FEDERAL COURT OF AUSTRALIA Rural Security Holdings Pty Limited v Equititrust Limited [2011] FCA 512 Citation: Rural Security Holdings Pty Limited v Equititrust Limited [2011] FCA 512 Parties: RURAL SECURITY HOLDINGS PTY LIMITED v EQUITITRUST LIMITED File number(s): NSD 558 of 2011 Judge: EMMETT J Date of judgment: 6 May 2011 Legislation: Corporations Act 2001 (Cth) ss 459P, 467 Date of hearing: 3 May 2011 and 6 May 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 32 Counsel for the plaintiff: Mr B. Levet Solicitor for the plaintiff: Ronayne Lawyers Solicitor for the defendant: Mr D. Tucker of Tucker & Cowen Solicitors IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 558 of 2011 BETWEEN: Rural Security HoldingS Pty Limited Plaintiff AND: Equititrust Limited Defendant JUDGE: EMMETT J DATE OF ORDER: 6 MAY 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The originating process be dismissed. 2. The plaintiff notify the Australian Securities and Investments Commission as soon as practicable, and in any event no later than midday on 9 May 2011, of the making of order 1. 3. The plaintiff pay the defendant's costs of the proceeding. 4. The defendant file and serve written submissions on costs no later than 5pm on 10 May 2011. 5. The plaintiff file and serve written submissions in reply no later than 5pm on 12 May 2011. 6. The proceeding be listed for the determination of costs at 9.30am on Friday, 13 May 2011. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 558 of 2011 BETWEEN: Rural Security HoldingS Pty Limited Plaintiff AND: Equititrust Limited Defendant JUDGE: EMMETT J DATE: 6 MAY 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 3 May 2011, Rural Security Holdings Pty Limited (the Plaintiff) commenced a proceeding by way of originating process, seeking an order that the defendant, Equititrust Limited (the Company), be wound up pursuant to s 459P of the Corporations Act 2001 (Cth) (the Corporations Act). Section 459P provides that any one or more of a number of persons having certain relationships with a company may apply to the Court for the company to be wound up in insolvency. Relevantly, s 459P(1)(b) provides that a creditor of a company may apply to the Court for the company to be wound up in insolvency, even if the creditor is a secured creditor or is only a contingent or prospective creditor. Under s 459P(2), an application by a person who is a creditor only because of a contingent or prospective debt may be made only with the leave of the Court. 2 The Company, by amended notice of motion filed on 4 May 2011, seeks dismissal of the proceeding under s 467(1)(a) of the Corporations Act. Under s 467(1)(a), on hearing a winding up application, the Court may dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application. As I understand it, however, the Company also seeks a dismissal of the Plaintiff's winding up application on the basis that there is no reasonable prospect that the Plaintiff will succeed in obtaining the relief that it claims. 3 The proceeding was commenced in curious circumstances. Shortly before the filing of the originating process, the Plaintiff commenced a proceeding in the District Court of New South Wales, claiming from the Company restitution in the sum of $208,000, in lieu of damages, for alleged conversion by the Company of plant and equipment alleged to be owned by the Plaintiff. The claim that the Company converted property of the Plaintiff is totally without particulars and, in the course of the hearing, counsel for the Plaintiff was unable to inform the Court of the case that the Plaintiff wished to make out concerning alleged conversion of the Plaintiff's property by the Company. 4 The claimed basis of ownership of the property that was the subject of the alleged conversion is somewhat tortuous. It begins with an instrument described as a lease agreement (the Lease) between SMSCF Pty Limited (SMSCF) and a number of companies including Checkling Pty Limited (Checkling). The date of the Lease is not clear. A copy in evidence has no date inserted in the space provided in the attestation page. An annexure to that copy says that it is an annexure to an instrument dated 12 March 2008. By instrument bearing the date 26 March 2008 (the Charge), Checkling charged in favour of SMSCF all of its assets and undertaking as security for all moneys owing by Checkling to SMSCF. The liabilities secured expressly included liability on the part of Checkling under a lease agreement said to be dated on or about the date of the Charge. That may or may not be a reference to the Lease, which may have been entered into on 12 March 2008 or some other date. I shall assume, in favour of the Plaintiff, that it is a reference to the Lease. The Charge referred to permitted encumbrances, including a prior fixed and floating charge in favour of the Company over the assets and undertaking of Checkling. 5 By deed of assignment of 16 June 2010 (the Assignment), SMSCF assigned to the Plaintiff the whole of the right, title and interest of SMSCF, both legal and beneficial, in and to assets described as the Securities and the Associated Rights. The term Securities was defined as including a lease agreement dated 26 March 2008 between SMSCF, Checkling and others. The Securities was also defined as including a fixed and floating charge, dated 26 March 2008, granted by Checkling in favour of SMSCF. Those terms appear to be intended to refer to the Lease and the Charge. 6 On 16 June 2010, SMSCF gave notice of assignment to Checkling that it had assigned its right, title and interest under and in connection with the Charge. The notice of assignment also referred to a loan from SMSCF to Checkling, in the sum of $725,000, made on 26 March 2008. It may be, although it is totally unclear, that that was intended to be a reference to the amount that was in substance advanced by SMSCF on the security of the Lease. The notice of assignment, however, refers to that liability as a principal loan amount. As I have said, there is no evidence that the Lease, in any event, was made on 26 March 2008. 7 It seems that things did not go well for Checkling. The Plaintiff appointed receivers under the Charge and the Company appointed receivers under the deed of charge in its favour. Thereafter, various communications occurred between the two lots of receivers and their solicitors, concerning the subject matter of the Lease. The annexure to the Lease contained a lengthy description of property. The property included office furniture and equipment, as well as farm or rural equipment, such as tractors, pumps, mowers and the like. Significantly, the assets said to be the subject of the Lease included three items, which, on their face, give the appearance of being fixtures. The three items are: a lunch room of approximately eight by four metres, colourbond clad, with one door, two windows, toilet and shower on a concrete pad; a workshop of approximately 22 by 13 metres, galvanised steel framed, bolted on a concrete pad, colourbond clad with two sliding doors and pitched roof; and a site office, described as LPB, approximately five by three metres, with door, two windows, air conditioned, and skid mounted on a concrete pad. 8 Whether those items were located on concrete pads on the land of Checkling, at the time when the Lease was entered into, is not clear. It is reasonable to draw the inference, however, that, whether the items were located on the land at the time of the Lease or afterwards, they are, or became, fixtures. That, of course, is by no means free of argument. Quite substantial items can be affixed to land for their better enjoyment, without their becoming fixtures. On the other hand, substantial items may rest on land by their own weight, without being affixed, and yet be regarded as fixtures. Be that as it may, that curiosity is not decisive in the proceeding. 9 The assertion seems to be that in some way the Plaintiff demanded delivery up of the subject matter of the lease agreement, and the Company declined to comply, thereby committing the tort of conversion. Assuming that there was an effective assignment by SMSCF to the Plaintiff of what is, in effect, the reversion under the lease agreement, such that the Plaintiff became the owner of the property that was the subject of the lease agreement, it is by no means clear that the Plaintiff became entitled to possession of the property. That is to say, there is no evidence that the lease agreement has been terminated, thereby bringing to an end the right of Checkling and the other parties to the lease agreement to possession and use of the equipment and buildings. There has been communication, as I have said, between the receivers, which does not support a contention that there has been a formal termination of the lease entitling the plaintiff to possession of the property that is the subject of the lease agreement. 10 On 11 October 2010, the Plaintiff's receiver sent an email to the Company's receiver, referring to the monthly instalments due under the lease agreement. The Plaintiff's receiver said that the Plaintiff was prepared to allow continued use of the property in return for weekly instalments being paid in an amount of $2,750. The email said that the terms proposed were not a reduction of the total instalments due in accordance with the lease agreement. The email ended by saying that in the event that Windsor Turf Farm, which seems to be a business name of Checkling, was unable to meet those instalments, the Plaintiff's receiver would take steps to secure the property. 11 On 21 October 2010, the Plaintiff's receiver sent another email to the Company's receiver saying that he needed to know, by the following day, whether the Company was interested in an offer for the securities that had been given to the Company. The email of 22 October 2010 said that the Plaintiff had funds ready to go, but that, if a purchase could not be agreed upon promptly, the Plaintiff would begin to realise the plant and equipment. On 12 November 2010, the Company's receiver told the Plaintiff's receiver that he was happy for an inspection to take place and asked when removal of the equipment was likely to be scheduled. 12 On 20 December 2010, the Plaintiff's receiver wrote to the Company's receiver, noting that Checkling was still in possession of the plant and equipment that was the subject of the Lease, and that the rent under the Lease had not been paid since the commencement of the lease. The letter asserted that an amount of some $541,034.99 remained due and payable, which was calculated as 735 days from 4 March 2008 to 9 March 2010. The latter date seems to be the date of the appointment of the Company's receiver. That calculation suggests that 4 March 2008 was the date of the advance or payment whereby SMSCF purported to acquire the plant and equipment. The letter asserted that the sum of $208,316.87 remained due and payable, calculated as 283 days from 10 March 2010 to 17 December 2010. The letter demanded payment within 21 days of the sum of $749,351.86 or the making of suitable arrangements for the repayment of that amount. The letter said that, if no response was provided within that timeframe, the Plaintiff's receiver would be commencing legal proceedings against the Company's receiver without further notice. On 14 February 2011, the Plaintiff's receiver wrote again to the Company's receiver saying that the Plaintiff wished to make an offer of $3.8 million to acquire the Company's mortgage over the property. The basis of the acquisition was to involve a $1 million payment immediately and the balance to be paid within four weeks. 13 The solicitors for the Company responded on 28 February 2011, saying that they understood that the Plaintiff claimed to be the assignee of SMSCF's rights under the Lease. The letter said, however, that the Company had no evidence of any valid assignment. The letter referred to an equipment lease of 4 March 2008. The letter also observed that the lease agreement asserted that SMSCF had title to and was owner of the goods set out in the annexure. The letter pointed out that the annexure referred to four buildings affixed to land owned by Checkling, which were plainly fixtures to, and formed part of, the land. The letter pointed out that the land was the subject of first and second registered mortgages registered in February 2008, prior to the execution of the lease agreement. 14 The letter then went on to say that the Company's receiver had, on a number of occasions, invited the Plaintiff's receiver to recover possession of the goods referred to in the Lease, but not the buildings. The letter said that, in response to those invitations, the Plaintiff's receiver had made arrangements to collect the goods on 17 November 2010, but had failed to collect the goods on or after that date. The solicitor's letter said that the Company's receiver again repeated the offer for the Plaintiff's receiver to recover the goods referred to in the Lease, other than the buildings, subject to establishing title to those goods by demonstrating that the Plaintiff was a valid assignee of the Lease. 15 The letter then observed that, if the Plaintiff's receiver continued to assert that the buildings were not fixtures to the land, he was invited to commence proceedings to establish that proposition. The letter said that the Company's receiver would of course abide by any order of the Court in that regard, including any order permitting the Plaintiff's receiver to recover possession of the buildings if it were found, contrary to the Company's view, that the buildings are not fixtures. 16 There was no response to the letter of 28 February 2011 and, on 11 April 2011, the solicitors wrote again to the Plaintiff's receiver pointing out that there had been no response. That letter observed that, on their instructions, the relevant plant and equipment was old, in poor condition and of little value. The letter said that the rent purportedly payable under the Lease for the plant and equipment, putting to one side for the moment the buildings, was substantially in excess of a fair market rent. The letter noted that, in the earlier letter of 28 February 2011, it had been pointed out that arrangements had been made to collect the equipment in November 2010, and that there had been a failure to do so. 17 The letter also observed that the Plaintiff's receiver had ignored the request to prove a valid assignment of the Lease and, therefore, to demonstrate the Plaintiff's title to the plant and equipment. The letter ended by observing that it seemed to the Company that the Plaintiff had no interest in collecting the equipment to which it claimed title. Rather, it said, the true purpose of the Plaintiff was to manufacture a claim against the Company's receiver and to leave the plant and equipment, which had little value, on Checkling's land, so as to allow the asserted claim to accrue at the rate of about $22,000 a month. 18 The Plaintiff's receiver responded by letter of 12 April 2011 attaching a copy of the Assignment. The letter said that the Plaintiff's receiver understood that the Plaintiff was now independently pursuing the matter, and that the Company's solicitors should liaise with the Plaintiff directly if they had any issues with the Lease or requests to collect the plant and equipment. 19 The next step appears to have been the commencement of the District Court proceeding by the Plaintiff against the Company and against the Company's receiver. The pleading in that proceeding is less than informative. The pleading asserts that, on 12 March 2008, Checkling and other persons entered into the Lease with SMSCF, and that Checkling charged its interest in the Lease to SMSCF on or about 12 March 2008. The pleading then asserts that on or about 16 January 2010 (sic, scilicet June), SMSCF assigned its rights under the charge to the Plaintiff pursuant to the Assignment, and that notice of the Assignment was given to Checkling on 16 June 2010. The pleading then asserts that on 10 March 2010, the Company appointed the Company's receiver as receiver and manager of Checkling. 20 Curiously, the statement of claim then asserts that, on or about 1 June 2009, the Company, either alone or in conjunction with the Company's receiver, converted the plant to its own use. Alternatively, the statement of claim asserts, such conversion was by the Company's receiver alone. The pleading ends with an assertion that the value of the plant is $208,000 and that the Plaintiff was entitled to damages, including but not limited to that amount, but that the Plaintiff waived its right to seek damages by way of conversion and in lieu thereof sought by way of restitution the amount of $208,000 from the Company. 21 If that is the basis upon which the Plaintiff asserts that it is a creditor of the Company, it is bound to fail. The alleged conversion is said, totally without particularisation, to have occurred on 1 June 2009, at which time SMSCF was the only person entitled under the Lease. There is no suggestion that in some way the cause of action was assigned with the Lease. 22 On the material before me and in the light of the inability of counsel for the Plaintiff to formulate the basis upon which it is said that there was a conversion, I am not persuaded that there is any reasonable prospect of the Plaintiff establishing that it is a creditor of the Company. More importantly, from the Company's point of view, I am not satisfied that, on the material before me, there is any reasonable prospect that the Plaintiff can establish that the Company is insolvent – that is to say, that it is unable to pay its debts as and when they fall due. 23 Mr David Kennedy is the chief executive officer of the Company. He is also a director of the Company. The Company is a private mortgage lender and it is the responsible entity of the Equititrust Income Fund, which is a pooled investment scheme operated under the managed investments provisions of the Corporations Act. The Company is also the responsible entity of the Equititrust Premium Fund. The Company holds an Australian Financial Services Licence. Mr Kennedy says that the Company has not received any statutory demand from any creditor, and, in particular, has not received one from the Plaintiff. He says that the Company has not suffered any judgment against it from the Plaintiff. Indeed, he says that the Company has no judgments against it. 24 The evidence presently before me includes financial information concerning the Company including its annual financial report as at 30 June 2010 and current consolidated accounts for the period ended March 2011. It also includes an interim financial report of the Equititrust Income Fund as at 31 December 2010. The only material to which the Plaintiff points as potentially indicating that the Company is insolvent consists of the balance sheet and a review report by the independent auditor of Equititrust Income Fund dated 16 March 2011. The interim financial report indicates that, as at 31 December 2010, the Equititrust Income Fund had total assets of $262,548,399 and total liabilities of $31,027,609, giving net assets attributable to investors of $231,520,690. The liabilities included interest bearing liabilities as at 31 December 2010 of $26 million. In relation to that item, note 11 indicates that the existing repayment agreement with the external financier was for a principal reduction of $3 million per month until fully repaid. The facility expires on 31 October 2011. Note 11 pointed out that, during the period, the Scheme had breached several covenants with respect to the finance facility. 25 In their independent auditor's review report, KPMG drew attention to note 3, which indicated that the ability of the Scheme to continue as a going concern was dependent upon the Scheme successfully agreeing with its external financier revised terms of the facility realising sufficient cash funds from the repayment of existing mortgage loans of the Scheme to meet loan repayment commitments, pay valid redemption requests within the period set out in the Scheme's constitution, and provide funding for the ongoing business operation. KPMG said that those conditions, along with matters as set forth in note 3, should they arise, indicate the existence of material uncertainty which may cast significant doubt about the Scheme's ability to continue as a going concern. 26 Note 3 is a detailed note concerning the question of whether the Scheme could continue as a going concern. The note ends by referring to the directors of the responsible entity. The note says that, based on the assumptions that are set out in the note, the directors are of the opinion that the Scheme will continue as a going concern. However, if the responsible entity is unsuccessful in managing the conditions set out in the note, which include the acceptance by the lender of the proposed revised finance loan facility, the Scheme may be unable to realise its assets and discharge its liabilities in the normal course of business. There is evidence now before the Court that an arrangement has been made with the external financier to whom the sum of $26 million is owed, accommodating the Company at least until 30 June 2011. 27 Another matter, to which attention was drawn as possibly indicating insolvency, is that the annual financial report as at 30 June 2010 shows the Company's total current liabilities as $18,663,729, as against total current assets of $13,804,048. One rule of thumb that sometimes applies in determining whether a company can pay its debts as and when they fall due involves determining whether or not its current assets exceed its current liabilities. However, the current liabilities included in the balance sheet include an item of $15,588,404, said to be interest bearing loans and borrowings. Mr Mark McIvor is the managing director of the Company. He is also the sole director and secretary of M. M. Holdings Pty Limited (MM Holdings), and is the controlling mind of MM Holdings. Mr McIvor says that from time to time MM Holdings has advanced funds to the Company for the purposes of providing the Company with what is, effectively, an overdraft facility. The terms of the loan are set out in a letter of 1 July 2008. That letter provides, relevantly, that all loans are to be repaid at times mutually agreed between the parties, and, if times cannot be agreed, upon demand by the lender. 28 Mr McIvor says that no time for the repayment of the loan has been agreed between MM Holdings and the Company; accordingly, the loan is repayable on demand. For that reason, it is recorded in the accounts of the Company as a current liability. Mr McIvor says that, notwithstanding that the loan by MM Holdings is repayable on demand and is recorded in the accounts as a current liability, MM Holdings has not demanded repayment of the loan and Mr McIvor does not intend to cause MM Holdings to demand repayment of the loan in the foreseeable future. He says that he would not cause MM Holdings to demand repayment of the loan in circumstances where there was any real prospect that doing so would have the effect that the company would be unable to pay its debts as and when they fall due. 29 In the consolidated statement of financial position in the annual financial report of 30 June 2010, the consolidated total current assets are shown as $152,847,347 as against total current liabilities of $332,670,750. However, the total current liabilities include an item for securitised unit-holders' funds of $245,336,193. That represents the entitlements of unit-holders. Theoretically, if all unit-holders were to seek immediate redemption, that might render the fund, of which the Company is the responsible entity, insolvent. All units in the scheme that constitutes the fund are of the same class and carry equal rights. Each unit represents a right to an individual share in the scheme, and does not extend to a right to the underlying assets. 30 All units in the Scheme outstanding at 30 June 2010 have a contractual term to maturity of one year or less. However, since the schemes are currently non-liquid, investors can choose to have maturing investments reinvested for a further term or transferred to a pending redemption class of investment, where the investment is held until such time as the scheme has sufficient liquidity to pay all or a part of the investment to the investor. The Company says that, on the basis of those arrangements, it is inappropriate to treat the securitised unit-holders' funds item as a current liability for the purposes of determining the solvency of the Scheme and the company as a whole. The consolidated statement of financial position as at 30 June 2010 shows that the Company has net assets of $73,178,075 and that the consolidated net assets are $73,670,806. 31 In the light of the evidence which I have summarised, I do not consider that there is any reasonable prospect that the Plaintiff could establish that the Company is insolvent. I consider, therefore, that the winding up application should be dismissed summarily. Even if there were an arguable case that the Company is insolvent, it is inappropriate that the question of the liability of the Company to the Plaintiff for alleged conversion should be determined in a winding up proceeding. That is particularly so when there is already on foot a proceeding commenced by the Plaintiff to establish that very question. One could very easily draw the inference that the only possible reason for making this winding up application was to embarrass the Company. 32 There does not appear to be any doubt that the Company has very, very substantial assets against a possible claim of $208,000 which has been pursued with particular lack of diligence on the part of the Plaintiff. There are reasonable bases for concluding that the winding up application was commenced for an improper purpose. It is not necessary for me to draw a final conclusion in that regard. I am satisfied that, on the basis of the evidence before me at present, there is no reasonable prospect that the winding up application will succeed, not only because there is a real question as to whether the Plaintiff is a creditor of the Company, but also because there is no basis for concluding that the Company is insolvent. Accordingly, I propose to dismiss the proceeding. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 17 May 2011