Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 2427 (19 September 2012)

Last Updated: 24 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-3569 [2012] NZHC 2427

BETWEEN TRUSTEES EXECUTORS LTD Plaintiff

AND PERPETUAL TRUST LTD Defendant

Hearing: 19 September 2012

Counsel: A L Holloway for Trustees Executors Ltd

S E Fitzgerald and J Edwards for Perpetual Trust Ltd

Judgment: 19 September 2012

_{(ORAL) JUDGMENT (NO. 4) OF HEATH J}

Solicitors:

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

J R Billington QC, PO Box 4338, 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 [19 September

2012]

The application

[1] Trustees Executors Ltd is the statutory supervisor of two group investment funds. The two funds are the Perpetual Mortgage Fund (the Mortgage Fund) and the Perpetual Cash Management Fund (the Cash Fund). Each is a “participatory security”, as defined by the Securities Act 1978 (the Act). Perpetual Trust Ltd is the trustee of each Fund and the issuer of offer documents to the public.

[2] Trustees Executors applies for orders under s 49 of the Act. That provision confers jurisdiction on the Court to make orders to protect the interests of members of the public. The proposed orders (that are supported by Perpetual) are designed to amend the Deed of Trust by which the Funds were established on 14 October 1991, to amend the Declaration of Establishment of the Cash Fund of 2 October 1992 and to terminate under the amended terms of the Deed, the Mortgage Fund.

[3] If the application were successful, it would also be necessary to determine questions of costs, and to establish a mechanism both to enable the court to monitor compliance with the orders made and to determine when existing orders that will continue, in the meantime, should be terminated.

Background

[4] The background to the application is well-known and has been recorded in earlier decisions in the Court.[1] I provide a brief summary only, by way of context.

[5] In February 2012, a decision was made by Perpetual, as trustee of the Cash Fund, to loan a sum of $18 million to Torchlight Fund No 1 LP. That advance was made on 20 February 2012. Further advances followed which brought the total

_{amount loaned to $28.22 million.}

[6] Trustees Executors became aware of the transaction through Perpetual’s standard reporting to it as statutory supervisor. It commenced an investigation of the circumstances in which the loan was made. In doing so, Trustees Executors notified, and worked in conjunction with, the Financial Markets Authority (the Authority).

[7] Perpetual filed proceedings against the Authority seeking judicial review of various steps taken. Confidentiality orders were initially made in respect of that proceeding. Those orders were subsequently discharged. To the extent that information contained in an earlier judgment of this Court could be published,[2] but restrictions on search, copy or inspection of the relevant Court file were maintained.

[8] On 9 July 2012, Perpetual gave various undertakings to Trustees Executors, including one not to allot securities in the Funds except with the statutory supervisor’s prior consent. They reflected undertakings previously given to the Authority. Those undertakings were also given to the Court on 12 July 2012 and remain in force pending further order of the Court.

[9] On 11 July 2012, following a joint application made by Trustees Executors and Perpetual, the Court made an order restraining Perpetual from making any redemption payments from the Mortgage Fund. The market was notified of that Fund being placed in moratorium. On 12 July 2012, the moratorium was extended until 28 September 2012.

[10] On 12 July 2012, Ms Fatupaito and Mr Duffy were appointed as independent “Observers” of the Fund, on terms outlined in earlier judgments.[3] The loan to Torchlight was fully repaid on 24 July 2012.

[11] On 11 September 2012, the Mortgage Fund had received 437 redemption requests since it was placed into moratorium. They represented $18.3 million or

32.6% of the units on issue. The Mortgage Fund is currently unable to pay all of the

_{redemption requests.}

[12] Perpetual maintains its position that the loan made to Torchlight was not in breach of the Trust Deed, Declaration of Establishment or any of the offer documents. I make it clear that the Court has not ruled on whether Perpetual’s position is or is not correct. It is inappropriate for the Court to do so at this time.

Section 49: Jurisdiction

[13] While Perpetual consents to the proposed orders, I must first consider the scope of the Court’s jurisdiction under s 49 and whether it allows me to make the orders sought. I have received submissions on that issue from counsel for Trustees Executors. Perpetual does not disagree with the submissions on jurisdiction.

[14] Section 49(1) and (3) of the Act provide:

49 Trustees and statutory supervisors may apply to Court for orders relating to securities

(1) Where at any time after due inquiry, a trustee or statutory supervisor of securities is of the opinion that—

(a) there is a significant risk that the interests of the security holders will be materially prejudiced; or

(b) The provisions of any deed relating to the securities are no longer adequate to give proper protection to the security holders—

the trustee or statutory supervisor may, in its absolute discretion, apply to the

Court for an order or orders under this section.

...

(3) On an application by a trustee or statutory supervisor under this section, the Court may, after giving the issuer and such other persons as it thinks fit an opportunity of being heard, by order—

(a) Amend the provisions of any deed relating to the securities: (b) Impose such restrictions on the activities of the issuer,

including restrictions on advertising, as the Court thinks

necessary for the protection of the interests of the security holders:

(c) Direct the issuer or the trustee or statutory supervisor to convene a meeting of the security holders for the purpose of having placed before them by the trustee or statutory supervisor such information relating to their interests, and

such proposals for the protection of their interests, as the Court or the trustee or statutory supervisor considers necessary or appropriate, and for the purpose of obtaining their opinions or directions in relation thereto; and the Court may give such directions in relation to the conduct of the meeting as the Court thinks fit:

(d) Stay all civil actions or civil proceedings before any Court by or against the issuer or any guarantor of the securities:

(e) Restrain the payment of any money by the issuer or any guarantor of the securities to the security holders or any class of such holders:

(f) Appoint a receiver or manager of such of the property as constitutes the security (if any) for the securities:

(fa) remove a person as manager and appoint another person as manager (with any powers that the court orders):]

(g) Give such other directions as the Court considers necessary to protect the interests of the security holders, other holders of securities of the issuer, any guarantor of the securities, or the public.

In making any such order the Court shall have regard to the interests of all creditors of the issuer.

....

[15] Trustees Executors applied under s 49 because it had formed the opinion that the transactions in issue had given rise to a significant risk that interests of investors in the Funds would be materially prejudiced[4] and that the provisions of various deeds relating to the Funds were no longer adequate to give proper protection to the investors.[5]

[16] Trustees Executors remains of the opinion that the interests of investors in the Mortgage Fund will be materially prejudiced as a consequence of outstanding redemption requests and the continuing need for a moratorium to remain in place, to prevent redemptions from being made. Because Perpetual continues to assert that the loan to Torchlight was not in breach of the Trust Deed, Declaration of Establishment and offer documents and its intention is to “internalise” the Cash

_{Fund, Trustees Executors takes the view that the Deed of Trust and Declaration of}

Establishment of the Cash Fund are no longer adequate to give proper protection to the investors.

[17] Trustees Executors also agree with Perpetual’s advice to it that investment in

mortgages from the Cash Fund should no longer be permitted.

[18] Mr Holloway, for Trustees Executors, submits that the statutory supervisor was entitled to form opinions of a significant risk that the interests of security holders would be materially prejudiced and that the provisions of any deed relating to the securities were no longer adequate to give proper protection to them. In terms of s 49(1), formation of those views provided Trustees Executors with the ability to apply to the Court to invoke s 49.

[19] I agree with that submission. There was an ample foundation for the statutory supervisor’s view. It flowed from the nature of the Torchlight loan, the circumstances in which it was made and Perpetual’s denial that the loan was made in breach of the Deeds and offer documents.

[20] Mr Holloway also submits that s 49(3)(a) and (g) of the Act, gives the Court jurisdiction to amend provisions of any deed relating to the securities, and to give such other directions as the Court thinks necessary to protect the interests of those security holders. Again, I agree. The wording of the sub-sections in issue makes that clear.

Section 49: Discretion

[21] The next question is whether, as a matter of discretion, the orders sought should be made.

[22] Trustees Executors contends that the orders are necessary because:

(a) First, the Mortgage Fund is unable to meet existing redemption requests. Realistically, it submits, the Mortgage Fund is not a going concern and needs to be wound up. The Mortgage Fund is illiquid

and its assets may be insufficient to redeem all investments at a $1 unit price. There is a potential for inequality as between different investors.

(b) Second, the termination mechanism under the Trust Deed is cumbersome. It relies on Perpetual remaining solvent and being able to fulfil its role as trustee without conflict. Given Perpetual’s widely publicised decision to wind-up the Mortgage Fund, any further delay and expense would have the potential to prejudice unitholders.

(c) Third, Trustees Executors is concerned that the position taken by Perpetual that it has complied with relevant documents and statutes gives rise to a risk that similar lending could occur again, unless amendments were made to the necessary documents. Allied to that is the view that internalisation of the Cash Fund would mean that its own investors were effectively “controlled” by Perpetual. In short, Trustees Executors wishes to protect investors by ensuring that the scope of investments that could be made by Perpetual in respect of the Cash Fund is more narrowly expressed.

(d) Fourth, it is contended that making the proposed “other direction”, under s 49(3)(g), to wind-up the Mortgage Fund (consequent upon proposed amendments to the Trust Deed) is reasonably “necessary” to realise the protection for unitholders that is intended by allowing for a more efficient winding-up mechanism.

[23] In my view, those reasons justify making the proposed orders. In particular, I consider that protections of the type sought are required to remove (or to at least significantly minimise) any prospect of further loans of the Torchlight variety being entered into in a manner that could cause serious risk to investors. Whether Perpetual is right or wrong in its contention that the Torchlight loan did not infringe any statutory or other requirements by which it was bound, the fact that Perpetual maintains that a loan of that type is permissible is sufficient for me to exercise my discretion to avoid any similar risk arising in the future.

[24] The proposed amendments to the Deeds relating to the securities and the order terminating the Mortgage Fund are necessary to provide a more efficient and effective means of discontinuing the Mortgage Fund, in light of its illiquidity. The need for a fair and orderly procedure which treats all investors equitably, to wind-up the Mortgage Fund, is required.

Orders

[25] I am prepared to make orders in terms of the application. While I summarise those orders now, I authorise the Registrar to seal them in the form set out in the draft order tendered by counsel.

[26] The draft orders will be available for search and inspection. That will avoid the need for me to set out fully in this judgment the precise terms of the orders made.

[27] I order:

(a) The Deed of Trust of 14 October 1991 under which the two Funds were established shall be amended as shown in Appendix A to the draft order. That Appendix shows deleted text struck out and added text underlined. Among other things, those amendments allow the Court to order termination of a Fund and sets out the effect of such an order.

(b) The Declaration of Establishment dated 2 October 1992 for the Cash Fund shall be amended as shown in Appendix B to the draft order with deleted text struck out and added text underlined. The effect of these amendments are to narrow the definition of the term “authorised investments”.

(c) With effect from 19 September 2012 (that is, today) Perpetual

Mortgage Fund shall be terminated in accordance with the Deed of

_{Trust of 14 October 1991 as amended by the order made earlier.}[6]

(d) Perpetual shall pay all of Trustees Executors’ reasonable costs incurred in its role as statutory supervisor in relation to the Torchlight loan and/or these proceedings. In the event that there is any dispute as to quantum, leave is reserved for that issue to be referred back to me for decision.

(e) Perpetual shall pay all of the costs associated with these proceedings, including terminating the Perpetual Mortgage Fund, from its own assets and not from the assets of either the Mortgage Fund or the Cash Management Fund.

[28] A telephone conference shall be allocated by the Registrar on the first available date after 19 October 2012. The purpose of that telephone conference will be to report back to the Court on the orders made, to address the discontinuance of this proceeding and to consider termination of Perpetual’s undertakings to the Court given on 12 July 2012. The parties shall file a joint memorandum (or individual memoranda) in relation to those matters, two working days before the telephone conference.

[29] Leave is reserved for either party to apply at short notice in the meantime. [30] For the avoidance of doubt, I confirm that

(a) the written undertakings to the Authority, Trustees Executors and the Court remain extant and will continue pending further order of the Court and

(b) the Mortgage Fund moratorium shall continue, pending further order of the Court to the extent that the order is not inconsistent with the terms of the amended provisions of the Trust Deed with regard to termination. Leave is reserved to either party to seek clarification on that issue should any dispute arise as to interpretation.

(c) the role of the “Observers” continues pending further order of the

Court. Their role is as stated in earlier judgments.[7]

(d) the undertaking given to the Court on 3 August 2012, that Perpetual would not make loans out of the Cash Fund, continues in force pending further order of the Court.

(e) the order that the Court file not be searched, copied or inspected without leave of the Court, on notice to both parties, remains extant.

[31] I thank counsel for the responsible and efficient way in which the issues arising in this proceeding have been resolved.

_{P R Heath J}

---

[1] See Perpetual Trust Ltd v Financial Markets Authority [2012] NZHC 1469, Perpetual Trust Ltd v Financial Markets Authority [2012] NZCA 298, Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678, [2012] NZHC 1817 and [2012] NZHC 1937.

[2] Perpetual Trust Ltd v Financial Markets Authority [2012] NZHC 1469, Perpetual Trust Ltd v

_{Financial Markets Authority [2012] NZCA 298.}

[3] Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678 at paras [19] and [21], [2012] NZHC 1817 at paras [4]–[8].

[4] _{Securities Act 1978, s 49(1)(a).}

[5] Ibid, s 49(1)(b).

[6] See para [27](a) above.

[7] Trustees Executors Ltd v Perpetual Trust Ltd [2012] NZHC 1678 at paras [19] and [21], [2012] NZHC 1817 at paras [4]–[8].