FEDERAL COURT OF AUSTRALIA City Pacific Limited, in the matter of City Pacific Income Fund [2011] FCA 926 Citation: City Pacific Limited, in the matter of City Pacific Income Fund [2011] FCA 926 Parties: CITY PACIFIC LIMITED (IN LIQUIDATION) ACN 079 453 955, DAVID ANTHONY HURST AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) and ANDREW HUGH JENNER WILY AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) File number(s): NSD 397 of 2010 Judge: EMMETT J Date of judgment: 22 July 2011 Legislation: Corporations Act 2001 (Cth) s 601NF Date of hearing: 22 July 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 10 Counsel for the plaintiffs: M Izzo Solicitor for the plaintiffs: Piper Alderman IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 397 of 2010 IN THE MATTER OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) CITY PACIFIC LIMITED (IN LIQUIDATION) ACN 079 453 955 First Plaintiff DAVID ANTHONY HURST AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) Second Plaintiff ANDREW HUGH JENNER WILY AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) Third Plaintiff JUDGE: EMMETT J DATE OF ORDER: 22 JULY 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 601NF(2) of the Corporations Act 2001 (Cth), the joint liquidators of the City Pacific Income Fund make an in specie distribution of the Pacific First Mortgage Fund ordinary units to the City Pacific Income Fund unit holders in proportion to their holdings in the City Pacific Income Fund. 2. Pursuant to s 601NF(2) of the Corporations Act 2001 (Cth), the joint liquidators of the City Pacific Income Fund make an in specie distribution of the Pacific First Mortgage Fund Litigation Recovery Rights Units to the City Pacific Income Fund unit holders in proportion to their holdings in the City Pacific Income Fund. 3. Pursuant to s 601NF(2) of the Corporations Act 2001 (Cth), Mr Andrew Hugh Jenner Wily and Mr David Anthony Hurst, as joint liquidators of the City Pacific Income Fund, have the power, jointly and severally, to act as attorney and agent on behalf of each City Pacific Income Fund unit holder in all necessary respects in order to effect the transfer of units as outlined in orders 1 and 2 above. 4. Costs of the application be costs in the winding up. 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 397 of 2010 IN THE MATTER OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) CITY PACIFIC LIMITED (IN LIQUIDATION) ACN 079 453 955 First Plaintiff DAVID ANTHONY HURST AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) Second Plaintiff ANDREW HUGH JENNER WILY AS JOINT LIQUIDATOR OF CITY PACIFIC INCOME FUND (IN LIQUIDATION) Third Plaintiff JUDGE: EMMETT J DATE: 22 JULY 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 City Pacific Limited (City Pacific) is the responsible entity of a managed investment scheme known as the City Pacific Income Fund (the Income Fund). On 30 April 2010, the Court ordered that the Income Fund be wound up and that Messrs David Hurst and Andrew Wily (the Liquidators) be appointed as liquidators of the Income Fund. Messrs Hurst and Wily, together with City Pacific, have now applied for directions in connection with the winding up of the Income Fund. 2 The assets of the Income Fund include units in a managed investment scheme known as the Pacific First Mortgage Fund (the Mortgage Fund). City Pacific was previously the responsible entity of the Mortgage Fund. Trilogy Funds Management Limited (Trilogy) is now the responsible entity of the Mortgage Fund. Clause 9.3 of the constitution of the Income Fund, which deals with winding up, relevantly provides that the responsible entity must convert all assets to money, deduct all proper costs, and distribute the money to each member in proportion to the member's interests in the Income Fund, and must proceed with the winding up efficiently, diligently and without undue delay. 3 As at the date of liquidation of the Income Fund, there were 7,221,977 units on issue. As at 23 November 2010, the assets of the Income Fund included 5,256,445 units in the Mortgage Fund. In addition, on 15 March 2011, Trilogy, in its capacity as responsible entity of the Mortgage Fund, issued one Litigation Recovery Rights Unit for every Mortgage Fund unit to all holders of units in the Mortgage Fund. Accordingly, the Income Fund now holds 5,256,445 Litigation Recovery Rights Units. 4 The Liquidators have attempted to locate new investors who may be willing to buy the units in the Mortgage Fund. They have also attempted to negotiate with other investors in the Mortgage Fund to sell the units held by the Income Fund to the Mortgage Fund at a price that might be acceptable. The Liquidators have not received any offers that they regard as realising a reasonable price. They therefore believe that the best interests of the unit holders of the Income Fund are served by making a distribution in specie of the units in the Mortgage Fund to the holders of units in the Income Fund in proportion to their holding of units in the Income Fund. 5 If unit holders in the Income Fund become unit holders in the Mortgage Fund, they will receive any future return of capital directly from the Mortgage Fund, as well as the proceeds from the Litigation Recovery Rights Units, without the value of those benefits being diluted by the costs of keeping the winding up of the Income Fund on foot for what might be an extended period. The Liquidators estimate that the costs of the liquidation of the Income Fund will amount to approximately $5,000 per month. If a distribution in specie cannot be effected, the best option would likely be to hold the units in the Mortgage Fund until Trilogy has completed the winding up of the Mortgage Fund. The Liquidators estimate that that could take a further two years. 6 The Liquidators consider that the distribution in specie of the units in the Mortgage Fund to the holders of units in the Income Fund would not prejudice their proprietary rights. Indeed, they are of the view that a distribution in specie will ensure that the value of the interests that the unit holders of the Income Fund have in relation to the Mortgage Fund is maintained, rather than being diminished by approximately 50 per cent, which would occur were the units to be sold. 7 The Liquidators have investigated the possibility of prejudice to the rights and interests of third parties. They have been unable to identify any third party who might suffer any prejudice as a result of the transfer of the units in the Mortgage Fund to the holders of units in the Income Fund. 8 A difficulty with the proposed distribution in specie is that, under the constitution of the Mortgage Fund, a transfer must be effected in a form nominated by Trilogy, as responsible entity, and a transferee must consent to be bound by the provisions of the constitution. There are 143 unit holders in the Income Fund. The Liquidators consider that it would be costly and impractical to require each unit holder to sign, as transferee, a transfer form in the form nominated by Trilogy. To overcome that practical difficulty, the Liquidators have proposed that City Pacific, as responsible entity of the Income Fund, be given powers to act as attorney and agent of the unit holders for the purposes of enabling a distribution in specie to be carried out. 9 Section 601NF(2) of the Corporations Act 2001 (Cth) provides that the Court may give directions about how a registered scheme is to be wound up. Clause 9.3 of the constitution of the Income Fund, to which I have referred, does not refer expressly to a distribution in specie or to the capacity of the responsible entity to act as agent or attorney in order to effect such a distribution. Nevertheless, there is nothing in the proposal that is inconsistent with clause 9.3. 10 In the circumstances, I consider that it is appropriate that a direction be given under s 601NF(2) that the liquidators of the Income Fund are justified in making a distribution in specie of the ordinary units in the Mortgage Fund and of the Litigation Recovery Right Units. I consider that it is also appropriate to direct, under s 601NF(2), that the Liquidators, in their capacity as liquidators of the Income Fund, have power, jointly and severally, to act as attorney and agent on behalf of each holder of units in the Income Fund in all respects necessary to effect a transfer of the units in the Mortgage Fund to the holders of units in the Income Fund. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 12 August 2011