Supreme Court New South Wales

• Medium Neutral Citation: Columbus Investment Services Ltd [2014] NSWSC 47
• Hearing dates: 29 October 2013
• Decision date: 10 February 2014
• Jurisdiction: Equity Division
• Before: Robb J

Decision

(1) Order pursuant to section 63 of the Trustee Act, 1925 (NSW) that in the circumstances set out in the Written Statement dated 5 September 2013, and the Witness Statements of Frank John Tearle dated 4 September 2013 and 23 October 2013, the Plaintiff would be justified in distributing the net assets of the Ironstone Residential Fund ARSN 115 654 138 ("Fund") to the unit holders of the Fund and otherwise completing the winding up of the Fund in accordance with its Constitution

(2) Order that the costs of this application, calculated on an indemnity basis, be paid out of the Fund

• Catchwords: EQUITY - trusts and trustees - plaintiff responsible entity of registered scheme - purpose of scheme cannot be accomplished - notice given to unit holders under s 601NC Corporations Act - unit holders resolve that registered scheme be wound up - doubt about validity of proxy - unit holder declines to execute release under constitution - complaint to ASIC - application for judicial advice that plaintiff may wind up registered scheme and distribute assets
• Legislation Cited: Corporations Act 2001 (Cth)
• Category: Principal judgment
• Parties: Columbus Investments Services Ltd (plaintiff); Nominal Defendant
• Representation: Counsel: N Furlan (plaintiff); Solicitors: Piper Alderman (plaintiff)
• File Number(s): 2013/275011

Judgment

1 By summons filed on 11 September 2013 the plaintiff, Columbus Investment Services Ltd, seeks the following substantive orders:

"1. An order pursuant to section 63 of the Trustee Act, 1925 (NSW) that in the circumstances set out in the Written Statement dated 5 September 2013 and filed with this Summons and the Witness Statement of Frank John Tearle dated 4 September 2013 and filed with this Summons, the Plaintiff would be justified in distributing the net assets of the Ironstone Residential Fund ARSN 115 654 138 ("Fund") to the unit holders of the Fund and otherwise completing the winding up of the Fund in accordance with its Constitution.

2. An order that the costs of this application, calculated on an indemnity basis be paid out of the Fund."

2 As noted in its summons, the plaintiff relied upon a written statement, and a witness statement of Frank John Tearle dated 4 September 2003. At the hearing of the application the plaintiff also relied upon a second witness statement of Mr Tearle dated 23 October 2013. As Mr Tearle's statements were not sworn evidence, I received the statements on the basis that they provided information that supplemented the Written Statement. The plaintiff tendered a bundle of the documents referred to by Mr Tearle in his statements, which were received into evidence. The plaintiff also tendered a copy of the written legal advice that it had received, and upon which it wished to act if the Court gives the advice sought in the summons. The legal advice was received separately into evidence as a confidential exhibit.

3 On an application such as the present, which is non-contentious, it is not necessary for the Court to set out in detail the facts upon which the plaintiff seeks judicial advice, or to provide detailed reasons in support of its decision. In the present case the written statement and the two witness statements of Mr Tearle set out the relevant facts comprehensively and in meticulous detail. The Court was provided with all of the documents relevant to the application, as referred to and explained by Mr Tearle in his witness statements.

4 Mr Furlan of counsel appeared for the plaintiff on the hearing, and in his submissions he carefully explained each of the steps, and took the Court to each of the material documents, which were relevant to the issue of whether the plaintiff can now lawfully wind up the Fund and distribute its assets. Mr Furlan's submissions are set out in the transcript of the hearing of the application.

5 I have had the benefit of reading the legal advice that was provided to the plaintiff, and which has become a confidential exhibit.

6 I accept the submissions made on behalf of the plaintiff by Mr Furlan, and agree with the conclusions and the reasoning set out in the confidential legal advice.

7 The Court will make each of the orders sought by the plaintiff in the summons.

8 In the circumstances it is sufficient to record that the plaintiff is the responsible entity of a registered scheme called the Ironstone Residential Fund ("Fund"). The Fund was established under a constitution dated 27 July 2005, under a different name. The constitution of the Fund has been varied and replaced on a number of occasions. The current constitution was created by deed poll on 29 June 2009, and lodged with the Australian Securities and Investments Commission ("ASIC") under s 601GC(2) of the Corporations Act, 2001 (Cth) (the "Act") on 30 June 2009.

9 The Fund is in the form of a unit trust, and the current constitution is the present trust deed for the Fund.

10 The Fund changed its name to its current name of Ironstone Residential Fund on 23 May 2008.

11 The principal investment objective of the Fund was to provide investors geared exposure to the Australian residential property market with the aim of outperforming the major residential property markets of Australia over the long term.

12 The promoter and the investment manager for the Fund was Ironstone Funds Pty Ltd ("Fund Manager"). On 23 March 2011 the plaintiff terminated its agreement with the Fund Manager because the Fund Manager was not in a position to continue to provide effective services. The Fund Manager was deregistered by ASIC on 15 February 2013.

13 The genesis of the need for the plaintiff to make the present application was that the Fund Manager was unable to raise sufficient inflows of funds from investors to make the Fund viable. As at 30 March 2012, the Fund had assets of approximately $3.8 million and borrowings of approximately $2 million secured on the property assets of the Fund. The property assets of the Fund comprised four properties listed in par 19 of the written statement.

14 The Fund has a total of 6 unit holders ("Unit Holders"). They invested a total of $1,840,803 into the Fund. There have been no distributions to Unit Holders.

15 The cash resources within the Fund were not sufficient to meet the payment of interest on borrowings in the future without further inflows into the Fund. I infer that there were no reasonable prospects that such inflows could be received.

16 On 30 March 2012 the plaintiff issued a notice to Unit Holders pursuant to s 601NC of the Act. Under that section the responsible entity of a registered scheme may take steps to wind up the scheme if the purpose of the scheme cannot be accomplished. The notice that the plaintiff issued to the Unit Holders was required by s 601NC(2) to give the Unit Holders an opportunity to call a meeting of the Unit Holders to consider the proposed winding up of the scheme and to vote on any extraordinary resolution that was proposed about the winding up of the scheme.

17 As contemplated by s 601NC(2), the required proportion of the Unit Holders called an extraordinary general meeting of Unit Holders in accordance with s 252B of the Act, and the plaintiff duly gave a notice of a meeting of the Unit Holders for 20 June 2012.

18 At that meeting an extraordinary resolution was passed directing the plaintiff to wind up the Fund pursuant to s 601NB of the Act. 1,031,495.8937 votes were, as recorded in the minutes of the meeting, cast in favour of the resolution. That represented 84.813% of the votes entitled to be cast at the meeting. Prior to the meeting the plaintiff received a proxy form from one of the Unit Holders, known as Abcorp investments Pty Ltd ("Abcorp"), which appointed the chairperson of the meeting as its proxy. The chairman was authorised to vote in favour of the termination and winding up of the fund. At the meeting the chairman, who was a representative of the plaintiff, exercised the proxy in accordance with its terms, and cast Abcorp's vote in favour of the resolution. Abcorp was entitled to cast 6180.0912 votes. Had the chairman not exercised the proxy and not cast those votes, the resolution would still have been passed by 84.3% of the votes of the Unit Holders. That result flowed from the fact that one of the Unit Holders, Flying Bricks Holdings Pty Ltd, exercised its 1,025,3158025 votes in favour of the resolution. As the resolution was an extraordinary resolution, it was required by s 9 of the Act to be passed by at least 50% of the total votes that may be cast by members entitled to vote on the resolution (including members who are not present in person or by proxy).

19 The plaintiff commenced the winding up of the Fund on 20 June 2012, and has proceeded to sell the assets of the Fund and pay all of the liabilities of the Fund. The Fund presently has approximately $400,000 to distribute to the Unit Holders.

20 A number of events have occurred that have caused the plaintiff concern as to whether it is entitled to comply with the resolution to wind up the Fund and distribute the balance of its assets to the Unit Holders. That concern has led to the present application.

21 On 14 August 2012 ASIC exercised its power under s 601FF of the Act to require the plaintiff to provide ASIC with the somewhat compendious information listed in the schedule to ASIC's letter of that date. The information sought, in item 4, included information about the meeting of Unit Holders on 20 June 2012, and especially in relation to the use of proxies. The plaintiff responded to ASIC by email dated 27 August 2012. That information included information concerning the provision and exercise of the Abcorp proxy. ASIC sought further information by letter dated 26 October 2012, which sought copies of the relevant proxies. The plaintiff provided that information by email on 31 October 2012.

22 ASIC responded by letter dated 5 December 2012. It noted that the Abcorp proxy had only been signed by one of the directors of the company, although ASIC's records showed that, as at the date of the meeting, the company had two directors. ASIC suggested that the proxy might have been invalid for failure to comply with the requirements of s 127(1) of the Act.

23 The plaintiff replied to ASIC by its solicitors' letter dated 12 December 2012. The solicitors noted that in Abcorp's application for units in the Fund it had indicated that it was a single-director company, and that the proxies had been carefully scrutinised before the vote was taken to check their validity. The solicitors also suggested that compliance with s 127(1) of the Act was not the only basis for the validity of a document executed on behalf of a company.

24 The first issue of concern to the plaintiff was whether the validity of the resolution to wind up the Fund might be undermined if the position taken by ASIC is valid, and the chairman of the meeting was not entitled to vote Abcorp's votes in favour of the resolution.

25 The legal advice provided to the plaintiff, after explaining that all formal steps and timing requirements for the holding of the meeting had been satisfied, concluded that it was immaterial whether or not the Abcorp votes had been validly cast, as the requisite majority to secure the passing of the resolution existed in any event.

26 I agree with the reasoning in the legal advice given to the plaintiff.

27 The plaintiff has also raised the fact that clause 50.6 of the current constitution of the Fund provides that, before the responsible entity pays any money due to Unit Holders by way of distribution, it may require the execution of a receipt and release by the Unit Holders. Five of the six Unit Holders signed the requisite release, but one has refused to do so, and has made a complaint to ASIC.

28 It is clear that the refusal of one Unit Holder to sign the release does not affect the validity of the resolution, or put the plaintiff at risk that it will be in breach of trust if it complies with the resolution without receiving releases in accordance with the constitution from all of the Unit Holders.

29 The plaintiff understands that the unit holder who has refused to sign the release has made a complaint to ASIC. At the time of the hearing the plaintiff did not know precisely what the substance of any such complaint is, and the plaintiff had not received any notice of the making of a complaint against it in any formal way.

30 On 11 December 2012 the plaintiff's solicitors sent a letter to the Court in which they referred to the submissions that had been made at the hearing, and provided the Court with a preliminary notice received from the Financial Ombudsman Service dated 6 December 2013. The notice merely stated that the Financial Ombudsman Service was in the process of assessing its jurisdiction to consider the dispute. The notice gave no indication of the substance of any complaint that may have been made.

31 As I understand the plaintiff's position, it has taken the commercial decision that it is in the interests of the Unit Holders as a whole, as well as its own interests, that the resolution to wind up the Fund should be implemented and the distribution of assets completed as soon as is reasonably possible. As the plaintiff clearly has competent legal advice, I infer that the plaintiff is well aware that if it distributes the assets of the Fund, but subsequently becomes embroiled in disputes of any kind that may cause it to incur costs for which it is entitled to be indemnified out of the assets of the Fund, its capacity to realise its rights of indemnification may be lost or diminished.

32 It is proper for the plaintiff to take the course that it proposes to take, which does not diminish the appropriateness of the Court giving the advice sought in relation to the propriety of the plaintiff complying with the resolution.

33 The evidence also discloses that the plaintiff is a party to litigation against a number of former directors of the Fund Manager. In those proceedings the plaintiff sues in its personal capacity, and not in its capacity as the responsible entity for the Fund. All other litigation in which the plaintiff may have been involved in its capacity as the responsible entity has come to an end.

34 In the circumstances that I have outlined, and on the basis of all of the evidence to which I have referred above, I conclude that it is appropriate to give the plaintiff the advice that it seeks, and also to make the costs order set out in the summons.

35 Accordingly I make the following orders:

(1) Order pursuant to section 63 of the Trustee Act, 1925 (NSW) that in the circumstances set out in the Written Statement dated 5 September 2013, and the Witness Statements of Frank John Tearle dated 4 September 2013 and 23 October 2013, the Plaintiff would be justified in distributing the net assets of the Ironstone Residential Fund ARSN 115 654 138 ("Fund") to the unit holders of the Fund and otherwise completing the winding up of the Fund in accordance with its Constitution.

(2) Order that the costs of this application, calculated on an indemnity basis, be paid out of the Fund.

Decision last updated: 10 February 2014