FEDERAL COURT OF AUSTRALIA

Cook v Scott William Law trading as E. R. Henry Wherrett & Benjamin

[2003] FCA 966

CORPORATIONS –winding up of unregistered managed investment scheme – court approval of deed of settlement by liquidator

Corporations Act 2001 (Cth) s 477 (2A)

PAUL JOHN COOK V SCOTT WILLIAM LAW trading as E. R. HENRY WHERRETT & BENJAMIN

T3016 of 2003

HEEREY J

15 SEPTEMBER 2003

MELBOURNE (HEARD IN MELBOURNE (AND HOBART BY VIDEOLINK))

THE COURT ORDERS THAT:

1.         The Court approves the deed of settlement dated 9 April 2003 between Paul John Cook, Scott William Law and Nigel Rutherford Henry being Annexure B to the Affidavit of Paul John Cook sworn 12 June 2003.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     The applicant Paul John Cook (the Liquidator) was on 4 March 2002 appointed as liquidator of the unregistered managed investment scheme (the Scheme) of E.R. Henry Wherrett & Benjamin in so far as it related to certain specified mortgages (the Mortgages) over real estate in Tasmania.  On the same day it was ordered that the Scheme be wound up and that the respondents Scott William Law and Nigel Rutherford Henry transfer to the Liquidator all their right, title and interest in the Mortgages.

2                     The liquidator now seeks approval pursuant to s 477 (2A) of the Corporations Act 2001 (Cth) of a deed of settlement dated 9 April 2002 between himself on the one hand and the respondents on the other. 

3                     The Mortgages comprise three mortgages over units 20 and 21, 315 Tolosa Street, Glenorchy and two mortgages over vacant land at Tamarix Road, Primrose Sands. 

4                     On the Glenorchy property, consisting of two self contained home units, there were the following amounts of principal owing:

First mortgage:                $29,920.32

Second mortgage:                     $297,165.00

Third mortgage:                          $48,500.00

Total:                                        $375,585.32

Interest accrued to 11 March 2002:

First mortgage:              $25,279.51

Second mortgage                      $84,645.23

Third mortgage                         $14,531.07

Total:                                      $124,455.81

The units are currently occupied.  The Valuer General has valued the two units as at 1 August 1998 at $66,000 each.  There are six investors in the first mortgage, four in the second and two in the third.

5                     On the Primrose Sands property there were the following amounts owing:

First mortgage:             $60,000.00

Second mortgage:                    $40,000.00

Total:                                      $100,000.00

Interest accrued to 11 March 2002:

            First mortgage                         $16,443.25

            Second mortgage                     $10,934.38

            Total:                                       $27,377.63

The Primrose Sands property was sold on 14 February 2003 for $34,818.59 net after payment of arrears of rates and land tax.  There are two investors in the first mortgage and one in the second.

6                     The settlement involves (a) the respondents paying $200,000 to the Liquidator within 14 days and $80,000 12 months later, (b) the respondents waiving their right to share in the distribution in respect of their investment as investors in the Glenorchy first mortgage $8,812.30 and the Primrose Sands first mortgage $50,000, (c) other investors in the first mortgages on both properties to receive full repayment of principal and interest, (d) the remaining investors in the second and third mortgages to receive a dividend of approximately eighty cents in the dollar, (e) the Liquidator to release the respondents from further claims,  (f) on receipt of the first compromise payment the investors to release the Liquidator and each other from all further claims.

7                     At a meeting held on 7 May 2003 six out of seven voting investors voted to approve the proposed settlement. 

8                     The alternative courses of action open to the investors are (a) application to the Supreme Court of Tasmania for a default order under the Legal Profession Act 1993 (Tas) and (b) action against the respondents for negligence, breach of fiduciary duty or breach of contract.

9                     As to (a), the procedure involves application to the Supreme Court for an order declaring a firm or legal practitioner to be in default.  If a default order is made a fund is established in the Supreme Court and is to be applied as the Court directs in compensation for the loss of trust money or other property suffered by a client as a result of a fiduciary default.  Apparently the Supreme Court’s practice has been not to make payments of costs or interests by way of compensation.  More importantly, the funding of any such court fund will depend on the contribution from the Solicitors’ Trust.  The Trust is subject to liabilities which may exceed $8 million.  It does not yet have funds in hand.  Full payment could take ten years and would not include interest.

10                  The Solicitors’ Trust has brought proceeding M67 of 2003 against the respondents to recover from the respondents moneys which the Trust was by s 108(2B) of the Legal Profession Act obliged to pay the Liquidator by way of reimbursement of his costs and expenses.  This proceeding has now been settled.  The Trust is aware of the proposed settlement between the Liquidator and the respondents but does not wish to be heard.

11                  As to (b) it is likely that proceedings would be defended.  The respondents’ professional indemnity insurer was HIH, so no indemnity is available.  There is no material before me as to the strength or otherwise of the claims which would be made in such proceedings or the prospects of recovery from the respondents personally.  All that can be said is that there would be delay, perhaps for several years, further expenditure, and uncertainty.

12                  Having regard to the delay and uncertainty involved in alternative courses of action, and the facts that the settlement returns substantial amounts and avoids the uncertainty as to priorities between investors, I am satisfied that settlement is reasonable and should be approved.  There will be an order that the Court approve the deed of settlement dated 9 April 2003 between Paul John Cook, Scott William Law and Nigel Rutherford Henry being annexure “B” to the affidavit of Paul John Cook sworn 20 June 2003.

Associate:

Dated: