Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1937 (3 August 2012)

Last Updated: 8 August 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-3569 [2012] NZHC 1937

BETWEEN TRUSTEES EXECUTORS LTD Plaintiff

AND PERPETUAL TRUST LTD Defendant

Hearing: 3 August 2012

Counsel: C M Stevens for Plaintiff

S E Fitzgerald and J Edwards for Defendant

Judgment: 3 August 2012

_{(ORAL) JUDGMENT (NO. 3) OF HEATH J}

Solicitors:

Russell McVeagh, PO Box 8, Auckland Phillips Fox, PO Box 2791, Wellington Counsel:

J R Billington QC, PO Box4338, Shortland Street, Auckland

Copy to:

Financial Markets Authority, PO Box 1179, Wellington

_{H Rennie QC, PO Box 10242, Wellington}

TRUSTEES EXECUTORS LTD V PERPETUAL TRUST LTD HC AK CIV 2012-404-3569 [3 August 2012]

Introduction

[1] In this proceeding, Trustees Executors Ltd, as statutory supervisor of the Perpetual Cash Fund and the Perpetual Mortgage Fund, applies for orders under s 49 of the Securities Act 1978. The application has been made in order to manage risks to security holders or potential investors, arising out of concerns about the conduct of directors of Perpetual Trust Ltd in advancing a total of approximately $28 million to an associated entity, from trust funds.

Procedural history

[2] When the application last came before the Court for hearing, on 12 July 2012, I identified two general themes that emerged from the issues raised in the application and the supporting affidavits. One concerned the question of confidence; the other involved the value of securities from which moneys advanced to the associated entity, Torchlight Fund No 1 LP (Torchlight), were to be repaid.

[3] I made a series of orders and directions designed to protect the interests of existing and potential security holders. Those orders were to enure until 10am today, when it was expected that the application would be argued on a substantive basis. One of the reasons for adjourning until today was to see whether the expectation of repayment of the full amount of approximately $28 million by 31 July 2012 had been achieved.1

[4] The orders and directions that I made included

(a) appointment of two individuals, Ms Vivian Fatupaito and Mr

Christopher Duffy from an accounting firm, WHK, to act jointly as

_{“Observers”, pending further order of the Court}2 _and

1 Announcement to New Zealand Stock Exchange by Perpetual’s parent company, Pyne Gould

_{Corporation Ltd: Perpetual Trust FMA Update, 12.28pm, 5 July 2012.}

2 Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678 at para [21].

(b) requirements for valuations to be undertaken of properties over which the loan to Torchlight had been secured.3

In addition, undertakings previously provided by Perpetual to the Financial Markets Authority4 (the Authority) and the statutory supervisor were provided to the Court, pending further order. Other powers available to the statutory supervisor or the Authority were unaffected by the undertakings given or the orders made in my judgment of 12 July 2012.5

[5] On 24 July 2012, at the request of counsel for both parties, I held a telephone conference, at which I was asked to clarify the role of the Observers. In a judgment given later that day, I said:6

[4] Observers were appointed as one means of providing confidence to the market that there was a degree of independent oversight, in relation to Perpetual’s trusteeship of the Perpetual Cash Fund and the Perpetual Mortgage Fund. Their appointment was not intended to intrude on decision- making powers of the directors of Perpetual Trust but was designed to enable oversight of the activities of the Perpetual Trust Board, insofar as it related only to management of the Cash Fund and the Mortgage Fund.7

[5] The appointment of Observers was to provide a complementary method of monitoring the trusteeship. The powers conferred on Trustees Executors, as statutory supervisor of the two Funds, remained unaffected.8

Also, there was the ability to monitor through undertakings provided by Perpetual Trust to the Financial Markets Authority and the statutory supervisor.9 Those undertakings were also given to the Court on 12 July

2012 and were to enure pending further order of the Court.10

[6] In contrast to the powers conferred on the statutory supervisor by the Securities Regulations 2009 and the Deed of Participation, the Observers were authorised, pending further order of the Court, to attend Perpetual Trust’s board meetings, “in relation to the Funds”, “to ask questions of members of the Perpetual Trust board, regarding the Torchlight advances” and to have full access to information provided by Perpetual Trust to investors and/or investors’ advisors, with respect to the Torchlight advances. Finally, they were entitled to obtain information to identify the flow of cash in relation to the Torchlight advances, to the ultimate beneficiaries of those

3 _{Ibid, at paras [20] and [21].}

4 _{Ibid, at para [17].}

5 _{Ibid, at para [18].}

6 _{Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1817.}

7 _{Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678, at para [12].}

8 Clause 10.2 of the Deed of Participation, read in conjunction with cl 1 of Schedule 17 to the

_{Securities Regulations 2009.}

9 _{Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678, at para [17].}

10 Ibid, para [18].

moneys.11 I intended that the power to ask questions of board members would operate both within the confines of a formal board meeting and outside.12

[7] The need to keep separate the functions undertaken by Ms Fatupaito and Mr Duffy (or their alternates), as Observers, was underscored by the order for costs and reasonable expenses incurred by the Observers being met out of Perpetual Trust’s own resources, not from the two Funds. While I was aware that Ms Fatupaito and Mr Duffy were carrying out tasks in respect of powers conferred on the statutory supervisor by regulation and the Deed of Participation, as well as the undertakings, I deliberately limited costs and disbursements that could be recovered out of Perpetual Trust’s non-Fund assets to those incurred as Observers only.

[8] The other area in which the question of demarcation becomes important is in relation to the affidavits to be filed on the s 49 application. I directed that a joint affidavit from the Observers be filed and served on or before 25 July 2012, outlining what has occurred “over the period during which they have performed those functions and identifying any concerns arising during the period of their appointment”.13 That affidavit was designed to capture what had been sought and obtained by the Observers in relation to their specific functions as such, as well as the outcome of inquiries into the flow of cash, in relation to the Torchlight advance. On the other hand, any investigations that had been undertaken pursuant to the statutory supervisor’s own powers (including those derived from the undertakings) were to be provided separately in support of the application, on or before 27 July 2012.14

(footnotes retained)

The s 49 application

[6] Affidavits have been filed in support of and in opposition to the s 49 application. However, on 1 August 2012, counsel for the parties confirmed that a number of directions could be made by consent.

[7] I am now informed that all of the money advanced to Torchlight has been repaid. In those circumstances, the question of security for the advances has no immediate effect on orders required. Any issues arising out of the past conduct of those who were responsible for making the decisions to lend to Torchlight can now

_{safely be left to the Authority or the statutory supervisor. No further action is}

11 _{Ibid, at para [21].}

12 _{Ibid, at para [21](b).}

13 _{Ibid, para [19](b)(ii).}

14 Ibid, para [19](b)(iii).

presently required from the Court. The s 49 application is now driven by the issue of public confidence in the actions of those responsible for Perpetual’s management.

[8] In submissions today, Mr Stevens, for Trustees Executors, as statutory supervisor, raised some concerns about information gathered while affidavits were being prepared for today’s hearing. He referred, in particular, to a loan that appears to have been made at a time proximate to the Torchlight loan to a company associated with Mr Tinkler, who was then general counsel to Pyne Gould Corporation (Perpetual’s parent), and is now a director of that company. The amount of the advance was $3.3 million. Mr Stevens submits that no written application for credit was made. Nor was any security given. The loan was subsequently repaid.

[9] Ms Fitzgerald, for Perpetual, has indicated that a number of issues raised by Mr Stevens, including aspects of the loan made to the company associated with Mr Tinkler, are in dispute. It is not my function today to resolve any issues in that regard. They can be addressed further by the statutory supervisor and, if necessary, the Authority who may raise them later if they consider there is a need to do so.

[10] Perpetual’s present intention is to “internalise” the Cash Fund and to wind up the Mortgage Fund. An issue that arises in relation to the proposed “internalisation” involves the role of the statutory supervisor and whether it would continue. I identify later the basis upon which internalisation is intended to proceed.15 I record, at this stage, that there is a live issue over whether, in the form that internalisation is intended to take, the statutory supervisor (or some other form of supervision) should continue to be required, whether at the direction of the Court, or otherwise.

[11] In their joint memorandum of 1 August 2012, counsel for Trustees Executors and Perpetual stated:16

3. The parties propose that the existing orders remain in place, namely: (a) Ms Fatupaito and Mr Duffy remain in their role as

“Observers”, pending further order of the Court or

_{agreement of the parties; and}

15 _{See para [15] below.}

16 References to “CMF” are to the Perpetual Cash Fund.

(b) the undertakings referred to at paragraph [17] of Your Honour’s judgment dated 12 July 2012 (given to Trustees Executors Ltd and to the Court) remain in place, pending further order of the Court or agreement of the parties (subject to the additional undertaking set out at paragraph

4(e) below).

4. Further orders in the following terms are now sought by consent:

(a) Without prejudice to Trustees Executors Ltd’s existing rights and powers as statutory supervisor of the Funds, Perpetual Trust Ltd will engage with Trustees Executors Ltd, in its role as statutory supervisor (including where Trustees Executors Ltd acts in that role through WHK), in respect of any concerns or queries Trustees Executors Ltd has in respect of the Funds (including in particular unit pricing), including meeting with Trustees Executors Ltd and/or WHK, and providing documents and information to those entities, if requested.

(b) Noting that the Perpetual Trust Ltd Board has resolved to wind up the Mortgage Fund, Perpetual Trust Ltd will provide Trustees Executors Ltd with its proposals for winding up of the Mortgage Fund within 10 business days of the date of this order, including any proposals (if necessary) for Court orders in connection with the winding up of the Fund.

(c) Noting that the Perpetual Trust Ltd Board has resolved that it will work to a position where there are no further external investors in the CMF (the “internalisation” of the CMF), and that Perpetual Trust Ltd has further resolved to amend the investment policy for the CMF to the effect that no further mortgage lending will be made from the CMF, Perpetual Trust Ltd will provide Trustees Executors Ltd with its proposals for the internalisation for the CMF and the steps to be taken to achieve that, within 10 working days of this order.

(d) The existing undertakings at paragraph [17] the judgment dated 12 July 2012 are amended as of the date of this order to include an undertaking in the following terms: “Pending further order of the Court or agreement by the parties, no further mortgage lending shall be made from the Cash Management Fund”.

(e) To the extent any orders are made modifying the current position in respect of confidentiality and/or the sealing of the Court file in proceedings CIV-2012-404-2851 (between Perpetual Trust Ltd as plaintiff and the Financial Markets Authority as defendant) (the “FMA proceedings”), those orders are, subject to any other order of the Court, replicated in this proceeding.

(f) The fixture currently scheduled for Friday 3 August 2012 be vacated and Trustees Executors Ltd’s amended interlocutory application of 31 July 2012 for interim orders is adjourned.

(g) Leave is reserved to bring the matter back before the Court on short notice, if required, including in relation to any extension of the suspension of the Mortgage Fund past 31

August 2012, should that be required in the context of the winding up of that Fund.

[12] The orders and directions that are required to give effect to the points raised in that joint memorandum need to be expressed in more specific terms than those proposed. The orders need to take account of the fact that the continuing involvement of the two Observers, on the basis identified in my judgment of 24 July

2012, is to protect the interests of existing investors, even though the relevant fund has been replenished. Although the Mortgage Fund is to be wound up, the process of “internalisation” of the Cash Fund still requires oversight.

Orders

[13] I make the following orders:

(a) The appointment of Ms Fatupaito and Mr Duffy as Observers continues, pending further order of the Court, on the terms set out in my judgment of 12 July 2012, and clarified in my judgment of 24 July

2012. That appointment may also be terminated earlier, by agreement between Trustees Executors and Perpetual.

(b) The undertakings given to Trustees Executors and the Authority on 9

July 2012, and to the Court on 12 July 201217 continue, pending further order of the Court or earlier agreement to terminate between Trustees Executors, Perpetual and the Authority.

(c) Perpetual shall provide to Trustees Executors, within 10 working days of today’s date, proposals for the winding up of the Perpetual Mortgage Fund. Those proposals shall include the terms of any

17 Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678 at para [17].

proposed orders of the Court designed to facilitate liquidation of the

Fund.

(d) Perpetual shall provide to Trustees Executors proposals for the “internalisation” of the Cash Fund and the steps it intends to take to achieve that, within 10 working days of today’s date.

(e) Trustees Executors’ amended application for orders under s 49 of the Securities Act 1978 is adjourned until 9am on 17 August 2012. If it were proposed that any additional matters be argued at that hearing, counsel shall file a joint memorandum identifying such issues, on or before 13 August 2012, and shall request the Registrar to arrange a telephone conference for any additional timetabling directions to be made.

[14] I have not made orders in relation to all matters set out in the joint memorandum. I explain why:

(a) In relation to para 4(a) the existing orders, undertakings and terms of the Deed of Participation require Perpetual to engage with Trustees Executors or the Observers (making allowance for the different roles they play) in respect of those aspects of the Funds’ activities to which counsel referred. No further order is required. As made clear in my judgment of 24 July 2012, existing rights under the Deed of Participation and the statute remain exercisable by Trustees Executors; in addition, the Authority’s statutory powers remain unaffected by the orders made.

(b) The situation addressed in para 4(d) relates to an undertaking, rather than a Court order. I record Perpetual’s undertaking that it will not, pending further order of the Court or earlier termination of the undertaking by agreement between Trustees Executors and Perpetual, make any further loans from the Cash Management Fund.

(c) In respect of para 4(e), Perpetual will know of any changes made to confidentiality orders or to the inspection of the Court file in proceedings brought by it against the Authority. If any orders are sought to alter the status quo, a mirror application can be made to the Court in respect of this proceeding. That will enable both issues to be addressed contemporaneously and will ensure that the Registrar does not overlook the need to note changes to the relevant order in this proceeding.

(d) I did not vacate the hearing scheduled for today as the issues raised are of public importance. It seemed to me important that the outcome of discussions between Trustees Executors and Perpetual should be aired in open Court.

[15] I am told by counsel that “internalisation” of the Cash Fund is intended to restrict the allotment of units in that Fund to investors which are, broadly, trusts of which Perpetual is a trustee, or otherwise do not constitute “members of the public” for the purposes of the Securities Act 1978.18 That is the context in which the issue over whether further supervision is required is raised.

Costs

[16] I was advised that no costs incurred by Perpetual in relation to this proceeding, the proceeding it has brought against the Authority,19 or those incurred directly or indirectly in respect of issues raised about the appropriateness or legality of the Torchlight loan have been charged against either the Perpetual Cash Fund or the Perpetual Mortgage Fund.

[17] Questions of costs remain to be determined. By consent, counsel sought the following directions:

18 _{Securities Act 1978, s 3.}

19. Generally, see Perpetual Trust Ltd v Financial Markets Authority [2012] NZHC 1469. See also Perpetual Trust Ltd v Financial Markets Authority [2012] NZCA 298 (dismissing an appeal from this Court’s decision) and [2012] NZCA 308 (giving reasons for that decision).

6. In order to resolve as quickly as possible the position on the costs resulting from this proceeding; Trustees Executives Ltd’s costs in respect of the Financial Markets Authority proceedings; and the costs otherwise in relation to the issues raised directly or indirectly in respect of the Torchlight loan (including whether all such costs are to be met by Perpetual Trust Ltd and not out of the Funds), the following timetabling orders are sought in relation to costs:

(a) On or before 6 August 2012, Trustees Executors Ltd file and serve a memorandum setting out its position on payment of the costs:

(i) of this proceeding and proceeding CIV-2012-404-

2851 (between Perpetual Trust Ltd as plaintiff and the Financial Markets Authority as defendant);

(ii) incurred in its role as statutory supervisor since 26

April 2012;

(iii) the costs of WHK; and

(iv) the costs associated with the Observer role,

Including details as to the quantum of costs sought across the above categories, and including relevant supporting invoices or other documentation to date (“Trustees Executives Ltd’s costs memorandum”)

(b) On or before 10 August 2012, Perpetual Trust Ltd file and serve a memorandum in response to Trustees Executors Ltd’s costs memorandum, including any proposals by Perpetual Trust Ltd for the payment of the costs set out in paragraph 6(a) above, any reimbursement of Perpetual Trust Ltd’s costs out of the Funds, and including relevant supporting invoices or other documentation to date.

[18] I make orders in terms of those requested.

[19] In the event that no agreement is reached by the parties on costs on or before

15 August 2012, the question of costs shall be determined at the hearing scheduled for 9am on 17 August 2012. Two hours have been allocated for that hearing.

[20] I emphasise that any agreement or order in relation to such costs against Perpetual, will be payable out of its general assets, not out of either the Cash Fund or the Mortgage Fund.

[21] Any residual issues will be addressed at the same hearing. Counsel have leave to apply at short notice in that respect for a telephone conference, should

further directions be required. I will make myself available at short notice if required for that purpose.

_{[22] I thank counsel for their assistance in relation to the matters raised today.}

P R Heath J