MacarthurCook Fund Management v Zhaofeng Funds Management [2012] NSWSC 1368

Supreme Court New South Wales

Medium Neutral Citation: MacarthurCook Fund Management v Zhaofeng Funds Management [2012] NSWSC 1368 Hearing dates: 19/10/2012, 26/10/2012 and 02/11/2012 Decision date: 02 November 2012 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Stay continued on undertakings. Catchwords: [PROCEDURE] - civil - judgments and orders - stay pending appeal - whether grant of stay might have an adverse impact on the plaintiffs' rights under judgment - whether declining to continue the stay would have significant impact on the interests of other unit holders - whether interests of justice favour grant of stay. Legislation Cited: Corporations Act 2001 (Cth) Property Law Act 1974 (Qld) Category: Procedural and other rulings Parties: MacarthurCook Fund Management Limited (ACN 004 956 558) (First Plaintiff) Sandhurst Trustees Limited (ABN 16 004 030 737) (Second Plaintiff) Zhaofeng Funds Management Limited (ABN 33 107 352 821) (First Defendant) TFML Limited (ABN 39 079 608 825) (Second Defendant) Representation: Counsel: J E Marshall SC / V A Thomas (Plaintiffs) J C Kelly SC (Defendants) Solicitors: Ashurst Australia Lawyers (Plaintiffs) Piper Alderman (Defendants) File Number(s): 2010/117253

Judgment 1HIS HONOUR: The second defendant (TFML) is the trustee and responsible entity of a publicly listed trust known as the P-REIT Trust. That trust is a registered managed investment scheme. For the purposes of s 601KA(4) of the Corporations Act 2001 (Cth), it is not liquid. 2The plaintiffs (it is not necessary to differentiate, or to explore the precise legal relations, between them) held some 15 million units in P-REIT Trust. They sued in this Court for an order in effect that they were entitled to cash out those units, by reason of an agreement made between them and the previous management of the trust. Hammerschlag J agreed with that contention and on 21 August 2012, judgment was entered in favour of the plaintiffs against TFML in a sum exceeding $17.7 million. With the accrual of interest, there is now more than $18 million owing under that judgment. 3TFML has appealed. The appeal has been fixed for hearing in April next year. 4I am concerned today (as I have been for the two previous Fridays) with an application for a stay. 5On 31 August 2012, a stay was ordered on conditions. Those conditions included, among other things, that the stay would be vacated if TFML failed to deliver a registrable mortgage to the plaintiffs, that mortgage to be given with the consent of the first mortgagee (the bank) over certain described property. 6In support of the orders, TFML gave certain undertakings. One of those was that it would use its best endeavours to procure the bank's consent. 7It does not seem to be suggested that TFML breached that undertaking. However, it is apparent that the endeavours that it did use were not sufficient to move the bank to agree. Thus, there was no consent, there has been no delivery of a registrable mortgage, and the stay was liable to be vacated automatically in accordance with its terms. It has been continued from time to time pending the decision of this application. 8It was suggested by the plaintiffs at one stage that the absence of the bank's consent was not a problem, because the land over which the mortgage was to be granted was in Queensland, and because s 80(4) of the Property Law Act 1974 (Qld) would have the effect that the grant of a mortgage was not a breach of the mortgage to the bank. That submission was supported by authority. However, it seemed to me (and still does) that regardless of that particular aspect of the law of Queensland, the grant of the mortgage (whatever might be the effect thereof between the relevant custodian, who is not TFML, and the bank) would amount to a breach of the facility agreement between TFML and the bank. I do not know whether the particular submission to which I have referred is pressed, but if it were, it does not seem to me to have any dispositive effect. 9It has been agreed that I may approach this application on the basis that the issues sought to be agitated on appeal raise serious questions that ought to be determined by the Court of Appeal. Thus, I am spared the embarrassment of expressing a view as to whether the appeal's prospects of success should be taken into account in the discretionary exercise attending the grant of a stay. 10The starting point is, of course, that the plaintiffs have obtained a judgment of the court and that, prima facie, they are entitled to the fruits of that judgment. It is TFML that needs to show why that prima facie position should be disturbed. 11The plaintiffs' position is and always has been that they would not oppose the stay if they were granted adequate security. Thus, when the proposal to take a registered second mortgage collapsed in the circumstances that I have described, the plaintiffs indicated that they would not oppose the continuation of a stay if an amount to cover the judgment debt plus interest were paid into a jointly controlled account. The money in that account would be held to abide the outcome of the appeal. 12That submission, or more accurately the attitude reflected in it, seems to carry with it an acknowledgement that the plaintiffs are not opposing the stay on the basis that being kept out of their money will cause them hardship which cannot be remedied otherwise than by permitting them to go ahead and enforce their judgment. Indeed, I note that no submission has been made that, among the various discretionary factors to be considered, that of hardship to the plaintiffs by being kept out of their money is one to be taken into account. 13That is not to say that the plaintiffs do not suggest that they are out of danger. However, the case that they put is, rather, that the position of TFML, or more accurately of the trust of which it is trustee and responsible entity, is not so rosy as to support the proposition that the plaintiffs' position is relatively safe pending the determination of the appeal. 14The financial statements of the trust, for the year ended 30 June 2012, show on their face that it had net assets attributable to unit holders of $45.5 million. I understand that the accounts reflected a potential (as it then was) liability to the plaintiffs. Be that as it may, a more detailed analysis of the accounts showed that the non current assets of the trust included about $81.35 million in real property investments, and a further $37.45 million in "available-for-sale financial assets". 15The real estate assets are, I think, commercial properties over which the bank holds a first mortgage, and over which it was promised that the registered second mortgage would be granted as a condition of continuation of the stay. 16The available for sale financial assets comprise principally some $30.35 million worth of "Bakehouse Bonds". (When I say "worth" I mean to indicate no more than that is the value attributed to them in the accounts.) 17Those bonds are said to be "CPI linked debt instruments against a large scale mixed use property known as" (and a description is given). There are statements made as to the face value of the bonds, as to their being "indexed to CPI" and as to their paying quarterly in arrears "a coupon of 5.5 per cent per annum". 18The ground in relation to the financial statements has shifted somewhat over the three Fridays over which this application has been heard. Over that time, material has been put into evidence which is said to support, alternatively detract from, the apparently sound position shown by the financial statements. 19The evidence appears to me to indicate the following matters. 20First, there is or appears to be a trust known as the Bakehouse Bonds Security Trust. That trust is constituted by a deed poll made on 1 January 2011. 21Secondly, it does appear that the custodian for the P-REIT Trust holds $30 million worth of bonds in that security trust, and that TFML in its own right holds a further $5 million worth of bonds. 22Thirdly, it appears that those bonds are "backed" by a second mortgage over two parcels of real estate. The registered second mortgage appears to suggest that the principal secured is $19.5 million. There are, however, in evidence two unstamped, unregistered and undated variations of mortgage (there are two because there are two separate parcels of mortgaged land) which suggest that the principal amount of the loan is indeed $35 million. 23Thus, on the face of things, there is a basis for thinking that there are bonds of the kind described in the financial statements for the year ended 30 June 2012, and that those bonds are backed by a mortgage which (if the variations were registered) might be enforceable at law for up to $35 million. 24There is a deal of evidence as to the underlying real estate, which is not entirely easy to follow. That evidence suggests that an area of land of which one of what I will call the mortgaged parcels forms part is valued at some $90 million, and that another area of land of which the other mortgaged parcel forms part is valued at some $68 million. There are said to be total debts owing to the first mortgagee of $81 million. Thus, if there were complete congruity between the land the subject of the valuations and the land the subject of the mortgages as varied, there would be (on this evidence) a surplus value of some $77 million available to secure the principal (assuming the efficacy of the variations) of $35 million. 25However, that congruity does not appear to exist. On the material before me, I am not able to determine to what extent the land that is the subject of the mortgages and variations represents the substance of the land that was valued. Nor am I able to determine how any hypothetical exercise of a power of sale by the first mortgagee might impact on the rights given by the second mortgage (with or without the variations). 26That is not an entirely satisfactory state of affairs. 27However, whatever may be the state of affairs in relation to the financial statements, the assets described in them, and the assets underlying those assets, the reality is that that position is what it is. To my mind, there are two serious issues to be considered. One is the extent to which the grant of a stay might have some adverse impact (other than deferring enjoyment) on the plaintiffs' rights under their judgment. The other is the impact on other unit holders if a stay is not granted and if the plaintiffs proceed to enforce their rights under the judgment. 28As to the first matter: TFML proffers detailed undertakings which, if not drafted by the plaintiffs, were at least settled in conjunction with them. The effect of those undertakings includes that TFML, in its capacity as trustee and responsible entity of the trust, will not dispose of certain classes of assets without giving prior written notice to the plaintiffs; will not dispose of any asset for less than 95 per cent of a stated value; will use sale proceeds of any asset to reduce its indebtedness to the bank; will not undertake any new investments; and will not (with certain exceptions) otherwise pay away its income or capital assets. It will not incur any substantial debts, and will not enter into any (other than limited exceptions) related party transactions. 29It seems to me that the effect of the undertakings is that they will, so far as possible, secure the position that presently exists (and that existed on 24 August 2012, when the judgment was given) until the hearing and determination of the appeal. Thus, it is likely that whatever assets were and now are available to satisfy the judgment on 21 August 2012 will remain available, and that so far as possible (barring financial catastrophes and the like) they will retain approximately the value that they maintain at present. 30In those circumstances, and repeating that the plaintiffs do not put their case on the basis that they need the money for their operations or that for some other reason being kept out of the money will cause them irreparable harm, it seems to me that the undertakings do what can reasonably be expected to maintain the status quo. 31I do accept, as was submitted for the plaintiffs, that the undertakings were given, in effect, in aid or support of the promise for security, and that the promise for security was an integral element of the stay that was granted. Thus, in circumstances where the security cannot be given, I accept that a continuation of the stay only on the basis of the undertakings represents a significant decrease in the advantages enjoyed by the plaintiffs under the orders of 31 August 2012. Nonetheless, the Court is required to deal with the position as it exists, not with some earlier or hypothetical position. 32I referred earlier to other interests. The P-REIT Trust is, as I have said, a trust that is not liquid. Thus, in general, its unit holders are restricted from accessing their investments, in accordance with Pt 5C.6 of the Corporations Act. The plaintiffs were able to access their investment because of the arrangements made by them with the previous management (that is the effect of the judgment of Hammerschlag J). The other unit holders, of whom there are about 800, are not so fortunate. 33When one takes into consideration the nature of the assets of the trust and their illiquid character, it is I think clear that any enforcement activity on the part of the plaintiffs will have the effect that the trust is thrown into administration, or wound up. That is hardly to the benefit of the other unit holders. Indeed, that would circumvent the very purpose underlying Pt 5C.6 of the Corporations Act. 34Thus, I think, enabling the plaintiffs to enforce their rights is likely to have a significant adverse impact on the position of the other unit holders. 35The question is ultimately to be considered by reference to the interests of justice. In this case, in circumstances where the undertakings that have been offered appear sufficient to preserve the assets of the trust more or less in their present state and value pending the hearing and determination of the appeal, and where declining to continue the stay would have a significant adverse impact on the interests of other unit holders, I conclude, notwithstanding the doubts that have been raised as to the sufficiency of TFML's disclosure, that the interests of justice do require the continuation of the stay. 36Accordingly, upon the second defendant giving to the Court by Senior Counsel the undertakings 1 to 11 first offered to the Court on 31 August 2012, I order that the stay granted on that day and from time to time continued be continued up until the determination of the appeal or the further order of the Court. I reserve liberty to apply to a judge of appeal for discharge or variation of these orders.