In the matter of PrimeSpace Property Investment Limited (in liq) [2017] NSWSC 386 (10 April 2017)

Last Updated: 18 April 2017

Supreme Court New South Wales

Case Name:	In the matter of PrimeSpace Property Investment Limited (in liq)
Medium Neutral Citation:	[2017] NSWSC 386
Hearing Date(s):	4 April 2017
Decision Date:	10 April 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Direction made that liquidators would be justified in commencing proceedings.
Catchwords:	TRUSTS – Judicial advice as to commencement of proceedings.
Legislation Cited:	- Corporations Act 2001 (Cth), s 511 - Court Suppression and Non-Publication Orders Act 2010 (NSW) - Trustee Act 1925 (NSW), s 63
Cases Cited:	- BCI Finances Pty Ltd v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 - Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 - Philip Walton trading as Pitcher Walton & Co v Efato Pty Ltd (in liq) [2008] NSWCA 86 - 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] FCA 90; (2002) 115 FCR 409 - Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 - Re PrimeSpace Property Investment Ltd (in liq) [2016] NSWSC 1113 - Re Primespace Property Investment Ltd (in liq) [2016] NSWSC 1450 - Re Primespace Property Investment Ltd (in liq) [2016] NSWSC 1821 - Re PrimeSpace Property Investment Ltd (in liq) [2016] NSWSC 1891 - Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18
Category:	Procedural and other rulings
Parties:	Shaun Robert Fraser (First Plaintiff) Anthony Gregory McGrath (Second Plaintiff) PrimeSpace Property Investment Limited (in liquidation) (Third Plaintiff)
Representation:	Counsel: F Ashworth (Plaintiffs) Solicitors: Johnson Winter & Slattery (Plaintiffs)
File Number(s):	2016/107316

JUDGMENT

1. By Interlocutory Process filed on 24 March 2017, the Plaintiffs, Messrs Fraser and McGrath as liquidators of PrimeSpace Property Investment Limited (in liq) (“PPIL”) and PPIL apply for directions under s 511 of the Corporations Act 2001 (Cth), s 63 of the Trustee Act 1925 (NSW) and the inherent jurisdiction of the Court. The liquidators initially sought directions that that they would be justified in pursuing a claim against PPIL’s former solicitors in relation to the circumstances in which PPIL, as responsible entity of the Prime Access Property Fund (“PAPF”), issued convertible notes pursuant to Convertible Note Subscription Agreements during 2011, including by commencing proceedings against that firm of solicitors, and taking any steps incidental to doing so.
2. The liquidators initially also sought an order that PPIL’s costs of and incidental to the commencement, and presumably the conduct, of those proceedings be paid from the assets of PAPF. That order would have raised complex questions, where the success of the proceedings would have largely benefited creditors of PPIL in its own right rather than creditors of PPIL in its capacity as trustee of PAPF, and the cost of unsuccessful proceedings would have been borne by creditors of PPIL as trustee of PAPF. That analysis would have further been complicated by the fact that there is some overlap between creditors in the two capacities. After the hearing of the application, and while judgment was reserved, the Court was informed that the liquidators intend to pursue alternative litigation funding arrangements and anticipate making a further application to the Court in that respect, and did not require the Court to address that further application that the costs be paid from the assets of PAPF. I proceed on that basis.

The applicable principles

3. I summarised the scope of the Court’s jurisdiction to make a direction of this kind in my judgment delivered on 22 December 2016 ([2016] NSWSC 1891) (“Earlier Judgment”) and I draw on that summary here. In Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [8], I observed that:

“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] VSC 336; (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].”

4. As I noted in the Earlier Judgment, 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] FCA 90; (2002) 115 FCR 409 at [65]; Re MF Global Australia Ltd (in liq) above at [7]; Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 at [51]. For the same reasons I noted in respect of the anterior application in the Earlier Judgment, 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 directions sought by the liquidators raise at least the question of the prospects of the proceedings and whether their costs are reasonably incurred.

Factual background

5. I have dealt with the matters that led to this application in several previous judgments ([2016] NSWSC 1113, [2016] NSWSC 1450, [2016] NSWSC 1821) and most recently in the Earlier Judgment and address those matters only briefly in this judgment. 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.
6. PPIL as responsible entity of PAPF sought to raise $5 million by the issue of convertible notes to investors pursuant to Convertible Note Subscription Agreements in a substantially similar form which was to be used for the development of the IQ Smart apartments. PPIL instructed solicitors to prepare a Convertible Note Subscription Agreement, which included the form of convertible note to be issued. PPIL subsequently entered into Convertible Note Subscription Agreements with 22 investors and issued approximately $5 million of convertible notes in PAPF.
7. PPIL had a right of indemnity from the assets of PAPF in accordance in accordance with PAPF’s Constitution. Clause 19 of PAPF’s Constitution also 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.”

8. The Subscription Agreements relevantly recited that:

“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.”

9. Clause 4 of the Subscription Agreements 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 Agreements also provided that monies outstanding under the convertible notes were immediately due and payable on an event of default. However, the Subscription Agreements did not include a limitation of liability provision to limit PPIL’s liability to noteholders under the Convertible Note Subscription Agreements to the extent of its indemnity from the assets of PAPF.

10. 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 unsuccessful in establishing a genuine dispute so as to set aside those demands in proceedings in the Federal Court of Australia and was unsuccessful in seeking an order extending the time for payment of the amount claimed by the demand pending appeal.
11. 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 PPIL had placed no reliance on the cap on liability imposed by cl 19.2(2) of PAPF’s Constitution. In PrimeSpace Property Investment Ltd v Vienne Pty Ltd (No 2) [2015] FCA 367, Perram J expressed the view that reliance on cl 19.2(2) of PAPF’s Constitution would not have assisted PPIL 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.”

12. As I noted in the Earlier Judgment, 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 contain a limitation of liability provision. PPIL was placed in voluntary administration immediately after the failure of its application for an extension of time, and passed from voluntary administration into liquidation.

The affidavit evidence and Counsel’s opinion

13. This application is supported by three further affidavits of one of the liquidators, Mr Fraser, sworn since the date of the Earlier Judgment.
14. By his affidavit dated 24 March 2017, Mr Fraser refers to the history of his appointment, initially as joint and several voluntary administrator of PPIL and subsequently as liquidator of PPIL and to PPIL’s role as trustee of PSNT and responsible entity for PAPF. Mr Fraser updates the progress of the liquidation since his fourth affidavit sworn in the proceedings on 21 September 2016 and outlines subsequent investigations, including an examination of a former fund manager of PPIL and of persons associated with PPIL’s former solicitors acting on the convertible notes issue. Mr Fraser refers to the receipt of Counsel’s advice and to the view he has formed that it is in the interests of creditors to pursue a claim against PPIL’s former solicitors for negligence and breach of contract in connection with the preparation of documentation for the convertible notes issue.
15. By a further affidavit dated 3 April 2017, Mr Fraser provided a more detailed outline of the claim against PPIL’s former solicitors in respect of a convertible notes issue, which involves a claim that those solicitors breached duties owed to PPIL to take reasonable care and exercise skill and diligence by failing to draft the Subscription Agreements so as to limit PPIL’s liability to noteholders under the Subscription Agreements to its right of indemnity from the assets of PAPF, or to advise PPIL that the effect of the Subscription Agreements was not so limited, or to advise PPIL as to the risks of entering into the Subscription Agreements without such a limitation. Mr Fraser expressed the view that PPIL’s liability under the Subscription Agreements, by reason of the lack of such a limitation, gave rise to its insolvency and its external administration and identifies loss and damage of several kinds which PPIL claims to have suffered by reason of these matters, including its liability to noteholders that cannot be satisfied out of PAPF’s assets; the reasonable costs of PPIL’s external administration, which, he suggests, would not otherwise have been incurred; and several other costs.
16. Mr Fraser also points to a policy of insurance which would respond to the claim against the solicitors, although the limit of liability is less than the amount of the claim, and to evidence which indicates that then partners in PPIL’s former firm of solicitors own property in their own names, which may be available to satisfy recoveries beyond the level of insurance cover. Mr Fraser also refers to the costs which will be incurred in respect of his firm’s fees, and solicitors’ and Counsel fees, in respect of the claim, which are substantial, with an estimated length of hearing of 5 to 7 days.
17. Mr Fraser also sets out the basis on which he has formed the view that it would be in the interests of creditors of PPIL to pursue the claim against PPIL’s former solicitors, having regard to Counsel’s opinion and the possibility that a significant sum could be recovered by PPIL if the claim is successful. Mr Fraser’s analysis indicates that a wholly successful result would have a substantial benefit for recoveries by creditors of PPIL in its own right in the liquidation. Mr Fraser fairly noted that the position of creditors of PPIL as responsible entity for PAPF, who did not also have claims against PPIL in its personal capacity, may be adversely affected by the use of PAPF’s funds to pursue the relevant claim. It is not necessary to address that question, or the difficult question of balancing the rights of different groups of creditors who will benefit or suffer by pursuit of a particular claim, where the liquidators no longer seek approval to apply the funds of PAPF to pursuit of the claim. By his affidavit dated 4 April 2017, Mr Fraser corrected aspects of a calculation undertaken in his earlier affidavit, to which it is not necessary to refer in detail.

Prospects of claim

18. In my Earlier Judgment, I expressed the view that the liquidators could 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. That view needs to be formed with a higher level of confidence to warrant the substantially larger costs of proceedings.
19. The liquidators relied on a confidential opinion of Counsel dated 14 March 2017 and a supplementary opinion of Counsel dated 3 April 2017, which were tendered in the proceedings subject to a non-publication order made under the Court Suppression and Non-Publication Orders Act 2010 (NSW). I have reviewed that advice, which is detailed and comprehensive. That advice covers matters which would ordinarily be expected to be covered in a Counsel’s opinion in respect of a claim of some complexity.
20. PPIL quantifies its loss as potentially extending to the amount by which its liability to noteholders would exceed the value of the 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.
21. As I noted in the Earlier Judgement, it seems to me to be at least seriously arguable that a deficit that renders a company insolvent is a recoverable loss in a claim for breach of contract or negligence although, by definition, that company will not have paid out the amount of that deficit, and that question is plainly not beyond doubt: Philip Walton trading as Pitcher Walton & Co v Efato Pty Ltd (in liq) [2008] NSWCA 86; Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 at [176]–[178]; BCI Finances Pty Ltd v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [330]–[332]. I expressed the view in the Earlier Judgment, and remain of the view that:

“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) [2015] UKSC 23; [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.”

22. PPIL also quantifies its 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 the costs of the administration and liquidation. These other claims available to PPIL are lesser in amount but also involve lesser complexity than the claim for the amounts due to noteholders.
23. I am satisfied that the liquidators would be justified in causing PPIL to commence the relevant proceedings, having regard to the advice which they have received from Counsel as to their prospects; the nature of the loss claimed, to which I have referred above; the fact that insurance and possibly personal assets of partners of PPIL’s former solicitors’ firm are likely to be available to satisfy a judgment in PPIL’s favour in large part, or a settlement; the fact that holders of the converting notes and other creditors of PPIL in its personal capacity would benefit from the recovery in successful proceedings; and the fact that it is not now proposed that the proceedings would be funded from PAPF in a manner that would have potentially been disadvantageous to creditors of PPIL in its capacity as responsible entity of PAPF, if the proceedings had failed.

Orders

24. For these reasons, I make orders in accordance with the Short Minutes of Order initialled by me and placed in the file which provide, in substance directions that the liquidators would be justified in pursuing a claim against PPIL’s former solicitors in relation to the circumstances in which PPIL issued the convertible notes under the Convertible Notes Subscription Agreements, including by commencing proceedings, and taking any steps incidental to these matters, and that the costs of paragraph 1(b) of the liquidators’ interlocutory process filed on 24 March 2017 be costs in the winding up of PPIL, to be paid out of the assets of PAPF.

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