Re Orchard Aginvest Ltd[2008] QSC 2

SUPREME COURT OF QUEENSLAND

CIVIL JURISDICTION

FRYBERG J

No 11325 of 2007

BRISBANE 

..DATE 09/01/2008

ORDER

HIS HONOUR:  The applicant, Orchard Aginvest Limited, is the responsible entity, as that term is defined in the Corporations Act, in respect of the Primary Agribusiness Fund.  That fund is a registered managed investment scheme within the meaning of that Act.

It was established in 2004 and the applicant was, in fact, the promoter of it.  An associated company of the applicant is the responsible entity in respect of another scheme called the Primary Infrastructure Fund which is another fund which the applicant also promoted.  The Primary Agribusiness Fund raised money from the public in the later part of 2005 for the purpose of agricultural activities on land owned by it or leased by it from other persons.  It was, no doubt, anticipated that it would be profitable.  That has not turned out to be the case.

For reasons which need not now be investigated in detail the amount of income earned by the 10 farms which the fund operates has not been sufficient to meet outgoings.  There is presently insufficient income to enable the fund to pay rent in respect of the five farms which are being leased.  The liabilities of the fund exceed its assets by a small margin.

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HIS HONOUR:  The applicant contends that the fund is presently insolvent and the uncontradicted evidence before me supports that contention.  The fund is also committed to a management agreement in respect of a number of farms with a firm which, it seems, is an onerous agreement and which continues to prevent profitable operations.

The applicant has chosen not to proceed to wind up the fund under section 601NC of the Act.  It is a matter of some doubt whether that section would be available in circumstances of insolvency given the wording of sub-section (1) of that section.  Moreover, the applicant submits that the expense of proceeding under that section would be greater than proceeding under section 601ND.  It submits that the Court may make an order under the latter section in the present case because, in the circumstances, it is just and equitable that such an order be made.

There is no direct authority cited to me to establish that a mere insolvency makes the winding up one which would be just and equitable but in the absence of any submission to the contrary I am prepared to proceed on the basis that the terms of the section are satisfied by that condition of insolvency.

The application has been before the Court on two previous occasions.  On the first, the Court directed that notice of the application be given to all members of the scheme and all known creditors and potential creditors.  That has been done.  After it was done one creditor appeared and sought an adjournment of the application to enable it to give further consideration to the material and that adjournment was granted in December last year.

When the matter came on for hearing yesterday that creditor did not appear and there is material before me to indicate that it no longer is interested in opposing the application.  ASIC has been notified of the application and the material has been served upon it.  It has provided a letter to the applicant that it is not aware of any information which would require the appointment of a registered liquidator under subsection 601NF of the Corporations Act and its non‑appearance I take to mean that it has no reason to oppose the application as made.

On the face of things, therefore, there seems to be no reason why the order sought should not be made.  However, there is one matter which has concerned me and which led to the adjournment of the application from yesterday until today.  That is the fact that an associated company of the applicant is the responsible entity for the Primary Infrastructure Fund which leases to the present fund five of the 10 farms which the fund operates.

As counsel, quite rightly, pointed out to me this does give rise to a potential conflict of interest, if not in the strict equitable sense, in the practical sense that the winding up of the fund will mean that it is unable to continue paying rent to the other fund.

It is impossible to foresee the range and precise concatenation of circumstances which might arise to bring that potential conflict to reality.  It is, however, a matter which is of considerable concern to me.  That concern has not been reduced by the vehement opposition which the applicant has put forward to the making of any order under section 601NF of the Act.  That opposition has been founded on a number of bases.

First, it was asserted from the Bar table yesterday that the applicant was concerned that should an independent person be appointed to ensure that the scheme be wound up by the applicant in accordance with its constitution and any Court orders, undesirable consequences would follow.  In particular, it was asserted that the Fund's bank would be likely to appoint a receiver pursuant to security held by it over the fund assets.

One reason for the adjournment was to enable evidence of this to be obtained.  Since yesterday the solicitor for the applicant has spoken with a bank officer in relation to the matter.  The bank officer advised that in the event that the Court appointed a registered liquidator under section 601NF(1) the bank would take immediate steps to have that liquidator terminated and its own liquidator appointed.

He also informed the solicitor that the bank was confident that the applicant would act appropriately as the responsibly entity and that it would be very concerned about an external party being involved in the winding up process and would move to ensure that it, the bank, controlled the process in order to protect its debt.  With respect, that seems to me an extraordinary attitude for the bank to adopt.

The proposal was always that the applicant conduct the winding-up.  The only question was whether an independent person, who  happened to be a registered liquidator, should be appointed, in effect, to take responsibility for ensuring that the applicant carried out its duties.  It is most unlikely that if an order were made under section 601NF(1) appointing an independent person the bank could succeed in any application to have what the bank officer described as its own liquidator appointed.  I see nothing in that conversation which would lead me to infer that the course threatened by the bank would detrimentally impact on the fund were an appointment made under section 601NF(1).

For the applicant, Mr Morris QC, submitted that I should infer from the bank officer's statement that the bank wished to control the process, that the bank would be likely to appoint a receiver should someone be appointed to supervise the winding up by the applicant.  I am not prepared to draw any such inference.  It seems to me that the bank would be unnecessarily incurring costs were it to do such a thing particularly since the bank officer expressed confidence in the applicant to carry out the winding up.

The fact that the bank is resistant to having an independent person supervise the winding up proposed to be carried out by the applicant does nothing but raise suspicion that some step is proposed by the applicant and known to the bank which would not be acceptable to an independent supervisor.  That, if anything, favours the appointment of someone to carry out the supervision.  There is, of course, no suggestion that the applicant's legal advisers have even contemplated such a possibility.

I do not think the bank would appoint a receiver were some supervision to be required provided the winding up were carried out by the applicant. 

The applicant opposes the appointment of a person to supervise and does so for reasons which were explained by a director, Mr McMahon.  First, Mr McMahon expressed his concern that a liquidator should be appointed to the fund.

It is not clear what Mr McMahon's concern is.  If he means that he is concerned that a registered liquidator be appointed as opposed to someone simply to liquidate the fund then one wonders why it is that the appointment of someone who is registered as a liquidator under the Corporations Act should be so anathema to him.  If his concern is simply at the appointment of anyone to be a liquidator then his concern is nonsensical.  The application is, in effect, for the applicant to be appointed as a liquidator for a liquidator is simply someone who is appointed to wind up a body, getting its assets, pay its debts and do anything else necessary for the winding up of the entity.  The applicant is, in effect, then to be a liquidator.

The second reason given by Mr McMahon is that the appointment of a liquidator is an event of default under the bank's security documents.  The documents have not been put before me.  Whether or not the making of an order as sought by the applicant amounts to an event of default will depend upon the precise terms of those documents.  If they are apt to cover the making of an order under section 601ND(1) then the event which Mr McMahon fears will inevitably occur by reason of the applicant's success in its application.  If those words are not apt to cover that then they are most unlikely to be apt to cover the appointment of a person under section 601NF(1).  That reason seems to me to be without foundation. 

The third reason given by Mr McMahon also seems to me to be wrong.  The cost of appointing a person under section 601NF(1) to supervise the winding up is unlikely to exceed the cost of appointing the same person to carry out the winding up on behalf of the applicant.  Yesterday I was told from the Bar table that the applicant intended to appoint a firm of accountants, Horwaths, to carry out the winding up on its behalf.  The material put before me today, however, indicates that Horwaths have a more limited brief.  Their brief is simply to assist by running an expressions of interest campaign for the sale of assets, negotiating with potential purchasers and advising the applicant about the best course to maximise the return from the assets.  No doubt their charges for doing that would be less than their charges for carrying out the winding up.

On the other hand, their charges for simply ensuring that the scheme is wound up in accordance with its constitution, in other words, carrying out the supervisory role which would be envisaged if orders were made under both sections 601NC and section 601NF would be much less.  No figures have been put before me to indicate what the cost would be.  I am not persuaded that making an appointment under section 601NF(1) would increase the cost which will be incurred in any event in relation to the winding up.

The fourth reason given by Mr McMahon was that the applicant is in a much better position to conduct the orderly winding up of the scheme given its experience in managing the scheme and the farms.  That reason betrays ignorance of what was proposed.  It was not proposed that the applicant should not carry out the winding up.  The reason is of no weight.

An alternative proposal which I suggested today was that instead of appointing a person under section 601NF(1) to take responsibility for ensuring that the scheme was wound up, in accordance with its constitution and Court orders, I should give directions about how the scheme is to be wound up, and that such directions should include a provision that an independent person who is also a registered liquidator report to the Court at reasonable intervals on the progress of the winding up, particularly in respect of so much of the winding-up as impinges upon the area in which the conflict of interest exists.

By now, it should be apparent that the reason why I have been concerned is that the existence of the conflict of interest may lead to the applicant being unable properly to carry out its duties as the body to carry out the winding-up, or may at least place temptations in its way in that regard. 

The suggestion that somebody report to the Court in respect of the conflict of interest was opposed with equal vehemence.  Counsel submitted that no order should be made under any part of section 601NF(1), either subsection (1) or subsection (2) for a number of reasons.

First, the section does not empower the Court to make an appointment of its own motion.  On that point, I think counsel's submission is correct. 

Second, it was submitted that an order ought not to be made because no interested party sought such an order.  However, it is unclear on the material - indeed, I think there is no material - to indicate whether any interested party appreciated the potential conflict of interest which exists.

Third, it is submitted that the terms of the statute do not permit the making of an order, because both subsection (1) and subsection(2) permit an order only if the Court thinks it is necessary to do so.

It is submitted that that necessity must relate to the winding-up and that it must be shown to be essential for the purpose of the winding-up that the appointment be made or that the direction be given.  Since the conflict is only potential, it may be that the winding-up can be carried out without any conflict actually arising, and therefore the statutory test of necessity can not be satisfied.  I am inclined to think that this submission is correct. 

Fourth, counsel submits that the making of an appointment, or the giving of a direction, would have detrimental financial effects on the fund.  I reject that submission as not supported by the evidence, for the reasons I have given earlier.

Finally, counsel submitted that the order was superfluous, because if a problem arose, ASIC or some other interested party could make an application.  It would be premature, went the submission, to deal with the matter now.  I would reject that submission also, though I see the force of the point of prematurity.  It seems to me, however, that the contingency of conflict of interest is of sufficient seriousness to warrant an order being made now.

Where does that leave the position?  I have held that an order can not be made by the Court of its own volition under section 601NF(1), and that in all probability, it can be made only if the order is necessary - in the sense of essential - to enable the winding-up to occur.

It follows, that in my view, it is not open to me to make an order to deal with the potential conflict of interest, even though, in my view, it is highly desirable that some such order ought to be made. 

The question then is whether or not I should make an order for the winding-up in the absence of such a provision. 

Despite the fact that I think the winding-up process may become seriously flawed because of the absence of any supervision or reporting condition, I think that to refuse to make the winding-up order would create more mischief than it would solve.  The fact of the matter is that the fund is insolvent.  It can not be allowed to continue.  Something has to be done.

Were I to refuse the application, the only likely consequence would be that the responsible entity, the applicant, would proceed under section 601NC, and I see no benefit in that.

Therefore, despite my view that it is undesirable that the applicant carry out the winding-up unsupervised - at least in respect of the area in which the conflict of interest exists - I see no alternative but to allow that course to occur.

I will, therefore, make an order in accordance with paragraph (1) of the application.

MR MORRIS:  Your Honour, would you permit me to say on the record, in the reasons that your Honour just gave, there are two matters that I should address.

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MR MORRIS: The other thing is more fundamental.  Your Honour did, at one stage, allude to a suspicion of an improper purpose on the part of my client, and the Commonwealth Bank being aware of that improper purpose.  May I simply say that during the course of submissions that suggestion wasn't canvassed, and had it been canvassed, I would have repudiated it utterly.  The fact is - as your Honour sees from the material - my instructing solicitor, Ms Davies, has been in direct communication with the bank. 

Were there the slightest hint of any such improper purpose or knowledge of improper purpose, she and I would have brought it to the attention of the Court.  And, certainly, the legal representatives have far from any knowledge of existence of such impropriety.  On the contrary, a firm understanding - speaking both for myself and for Ms Davies - that the bank and our client are acting completely at arm's length.

HIS HONOUR: I am sure you would have done, Mr Morris, and I will allow your statement to remain on the record of the reasons.

MR MORRIS: Thank you, your Honour.

HIS HONOUR: And, I will say that I certainly did not intend to suggest that either you or Ms Davies would have acted otherwise than as you say.  But, rather that there may be matters of which you are unaware.

MR MORRIS: May it please, your Honour.