a later, separate proceeding, the bank sought leave to commence a proceeding against the company for a declaration that the proceeds of sale were subject to a charge in favour of the bank, and for damages from the company for wrongful conversion. The liquidator submitted that the earlier decision created an estoppel between the parties. Hanger J rejected the

[page 287] liquidator’s submission, and granted the bank leave to proceed. In so holding, his Honour said: [Section 237(3)] does not, in my opinion, enable the Court to make binding orders on persons in the nature of judgments. The directions which a Court may give on an application under it are more like the directions or advice which may be given under s.45 of the Trustees and Executors Acts. Such directions are not, in my opinion, subject to appeal. (Re Tooth’s Trusts (1877) 5 QSCR 10) … In plain fact, there had been no judicial determination of the Bank’s claim and I think it is entitled to obtain a determination and, if it wishes, to appeal.21

12.28 Re Equity Funds of Australia (in liq) (1977-78) CLC 40-303; (1976) 2 ACLR 238 concerned a review under s 279 of the Companies Act 1961 (NSW) against a decision of a liquidator to compromise claims by a certain creditor by admitting its proof of debt in a certain amount. In dealing with that application, Bowen CJ contrasted the position under s 274 of that Act, under which a liquidator could apply to the Court to determine any question arising in a winding up, with the position under s 279, under which any person aggrieved by a decision of a liquidator could apply to the Court to review it. Bowen CJ said: A decision given under sec. 279 is res judicata. A direction given under sec. 274 generally is not. Thus if a liquidator applies under sec. 274, obtains the Court’s direction and then acts in accordance with that direction, he will be protected, but his acts and decisions taken in pursuance of the direction will be open to legal challenge by parties adversely affected by them, notwithstanding the Court’s direction under sec. 274.22

12.29 In Re TTC (SA) Pty Ltd (in liq) (1983) 32 SASR 532, a company that had entered into a scheme of arrangement was subsequently wound up. During the liquidation, the bank and the liquidator compromised a proceeding on the basis (inter alia) that the bank would receive no further money in the liquidation until unsecured creditors were paid in full. Because of rising property prices, the liquidator had more than enough money to pay the principal debts of unsecured creditors in full. The liquidator applied for a direction whether he ‘must or may’ pay to the unsecured

creditors interest in relation to their debts during the time that the scheme of arrangement was in operation. As White J noted, ‘the substantive rights of the bank and the unsecured creditors [were] very much in issue.’23 The bank had made it clear [page 288] to the liquidator that it would regard such payments as a breach of the terms of compromise. The application for directions was made pursuant to s 237(3) of the Companies Act 1962, which provided: The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.

12.30 The bank appeared on return of the application for directions, but submitted that the question should not be determined. White J agreed. He accepted the correctness of the holding in Re Blackbird Pies that a direction did not amount to a judicial determination raising an estoppel.24 12.31 A little earlier, White J made the following remark: The question whether a court ought to determine an application by way of directions, where substantive rights of other parties are involved and where facts might be in issue, requires the exercise of a discretion.25

12.32 Read in the context of White J’s reliance in the next paragraph on Re Blackbird Pies, that passage is not to be understood as suggesting that the court had a discretion to determine the rights of third parties on an application for directions. Rather, what was being said was that the court had a discretion to give a direction to a liquidator that necessarily assumed the existence or absence of third party rights, but that such a direction did not determine those rights. 12.33 In Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 9 ACLR 56, Blackburn CJ considered that: It is clear, upon authority, that s 379(3) does not enable the court to make binding orders in the nature of judgments. That is exactly what this summons asks the court to do; it asks the court to determine finally the rights and liabilities of the company and of the mortgagor rising out of the mortgage … The function of a liquidator’s

summons for directions is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation.26

12.34 That passage was cited with approval by Young J in Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, although his Honour suggested that this was a limitation ‘that the court imposes on itself.’27 [page 289] 12.35 The passage from Rodger v Gourlay was also cited with apparent approval by the Victorian Full Court in Murdoch v Crawford [1986] VR 97 at 99. The question under consideration in this chapter did not, however, arise for determination in Murdoch v Crawford. As the Court noted, the application for directions and the appeal were throughout conducted by all parties on the basis that the direction given amounted to a judicial determination, binding on the parties and subject to appeal. 12.36 In discussing more generally the question whether there is a right to appeal from the determination of an application for directions, the Full Court said: If the correct view is that the court, in giving directions under this section, is not making a judicial determination but giving an advisory opinion, then no appeal lies. There is authority for the view that an appeal is incompetent. In Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 33 Hanger J considered that directions given under the forerunner of this section were not binding orders in the nature of judgments but advisory opinions and were not subject to appeal. His Honour cited Re Tooth’s Trusts (1877) 5 QSCR 10, where Lilley J expressed the opinion that no appeal lay from the ‘opinion advice or direction’ of a judge given to a trustee under the statute in that behalf. In the Security Provident Fund Case Blackburn CJ said that it was at least doubtful whether any appeal lay where directions were given under s379. As to a trustee’s application for directions reference may also be made to Re Petersen, deceased [1920] St R Qd 42 and Re Kirkegaard, deceased [1950] St R Qd 144. In Re J S Mitchell (1913) 30 WN (NSW) 137 Harvey J doubted whether an appeal lay where advice was given to a trustee: see further Re Carlyon (1886) 56 LJ Ch 219, at p. 220 and Re Davies (1888) 38 Ch D 210, at p. 213 … On the other hand, the High Court has entertained appeals where directions have been given to the trustee in bankruptcy in respect of a matter arising in connection with the administration of the estate under s134(4) of the Bankruptcy Act: see, for example Hall v Richards [1961] HCA 34; (1961)

108 CLR 84; Miles v Official Receiver [1963] HCA 24; (1963) 109 CLR 501; the point does not seem to have been adverted to.28

12.37 To the list of High Court cases in which an appeal has been determined from a direction given to a liquidator must now be added Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers appointed) [page 290] (in liq) (2013) 251 CLR 592.29 There the High Court entertained an appeal from a direction given to a liquidator on an application under s 511 of the Corporations Act. 12.38 In Re Neander Constructions Pty Ltd (1988) 12 ACLR 775 was an ex parte application by a liquidator for directions as to the order in which proceeds of realisation of the assets of a company were to be distributed. It appeared that the chief concern of the liquidator was a provision of the Income Tax Assessment Act 1936 (Cth) concerning unremitted group tax. McPherson J refused to give the direction, citing with approval Re Blackbird Pies. The proceeding was then converted into an ordinary inter partes proceeding, through the filing of an originating application seeking a declaration, and the service of that application on the Commissioner of Taxation. 12.39 Re Sportsman’s Leisure & Hobby Warehouse Pty Ltd (In liq) [1990] 2 Qd R 93 concerned the proper treatment of money recovered by liquidators in earlier voidable preference proceedings. The liquidator intended to deal with that money according to the usual order of priorities in winding up. The Commissioner of Taxation, however, contended that the money should be paid to him by reason of the same statutory provision concerning unremitted group tax as that considered in Neander Constructions. The liquidators applied for a direction under s 379(3) of the Companies Code30 that they should ‘distribute funds … in accordance with the order of priority set out’ in the Companies Code. The liquidators’ summons was served on the Commissioner. The Commissioner appeared by counsel, informed the Court that he would not regard himself as

bound by the outcome of the application, and withdrew. The liquidators pressed on, contending that the outcome would create an issue estoppel binding on the Commissioner. Cooper J rejected that contention. He followed Blackbird Pies and Neander Constructions in holding that a direction given under s 379(3) does not bind the parties as to their substantive rights and is not appealable. 12.40 Several contrary cases were noted by Cooper J,31 but his Honour observed that most of them were explicable on the basis that: (a) they were preference cases, the principles of which were applicable only in that context; or (b) the parties to the proceeding agreed to be bound by the outcome. The preference cases are considered below. [page 291] 12.41 Many post-GB Nathan cases have accepted GB Nathan as correctly stating the law. The first three such cases were decisions of McLelland J himself. In one of those cases, Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742, a liquidator sought a direction as to whether he should admit a bank’s proof of debt in a certain amount. The former directors of the company were vehemently opposed to the liquidator doing so, and the liquidator was concerned to protect himself from claims by them. The summons for directions was served on the former directors, and they appeared. The summons was also served on the bank, and it too appeared, although at an early stage it was excused from further attending. McClelland J referred to the usual procedure by which a person can appeal from a liquidator’s decision to reject his or her proof of debt, and to the ability of a person aggrieved by a liquidator’s decision to admit a proof of debt to apply to the court to modify the decision.32 His Honour then said: A determination by the court on any such appeal would be binding as between the parties to the appeal on the issue of the validity or otherwise of the claim the subject

of the proof of debt in question. However no such binding determination can arise from a direction given in a liquidator’s application for directions, and such an application is not an appropriate vehicle for the determination of substantive issues: see generally Re G B Nathan & Co Pty Ltd (in liq) (1991) 5 ACSR 673; 9 ACLC 1291 as to the nature, scope and incidents of an application for directions. A direction to the effect that a liquidator would be justified in admitting, or alternatively would be justified in rejecting, a particular proof of debt, would not be determinative of the validity or otherwise of the claim the subject of the proof, and would not preclude a subsequent appeal to the court from the liquidator’s decision in compliance with the direction. It would normally therefore be inappropriate for such a direction to be sought or given.33

12.42 In Re Everything Australian Pty Ltd (1992) 9 ACSR 75, the liquidator sought a direction as to whether to pay the proceeds of sale of the company’s business to the Commissioner of Taxation (who claimed to be entitled to the proceeds pursuant to a section of the Income Tax Assessment Act 1936 (Cth) dealing with unremitted group tax) and the Commonwealth Bank (which claimed to be entitled to the proceeds pursuant to a crystallised floating charge). The bank was made a respondent to the action. It is not clear from the report whether the Commissioner was also made a respondent. McClelland J determined that it would not be appropriate to direct the liquidator as to whom to pay the proceeds. Instead, he directed that the liquidator would be acting properly in commencing what was effectively an interpleader proceeding seeking declaratory relief. In so holding, McClelland J said that: … the bank’s claim is not a claim within the winding up, but a proprietary claim adverse to the interests of those claiming within the winding up

[page 292] through the liquidator, which cannot be effectively determined in an application for directions in the winding up, notwithstanding that the bank has been made a respondent to the application: see Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 676-81. Even if the liquidator were to adopt the course I earlier contemplated and the bank did not commence proceedings within the nominated time, the liquidator would not thereby obtain protection against a subsequent assertion by the bank of its proprietary claim.34

12.43 Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 245 involved an application by a receiver for a

direction that he was justified in accepting a particular offer to purchase the company’s business. Lockhart J refused the application, on the basis that it was purely a commercial decision to be made by the receiver. In the course of his reasons, his Honour said: The extent to which directions of the court given under sections of this kind can bind anyone is a matter of considerable doubt. Plainly the court cannot give directions as to the rights of persons who are not parties to the hearing of the application: Re Odessa Promotions Pty Ltd (in liq); Pescod v Harrison (1979) CLC 40–523 per King J at 32,106 and 32,107; but even if persons are joined as parties to the application it is doubtful if they can be bound in a sense that can give rise to issue estoppel: see Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14 at 33 per Hanger J and Re Tooth’s Trusts [1877] 5 QSCR 10.35

12.44 Five years after Re GB Nathan, McLelland CJ (as his Honour then was) returned to the point in Re JW Murphy and PC Allen (1996) 19 ACSR 569: It is to be emphasized that an application for directions under s 379(3) of the Companies Code (or s 479(3) of the Corporations Law) is an administrative nonadversary proceeding, and a direction given pursuant to the section has no effect on the substantive rights of persons external to the winding up.36

12.45 Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141 involved an application by an administrator of a deed of company arrangement for directions pursuant to s 447D of the Corporations Law. The directions concerned a dispute between the company and a creditor as to title to certain goods. The administrator sought a direction that the goods were the company’s. The creditor appeared, and submitted that it was not appropriate [page 293] to determine the question of title to property on a summons for directions. Lindgren J agreed. His Honour said at 147: The preponderance of authority is to the effect that on a liquidator’s application for directions under that provision [s 479(3)] or its predecessors, the Court has no power to make orders binding upon, or affecting the rights of, third parties, and the view is also commonly taken that directions should not be given where the proposed acts of the liquidator which would be ‘sanctioned’ by the directions would affect such rights.37

12.46 Later, Lindgren J said: Conceptually, the application for directions is an ex parte one. No doubt, on an application for directions under ss 479(1) or 447D, the Court has power to grant leave to, inter alia, a ‘creditor’ of the company to be heard on the question whether the directions sought should be made, without being made a party … But whether or not advantage is taken of leave to be heard, directions given by the court to a liquidator or administrator would not affect the creditor’s rights and a creditor would not be ‘estopped’ by the directions. Although O 71 r 10(4) in terms empowers the court to order that a creditor be added as a respondent in a proceeding under the Law, it follows from what I said that in my respectful view it is difficult to understand on what basis it would be an appropriate exercise of discretion to do so, at least in the absence of consent, so long as the proceeding remained no more than an application to directions under the statutory provision.38

12.47 In Re Southern Cross Airlines Holdings Limited [2000] 1 Qd R 84, Fitzgerald P (with whom McPherson JA and Thomas J agreed) said: It is ordinarily inappropriate for a direction to be given which will adversely affect identifiable legal rights or interests of other persons or will entitle the liquidator to do so with impunity.39

12.48 The use of the word ‘ordinarily’ raises a query. It suggests that there may be some cases in which it is appropriate for a direction to be given that will adversely affect ‘identifiable’ rights. However, the last part of the sentence — ‘or will entitle the liquidator to do so with impunity’ — suggests that the Court had in mind only that the effect of the direction would be to prevent the liquidator from being liable to a third party for having acted consistently with the direction. That is, of course, the very reason why liquidators seek directions. The decision appears to provide little support for the proposition [page 294] that the court may make a determination about pre-existing rights of persons not joined as parties to the application for directions. 12.49 In Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466, Austin J said:

I should note the very limited scope of the protection that directions under s 479(3) will give in the present circumstances. The directions will not determine as between the company and the investors whether there is a trust or any particular person is a beneficiary or any particular assets are held by the company in trust for the investors, and will not protect the company or liquidator from any claims by persons who do not receive a distribution but are able to establish that they should have been recognised as beneficiaries. As McLelland J pointed out in the G B Nathan case (at NSWLR 681), the significance of the directions is only that if the liquidator acts in accordance with them and has made full and fair disclosure of the material facts, he will be protected from claims by unsecured creditors or contributories in respect of any alleged breach of his duties as liquidator.40

12.50 In Derwinto Pty Ltd v Lewis (2002) 42 ACSR 645, Austin J converted an application for directions in which the competing parties were represented into an ordinary proceeding, and dealt with the questions raised by the directions application as separate, preliminary questions. His Honour said: The parties have been represented and have fully argued the issues. They should have the benefit of a binding determination inter parties, rather than merely a form of judicial advice to the administrators. As McLelland J observed as regards an application by a liquidator, an application for directions ‘is not an appropriate vehicle for the determination of substantive issues’: Re Magic Australia Pty Ltd (in liq) (1992) 7 ACSR 742 at 745.41

12.51 In ASIC v Rowena Nominees Pty Ltd (2003) 45 ACSR 424, Pullin J said: The only proper subject of a liquidator’s application for directions is the manner in which the liquidator should act in carrying out his functions and that the only binding effect of a direction given in pursuance of such application is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the directions: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679. An application under the section is an administrative non-adversary proceeding: Re Murphy & Allen; Re BPTC (in liq) (1996) 19 ACSR 569, although in this case I granted leave to any interested beneficiary to make submissions. The section does not enable the court to make binding orders in the nature of a judgment. The function of a liquidator’s application for

[page 295] directions is to give him advice as to his proper course of action in the liquidation. It is not to determine the rights and liabilities arising from the company’s transactions

before the liquidation. The court must confine itself, in giving directions, to matters concerning the administration of the company, and it has no authority to resolve substantive matters in dispute between a trustee and a third party: Re G B Nathan & Co, above, at NSWLR 679–80; Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745; the cases cited by Goldberg J in Re Ansett Australia Ltd (2001) 39 ACSR 355 at [59]; Conlan v Registrar at [343]–[348]; and see also Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466.42

12.52 In Re Riverside Nursing Care Pty Ltd (2004) 22 ACLC 215, Finkelstein J said that on a liquidator’s application for directions ‘no order binding upon or affecting the rights of third parties can be made’.43 His Honour returned to the point in Re Media World Communications Ltd (2005) 216 ALR 105, saying: … the application was for directions under s 447D. This procedure is commonly employed by administrators who seek guidance from the court about problems which arise during the course of an administration. But it is not a provision which can be employed to resolve substantive rights of third parties … At a preliminary hearing before another judge, Mr Naidoo a subscribing shareholder, and Blackburn’s Office Supplies Pty Ltd, a trade creditor, were given leave to be heard in the proceeding. This was done so the views of those who might be effected by the decision were before the court. When those parties filed outlines of argument it became apparent that the administrator had a substantial dispute on his hands. Further, not only would the relief that he seeks directly affect the substantive rights of subscribing shareholders, it would also affect the rights inter se of the subscribing shareholders and the company’s trade creditors. And this on an application where none of the people who would be affected were parties, with the consequence that any direction given would not bind anyone and there may not be a right of appeal: Murdoch v Crawford [1986] VR 97 at 99–100; (1985) 10 ACLR 237 at 239–40 and the cases therein cited.44

12.53 As we will see below, Finkelstein J then determined to convert the application for directions into an ordinary inter-partes proceeding. 12.54 In Re Stacks Managed Investments Ltd (2005) 219 ALR 532, White J said: The power to give directions under s 601NF(2) is a power limited to giving directions about ‘how a registered scheme is to be wound up’. It doubtless empowers the court to give directions, where it is necessary to do so, on how the responsible entity is to exercise its powers in winding up the scheme. It authorises the making of directions of a kind which would be made in an administration suit for the purpose of settling the entitlements of members.

[page 296]

But in my view, and notwithstanding the authorities under s 601EE(2), the subsection does not authorise the court to confer additional powers upon a responsible entity to which third parties would be made subject, or to interfere with the rights which third parties would otherwise enjoy. The fact that the power is to give directions indicates that it is one to direct the responsible entity in how to perform its functions and obligations, not that it be the source of new powers. In this respect it differs from s 601EE(2). … In my view, the power under s 601NF(2) to give directions is a power to give directions to a person, namely the responsible entity, or the person appointed under s 601NF(1). It is akin to the power on a liquidator’s application under s 479(3) to give directions on a matter arising in a winding up. Under that provision, the court does not have power to affect the substantive rights of third parties … … I do not read the power to give directions in s 601NF(2) in the wide way for which the plaintiff contends as, in effect, permitting the court, by order, to impose a new legislative regime on the winding up of a particular scheme, and thereby affecting the rights of and imposing duties on third parties.45

12.55 In Matter of Enviro Friendly Products Pty Ltd [2013] FCA 852, Foster J said: In the present case, the liquidators submitted that, as between those persons and entities for whom the court concludes the company holds STCs in trust, on the one hand, and the general body of creditors, on the other hand, the court’s determination on the question of whether those STCs are, in fact, held in trust, will have the practical effect of determining whether the relevant STCs are held in trust because the liquidators will be protected from liability in the event that they act in accordance with the directions of the court in dealing with the relevant STCs. I agree.46

12.56 In Retail Adventures Pty Ltd [2013] FCA 891, Jacobson J said: The Court will not make orders as to the rights of third parties in an application under s 447D … Accordingly, directions under s 447D do not constitute any binding or authoritative determination of substantive rights, but function to protect the administrator’s rights in the event of an allegation of breach of duty in respect of the conduct of the administration … The Court has the power to grant leave to, inter alia, a creditor of the company to be heard on the question in order to assist the court, without being made a party or for any directions to take any binding effect over the creditor.47

[page 297] 12.57 In Re ICS Real Estate Pty Ltd [2014] NSWSC 479, Brereton J considered that a distinction was to be drawn between compulsory and voluntary winding up, saying:

However, the sections are not identical. Notably, while s 479(3) authorises only ‘directions in relation to any particular matter arising under the winding up’, s 511(1) (a) empowers the court to ‘determine any question arising in the winding up of a company’, provided that it will be just and beneficial to do so. Under s 479(3), the court’s only power is to give directions to the liquidator, and this does not extend to making orders binding upon or affecting the rights of third parties [see Editions Tom Thompson 622; Re Southern Cross Airlines [2000] 1 Qd R 84], although such an application can be reconstituted as an inter partes proceeding for the determination of substantive rights [Re GB Nathan & Co, NSWLR 680; Editions Tom Thompson, 627; Re Willmott Forests Ltd (No 2), [44]–[45]]. But the power under s 511(1)(a), ‘to determine any question arising in the winding up’, is wider and accommodates the determination of substantive rights, although the court would not do so without affording potentially affected parties an opportunity to be heard [Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2007] FCA 1443, [50]–[51] (French J); Re Willmott Forests Ltd (No 2), [46]–[45]].48

12.58 If the distinction there drawn between compulsory and voluntary winding up is valid, it arises because of the terms of the legislation giving courts the power to give directions. In the one case, but not the other, the legislation enables the court to ‘determine’ the question.

III.B. Preference cases 12.59 There are several cases that have concluded, or at least proceeded on the basis, that the jurisdiction to grant directions carries with it the power to determine a preference claim brought by a liquidator. One such case is Re Reid Murray Holdings [1969] VR 315. Adam J held that it was open to the Court on an application for directions to declare a transaction to be void as a preference. His Honour listed several cases in England and Australia where the courts had entertained summary applications by liquidators in compulsory liquidations for determination of questions of preference.49 12.60 Two of the cases listed by Adam J were High Court decisions. But it is not clear from the report of those two cases whether the application was an application for directions, or an ordinary proceeding in which a liquidator [page 298]

sought a declaration that a particular payment fell within the statutory provision rendering unfair preferences void against a liquidator. 12.61 More importantly for present purposes, in all of the cases mentioned by Adam J, the person against whom the order was sought was a party to the proceeding. The question his Honour was addressing was merely whether the liquidator’s claim could be brought in a summary way by originating motion, or whether it was necessary for the liquidator to commence an ordinary proceeding by writ. 12.62 In Re S & N (Nominees) Pty Ltd (in liq); Yeomans v Lease Industrial Finance Ltd (1986) 84 FLR 463 a liquidator’s summons sought a declaration that a particular payment constituted a preference. The recipient of the alleged preference was joined as a respondent to the application. The application was purportedly made pursuant to what was s 413 of the Companies Act 1981 (Cth), which enabled a liquidator to apply to a court to determine a question arising in the winding up. But as Jenkinson J pointed out, that section applied only in the case of a voluntary winding up, and this winding up was ordered by the Court. That slip had gone unremarked at the hearing: at 475–6.50 After determining the merits of the preference claim, Jenkinson J referred to Security Provident Fund and invited written submissions on whether any order should be made. In a separate judgment, his Honour simply said that that he would follow Reid Murray Holdings and Gapes Interstate Transport in holding that the Court had jurisdiction in the proceeding to determine the issues raised and “to make orders adjusting the rights of the parties”. It is not clear whether his Honour regarded the jurisdiction as arising pursuant to the court’s statutory power to give directions in 379(3) of the Companies Act 1981, or whether the jurisdiction was founded on the unfair preference provisions in that Act.

III.C. Reconstitution as inter partes proceeding 12.63 In GB Nathan itself, McClellan J referred to the conversion of

a liquidator’s application for directions into an ordinary inter partes proceeding in which substantive rights are determined. His Honour said that: the procedures of the court are sufficiently flexible to enable proceedings commenced as an application for directions to be changed into proceedings for the determination of substantive rights, and this is sometimes a convenient course in order to avoid the need to commence further proceedings involving additional cost and delay.51

12.64 That observation has been adopted many times. Re Mento Developments (2009) 73 ACSR 822 is one such case. Reconstitution invariably involves at least joining all affected persons as parties, either directly or through a court-appointed representative, and treating the proceeding as a claim for [page 299] declaratory relief. As noted above, that is what occurred in Media World Communications. There Finkelstein J said: In those circumstances I said that I would not dispose of the application unless Mr Naidoo and Blackburn’s Office Supplies (or other appropriate persons) were joined as parties and appropriate representative orders made. Only in this way would the court dispense ‘perfect justice’, to adopt the language of the old Chancery Court. In the event joinder orders were made, together with the usual order for the costs of the representative parties. In addition I intend to grant relief in the form of a declaration, being the type of relief that should have been sought. Put differently, I will treat this application as one in which the administrator seeks a substantive remedy, as befits the case.52

12.65 Arguably, sufficient conversion for the purposes of binding affected parties is achieved by joining them as parties to the application for directions. In Riverside Nursing Care, Finkelstein J said: It is important to observe that this application is brought ex parte. In Editions Tom Thompson (supra) at 149-150 Lindgren J said that this was the proper course to take and that to join an interested party as a defendant was ‘strictly inappropriate, since the giving of directions to the Administrators is not the making of an order which could directly affect [the defendant’s] rights or liabilities’. This probably goes too far. Relevantly, the court’s practice of giving advice dates back to its dealings with trustees in the first half of the 19th century. The only way a trustee could obtain advice was to pay the trust fund into court and seek an administration order. This was a lengthy and costly process. The Law of Property and Trustee Relief Amendment Act 1859 (UK) 22 & 23

Vict, c 35 was enacted to enable trustees, without bringing an action, to apply for the opinion, advice or direction of the judge on any question concerning the management or administration of trust property: Amendment Act, s 30. The petition or summons had to be served on all interested parties: Amendment Act, s 30. Provided the trustee was not guilty of fraud, wilful concealment or misrepresentation in obtaining the advice, he was discharged of all responsibility in the matter when acting on the advice: Amendment Act, s 30. While there are examples of applications for directions being made ex parte, the usual practice for over 150 years has been to join all interested parties so that binding decisions can be made. This practice is, and examples of cases which have applied it are, referred to in Ford & Lee, Principles of the Law of Trusts, 3nd ed (1996) at para [17030].53

12.66 Other cases, however, have suggested that there is a need, or at least that it is appropriate, for the proceeding to be converted further by having the liquidator seek declaratory relief. That was done, for example, by Finkelstein [page 300] J in Re Pasminco Ltd (2004) 49 ACSR 470, and by Dodds-Streeton J in Re AFS Group Limited [2013] FCA 799. 12.67 Merely giving third parties notice of the proceeding and an opportunity to be heard, but not joining those third parties as parties to the proceeding, is unlikely to bind them to the outcome. The remarks of Jacobson J in Retail Adventures quoted above are to that effect. Similarly, in Re Pasminco Ltd (2004) 49 ACSR 470, Finkelstein J referred to the fact that an application for directions by the administrators of a deed of company arrangement did not name as parties companies — the ‘Aquila companies’ — who might be affected by the outcome. His Honour then said: This unsatisfactory state of affairs was resolved, at least in part, by Goldberg J before whom the application was first returned. On 27 January 2004 he granted leave to the Aquila companies to ‘appear and be heard in the proceeding without becoming a party to the proceeding’. No doubt the judge made this order because it was obvious to him, as it should have been to the administrators, that the application could not proceed without notice to the Aquila companies. On the other hand, merely giving the Aquila companies notice of the proceeding and an opportunity to be heard, an opportunity which they ultimately took up, may not be enough to ensure that those companies are bound by this judgment or precluded in other litigation from reagitating lost points: compare Re Lart; Wilkinson v Blades [1896] 2 Ch 788, 794 and House of Spring Gardens Ltd v Waite [1991] 1 QB 241, 252–254 where it was held that a

person who is aware of a proceeding, and takes the benefit of the decision, may be estopped from reopening any questions decided in that proceeding. In my view the Aquila companies should be made parties to the application (which at my direction has been recast as an originating process) so that there can be no doubt about the binding effect of these reasons for judgment and of any orders made.54

12.68 Finkelstein J also foreshadowed making a representative order appointing a party creditor to represent all unsecured creditors.55 That was necessary because the administrators sought approval to amend the deed of company arrangement.

IV. Willmott Forests (No 2): third-party rights determined without joinder 12.69 In Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18, Davies J declined to follow GB Nathan. Her Honour held that the Court could determine substantive rights of third parties on an application for directions under s 511(1), without those third parties being joined to the proceeding.56 [page 301] 12.70 Willmott Forests (No 2) raised issues typical in recent failed managed investment schemes. A timber scheme was operated on land owned by the responsible entity of the scheme. The land was leased by the RE to growers. When the scheme failed, a large number of trees were growing on the land, but were years away from being ready for harvest. The liquidator of the RE entered into an agreement to sell the land and the trees together. Steps were taken, with the approval of the court, to terminate the growers’ interests to the extent necessary to enable the liquidator to give clear title to the land and the trees to the purchaser. If those steps were taken, the liquidators would need to know how to deal with the proceeds of sale. The liquidators sought directions on that point. 12.71 A number of issues were relevant to a consideration of how the proceeds of sale should be distributed. Only two need be mentioned here. Was the land (or rights in relation to the land) part

of the scheme property held on trust for the growers? If no part of the land was scheme property, what was the correct division of the proceeds between that part representing the price paid for the land (which would be paid to a secured creditor), and that part representing the price paid for the trees (which would be paid to the growers)? 12.72 The liquidators sought a direction under s 511 of the Act in the usual form that they were ‘justified and acting properly’ in distributing the sale proceeds in a certain way. The manner of distribution proposed by the liquidators assumed that the land was not scheme property, and that the appropriate division of the proceeds between land and trees was the division agreed between the purchaser, the secured creditor and the liquidators reflected in the final form of the sale contract. 12.73 Pausing there, the case appeared to be a typical application by a liquidator for directions. All that was sought from the court was approval of conduct proposed to be undertaken by the liquidators. Such approval would offer the liquidators the usual protection from personal liability if it later transpired that the liquidators’ conduct was contrary to rights of third parties. But the approval would not, it might have been thought, have determined what those rights were. 12.74 However, an incorporated association of certain scheme members objected to the Court giving the directions sought, on the basis that the Court was being asked ‘to determine the rights of third parties’.57 One approach the Court might have adopted in the face of such a submission was to reject it on the basis that the Court was doing no such thing. The Court, however, appeared to accept that it would be determining the rights of third parties if the directions sought by the liquidators were made. It then considered whether it was open to the Court to do so on an application for directions under s 511, and held that it was. [page 302]

12.75 The following reasons were given in Willmott Forests (No 2) for rejecting the GB Nathan view that the Court has no power on an application for directions to determine third party rights: (a) the cases on s 479(3) indicate that it is not a question of power; rather, it is a question of the appropriateness of using the s 479(3) procedure to determine the substantive rights of third parties in the context of an application by a liquidator for directions about the proper course to be taken in a liquidation. In other words, there is little doubt that the Court has the power under that provision to make orders of a substantive nature affecting third parties. Whether it should do so is a matter of discretion;58 (b) there is authority directly on point that a court can entertain an application under s 511(1) for the determination of substantive rights affecting third parties.59 In this respect, the Court referred to the following cases: (i) Meadow Springs Fairway Resort Ltd (In Liq) v Balanced Securities Ltd (2007) 25 ACLC 1433; (ii) ASC v Melbourne Asset Management Nominees (1994) 49 FCR 334; (iii) Re Graf Holdings Pty Ltd [1999] NSWSC 217; (iv) Re Anglican Insurance Ltd (2008) 26 ACLC 147; (v) Re Great Southern Managers Australia Ltd (No 3) [2011] FCA 1192; (vi) Re Astarra Asset Management Pty Ltd [2011] NSWSC 91; and (vii) Re Rewards Projects Ltd [2011] WASC 339; and (c) doubt about the power of a court under s 511(1) to make orders affecting substantive rights of third parties had been put to rest by the High Court decision in Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. 12.76 Each of these three reasons is considered below.

IV.A. Discretion, not power 12.77 The first reason given in Willmott Forests (No 2) for reaching a conclusion contrary to GB Nathan was that it had been made clear in the cases that the Court has the power on a liquidator’s application for directions to make orders of a substantive nature affecting third parties. It was a matter of discretion, not power, Davies J said, as to whether or not a court would choose to do so. In particular, it is ‘a matter of process and procedure for the court, [but] not a matter of the power of the court’, as to whether substantive orders should be made without first giving affected parties the opportunity to be heard.60 12.78 Three cases were cited in support of that proposition. One of those cases — Australian Securities Commission v Melbourne Asset Management Nominees [page 303] Pty Ltd (1994) 49 FCR 334 — is discussed in detail below. For now, all that need be noted about that case is that the relevant third parties were all made parties to the proceeding in which the substantive questions were to be determined. In the other two cases — GB Nathan itself and Editions Tom Thompson, both of which were referred to above — all that the courts said was that a liquidator’s application for directions could be reconstituted as an inter partes proceeding for the determination of substantive rights. Those two cases do not support the proposition that, absent such reconstitution, a court has jurisdiction or power61 to determine third party rights on a liquidator’s application for directions.

IV.B. Cases said to be contrary to GB Nathan 12.79 Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd (2007) 25 ACLC 1433 was the first case relied on in Willmott Forests (No 2). It provides very little, if any, support for the proposition that a substantive question affecting the rights of third

parties can be determined on a liquidator’s application for directions without the proceeding being converted into an inter partes proceeding in which all relevant third parties are joined. 12.80 In Meadow Springs a liquidator brought an application for directions in which he sought the determination of a large number of questions concerning the entitlement of numerous persons and companies to the proceeds of settlement of a claim brought by the liquidator. Some of the parties who would be affected by a determination of those questions were joined as defendants, but it appears that others were not. French J held that it was not appropriate for those questions to be resolved without all affected parties being joined and filing any cross-claim. 12.81 In so holding, French J said this: Given the more substantive character of the applications contemplated by s 511(1)(a) the preceding observations are even more apposite in applications made under that provision. Whether the Court should proceed to entertain applications for the determination of substantive rights and award final relief as between competing creditors and others in an application under s 511, is a matter of discretion. … In my opinion it is open to the Court, in a suitable case, to entertain an application for the determination of questions under s 511 by joining affected parties with competing interests as defendants and permitting them to file cross-claims for declaratory relief as between themselves and any other interested parties and the liquidator so that there can be a res judicata between all of them.62

[page 304] 12.82 The first paragraph, taken on its own, might suggest that a court has a discretion under s 511 to determine substantive rights, even if the affected parties were not joined as defendants. But the second paragraph suggests that, in French J’s view, the only appropriate way in which substantive rights could be determined is by joining the affected persons as parties. That would seem to be confirmed by the fact that, in the two paragraphs immediately before the first paragraph above, French J quoted with apparent approval the tradition principle stated in GB Nathan, and then said:

On the other hand there is sufficient flexibility in the procedures of the Court to enable proceedings begun as an application for directions to be converted into proceedings for the determination of substantive rights.63

12.83 The second case relied on by in Willmott Forests (No 2) was Melbourne Asset Management Nominees. That case does provide some support for a view contrary to GB Nathan, but the support is limited. Like many of the managed investment scheme cases, Melbourne Asset Management Nominees involved a large number of investors. Northrop J declined to follow GB Nathan, holding instead: It has been accepted that Courts have power to make final orders in preference claims on an application by a liquidator under sections similar to s 479(3) of the Corporations Law. There is no logical reason why final orders binding on other persons cannot be made on applications under s 479(3) with respect to other subject matters … I can see no reason why binding orders cannot be made where the parties affected have been given the opportunity to be heard.64

12.84 It is the words ‘opportunity to be heard’ on which the Court fastened in Re Willmott Forests (No 2).65 But it is important to note that in Melbourne Asset Management Nominees the investors were not merely given the opportunity to come to court if they wished to make submissions. Rather, all of the investors were made party to the proceeding and were represented. That was achieved through the making of representative orders. Investors were divided into four separate classes, and a separate representative was appointed for each class, with separate legal representation, for each class.66 12.85 Accordingly, Melbourne Asset Management provides little support for the proposition that substantive questions affecting the rights of third parties can be determined on a liquidator’s application for directions without all third parties being joined as parties to the proceeding. [page 305] 12.86 Two other aspects must be noted about Northrop J’s decision in Melbourne Asset Management Nominees Pty Ltd. First, his Honour’s analogy with liquidators’ claims to recover preferences can only be taken so far. In a preference action, the substantive issue

affects only two parties: the liquidator on the one hand, and the creditor alleged to have received a preferential payment on the other. The creditor is always joined as a party to the preference action. It is, for all practical purposes, identical to a claim instituted by writ seeking substantive relief. 12.87 The second, related, aspect is this. After quoting GB Nathan, Northrop J said: Essentially, the controversy is sterile, serving no useful purpose. It really does nothing but bring the law and the courts into disrepute. It relates to practice and procedure.67

12.88 This is, with respect, at most only partly correct. In the circumstances in Melbourne Asset Management Nominees, it probably did not matter whether the proceeding was converted into an application for determination of substantive relief, or remained an application for directions in which certain questions would be answered. In either case, all parties who were affected by the outcome would be represented before the Court, and thus probably bound by the outcome. Absent a declaration being sought and granted by the Court in a converted proceeding to which third parties are joined, there may be room to doubt whether the answer given by the Court to the questions posed in that case were indeed binding. On one view of the law, an application for directions cannot affect the rights of third parties even if they are joined to the application for directions and appear before the Court to advance their position. The remarks of Lockhart J in Best & Less (Wollongong) Pty Ltd quoted at para 12.43 above were to that effect. It may be, however, that where all third parties affected by the answer to a question posed by a liquidator’s application for directions are represented and appear before the Court, those third parties are bound by the outcome, and the case should be treated as if a declaration of substantive right had been sought and obtained. 12.89 The statement by Northrop J that the ‘controversy is sterile’68 will not, with respect, be correct in other contexts. In particular, where a question arises in a proceeding in which some affected third parties are not joined and represented, the controversy really matters. Even if it can be said that all affected third parties had

notice of a proceeding and were given an opportunity to come to court to be heard, if those persons are not made party to the proceeding they are entitled to say that their rights are unaffected. The [page 306] purpose of an application for directions being merely to protect the liquidator, such third parties are entitled to consider that their particular rights can be enforced by them in a later proceeding.

IV.B.1. Re Graf Holdings Pty Ltd 12.90 Re Graf Holdings Pty Ltd [1999] NSWSC 217 was the third case relied on in Re Willmott (No 2). That reliance may have been misplaced. The Court in Re Graf expressly said that it could not, and would not, determine third party rights. The liquidator of a company found amongst its records certain documents suggesting that the company was indebted to a trust of which the company was a beneficiary. Both the trust and the company (as well as other related companies) appeared to have been established and to some extent controlled by the same person, who later died. But there was no direct evidence of the creation and operation of the trust. A company that was likely the trustee of the trust (if it existed) had been deregistered for several years. The liquidator sought a direction that he was justified in distributing the assets of the company on the basis that it was not indebted to the trust. 12.91 The Court granted the direction sought. But that was on the express basis that the substantive question of law was not being resolved in a way that bound any third party. Austin J said: The question which they raise is whether the liquidator’s proposed course of conduct would be justified in all the circumstances, not whether the recipient of the distribution is entitled to it as against the trustee of the Trust or potential beneficiaries: (compare Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141, 149G.) It is true that if the liquidator makes a distribution in reliance on the court’s direction he will be protected from personal liability and the true beneficiaries (if there are any) will find it more difficult to recover their entitlements. This is because

they will then need to establish a right to trace the assets distributed into the hands of the recipients (or even beyond them) or a right of recovery against the recipients personally. But the court’s direction does not purport to determine their rights, and leaves it open for any beneficiary to seek to establish a right subsequently if permitted by relevant limitation periods to do so. Proof an entitlement will necessarily involve evidence not before the court in this application. Further, the court’s direction does not and cannot deprive a person claiming an interest through a trustee or beneficiary which is a deregistered company, of the opportunity to apply to the Commission or the court to reinstate the company under s 601AH. I conclude, therefore, that the court’s reluctance to determine substantive rights in an application for directions is no impediment to the present proceedings.69

[page 307] 12.92 Austin J thus expressly held that third parties could later establish rights contrary to the direction to the liquidator.

IV.B.2. Re Anglican Insurance 12.93 Re Anglican Insurance Ltd (2008) 26 ACLC 147 was the next case cited in Re Willmott Forests (No 2). Again, it does not appear to provide support for an approach contrary to GB Nathan. In Re Anglican Insurance, an insurance company decided to cease business. It entered into an agreement with the intention that its liabilities for present and future claims would be assumed by another insurer. The first insurer was then wound up. Its liquidator made an ex parte application under s 511 of the Corporations Act seeking the Court’s determination of the question whether the agreement was ‘effective to transfer’ the company’s liability for present and future insurance claims to the new insurer. The Court refused to determine the question, and said that the liquidator should join the new insurer and seek declaratory relief. In so concluding, Barrett J said: An application under s 511 for determination by the court of a ‘question arising in the winding up’ is not the occasion for the making of orders affecting the rights of outsiders. Indeed, a determination under s 511 cannot, of itself, bind anyone except the liquidator and the persons entitled to participate under the winding up. Its effect within that group is merely to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty.70

12.94 Barrett J then set out, with apparent approval, the passage from GB Nathan cited above supporting the traditional principle that the jurisdiction to give directions does not enable the court to making binding orders affecting the rights of third parties.

IV.B.3. Re Great Southern Managers 12.95 Re Great Southern Managers Australia Ltd (No 3) [2011] FCA 1192 was the next case cited in Re Willmott Forests (No 2). Again, that case does not appear to support an approach contrary to GB Nathan. Great Southern was a two-party case, in which both parties appeared to argue their position. And in any event, no substantive rights were determined. 12.96 In Great Southern, the liquidator of a company sought determination of a question whether certain fees paid by members to the RE should be treated as the property of that company, or whether they should be paid to the new responsible entity that had replaced the company. Arguments of set-off arose between the company and the new RE. The new RE appeared by counsel and made submissions, although the Court noted that there were several [page 308] legal arguments in respect of which the new RE had not had an adequate opportunity to present submissions.71 12.97 McKerracher J declined to answer the question raised by the liquidator. His Honour did so ‘in the absence of proper pleadings, evidence and argument from [the new RE]’.72 Accordingly, no substantive rights were determined in Great Southern. Moreover, there appears to have been no suggestion that the Court might have been prepared to make a binding determination of rights without the affected parties appearing before the Court, if not also being joined to a reconstituted proceeding in which declaratory relief was sought.

IV.B.4. Re Astarra Asset Management

12.98 Re Purchas (as liquidator of Astarra Asset Management Pty Ltd (in liq)) [2011] NSWSC 91 was the next case cited in Re Willmott Forests (No 2). It too does not appear to suggest anything inconsistent with GB Nathan. A liquidator made an ex parte application for directions as to how he should deal with certain money in which the company in liquidation had no interest. It appeared that the money in question ought to be paid to one of two other companies. The application for directions was made ex parte, although one of the two companies appeared to support the liquidator’s submission that the money should be paid to it. The other company, incorporated in the British Virgin Islands, did not appear and could not be contacted. 12.99 Ward J made the direction sought. But he was careful to note the liquidator’s counsel’s acknowledgement that: … a determination under s 511 cannot, of itself, bind anyone except the liquidator and the persons entitled to participate under the winding up. Its effect within that group is merely to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty (citing Re Anglican Insurance Ltd [2008] NSWSC 41 at [38]; and S & D International at [7]).73

12.100 There is little doubt that Ward J accepted that acknowledgment as correct. The acknowledgment is, of course, entirely consistent with GB Nathan.

IV.B.5. Re Rewards Projects Ltd 12.101 The final case cited in Willmott Forests (No 2) at [47] was Re Rewards Projects Ltd [2011] WASC 339. This case does provide some support for the Court’s approach in Willmott Forests (No 2), although of a somewhat limited and equivocal nature. The liquidators of an RE of a failed timber scheme made an ex parte application for directions under the Corporations Act and the Trustees [page 309] Act 1962 (WA). When the scheme was wound up, $1.9 million was left in a maintenance fund account held by the RE. The fund was

created by the RE paying a proportion of the initial contributions made by growers into the maintenance fund account. The deed governing the maintenance fund provided that the fund would be held by the RE on trust for the growers to secure the RE’s maintenance obligations. The liquidators brought an ex parte application for a direction that they would be acting properly in paying that money to the RE in its own right. No grower appeared, although the application was advertised, and the relevant court documents were available on the liquidators’ website. 12.102 Master Sanderson made the direction sought. He reasoned that the position of the RE was to be equated to that of a settlor of a trust that fails because its purpose cannot be achieved. In that case, there is a presumption that the assets of the failed trust should revert on a resulting trust to the settlor. They would not be the property of the beneficiaries. As there was no contrary presumption of advancement, and no evidence of a contrary intention, the resulting trust applied. The money in the account was therefore properly to be treated by the liquidator as part of the pool of assets available to satisfy creditors of the RE.74 12.103 On one view, therefore, Master Sanderson appears to have determined on an application for directions a question affecting the rights of third parties (the growers) without those parties being joined to the proceeding. But two parts of the judgment strongly suggest that there was no such binding determination. First, Master Sanderson said: Subject to the liquidator making full and fair disclosure of the material facts, the effect of such an order is to protect the liquidator from claims that he or she has acted unreasonably, inappropriately or in breach of duty. Effectively the order sanctions a proposed course of conduct: see Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674, 679–680.75

12.104 Second, one of the reasons Master Sanderson gave for making the direction sought was the fact that: … the liquidators were not asking the court to decide any entitlement to the fund held in the Maintenance Fund that is contested by another party.76

IV.C. Doubts put to rest by Macedonian

Orthodox? 12.105 The third reason cited in Willmott Forests (No 2) for reaching a conclusion contrary to GB Nathan was that: … if and in so far as there was any doubt about the power of the Court under s 511(1) to make orders affecting substantive rights of third parties,

[page 310] that doubt has been put to rest by the High Court decision in Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand.77

12.106 The headnote to Macedonian Orthodox does, at first sight, appear to support that proposition. The headnote records the court holding that: … the extent to which judicial advice may determine substantive rights in contested proceedings may be relevant to the exercise of the discretion whether to grant the advice sought. However, that consideration did not operate as an automatic bar to the giving of advice or as a factor of such weight as generally would compel the court not to give the advice.78

12.107 But the conclusion that Macedonian Orthodox is relevant to liquidators’ applications for directions is not, with respect, correct. To explain why, it is necessary to briefly summarise the facts. A charitable trustee was sued for breach of trust. The trustee sought directions under s 63(1) of the Trustee Act 1925 (NSW) whether it would be justified in defending the claim, and whether the trustee would be indemnified from the assets of the trust for the costs of that defence. The trial judge gave both directions. The NSW Court of Appeal reversed that decision on the basis that it was generally inappropriate to give judicial advice in respect of adversarial proceedings. The High Court allowed the appeal and restored the trial judge’s decision. 12.108 There are, it is suggested, two main reasons why the High Court’s decision does not affect the authority of GB Nathan. First, the case did not involve the determination of substantive rights of third

parties. It merely involved an application by a trustee for approval to use trust money to defend a claim for breach of trust. The most that can be said in such a case is that the right of trust beneficiaries were indirectly affected, because the trust fund would be depleted by reason of legal costs. This first point was recognised by Ferguson J in Re Association for Visual Impairment The Homeless and The Destitute Inc [2013] VSC 673: … the situation here is to be contrasted with that in Macedonian Orthodox. There the directions to be given did not have any relevant effect on the rights of the parties in the separate breach of trust proceedings. It was simply a case of giving the trustee advice about defending the claim. As the plurality there observed, the court’s task in giving directions was radically different from determining the issues in the breach of trust proceedings. The trustee there was not seeking advice about whether, without any payment, it should dispose of property to which a third party may have a claim.79

[page 311] 12.109 Secondly, and more importantly, the legislation under which the application was brought expressly provided that the court’s advice to the trustee could bind third parties, just as if the decision had been given a proceeding to which those persons were parties. All that is required, says the Trustee Act 1925 (NSW), is that those third parties are given notice of the application. Section 63(11) relevantly provides: … any person on whom notice of any application under this section is served … shall be bound by any opinion advice direction or order given or made under this section as if the opinion advice direction or order had been given or made in proceedings to which the person was a party.

12.110 There is no such provision in the Corporations Act in relation to applications by liquidators for directions. This important difference in the legislation explains the reasoning of the Court. The plurality in Macedonian Orthodox accepted as correct a submission that there remained a discretion to give judicial advice to a trustee even ‘where the question for advice is in form or substance an application which will determine or affect questions that could also be resolved in ordinary adversarial litigation’.80 The plurality also appeared to accept as correct at a submission that:

… the court’s sole purpose in giving judicial advice is to determine what ought to be done in the best interests of the trust estate, and that while it was not the court’s purpose to determine the rights of adversaries, that could be done as a necessary incident of determining what course ought to be followed in the best interests of the trust estate.81

12.111 Both those passages might, in isolation, be taken as supporting the approach in Willmott Forests (No 2). But properly understood, they ought be seen as referable to the particular legislation engaged in Macedonian Orthodox. So much seems clear from the fact that the acceptance of the submission just quoted was cast by the High Court in these terms: In the present context, that conclusion would appear to be supported by s 63(3)–(4) of the Act, which contemplate the use of evidence in some cases, by the notice procedures in s 63(4) and (8)–(10), and by the possibility of appeal contemplated by s 63(11) — all steps which could be material if

[page 312] there were a risk that the judicial advice given might affect the rights of adversaries.82

12.112 In other words, it was the particular legislation that gave rise to the possibility, through express authorisation, of the court determining substantive third party rights on an application by a trustee for directions. 12.113 The same emphasis on the terms of the particular legislation emerges from what the plurality said a little later: The Court of Appeal then said: ‘It is, indeed, well-established that judicial advice is generally an inappropriate mechanism for determining substantive rights in contested proceedings.’ For this proposition six cases were cited. Four do not support it as a proposition about s 63 in its present form.83

12.114 For these reasons, the result and the reasoning in Macedonian Orthodox is, it is suggested, of little relevance to the question whether substantive third party rights can be determined on a liquidator’s applications for directions, without the third parties being joined. 12.115 In Willmott Forests (No 2), the Court considered that the

NSW Court of Appeal in Hall v Poolman (2009) 75 NSWLR 99 had ‘accepted that the principles espoused by the High Court in Macedonian Orthodox … applied to an application for judicial directions under s 479(3) and s 511(1)’.84 But all that the Court of Appeal said in Hall v Poolman in the cited passage was that: The matters taken into account in an application for approval of a funding agreement under s 477(2B) or s 506(1A) and in an application for judicial directions under s 479(3) or s 511 are essentially the same, although additional questions will arise in an application for judicial directions concerning the appropriateness of the court acceding to the application (a question comprehensively explored by the High Court in the Macedonian Orthodox Community Church St Petka case).85

12.116 That passage is directed to the considerations to be taken into account in determining whether the court should grant the direction sought. The Court of Appeal suggested, by its reference to Macedonian Orthodox, that those considerations were ‘essentially the same’ in an application under the Corporations Act as under the s 63 of the Trustees Act. That says nothing about whether the Court has jurisdiction to determine the rights of third parties in [page 313] an application to which they are not joined. That depends entirely on the terms of the legislation governing the application.

V. Subsequent cases 12.117 Several cases in Victoria have cited the approach taken in Willmott Forests (No 2) with apparent approval. In Re Sports Alive Pty Ltd [2013] VSC 69, the liquidator of a betting company was in doubt whether the company held money on trust for its clients. The liquidator brought an application for directions under the Corporations Act s 511 seeking the determination of that question. The liquidator contended that the money was not held on trust. The ACT gambling regulator was named a defendant, and it submitted that the monies were held on trust for clients. One particular client also appeared to make the same submission as the regulator. Robson J

held that the moneys were not held on trust for clients. In so holding, his Honour cited with approval the decision in Willmott Forests (No 2) that s 511 ‘does give the court the power to make orders that affect substantive rights of third parties’.86 12.118 Robson J reached a slightly different conclusion in Re Mento Developments (2009) 73 ACSR 622. His Honour there conducted a detailed review of the High Court’s decision in Macedonian Orthodox, the principles from which Robson J considered ‘applied to an application for judicial directions under s 479(3)’.87 After that review, Robson concluded that a direction given on such an application: … should not seek to resolve an issue between competing parties but the fact that the advice may tend to foreclose an issue in other disputed proceedings is not of special significance in the court exercising its discretion to give private advice to the liquidator.88

12.119 The words ‘may tend to foreclose an issue’ reflect the language used in Macedonian Orthodox at [59]. But, as noted above, those remarks were specifically directed by the High Court at the jurisdiction given by s 63 of the Trustee Act 1925 (NSW). Outside that specific context, the words ‘tend to foreclose’ are unclear. If they are meant to suggest an ability to determine an issue in a way that binds third parties affected by it, then for the reasons given it is respectfully suggested that they are incorrect. If by ‘tending to foreclose’ one means only that a direction may have the practical result that the affected parties, while not bound by the outcome, choose not to later contend for a contrary conclusion, that is a very different thing. [page 314] 12.120 In Re Association for Visual Impairment The Homeless and The Destitute Inc [2013] VSC 673, the liquidators of a company sought a direction that property was held on resulting trust for a third party. That person appeared by counsel to contend for an affirmative answer to the question, but she was not joined as a party to the proceeding, and the proceeding was at that stage not converted to an

application for a declaration. Although Ferguson J appeared inclined to the view that the Court had power to make the directions sought by the liquidator, as a matter of discretion her Honour declined to resolve the question on an application for directions. The proceeding was later converted to an inter partes proceeding and the question was determined.89

VI. Reconstitution and representation: the safer course 12.121 A recent case recognised that significant uncertainty remains about the rights of third parties in the context of an application for directions. In Re AFS Group Ltd [2013] FCA 799, the Court chose to follow the traditional course of reconstituting the proceeding and appointing representative parties. That case involved an application for directions was brought by liquidators under s 511 of the Corporations Act. The liquidators wished to know how they should treat money held by a company in a particular bank account. Alternatively, they sought declarations that the money was held on trust or was the beneficial property of the company. The money represented principally fees and commissions paid by issuers of financial products recommended by financial advisers as representatives of a subsidiary of the company. 12.122 Initially, the application for directions was brought by the plaintiffs (then voluntary administrators) without any other party being joined. All authorised representatives were notified of the application and provided with access to court documents. Some representatives appeared on the return of the application, although they were not at that stage parties. 12.123 Dodds-Streeton J requested submissions on the question whether, if the plaintiffs in substance sought a binding determination of third party rights, such relief should be granted in an application for directions. The parties who were, at that stage, appearing before her Honour all agreed that the answer was yes. Her Honour’s summary of, and response to, their position is instructive, orthodox and, with respect, to be commended:

In the present case, the parties submitted, broadly speaking, on the basis of Willmott [Forests (No 2)], that where: (a) all potentially affected persons had been notified and afforded the opportunity to put their case; (b) no objection was raised; (c) it would assist the liquidators to proceed with the winding up; and

[page 315] (d) there was an urgent need to deal with the assets of the company, neither joinder nor a separate inter partes proceeding was necessary. While recent authority indicates that the Court is empowered under s 511 of the Act to give directions which may affect the substantive rights of third parties and should in some circumstances exercise that power without joining the affected parties, such action, while otherwise expedient particularly in urgent situations, may not accord with the principles stated in John Alexander’s Clubs.[90] Uncertainty may attend the binding effect of the relief granted. In the present case, for the avoidance of doubt, particularly as it involved no significant additional effort, delay or expense, the proceeding (which did not require pleadings or discovery) was reconstituted as an inter partes application, the competing claimants were joined as defendants and an appropriate representative order was made.91

12.124 In the end, following reconstitution, there were two defendants: the NAB, a secured creditor of AFS, and a person representing the class of authorised representatives who had claims to the money. All affected parties were therefore joined to the proceeding and represented.

VII. Conclusion 12.125 The approach adopted in Re AFS Group Ltd is, with respect, by far the better course. Absent legislative intervention along the lines of s 63(11) of the Trustee Act 1925 (NSW), quoted and discussed above at para 12.109 and following, it is suggested that applications for directions involving questions of third party rights should ordinarily be converted into inter partes proceedings by joining affected parties. In the context of managed investment schemes, representative orders should be made, perhaps by invoking the procedure in r 16.01(2)(c) or r 18.03. Exceptional circumstances that

might warrant not joining third parties are where there is real urgency attending the matter, or, perhaps, where the relevant corporation or scheme has assets of such low value that it is uneconomic to proceed otherwise. Absent such circumstances, the orthodox approach, consistent with Re GB Nathan and Re AFS Group Limited, should be followed. In the context of court ordered liquidations and the winding up of managed investment schemes, that approach correctly represents the law. 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12.

13. 14. 15.

John Alexander’s Clubs Pty Ltd v White City Club Ltd (2010) 241 CLR 1; (2010) 266 ALR 462; [2010] HCA 19 at [131]. John Alexander’s Clubs Pty Ltd v White City Club Ltd (2010) 241 CLR 1; (2010) 266 ALR 462; [2010] HCA 19 at [131]–[132]. News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410; (1996) 139 ALR 193 at 524. As exists in s 63(11) of the Trustee Act 1925 (NSW), quoted and discussed in para 12.109 and following below. Re Permanent Trustee Australia Ltd (1994) 33 NSWLR 547 at 548. All references to rules in this chapter are to the Supreme Court (General Civil Procedure) Rules 2005 (Vic). The Trustee Acts in other states generally enable applications for directions: Trustee Act 1925 (NSW) s 63; Trusts Act 1973 (Qld) s 96; Trustee Act 1936 (SA) s 92; and Trustee Act 1962 (WA) s 92. No such legislation exists in the Northern Territory, Tasmania or Victoria. See para 12.7 above. Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 677. Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679 (citations omitted). Re Mockett’s Will (1860) Johns 628; (1860) 70 ER 571 at 630. Re Lorenz’s Settlement (1861) 1 Dr & Sm 401; (1861) 62 ER 433 at 404 (emphasis added). Contrast the discussion of Finkelstein J in Re Riverside Nursing Care Pty Ltd (2004) 22 ACLC 215; [2004] FCA 93 at [3]–[4]: although any creditor not joined to the application who was dissatisfied with the result would not be bound by the ruling, and was free to challenge it in separate proceedings, where interested parties are joined to a trustee’s application for directions, ‘binding decisions can be made.’ Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] 3 All ER 198 at 201. Re MF Global UK Ltd (No 3) [2013] All ER (D) 139 (Jun); [2013] 1 WLR 3874; [2013] 2 BCLC 426 at [26]. Re Bridge, Franks v Worth (1887) 56 LJ Ch 779; Re Carlyon; Carlyon v Carlyon (1886) 56 LJ Ch 219; In re Davies; Davies v Davies (1888) 38 Ch D 210; In re Royle; Royle v Hayes (1889) 43 Ch D 18. The latter case was cited with approval in Hudson v Gray (1927) 39 CLR 473 at 502, and in Gonzales v Claridades (2003) 58 NSWLR 211; [2003] NSWCA 227 at [31]. It has been held that where property is held on trust, the administration jurisdiction of the court can be invoked to determine which beneficiary the trustee

16. 17. 18. 19. 20. 21. 22.

23. 24.

25. 26. 27. 28.

29.

30. 31.

32. 33. 34. 35. 36. 37. 38.

should transfer the property to, because that does not involve third party rights: In re Hargreaves; Midgley v Tatley (1889) 43 Ch D 401. Starke J appears to have some doubt as to the correctness of that decision in Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619 at 633. Re Elders Forestry Management Ltd (2012) 90 ACSR 573; [2012] VSC 287. Re Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91 at [40]. Jacobs’ Law of Trusts in Australia (7th ed) at para 2134, p 590. Re A Singer and Co [1943] Ch 121; [1943] 1 All ER 225 at 125. Re Blackbird Pies (Management) Pty Ltd [1969] Qd R 387. Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14 at 35. Re Equity Funds of Australia (in liq) (1977-78) CLC 40-303 at 29,254. The passage does not appear in the alternative report of Bowen CJ’s decision: Re Equity Funds of Australia (in liq) (1976) 2 ACLR 278. Re TTC (SA) Pty Ltd (in liq) (1983) 32 SASR 532; (1983) 7 ACLR 784 at 535. Re TTC (SA) Pty Ltd (in liq) (1983) 32 SASR 532; (1983) 7 ACLR 784 at 535. See also Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14 at 537: ‘the determination on the liquidator’s summons does not raise an estoppel.’ Re TTC (SA) Pty Ltd (in liq) (1983) 32 SASR 532; (1983) 7 ACLR 784 at 534. Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 73 FLR 264; (1984) 9 ACLR 56 at 57. Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 118. Murdoch v Crawford [1986] VR 97 at 99. As to the right of appeal, see also Re Laymar Constructions Pty Ltd (in liq) & Companies Act (1977) 3 ACLR 65 (NSWCA); Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 680 (‘the availability of an appeal in any particular case must depend upon the legislative provisions and rules regarding appeals in the particular court … cases may arise where the practical consequences of the giving of directions could justify an appeal’) and Coats v Southern Cross Airlines Holdings Ltd (in liq) [2000] 1 Qd R 84 at 95. That case did not involve the determination of third party rights, in the sense of determining what those rights were. Instead, the case resolved the question whether the statutory power of a liquidator to a disclaim a lease would, once exercised, have certain legal consequences. See chapter 11 of this book. ‘The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.’ Re Securitibank Ltd [1978] 2 NZLR 133; Re Reid Murray Holdings Ltd [1969] VR 315; Re Gapes Interstate Transport Pty Ltd [1970] 2 NSWR 365; Re S & N (Nominees) Pty Ltd (1986) 84 FLR 463. Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745. Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745. Re Everything Australian Pty Ltd (1992) 9 ACSR 75 at 76. The other McLelland J case was Re Siromath Pty Ltd (No 2) (1991) 6 ACSR 226. Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 245 at 246. Re JW Murphy and PC Allen (1996) 19 ACSR 569 at 570. Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141; (1997) 24 ACSR 617 at 147. Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141; (1997) 24 ACSR 617 at 150.

39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

Re Southern Cross Airlines Holdings Limited [2000] 1 Qd R 84 at 93. Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466 at [49]. Derwinto Pty Ltd v Lewis (2002) 42 ACSR 645 at [28]. ASIC v Rowena Nominees Pty Ltd (2003) 45 ACSR 424 at [78]–[79]. Re Riverside Nursing Home Care Pty Ltd (2004) 22 ACLC 215 at [3]. Re Media World Communications Ltd (2005) 216 ALR 105 at [5]. Re Stacks Managed Investments Ltd (2005) 219 ALR 532 at [52]–[55]. In Matter of Enviro Friendly Products Pty Ltd [2013] FCA 852 at [9]. Retail Adventures Pty Ltd [2013] FCA 891 at [39]–[41]. Re ICS Real Estate Pty Ltd [2014] NSWSC 479 at [25]. Re Reid Murray Holdings [1969] VR 315 at 317. The cases cited were Re Washington Diamond Mining Coy [1893] 3 Ch 95; Re G Stanley and Co [1925] 1 Ch 148; Re MIG Trust Ltd [1933] Ch 542; Peat v Gresham Trust [1934] AC 252; Re B P Fowler Ltd [1938] Ch 113; Re A Singer and Co [1943] Ch 121; Re Evers Motor Co [1962] QWN 6; Pitts v Lehmann (1940) 40 SR (NSW) 614; Rees v Bank of NSW (1964) 111 CLR 210; Re Quality Camera [1965] NSWR 1330; Re York (Stationers) Pty Ltd [1965] NSWR 446; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. Re S & N (Nominees) Pty Ltd (in liq); Yeomans v Lease Industrial Finance Ltd (1986) 84 FLR 463 at 475–6. Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 678. Re Media World Communications Ltd (2005) 216 ALR 105 at [5]. Re Riverside Nursing Home Care Pty Ltd (2004) 22 ACLC 215 at [3]. Re Pasminco Ltd (2004) 49 ACSR 470 at [18]. Re Pasminco Ltd (2004) 49 ACSR 470 at [19]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [43] and following. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [41]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [44]–[45]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [46]–[47]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [45]. The distinction between jurisdiction and power is not, it is suggested, relevant for present purposes. Meadow Springs Fairway Resort Ltd (In Liq) v Balanced Securities Ltd (2007) 25 ACLC 1433 at [50]–[51] (emphasis added). Meadow Springs Fairway Resort Ltd (In Liq) v Balanced Securities Ltd (2007) 25 ACLC 1433 at [49] (emphasis added). Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334; (1994) 121 ALR 626 at 352. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [45], [46] and [56]. Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334; (1994) 121 ALR 626 at 343–5. Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334; (1994) 121 ALR 626 at 352. Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334; (1994) 121 ALR 626 at 352. Re Graf Holdings Pty Ltd [1999] NSWSC 217 at [38] (emphasis added).

70. 71. 72. 73. 74. 75. 76. 77. 78.

79. 80.

81.

82.

83.

84. 85. 86. 87. 88.

89. 90. 91.

Re Anglican Insurance Ltd (2008) 26 ACLC 147; [2008] NSWSC 41 at [38]. Re Great Southern Managers Australia Ltd (No 3) [2011] FCA 1192 at [5]. Re Great Southern Managers Australia Ltd (No 3) [2011] FCA 1192 at [33]. Re Purchas (as liquidator of Astarra Asset Management Pty Ltd (in liq)) [2011] NSWSC 91 at [36]. That conclusion may be open to question, on the basis that it was the growers who ought to have been treated as the settlors of the trust. Re Rewards Projects Ltd [2011] WASC 339 at [20]. Re Rewards Projects Ltd [2011] WASC 339 at [25]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [48]. Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 66. Re Association for Visual Impairment The Homeless and The Destitute Inc [2013] VSC 673 at [15]. Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 249 ALR 250 at [60] (emphasis added). Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 249 ALR 250 at [105] (emphasis added). Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 249 ALR 250 at [106]. Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 249 ALR 250 at [108]. Re Willmott Forests Ltd (in liq) (No 2) (2012) 88 ACSR 18 at [53]. Hall v Poolman (2009) 75 NSWLR 99 at [172]. Re Sports Alive Pty Ltd [2013] VSC 69 at [14]. Re Mento Developments (2009) 73 ACSR 622 at [48]. Re Mento Developments (2009) 73 ACSR 622 at [49]. Robson J later noted, at [51], that the liquidator did not seek a resolution of the relevant issue, but merely a direction that the liquidator would be acting properly if he proceeded on a particular basis. Re Association for Visual Impairment The Homeless and The Destitute Inc (No 2) [2014] VSC 183. The principle quoted was that set out at para 12.3 above. Burdett-Baker, in the matter of AFS Group Ltd (in liq) v National Australia Bank Ltd [2013] FCA 799 at [59].

[page 317]

13 PRACTITIONER REMUNERATION, COSTS AND SECURITY Nick Anson and Catherine Button Nick Anson is a partner in the Dispute Resolution department at Minter Ellison in Melbourne. He specialises in insolvency and restructuring and banking and finance litigation. Nick has a BCL (1st) from the University of Oxford and is a guest lecturer in the Masters in Law program at the University of Melbourne in Corporate Insolvency. He acts for secured creditors, insolvency practitioners and creditors, as well as borrowers and directors. Nick advised the receivers and managers of Great Southern Limited. Catherine Button is a member of the Victorian Bar practising in corporate and commercial law. She holds degrees in Arts and Law from Melbourne University and a BCL (1st) and D Phil from the University of Oxford and has acted in a number of managed investment scheme cases. Catherine has particular experience in class actions arising from corporate collapses and alleged regulatory breaches.

I. Introduction 13.1 Under the Corporations Act, appointment as a liquidator, receiver or administrator brings with it a statutory right to recovery of remuneration and expenses. However, there is no express power for an insolvency practitioner to recover remuneration and expenses from the assets of an MIS or trust. Practitioners taking those appointments frequently have to navigate the uncertain and somewhat arcane territory of equitable liens and equitable allowances. Unless the appointment is pursuant to a contract with a third party, such as a bank, which covers the payment of fees and

expenses, the insolvency practitioner will have no immediately enforceable right to recoupment of fees and expenses. In order to secure payment insolvency practitioners appointed to an RE or to a specific MIS will typically need to apply to the court seeking an order approving payment of those amounts pursuant to the principle in Re Universal Distributing (1933) 48 CLR 171, or on [page 318] the basis that an equitable allowance ought to be made under the principle in Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32. 13.2 As this chapter explores, each of those bases for payment carries risks and uncertainties which insolvency practitioners need to be mindful of, not only in making applications to the court, but in how they structure their teams and how they record their work. This is so notwithstanding that there are signs that some of the criteria for payment under these equitable heads are increasingly construed in a pragmatic way. In addition, given that insolvency practitioners appointed to the RE are commonly required to wind up or administer the MIS, these appointments bring additional complexity. Such complexity may arise where the ‘house’ funds are insufficient to meet the practitioner’s fees and costs and the practitioner seeks recourse to trust funds (or vice versa) or where the RE is the trustee of numerous schemes, some of which are in funds, and others of which are not. If house funds are used to meet a trust shortfall, the general creditors of the RE will suffer. If trust funds are used to meet a house shortfall, the beneficiaries will suffer. In those circumstances, who is to wear the shortfall? The general creditors of the RE, the beneficiaries of one or more funds or, as has in fact happened, the insolvency practitioners themselves? 13.3 While the payment of costs and expenses is based on equitable principles of long standing, the law in this area is developing as insolvency practitioners and their legal advisors look for ways to streamline the application process, monetise payment

rights which may be long-dated (e.g. in timber schemes) and secure payment of interest. 13.4 This chapter will refer interchangeably to MISs and trusts (and the related concepts of RE and trustee, and scheme and trust property) to avoid repetition, unless the context otherwise requires.

II. The statutory lacuna 13.5 In its March 2014 discussion paper, The establishment and operation of managed investment schemes,1 CAMAC posed the question ‘should the Corporations Act make provision for meeting remuneration and expenses in relation to the winding up of a scheme along the lines of the provisions applicable to companies?’2 As CAMAC drew out, whereas the Corporations Act makes provision for the payment of, and priority attaching to, administrators’ and liquidators’ remuneration and expenses, there are precious few provisions touching on the payment of the fees and expenses of insolvency practitioners appointed to an MIS. 13.6 Notwithstanding that these provisions have not served as a stable or substantive basis for payment of insolvency practitioners’ costs in the MIS [page 319] context, it is worth noting those provisions that do exist and the ways in which they have been (and might yet be) used. The Corporations Act requires that the constitution of an MIS make ‘adequate provision’ for the winding up of the scheme.3 Typically, this provision is approached on the basis that it is complied with by provisions specifying the circumstances in which the scheme must be wound up, and providing for an indemnity in favour of the RE for the costs of winding up the scheme itself. As such, the concept of ‘adequate provision’ has not been approached on the basis that it requires that a scheme constitution include any provisions which would ensure that funds are actually available for that purpose.

13.7 More promising is s 601NF(2), which permits the court to ‘give directions about how a registered scheme is to be wound up if the court thinks it is necessary to do so.’ For unregistered schemes, the power is cast in broader terms: s 601EE4 provides that the court may make ‘any orders it considers appropriate’ for the winding up of unregistered schemes. Although cast in narrower terms, s 601NF(2) has in practice been used to give directions regarding how the remuneration and expenses of insolvency practitioners are to be funded. 13.8 In Re Rubicon Asset Management Ltd (2009) 77 NSWLR 96, having directed an RE (itself under external administration) to wind up the scheme, McDougall J found that the power to give directions under s 601NF extended to a power to give directions about how the costs and expenses of a winding up were to be paid and to authorise recourse to the RE’s own assets if the scheme assets were insufficient. As such, in circumstances where the RE had an excess of liabilities over assets and was so insolvent (as were the schemes to be wound up), the ruling authorised the postponement of the claims of the RE’s creditors to the costs of the winding up so that the RE’s cash reserves and other assets were available to meet the costs of the winding up. McDougall J put, and answered, the question in the following terms: To put the question more bluntly: is an order that the expenses of winding up a scheme be borne out of the assets of the responsible entity, to the extent that the scheme’s assets are insufficient, an order ‘about how’ that scheme ‘is to be wound up’? As a matter of language, I think, a direction about payment of costs and expenses of winding up is capable of being a direction about how that winding up is to be conducted. That is because, in the real world, the process of winding up will necessarily be attended by, or productive

[page 320] of, costs and expenses. Whether or not that linguistic conclusion should be adopted as the proper construction of s 601NF(2) must depend, to a large degree, on a consideration of the subsection in its context. That context includes, as I have said, recognition that a responsible entity may continue to hold that position, and therefore in principle be required to perform its duties, notwithstanding that it is insolvent or under external administration.5

13.9 As the judge stressed, context is everything. In that case, the context included the fact that the scheme constitutions provided for the RE to bear the cost of winding up the schemes, albeit that it had a right of indemnity against the schemes for those costs. The fact that the right of indemnity was of no practical value did not detract from the duty that McDougall J found that the RE had under the schemes’ constitutions to effect the winding up.6 To that extent, the exercise of the power in s 601NF to give directions in that case was arguably anchored in the constitution of the schemes, rather than any power to give directions as to the funding of the costs of liquidators of schemes which is at large, irrespective of the established trust principles. Accordingly, Re Rubicon Asset Management Ltd may not suggest that s 601NF will serve as a suitable statutory base in every case. There are further indications that s 601NF may have limited potential to act as a statutory savior: first, s 601NF has not been widely used in practice to found an order for the payment of remuneration and expenses, although it has been used to found remuneration orders which are ancillary to other orders made under s 601NF.7 Secondly, even where s 601NF is invoked to found an order for payment, the court may approach the making of such orders by application of the Universal Distributing [page 321] principle in any event.8 Thirdly, as White J emphasised in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466, s 601NF(2) only permits the court to give directions about ‘how a registered scheme is to be wound up’9 and ‘does not authorise the court to confer additional powers upon a responsible entity to which third parties would be made subject, or to interfere with the rights which third parties would otherwise enjoy.’10 For these reasons, it appears unlikely – at least in the short term – that s 601NF(2) will permit insolvency practitioners to throw off the shackles of the equitable principles the subject of this chapter.

III. Limited reliance on trustee’s own right of indemnity 13.10 In practice, an insolvency practitioner appointed to an RE will often obtain limited comfort from the trustee’s own right of indemnity from scheme property. This is likely to follow from a number of considerations. 13.11 First, the trustee’s own entitlements to be indemnified from scheme property must be set out in the scheme constitution.11 However, many constitutions provide only a very limited right of indemnity, and provide instead for various fees to be payable to a responsible entity or, where relevant, the ‘manager.’ The potential interactions between s 601GA(2) and the right of indemnity under general law have received some attention in cases at first instance to the effect that a limited right of indemnity may not necessarily abrogate or limit a trustee’s right of indemnity under general law.12 However, in the absence of appellate authority the practitioner should be conservative. 13.12 Secondly, a trustee’s right of indemnity will not be available, or will at least be impaired, where there is evidence of prior breaches of duty by the trustee.13 In cases where the responsible entity goes into liquidation, [page 322] such breaches of duty may not be hard to find. Accordingly, an insolvency practitioner will be concerned to ensure that his or her entitlement to fees and reimbursement is not prejudiced by prior breach or default, of which the insolvency practitioner may be wholly unaware. 13.13 Thirdly, the trustee’s right of indemnity is a personal asset of the trustee. While that means that it may be subject of a security granted by a trustee,14 in the case of a registered scheme the Corporations Act expressly provides that where the responsible entity

is being wound up, is under administration or is subject to deed administration, the right of the company to be indemnified out of scheme property may only be exercised by the liquidator or administrator of the company or deed.15 Accordingly, the right may be of limited value to a receiver and manager appointed to the assets of a responsible entity or a court-appointed receiver.

IV. The Universal Distributing principle IV.A. Origins and application 13.14 Put simply, the principle from Universal Distributing is that the costs incurred in the realisation of a fund should be ‘thrown against the proceeds.’16 In Universal Distributing, the assets of the company were insufficient to satisfy the liabilities secured by debentures. While the debenture debt took priority over the general costs, charges and expenses of the liquidation, the expenses incurred by the liquidator in the realisation of the assets the subject of the debenture were to be thrown against the fund and secured by an equitable lien over the fund. The question Dixon J posed was ‘whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the fund.’ Dixon J’s answer: ‘I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.’17 Such an entitlement arises because it would be inequitable for the expenses of [page 323] those who created a valuable fund not to have their costs and expenses paid out of the fund created.18 13.15 Not only (in theory at least) is the lien confined to remuneration for work done by insolvency practitioners19 for the

‘exclusive purpose’ of raising the fund, but the expenses must have been ‘reasonably incurred in the care, preservation and realization of the property.’20 While such a limitation may reasonably give rise to fears on the part of insolvency practitioners that their work will be scrutinised with the counsel of perfection of perfect foresight (which is so often in evidence when actions are scrutinised with the benefit of hindsight), in practice, a more pragmatic approach prevails and a broad range of activities are treated as falling within the bounds of the principle. For example, in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377, Finkelstein J confirmed that the principle applied (again ‘provided a liquidator is acting reasonably’) to give rise to an equitable lien for the costs and expenses of: identifying or attempting to identify trust assets; protecting or attempting to recover trust assets; and distributing trust assets to the persons beneficially entitled to them.21 Nor is it necessary for the practitioner to demonstrate an actual benefit from the work or expenditure. Rather, the test is one of nexus: was there a sufficient nexus (strictly, the ‘exclusive purpose’ test) between the work and the salvage objective? 13.16 Before moving on, it should be noted that where (as is common) a liquidator has been funded by a bank or other third party, the existence of that third party funding does not deprive the practitioner of the lien.22 [page 324]

IV.B. Stewart v Atco Controls: signalling the demise of ‘exclusive purpose’? 13.17 Insolvency practitioners want some certainty about recovering costs. On the plus side of the ledger, the equitable lien is not a discretionary remedy: provided the qualifying criteria are met, the insolvency practitioner is entitled to the equitable lien.23 On the negative side of the ledger, the exclusive purpose criterion raises issues and gives rise to practical challenges which need to be

managed, for example in relation to the structuring of teams, work streams and in record keeping. 13.18 As already noted, in Universal Distributing, Dixon J referred to the lien as being available for ‘work done for the exclusive purpose of raising the fund.’ The ‘exclusive purpose’ criterion is routinely reiterated in cases where an equitable lien is claimed pursuant to the Universal Distributing principle. In Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144, Davies J described the position as follows: It is clear on the authorities that the equitable lien will extend only to the receivers’ costs, expenses and remuneration incurred ‘exclusively’ in the care, preservation and realisation of the property and assets of the 10 MIS in question … The lien will not extend to the general receivership costs or costs, expenses and remuneration referable to the care, preservation and realization of the property and assets of any other scheme or schemes.24

13.19 Exclusivity of purpose is not a subjective test. That was made clear by the High Court in Stewart v Atco Controls Pty Ltd (in liq) (No 2) (2014) 311 ALR 351 where the liquidator’s principal purpose in bringing the proceedings was to remove Atco’s status as a creditor of Newtronics Pty Ltd (in liq) (at least in the view of Cavanough AJA in the Court of Appeal).25 Notwithstanding that purpose, the liquidator was not outside the equitable lien principle because, as the High Court stated in explaining Dixon J’s reference to exclusivity in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171: His Honour’s reference to exclusivity of purpose is likely to have been intended to convey that only work done in connection with creating the fund was to be reimbursed. It most certainly does not imply that the subjective purpose of the liquidator is a relevant consideration.26

[page 325] 13.20 While it is too soon to declare the ‘exclusive purpose’ criterion dead, the High Court’s use of the expression ‘in connection with’ suggests (and reflects) a more lenient approach than might be expected based on the exclusive purpose criterion as originally articulated.

V. Funding by way of equitable allowance: Berkeley Applegate 13.21 The superior courts have an inherent jurisdiction in respect of trusts. An incident of that jurisdiction is the discretion to make provision for certain of a trustee’s costs. In the insolvency sphere, that principle is referred to as the principle in Berkeley Applegate.27 That decision held that the jurisdiction was available in relation to the expenses of the liquidator of a company which held assets on trust, notwithstanding that legal title to the assets continued to be held by the company, which meant the company, and not the liquidator, was the trustee. The inherent equitable jurisdiction to allow a trustee remuneration, costs and expenses out of trust assets extends to a person, such as a liquidator, who controls a trustee.28 Whereas access to the Universal Distributing equitable lien is not dependent on the existence of a trust, payment of expenses in the form of an equitable allowance pursuant to the Berkeley Applegate principle is dependent on rights that are enforceable in equity. As Campbell J observed in Re Application of Sutherland (2004) 50 ACSR 297, Berkeley Applegate is justified by the equitable principle that where a person seeks to claim an equitable interest in property, the court has a discretion to require that an allowance be made for costs incurred and for skill and labour expended in the administration of the property.29 As part of their inherent jurisdiction in respect of trusts, the superior courts have the power to make a discretionary equitable allowance for certain of a trustee’s costs. Typically, this jurisdiction is enlivened only if the trustee’s rights under the trust instrument are insufficient. 13.22 Happily for insolvency practitioners dealing with failed MISs, the Berkeley Applegate jurisdiction is available by virtue of the requirement in s 601FC(2) that the RE hold scheme property on trust for scheme members and hold it separately from its own assets.30 The trust jurisdiction may also be enlivened in the MIS context by the provisions of the Corporations Act [page 326]

concerning the client segregated accounts of financial services licensees.31 It should also be noted that, consistent with the status of the RE as the trustee of scheme property, a RE is required by s 601FC(1)(c) to act in the best interests of scheme members and to prefer members’ interests to its own. As will be discussed further below, this has implications for insolvency practitioners fulfilling the functions of a RE in winding up an MIS. 13.23 Like the Universal Distributing principle, the Berkeley Applegate principle may be simply stated, but gives rise to issues in practice. Put simply, the court may make an equitable allowance for the skill and labour of those who undertook work ‘necessary before the [trust] estate could be realised for the benefit of investors.’32 The rationale for the allowance lies in the maxim ‘he who seeks equity must do equity,’ or, perhaps more aptly in this context ‘beneficiaries do not get a free ride.’ Some features of the equitable allowance may be briefly stated: the equitable allowance is discretionary (cf the Universal Distributing equitable lien); it can be used to cover expenses not covered by the salvage principle, and so complements the Universal Distributing jurisdiction; and (in theory at least) it is a discretion to be exercised ‘sparingly’ and in ‘exceptional circumstances.’33 More practically, the relevant factors which are to be considered in determining whether an equitable allowance ought to be made include: whether the work claimed for could have been done by another; the complexity of the work and the task, and whether the work was of ‘substantial benefit’ to the trust property (cf salvage where it is not necessary to show any benefit but merely nexus). While, as noted, the jurisdiction is to be exercised ‘sparingly’ and in ‘exceptional circumstances,’ in practice, a more liberal approach is taken,34 perhaps driven by the imperative to ensure that insolvency practitioners are afforded indemnity for sufficient costs, expenses and remuneration to promote the objective of having such qualified practitioners available and willing to take on appointments to wind up MISs, which appointments can be complex and onerous. These policy imperatives were referred to in Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425, where Palmer J remarked that:

It is in the interest of members of all schemes that highly experienced and capable insolvency practitioners, such as the administrators, be willing

[page 327] to undertake the administration. Insolvency practitioners will only do so if they are adequately remunerated and are not left out of pocket when means to pay them might be found out of assets under administration.35

V.A. Work that is ‘necessary’ and for the ‘benefit’ of investors: Universal Distributing vs Berkeley Applegate 13.24 Like the equitable lien in salvage cases, there remains uncertainty about what is ‘necessary’ for the realisation of an estate for the benefit of investors. While we saw in the salvage context a fairly liberal approach to the ‘exclusive purpose’ criterion, the same cannot be said of the equitable allowance jurisdiction. On the contrary, the stipulation that action be taken for the ‘benefit’ of investors is no mere formal incantation signifying nothing more than nexus, as the liquidators of Lehman Brothers Securities Asia found out to their cost. The different experiences of the Lehman liquidators making application under the Berkeley Applegate jurisdiction, and the liquidators in Stewart v Atco Controls, applying under the Universal Distributing jurisdiction, serves to highlight the different features of those jurisdictions, particularly when it comes to actions adverse to the interest of the investors. 13.25 In Lehman Brothers Securities Asia Ltd [2011] HKCFI 265,36 a company (LBSAL) held shares in a company listed on the Dhaka Exchange as trustee. It was accepted that the ultimate beneficial owner was another entity, Goddard. There was an issue whether LBSAL held the shares directly for Goddard (entitling it to the return of the shares) or whether LBSAL held them for Lehman Bros Commercial Corporation Asia Ltd (in which case the shares might be subject to competing security interests). To the prejudice of Goddard, the liquidators incurred substantial costs in searching for possible

third party interests. When it came time to determine whether the liquidators should have their claims met pursuant to the Berkeley Applegate jurisdiction, the Court denied the liquidators’ claims to recoup the very substantial amounts spent exploring the possibility of third party interests, which costs were adverse to the interests of the beneficial owner of the shares, and limited their claim to the very limited costs incurred in preserving the entitlement of the beneficial owner of shares. In reaching this decision, the Hong Kong Court of First Instance did not mince its words: The Liquidators were required to do virtually nothing in the administration or management of the Shares other than the very minimal work of ‘keeping an eye’ on the Shares, maintain[ing] a record of the Shares, receive[ing] dividends, notices and the like …

[page 328] … From what I can perceive, the substantial part of the Liquidators’ work in respect of the Shares and for which costs were incurred was not in verifying Goddard’s entitlement but in establishing their non-entitlement.37

13.26 As found by the Court, the liquidators had ‘put on their thinking caps’ as liquidators of other Lehman entities in an effort to aid the general creditors of those entities by bringing the shares into the asset pools of those companies for general distribution. As the Court observed: ‘It is a fine line between verifying Goddard’s beneficial ownership and the search for possibilities of third party security interests.’38 The line was crossed. 13.27 By contrast, the liquidators in Stewart v Atco Controls Pty Ltd had much greater success in invoking the Universal Distributing principle, notwithstanding that they too had taken an aggressive stance against a secured creditor and sought to recoup the costs of so doing. The liquidators of Newtronics Pty Ltd (in liq) brought proceedings challenging the enforceability of security in favour of Atco (its parent company) and the validity of the debt, and also challenging the appointment and actions of Newtronics’ receivers. At trial, Newtronics was successful against Atco, but not against the

receivers. Just before the appeal was to be heard, the receivers settled with Newtronics on terms that they paid $1.25 million to it. Meanwhile, Atco proceeded with, and succeeded in, its appeal against the adverse first instance judgment on its security. At that point, the liquidators had a substantial fund, but had lost the argument on the validity of Atco’s charge. The liquidators refused to pay the fund over to Atco, and asserted an equitable lien including for the costs of the litigation the company had (under their control) brought against Atco and the receivers. 13.28 Having restated the principle from Universal Distributing, the Court found that the fund constituted by the settlement sum was created by the efforts of the liquidator in pursuing litigation against the receivers and realising the chose in action against them. It was accepted that the liquidator had acted with propriety in bringing and pursuing that litigation. Atco sought to take the case outside Universal Distributing on the basis that the nature and purpose of the action brought against it was to challenge its security and that it did not stand to benefit from the litigation. However, having regard to the principle that it is not a liquidator’s duty to ensure litigation is conducted for the benefit of a secured creditor — that duty is owed to the body of creditors as a whole and to the court — the Court found that the liquidator was acting consistently with the duty to do what can be done to augment the disposable assets of the company. As such, the Court found that the ‘true purpose’ of the proceedings was the realisation of Newtronics’ assets (including the chose in action against the receivers). On that basis, the liquidator’s costs fell within [page 329] the Universal Distributing principle notwithstanding that the proceeding was contrary to Atco’s interests.39 13.29 While Stewart v Atco Controls puts in stark focus the extent to which Universal Distributing operates as a nexus test, and so may ultimately operate such that the innocent creditor (or investor) is required to foot the bill for the liquidator’s proceeding inimical to

that person’s interest, it is important to note that a key factual finding was not challenged on appeal. In that case, the trial judge found — and there was no challenge to this finding on appeal — that an essential element of the cause of action against the receivers was the invalidity of Atco’s security. The result of this was that the costs of the litigation were treated as non-divisible. However, it is not clear that the same result would be reached if the challenge to Atco’s security had been severable from the action against the receivers.

VI. House vs trust assets: categorising costs 13.30 The RE of an MIS is required by s 601FC(1)(i) to keep its own assets separate from trust assets. The RE’s own funds are often referred to as ‘house’ funds, as distinct from the scheme assets held on trust for investors. 13.31 Ideally, and having regard to the fact that the equitable lien is not available for general expenses, practitioners will be in a position to segregate those expenses which are incurred in winding up the MIS from those which are incurred, e.g., as liquidator of the RE. However, in practice, a fairly generous approach has been taken to the range of costs that constitute costs incurred in the care, preservation and realisation of scheme assets. For example, in Re Gunns Plantations Ltd (No 4) [2013] VSC 595, even matters such as court applications to extend the period of the first creditors’ meeting and the convening period were accepted as costs which ‘relate to the care, preservation and realization of the relevant assets’ and so were recoverable under the Universal Distributing principle.40 13.32 It should also be recalled that Berkeley Applegate may be available to ‘mop up’ costs not falling within the bounds of Universal Distributing. That possibility was raised, but not decided, in Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426. In that case, the liquidators contended that, if there was a shortfall in house funds, the Court should make a discretionary Berkeley Applegate order in their favour. While Black J indicated that ‘there would have been a strong case for a discretionary order of the kind for which

[page 330] the Liquidators contended,’41 ultimately the issue did not arise as other orders made avoided a deficiency in ‘house’ assets.42

VII. House vs trust assets: use of house assets in priority to trust assets 13.33 In some cases, the house has substantial assets whereas the assets of the schemes are severely depleted and are insufficient to meet the costs of the insolvency practitioners. Even where that disparity is not evident, investors may press for house funds to serve as the first port of call, to their benefit, but to the detriment of the RE’s general creditors. Notwithstanding the capacity for trust funds to bear those costs pursuant to the Universal Distributing and Berkeley Applegate jurisdictions, some of the general principles concerning use of house funds do suggest that recourse should first be had to house funds in some instances. First (and perhaps obviously), the general remuneration, costs and expenses of the administration and liquidation should usually fall on non-trust assets if they exist. Secondly, insolvency practitioners will generally be confined to house funds (with no recourse to trust funds) where the company does not act solely as trustee, the company has sufficient beneficial assets to meet the practitioners’ remuneration, costs and expenses, and the work done by the liquidator in relation to trust assets may be treated as work done for the purposes of winding up the company’s affairs. These principles are articulated in Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426, where, having acknowledged that the Berkeley Applegate jurisdiction extended to those who, for practical purposes, control a trust, Black J stated: The Liquidators acknowledge authority that that jurisdiction may not be exercised where the Company does not solely act as trustee and has sufficient beneficial assets to meet the liquidators’ remuneration, costs and expenses, and where the work done by the liquidator in relation to trust assets may properly be treated as done for the purposes of winding up the company’s affairs. The principle that, where a company has assets which are not held on trust, the liquidator’s costs should usually fall on its non-trust assets was recognised in Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 685–689 and the authorities were considered by Young CJ in Eq in Re Greater

West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301. In Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 48 ACSR 97 at [212], Campbell J noted the possibility that such costs could be shared between the distributable property of the company and trust assets, but it was not necessary to decide that question in the circumstances of that case.43

[page 331] 13.34 However, in Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 it was not accepted that there was any requirement to first use house funds for costs that qualified as salvage expenses, which were recoverable under Universal Distributing. In that instance, Black J applied Universal Distributing to allow the liquidators to fund the costs of recovery actions from the client segregated accounts (which were trust funds) and the recoveries generated. It was not accepted that house funds should be used first to fund those expenses.44 13.35 The third principle holds that, where the company is a trustee of a trading trust and has no other assets, the liquidators are entitled to be paid their costs and expenses for general liquidation work, as well as administering trust assets, out of trust assets.45

VIII. House vs trust assets: recourse to trust assets where house assets insufficient 13.36 While the distinction between house and trust assets is clear enough and the practical issues regarding allocation by insolvency practitioners of work between the house and trust purposes (and indeed between different trusts), while practically difficult, is clear in concept, particular issues arise in two circumstances: first, when there is a shortfall in house assets, and secondly, when some trusts have funds and others do not. 13.37 In addressing the first of those situations, it should be recalled that Universal Distributing applies to permit recourse to trust assets irrespective of the financial health of the house assets. To the extent that there is a deficiency, much can be achieved by

characterising liquidation costs as costs of administering the trust assets. In addition to the already somewhat fluid nature of the boundary and the pragmatic approach taken to characterisation already mentioned, house liquidation costs may quite properly be characterised as work referable to, and chargeable against, the trust assets for a number of reasons. First, in many cases there is a genuine overlap in the character of work undertaken. That overlap may be such that there is a claim against both the house and the trust funds. Such an overlap may exist, for example, in relation to work undertaken to identify assets held by the company, whether they are held beneficially or not. If both the house and the trust had funds, they could both contribute to the practitioners’ costs and expenses. However, if one has no assets, the entire cost must be met from the other source. This was addressed in Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 where Campbell J put the point in terms invoking principles of contribution between parties who are jointly and severally liable: [page 332] To the extent that the liquidator does work which would entitle him both to remuneration as liquidator, and also to payment in accordance with the principle recognised in Berkeley Applegate, there is a situation where two funds — the distributable property of the company, and the trust assets — are each liable to bear that expense. If two funds are both liable to meet an expense, principle ordinarily requires that there be contribution between the two funds in meeting that expense … The usual principle concerning contribution is that if one of two parties each liable to pay some particular amount is insolvent, the other party must bear the whole of that amount. The other party will have a right of contribution against the insolvent party, which would be provable in the bankruptcy or liquidation of the insolvent party. Whether or not contribution is available in cases where there are both trust assets and non-trust assets available to meet a liquidator’s expense in the ‘overlap’ area, the equitable lien recognised in Berkeley Applegate means that all costs of the liquidator properly attributable to the administration of the trust assets can be paid from the trust assets. Thus, if a liquidator has done work which is attributable equally to the winding up of the company, and the administration of trust assets, and there are no assets of the company at all to meet his expenses in doing so, the expenses are payable solely from the trust assets.46

13.38 Secondly, much of the work of liquidation may be regarded as being necessary to the proper administration of the trust. The ‘dual

character’ that much work carries was discussed at some length in 13 Coromandel Place. There Finkelstein J drew a distinction between work that might bear that dual character (for which the liquidator is entitled to be indemnified out of trust assets) and work which is ‘unrelated to the beneficiaries and their claims.’47 His Honour went on to suggest that, provided that the liquidation of a company carrying on the business of trustee is necessary for the proper administration of the trust, even those costs may be chargeable to the trust. However, Finkelstein J did caution that: … it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against trust assets.48

13.39 In some cases, it also appears to have been assumed (without substantial analysis) that trust assets will be available where the house assets are not sufficient to meet the practitioners’ costs and expenses. In Trio Capital, [page 333] Palmer J appears to have assumed that there could be general recourse to trust assets in the event of an insufficiency in house assets. His Honour stated that there would have been ‘no difficulty’ in the Court authorising the administrators to have recourse to scheme assets after the corporate assets were exhausted ‘if all that were involved were a single scheme.’49 In that case (as is further noted below), the sticking point was that there were multiple schemes, some of which were in funds and others of which were not. Similarly, McLelland J in Re GB Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 considered that, in the event of an insufficiency in house assets, an equitable allowance pursuant to the Berkeley Applegate principles would usually be available. It may be that, in future cases, there will be closer scrutiny of the extent to which the costs and remuneration (for which there is a shortfall) meet the Berkeley Applegate criteria on their own merits.

IX. Allocation of expenses between MISs and trusts generally 13.40 The courts have adopted pragmatic solutions to balance the need to limit the amount of evidence required to quantify the amounts secured by lien with the need to identify potential grounds for challenge. Pragmatic solutions have also been found to the allocation of expenses between different MISs where an expense or remuneration has been incurred on a basis that is not specifically referrable to a single asset or a particular scheme. This is of particular importance given that it is common for an entity to be the RE of more than one MIS. 13.41 Where an entity is the RE of more than one scheme, a rational basis for the allocation is obviously required. An entitlement to an indemnity secured by lien must be scheme specific and a global claim cannot be made.50 Accordingly, an insolvency practitioner must justify a claim in relation to each MIS in question, the work done and the remuneration and expenses which they seek to recoup.51 If work has been performed for the benefit of investors for whom no property is in fact held on trust, an insolvency practitioner cannot look to recoup costs and expenses from the trust assets of a separate trust unless those assets are charged with a proportionate share of the relevant costs.52 13.42 The general principle of allocation is simply that allocation should be on a basis that is fair and reasonable.53 There is some evidence of resistance to further factual inquiries that may increase the accuracy of an allocation [page 334] but add further substantial costs. This tension weighs in favour of a summary apportionment that must err on the side of caution and reflect that the practitioner ultimately bears the relevant burden.54 13.43 The maxim that equity is equality operates as a fallback

mechanism that can provide a basis for apportionment where a trustee, or insolvency practitioner, cannot otherwise, with some accuracy, apportion expenses of an administration between various trusts.55 13.44 As the principles of allocation need only be fair and reasonable, they are necessarily contestable, so key stakeholders have sought to justify potential allocations by reference to different criteria, depending on the type of liability, such as: (a) the value of estimated claims versus the value of claims and recoveries as at a particular time;56 (b) the allocation of expenses between head leases by reference to net plantable area used for particular schemes or non-scheme purposes;57 or (c) in relation to staff-related expenses, proportionately based on scheme specific measurements (such as net plantable area for forestry schemes) or equally for pure overheads.58 13.45 In the case of insurance-related expenses, the appropriate basis for allocation is likely to turn on the type of policy in question.59 13.46 There would appear to be good analogy with those cases in Canada dealing with the apportionment of expenses between different types of secured creditors,60 although thus far there has been little cross-pollination between the case law.

X. Solvent and insolvent trusts: can solvent trusts be required to bear the costs associated with insolvent trusts? 13.47 The foregoing analysis addresses practical issues arising in apportionment where multiple trusts are involved. An added complication arises when the financial health of the various trusts varies. Is the insolvency practitioner entitled, in those circumstances, to use the funds of the solvent

[page 335] trusts to recoup remuneration earned and costs incurred in relation to the insolvent trusts, or to draw on the funds of the solvent trusts disproportionately for common expenses? This may, in some cases, be the only way in which the insolvency practitioners’ remuneration and costs will be met in full. In that instance, permitting such subsidisation would serve the policy objective of ensuring that practitioners are adequately remunerated and willing to take on such appointments, but would do so to the clear and distinct prejudice of investors in the solvent funds. 13.48 Exactly this issue arose in Trio Capital. In that case, the Plaintiffs were the administrators of Trio Capital Ltd and two related companies. Trio was the RE of 12 schemes. The administrators had a statutory right of indemnity out of the property of Trio for their remuneration as administrators and their costs of the administration of Trio pursuant to s 443D, but Trio’s ‘property’ consisted mainly of the right to fees as RE of the 12 MISs of which Trio was RE. Trio’s assets were ‘insufficient by a wide margin’ to meet in full the administrators’ costs in relation to the affairs of Trio itself and in relation to the investigation and administration of the schemes of which Trio was the RE.61 13.49 Of the 12 schemes, some were solvent, but others (referred to as the ‘impaired schemes’) had insufficient assets to pay the fees of the administrators in investigating, identifying property, obtaining control of scheme property and seeking a replacement RE. 13.50 The administrators contended that they were not obliged to exhaust the corporate (house) assets before recovering scheme costs out of scheme assets and had a discretion to apportion costs between the house and trust funds as they saw fit. That argument was rejected. First, the administrators had no immediate right to have recourse to trust assets beyond that allowed by the trust instrument; insolvency practitioners are required to apply to the court to use trust funds pursuant to the Berkeley Applegate jurisdiction.62 Secondly, while there was an existing order permitting recoupment of

remuneration and expenses out of scheme assets to the extent of house assets being insufficient, that order did not give the administrators a discretion to decide the sequence of payments out of the corporate assets or to the solvent schemes with the costs of the impaired schemes.63 Thirdly, and more relevantly for present purposes, the administrators’ proposal was rejected because it would ‘benefit [the administrators] at the expense of the members of the Unimpaired [solvent] Schemes.’ That could not be permitted because ‘for the administrators to treat the members of the Unimpaired Schemes [page 336] differently from the members of Impaired Schemes and in a way which promotes their own interests would be a breach of their fiduciary obligations of loyalty as administrators of the trustee of the Unimpaired Schemes’, unless authorised by the court.64 Notwithstanding the Court’s sympathy for the plight of the administrators and its desire, as a matter of policy, not to see the administrators out of pocket, the Court did not exercise its jurisdiction to permit the administrators to look to the solvent trusts to fund their costs and expenses.65 The administrators were required to treat each fund separately and act in the best interests of the investors in each trust. 13.51 While still leaving the administrators out of pocket to a degree, the Court, in effect directed that: corporate assets were first to be applied to pay, proportionately, corporate costs, scheme costs of solvent schemes and scheme costs of impaired schemes; and outstanding scheme costs were then to be paid out of the scheme to which they were referable (i.e. the administrators could not use the funds of solvent trusts to cover the costs referable to insolvent trusts, although some portion of the costs of insolvent trusts could be covered by corporate assets). Ultimately, while the Court gave the administrators some protection against the scheme costs of the impaired schemes (as those costs were permitted to be levied against

the house funds to a degree), the administrators were left out of pocket as there was no order permitting either the unmet corporate costs or the unmet scheme costs of the impaired schemes to be met from the assets of the solvent schemes.

XI. Recourse to trust assets for the costs of trust proceedings 13.52 Notwithstanding the focus on the equitable lien and equitable allowance in this chapter, the power of superior courts to make orders in respect of trusts under their general trust jurisdiction should not be overlooked. Trustees, including REs and those controlling them, may approach the court for guidance on the management of the trust. If they take that course, their costs are typically met from the trust funds by operation of the principle in Re Buckton [1907] 2 Ch 406. It should be noted that this jurisdiction may be invoked, even where directions are sought by liquidators under s 479(3) or s 511, provided that, in substance, the proceedings are trust proceedings.66 [page 337]

XII. Process 13.53 Much of the recent case law has dealt with the process by which the amount secured by lien is to be quantified. While it is clear that the Universal Distributing lien is not discretionary and arises by operation of law,67 the scope of the liabilities that are secured by lien and their quantification is frequently contested. The potential for dispute as to quantum arises in part because of the need for court approval – an equitable lien can only be enforced by sale in pursuance of a court order or ‘where the lien is over a fund, by an order for payment thereout’,68 sometimes referred to as a ‘payment out’ order. Accordingly, similar to the rule from Berkeley Applegate, there is no immediately enforceable right of recoupment for fees and expenses out of trust property.69

13.54 The case law has largely proceeded on the express assumption that the principles and procedures applicable to the statutory jurisdiction to fix remuneration should apply.70 Those procedures were summarised by the Supreme Court of Western Australia in Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 and Conlan v Adams (2008) 65 ACSR 521. Those procedures have themselves been expressly adopted by the Supreme Court of Victoria.71 13.55 Key principles as endorsed by the courts72 appear to be these: (a) A summary procedure is required. (b) The onus is on the practitioner to justify to a prima facie standard the reasonableness of the remuneration and expenses claimed. This requires evidence that: (i) the relevant work related to the care, preservation, realisation or administration of schemes or scheme property; (ii) the work was necessary and the insolvency practitioner acted reasonably in incurring the relevant expenses and performing the relevant work; (iii) the insolvency practitioner exercised commercial judgment in relation to the work and the costs attaching to that work; (iv) the amounts claimed are proportionate to the value of the services performed, given the size and complexity of the tasks performed; and (v) the principle by which expenses and remuneration have been allocated between schemes is fair and reasonable. [page 338] (c) The court must make an assessment by bringing an ‘independent mind’ to bear on the issues. (d) There must be sufficient evidence before the court to enable potential objectors to review the amounts claimed and ascertain whether there are any matters on which they wish to object.

(e) If the prima facie standard is satisfied then the court should establish a regime for dealing with objections.73 13.56 However, there remain clear tensions in the case law between allocations of responsibility between the relevant judicial decision makers. There is authority in New South Wales that a court constituted by a judge never considers a review of quantum, but only matters of principle.74 An account must be taken and remuneration fixed by a registrar or taxing master. This is reflected in various lien cases by orders that a registrar deal with the assessment and quantification of the remuneration or costs secured by the lien.75 13.57 By contrast, in some of the larger lien cases, such as the application in relation to Great Southern,76 it was recognised that a referral to a judicial officer is not necessarily appropriate, particularly in cases of ‘mega insolvencies’.77 Because the ultimate responsibility for assessment remains with the court, some flexibility is required as to process.78 Indeed in some other jurisdictions it has been noted that there may be no clear judicial officer with the requisite qualifications to delve into the detail of quantification.79 In such cases an external assessor or referee may need to be retained. In a given case, multiple experts may be required.80 13.58 In order to determine the reasonableness of remuneration and claims for which recoupment is sought in a cost effective manner, the courts have taken a pragmatic approach to the evidence required, for example by making use of rules of evidence which permit the use of summaries of voluminous documents as a way to minimise the amount of material which must otherwise be put into admissible form.81 [page 339]

XIII. Key risks for practitioners 13.59 Having considered above the principles governing recourse by insolvency practitioners to the equitable lien and equitable allowance jurisdictions and the ways in which those principles are

applied in circumstances where there are conflicting interests (e.g. between different scheme members, or between the creditors of the RE and the members of the scheme), what are the risks to which practitioners should have regard in structuring and discharging their appointments? As is set out below, risks arise in connection with the proper purpose criterion, the requirement that remuneration and expenses be reasonably incurred, the very question of whether there exists a fund able to make good the claims, and priority disputes.

XIII.A. Proper purpose 13.60 Insolvency practitioners seeking to rely on Re Universal Distributing must first establish that a relevant expense or claim to remuneration arises from work incurred for a purpose of care, preservation or realisation. While, as noted above, no subjective intention is required, some type of reasonable nexus is required between liabilities incurred and the actual assets that are preserved or realised. If liabilities are incurred in conducting a business, but the insolvency practitioner is only able to realise fixed assets, then the liabilities themselves may not properly be regarded as having been incurred in preserving or realising the relevant assets.82 Nor are practitioners able to claim expenses incurred for the purposes of the general administration either of the company or the insolvency practitioner’s office.83 13.61 Costs incurred and remuneration earned in unsuccessful realisation attempts will not be covered, unless the relevant activities form an indistinguishable part of the realisation process as a whole84 or provide an incontrovertible benefit85 to those interested in the relevant property or fund. 13.62 There are also indications in the case law that a purpose of enhancing the value of the property does not necessarily fall within the scope of the principle.86 As noted above, other recent examples where claims have failed on the grounds of an impermissible purpose arise from where an insolvency practitioner is appointed to multiple entities in a group and advances the

[page 340] interests of an entity or group of beneficiaries that is adverse to the beneficiaries of the main fund.87

XIII.B. Reasonably incurred 13.63 An insolvency practitioner must establish that the relevant liability has been ‘reasonably incurred’. This potentially raises issues both as to the nature of the services, works or goods acquired that gives rise to the liability and questions of quantum. 13.64 One example of liabilities that have been found not to have been reasonably incurred, albeit in a related context, can be found in Bruce v LM Investment Management Ltd (2013) 94 ACSR 684. There, the liabilities were found to relate to legal costs arising from litigation that was ‘in a way … reflective of the administrators acting in their own interests to keep control of the winding up of the [relevant MIS], rather than acting in the interest of members.’88 The administrators sought to justify their entitlement to be indemnified for their remuneration and costs pursuant to the terms of the scheme constitution, rather than Universal Distributing or Berkeley Applegate. Justice Dalton held that in light of s 601GA of the Corporations Act, the right of indemnity in the constitution could not permit an indemnity in circumstances where the RE had acted improperly or not for the purposes of the trust.89 Her Honour held that what was reasonable and proper was well less than half of the costs incurred.90 The experience of the liquidators relying on the Berkeley Applegate allowance in Re Lehman Brothers Securities Asia Ltd is also salutary. Mitigating such a risk obviously requires that insolvency practitioners ensure they have adequate supervision of legal proceedings, obtain appropriate legal advice at relevant junctures, and have a keen antennae for the potential for litigation to involve an actual or perceived conflict of interest. Acting on legal advice is no excuse in this context if costs are otherwise improper.91 13.65 Demonstrating that the quantum of a claim for remuneration by reference to a particular task is reasonably

necessarily requires proof of attention to the supervision of staff and adequacy of time recording. Ideally, courts are looking for regular review by insolvency practitioners of processes to ensure that they have been designed efficiently.92 13.66 Similar evidence is required of supervision of costs generally, including legal costs. Factors that have been referred to in recent case law include [page 341] evidence of a review of the nature and extent of write offs, the comparability of charge out rates between firms and evidence of negotiation with external service providers as to rates and discounts.93 13.67 Where an insolvency practitioner has failed to take reasonable steps to recover costs and expenses from third parties, such as the cost of compliance with subpoenas, it is open for a court to reduce the remuneration that would otherwise be recoverable from the relevant pool of assets.94

XIII.C. Existence of fund 13.68 Quantification itself is no guarantee that an asset of sufficient value will exist at the time a payment out order is obtained. There will be a risk that the relevant property, unless already reduced to a fund, is lost, destroyed or impaired before the lien can be exercised. An example of property that is at risk of being impaired includes agricultural assets on leases with third party land owners that are liable to be terminated for breach.

XIII.D. Priority 13.69 Finally, priority issues will potentially complicate the ability of an insolvency practitioner to reliably estimate whether amounts that can be recovered from trust property will be able to clear the

estimated quantum of expenses likely to be incurred in preserving or realising that property. Accordingly, an insolvency practitioner is likely to be very conservative when considering the types of expenses that should be paid unless the potential pool of assets against which an indemnity could be executed is large.

XIV. Mitigants 13.70 Despite the challenges standing in the way of recovery of remuneration and expenses from trust property, the case law demonstrates various risk reduction strategies that an insolvency practitioner would be well advised to consider.

XIV.A. Third party funding 13.71 As noted above,95 the case law now expressly recognises that the insolvency practitioner may have been funded by a third party funder and that this will not affect the existence or enforceability of the lien. The lien is available even though the relevant expenses have been paid by the funder. In those circumstances the funder is entitled to be subrogated to the lien and to any recoveries. This arrangement obviously pushes the risk of non-recovery [page 342] to the funding creditor. This situation most commonly arises in cases where funding is provided to a receiver or administrator by a bank or a group of funders, who may in turn have access to a broader range of securities than just the lien, or where funding is provided by a party that intends to recapitalise a group or assume control as a replacement responsible entity. 13.72 The funding creditor has to date not been named as a party to the proceedings and no issue has been taken as to whether the relevant funder is a necessary party to the litigation.

XIV.B. Use of directions as protection

13.73 One way for insolvency practitioners to reduce the risk that their claim to a lien over a particular asset for reimbursement of a particular expense is challenged prior to a payment out order being made is to obtain directions before a relevant expense is incurred.96 For example, directions have been made to the effect that: The Receivers are justified and carrying out their duties as receivers and managers and proceeding on the basis that they will be entitled to a lien over the trust property preserved or protected by their reasonable expenditure including their reasonable remuneration.97

13.74 Examples of the types of expenses in relation to which receivers have obtained directions before meeting those expenses include: (a) the funding of amounts payable under premium funding agreements to preserve an existing insurance policy; (b) the costs of convening meetings of members of schemes to consider a change of responsible entity; (c) incurring expenditure to preserve scheme property by, for example, paying rent payable under third party leases; and (d) incurring expenses in defending litigation, such as perhaps could have been obtained in relation to LM Investment Management Ltd.

XIV.C. Use of interim and pre-emptive orders 13.75 A further mechanism available to insolvency practitioners to mitigate counterparty exposure for unpaid fees or expenses, or at least manage their cash flow, is to obtain authority to permit the drawing of fees and reimbursement of expenses on an interim basis.98 [page 343] 13.76 To date, such orders have only been made in the context of an express statutory power to make any order the court considers appropriate in relation to the winding up of an unregistered scheme (s 601EE) or the court’s inherent power to control receivers appointed

by the Court. We are not aware of any authority in Australia99 that has recognised a power to grant such interim or pre-emptive orders in the case of an application that is purely justified by reference to Universal Distributing or the principle from Berkeley Applegate, but the jurisprudence in this field is developing and may yet take that step. In considering whether a court is willing to make such an order, care might be needed to ensure that appropriate undertakings are given to ensure that payment ‘on account’ does not equate in practice to payment ‘in any event.’100 Such undertakings need to ensure that all or part of any payments can be clawed back for the benefit of the relevant trust if it is subsequently held not to be payable and in appropriate cases that insolvency practitioners remain in office so that realisation attempts are completed.

XIV.D. Cost recovery 13.77 The cost of preparing claims for indemnity secured by lien are themselves recoverable under the lien.101 Any reworking of records to put them in a state where they can be used as evidence is likely to result in heavy discounts of relevant claims to remuneration for the cost of reworking on the basis that some of the work would not have been necessary if appropriate systems had been instituted earlier on and contemporaneous records kept.102 13.78 As noted above, there is also a practice and jurisdiction for all parties properly joined in such an application, including any contradictors or investor groups, to have their appropriate costs paid out of the relevant trust fund.103 By burdening the fund with the cost of scrutiny, that practice itself creates an incentive for investor groups to be pragmatic in finding cost effective ways to scrutinise such claims.

XIV.E. Availability of interest in equity 13.79 There is no clear authority to award interest in this precise context, but interest appears to have been permitted in some cases without material

[page 344] argument104 and to be consistent with authority. In the English case of Re Drax; Savile v Drax [1903] 1 Ch 781, Cozens-Hardy LJ observed: I am not aware of any case in which the Court of Chancery has refused to give interest on an equitable lien or charge, and I think the view taken by Bacon VC in Lippard v Ricketts [LR 14 Eq 291, 294] is the correct one. There he says: ‘in the case of In Re Kerr’s Policy [LR 8 Eq 331] the Court seems to have proceeded on the theory that a debt secured by equitable mortgage will, unless something is said or may be implied to the contrary, carry interest; and it seems to follow that, when the Court was once decided that there is a charge, the sum charged must bear interest.105

13.80 Re Drax; Savile v Drax [1903] 1 Ch 781 was cited as good authority in Firth v Centrelink (2002) 55 NSWLR 451, in which the court observed that it is a usual incident of equitable liens that they bear interest.106 Similar observations in related contexts were made in Simpson v Rowe [2011] VSC 149 (in the context of a barrister’s fruits of action lien)107 and in Re PM Sulcs & Associates Pty Ltd (in liq) [2012] NSWSC 689 (in the context of approval of a settlement deed).108 13.81 The availability or potential availability of interest in this context is perhaps surprising given that a liquidator or administrator is not generally entitled to interest on unpaid remuneration from corporate (or house assets) but would appear to be broadly consistent with the approach of the High Court of Australia to the award of interest in equity as evidenced by observations in cases such as Hungerfords v Walker (1989) 171 CLR 125.109

XIV.F. Ability to monetise — assignments of indemnity secured by lien 13.82 A final mechanism evidenced by the recent case law to maximise the practical value of the lien arises in the context where the only available asset has not yet been reduced to a fund. In those circumstances the right to an indemnity secured by lien arising from salvage principles has been held to be assignable.110 The rationale for this holding is that a lien securing the right of indemnity is a

proprietary ‘chose in action’ and hence is capable of assignment.111 This enabled the receivers of various forestry schemes [page 345] previously managed by Great Southern Managers Australia Limited to assign their lien to Gunns Plantations Limited for value several years before Gunns Plantations Limited itself transitioned to liquidation. This enabled the receivers to monetise their lien and retire.

XV. Reform 13.83 While the series of agricultural MIS collapses of the last seven years appears to have abated, given the prevalence of trust structures in the Australian economy, there remains a need to ensure that remuneration and indemnity entitlements adequately incentivise the incurring of appropriate expenses to preserve the assets available for relevant stakeholders. 13.84 Ideally the Corporations Act would include a statutory right to claim remuneration and expenses where an external administrator winds up a managed investment scheme or trust, or administers the scheme or trust property prior to a transition to a new trustee or RE. Such a jurisdiction would hopefully avoid some of the technical distinctions that currently plague the different bases for recovery of remuneration and expenses in the MIS and trust cases. This could be drafted in a way so as to include a statutory power to make interim awards subject to clawback and an express power to award interest. 13.85 It is hard to see how creditor or member approval could greatly simplify approval in such cases, given the potential for REs or trustees to have multiple trusts and beneficiaries with competing interests in the adopting of different potential allocation methodologies. In addition, it is hard to see in some of these ‘mega insolvencies’ that members will be in any position to provide appropriate supervision of the fees and expenses in relation to which indemnity is sought.112 However, the same might be said of creditor

approval of fees in complex insolvencies where there is no MIS overlay, so reasonable minds will differ on whether such a development would be practical or advisable. 13.86 Finally, consideration should perhaps be given to some form of practice direction so as to clarify the type of evidence that should be led in claims to recoupment from trust property and minimise uncertainty as to where and when appropriate objections should be raised and at what level of generality. 1. 2. 3. 4.

5. 6. 7.

8.

9.

Corporations and Markets Advisory Committee, The establishment and operation of managed investment schemes (March, 2014). Above n 1, p 183. See generally Chapter 12 of that report. Corporations Act s 601GA(1)(d). It is not proposed to further consider s 601EE save to direct the reader to the numerous judicial statements concerning the breadth of the power to make orders in respect of unregistered schemes, which typically do not have the constitutions required of registered schemes. These statements are helpfully summarised in Re Rubicon Asset Management Ltd (2009) 77 NSWLR 96; [2009] NSWSC 1068 at [47]. See also, in particular, Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753. Rubicon Asset Management Ltd (2009) 77 NSWLR 96; [2009] NSWSC 1068 at [53]–[54]. Rubicon Asset Management Ltd (2009) 77 NSWLR 96; [2009] NSWSC 1068 at [37] and [42]. Equititrust v Members of Equititrust Income Fund (2011) 87 ACSR 636; [2011] QSC 353 is an example of reliance being placed on s 601NF to found an ancillary order permitting an insolvency practitioner to claim remuneration and be indemnified from trust assets. In that case a receiver (Mr Whyte) was appointed to the trust property under both s 1101B(1) and s 601NF(2). Ancillary orders were made entitling the receiver to claim remuneration and to be indemnified from trust assets for remuneration for time spent by his firm in respect of the receivership. To the extent that the receiver acted pursuant to his appointment pursuant to s 1101B, the remuneration and indemnification order was made under s 1101B(1) and, conversely, where Mr Whyte acted pursuant to his appointment under s 601NF(2), the remuneration and indemnification order was made under that section. However, note that in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [50], White J found that ‘orders may be made under s 601NF(2), irrespective of whether an order is made under s 601NF(1).’ For example, in Re Environinvest Ltd (No 4) (2010) 81 ACSR 145; [2010] VSC 549, the liquidator of various MISs applied pursuant to s 601NF(2) for orders endorsing the payment of remuneration from the sale of scheme property (trees). In describing the application, Judd J noted (at [20]) that the remuneration claims fell into two groups, the first of which was constituted by claims under the Universal Distributing principle. For example, the court may give directions to persons or entities charged with winding up the scheme on the manner in which they should perform their functions and obligations.

10. 11. 12.

13. 14. 15. 16.

17. 18. 19.

20. 21. 22.

23.

24.

Re Stacks Managed Investments Ltd (2005) 54 ACSR 466; [2005] NSWSC 753 at [52]. Corporations Act s 601GA(2). See, e.g., the discussion in Re Gunns Finance Limited (in liq) (rec & mgrs apptd) and Gunns Plantations Ltd (in liq) (recs and mgrs apptd) (2013) 281 FLR 121; [2013] VSC 365 at [159]–[175]; Re Saker, Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) (No 2) (2011) 85 ACSR 211; [2011] FCA 958 at [51]. See, e.g., discussion of the clear accounts rule in RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 397–8. See, e.g., Re Benton, Mackay Rural Pty Ltd (Recs and Mgrs Apptd) [2014] FCA 1285. See Corporations Act s 601FH. Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171; [1933] ALR 107. See the High Court’s crisp summary in Stewart v Atco Controls Pty Ltd (in liq) (No 2) 98 ACSR 601; [2014] HCA 31 at [22]: ‘The principle in Universal Distributing is stated at some length, no doubt because Dixon J was concerned to identify its sources. It may be more shortly stated as: a secured creditor may not have the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses of creating that fund (including remuneration) being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.’ Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171; [1933] ALR 107 at 175 (emphasis added). Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [41], referring to Shirlaw v Taylor (1991) 31 FCR 222; (1991) 5 ACSR 767 at 230. The equitable lien is available not only to liquidators, provisional liquidators, administrators and court-appointed receivers, but also to privately appointed receivers and receivers and managers: Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [41]. Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171; [1933] ALR 107 at 174. 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at [31]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [51] (Davies J), citing Moodmere Pty Ltd (in liq) v Waters [1988] VR 215 at 221. While the principle that the lien exists notwithstanding third-party funding, it is curious that the High Court in Stewart v Atco Controls gave such emphasis to the funder’s right of indemnity against the lien holder in rejecting the submission that, because the liquidator’s expenses had been met by a third party, no lien arose. Instead of just finding that the fact that the liquidators were not out of pocket did not matter, the High Court emphasised the liquidator’s obligation to reimburse the indemnifier. ‘The indemnifier has a right of subrogation to all the rights and remedies of the party indemnified and any monies recovered by that party. It follows that the liquidator was obliged to reimburse [the indemnifier] and that the equitable lien attached to the settlement sum as a charge to permit that indebtedness to be met’: Stewart v Atco Controls Pty Ltd, (in liq) (No 2) 98 ACSR 601; [2014] HCA 31 at [50]. Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR 97; [2003] NSWSC 1008 at [211]; Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417 at [7]; Re Great Southern Managers Australia Limited [2009] 77 ACSR 9; [2009] VSC 642 at [16]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [42].

25. 26. 27. 28.

29. 30. 31. 32. 33.

34.

35. 36.

37. 38. 39. 40. 41.

42. 43. 44. 45.

46.

Atco Controls Pty Ltd (in liq) v Stewart [2013] VSCA 132 at [310]–[311]. The facts are summarised at para 13.27 below. Stewart v Atco Controls Pty Ltd (in liq) (2014) 98 ACSR 601; [2014] HCA 15 at [40]. Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32. Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 (Black J), citing Re Application of Sutherland (2004) 50 ACSR 297; [2004] NSWSC 798 and Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941. Re Application of Sutherland (2004) 50 ACSR 297; [2004] NSWSC 798 at [15], referring to Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 at 50. Corporations Act s 601FC(1)(c). Scheme property is discussed at length in chapter 8 of this book. Client funds are taken to be held on trust for the benefit of the client: Corporations Act s 981H(1). Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 at 50. Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 at 50; Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [23] and [26]; Re Application of Sutherland (2004) 50 ACSR 297; [2004] NSWSC 798 at [11]. See, e.g., in Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [58], where the court permitted Berkeley Applegate to support a claim for costs not covered by the salvage principle where the receivers, ‘acting in a responsible way,’ had incurred costs and remuneration. Note that this approach was in itself supported by reference to Universal Distributing where reference was made to the costs of liquidators who act ‘in a responsible way’ being allowed. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [32]. While presenting an extreme factual scenario and one that occurred in a different jurisdiction, the case nevertheless aptly demonstrates the perils for insolvency practitioners taking action adverse to the interests of investors if they hope to claim their costs and expenses pursuant to the Berkeley Applegate jurisdiction. Lehman Brothers Securities Asia Ltd [2011] HKCFI 265 at [50]–[51]. Lehman Brothers Securities Asia Ltd [2011] HKCFI 265 at [51]. Stewart v Atco Controls Pty Ltd (in liq) (2014) 98 ACSR 601; [2014] HCA 15 at [23]–[25], [38]–[42]. Re Gunns Plantations Ltd (No 4) [2013] VSC 595 at [15]–[16]. Black J considered there was a strong case including because, if the liquidators had not pursued recoveries, a court-appointed receiver would most likely have been required, in which case those costs would have been met from the fund in any event. Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [58]–[59]. Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [55]. Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [52]. Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR 97; [2003] NSWSC 1008 at [201] (Campbell J), citing Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; (1983) 7 ACLR 873. Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR

47. 48. 49. 50. 51. 52. 53. 54. 55.

56. 57. 58. 59. 60. 61. 62.

63. 64. 65. 66.

67. 68. 69.

70.

97; [2003] NSWSC 1008 at [212]. 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at 385. 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at 385. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at 434. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [4]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [4]. 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at 386. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [46]–[47]. Re MK Airlines Ltd (in liq) [2012] EWHC 2764 (Ch); [2014] BCC 103 at [39] and [50]. Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; (1983) 7 ACLR 873 at 103; 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at 386; Trio Capital Limited at [34]; and Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [45]. See, e.g., Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426. See, e.g., Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380. See, e.g., Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380. See Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380. See, e.g., Re Medican Holdings Ltd 2013 ABQB 224. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [6]. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [20]–[23], where Palmer J also noted the contrary views of Campbell J in Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR 97; [2003] NSWSC 1008 at [211]. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [24]. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [25]. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [31]–[35]. See, e.g. Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426, where Black J considered that substantive proceedings were necessary to determine the manner in which client funds should be distributed and were, in substance, trust proceedings, notwithstanding that directions were sought under ss 479(3) and 511. See, e.g., Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417 at [7]. Hewett v Court (1983) 149 CLR 639; (1983) 46 ALR 87; [1983] HCA 7 at [663] (Deane J). Re Georges v Seaborn International (Trustee), Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; (2012) 87 ACSR 442; [2012] FCA 75 at [298]; Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 at [431]–[432]. See, e.g., Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [5], [59] and Re Traditional Values Management Ltd (in liq) [2012] VSC 650 at [10]–[11].

71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.

82.

83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.

94. 95. 96.

97.

See e.g. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [78]. See, e.g., Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [75]. See, e.g. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 and Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417. See e.g. Onefone Australia Pty Ltd v One.Tel Ltd (2010) 80 ACSR 11; [2010] NSWSC 1120 at [80]–[81]; Ide v Ide (2004) 50 ACSR 324; [2004] NSWSC 751 at [39]. Onefone Australia Pty Ltd v One.Tel Ltd (2010) 80 ACSR 11; [2010] NSWSC 1120 at [81]; and Re Traditional Values Management Ltd (in liq) [2012] VSC 650. See, e.g., Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380. See also the observation in Re CA Pacific Finance Ltd (in liq) [2012] HKCFI 1327 at [19]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [64]. See, e.g., Re CA Pacific Finance Ltd [2012] HKCFI 1327. A prospect raised in both CA Pacific Finance Ltd [2012] HKCFI 1327 and Independent Insurance Co Ltd (No 2) [2004] BCC 919. See, e.g., as to s 50 of the Evidence Act 2008 (Vic), Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [65]–[71] and Re Gunns Plantations Ltd (in liq) (recs & mgrs apptd) [2014] VSC 239 at [104]. Re Regent’s Canal Ironworks Co (1876) 3 Ch D 43, considered in Re MK Airlines Ltd (in liq) [2012] EWHC 2764 (Ch); [2014] BCC 103 at [37]–[38]. Cf Coad v Wellness Pursuit Pty Ltd (in liq) [2009] 40 WAR 53; (2009) 71 ACSR 250; [2009] WASCA 68. See, e.g., Re Dalewon Pty Ltd (in liq) (2010) 79 ACSR 530; [2010] QSC 311 at [15]–[16]. Batten v Wedgewood Coal & Iron Co (1886) 31 Ch D 346. Dean-Willcocks v Nothintoohard Pty Ltd (in liq) (2007) 13 BPR 24,245; [2006] NSWCA 311 at [109], [112] (Beazley JA), [119] (McColl JA). See, e.g., the observations of Robson J in Re Great Southern Managers (Australia) Ltd (2009) 77 ACSR 9; [2009] VSC 642. See, e.g., Re Lehman Bros Securities Asia Ltd (in liq) [2011] HKCFI 265 at [52]–[53] and Green v Bramston [2010] EWHC 3106. Bruce v LM Investment Management Ltd (2013) 94 ACSR 684; [2013] QSC 192 at [89] and Bruce v LM investment Management Limited (No 2) [2013] QSC 347 at [30]. Bruce v LM Investment Management Limited (No 2) [2013] QSC 347 at [27]. Bruce v LM Investment Management Limited (No 2) [2013] QSC 347 at [32]. Bruce v LM Investment Management Limited (No 2) [2013] QSC 347 at [31], citing Re Beddoe, Downes v Cottam [1893] 1 Ch 457 at 562. ASIC v Letten (No 2) [2010] FCA 307 at [25]. Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [137]–[150]; Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638; [1998] BCC 324 and 345; ASIC v Letten (No 23) [2014] FCA 985 at [66]. ASIC v Letten (No 23) [2014] FCA 985 at [50]. See para 13.16 above. See, e.g., Re Great Southern Managers Australia Ltd (2009) 77 ACSR 9; [2009] VSC 642 at 12 (Robson J) and Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) (2009) 76 ACSR 146; [2009] VSC 557 (Davies J). Re Great Southern Managers Australia Ltd (2009) 77 ACSR 9; [2009] VSC 642 at 12 (Robson J).

98. ASIC v Letten (No 9) [2010] FCA 1459 at [13]; ASIC v Letten (No 19) [2012] FCA 375. 99. See in Hong Kong Re CA Pacific Finance Ltd (in liq) [2012] HKCFI 1327 at [25]. 100. Re MK Airlines Ltd, Katz v Bradney [2012] All ER (D) 163 (Apr); [2012] 3 All ER 781; [2012] EWHC 1018 (Ch) at [48]. 101. Re Reiter Brothers Exploratory Drilling Pty Ltd (1994) 3 Tas R (NC) N10; (1994) 12 ACLC 430. 102. Re Reiter Brothers Exploratory Drilling Pty Ltd (1994) 3 Tas R (NC) N10; (1994) 12 ACLC 430 at 442; Mirror Group Newspapers plc v Maxwell (No 1) [1998] BCC 324; 1 BCLC 638 at 334. 103. See, e.g., Re Buckton [1907] 2 Ch 406 at [671] and Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [27]. 104. See, e.g., Conlan v Executor or Other Personal Representative as Executor of Estate of Croci (decd) [2009] WASC 266 at [43]. 105. Re Drax; Savile v Drax [1903] 1 Ch 781 at 796. 106. Firth v Centrelink (2002) 55 NSWLR 451; [2002] NSWSC 564 at [118]–[119]. 107. Simpson v Rowe [2011] VSC 149 at [25]. 108. Re PM Sulcs & Associates Pty Ltd (in liq) [2012] NSWSC 689 at [13] (Black J). 109. Hungerfords v Walker (1989) 171 CLR 125; (1989) 84 ALR 119; [1989] HCA 8 at [148] (Mason CJ and Wilson J). 110. Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417 at [7]. 111. Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417 at [7], citing Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 (Owen J). 112. See, e.g., the observations in Bruce v LM Investment Management Ltd (No 2) [2013] QSC 347 at [33] (‘ASIC proposed that I order that the first respondent not be indemnified from the assets of FMIF save with the consent of unit-holders. The difficulty with that is that the unit-holders are never going to be informed in appropriate detail of the facts irrelevant to such an apportionment’).

INDEX References are to paragraph numbers

A Advising during crisis see also Insolvent trading; Officers’ duties (Chap 2D); Reform appointment of administrators …. 4.59, 4.82 premature appointment …. 4.59, 4.60, 4.81 available options …. 4.83 mindset of officers …. 4.3, 4.4 nature of insolvency laws …. 4.3, 4.4 overview …. 4.1, 4.2, 4.35, 4.36, 4.57, 4.84, 4.86 scrutiny of options …. 4.62 short-term liquidity issues …. 4.61

Agribusiness managed investment schemes CAMAC review, 2010 …. 2.39 collapse of schemes …. 2.38, 2.39, 5.1, 8.29, 9.1 common enterprise schemes …. 9.14 fair compensation …. 9.84 taxation benefits …. 9.16, 9.17 features of collapse …. 5.9 financial product disclosure …. 9.54, 9.55 ‘track record’ …. 9.56, 9.57 form of schemes …. 10.8 impact of financial stress …. 9.2 overview …. 1.11, 5.10, 9.14

restructuring see Restructuring of schemes scheme property …. 8.44, 8.53 application fees …. 8.53, 8.76 identifying …. 8.76 taxation benefits …. 9.16, 9.84, 10.12 deductions …. 9.16 product rulings …. 9.16, 9.17 types of schemes and products …. 8.54 impact of failure …. 8.55 winding up see Winding up

ALRC see Australian Law Reform Commission Appeals directions applications …. 12.36, 12.37, 12.39

Appointment of administrators Gunns schemes …. 6.5 overview …. 4.59, 4.82 premature appointment …. 4.59, 4.60, 4.81

ASIC regulatory guides agribusiness disclosure …. 9.54, 9.55 ‘track record’ …. 9.56, 9.57

Australian Law Reform Commission Collective Investments: Other People’s Money …. 2.23, 2.29, 5.2 background to report …. 2.21, 2.22 draft legislation …. 2.26, 2.27 officers’ duties to investors …. 3.74, 3.75, 3.76, 3.132 recommendations …. 2.23, 2.24–2.28, 2.32, 2.35, 2.47, 3.74, 3.75, 3.76, 3.132, 3.158, 3.159 responsible entity’s duties …. 3.158, 3.159 voluntary administration …. 2.28 winding up in insolvency …. 2.24–2.27, 2.32, 2.47

Collective Investments Superannuation …. 3.160, 3.161 Harmer Report …. 8.87, 11.14, 11.17, 11.40, 11.41, 11.42 recommendations …. 11.15, 11.16, 11.40

B Business judgment rule …. 3.25, 3.122, 4.46, 4.77 C CAMAC see Corporations and Markets Advisory Committee CASAC see Company and Securities Advisory Committee Class actions case studies …. 10.4 civil liability regime …. 10.3 commonality …. 10.18, 10.39, 10.43, 10.44 continuous disclosure provisions …. 10.16, 10.24 causation …. 10.24, 10.30, 10.35, 10.36 ‘fraud-on-the-market’ …. 10.24, 10.34 Grant-Taylor …. 10.30–10.35 features of schemes, and …. 10.8, 10.13 commercial purpose …. 10.10 effect of collapse …. 10.11 identity of members …. 10.9 tax benefits …. 10.12, 10.21 defining the class …. 10.7 identity of members …. 10.7, 10.9 misleading and deceptive conduct …. 10.19, 10.27 causation …. 10.28, 10.36 individual reliance …. 10.19 proof of reliance …. 10.27, 10.28, 10.29 misleading statements …. 10.19, 10.43

commonality …. 10.43, 10.44 individual reliance …. 10.19, 10.71 underlying questions …. 10.45 non-disclosure actions …. 10.16, 10.20, 10.21, 10.68, 10.69 causation …. 10.16 continuous disclosure provisions …. 10.16, 10.24, 10.30, 10.32, 10.33, 10.35 ‘fraud-on-the-market’ …. 10.23, 10.24, 10.34 individual reliance …. 10.16, 10.17, 10.19, 10.71 outcomes for investors …. 2.94 overview …. 1.16, 10.1, 10.2 product disclosure statements …. 2.87, 2.88, 10.6, 10.20, 10.40 credibility of evidence …. 10.41 cross and counterclaims …. 2.89 duration of proceedings …. 2.91 indirect reliance …. 10.42 reliance …. 10.22, 10.41, 10.42 tax benefits …. 10.21 underlying questions …. 10.40 prospectus …. 10.25 causation …. 10.26, 10.37, 10.38 recovery of loss or damage …. 10.25 reliance …. 10.16, 10.22, 10.46, 10.72 efficient market hypothesis …. 10.23 ‘fraud-on-the-market’ …. 10.23, 10.24 indirect reliance …. 10.42 individual reliance …. 10.5, 10.16, 10.17, 10.18, 10.19, 10.71 proof of reliance …. 10.27, 10.28, 10.29 security for costs …. 10.5, 10.13, 10.47, 10.70, 10.72 ability to pay …. 10.51, 10.55 class closure process …. 10.64 criteria for confining group …. 10.65

definition of group …. 10.63 economic benefits of closed classes …. 10.66 evidence of calculations …. 10.50 immunity from costs, and …. 10.52, 10.54 Kelly v Willmott …. 10.48, 10.49–10.62 necessary evaluation …. 10.56 order for payment …. 10.59 pro rata contribution …. 10.58 remittal of application …. 10.57, 10.58 stifling of proceedings …. 10.51, 10.54, 10.55 unidentified group members …. 10.59, 10.60, 10.60, 10.61, 10.62 winnowing process …. 10.61, 10.64, 10.67

Collective investment vehicles choice of structure …. 8.2, 8.3 implications of decisions …. 8.4 complexities of insolvency …. 1.5 global financial crisis, and …. 1.6 growth …. 2.20 managed investment trusts see Managed investment trusts overview …. 1.1, 1.2, 1.7, 1.21, 8.1 questions of insolvency …. 1.4, 1.20 responses to insolvency …. 1.7 unregistered schemes see Unregistered schemes

Collective Investments: Other People’s Money …. 2.23, 2.24–2.28, 2.32, 2.35, 2.47, 3.74, 3.75, 3.76, 3.132, 3.158, 3.159, 5.2 Collective Investments Superannuation …. 3.160, 3.161 Companies see Corporate groups voluntary administration …. 2.78 winding up …. 2.41, 2.42, 2.45, 2.58, 2.78

schemes, parallels …. 2.50, 2.51 statutory provisions …. 2.46, 2.49, 2.59, 2.78 trusts, distinction …. 2.45, 2.46, 2.52, 2.54

Company and Securities Advisory Committee Collective Investments: Other People’s Money …. 2.23, 2.29, 5.2 background to report …. 2.21, 2.22 draft legislation …. 2.26, 2.27 officers’ duties to investors …. 3.74, 3.75, 3.76, 3.132 recommendations …. 2.23, 2.24–2.28, 2.32, 2.35, 2.47, 3.74, 3.75, 3.76, 3.132, 3.158, 3.159 responsible entity’s duties …. 3.158, 3.159 voluntary administration …. 2.28 winding up in insolvency …. 2.24–2.27, 2.32, 2.47

Compensation see also Remedial orders agribusiness schemes …. 9.84 breach of officers’ duties …. 3.121, 3.183 breach of RE duties …. 3.13, 3.20 actions by members …. 3.218, 3.219 defective disclosure documents …. 9.95, 9.100 investor’s rights …. 9.84 insolvent trading …. 4.8, 4.50 standing …. 3.13

Compliance plan investor rights …. 9.59 overview …. 9.26 requirements …. 9.28

Compromises see Liquidators Consolidation see Corporate groups Constitution of scheme

investor’s liability …. 9.63 investor’s rights …. 9.59, 9.61 inspection of accounts …. 9.60 withdrawal from scheme …. 9.65 member’s interest …. 9.73, 9.77 overview …. 7.14, 9.26, 9.27 remuneration and expenses …. 7.56, 13.9, 13.11 responsible entities’ duties …. 3.11, 9.61 responsible entities’ powers …. 9.61 trustee’s right of indemnity …. 13.11 winding up provision …. 7.55

Consumer protection financial product disclosure …. 9.43, 9.45, 9.46 retail clients …. 9.44 significant risk …. 9.44, 9.52 underlying philosophy …. 9.45

Continuous disclosure provisions class actions …. 10.16, 10.24 causation …. 10.24, 10.30, 10.35, 10.36 ‘fraud-on-the-market’ …. 10.24, 10.34 Grant-Taylor …. 10.30–10.35

Contracts see also Leases disclaimer by liquidator …. 11.2, 11.3, 11.19, 11.53, 11.56 background to provisions …. 11.7–11.18, 11.39 exercise of court’s discretion …. 11.43–11.45, 11.51 leave of court …. 11.3, 11.4, 11.12, 11.20, 11.26, 11.43–11.45, 11.51, 11.53 personal bankruptcy …. 11.12, 11.13, 11.14, 11.15, 11.17, 11.39 setting aside by court …. 11.21, 11.46–11.49 unprofitable contracts …. 11.27–11.32

responsible entities’ duties …. 3.11 unprofitable contracts …. 11.27, 11.28 compatibility with liquidator’s duty …. 11.31, 11.32 continuing obligations …. 11.30 summary of principles …. 11.29, 11.30

Corporate groups agribusiness managed investment schemes …. 2.38, 5.9 borrowing within group …. 2.88 consolidation …. 8.4, 8.80 forms of consolidation …. 8.82 initiation …. 8.81 procedural consolidation …. 8.82 substantive consolidation …. 8.82–8.86 deeds of cross-guarantee …. 4.63, 5.9, 8.93 revocation …. 4.64, 4.65, 4.70, 4.71–4.73 effect of insolvency …. 8.80 officers’ duties …. 3.60, 3.65, 4.63, 4.65, 4.66, 4.71 proper purpose …. 4.63, 4.65, 4.66, 4.70, 4.72, 4.73 overview …. 8.79, 8.166 substantive consolidation see Substantive consolidation

Corporations and Markets Advisory Committee post-1998 reviews …. 2.38, 2.39 Managed Investment Schemes …. 5.44, 5.45, 5.46, 8.169, 9.15, 13.5

Creditors see also Class actions; Investors conflicts with investors …. 8.3, 8.19, 8.25, 8.27, 8.164 liquidator’s duties …. 8.29 resolution of disputes …. 8.165, 8.167, 8.168 scheme property …. 8.34 investment trusts …. 8.4, 8.5 access to trust property …. 8.8, 8.9–8.11 conflicts with investors …. 8.19, 8.25, 8.27

secured creditors …. 8.10 trustees’ liability …. 8.8 trustees’ right of indemnity …. 8.11, 8.19, 8.23, 8.24, 8.25, 8.26, 8.27 unsecured creditors …. 8.11, 8.19, 8.23, 8.24, 8.25, 8.26, 8.27 liquidator’s duties …. 8.29 overview …. 1.14, 8.3 scheme property …. 8.34 substantive consolidation …. 8.142 advantages of arrangements …. 8.144 appeals …. 8.151 compromises, and …. 8.143 dissenting creditors …. 8.145 meetings of creditors …. 8.146, 8.147 members’ approval …. 8.148, 8.149, 8.150 winding up resolutions …. 8.147 unsecured creditors …. 8.11, 8.19 approval of statutory pooling …. 8.103–8.105 clear accounts rule …. 8.23, 8.24, 8.26 conflicts with investors …. 8.19, 8.25, 8.27

Criminal offences breach of officers’ duties …. 3.46, 3.48, 3.49, 3.51, 3.53 insolvent trading …. 4.8, 4.51

D Damages breach of officers’ duty …. 3.191, 3.192, 3.193 injunctions, and …. 3.191, 3.192 standing …. 3.192 trustees’ right of indemnity, and …. 8.14 unliquidated damages as debt …. 4.19

Debts determining solvency …. 4.26 incurs a debt …. 4.10, 4.11, 4.22 ability to avoid a debt …. 4.17 choice …. 4.17, 4.18 common debts …. 4.14 contractual debts …. 4.15 date of debt …. 4.18 debt, meaning …. 4.13 failure to prevent …. 4.33, 4.34 incurs, meaning …. 4.13 operation of phrase …. 4.16 relationship between parties …. 4.12 steps to prevent debt …. 4.45 unliquidated damages as debt …. 4.19 overview …. 4.19 purpose of insolvency law …. 8.165 suspicion of insolvency …. 4.27 test for insolvency …. 4.21, 4.22 circumstances of company …. 4.23, 4.24, 4.25

Deeds of company arrangement eligible employee creditors …. 8.161 overview …. 8.156 substantive consolidation …. 8.157, 8.159 advantages …. 8.160 eligible employee creditors …. 8.161 third party claims …. 8.158 third parties …. 8.158 directions applications …. 12.45, 12.46, 12.67, 12.68 representative orders …. 12.68

Defences

insolvent trading …. 4.35, 4.36 reasonable expectation …. 4.37–4.39

Definitions managed investment scheme …. 2.4, 2.5, 2.74, 8.46, 9.18 member …. 6.47 member’s interest …. 9.74 onerous property …. 11.10 scheme …. 6.47 scheme property …. 6.45, 6.46, 6.47, 8.44, 8.45, 8.46, 8.47, 8.52, 8.53, 9.80

Directions applications appeals …. 12.36, 12.37, 12.39 consolidation …. 8.135, 8.136 applicable provision …. 8.137, 8.138 utility of power …. 8.139–8.141 conversion of proceedings …. 12.38, 12.53, 12.57, 12.63, 12.88, 12.97, 12.120, 12.121, 12.125 declaratory relief …. 12.64, 12.66 joinder of parties …. 12.64, 12.65, 12.97, 12.124 notice of proceedings …. 12.67 representative parties …. 12.121, 12.122, 12.124 function of directions …. 12.33, 12.34, 12.35, 12.36 legislative powers …. 2.44, 12.7, 8.135 judicial advice to trustees …. 12.10, 12.11 managed investment schemes …. 7.29, 12.9 voluntary liquidations …. 12.8, 12.57, 12.58 overview …. 1.18, 2.44, 7.50, 7.54, 12.2, 12.44 preference claims …. 12.40, 12.59, 12.60, 12.86 jurisdiction …. 12.62 parties to proceedings …. 12.61 void transactions …. 12.59

proposed directions …. 7.52 remuneration and expenses …. 7.58, 13.7, 13.52 pre-incurring expense …. 13.73, 13.74 Rubicon Asset Management …. 13.8, 13.9 scope of court’s power …. 12.54, 12.57 subject of application …. 12.51 third parties …. 1.18, 12.2, 12.11, 12.20, 12.24, 12.50–12.52, 12.54–12.56, 12.123, 12.125 compromise …. 12.28, 12.29 contrary cases …. 12.40, 12.75, 12.79–12.104 conversion of proceedings …. 12.38, 12.53, 12.57, 12.63, 12.67, 12.97, 12.120, 12.121, 12.125 court’s discretion …. 12.31, 12.32, 12.75, 12.77, 12.78, 12.82 deeds of company arrangement …. 12.45, 12.46, 12.67 estoppel …. 12.26, 12.27, 12.30, 12.39, 12.43 function of directions …. 12.33, 12.34, 12.35 GB Nathan …. 12.12–12.14, 12.69 joinder of parties …. 12.3, 12.4, 12.5, 12.85, 12.88, 12.97, 12.114, 12.124 notice of proceedings …. 12.67, 12.89 ordinarily, use of term …. 12.47, 12.48 proof of debt …. 12.41 Re Blackbird Pies …. 12.25–12.27 rejection of GB Nathan …. 12.69–12.116 scope of protection …. 12.49 supporting authorities …. 12.15–12.58 tax debts …. 12.42 trustee directions …. 12.15–12.23 uncertainty …. 12.121, 12.123 voluntary liquidations …. 12.57, 12.58 Willmott Forests (No 2) …. 12.69–12.116 trustees …. 12.10, 12.15, 12.18–12.22

conversion of proceedings …. 12.65 Macedonian Orthodox …. 12.107–12.110 parties to proceedings …. 12.11, 12.23 settlement construction …. 12.17 wills …. 12.16, 12.21 Willmott Forests (No 2) …. 12.69, 12.73, 12.117 Anglican Insurance …. 12.93, 12.94 approval of approach …. 12.117 Astarra Asset Management …. 12.98–12.100 case supporting approach …. 12.75, 12.79–12.105 collapse of scheme …. 12.70 court’s discretion …. 12.75, 12.77, 12.78, 12.82 distribution of sale proceeds …. 12.70, 12.71, 12.72 Graf Holdings …. 12.90–12.92 Great Southern Manager …. 12.95–12.97 Macedonian Orthodox …. 12.75, 12.105–12.116, 12.118, 12.119 Meadow Springs …. 12.79–12.82 Melbourne Asset Management …. 12.83–12.89 objection by members …. 12.74 opportunity to be heard …. 12.83, 12.84 reasons for rejection …. 12.75 Rewards Projects …. 12.101–12.104 subsequent cases …. 12.117–12.120

Directors see Officers Disclaimer of property background to provisions …. 11.7, 11.38, 11.39, 11.41, 11.56–11.59 Harmer amendments …. 11.18, 11.21, 11.42 Harmer Report …. 11.14–11.17, 11.40, 11.41, 11.42 onerous property, definition …. 11.10 personal bankruptcy …. 11.12, 11.13, 11.14, 11.17, 11.39,

11.40, 11.42 reforms …. 11.11 United Kingdom …. 11.7–11.10 contracts …. 11.2, 11.3, 11.19, 11.53, 11.56 background to provisions …. 11.7–11.18, 11.39 exercise of court’s discretion …. 11.43–11.45, 11.51 leave of court …. 11.3, 11.4, 11.12, 11.20, 11.26, 11.43–11.45, 11.51, 11.53 personal bankruptcy …. 11.12, 11.13, 11.14, 11.15, 11.17, 11.39 setting aside by court …. 11.21 unprofitable contracts …. 11.27–11.32 leases …. 11.3, 11.4, 11.6, 11.16, 11.19, 11.38, 11.56–11.59 contracts, as …. 11.33, 11.34, 11.41 Harmer amendments …. 11.42 Harmer Report …. 11.40, 11.41, 11.42 leave of court …. 11.20, 11.24, 11.26, 11.35–11.37, 11.39, 11.40 level of protection …. 11.54, 11.60 pre-Harmer amendments …. 11.39 setting aside by court …. 11.52 Willmott litigation …. 5.34, 9.85, 11.4, 11.22–11.24, 11.52, 11.60 overview …. 1.17, 11.1, 11.5 policy rationale …. 11.55 scope of power …. 11.4 setting aside by court …. 11.21, 11.46, 11.49 comparison of positions …. 11.47 prejudice to persons …. 11.46, 11.47, 11.48, 11.50 primary consequences …. 11.48 types of property …. 11.2 unprofitable contracts …. 11.27, 11.28

compatibility with liquidator’s duty …. 11.31, 11.32 continuing obligations …. 11.30 summary of principles …. 11.29, 11.30

Disclosure see Continuous disclosure provisions; Financial product disclosure; Prospectus F Financial product disclosure see also Product disclosure statements agribusiness schemes …. 9.54, 9.55 ‘track record’ …. 9.56, 9.57 assessment of risk …. 9.41 candour and honesty …. 9.36, 9.38, 9.39 consumer protection …. 9.43, 9.45, 9.46 retail clients …. 9.44 significant risk …. 9.44, 9.52 legislative history …. 9.33, 10.15 management of risk …. 9.42 misleading statements see Misleading statements origins of regime …. 9.33 overview …. 9.10, 9.30, 10.14 policy rationales …. 9.34, 9.35, 9.46 consumer protection …. 9.43–9.46 investor protection …. 9.34–9.42, 10.15 positive obligation …. 9.36 prospectus …. 9.37, 9.39, 9.40 requirements …. 9.36, 9.37 candour and honesty …. 9.36, 9.38, 9.39 significant risk …. 9.44, 9.49, 9.50 meaning …. 9.50 operation of provisions …. 9.51, 9.52

sufficiency of disclosure …. 9.39

Financial products interests in schemes, as …. 9.10, 9.29, 10.14

G Global financial crisis see also Restructuring of schemes collapse of schemes …. 1.6, 5.1 insolvency laws, and …. 1.6 investor’s right to withdraw from scheme …. 9.68

Group companies see Corporate groups ‘Growers’ groups overview …. 2.84 reasons for establishing …. 2.85 standing …. 2.84 winding up applications …. 2.83, 2.84

H Harmer Report …. 8.87, 11.14–11.17, 11.40, 11.41, 11.42 I Injunctions breach of officers’ duty …. 3.188 application requirement …. 3.190 damages claims, and …. 3.191, 3.192 limitations of provision …. 3.191, 3.192 standing …. 3.189, 3.192 company meetings …. 6.12, 6.13, 6.19 difficulties in succeeding …. 6.20 corporate context …. 6.18 Gunns scheme litigation …. 6.12, 6.17, 6.19

hearing of application …. 6.13 undertaking during application …. 6.21, 6.58, 6.61 overview …. 3.188, 6.18

Insolvency practitioner’s remuneration see Remuneration and expenses Insolvent trading Centro restructure, and …. 5.69 consequences of contravention …. 4.50 criminal offences …. 4.8, 4.51 directors’ personal liability …. 4.7, 4.8, 4.50 criminal offences …. 4.8, 4.51 defences …. 4.35, 4.36 business judgment rule, and …. 4.46 ill health …. 4.43, 4.44 information supplied by another …. 4.40–4.42 reasonable expectation …. 4.37–4.39 steps to prevent debt …. 4.45 directors’ personal liability …. 4.7, 4.50 compensation …. 4.8 elements …. 4.10 failure to prevent …. 4.33, 4.34 incurs a debt …. 4.11–4.19 insolvency requirement …. 4.20–4.26 suspicion of insolvency …. 4.27–4.32 incurs a debt …. 4.10, 4.11 ability to avoid a debt …. 4.17 choice …. 4.17, 4.18 common debts …. 4.14 contractual debts …. 4.15 date of debt …. 4.18 debt, meaning …. 4.13

failure to prevent …. 4.33, 4.34 incurs, meaning …. 4.13 operation of phrase …. 4.16 relationship between parties …. 4.12 steps to prevent debt …. 4.45 unliquidated damages as debt …. 4.19 information supplied by another …. 4.40–4.42, 4.54 insolvency requirement …. 4.10, 4.20 determining solvency …. 4.26 relevant factors …. 4.26 test for insolvency …. 4.21–4.25 overview …. 4.1, 4.5, 4.6, 4.9, 4.84 reform …. 4.75, 4.78 current issues …. 4.75 need for reform …. 4.78, 4.79 pre-pack reorganisations …. 4.47 suggested reforms …. 4.76, 4.77 Treasury consultation paper …. 4.47–4.49, 4.76, 4.77 relief against liability …. 4.35, 4.36, 4.52 court’s approach …. 4.53–4.56 suspicion of insolvency …. 4.10, 4.27 awareness of grounds …. 4.31, 4.32 examination of factors …. 4.29 objective test …. 4.28 sources of financial information …. 4.30 test for insolvency …. 4.21, 4.22 application of test …. 4.23 circumstances of company …. 4.23, 4.24, 4.25 vague expectations …. 4.25

Investment trusts creditors …. 8.4, 8.5

access to trust property …. 8.8, 8.9–8.11 conflicts with investors …. 8.19, 8.25, 8.27 secured creditors …. 8.10 trustees’ liability …. 8.8 trustees’ right of indemnity …. 8.11, 8.19, 8.23, 8.24, 8.26, 8.27 unsecured creditors …. 8.11, 8.19, 8.23, 8.24, 8.26, 8.27 investors …. 8.4, 8.5 conflicts with creditors …. 8.19, 8.25, 8.27 nature of a trust …. 8.6, 8.7 pooling of assets see Tracing of assets overview …. 8.1, 8.6 tracing of assets see Tracing of assets trust property …. 8.7 access by creditors …. 8.8, 8.9–8.11 trustees’ right of indemnity …. 8.15 trustees …. 8.7, 8.8 trustees’ lien over assets …. 8.16, 8.17 trustees’ right of indemnity …. 8.11, 8.12 clear accounts rule …. 8.20–8.24, 8.26 damages claims …. 8.14 expenses properly incurred …. 8.13 limits and qualifications …. 8.15–8.28 loss of right …. 8.19–8.28 scope of right …. 8.12 subrogation …. 8.18 trustees’ lien over assets …. 8.16, 8.17 unsecured creditors …. 8.11, 8.19, 8.23, 8.24, 8.25, 8.26 types of schemes and products …. 8.54 impact of failure …. 8.55

Investor protection see also Consumer protection failed or insolvent schemes …. 9.5

financial product disclosure …. 9.34, 9.35, 9.37, 9.46, 10.15 assessment of risk …. 9.41 candour and honesty …. 9.36, 9.38, 9.39 management of risk …. 9.42 sufficiency of disclosure …. 9.39 limits to protection …. 9.114 overview …. 1.15, 9.4, 9.5, 9.113, 10.2

Investors see also Class actions; Creditors conflicts between investors …. 8.55 resolution of conflicts …. 8.78 tracing …. 8.56 conflicts with creditors …. 8.3, 8.19, 8.25, 8.27, 8.164 liquidator’s duties …. 8.29 resolution of disputes …. 8.165, 8.167, 8.168 scheme property …. 8.34 different schemes and products …. 8.54 conflicts between investors …. 8.55, 8.56, 8.78 effects of financial stress …. 9.2 investment trusts …. 8.4, 8.5 conflicts with creditors …. 8.19, 8.25, 8.27 overview …. 1.14, 8.3 retail clients, as …. 9.32 scheme property …. 8.34 taxation benefits …. 9.15

Investor’s liability constitution of scheme …. 9.63 limited liability …. 9.62, 9.63, 9.64 loans to fund investment …. 9.64 overview …. 9.62

Investor’s rights defective PDSs …. 9.93, 9.113

additional orders …. 9.100–9.110 causation …. 9.98 civil liability …. 9.94 compensation …. 9.95, 9.100 inducement by representation …. 9.99 practical issues …. 9.111, 9.112 recovery of loss or damage …. 9.95 reliance …. 9.98 scope of liability …. 9.96 suffers loss and damage …. 9.97 overview …. 9.4 replacement responsible entity …. 9.86, 9.92 court applications …. 9.88 practical limitations …. 9.89–9.92 procedures …. 9.87 scheme documents, and …. 9.58, 9.59, 9.65, 9.83 inspection of accounts …. 9.60 responsible entities’ powers …. 9.61 scheme property …. 9.72, 9.79, 9.81 bundle of rights …. 9.82 compensation …. 9.84 determining interest …. 9.73–9.77 disclaimer of leases …. 9.85 enforceable proprietary rights …. 9.78 scheme documents …. 9.83 withdrawal from scheme …. 9.65 cancellation or restriction …. 9.68, 9.71 closure of investment …. 9.70 liquid assets …. 9.66 illiquid schemes …. 9.67 suspension of investment …. 9.69

J Joint stock companies …. 1.1 Jurisdiction responsible entities’ duties …. 3.10

L Leases character of leases …. 11.33 disclaimer by liquidator …. 11.3, 11.4, 11.6, 11.16, 11.38, 11.56–11.59 leases as contracts …. 11.33, 11.34, 11.41 Harmer amendments …. 11.42 Harmer Report …. 11.40, 11.41, 11.42 leave of court …. 11.20, 11.24, 11.26, 11.35–11.37, 11.39, 11.40 level of protection …. 11.54, 11.60 pre-Harmer amendments …. 11.39 setting aside by court …. 11.52 Willmott litigation …. 5.34, 9.85, 11.4, 11.22–11.24, 11.52, 11.60 overview …. 11.33

Limited liability companies …. 1.1 Liquidators competing duties …. 8.29 compromises …. 8.131, 8.133, 8.143 amount of debt …. 8.133 availability of power …. 8.132 limitations on power …. 8.133 court directions see Directions applications disclaimer of property see Disclaimer of property remuneration see Remuneration and expenses

special purpose liquidators …. 7.36 statutory pooling …. 8.117 statutory pooling determinations …. 8.90, 8.96, 8.111 approval by creditors …. 8.103–8.105 modification of provisions …. 8.97–8.101 termination by court …. 8.106 variation of determination …. 8.102, 8.103–8.105, 8.106 winding up of companies …. 2.46, 2.49 winding up of schemes …. 2.53, 2.54, 2.70, 7.40 competing duties …. 8.29 part of a scheme …. 7.36 potential conflicts …. 7.41, 7.45–7.48

M Managed investment schemes see also Prescribed interest schemes agribusiness schemes see Agribusiness managed investment schemes background to introduction …. 1.3, 2.35–2.37 post-1998 inquiries and reviews …. 2.38, 2.39 capital funds …. 7.5, 7.10 challenges of insolvency …. 2.95–2.97 class actions see Class actions collapse of schemes …. 1.6, 1.15, 2.38, 2.39, 5.1, 8.164, 9.1, 10.11 effect on investors …. 10.11 commercial purpose …. 10.10 common enterprise schemes …. 9.11, 9.14 taxation benefits …. 9.16, 9.17 complexities of insolvency …. 1.5 constitution see Constitution of scheme definition …. 2.4, 2.5, 2.74, 8.46, 9.18 disclosure requirements see Financial product disclosure

economic significance …. 2.1, 9.3 examples of schemes …. 2.1 features of schemes …. 2.4, 2.5, 3.1, 9.7, 10.3 interests in schemes …. 9.8 investment opportunities …. 2.6, 2.7 members …. 9.9 forms of schemes …. 2.8, 2.9, 2.52, 9.12, 10.8, 10.10, 12.10 framework of schemes …. 7.4, 7.5, 7.6 acquisition of interests …. 7.13 capital funds …. 7.5, 7.10 constitution of scheme …. 7.14 hypothetical scheme …. 7.4, 7.5 income funds …. 7.5, 7.15 responsible entities …. 7.11, 7.12 rights and obligations …. 7.7, 7.8, 7.10 global financial crisis, and …. 1.6 growth …. 2.3, 2.20, 7.2 impact of financial stress …. 9.2, 9.3 income funds …. 7.5, 7.15 insolvency, and …. 5.6, 8.169 interests in schemes …. 9.8 financial products, as …. 9.10, 9.29, 10.14 requirements for offer …. 9.10, 9.30, 9.33 investment opportunities …. 2.6, 2.7 investors see Investors legal status …. 7.6, 8.6, 9.12 members …. 6.47, 9.9 nature of schemes …. 7.3 overview …. 1.3, 1.7, 1.8, 1.21, 8.1 pooled schemes …. 9.11, 9.13 taxation benefits …. 9.15 product disclosure statements see Product disclosure statements

promotion of scheme …. 3.174 registration requirement …. 9.18, 9.19 regulation …. 2.4, 2.7, 5.2, 5.3, 9.5, 9.6, 9.113 related party transactions …. 3.166, 3.167 officers’ duties …. 3.28, 3.166, 3.167, 3.172 responsible entities see Responsible entities restructuring see Restructuring of schemes scheme documents see Scheme documents scheme property see Scheme property statistics …. 2.2, 2.3 statutory framework …. 2.4, 5.2, 9.6 taxation benefits …. 9.15, 10.12, 10.21 deductions …. 9.16 product rulings …. 9.16, 9.17 tracing of assets see Tracing of assets types of schemes and products …. 8.54 impact of failure …. 8.55 unregistered schemes see Unregistered schemes viability of schemes …. 5.6, 5.7, 7.22, 7.23, 7.25 winding up see Winding up

Margin calls …. 5.53, 5.55, 5.56 Members see Investors MIS see Managed investment schemes Misleading and deceptive conduct class actions …. 10.19, 10.27 causation …. 10.28, 10.36 individual reliance …. 10.19 proof of reliance …. 10.27, 10.28, 10.29 Gunns scheme litigation …. 6.13, 6.21, 6.22, 6.39, 6.54, 6.56, 6.60, 6.61 product disclosure statements …. 2.90, 9.98, 9.112

carve-outs …. 9.112

Misleading statements breach of officers’ duty …. 3.24 class actions …. 10.19, 10.43 commonality …. 10.43, 10.44 individual reliance …. 10.19, 10.71 underlying questions …. 10.45 overview …. 9.10 product disclosure statements …. 2.87, 9.48, 9.93, 9.112, 9.113 class actions …. 2.87, 2.88, 2.89, 2.91, 10.6 cross and counterclaims …. 2.89 defensive nature of litigation …. 2.88 duration of proceedings …. 2.91 insurance proceeds …. 9.112 interaction of provisions …. 2.90

N Novation see Statutory novation provisions O Officers advising during crisis …. 4.1, 4.2, 4.35, 4.36, 4.57, 4.84, 4.86 appointment of administrators …. 4.59, 4.60, 4.81, 4.82 available options …. 4.83 mindset of officers …. 4.3, 4.4 scrutiny of options …. 4.62 short-term liquidity issues …. 4.61 appointment of administrators …. 1.10, 4.59, 4.82 premature appointment …. 4.59, 4.60, 4.81

Officers’ duties insolvent trading see Insolvent trading

overview …. 5.3

Officers’ duties (Chap 5C) act honestly …. 3.81, 3.82, 3.86, 3.89, 3.91, 3.95 content of duty …. 3.90, 3.97 failure to consider interests …. 3.104 fiduciary loyalty, and …. 3.94 former provisions …. 3.83–3.85, 3.88, 3.89, 3.91, 3.93 genuine attempt …. 3.102, 3.103, 3.104, 3.105 good faith, and …. 3.101, 3.105, 3.107 good faith duties, and …. 3.87, 3.89, 3.90 moral turpitude, meaning …. 3.100 relief against liability …. 3.106, 3.107 test for honesty …. 3.98, 3.99 actions by members …. 3.183 damages …. 3.191, 3.192, 3.193 explanatory memorandum to Bill …. 3.184 defeat of proposed amendments …. 3.185 general law rights …. 3.184, 3.186 injunctions …. 3.188–3.193 remedial orders …. 3.194–3.230 best interests of members …. 3.76, 3.130, 3.139 absence of member approval …. 3.142 background to introduction …. 3.76, 3.132 boundaries of duty …. 3.140, 3.141 conflict of interests …. 3.132, 3.133, 3.134, 3.166–3.176 consequences of conflict …. 3.134 loyalty to members …. 3.138, 3.140 objective enquiry …. 3.164 undivided loyalty …. 3.140, 3.145, 3.148 care and diligence …. 3.108, 3.109 business judgment rule …. 3.122, 3.129

caution requirement …. 3.119 circumstances of scheme …. 3.115 compensation orders …. 3.121 correspondence of duties …. 3.118–3.120 declarations of contravention …. 3.125–3.129 former provisions …. 3.110–3.114, 3.117 relief against liability …. 3.123–3.129 standard of care …. 3.120, 3.179 Collective Investments: Other People’s Money …. 3.74, 3.75 best interests of investors …. 3.76, 3.132 compensation orders …. 3.121, 3.183 conflict of duties …. 3.3, 3.80, 3.96 conflict of interests …. 3.132, 3.133, 3.134, 3.168 equitable rules, and …. 3.171 proof of transaction …. 3.172 promotion of scheme …. 3.174 provision of services …. 3.173 related party transactions …. 3.166, 3.167, 3.172 resolution of conflicts …. 3.176 routine conflicts …. 3.169, 3.170 ensuring RE’s compliance …. 3.28, 3.29, 3.180 harm to investors …. 3.181, 3.182 exercise of powers …. 3.96 former provisions …. 3.75, 3.76 act honestly …. 3.83, 3.84, 3.85, 3.88, 3.89, 3.91, 3.93 care and diligence …. 3.110–3.114, 3.117 loyalty …. 3.95 overview …. 1.9, 3.3, 3.77, 3.78, 3.79 use of information …. 3.177 standard of care …. 3.179 use of position …. 3.71, 3.178 standard of care …. 3.179

Officers’ duties (Chap 2D) best interests of company …. 3.25, 3.27, 3.39, 3.47, 3.73, 3.87, 4.62 civil penalties …. 3.48, 3.49 consideration of interests …. 3.61–3.66 corporate groups …. 3.60, 3.65, 4.63, 4.65, 4.66, 4.71 former provisions …. 3.40, 3.41, 3.45, 3.46, 3.48, 3.51 general law duty …. 3.42–3.45, 3.59, 3.67, 3.93 good faith test …. 3.50, 3.89 intertwined duties …. 3.54 knowledge requirement …. 3.57 objective standard …. 3.52, 3.54 objective test …. 3.53, 3.54, 3.58, 3.59, 3.64 propositions …. 3.43, 3.44, 3.45 reasonable belief of benefit …. 3.60 risks and benefits of decisions …. 3.39 best interests of RE …. 3.68 care and diligence …. 3.17, 3.18, 3.21, 3.116, 4.58 appointment of administrators …. 4.59, 4.60 business judgment rule …. 3.25, 3.122, 4.46, 4.77 civil penalty provisions …. 3.19, 3.38 compensation orders …. 3.20 correspondence of duties …. 3.118–3.120 ensuring RE’s compliance …. 3.18, 3.28, 3.29 extent of balancing exercise …. 3.30 foreseeable risk of harm …. 3.27, 3.35 former provisions …. 3.110–3.114, 3.117 misleading statements …. 3.24 objective standard …. 3.112 profiting from breach …. 3.31 related party transactions …. 3.28 risks and benefits of decisions …. 3.22, 3.23, 3.24, 3.25, 3.26,

3.27, 3.30, 3.31, 3.35 short-term liquidity issues …. 4.61 standard of care and diligence …. 3.112, 3.117 statements of advice …. 3.32–3.36 conflict of duties …. 3.3, 3.80, 3.96 equitable duties …. 1.9, 3.29, 3.41 former provisions …. 3.40, 3.45, 3.47, 3.75, 3.76 act honestly …. 3.50, 3.83–3.85, 3.88, 3.89, 3.91, 3.93, 3.131 care and diligence …. 3.110–3.114, 3.117 equitable duties, as …. 3.41 fraud on a power …. 3.95 intention to deceive …. 3.46 interpretation difficulties …. 3.48, 3.89 key amendments …. 3.51 replacement of honesty test …. 3.50, 3.85, 3.131 requirements for breach …. 3.41, 3.45 overview …. 1.9, 3.2, 3.3, 3.5, 3.79 proper purpose …. 3.39, 3.47, 3.59, 3.68, 3.73, 3.87, 3.90, 4.62 ‘but for’ approach …. 4.67 civil penalties …. 3.48, 3.49 competing purposes …. 4.68 corporate groups …. 4.63, 4.65, 4.66, 4.70, 4.72, 4.73 former provisions …. 3.40, 3.41, 3.45, 3.46, 3.48, 3.51 general law duty …. 3.42–3.45, 3.93 general law test …. 3.44, 3.56 good faith test …. 3.50, 3.89 improper …. 3.55 intertwined duties …. 3.54 objective standard …. 3.52, 3.54 objective test …. 3.44, 3.53, 3.54, 3.56, 3.58, 3.67 propositions …. 3.43, 3.44, 3.45 risks and benefits of decisions …. 3.39

statements of purpose …. 4.69 statutory duties …. 1.9, 2.5, 3.2, 3.3 best interests and proper purpose …. 3.39–3.68, 3.73 care and diligence …. 3.17–3.38 use of position …. 3.69–3.73 use of position …. 3.69, 3.73 detriment …. 3.71, 3.73 impropriety …. 3.70 purpose of an act …. 3.72 scope of operation …. 3.70

P Partnerships winding up …. 2.50, 2.51, 2.54, 2.57, 2.58 dissolution by court …. 2.60, 2.61, 2.66 partners’ entitlement …. 2.62

PDS see Product disclosure statements Pooling see Statutory pooling; Tracing Prescribed interest schemes Collective Investments: Other People’s Money …. 2.23 financial product disclosure …. 9.33, 9.40 overview …. 2.16 winding up …. 2.17, 2.19 meetings of interest holders …. 2.18

Product disclosure statements additional orders …. 9.100, 9.110 balance of interests …. 9.108 court’s considerations …. 9.108 justice between parties …. 9.108, 9.109 liable persons …. 9.107

loan agreements …. 9.104–9.109 restitution …. 9.109 scope of provision …. 9.103 text of provision …. 9.101 third parties …. 9.103–9.109 types of orders …. 9.101, 9.102 class actions …. 2.87, 2.88, 10.6, 10.20, 10.40 credibility of evidence …. 10.41 cross and counterclaims …. 2.89 duration of proceedings …. 2.91 reliance …. 10.22, 10.41, 10.42 tax benefits …. 10.21 content …. 9.49, 10.15 defective statements …. 2.86, 2.90, 9.47, 9.48, 9.93, 9.113 additional orders …. 9.100–9.110 causation …. 9.98 civil liability …. 9.94 compensation …. 9.95, 9.100 inducement by representation …. 9.99 practical issues for investors …. 9.111, 9.112 recovery of loss or damage …. 9.95 reliance …. 9.98 remedies …. 9.53 scope of liability …. 9.96 suffers loss and damage …. 9.97 mandatory information …. 9.49 misleading and deceptive conduct …. 2.90, 9.98, 9.112 carve-outs …. 9.112 misleading statements …. 2.87, 9.48, 9.93, 9.112, 9.113 class actions …. 2.87, 2.88, 2.89, 2.91, 10.6 cross and counterclaims …. 2.89 defensive nature …. 2.88

duration of proceedings …. 2.91 interaction of provisions …. 2.90 insurance proceeds …. 9.112 overview …. 2.86, 2.90, 7.13, 9.30, 9.46, 9.47 requirement to provide …. 9.31 retail clients …. 9.31, 9.32, 9.51 significant risk …. 9.49, 9.50, 9.93 meaning …. 9.50 operation of provisions …. 9.51, 9.52 time of provision …. 9.31

Prospectus class actions …. 10.25 causation …. 10.26, 10.37, 10.38 overview …. 9.37, 9.40 recovery of loss or damage …. 10.25 sufficient disclosure …. 9.39

R Reasonable expectation defence …. 4.37–4.39 Reform see also Australian Law Reform Commission business rescue culture …. 4.80 collective investment vehicles …. 1.21 insolvency laws …. 4.74 insolvent trading …. 4.75, 4.78 current issues …. 4.75 need for reform …. 4.78, 4.79 pre-pack reorganisations …. 4.47 suggested reforms …. 4.76, 4.77 Treasury consultation paper …. 4.47–4.49, 4.76, 4.77 remuneration and expenses …. 13.83, 13.86 member approval …. 13.85

statutory right …. 13.84 restructuring of schemes …. 5.41, 5.49, 5.77 CAMAC report …. 5.44, 5.45, 5.46 courts’ power …. 5.42, 5.43, 6.63, 6.64 schemes of arrangement …. 5.48 separate legal entity …. 5.44, 5.45, 5.46 statutory novation provisions …. 1.12, 5.41, 5.43, 6.63, 6.64 voluntary administration …. 5.44, 5.46–5.48 statutory novation provisions …. 1.12, 5.41, 5.43, 6.63, 6.64, 8.31 ‘growers interests’, and …. 6.65–6.69 voluntary administration …. 5.44, 5.46–5.48, 7.69

Registered managed investment schemes see Managed investment schemes Related party transactions officers’ duties …. 3.28 conflict of interest …. 3.166, 3.167, 3.172 overview …. 3.166, 3.167

Remedial orders background to provision …. 3.196 ancillary relief …. 3.198, 3.199 CLERP amendments …. 3.209 original enactment …. 3.204–3.208 remedies under provisions …. 3.210–3.216 Trade Practices Act equivalents …. 3.197, 3.198, 3.200–3.203, 3.206 breach of officers’ duty …. 3.194, 3.195, 3.217 accessories to contravention …. 3.194 breach by RE …. 3.217, 3.218, 3.219 nature of action …. 3.220–3.230 standing …. 3.224 overview …. 3.194

requirements for orders …. 3.195

Remuneration and expenses allocation of expenses …. 13.40, 13.41 Canada …. 13.46 criteria …. 13.44 equity is equality …. 13.43 general principle …. 13.42 insurance-related expenses …. 13.45 assignments of indemnity …. 13.81 availability of interest …. 13.79–13.81 constitution of scheme …. 7.56, 13.9 trustee’s right of indemnity …. 13.11 cost recovery …. 13.77, 13.78 costs of trust proceedings …. 13.52 directions applications …. 7.58, 13.7, 13.52 pre-incurring expense …. 13.73, 13.74 Rubicon Asset Management …. 13.8, 13.9 dual character of work …. 13.38 equitable allowance …. 13.1, 13.2, 13.21, 13.24 benefit of investors …. 13.24, 13.25, 13.26 Berkeley Applegate …. 13.21 considerations …. 13.23 features …. 13.23 Lehman Brothers …. 13.24, 13.25, 13.26 ‘mop up’ costs …. 13.32 rationale for allowance …. 13.23 trust requirement …. 13.21, 13.22 use of house assets …. 13.33 house and trust assets …. 13.30, 13.36 recourse to trust assets …. 13.36–13.39 segregation of expenses …. 13.31, 13.32

sufficiency of house assets …. 13.33–13.35 use of house assets …. 13.33–13.35 indemnity from scheme property …. 7.62 interim orders …. 13.75, 13.76 key risks …. 13.59 existence of fund …. 13.68 mitigation of risk …. 13.70–13.74 priority …. 13.69 proper purpose …. 13.60–13.62 reasonably incurred …. 13.63–13.67 mitigation of risk …. 13.70 directions applications …. 13.73, 13.74 third party funding …. 13.71, 13.72 multi-function REs …. 7.63 overview …. 1.19, 7.30, 7.55, 7.57, 7.61, 7.63, 13.1–13.4 pre-emptive orders …. 13.76 process …. 13.53, 13.54, 13.65 evidence requirements …. 13.58 key principles …. 13.55 referral to judicial officer …. 13.57 tensions in case law …. 13.56 proper purpose …. 13.60 enhancement of value …. 13.62 unsuccessful realisation attempts …. 13.61 reasonably incurred …. 13.63, 13.64 quantum of claim …. 13.65 recovery from third parties …. 13.67 supervision of costs …. 13.66 reform …. 13.83, 13.86 member approval …. 13.85 statutory right …. 13.84 solvent and insolvent trusts …. 13.47

Trio Capital …. 13.48–13.51 use of solvent trusts funds …. 13.47 statutory provisions …. 13.5, 13.6 adequate provision for winding up …. 13.6 directions applications …. 13.7–13.9 third party funding …. 13.16, 13.71, 13.72 trust proceedings …. 13.52 trustee’s right of indemnity …. 13.10, 13.11 loss or impairment …. 13.12 personal asset, as …. 13.13 uncertainty, and …. 7.64, 13.2, 13.17 Universal Distributing principle …. 7.59, 13.1, 13.2, 13.9, 13.14, 13.21, 13.23 application …. 13.15 assignments of indemnity …. 13.81 benefit of investors …. 13.24, 13.27, 13.28 exclusive purpose …. 13.14, 13.15, 13.17–13.20, 13.24 interest …. 13.79, 13.80 origins of principle …. 13.14 quantification …. 13.53 range of costs …. 13.15, 13.31 recourse to trust assets …. 13.37 Stewart v Atco Controls …. 13.17–13.20, 13.24, 13.27–13.29 test for exclusivity …. 13.19, 13.29 third party funding, and …. 13.16 use of house assets …. 13.33, 13.34

Representative actions see Class actions Responsible entities see also Trustees background to provisions …. 2.23, 2.30, 2.34, 2.35 best interests duty …. 3.133, 3.158 boundaries of duty …. 3.140, 3.141

conflict of interests …. 3.133, 3.134, 3.135, 3.158, 3.159, 3.165, 3.166–3.176 resolution of conflicts …. 3.135, 3.176 test for breach …. 3.165 trustees’ duty, and …. 3.136, 3.137, 3.144–3.157, 3.160, 3.161, 3.162, 3.163 undivided loyalty …. 3.140, 3.159, 3.165 breach of duties …. 3.4, 3.12, 3.16, 3.183 civil penalty provisions …. 3.13, 3.14 compensation orders …. 3.13, 3.20, 3.218, 3.219 officers’ breach …. 3.18, 3.20, 3.183, 3.184, 3.185 recovery for loss or damage …. 3.15 conflict of interests …. 3.133, 3.134, 3.135, 3.158, 3.159, 3.165, 3.168 equitable rules, and …. 3.171 proof of transaction …. 3.172 promotion of scheme …. 3.174 provision of services …. 3.173 related party transactions …. 3.166, 3.167, 3.172 resolution of conflicts …. 3.135, 3.176 routine conflicts …. 3.169, 3.170 criticisms of model …. 7.12 directors see Officers duties …. 3.2, 3.3, 3.5, 3.77, 5.3 act honestly …. 3.82 best interests of members …. 3.133, 3.134, 3.135–3.141, 3.144–3.163, 3.165, 3.166–3.176 breach of duties …. 3.4, 3.12–3.16, 3.18, 3.20, 3.183 care and diligence …. 3.109 common law …. 3.10 constitution of scheme …. 3.11, 9.61 equitable duties …. 3.8, 3.11

federal jurisdiction …. 3.10 statutory duties …. 3.6, 3.7, 3.17 trustee, meaning …. 3.9 financial records …. 9.25 financial services licences …. 9.29 insolvency …. 2.68, 2.69, 7.18, 7.39, 9.86 assessment of financial position …. 7.23, 7.24 effect on scheme …. 7.22, 7.23, 7.25 scheme property …. 7.24 liquidator’s duties …. 8.29 officers see Officers overview …. 1.9, 2.5, 3.1, 7.11, 9.20, 9.61 replacement …. 1.11, 6.23, 7.39, 8.30, 9.4, 9.86, 9.92 court applications …. 9.88 Great Southern case study …. 5.25, 5.26 Gunns schemes …. 6.6, 6.8, 6.11, 6.23–6.58, 6.62, 6.64, 6.67 investor’s rights …. 9.86–9.88 practical limitations …. 9.89–9.92 procedures for replacement …. 9.87 statutory novation provisions …. 1.11, 1.12, 5.37–5.40, 5.41, 5.43, 6.1, 6.23–6.58, 6.62, 6.64–6.69, 7.39, 8.30, 8.31, 9.90, 9.91 scheme property see Scheme property voluntary administration …. 7.21 winding up …. 7.19, 7.21 courts’ powers …. 7.20 liquidator’s duties …. 8.29 winding up of scheme …. 7.32, 7.33 considerations …. 7.34 expenses …. 7.60 potential conflicts …. 7.35, 7.41, 7.44, 7.49 right of indemnity …. 7.60

Restructuring of schemes see also Winding up Centro restructure …. 5.61, 5.64, 5.70, 9.69 collapse …. 5.62, 5.63 debt levels …. 5.61, 5.62 number of stakeholders …. 5.66 revised debt facilities …. 5.64, 5.65 risk to directors …. 5.69 share price …. 5.63, 5.70 support by stakeholders …. 5.67, 5.68 courts’ role …. 1.12, 6.1, 6.59, 6.62 difficulties in restructuring …. 2.92, 5.10 Great Southern case study …. 5.24, 5.25 constitutional amendments …. 5.28, 5.29 grower agreements …. 5.28, 5.29 members’ meetings …. 5.27 replacement of RE …. 5.25, 5.26 Gunns schemes …. 6.1 aim of restructure …. 6.11 appointment of administrators …. 6.5 description of schemes …. 6.2–6.5 existing leases …. 6.11 implications of decision …. 6.59–6.69 injunction application …. 6.12, 6.13, 6.17, 6.58, 6.61 legal context …. 6.17–6.22 misleading and deceptive conduct …. 6.13, 6.21, 6.22, 6.39, 6.54, 6.56, 6.60, 6.61 next stage of litigation …. 6.14–6.16 options for investors …. 6.11 principal litigation …. 6.22 replacement of RE proposal …. 6.6, 6.8, 6.11 resolutions at meetings …. 6.10 restructure proposal …. 6.8, 6.9, 6.10, 6.11

sale of assets proposal …. 6.7 stages of restructure …. 6.11 statutory novation provisions …. 6.23–6.58, 6.62, 6.64, 6.67 impediments to restructure …. 5.50 number of stakeholders …. 5.66 risk to directors …. 5.69 Octaviar restructure …. 5.71, 5.72, 5.73 failed attempts …. 5.74 recent proceedings …. 5.76 risks to parties …. 5.75 overview …. 1.10, 1.11, 2.92, 5.4, 5.5, 5.77 reform proposals …. 5.41, 5.49, 5.77 CAMAC report …. 5.44, 5.45, 5.46 courts’ power …. 5.42, 5.43, 6.63, 6.64 schemes of arrangement …. 5.48 separate legal entity …. 5.44, 5.45, 5.46 statutory novation provisions …. 1.12, 5.41, 5.43, 6.63, 6.64, 6.65–6.69 voluntary administration …. 5.44, 5.46–5.48 replacement of RE …. 1.11 Great Southern case study …. 5.25, 5.26 Gunns schemes …. 6.6, 6.8, 6.11, 6.23–6.58, 6.62, 6.64, 6.67 statutory novation provisions …. 1.11, 1.12, 5.37–5.40, 5.41, 5.43, 6.1, 6.23–6.58, 6.62, 6.64–6.69 statutory novation provisions …. 1.11, 5.37, 5.38, 6.1 effect of provisions …. 5.39, 5.40, 6.30–6.38 ‘growers interests’ …. 6.65–6.69 Gunns schemes …. 6.23–6.58, 6.62, 6.64, 6.67 information to growers …. 6.26–6.29, 6.39, 6.55 quarantine of liabilities …. 6.34, 6.35, 6.38 reform proposals …. 1.12, 5.41, 5.43, 6.63, 6.64, 6.65–6.69 scheme leases …. 6.35, 6.40–6.58, 6.67

scope of provisions …. 6.25 ‘stepping into the shoes’ characterisation …. 6.31, 6.33, 6.36, 6.62 text of provisions …. 6.23, 6.24 Tricom restructure …. 5.51, 5.56, 5.60 ASX reaction …. 5.59 collapse …. 5.53–5.55 margin calls …. 5.53, 5.55, 5.56 Opes Prime, distinction …. 5.58 rebranding …. 5.60 securities lending …. 5.51, 5.52, 5.54, 5.57

Retail clients …. 9.31, 9.32, 9.44, 9.51, 9.54 S Scheme documents compliance plan …. 9.26 investor rights …. 9.59 requirements …. 9.28 constitution of scheme …. 7.14, 9.26, 9.27 investor’s liability …. 9.63 investor’s rights …. 9.59, 9.60, 9.61, 9.65 member’s interest …. 9.73, 9.77 remuneration and expenses …. 7.56, 13.9, 13.11 responsible entities’ duties …. 3.11, 9.61 responsible entities’ powers …. 9.61 trustee’s right of indemnity …. 13.11 winding up provision …. 7.55 investor rights, and …. 9.58, 9.59 inspection of accounts …. 9.60 responsible entities’ powers …. 9.61 scheme property …. 9.83

withdrawal from scheme …. 9.65 overview …. 9.26 scheme property …. 2.73, 2.75, 8.35, 8.48, 8.49, 8.53, 9.27 exclusion of property …. 8.50 investor’s rights …. 9.83 winding up, and …. 2.57, 2.73, 2.75, 7.55, 7.56

Scheme property agribusiness schemes …. 8.44, 8.53, 8.76 application fees …. 8.53, 8.76 conflicts between stakeholders …. 8.34 contribution to scheme …. 2.76, 2.77 definition …. 6.45, 6.46, 6.47, 8.44, 8.45, 8.46, 8.47, 8.52, 8.53, 9.80 difficulties in identifying …. 2.72, 2.73, 2.77, 8.65 equitable title …. 9.24 holding on trust …. 2.72, 2.74, 2.76, 3.1, 3.9, 8.35, 8.36, 8.52, 9.21, 13.22 separation of property …. 9.25, 13.30 trustees’ powers and duties …. 8.37 unregistered schemes …. 8.36 identifying property …. 8.48, 8.49 agribusiness schemes …. 8.76 tracing, and …. 8.49 inclusions …. 2.5, 8.44, 8.45, 9.22 investor’s rights …. 9.72, 9.79, 9.81 bundle of rights …. 9.82 compensation …. 9.84 determining interest …. 9.73–9.77 disclaimer of leases …. 9.85 enforceable proprietary rights …. 9.78 scheme documents …. 9.83 legal title …. 9.24

member’s interest …. 9.73 court’s approach …. 9.77 definition …. 9.74 general law …. 9.76 personal property, as …. 9.75 necessity to identify …. 8.33 overview …. 1.14, 7.24, 8.4, 8.32, 9.22 rationale for rules …. 8.33 right of indemnity …. 6.49–6.52, 7.60 liquidators …. 7.62 rights …. 8.51, 9.23 sale of other property, and …. 8.40 apportionment …. 8.40, 8.41, 8.42, 8.43 scheme documents …. 2.73, 2.75, 8.35, 8.48, 8.49, 8.53, 9.27 exclusion of property …. 8.50 investor’s rights …. 9.83 scheme leases, as …. 6.45, 6.46, 6.47, 6.48 scope of property …. 8.39, 8.40 unregistered schemes …. 8.36, 8.46 winding up, and …. 2.52, 2.57, 2.72–2.76, 8.38, 8.48

Schemes of arrangement flexibility …. 8.130 overview …. 8.124, 8.125 Re Casablanca …. 8.128, 8.129 requirements …. 8.126, 8.130 third party claims …. 8.127, 8.158

Securities lending …. 5.51, 5.52, 5.53, 5.57 Stakeholders see Creditors; Investors Standing compensation orders …. 3.13

damages …. 3.193 ‘growers’ groups …. 2.84 injunctions …. 3.189, 3.192 remedial orders …. 3.224

Statements of advice breach of officers’ duty …. 3.32 loss requirement …. 3.33–3.36

Statutory novation provisions effect of provisions …. 5.39, 5.40, 6.30, 6.31, 6.53, 6.54, 8.30, 9.91 quarantine of liabilities …. 6.34, 6.35, 6.38 ‘stepping into the shoes’ characterisation …. 6.31, 6.33, 6.36, 6.62 Gunns schemes litigation …. 6.23–6.58, 6.62, 6.64 effect of provisions …. 6.30–6.38 information to growers …. 6.26–6.29, 6.39, 6.55 quarantine of liabilities …. 6.34, 6.35, 6.38 scheme leases …. 6.35, 6.40–6.58, 6.67 overview …. 1.11, 5.37, 5.38, 6.1, 7.39, 9.90 reform proposals …. 1.12, 5.41, 5.43, 6.63, 6.64, 8.31 ‘growers interests’, and …. 6.65–6.69 scheme leases …. 6.40–6.58, 6.67 right of indemnity …. 6.49–6.52 scheme property, as …. 6.45, 6.46, 6.47, 6.48 scope of provisions …. 6.25 text of provisions …. 6.23, 6.24

Statutory pooling application of provisions …. 8.89 court orders …. 8.90, 8.107 ancillary orders …. 8.111, 8.114, 8.116 disadvantage caused by orders …. 8.110 effects of order …. 8.111, 8.112

just and equitable …. 8.108, 8.109, 8.116 modification of application of Act …. 8.113 notice by liquidator …. 8.117 published reasons …. 8.107 relevant matters …. 8.109 secured creditors …. 8.112 variation of orders …. 8.111, 8.115, 8.116 effect of pooling …. 8.88 introduction of provisions …. 8.87 effect on existing mechanisms …. 8.122, 8.123 liquidator’s determination …. 8.90, 8.96, 8.111 approval by creditors …. 8.103–8.105 modification of provisions …. 8.97–8.101 termination by court …. 8.106 variation of determination …. 8.102, 8.103–8.105, 8.106 lodgment of orders …. 8.118 number of lodgments …. 8.119, 8.120 membership of group …. 8.91 overview …. 1.14, 8.86, 8.90 previous statutory provisions …. 8.122, 8.123 requirements …. 8.91 carrying on of a scheme …. 8.92 joint undertaking …. 8.92 present satisfaction …. 8.94 property …. 8.93, 8.94 solvent companies in group …. 8.95 use since enactment …. 8.118, 8.121 number of lodgments …. 8.119, 8.120 voluntary administration, and …. 8.89

Substantive consolidation advantages …. 8.83

arrangements with creditors …. 8.142 advantages of arrangements …. 8.144 appeals …. 8.151 compromises, and …. 8.143 dissenting creditors …. 8.145 meetings of creditors …. 8.146, 8.147 members’ approval …. 8.148, 8.149, 8.150 winding up resolutions …. 8.147 comparison of means …. 8.162 competing philosophies …. 8.83 compromises …. 8.131, 8.134, 8.143 amount of debt …. 8.133 availability of power …. 8.132 limitations on power …. 8.133 deeds of company arrangement …. 8.156, 8.157, 8.159 advantages …. 8.160 eligible employee creditors …. 8.161 third party claims …. 8.158 directions applications …. 8.135, 8.136 applicable provision …. 8.137, 8.138 utility of power …. 8.139–8.141 effect on stakeholders …. 8.83, 8.84 example of utility …. 8.85 overview …. 8.4, 8.82 previous statutory provisions …. 8.122, 8.123 schemes of arrangement …. 8.124, 8.125 flexibility …. 8.130 Re Casablanca …. 8.128, 8.129 requirements …. 8.126, 8.130 third party claims …. 8.127, 8.158 statutory pooling see Statutory pooling voluntary administration …. 8.152

court orders …. 8.152–8.155

Superannuation entities best interests duty …. 3.154–3.157, 3.160 economic wellbeing of members …. 3.160, 3.161 subjective or objective enquiry …. 3.162, 3.163

T Third parties contracts, setting aside …. 9.103 loan agreements …. 9.104–9.109 deeds of company arrangement …. 8.158, 12.45, 12.46, 12.67 representative orders …. 12.68 directions applications …. 1.18, 12.2, 12.11, 12.20, 12.24, 12.44, 12.50–12.52, 12.54–12.56, 12.123, 12.125 compromise …. 12.28, 12.29 contrary cases …. 12.40, 12.75, 12.79–12.104 conversion of proceedings …. 12.38, 12.53, 12.57, 12.63, 12.67, 12.97, 12.120, 12.121, 12.125 court’s discretion …. 12.31, 12.32, 12.75, 12.77, 12.78, 12.82 deeds of company arrangement …. 12.45, 12.46, 12.67 estoppel …. 12.26, 12.27, 12.30, 12.39, 12.43 function of directions …. 12.33, 12.34, 12.35 GB Nathan …. 12.12–12.14, 12.69 joinder of parties …. 12.3, 12.4, 12.5, 12.85, 12.88, 12.97, 12.114, 12.124 notice of proceedings …. 12.67, 12.89 ordinarily, use of term …. 12.47, 12.48 proof of debt …. 12.41 Re Blackbird Pies …. 12.25–12.27 rejection of GB Nathan …. 12.69–12.116 scope of protection …. 12.49 supporting authorities …. 12.15–12.58

tax debts …. 12.42 trustee directions …. 12.15–12.23 uncertainty …. 12.121, 12.123 voluntary liquidations …. 12.57, 12.58 Willmott Forests (No 2) …. 12.69–12.116 overview …. 12.1 schemes of arrangement …. 8.127, 8.158 substantive consolidation …. 8.158 Willmott Forests (No 2) …. 12.69, 12.73, 12.117 Anglican Insurance …. 12.93, 12.94 approval of approach …. 12.117 Astarra Asset Management …. 12.98–12.100 case supporting approach …. 12.75, 12.79–12.105 collapse of scheme …. 12.70 court’s discretion …. 12.75, 12.77, 12.78, 12.82 distribution of sale proceeds …. 12.70, 12.71, 12.72 Graf Holdings …. 12.90–12.92 Great Southern Manager …. 12.95–12.97 Macedonian Orthodox …. 12.75, 12.105–12.116, 12.118, 12.119 Meadow Springs …. 12.79–12.82 Melbourne Asset Management …. 12.83–12.89 objection by members …. 12.74 opportunity to be heard …. 12.83, 12.84 reasons for rejection …. 12.75 Rewards Projects …. 12.101–12.104 subsequent cases …. 12.117–12.120

Tracing of assets courts’ approaches …. 8.57, 8.62 first in, first out rule …. 8.59 intention-based …. 8.58, 8.68, 8.74 lowest intermediate balance rule …. 8.60

rateable distribution …. 8.60, 8.63 recent Australian approach …. 8.63–8.76 rolling charge model …. 8.62 overview …. 1.14, 8.4, 8.56 rateable distribution …. 8.60, 8.63 justification for approach …. 8.69 Letten (No 7) …. 8.64–8.70 objections by investors …. 8.67 personal equities …. 8.77 pooling of tainted accounts …. 8.73 priority claims …. 8.77 Re Sonray …. 8.71–8.76

Trading trusts see Investment trusts Trustees directions applications …. 12.10, 12.15, 12.18–12.22 conversion of proceedings …. 12.65 Macedonian Orthodox …. 12.107–12.110 parties to proceedings …. 12.11, 12.23 settlement construction …. 12.17 wills …. 12.16, 12.21 scheme property …. 2.72, 2.74, 2.76, 3.1, 3.9, 8.35, 8.36, 8.52, 9.21, 13.22 separation of property …. 9.25, 13.30 powers and duties …. 8.37 unregistered schemes …. 8.36

Trustees’ duties best interests of beneficiaries …. 3.136, 3.137, 3.144, 3.149, 3.150 best efforts …. 3.146 objective test …. 3.147 statutory provisions …. 3.152–3.157 superannuation entities …. 3.154–3.157, 3.160, 3.161, 3.162,

3.163 undivided loyalty …. 3.145, 3.148

Trustees’ right of indemnity constitution of scheme …. 13.11 damages claims …. 8.14 expenses properly incurred …. 8.13 limits and qualifications …. 8.15–8.28 loss of right …. 8.19, 8.28, 13.12 clear accounts rule …. 8.20–8.24, 8.26 conflicts between stakeholders …. 8.19, 8.25, 8.27 unsecured creditors …. 8.23, 8.24, 8.26, 8.27 overview …. 6.49, 8.12 personal asset, as …. 13.13 practitioner’s remuneration, and …. 13.10–13.13 scope of right …. 8.12 subrogation …. 8.18 trustees’ lien over assets …. 8.16, 8.17 unsecured creditors …. 8.11, 8.19 clear accounts rule …. 8.23, 8.24, 8.26 conflicts with investors …. 8.19, 8.25, 8.27

Trusts equitable jurisdiction …. 13.21 investment trusts see Investment trusts scheme property …. 2.72, 2.74, 2.76, 3.1, 3.9, 8.35, 8.36, 8.52, 9.21, 13.22 separation of property …. 9.25, 13.30 trustees’ powers and duties …. 8.37 unregistered schemes …. 8.36 winding up …. 2.45, 2.50, 2.51, 2.57, 2.58, 7.17 companies, distinction …. 2.45, 2.46, 2.52, 2.54 courts’ power …. 2.63, 2.66

statutory provisions …. 2.65, 2.66

Turnbull review …. 2.38 U United States nature of financial distress …. 4.3

Unregistered schemes claims by investors …. 3.187 scheme property …. 8.36, 8.46 winding up …. 2.11, 2.51, 2.55, 2.56 court orders …. 2.14, 2.44, 2.48, 2.50, 7.37

V Voluntary administration Collective Investments: Other People’s Money …. 2.28 companies …. 2.78 deeds of company arrangement …. 8.156 overview …. 4.3, 8.89 reform proposals …. 5.44, 5.46–5.48, 7.69 responsible entities …. 7.21 statutory pooling, and …. 8.89 substantive consolidation …. 8.152 court orders …. 8.152–8.155

W Wallis Inquiry, 1997 …. 2.34 Winding up see also Restructuring of schemes application costs …. 7.30, 7.65 balancing …. 7.67 contradictor’s costs …. 7.66

courts’ approach …. 7.68 applications …. 7.52 appointment to conduct …. 2.70, 7.30 insolvency practitioners …. 2.71 liquidators …. 7.36, 7.40, 7.41, 7.45–7.48 potential conflicts …. 7.35, 7.41–7.49 responsible entities …. 7.32, 7.33, 7.34, 7.35, 7.41, 7.44, 7.49 special purpose liquidators …. 7.36 unregistered schemes …. 7.37 background to provisions …. 2.15, 2.20 Collective Investments Bill 1995 …. 2.29–2.33 Collective Investments: Other People’s Money …. 2.21–2.29, 2.32, 2.35, 2.47 Managed Investments Act 1998 …. 2.35–2.37 post-1998 inquiries and reviews …. 2.38, 2.39 prescribed interest schemes …. 2.16–2.19, 2.23 Wallis Inquiry, 1997 …. 2.34 companies …. 2.41, 2.42, 2.45, 2.58, 2.78 schemes, parallels …. 2.50, 2.51 statutory provisions …. 2.46, 2.49, 2.59, 2.78 trusts, distinction …. 2.45, 2.46, 2.54 complexity of winding up …. 7.16, 7.69 constitution of scheme …. 7.55 court orders …. 2.12, 2.13, 2.51, 5.8, 7.26, 7.28, 7.30, 7.51, 13.7 additional powers …. 2.48, 2.49 application costs …. 7.68 incidence of formal orders …. 2.67, 2.69 limits of powers …. 2.43, 2.44, 2.53 unregistered schemes …. 2.14, 2.44, 2.48, 2.50, 7.37 courts’ powers …. 7.20 court’s role …. 7.53, 8.165 ‘de facto’ winding up …. 2.68, 2.80, 5.10

Elders case study …. 5.30–5.32 Gunns case study …. 5.33 Timbercorp case study …. 5.11–5.23, 5.40 directions applications see Directions applications Elders case study …. 5.30 constitutional amendments …. 5.31, 5.32 Forest Enterprises case study …. 5.35 compromise …. 5.36 form of scheme …. 2.52 group companies see Statutory pooling ‘growers’ groups …. 2.83, 2.84 Timbercorp case study …. 5.11 Gunns case study …. 5.33 just and equitable ground …. 7.27 legal framework of schemes …. 7.8, 7.16 capital funds …. 7.10 liquidators …. 2.70, 7.40 competing duties …. 8.29 function …. 2.53, 2.54 potential conflicts …. 7.41, 7.45–7.48 special purpose liquidators …. 7.36 liquidator’s remuneration see Remuneration and expenses methods of winding up …. 2.12 multiple applications …. 2.79, 2.80 examples …. 2.82 time and expense …. 2.81 nature of winding up …. 7.3 outcomes for investors …. 2.93, 2.94 overview …. 1.13, 2.10, 2.43, 2.67, 2.95–2.97, 5.7, 7.1, 7.2, 7.9, part of a scheme …. 7.35, 7.38 special purpose liquidators …. 7.36 partnerships …. 2.50, 2.51, 2.54, 2.57, 2.58

dissolution by court …. 2.60, 2.61, 2.66 partners’ entitlement …. 2.62 potential conflicts …. 7.30, 7.35, 7.41 Environinvest schemes …. 7.42–7.47 practitioner’s remuneration see Remuneration and expenses prescribed interest schemes …. 2.17–2.19 process …. 2.40, 2.45, 2.54 responsible entities …. 7.19, 7.21 courts’ powers …. 7.20 right of indemnity …. 7.60 winding up of scheme …. 7.32, 7.33, 7.34, 7.35, 7.41, 7.44, 7.49, 7.60 scheme documents …. 2.57, 2.73, 2.75, 7.55, 7.56 scheme property …. 2.52, 2.57, 2.72, 8.38, 8.48 contribution to scheme …. 2.76, 2.77 difficulties in identifying …. 2.72, 2.73, 2.77 holding of property …. 2.72, 2.74, 2.76 scheme documents …. 2.73, 2.75 statutory provisions …. 2.10, 2.11, 2.44, 2.53, 2.64, 2.66, 2.97, 5.8, 7.17 background to provisions …. 2.15–2.39 companies …. 2.46, 2.49, 2.59, 2.78 trusts …. 2.65, 2.66 Timbercorp case study …. 5.11 adjournment of applications …. 5.12 amendment power …. 5.14, 5.15 apportionment …. 5.22, 5.23 apportionment proceeding …. 5.21, 5.40 extinguishment of growers’ rights …. 5.19, 5.20, 5.21 sale of forestry assets …. 5.13 sale of land …. 5.19 sale process …. 5.18

settlement …. 5.22 termination of growers’ interests …. 5.13, 5.16 trusts …. 2.45, 2.50, 2.51, 2.57, 2.58, 7.17 companies, distinction …. 2.45, 2.46, 2.52, 2.54 courts’ power …. 2.63, 2.66 statutory provisions …. 2.65, 2.66 unregistered schemes …. 2.11, 2.51, 2.55, 2.56 court orders …. 2.14, 2.44, 2.48, 2.50, 7.37