Supreme Court New South Wales Medium Neutral Citation: In the matter of PrimeSpace Property Investment Limited (in liquidation) [2016] NSWSC 1891 Hearing dates: 15 December 2016 (last submissions 20 December 2016) Decision date: 22 December 2016 Jurisdiction: Equity - Corporations List Before: Black J Decision: Direction made that liquidators would be justified in distributing funds held by PPIL as trustee and responsible entity of unregistered managed investment fund to pay specified costs of examinations and obtaining Counsel's advice. Catchwords: TRUSTS – Reliance on right of indemnity for trustee's costs of examinations and seeking legal advice. Legislation Cited: - Corporations Act 2001 (Cth), ss 479, 511, 601FC, Pt 5.9, Ch 5C - Trustee Act 1925 (NSW), s 63 Cases Cited: - BCI Finances Pty Ltd v Binetter (No 4) [2016] FCA 1351 - Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 - PrimeSpace Property Investment Ltd v Vienne Pty Ltd [2015] FCA 326 - PrimeSpace Property Investment Ltd v Vienne Pty Ltd (No 2) [2015] FCA 367 - Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 - Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 - Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 - Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] UKHL 39; [2009] AC 1391 Texts Cited: - JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (7th ed 2006, LexisNexis Butterworths) Category: Procedural and other rulings Parties: Shaun Robert Fraser (First Plaintiff) Anthony Gregory McGrath (Second Plaintiff) Primespace Property Investment Limited (in liquidation) (Third Plaintiff) IQIT Nominees Pty Ltd as trustee of the IQ Investment Trust (Defendant) Representation: Counsel: V Whittaker (Plaintiffs) Solicitors: Johnson Winter & Slattery (Plaintiffs) File Number(s): 2016/107316 Judgment Background to the application 1. By Amended Interlocutory Application filed on 30 September 2016, the Plaintiffs, Messrs Fraser and McGrath as liquidators of PrimeSpace Property Investment Limited (in liq) ("PPIL") and PPIL seek several directions. The only direction that remains to be addressed is a direction sought under s 479(3) and s 511 of the Corporations Act 2001 (Cth) or alternatively s 63 of the Trustee Act 1925 (NSW) that the liquidators would be justified in distributing funds held by PPIL in its capacity as trustee and responsible entity of the Prime Access Property Fund ("PAPF") for specified purposes. The particular direction sought is that PPIL, in its capacity as trustee and responsible entity of PAPF would be justified in distributing funds held by it to pay its reasonable costs and expenses of investigating the circumstances in which PPIL issued convertible notes pursuant to Convertible Note Subscription Agreements during 2011, including conducting examinations and seeking the production of documents and obtaining an opinion from Counsel for the purpose of determining whether it would justified in commencing proceedings in respect of those circumstances and the liquidators and PPIL taking such steps or action as is incidental to those matters. 2. The Court may exercise the power to give such a direction to assist a liquidator in the proper performance and discharge of his or her duties and functions, including giving advice as to the proper course of action when a matter involves a legal issue of substance: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at [65]; Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7]; Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 at [51]. I summarised the circumstances in which the court may give such a direction to a liquidator in a voluntary winding up in Re MF Global Australia Ltd (in liq) above at [8]: "Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a Court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be 'just and beneficial' to give the relevant direction. The Court may give such a direction where it will be 'of advantage in the liquidation': Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is 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: Handberg v MIG Property Services Pty Ltd at [7]." 1. I am satisfied that this application raises an issue of propriety and reasonableness, and not a mere commercial decision. I am also satisfied that the giving of a direction in this case will clarify the course which the liquidators should adopt and will be of advantage to the liquidation of PPIL. The application has had to be decided in circumstances of some urgency, to preserve a prospect that the liquidators may conduct the relevant examinations, seek the relevant advice and commence proceedings prior to the possible expiry of a limitation period in early 2017. 2. The direction sought by the liquidators raises at least the question whether the costs of those examinations and obtaining that opinion are prudently incurred, so far as the matters warrant investigation and there is some prospect of a return that would justify the costs expended. That direction also raises a second question whether it is proper that the costs of those steps be funded from trust assets, in circumstances that PPIL itself has no substantial assets, and has a wide right of indemnity under the trust deed for PAPF, but any recoveries from the contemplated claim are likely to be for the benefit of PPIL in its personal capacity and its creditors rather than for PAPF. Factual background 1. I have dealt with aspects of that application and set out the background to the application in earlier judgments ([2016] NSWSC 1113, [2016] NSWSC 1450, [2016] NSWSC 1821) and largely do not repeat that background. It is relevant to note, for present purposes, that PPIL acted as responsible entity and trustee of funds and trusts within the Prime Access Group. PPIL is presently the responsible entity of PAPF and is also the trustee of the PrimeSpace Northbourne Trust ("PSNT") which has a substantial interest in the IQ joint venture, which funded and managed the development of the IQ Smart Apartments in Canberra. PSNT's interest in that joint venture was funded, inter alia, by the issue of convertible notes and equity invested by PSNT and funded by PAPF. 2. This application is supported by an affidavit of one of the liquidators, Mr Fraser, dated 12 July 2016 which also dealt with other matters as to which directions have previously been made by the Court. That affidavit sets out (at [77]ff) the circumstances in which PPIL as responsible entity of PAPF sought to raise $5 million by the issue of convertible notes to 22 investors pursuant to Convertible Note Subscription Agreements in a substantially similar form (an example of which is Ex A1), which was to be used for the development of the IQ Smart Apartments in Canberra. 3. Mr Fraser refers to the terms of those agreements. The Subscription Agreements set out the background to the transaction as follows: "A. [PPIL] has requested the Investor to provide funds to [PPIL] for pre-development expenses and for other purposes. B. [PPIL] is the responsible entity of [PAPF]. C. [PAPF] is an unlisted unit trust governed by the Constitution. D. [PAPF] is a Registered Scheme as defined in the Constitution. E. The Investor has agreed to subscribe for the convertible notes of the Fund on the terms and conditions set out in this Agreement." 1. Clause 4 of the Subscription Agreement provided referred to the Constitution of PAPF and provided that: "[The Subscription] Agreement is supplemental to the Constitution. Should there be any inconsistency between the provisions of this Agreement and the Constitution, this Agreement shall prevail." The Subscription Agreement also provided that monies outstanding under the convertible notes were immediately due and payable on an event of default. 1. Clause 19 of PAPF's Constitution in turn sought to limit the liability of PPIL in specified circumstances, providing that: Limitation on Responsible Entity's liability 19.1 The Responsible Entity and each director and officer of the Responsible Entity, is not liable in contract, tort, or otherwise to any Holder or other person for any loss suffered in any way relating to the Fund, or for any act or failure to act in connection with the Fund or with the office of trustee, or of director or officer, except to the extent that the Corporations Act imposes such liability. 19.2 Liability limited to Assets vested in Responsible Entity Subject to the Corporations Act: (1) except where the Responsible Entity has acted with fraud or in breach of trust, the Responsible Entity is not in any event liable to the Holders to any greater extent than in respect of the Assets (net of Liabilities) actually vested in the Responsible Entity or received by it or its agents under this Constitution; and (2) the liability of the Responsible Entity to any person other than a Holder in respect of the Fund, including any contracts entered into as trustee of the Fund or in relation to the Assets, is limited to the Responsible Entity's ability to be indemnified from the Assets." 1. On 7 November 2014, PPIL passed a resolution, as responsible entity of PAPF, to wind up PAPF. Three noteholders subsequently issued creditor's statutory demands for the face value of their notes. PPIL was initially unsuccessful in establishing a genuine dispute so as to set aside those demands in proceedings in the Federal Court of Australia. In PrimeSpace Property Investment Ltd v Vienne Pty Ltd [2015] FCA 326, Griffiths J held that PPIL was unable to establish a serious question to be tried that it was not personally liable to repay amounts advanced under the Subscription Agreements or that its liability was excluded by cl 19.1 of PAPF's Constitution. His Honour noted (at [20]) that, perhaps surprisingly, PPIL had placed no reliance on the cap on liability imposed by cl 19.2(2) of PAPF's Constitution. 2. A subsequent judgment of Perram J in PrimeSpace Property Investment Ltd v Vienne Pty Ltd (No 2) [2015] FCA 367 suggested that reliance on cl 19.2(2) of PAPF's Constitution would not have assisted PPIL in any event. His Honour (at [6]) treated the question whether PPIL's liability was limited to the assets of the relevant trusts as being in issue and observed (at [11]) that the Subscription Agreements, including cl 4, did not result in the express application of PAPF's Constitution to the Subscription Agreements and that he could not see any reason why such a term should be implied and (at [12]) that: "In any event, even if that problem could be surmounted, the argument would still fail. [PPIL] seeks to show that the constitution limits [PPIL's] liability to the trusts' assets (or a surplus on a winding up). There can be no doubt that the subscription agreements do not do this. Hence, even on [PPIL's] argument, the constitution will then prevent what the subscription agreement allows. This would be an inconsistency of the kind referred to in the second sentence of cl 4 and hence the constitution would be outflanked by the subscription agreements." 1. Although these judgments do not establish those matters in a way that would be binding on non-parties to the proceedings, including PPIL's former solicitors, there is a real prospect that a court dealing with the matter in future proceedings would reach the same view, where the Convertible Note Subscription Agreements did not itself contain a limitation of liability provision. 2. Mr Fraser's assessment is that PPIL has a substantial liability to noteholders arising from that matter, in the order of $23.7 million as at 30 June 2016, and the absence of a limitation on its personal liability had the result that it had to be placed into voluntary administration and subsequently wound up. Mr Fraser expresses the view that, based on his review of the files of PPIL's former solicitors and legal advice obtained from PPIL's present solicitors, PPIL may have a reasonable basis for a claim against its former solicitors in respect of these matters. Although Mr Fraser foreshadowed the tender of legal advice from PPIL's current solicitors to support that position, that advice was ultimately not tendered. 3. Mr Fraser also refers to a right of indemnity for PPIL under the trust deed for PAPF, which provides for a right of indemnity in respect of all liabilities incurred by PPIL arising "in connection with" PAPF and the Assets (as defined) and for costs incurred by PPIL in taking any proceeding in relation to anything done or omitted to be done "concerning" PAPF. It seems to me that indemnity is sufficiently wide in its terms to extend to liabilities incurred by PPIL in undertaking the proposed examinations and obtaining Counsel's advice, in relation to matters that can be properly characterised as being "in connection with" PAPF or the Assets or as relating to an act or omission "concerning" PAPF. Mr Fraser also expresses the view that the debt to the noteholders (or, I interpolate, at least that part of it for which it was personally liable in excess of any right of recovery against the assets of PAPF) was incurred in PPIL's personal capacity, albeit in the course of acting as responsible entity and for the purposes of raising funds for PAPF. 4. The liquidators also rely on a further affidavit of their solicitor, Ms Thomson, dated 20 December 2016, which refers to the replacement of PPIL as project manager of the IQ Smart Apartments development, following the appointment of administrators to PPIL, resulting in the loss of revenue derived from providing such services, although presumably there would also have been some saving of costs that would be otherwise incurred in providing those services. In particular, Ms Thomson refers to the loss of the balance of a project management fee, quantified as $692,625, which was not payable to PPIL after its appointment as project manager was terminated. Ms Thomson also identifies the proposed examinees in respect of the proposed examinations and estimates the costs that would be incurred in respect of the examinations as well as obtaining Counsel's advice as to the merits of a claim against its former solicitors as in the order of $35,000–$40,000 plus GST, on an identified basis. Prospects of claim to be investigated 1. In initial submissions made on 2 December 2016, Ms Whittaker, who appears for the liquidators, identifies the claim to be investigated as whether PPIL's former solicitors breached their duties by failing to ensure that PPIL's liability under the Subscription Agreements was limited to trust assets. It seems to me that the liquidators may properly form the view that there is sufficient prospect of establishing liability, in a claim against PPIL's former solicitors, to warrant further investigation involving the expenditure of the relatively limited amounts proposed. 2. The question of the nature of PPIL's recoverable loss is plainly relevant to whether the direction sought should be given, since the amount recoverable will cast light on whether the proposed expenditures in examinations and taking Counsel's advice is likely to produce an appropriate return. PPIL seeks to quantify that loss as at least the amount of management fees which were lost on termination of its appointment as project manager of the IQ Smart Apartments development, and potentially extending to the amount by which its liability to noteholders would exceed the value of trust assets of PAPF, although it has not, in fact, met such a liability to noteholders since it was placed in voluntary administration and then in liquidation by reason of its inability to do so. 3. By further submissions made on 20 December 2016, Ms Whittaker made further submissions as to the nature of the loss suffered by PPIL as a result of the alleged breach. Ms Whittaker submitted, and it seems to me at least arguable that, PPIL suffered loss on the basis that, but for any breach of duty by its former solicitors, its liabilities to third parties would have been less than they now are. There is authority that suggests that it is at least arguable that a deficit that renders a company insolvent is a loss although, by definition, that company will not have then paid out the amount of that deficit. That approach was adopted by Lord Mance (although Lord Phillips, with whom Lord Walker agreed, appears to have taken a different view) in Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] UKHL 39; [2009] AC 1391 at [231] and also finds support in Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 and in the observations of Gleeson J in the Federal Court of Australia in BCI Finances Pty Ltd v Binetter (No 4) [2016] FCA 1351 at [330]–[332]. The practical effect of that approach would, of course, be to allow PPIL to recover such loss in a manner that would potentially benefit its creditors. Although that approach could not be treated as necessarily settled or available for all purposes, it seems to me to be sufficient to support a conclusion that the liquidators could properly form the view that a substantial claim of damages may be available to PPIL which warrants further investigation. 4. It seems to me that PPIL may well have an arguable case to recover lost management fees and, potentially, its additional liability to noteholders beyond the level of trust assets. Exercise of right of indemnity 1. Ms Whittaker notes that the liquidators accept that, so far as is presently known, any cause of action that PPIL has against its former solicitors is not an asset of PAPF, since the amount sought to be recovered would be that amount to which PPIL was liable beyond trust assets, that is its personal liability, by reason of the alleged breach of duty. 2. It seems to me that the proposed investigation of claims against PPIL's former solicitors would fall within the terms of the indemnity in cl 20.1(1)(a) of the trust deed of PAPF, because that indemnity extends very widely to liabilities incurred by PPIL "arising in or about or in connection with" PAPF, and the relevant expenses would have a connection with PAPF, although they would be incurred for the personal benefit of PPIL (and its creditors) in investigating a claim that was for its (and its creditors') personal benefit rather than for the benefit of PAPF. It seems to me that, as Ms Whittaker submits, those expenditures would also fall within the scope of the indemnity under the trust deed so far as they were incurred in taking action in relation to a step that was done, or omitted to be done, "concerning" PAPF, again notwithstanding the absence of benefit to PAPF from the investigation. It therefore seems to me likely that the relevant indemnity extends, in its terms, to the costs proposed to be incurred by PPIL. 3. Ms Whittaker also submits that it would be an odd result if PPIL's right of indemnity extended to the costs of preparing the relevant trust deed (or, I interpolate, the Subscription Agreements) but not to investigating whether the work done by the solicitors in that respect had been done in breach of duty. I do not accept that that is necessarily an odd result, if the relevant investigation is directed to the personal benefit of PPIL, rather than to the benefit of the trust. That submission directs attention to the question whether the relevant costs can properly be incurred, pursuant to the indemnity, notwithstanding that they are for the personal benefit of the trustee, to which I now turn. 4. I recognise that a real concern may arise that, in principle, one would not ordinarily expect that a trustee could expend trust assets to pursue a personal claim, that will benefit it and not the trust. However, the duties of a trustee may be limited by the provisions of the trust deed, although there is an irreducible core of duties owed by a trustee to the beneficiaries which cannot be excluded and, at a minimum, a trustee is obliged to perform the trust honestly and in good faith for the benefit of the beneficiaries: Armitage v Nurse [1998] Ch 241 at 253–254; JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (7th ed 2006, LexisNexis Butterworths) at [1617]. 5. On balance, it seems to me that the terms of a trust deed can authorise an indemnity for expenses in pursuing a claim with an appropriate nexus with the trust for the personal benefit of the trustee, as a matter of the scope of the relevant indemnity, just as they can authorise the payment of remuneration to a trustee for its personal benefit. An entity which accepts appointment as trustee of a trust may anticipate that it may incur loss from performing its duties as trustee, not only in its capacity as trustee of the trust but also in its personal capacity. It seems to me that a trustee could properly require, and a trust deed could properly provide, that the trustee be indemnified against costs which are incurred in recovering loss that it has suffered in its personal capacity, as distinct from as trustee of the trust. There is no greater oddity in such a provision than there is in a provision in a trust deed that allows remuneration of the trustee. For that reason, it seems to me that the right of indemnity in the PAPF trust deed which extends, in its terms, to the cost of investigating a personal claim by the trustee, also authorises the trustee to incur those costs, notwithstanding that its doing so might have been a breach of its duties as trustee in the absence of such authorisation. 6. In expressing that view, I have proceeded on the basis that PAPF is not a registered scheme for the purposes of Pt 5C of the Corporations Act. Mr Fraser's evidence (Fraser 6.4.16 [8]) is that PAPF is presently an unlisted managed investment scheme and that it was, but only until 30 November 2015, registered under Chapter 5C of the Corporations Act. An ASIC extract confirms the presently deregistered status of PAPF for the purposes of Pt 5C of the Corporations Act. It is therefore not necessary to address the question whether, if PAPF had been a registered scheme, the course proposed by the liquidators would have been inconsistent with PPIL's duties as responsible entity under s 601FC(1)(c) of the Corporations Act which, in the case of a conflict between members' interests and its own interests, would require it to give priority to members' interests. Conclusion 1. For these reasons, I am satisfied that the direction sought by the liquidators should be given. That direction does not, of course, require the liquidators to rely on their right of indemnity under the PAPF trust deed in order to conduct the examinations, still less to apply trust assets to fund the pursuit of any further proceedings which may be brought against PPIL's former solicitors for its personal benefit. Alternatives to the exercise of the right of indemnity in respect of such proceedings would include at least the liquidators' seeking funding from noteholders who would benefit from any recoveries in such proceedings for the costs of such proceedings, or, as Ms Whittaker recognised in submissions, seeking litigation funding, which are steps that would ordinarily be available to a liquidator of an insolvent company with a potentially valuable claim against a third party. The appropriateness of that course may need to be further addressed if the liquidators were ultimately to seek a direction that they were justified in applying trust assets to pursue substantive proceedings against PPIL's former solicitors, as distinct from undertaking the more limited steps and incurring the more limited expenditures that they propose at this point. 2. Accordingly, I make the following direction: 1 Direct pursuant to sections 479(3) and 511 of the Corporations Act, or alternatively under section 63 of the Trustee Act, that the Liquidators would be justified in distributing the funds held by PrimeSpace Property Investment Ltd (in liq) ("PPIL") in its capacity as trustee and responsible entity of the Prime Access Property Fund ("PAPF") to pay PPIL's reasonable costs and expenses in: (a) the Liquidators investigating the circumstances in which PPIL issued convertible notes pursuant to Convertible Note Subscription Agreements during 2011 (Convertible Notes) including conducting examinations and seeking production of documents pursuant to Part 5.9 of the Corporations Act; (b) the Liquidators obtaining an opinion from counsel for the purpose of determining whether PPIL would be justified in commencing proceedings in respect of the circumstances in which the Convertible Notes were issued; and (c) the Liquidators and PPIL taking such other steps or action incidental to any of the foregoing. 2. The costs of and incidental to this application be payable out of the assets of PAPF. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 December 2016