FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Letten (No 8)

[2010] FCA 1458

THE COURT ORDERS THAT:

NOTE: For the purpose of this order, “Receivers” has the meaning ascribed to it in the Orders of Justice Gordon made in this proceeding on 25 February 2010, 4 March 2010 and 30 July 2010.

THE COURT ORDERS THAT:

1.    The Receivers are justified in settling the contracts of sale entered into by the Receivers on 16 November 2010 in relation to the Reef House Properties, exhibited at exhibit DJT-87 to the Twenty First affidavit of Damian John Templeton sworn 30 November 2010.

2.    Until further order, Confidential Exhibit DJT-83 to the Twenty First Affidavit of Damian John Templeton sworn 30 November 2010 and any transcript which was made of the hearing which took place in this proceeding at 10:15 am on Wednesday 8 December 2010 be placed in a sealed envelope and marked “Confidential: No access without leave of a judge of the Court”.

3.    Until further order, pursuant to section 50 of the Federal Court of Australia Act 1976, there be no publication of Confidential Exhibit DJT-83 to the Twentieth Affidavit of Damian John Templeton sworn 30 November 2010 or any transcript which was made of the hearing which took place in this proceeding at 10:15am on Wednesday 8 December 2010 other than to ASIC and its legal representatives, the legal representatives of the defendants, legal representatives of the non-parties heard on the application, judges of the Court, judges’ associates and executive assistants and the Receivers and their legal representatives and staff.

4.    The proceedings otherwise be adjourned to a date to be fixed.

5.    Costs reserved.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    This is the eighth judgment in a series about unregistered managed investment schemes in which Mr Mark Ronald Letten (Mr Letten), the first defendant, has been involved. The history of the proceedings was most recently summarised in Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231 at [7] to [12]. I adopt the same terms and abbreviations in these reasons for judgment.

2    This judgment concerns Scheme 6 – The Reef House Resort. It was described in Australian Securities and Investments Commission v Letten (No 4) [2010] FCA 571 at [14] and [15] in the following terms:

14    The Disclosure Report identifies the property as the Sebel Reef House Resort, the Esplanade, Palm Cove, Queensland (the Resort) with the Resort’s operations being managed by Mirvac Hotels. The whole of the real property is mortgaged to Westpac together with a fixed and floating charge over the assets of Firbank Arch Pty Ltd (receiver and manager appointed) (Firbank). Firbank is the seventh defendant and the trustee of the Reef House Resort Unit Trust (the Trust).

15    The Disclosure Report also records that:

1.    LGH Finance Pty Ltd (the 11th defendant) holds 66% of the units in the Trust on behalf of Glenline Pty Ltd (the eighth defendant) which in turn holds the units as joint venture manager for the scheme;

2.    the balance of the units in the Trust (34%) are held by Tercar Pty Ltd (Tercar) and that Mr Thomas Avelsgaard is a director and shareholder in Tercar;

3.    in addition to the Westpac mortgage, the scheme owes an amount to LGH Administration Pty Ltd (LGHA), the 10th defendant, of approximately $5.0 million, and to Tercar of $1.37 million.

A flow chart included by the Receivers in the Disclosure Report summarising the arrangements is attached as Annexure B to these reasons for decision.

A diagram setting out the structure of the Reef House Resort Scheme is Annexure A to these reasons for judgment. A more extensive summary of the Reef House Resort was provided in Letten (No 7) at [155] – [163]. I incorporate that summary into these reasons for judgment.

3    On 25 February 2010, the following Orders were made affecting the entities and properties identified in the summary (the Appointment Order):

1.    pursuant to s 1323(1)(h)(ii) of the Corporations Act 2001 (Cth) (the Corporations Act), the Receivers were appointed as receivers and managers to the property of Firbank Arch and Glenline other than property that also constituted property of Scheme 6 – The Reef House Resort;

2.    the Reef House Resort Scheme was wound up pursuant to s 601EE(1) of the Corporations Act; and

3.    the Receivers were appointed as receivers and managers of the property of the Reef House Resort Scheme.

4    On 4 June 2010, the Appointment Order was varied with respect to the Reef House Resort, Firbank Arch and Glenline so that the Receivers had the power to sell the Reef House Properties. The Orders were as follows:

1.    Paragraphs 3 and 8(c) of the [Appointment Order] be varied with respect to the Reef House Resort and the Seventh and Eighth Defendants (the Reef House Parties) so that the Receivers shall have the power to sell:

(a)    the land, buildings and fixtures, in respect of the Sebel Reef House Resort, the Esplanade, Palm Cove, Queensland;

(b)    the Sebel Reef House Resort business including:

(i)    hotel operations;

(ii)    food and beverage operations;

(iii)    conference operations;

(iv)    associated goodwill;

(v)    debtors; and

(vi)    all ancillary property and plant and equipment used in the Sebel Reef House Resort operations; and

(c)    all other rights, plant and equipment, vehicles and any other thing owned by the Reef House Parties,

(each a Reef House Property and collectively the Reef House Properties),

save that the Receivers shall not enter into any contract of sale in respect of the Reef House Properties which is not conditional upon approval of the Court.

2.    In selling the Reef House Properties the Receivers, consistent with their duties as receivers and managers:

(a)    may sell each Reef House Property together with or separately from the other Reef House Properties;

(b)    shall obtain proposals from at least three real estate agents or other agent(s) in relation to the sale of the Reef House Properties;

(c)    shall select and appoint that real estate or other agent(s) to sell the Reef House Properties or any of them which the Receivers believe, on the basis of the proposals submitted, to be the most appropriate in all of the circumstances (and as consented to by the Secured Lender), provided that the sales commission payable to the selling agent shall not exceed 1.5% (plus GST), exclusive of disbursements, of the achieved sale price;

(d)    shall conduct a marketing campaign for the Reef House Properties or any of them for a period of not less than four weeks;

(e)    may sell the Reef House Properties or any of them either by auction, tender or expressions of interest as agreed with the appointed agent(s);

(f)    may undertake any capital works which the Receivers consider to be necessary or appropriate in order to sell any of the Reef House Properties; and

(g)    shall, upon commencement of the sale process, write to all investors in the Reef House Resort (either by email where email addresses of the investors are known or by mail in all other cases) and Tercar Pty Ltd, setting out:

(i)    the identity of the appointed agent(s); and

(ii)    the process (in general terms) which will be adopted by the Receivers in selling the Reef House Properties.

3.    Subject to paragraph 2(c) above, the Receivers are justified in paying all agent’s reasonable fees and other reasonable expenses associated with the sale of the Reef House Properties.

4.    Notwithstanding paragraphs 3 and 5 of the [Appointment Order], and subject to paragraphs 20 and 21 of the [Appointment Order], the Receivers are justified in:

(a)    paying the proceeds of the realisation of the Reef House Properties to the relevant Secured Lender, in reduction or extinguishment of the secured liabilities to the Secured Lender (without prejudice to the relevant defendants’ rights to dispute any of the Secured Lender’s claim), after deduction of the reasonable selling expenses of the Receivers and the reasonable fees and expenses of the Receivers in respect of getting in, preserving and realising the Reef House Properties (as agreed with the Secured Lender);

(b)    paying the remaining proceeds of the realisation of the Reef House Properties (after payment of any Secured Lender), including any amounts deducted from the amount paid to any Secured Lender in accordance with paragraph 4(a) above, into the bank account established by the Receivers in relation to the Reef House Resort.

5    On 16 November 2010, the Receivers on behalf of Firbank Arch, entered into a business sale agreement and contract of sale of residential lots in a community titles scheme in respect of the Reef House Properties (the Agreements). A copy of the Agreements was provided to the Court.

6    On 30 November 2010, the Receivers filed an interlocutory process which, pursuant to ss 1323(5) and 601EE of the Corporations Act, O 26 r 4 of the Federal Court Rules and paragraph 29 of the Appointment Order, sought approval of the Receivers entering into the Agreements. The interlocutory process was supported by an affidavit sworn by Damian John Templeton on 30 November 2010 (the Twenty First Templeton Affidavit).

7    On 8 December 2010, the interlocutory process came on for hearing. In addition to Counsel for the Receivers, a number of other parties appeared including Mr Willis for Thomas and Caryn Avelsgaard, Tercar Pty Ltd and T.G Avelsgaard & Associates Pty Ltd (collectively, the Avelsgaard Interests), Mr Tsiavis for ASIC and Mr Waller SC and Mr Hibble for Mr Letten. ASIC and Mr Letten did not oppose the orders sought by the Receivers. The Avelsgaard Interests sought an adjournment of the hearing of the application for two weeks to enable them to consider the application and to obtain independent expert advice “as to whether there [was] any realistic prospect of a different price or different [sale] process, producing a different result”. On 15 December 2010, the Avelsgaard Interests informed the Court that although they were disappointed with the sale price negotiated by the Receivers and reserved their rights in all capacities, they did not oppose the Receivers’ application to seek the Court’s approval for the sale of the Reef House Properties to proceed.

8    On 17 December 2010, I made orders that the Receivers were justified in settling the Agreements. These reasons for judgment record why those orders were made.

Applicable Principles

9    The applicable principles were not in dispute.

10    As is apparent from the summary (see [2] above) and Annexure A to these reasons for judgment, the Reef House Properties are not exclusively property of the Reef House Resort Scheme. As a result, the power to authorise the sale of the Reef House Properties is derived from various sources – s 601EE of the Corporations Act to the extent that the Reef House Properties are property of the Scheme and otherwise the Court’s inherent power to authorise the sale consequent upon the appointment of the Receivers by the Court: Letten (No 7) at [269] to [271] (see also AIDC v Co-Operative Farmers and Graziers Direct Meat Supply Ltd [1978] VR 633 at 643).

11    In addition, the Receivers submitted (and I accept) that although the Court has a broad unfettered discretion (AIDC at 647-8), the interests of all creditors and other stakeholders were relevant to the exercise of the power of sale and had to be given due and proper regard. One way of approaching the current issue (but not the sole way) was to enquire whether the Receivers had discharged the duty imposed on them by s 420A of the Corporations Act. That section provides:

In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:

(a)    if, when it is sold, it has a market value – not less than the market value; or

(b)    otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

12    In ascertaining whether a controller has taken all reasonable care in the sale of a property pursuant to s 420A of the Corporations Act, the section necessitates an assessment or enquiry into the process adopted by the Receivers in selling the property: Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54 at [442]–[443] and Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 at [126]. The actions of the controller in selling the property (in this case the Receivers) is of course a human endeavour which requires “the exercise of judgment, taking into account all the relevant variables and circumstances of the particular case”: Florgale at [442].

Application of principles to the facts

13    The sale process undertaken by the Receivers was set out at length in the Twenty First Templeton Affidavit. The process adopted was in accordance with the Orders made by the Court on 4 June 2010 (see [4] above). The Receivers engaged experienced real estate agents to conduct the sale process and, after consultation with relevant stakeholders, accepted the agent’s advice as to how to best market and sell the Reef House Properties.

14    The ultimate sale price was disappointing. It was below the estimated market value of the Reef House Properties which was obtained in March 2010. However, in the present case, the sale at a price below the estimated market value does not itself mean that the Receivers’ duty to take all reasonable care has not been satisfied: Florgale at [410] and Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 256 ALR 104. As noted earlier, the sale process was consistent with the 4 June Orders. The Reef House Properties were advertised for sale on the open market resulting in arm’s length dealings between the Receivers and potential purchasers.

15    There were difficulties with the Reef House Properties. They are located in a tourism area which has suffered as a result of the global financial crisis. In addition, there has been a failure to undertake necessary maintenance of the properties in recent years. As a result, the Reef House Properties need immediate building works to be carried out including:

1.    “various structural and fabric repairs required to a number of areas including (without limitation) where water seepage through walls/slabs is occurring”;

2.    “the Central Facilities building … require[d] structural and fabric repairs … where termite damage and decay [had] occurred;

3.    various mechanical, electrical, fire and building compliance works estimated to cost approximately $700,000;

4.    the need to upgrade certain rooms with the works estimated to cost $315,000. Approximately 20 rooms were not used because they were not to the required standard.

16    The state of the buildings also contributed to the fact that the Reef House Properties were not generating sufficient funds to pay the debt of the secured lender or cover the receivership costs. I accept that although the sale price achieved will not be sufficient to discharge the whole of the secured debt, the sale price was a price not less than the market value.

17    Notwithstanding the disappointing result, I consider that taking into account all the relevant variables and circumstances of this particular case, the Receivers are justified in settling the Agreements they entered into on 16 November 2010 in relation to the Reef House Properties.

Associate:

Dated:    22 December 2010

Annexure A

SCHEDULE OF PARTIES

LGH HOLDINGS LIMITED (ACN 007 191 943)

Second Defendant

211 WELLINGTON ROAD PTY LTD (ACN 092 663 860)

Third Defendant

BLUEMIST HOLDINGS PTY LTD (ACN 097 306 922)

Fourth Defendant

DELLWOOD HOLDINGS PTY LTD (ACN 098 505 803)

Fifth Defendant

ENMORE ENTERPRISES PTY LTD (ACN 082 158 487)

Sixth Defendant

FIRBANK ARCH PTY LTD (ACN 059 464 381)

Seventh Defendant

GLENLINE PTY LTD (ACN 098 532 364)

Eighth Defendant

GERLING HOLDINGS PTY LTD (ACN 091 726 457)

Ninth Defendant

LGH ADMINISTRATION PTY LTD (ACN 007 165 069)

Tenth Defendant

LGH FINANCE PTY LTD (ACN 078 859 248)

Eleventh Defendant

LOW HEAD VILLAGE PTY LTD (ACN 091 731 958)

Twelfth Defendant

NICHOLSON STREET PTY LTD (ACN 069 104 089)

Thirteenth Defendant

HOLLOWAY CREST PTY LTD (ACN 091 731 967)

Fourteenth Defendant

ROSEBERY ENTERPRISES PTY LTD (ACN 091 826 229)

Fifteenth Defendant

SIMMS INVESTMENTS PTY LTD (ACN 093 504 511)

Sixteenth Defendant

SY21 RETAIL PTY LTD (ACN 107 874 564)

Seventeenth Defendant

THE GLEN CENTRE HAWTHORN PTY LTD (ACN 089 906 543)

Eighteenth Defendant

CASTELLO HOLDINGS PTY LTD (ACN 088 204 175)

Nineteenth Defendant

TWINVIEW NOMINEES PTY LTD (ACN 097 307 278)

Twentieth Defendant

YARRA VALLEY GOLF PTY LTD (ACN 066 632 479)

Twenty-First Defendant

ADINA RISE PTY LTD (ACN 083 181 122)

Twenty-Second Defendant

ALBRIGHT INVESTMENTS PTY LTD (ACN 088 204 166)

Twenty-Third Defendant

ASHFIELD RISE PTY LTD (ACN 093 504 806)

Twenty-Fourth Defendant

BRADFIELD CORPORATION PTY LTD (ACN 088 204 371)

Twenty-Fifth Defendant

COPELAND ENTERPRISES PTY LTD (ACN 093 504 824)

Twenty-Sixth Defendant

DEVLIN WAY PTY LTD (ACN 088 264 813)

Twenty-Seventh Defendant

FIRST HAZELWOOD PTY LTD (ACN 093 505 303)

Twenty-Eighth Defendant

GLENBELLE PTY LTD (ACN 097 306 646)

Twenty-Ninth Defendant

GLENVALE WAY PTY LTD (ACN 088 287 021)

Thirtieth Defendant

GREENVIEW LANE PTY LTD (ACN 093 505 312)

Thirty-First Defendant

HALLMARK CORPORATION PTY LTD (ACN 093 505 312)

Thirty-Second Defendant

MOORLEIGH HOLDINGS PTY LTD (ACN 088 287 058)

Thirty-Third Defendant

NORTON RIDGE PTY LTD (ACN 078 821 066)

Thirty-Fourth Defendant

RALEIGH GLEN PTY LTD (ACN 088 204 380)

Thirty-Fifth Defendant

REDCREST HOLDINGS PTY LTD (ACN 100 836 486)

Thirty-Sixth Defendant

SURI CORPORATION PTY LTD (ACN 093 505 321)

Thirty-Seventh Defendant

SUTTON RISE PTY LTD (ACN 088 204 399)

Thirty-Eighth Defendant

THE VIRTUAL MLMER PTY LTD (ACN 065 374 665)

Thirty-Ninth Defendant

TIVENDALE PTY LTD (ACN 093 505 349)

Fortieth Defendant

TULLOCH DOWNES PTY LTD (ACN 078 895 048)

Forty-First Defendant

MAINKING PTY LTD (ACN 100 790 485)

Forty-Second Defendant

TOPGLEN PTY LTD (ACN 096 857 564)

Forty-Third Defendant

ALLBLUE PTY LTD (ACN 100 836 388)

Forty-Fourth Defendant

ARANBAY PTY LTD (ACN 098 532 319)

Forty-Fifth Defendant

MELVILLE CORPORATION PTY LTD (ACN 091 911 045)

Forty-Sixth Defendant

TILLEY LANE PTY LTD (ACN 086 136 361)

Forty-Seventh Defendant

HPSC PTY LTD (ACN 059 930 139

Forty-Eighth Defendant

JENSDALE PTY LTD (ACN 098 367 974)

Forty-Ninth Defendant

OAKDALE RISE PTY LTD (ACN 091 598 908)

Fiftieth Defendant

MAYWOOD INVESTMENTS PTY LTD (ACN 091 599 218)

Fifty-First Defendant

ACETRAIN PTY LTD (ACN 100 820 282)

Fifty-Second Defendant

SAGE BAY PTY LTD (ACN 097 306 628)

Fifty-Third Defendant

TOBAGO HOLDINGS PTY LTD (ACN 093 504 520)

Fifty-Fourth Defendant