FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 9) [2011] FCA 998 Citation: Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 9) [2011] FCA 998 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v GDK FINANCIAL SOLUTIONS PTY LTD (ACN 085 488 311), WINDSOR VILLAGE MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 339 913), WESTERN RETIREMENT VILLAGE MANAGEMENT PTY LTD (ACN 091 443 239), THE MEWS VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 091 526 224), PERIDON MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 322 276), ROSEDALE VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 089 667 096), PETER HASTINGS WARNE, RENTAL FLEETS AUSTRALIA PTY LTD (ACN 082 558 978), JOHN MONTGOMERIE, ANDREW REGINALD (TRUSTEE OF BANKRUPT ESTATE OF ROHAN ELLIOT VON STANKE) YEO, GIUSEPPE DE SIMONE, SEACHANGE MANAGEMENT PTY LTD (ACN 091 443 211), ZMB AUSTRALIA PTY LTD (ACN 105 746 067), YOUNG TURKS PTY LTD (ACN 005 872 122) and TOUMA PTY LTD (ACN 124 195 366) File number: VID 590 of 2006 Judge: DODDS-STREETON J Date of judgment: 29 July 2011 Catchwords: CORPORATIONS – Unregistered managed investment scheme – Application in dual capacity as receivers of the scheme and liquidators of a company involved in the scheme for approval of funding agreement to enable further litigation – Approval granted Legislation: Corporations Act 2001 (Cth) ss 477(2B), 601EE(2) Federal Court of Australia Act 1976 (Cth) s 23 Cases cited: ASIC v GDK Financial Solutions Pty Ltd (in liq) (No 6) [2010] FCA 1092 cited Mier v FN Management Pty Ltd [2006] 1 Qd R 339 cited Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 cited ZMB Australia Pty Ltd v Warne [2011] FCAFC 65 cited Date of hearing: 29 July 2011 Date of publication of reasons: 30 August 2011 Date of last submissions: 29 July 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 29 Counsel for the Mews Receivers: Mr J Vaughan Solicitor for the Mews Receivers: Blake Dawson Counsel for the Seventh Defendant: The Seventh Defendant did not appear IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 590 of 2006 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: GDK FINANCIAL SOLUTIONS PTY LTD (ACN 085 488 311) First Defendant WINDSOR VILLAGE MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 339 913) Second Defendant WESTERN RETIREMENT VILLAGE MANAGEMENT PTY LTD (ACN 091 443 239) Third Defendant THE MEWS VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 091 526 224) Fourth Defendant PERIDON MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 322 276) Fifth Defendant ROSEDALE VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 089 667 096) Sixth Defendant PETER HASTINGS WARNE Seventh Defendant RENTAL FLEETS AUSTRALIA PTY LTD (ACN 082 558 978) Eighth Defendant JOHN MONTGOMERIE Ninth Defendant ANDREW REGINALD (TRUSTEE OF BANKRUPT ESTATE OF ROHAN ELLIOT VON STANKE) YEO Tenth Defendant GIUSEPPE DE SIMONE Eleventh Defendant SEACHANGE MANAGEMENT PTY LTD (ACN 091 443 211) Twelfth Defendant ZMB AUSTRALIA PTY LTD (ACN 105 746 067) Thirteenth Defendant YOUNG TURKS PTY LTD (ACN 005 872 122) Fourteenth Defendant TOUMA PTY LTD (ACN 124 195 366) Fifteenth Defendant JUDGE: DODDS-STREETON J DATE OF ORDER: 29 JULY 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The Mews Receivers be given leave to enter into, and perform, a funding agreement with WRVM and themselves in their capacity as Liquidators of WRVM that is substantially in the terms set out in attachment "BKM 24" to the affidavit of Brian Keith McMaster sworn 25 March 2011. 2. Pursuant to section 477(2B) of the Corporations Act 2001 (Cth), the Liquidators be given leave to enter into, and perform, a funding agreement with themselves in their capacity as the Mews Receivers and WRVM that is substantially in the terms set out in attachment "BKM 24" to the affidavit of Brian Keith McMaster sworn 25 March 2011. 3. The funding be limited to the amount of $300,000 with liberty to apply on 14 days' notice to the seventh defendant's solicitors. 4. The Mews Receivers' costs incurred in the course of this application are costs properly incurred in the performance of their duties and the exercise of their powers as the Mews Receivers. 5. The Memorandum of Advice of Blake Dawson dated 24 March 2011, which is exhibit "BKM 22" to the affidavit of Brian Keith McMaster sworn 25 March 2011, be placed in a sealed envelope marked "Not to be accessed for inspection without order of a judge of the Court". 6. Any application to inspect the document referred to in order 5 be referred to a judge of the Court and notice thereof be provided to the solicitors for the Mews Receivers. 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 VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 590 of 2006 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: GDK FINANCIAL SOLUTIONS PTY LTD (ACN 085 488 311) First Defendant WINDSOR VILLAGE MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 339 913) Second Defendant WESTERN RETIREMENT VILLAGE MANAGEMENT PTY LTD (ACN 091 443 239) Third Defendant THE MEWS VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 091 526 224) Fourth Defendant PERIDON MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 088 322 276) Fifth Defendant ROSEDALE VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) (ACN 089 667 096) Sixth Defendant PETER HASTINGS WARNE Seventh Defendant RENTAL FLEETS AUSTRALIA PTY LTD (ACN 082 558 978) Eighth Defendant JOHN MONTGOMERIE Ninth Defendant ANDREW REGINALD (TRUSTEE OF BANKRUPT ESTATE OF ROHAN ELLIOT VON STANKE) YEO Tenth Defendant GIUSEPPE DE SIMONE Eleventh Defendant SEACHANGE MANAGEMENT PTY LTD (ACN 091 443 211) Twelfth Defendant ZMB AUSTRALIA PTY LTD (ACN 105 746 067) Thirteenth Defendant YOUNG TURKS PTY LTD (ACN 005 872 122) Fourteenth Defendant TOUMA PTY LTD (ACN 124 195 366) Fifteenth Defendant JUDGE: DODDS-STREETON J DATE: 29 JULY 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 On 29 July 2011, I made orders, approving entry into a funding agreement for proposed litigation by the applicants, Messrs Mark Mentha and Brian McMaster, in their dual capacity as the receivers of the Mews Scheme and as the liquidators of Western Retirement Village Management Pty Ltd (in liq) ("WRVM"). My reasons for making the orders are set out below. The orders were sought by interlocutory process dated 25 March 2011 pursuant to s 601EE(2) and s 477(2B) of the Corporations Act 2001 (Cth) ("the Act") and s 23 of the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"). 2 The affidavits in support of the application were as follows: (a) the affidavit of Brian McMaster sworn 25 March 2011; and (b) the affidavit of Catherine Pedler sworn 27 April 2011. 3 The applicants also relied on written submissions dated 27 April 2011. 4 The application was supported by the seventh defendant, Peter Warne, who, by order of Finkelstein J made on 21 March 2007, was appointed representative of the cash investors in the Mews Scheme. The seventh defendant relied on: (a) written submissions dated 28 April 2011; and (b) supplementary written submissions dated 22 July 2011. 5 As appears from the voluminous materials filed in the proceeding, in late 2006 the applicants were appointed receivers of an unregistered managed investment scheme, the Mews Scheme (as defined in the order of Finkelstein J made 28 November 2006), and were also appointed liquidators of the companies involved in the scheme, including WRVM (as defined in the orders of Finkelstein J made 19 October 2007). 6 Relevant background to the application is as follows. BACKGROUND 7 The Mews Scheme was an unregistered managed investment scheme which involved the establishment of a retirement village on the Mews land, of which WRVM was the registered proprietor. WRVM was also one of the promoters of the Mews Scheme. Its involvement was described by Finkelstein J in ASIC v GDK Financial Solutions Pty Ltd (in liq) (No 6) [2010] FCA 1092 at [4] as follows: Young Turks and GDK Financial Solutions Pty Ltd entered into a joint venture to establish WRVM to purchase and develop the Mews land as trustee for Young Turks and GDK. WRVM and The Mews Village Nominees Pty Ltd (MVN) entered into a marketing, management and profit share agreement. WRVM sold the Mews land to MVN and lent it money to complete the purchase. WRVM (and hence Young Turks and GDK) was never paid the deposit, or the balance of the purchase price, by MVN. Thereafter, Young Turks and GDK assigned their right, title and interest in the Mews land to ZMB. Later ZMB also acquired the interest of two investors, Seachange Management Pty Ltd and Francis Street Pty Ltd, in the Mews scheme. 8 Further background to the litigation was set out in the reasons for judgment of the Full Federal Court in ZMB Australia Pty Ltd v Warne [2011] FCAFC 65 at [9]: On 28 November 2006 on ASIC's application Finkelstein J ordered the Mews Scheme be wound up and Receivers appointed: Re GDK Financial Solutions Pty Ltd (2006) 236 ALR 699. He also ordered that Mews Village Nominees Pty Ltd ("Mews Village") be wound up and he appointed the same persons as liquidators as he had appointed Receivers of the Mews Scheme. Justice Finkelstein made a number of consequential orders for the management of the Receivership. Annexed to the Court's orders was a description of the Mews Scheme which relevantly identified the investors in the Mews Scheme by reference to a partnership agreement and various sub partnership agreements. The precise investors have not yet been identified. The administration has proceeded upon the basis that the precise identification of the investors and their entitlements will occur after the Receivers have got in all the Mews Scheme assets and dealt with all claims against the Mews Scheme. … The principal asset of the Mews Scheme was the Mews Land of which WRVM remained the registered proprietor. The Mews Land was sold by the Receivers on 6 December 2007 for $25.15 million. The proceeds of sale are held by the Receivers in the Mews Fund awaiting distribution to the investors in the Mews Scheme. The Mews Fund amounts to about $4 million. 9 Mr McMaster deposed that the Mews receivers, on the basis of legal advice which comprised a confidential exhibit to his affidavit, believed that WRVM had high prospects of success for the recovery of significant amounts should it commence contemplated legal proceedings, as there was no reason to believe that a prospective defendant would be unable to satisfy any judgment debt. WRVM had no funds to conduct the litigation, so the applicants proposed to execute a funding agreement in their capacities as, on the one hand, receivers of the Mews Scheme, and, on the other hand, the liquidators of WRVM, so that a specified "capped" sum to fund the litigation would be provided from the Mews fund, with liberty to apply for further funds only on notice to the seventh defendant, and on the basis that all proceeds of such litigation would be paid to the Mews fund. Mr McMaster deposed that an examination of WRVM's books and records revealed the following factual background to the proposed litigation: [The following paragraphs (a) to (e) and 10 to 17 are confidential and will not be published] (a) [Confidential] (b) [Confidential] (c) [Confidential] (d) [Confidential] (e) [Confidential] 10 [Confidential] 11 [Confidential] 12 [Confidential] 13 [Confidential] 14 [Confidential] 15 [Confidential] 16 [Confidential] 17 [Confidential] 18 Mr McMaster deposed that the risk to the Mews receivers, and hence to the Mews Scheme, involved in entering the funding agreement, was that if the litigation were unsuccessful, either WRVM or the liquidators personally might be ordered to pay the defendant's costs, which would be borne by the Mews receivers in accordance with the funding agreement. LEGISLATION 19 Section s 601EE(2) of the Act provides: The Court may make any orders it considers appropriate for the winding up of the [unregistered managed investment] scheme. 20 Section 477(2B) of the Act provides: Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 21 Section 23 of the Federal Court Act provides: The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate. DISCUSSION 22 The present application is made both by liquidators and receivers of an unregistered managed investment scheme. It relates to an agreement which might operate for more than three months so approval of the liquidators' entry into it is governed by s 477(2B) of the Act. Approval of the receivers' entry into the agreement is sought under s 601EE(2). 23 In Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375, Gordon J summarised the principles relevant to curial approval under s 477(2B) of the Act at [26] as follows: (1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims: [T]he Court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors. (2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647; (3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642; (4) in reviewing the liquidator's proposal, the task of the Court is: [not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in … a hearing de novo [but] … simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up. See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter; (5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit": Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28]; (6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein. 24 In Mier v FN Management Pty Ltd [2006] 1 Qd R 339, Keane JA discussed s 601EE(2) at 347-348 as follows: It follows, in my view, 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. It follows that s. 601EE(2) must be read as empowering a court to make such orders as it considers appropriate in order to apply such a procedure to an unregistered managed investment scheme. It may also be accepted that the terms of the section allow for further orders to be made as needed so long as they are required for the "due conduct and completion of the winding up". The necessary corollary is that an order that could not reasonably be seen as advancing this procedure would not be authorised by s. 601EE(2). The comprehensive survey of authority undertaken by White J. in Re Stacks Managed Investments Ltd shows that courts have used the power granted by s. 601EE to appoint persons to act as receivers, managers or liquidators with powers commensurate with those that would be possessed by persons fulfilling similar roles in the winding up of a company. (footnotes omitted) 25 In the present case, the funding agreement is, unusually, made both on the one part and on the other part by the same persons, the applicants, albeit in their different capacities respectively. Any assets recovered in the liquidation of WRVM (which has the standing to pursue the proposed claims) are payable to the Mews fund, on which investors represented by Mr Warne are now the only claimants. The Mews fund will bear the cost of funding the litigation, but will also be the sole beneficiary of any successful recovery. 26 The seventh defendant was excused from appearing at the hearing of the application, but supported the application, subject to an expression of concern that the litigation should not unduly deplete the Mews fund. The seventh defendant accordingly advocated that, as the amount currently in the Mews fund greatly exceeded the estimated costs of the litigation, the receivers should promptly apply to make an interim distribution, and submitted that the applicants should satisfy the court there were sufficient grounds to anticipate that any judgment would be satisfied. 27 Before me, counsel for the applicants stated that they intended to apply for approval of an interim distribution in about six weeks from the date of the order. Counsel also informed the court that the applicants had investigated the resources of the principal prospective defendant as fully as was feasible in the current circumstances, and further investigation was anticipated after the commencement of litigation. 28 Having read the confidential memorandum of advice of Blake Dawson dated 24 March 2011, I was satisfied that, having regard to the liquidators' commercial judgment and their knowledge of the circumstances of the liquidation; the legal advice they had obtained as to the nature, value and recovery of the claims in question; and the absence of any indication of bad faith, impropriety, legal error, or any disproportionate benefit to the entity providing funding; the liquidators' entry into the funding agreement should be approved pursuant to s 477(2B) of the Act, to facilitate the realisation of the company's assets and payment of its liabilities, thereby advancing its expeditious and beneficial winding up. 29 I was likewise satisfied that the entry into the funding agreement by the Mews receivers should also be approved pursuant to s 601EE(2) of the Act, in circumstances where: the proposed litigation had the potential significantly to increase the assets of the Mews fund (on which the investors represented by Mr Warne are now the only claimants); a capped amount will be provided in the first instance and any application for further funding will be made only on notice; a prompt application by the Mews receivers for approval of an interim distribution to investors was foreshadowed; the funding agreement was, in the commercial judgment of the Mews receivers (fortified by legal advice) appropriate; the capacity of the prospective defendants had been investigated to the extent feasible at this stage and there was no reason to believe that a principal prospective defendant would be unable to satisfy a judgment; appropriate safeguards were in place; the level of risk involved was outweighed by the prospects and magnitude of the prospective benefits; and the funding agreement had the potential to get in and distribute significantly greater funds to the investors, thus advancing the due conduct and beneficial completion of the winding up of the Mews Scheme. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton. Associate: Dated: 29 July 2011