FEDERAL COURT OF AUSTRALIA

Willmott Forests Limited, in the matter of Willmott Forests Limited (Receivers and Managers appointed) (in liq) [2011] FCA 1517

IN THE MATTER OF WILLMOTT FORESTS LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 063 26 650) IN ITS PERSONAL CAPACITY AND IN ITS CAPACITY AS RESPONSIBLE ENTITY OF EACH OF THE MANAGED INVESTMENTS SCHEMES LISTED IN SCHEDULE 1 AND IN ITS CAPACITY AS MANAGER OF THE UNREGISTERED MANAGED INVESTMENT SCHEME LISTED IN SCHEDULES 2 AND 3

THE COURT ORDERS THAT:

1.    The Second and Third Plaintiffs are justified in procuring the First Plaintiff to amend the constitutions of the managed investment schemes listed in Schedule 1, pursuant to section 601GC(1)(b) of the Corporations Act by executing the proposed deeds in the form annexed to Schedule 1 of this order, on the basis that such amendments will not adversely affect members’ rights.

2.    The Second and Third Plaintiffs are justified in procuring the First Plaintiff to amend the investment deeds and constitutions of the Professional Investor Schemes listed in Schedule 2 by executing the proposed deeds in the form annexed to Schedule 2 of this order, on the basis that such amendments will not adversely affect members’ rights.

3.    The Second and Third Plaintiffs are justified in disclaiming the Project Documents (referred to in paragraph 4(a) of the affidavit of Craig David Crosbie sworn 11 May 2011 (Affidavit)) of the Contractual and Partnership Schemes listed in Schedule 3 as onerous, pursuant to section 568(1) of the Corporations Act, on the condition that the Plaintiffs will seek the Court’s consent before disclaiming the Project Documents.

4.    Exhibits CDC-32 and CDC-33 to the Affidavit be kept confidential.

5.    Costs be 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.

IN THE MATTER OF WILLMOTT FORESTS LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 063 26 650) IN ITS PERSONAL CAPACITY AND IN ITS CAPACITY AS RESPONSIBLE ENTITY OF EACH OF THE MANAGED INVESTMENTS SCHEMES LISTED IN SCHEDULE 1 AND IN ITS CAPACITY AS MANAGER OF THE UNREGISTERED MANAGED INVESTMENT SCHEME LISTED IN SCHEDULES 2 AND 3

REASONS FOR JUDGMENT

INTRODUCTION

1    The plaintiffs, Willmott Forests Ltd (receivers and managers appointed) (in liquidation) (“WFL”) and its liquidators (Messrs Crosbie and Carson), by originating process dated 11 May 2011, apply for directions under s 511 of the Corporations Act 2001 (Cth) (“the Act”) and the inherent jurisdiction of the court. On 29 June 2011, I made the following directions:

1.    The Second and Third Plaintiffs are justified in procuring the First Plaintiff to amend the constitutions of the managed investment schemes listed in Schedule 1, pursuant to section 601GC(1)(b) of the Corporations Act by executing the proposed deeds in the form annexed to Schedule 1 of this order, on the basis that such amendments will not adversely affect members’ rights.

2.    The Second and Third Plaintiffs are justified in procuring the First Plaintiff to amend the investment deeds and constitutions of the Professional Investor Schemes listed in Schedule 2 by executing the proposed deeds in the form annexed to Schedule 2 of this order, on the basis that such amendments will not adversely affect members’ rights.

3.    The Second and Third Plaintiffs are justified in disclaiming the Project Documents (referred to in paragraph 4(a) of the affidavit of Craig David Crosbie sworn 11 May 2011 (Affidavit)) of the Contractual and Partnership Schemes listed in Schedule 3 as onerous, pursuant to section 568(1) of the Corporations Act, on the condition that the Plaintiffs will seek the Court’s consent before disclaiming the Project Documents.

4.    Exhibits CDC-32 and CDC-33 to the Affidavit be kept confidential.

5.    Costs be reserved.

2    WFL made the application in its capacity as responsible entity of eight registered managed investment schemes, six unregistered “Professional Investor Schemes”, 11 unregistered contractual investment schemes and five unregistered partnership managed investment schemes.

3    In support of the application, the plaintiffs relied upon the affidavit of Bryan Webster affirmed 17 June 2011 and the affidavits of Craig David Crosbie sworn 25 November 2010, 4 February 2011, 11 May 2011 and 22 June 2011.

4    The application was supported by the receivers of certain of the Willmott assets.

5    The liquidators and receivers broadly agreed on the factual context of the application set out under “Background” below, although the form of directions advanced by each differed in its formulation of the “quid pro quo” investors (“growers”) may receive for the termination or disclaimer of their rights.

6    A degree of urgency attended the application as, in the liquidators’ submission, the directions were required to facilitate the marketing of the land and leases unencumbered by the growers’ project documents (leases, licences and management and forestry agreements) and the funding urgently required for maintenance and the discharge of statutory requirements, with associated risks of fire and wastage, was lacking

7    The application was opposed by the Willmott Growers Group Inc (“WGG”), which was, by consent, granted leave to intervene as a contradictor. WGG had proposed a replacement responsible entity for certain of the schemes and had twice issued a notice of meeting to resolve upon the replacement of the responsible entity and associated matters.

8    WGG relied on the following affidavits:

(a)    the affidavits of Mark Albert Bland affirmed 3 June 2011, 20 June 2011, 22 June 2011 and 24 June 2011;

(b)    the affidavits of Paul Challis sworn 20 June 2011 and 27 June 2011; and

(c)    the affidavit of Ian Bond sworn 21 June 2011;

9    WGG also referred to or sought to rely on the affidavit of Gordon Michael Wise sworn 20 June 2011. Mr Wise, although not granted leave to intervene, likewise opposed the plaintiffs’ application for directions:

10    The eight registered managed investment schemes the subject of the application are:

(a)    Willmott Forests 1989 - 1991 Project (ARSN 092 516 651)

(b)    Willmott Forests 1995 - 1999 Project (ARSN 089 598 612)

(c)    Willmott Forests Project (ARSN 089 379 975)

(d)    BioForest Dual Income Project 2006 (ARSN 119 153 623)

(e)    BioForest Sustainable Timber and Biofuel Project 2007 (ARSN 124 135 535)

(f)    Willmott Forests Premium Forestry Blend Project (ARSN 131 549 589)

(g)    Willmott Forests Premium Forestry Blend Project - 2010 Project (ARSN 142 722 585)

(h)    Willmott Forests Premium Timberland Fund No. 1 (ARSN 136 768 520).

11    The six unregistered “Professional Investor Schemes” are:

(a)    Willmott Forests - Professional Investor - 2001 Project - 2001 Information Memorandum

(b)    Willmott Forests - Professional Investor - 2002 Project - 2002 Information Memorandum

(c)    Willmott Forests - Professional Investor - 2003 Project - 2003 Information Memorandum (2003) and 2003 Information Memorandum (2004)

(d)    Willmott Forests - Professional Investor - 2004 Project - 2004 Information Memorandum and 2004 Information Memorandum (2005)

(e)    2005 BioForest Wholesale Project No. 2 - 2005 Wholesale Forestry Memorandum (Bioforest)

(f)    Willmott Forests - Professional Investor - 2006 Project - 2006 Information Memorandum.

12    The eleven unregistered contractual managed investment schemes are:

(a)    1983 (No Project)

(b)    1984 (No Project)

(c)    1985 (No Project)

(d)    1986 (No Project)

(e)    1987 (No Project)

(f)    1989 (No Project)

(g)    1990 (No Project) Interest Only Offer

(h)    1991 (No Project)

(i)    1995 (No Project) (Custom)

(j)    Sharp/Reed Plantation Project - 1998 Information Memorandum

(k)    2001 (No Project).

13    The five unregistered “partnership” managed investment schemes are:

(a)    McKenzie & Partners - Forestry Partnership No. 1 (1993)

(b)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 1 (1994)

(c)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 2 (1994)

(d)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 3 (1994)

(e)    McKenzie & Partners - Forestry Partnership No. 2 (1994).

14    WFL acted as the responsible entity and manger of eight registered and 29 unregistered managed investment schemes prior to the appointment of receivers over many of its assets and the appointment of a voluntary administrator in September 2010, and its winding up in March 2011.

15    The history of those events and the current state of the schemes and associated assets were deposed to by Mr Crosbie in his four successive affidavits.

BACKGROUND

Mr Crosbie’s evidence

Background to Willmott schemes

16    Mr Crosbie deposed to the background as follows.

17    The Willmott Group’s core activities included establishing, managing, harvesting, processing and supplying timber products from plantation grown on behalf of shareholders, unitholders and scheme members, including in its three primary regional plantations as follows:

(a)    Bombala and Murray Valley regions in New South Wales and Victoria;

(b)    Sheoak and Silky Oak operations; and

(c)    African Mahogany operations in the Northern Territory.

18    Both the registered and unregistered schemes were and are operated either on freehold land owned by WFL or on leasehold land WFL leases from Hancock Victorian Plantations Pty Ltd (“HVP”) or the Forestry Commission of New South Wales (“Forests NSW”).

19    About 75,000 hectares of land are involved in the operation of the schemes. 62,000 hectares are freehold land owned by WFL itself of which the Bombala land (comprising 27,000 hectares) is unencumbered.

20    The remaining 15,000 hectares are leased from HVP or Forests NSW. The HVP arrangements for each Willmott scheme include a lease over specific parcels of land and a forestry property agreement, which vests trees in Willmott Forests Investment Management Pty Ltd (“WFIM”) as agent for the growers. HVP has no interest in the trees. Under a forestry management agreement, WFL grants rights to Grand Ridge Plantations Pty Ltd and HVP and provides them with a licence to access and use the land.

21    Under the arrangement with Forests NSW, Forests NSW leases the land to WFL, provides forest management services and has an agreement with WFIM that WFIM owns all the trees and timber.

22    The schemes of which WFL is the responsible entity include registered and unregistered managed investment schemes and vary within those categories. Generally, the growers paid up front and have no liabilities to contribute or make further payments, but WFL has ongoing obligations to the growers.

23    Most registered schemes are contract based although one project took the form of a unit trust. In contract based schemes, growers lease land on which they are entitled to plant and grow trees. There were multiple projects within each scheme.

24    The unregistered schemes are not identical and involve different Willmott companies. Some unregistered schemes involve very basic constituent documents, including short form leases and service agreements. Some unregistered schemes are described as partnerships. Many growers in the unregistered schemes have entered loan agreements to fund their investment.

25    Of the total of 510 plantations, 160 are on freehold land and 350 are on leasehold land. Of the schemes controlled by the liquidators, 12 are conducted on more than one plantation. One project is conducted on 380 plantations. About 30 of the 160 plantations situated on freehold land are used for more than one scheme.

26    A single scheme may be conducted on multiple plantations which are distant from each other. The growers’ individual woodlots may be adjacent to woodlots in other schemes, and land used in the schemes is intermingled, creating a “chequerboard” effect.

27    The lots are divided and allocated to growers at random and land in various schemes is intermingled. This is true of all regions. To access its lot, an individual grower may have to cross other growers’ land, and to identify a grower’s land, GPS is necessary, but not always possible. Surveying would be prohibitively expensive.

28    Each scheme is governed by a suite of different constituent documents, but all except a single unit trust scheme (“Willmott Forests Premium Timberland Fund No 1”) include a grower’s lease or licence, a forestry management agreement and, frequently, a forestry rights agreement.

29    Mr Crosbie deposed that the growers’ leases typically run for 25 years and the rent is prepaid or paid from the proceeds of tree harvests, so that WFL typically receives no further rent during the entire term. The land may be used only for the establishment and maintenance of trees in accordance with the schemes. The grower is entitled to quiet possession if it performs its obligations under the lease, and some leases entitle growers to enter and maintain and harvest trees. Some leases acknowledge that the growers own legal title to the trees under State legislation. Growers are prohibited from doing anything which violates the terms of applicable insurance policies or causes insurance premiums to be increased. WFL is entitled to terminate growers’ leases if there are outstanding amounts due under the forestry management agreement.

Administration and liquidation of Willmott group

30    On 6 September 2010, KordaMentha were appointed receivers over all the charged property of the Willmott group (which excluded the Bombala land and the scheme or trust property associated with the schemes). WFL was placed in voluntary administration on 6 September 2010, and Mr Fernandez was appointed voluntary administrator of the Willmott group under s 436A of the Act.

31    According to the directors’ Report as to Affairs dated 6 September 2010, WFL had $51 million land assets, $64 million in debts due from sundry debtors, $7.3 million cash, $1.6 million stock, $2.4 million plant and equipment and $95 million in other assets. The Bombala land was valued at $52 million in June 2010. The receivers currently control all assets except the Bombala land and scheme assets.

32    On 24 September 2010, pursuant to deeds between the receivers and secured creditors, the receivers’ appointment was terminated in respect of certain “excluded” property of WFL, including WFL’s rights, title to and interest in respect of its role as responsible entity of the registered schemes. In consequence, Mr Fernandez assumed the responsible entity’s rights, role and obligations in relation to the registered schemes.

33    On 12 October 2010, the receivers’ appointment was also terminated in respect of WFL’s role as manager of 22 of the unregistered schemes and, again, Mr Fernandez assumed that role. In consequence, at that stage, seven of the 29 unregistered schemes remained under the receivers’ control.

34    On 26 October 2010, Mr Fernandez was removed as voluntary administrator of the Willmott group and Messrs Crosbie and Carson, who are the current liquidators, were appointed voluntary administrators.

35    The new administrators determined that WFL was insolvent and without funds to meet its debts, comply with its statutory obligations as owner/manager of the plantations and fulfil its obligations to the growers and third parties under the constituent documents.

36    The administrators and WFL’s forestry personnel commenced a viability analysis. The initial investigations indicated that all schemes were insolvent because there were insufficient funds to meet their day to day expenditure (eg fire prevention and weed and pest control) and no obligation on growers to meet the additional payments.

37    It was necessary for the administrators to retain certain plantation employees of the Willmott group. The group also engaged contractors for fire maintenance over the fire season. Because WFL could not carry out those tasks, the value of the trees had and would continue to diminish.

38    The complex analysis of the schemes was directed at three categories:

(a)    long term viable insolvent schemes;

(b)    potentially viable insolvent schemes; and

(c)    long term non-viable insolvent schemes.

39    In his first affidavit, Mr Crosbie deposed that once the viability analysis was complete, the administrators intended to inform the growers of the analysis and invite them to make voluntary financial contributions. If the growers did not contribute on a voluntary basis, Mr Crosbie deposed that the administrators would seek a new responsible entity, sell the scheme assets or wind up the schemes. He further deposed to liaison with insurers and growers’ groups.

40    In his first and second affidavits, Mr Crosbie deposed that the administrators, from 12 November 2010, conducted an expression of interest campaign including advertising and inviting proposals for a new responsible entity and/or manager of any of the schemes, a restructure or recapitalisation.

41    In his second affidavit, Mr Crosbie deposed that in February 2011, the administrators received four non-binding proposals (which did not involve funding the operation and maintenance of the schemes while awaiting the satisfaction of certain conditions) and one binding offer from HPV. Mr Crosbie also exhibited a copy of a notice of meeting dated 23 December 2010 from Mr Challis of WGG, which the receivers did not regard as valid.

42    Mr Crosbie deposed that the timber plantations required ongoing maintenance. The responsible entity had statutory maintenance duties, such as track clearing and fire maintenance to the satisfaction of insurers. Based on advice from WFL staff, Mr Crosbie estimated that a care and maintenance program to June 2011 sufficient to fulfil insurance requirements would cost approximately $8 million. He deposed that the administrators would verify and allocate the costs on a scheme by scheme basis.

43    The Willmott group was, however, without funds.

44    In his second affidavit, Mr Crosbie deposed:

We are now faced with a situation in which we have no available funding and no proposal for a new responsible entity or manager for any of the Willmott Schemes. We have notified the Committees of Creditors that there are no unconditional offers capable of acceptance and that we do not consider that it is appropriate to attempt to collect funds from growers where no party is willing to accept the role of responsible entity or manager of the Willmott Schemes and there is no guarantee that the Willmott Schemes can continue.

45    Mr Crosbie deposed that the administrators intended to apply to the Commonwealth Bank and other banks to obtain credit to be secured by a first ranking mortgage over the Bombala land. The administrators intended to use the credit facility for statutory maintenance, wages of employees required by the administrators and the administrators’ fees and disbursements, including legal costs, but not for general scheme maintenance.

46    In his second affidavit, Mr Crosbie gave an update on the administration.

47    He deposed that Mr Fernandez, the first administrator, held title to the Bombala land as security for the payment of his fees, estimated at $600,000.

48    The viability analysis dated 19 January 2011 (“Poyry Report”) concluded that a number of Willmott schemes were not currently financially viable and that to be viable, a further $23 million would be required.

49    Mr Crosbie deposed that the administrators had tried to borrow funds to conduct the administration of the Willmott group. On 16 December 2010, the Commonwealth Bank offered credit to the administrators to borrow funds with the Bombala land as security. They obtained a valuation, which determined that the Bombala land, as presently encumbered by the Willmott schemes and with an allowance for rehabilitation, was valued at $2.1m to $3.2m.

50    In the s 439A report to creditors dated 14 March 2011, the administrators recommended that WFL be wound up and its assets realised. That did not mean, however, that the schemes would automatically be liquidated.

51    On 22 March 2011, the concurrent group meeting of creditors resolved to wind up WFL and the administrators were appointed liquidators. There was a deadlock on a poll between majority in number and value, and the chairman exercised his casting vote.

52    In his third affidavit, Mr Crosbie deposed that the expressions of interest campaign did not attract any offers capable of acceptance which the liquidators assessed to represent best value for the growers and creditors.

53    He deposed that WGG has expressed interest in taking over as responsible entity and manager of a number of the Willmott schemes, including the management of three unregistered schemes. Mr Challis anticipated issuing a notice of meeting and information memorandum to formalise the proposal but that had not occurred as at the date of Mr Crosbie’s third affidavit. Another group, called Plantation Capital Limited, proposed to take over as responsible entity and manager for all schemes if WFL entered a Deed of Company Arrangement (“DOCA”) and the secured creditors were bound.

54    Mr Crosbie deposed that the liquidators, as responsible entity and manager of the schemes, now sought to realise the assets of the Willmott group in order to obtain the best value for all stakeholders, including growers and creditors.

55    WFL’s freehold Bombala land was not under the receivers’ control but was subject to a lien for the first administrator’s fees. The Murray Valley land, North Coast of New South Wales land and Northern Territory land were all planted to various extents with trees, and all were under the receivers’ control.

56    WFL was also the lessee of land leased or sub-licensed from HVP and was lessee of the land owned by Forests NSW.

57    The freehold and leased land was mostly effectively encumbered by the schemes, because the growers owned legal title to the trees on it.

58    Mr Crosbie recognised that it was debatable whether WFL’s freehold land and leases were its own property (and hence subject to the charge and receivers) or whether they are scheme property (and hence held on trust for the growers), which will need to be determined.

59    Mr Crosbie deposed that the legal right conferred on many growers to maintain and harvest their own lots was, in practice, not possible to exercise. Growers could not readily identify their lots with certainty. Even if it were possible to clear fell individual lots, it would damage the adjacent grower’s trees. The trees were planted on different lots and at different times and it was not feasible profitably to harvest them on individual lots on a small scale.

60    Rather, a minimum thinning area of 100 hectares or a minimum clearfell area of 40 hectares was necessary to be profitable after costs, yet each grower held an average of only seven hectares.

61    It was therefore unlikely that the growers could market and sell their trees on an individual basis. The relevant contracts were usually large minimum supply contracts and it would be necessary to build or maintain roads and firebreaks at a cost of $25,000. It would be necessary to service at least 40 to 50 hectares to be cost effective.

62    WFL held public liability insurance with QBE for its growing and maintenance activities. The premium was $24,000 per annum. The insurance did not cover harvesting. Individual harvesting would avoid the policy and it was unlikely that the growers could obtain individual insurance, due to the higher risks associated with individuals.

63    For the above reasons, Mr Crosbie deposed that the grower leases were not capable of being performed. He considered that individual performance of the leases by the growers would constitute an irremediable breach and WFL could terminate the leases.

64    Mr Crosbie therefore considered that the leases had been frustrated due to the failure and insolvency of WFL. Growers could never individually harvest their trees and WFL’s insolvency had now cut off the alternative method of performance.

Onerous and unprofitable agreements and leases

65    In his third affidavit, Mr Crosbie deposed that the liquidators believed that the grower leases were onerous and unprofitable for various reasons as follows:

(a)    the leases generally ran for a 25 year term, and all rent was prepaid or payable in arrears at the end of the term, so that WFL would not receive any further payments from growers before the harvest, but bore the continuing obligation of maintenance;

(b)    if the schemes were continued and the growers leases were retained, the winding up of the Willmott group would be delayed for up to 25 years;

(c)    WFL would need to contribute $123 million net present value ($336.7 million in absolute terms) in order to run the schemes for their remaining life, but could not do so as it was insolvent;

(d)    the administrators’ and liquidators’ costs currently totalled $3.5 million. Of that, $1.55 million (45%) was attributable to scheme activities. The liquidators might not recover sufficient funds from the value of the trees in some schemes to cover the costs incurred, and the deficiency would deteriorate further as additional scheme costs were incurred;

(e)    the receivers and managers (KordaMentha) had advised that they had incurred $2 million in costs relating to scheme activity;

(f)    even if the funds were available, the Poyry Report concluded that between 28% to 88% of the schemes (depending on the discount factor applied) would not be viable;

(g)    the value of the trees, and hence viability of the schemes, would decrease over time, because WFL did not have the funds to undertake the maintenance. The trees would waste and there was a fire risk; and

(h)    the growers’ theoretical right to enter the land and harvest the trees would, even if it could be performed, increase WFL’s liability for the costs of monitoring.

66    In some schemes, the owners of the plantations had granted a forestry right to WFIM on behalf of the growers, to enter, establish and harvest one or more crops of trees. That right terminated at the same time as the lease of the plantation.

67    The forestry management agreements provided that WFL, for an upfront fee and for a percentage of the final proceeds of sale, would maintain and harvest the growers’ leasehold property. The estimate cost of those services for all plantations last year was $8 million.

68    Mr Crosbie deposed that the liquidators did not have the funds to undertake the maintenance, the cost may have increased and tree value may have depreciated, as the trees were not maintained. Further, the liquidators did not have sufficient staff to undertake maintenance. There was currently only one caretaker employed at Bombala and the liquidators had received fire maintenance notices from Rural Fire Services. In addition, they no longer possessed the necessary leased vehicles and fire equipment. They therefore considered that the forestry maintenance agreements were onerous and unprofitable and that they were are entitled to disclaim them under s 568 of the Act.

69    The effect of such disclaimer would be, effectively, to terminate the schemes; without the contracts providing growers with their fundamental rights, the schemes would no longer achieve their purpose. WFL would then seek to wind up the registered schemes under s 601NC of the Act and possibly exercise the constitutional power to terminate the regulated schemes and professional investor schemes on three months’ notice, if WFL has no further contractual obligations.

70    Alternatively, WFL could be allowed to disclaim the unprofitable leases and agreements at the time of, or in anticipation of, sale of the assets, on condition that the growers were entitled to a payment then referable to the trees, replacing their entitlement to the proceeds of harvest.

71    The liquidators identified an impediment to their proposed approach in that some schemes (contractual and partnership) did not have a constitution and the liquidators were not empowered to sell WFL assets related to the schemes. In order to sell those assets, the liquidators would need to disclaim at the appropriate time. Conversely, the professional and registered schemes had a constitutional document, and the power of sale could be achieved by amending them pursuant to s 601GC(1)(b) of the Act provided that WFL, as the responsible entity, believed that the amendment would not adversely affect the members’ rights.

72    Further, although a number of the scheme constitutions provided that WFL must ensure the growers’ rights were not adversely affected, that did not prevent the disclaimer of onerous property under s 568 of the Act.

Proposed constitutional amendment

73    The liquidators therefore proposed to amend the constitution of schemes with constitutions to allow them to terminate the Project Documents without a special resolution, as they believed, on the basis of the matters set out above, that such amendment would not adversely affect the growers’ rights and would save the expense of meeting with the growers.

74    In that context, the liquidators compared the currently existing growers’ rights in the context of WFL’s insolvency with the rights as they would be after the proposed amendment.

75    Currently, the liquidators intend to disclaim the grower leases and forest management agreements, which they could do without amending scheme constitutions, upon which the growers would be only unsecured creditors with the right to participate in any distribution on the winding up of the schemes.

76    In the liquidators’ view, the growers would thus be better off if the constitutions were amended to allow the responsible entity or manager to terminate project documents, on condition that the power would not be exercised without the court’s direction and the growers would receive the net proceeds of sale referable to the trees on termination.

77    The responsible entity would hold any amounts received on trust. The proposal would remove the risk of disclaimer other than for value, and would be better for growers than the current uncertainty.

78    The liquidators, with the concurrence of the receivers, wished to offer all the freehold and Forests NSW leases for sale at the one time. Potential buyers would require clear title, following which the sale would be at a large discount.

79    Mr Crosbie deposed that if the liquidators had the power of sale and the right to disclaim the project documents, the buyers would have a sufficient level of comfort to make a binding bid. Any contract would, however, be conditional on the court giving the liquidators approval to sell or terminate/disclaim. The liquidators would request the purchaser to allocate the purchase price between the land and the trees, and obtain independent expert opinion.

80    The court would then approve the payment to the growers of a relevant amount of the proceeds of the transaction.

Fourth Crosbie affidavit

81    By the fourth Crosbie affidavit sworn on 22 June 2011, Mr Crosbie agreed with Mr Webster’s estimate that a nominal discount rate of at least 15% was appropriate, contrary to the Poyry Report, which based its analysis on a nominal discount rate of 11%. He also agreed with the assumptions on which the Poyry Report was predicated, namely, that there would be a new responsible entity or manager, which would derive little return from owning the land and would have to accept WFL’s liabilities under the registered schemes, which were estimated at $1.6 million, plus the costs incurred by the receivers, estimated at $2 million.

82    Mr Crosbie deposed that as at June 2011, the liquidators had received no formal proposal other than WGG’s proposal to take over as responsible entity, which he found unsurprising, given the small commercial return from acquiring the freehold land subject to the schemes, as no rent or fees were payable until the termination of the project.

83    Mr Crosbie considered that the current WGG proposal forwarded by Mr Bland had outstanding problems. The fees were uncapped and unknown. The scheme would become a contributory scheme with initial contributions, annual management fees and no guarantee that there would not be supplementary fees in future. The growers’ interests could be diluted if they did not contribute. The proposed mechanism to match buyers and sellers was not an adequate protection. The proposed new responsible entity had not undertaken to apply for court approval for the proposal, so there was no safeguard for minority interests and, further, there was no guarantee that the 95-99 scheme would continue. Rather, it was proposed to undertake a due diligence after the responsible entity took over and if the scheme were not viable or the responsible entity did not receive enough contributions, it would be wound up. The liquidators considered that if the scheme were wound up, it would be more beneficial to do so together with the other schemes, as it would obtain a higher purchase price and incur fewer costs.

84    Further, Mr Crosbie deposed that the WGG proposal did not adequately deal with outstanding debts regarding the 95-99 scheme. The liquidators’ costs were $200,000 for that scheme and the receivers’ costs would also need to be considered.

85    If the WGG proposal were passed, the intermingling of the land would make it harder to sell the rest of the Bombala land, because the liquidators’ sale might not include the 95-99 scheme land and trees. In any event, making the directions sought would not prejudice any proposal, including that of WGG, to replace the responsible entity.

Mr Webster’s evidence

86    Mr Webster is a partner of KordaMentha and a joint and several receiver and manager of WFL and its subsidiaries comprising the Willmott Group with Messrs Korda and Mentha, appointed on 6 September 2010 under various deeds of charge.

87    By his affidavit sworn 17 June 2011, Mr Webster deposed that the receivers’ appointments to WFL’s rights, title to, interest in and obligations under WFL’s appointment as responsible entity or manager of almost all the schemes were terminated by Deeds of Partial Termination executed in September and October 2010. The receivers were thus excluded from WFL’s role as responsible entity or manager of some of the managed investment schemes.

88    Although the receivers were appointed over some freehold land, WFL’s interest in land as a lessee, WFL’s interests in farming equipment and inventories, and interests held by WFL in its own right in managed investment schemes it operates, they were not appointed over the Bombala land, or property that WFL held on trust or as responsible entity of the managed investment schemes, or over responsible entity functions, which remained (save for some exceptions) under the control of the insolvent WFL.

89    Mr Webster deposed at length to the viability of the Willmott schemes and to his review of the Poyry Report. As noted above, he considered that the nominal discount rate of 11% applied by Mr Poyry was too low, given a number of uncertainties and the long lead time to maturity of the plantations. Mr Webster also considered that other assumptions on which Mr Poyry’s report was based could not be sustained.

90    Mr Webster considered that despite the current WGG proposal for the replacement of the responsible entity of some Willmott schemes, the best course available to growers and stakeholders was the immediate sale of the assets of the schemes on an unencumbered basis.

91    In Mr Webster’s view, the advantage of the directions currently sought would be to facilitate the marketing and possible sale of the assets by indicating that the liquidators could, subject to court approval, take the steps to obtain and transfer clean title to the assets of the Willmott schemes.

INTERVENTION BY WGG

92    The application for directions was opposed by WGG, which was established as an incorporated association on 28 September 2010 by investors and financial advisers on behalf of, and to promote and represent the interests of, clients with investments in financial projects of which WFL is currently the responsible entity.

93    By the affidavit of its solicitor, Mark Bland, affirmed on 3 June 2011, WGG sought leave to intervene to the extent that the orders sought by the liquidators include or affect:

a.    Willmott Forests 1995-1999 Project ARSN 089 598 612 (1995-99 Project); and/or

b.    the following unregistered managed investment schemes:

i.    1994 Grimsey & Associates Pty Ltd - Forestry Partnership No. 1;

ii.    1994 Grimsey & Associates Pty Ltd - Forestry Partnership No. 2;

iii.    1994 Grimsey & Associates Pty Ltd - Forestry Partnership No. 3;

iv.    1993 McKenzie Private Partnership No.1; v. 1994 McKenzie Private Partnership No. 2;

vi.    Sharp - Reed Plantation Project - 1998; and

vii.    1995 No Project;

(collectively the WGG Unregistered Schemes)

94    WGG was granted leave to intervene by an order made on 7 June 2011 by consent.

95    At the hearing of the application on 28 June 2011, senior counsel for WGG sought to cross-examine the liquidator and the receiver. I declined leave to cross-examine in light of O 6 r 17 of the Federal Court Rules and, more fundamentally, because I considered that cross-examination would not assist me to determine the application for directions in the early stage of its factual context, and would unnecessarily prolong the proceeding and inflate costs.

Affidavits of Mark Bland

96    In his first affidavit, Mr Bland deposed that, in December 2010, WGG developed a proposal to replace WFL as responsible entity for the 1995-99 Project with a new responsible entity, Primary Securities Ltd (“Primary”). Mr Challis, the Chairman of WGG, corresponded with Mr Crosbie in relation to that proposal.

97    WGG issued a notice of meeting on 23 December 2010 to consider WGG’s proposal, which it withdrew following correspondence with the receivers’ solicitors. It issued a second notice of meeting on 20 May 2011 for 14 June 2011, containing resolutions proposing to amend the constitution of the 1995-99 Project and replace WFL with Primary as responsible entity.

98    Mr Bland asserted that WGG was also developing a proposal for the unregistered schemes to replace the existing manager and continue them.

99    Mr Bland deposed that the eight registered schemes of which WFL is responsible entity are all different.

100    The 1995-99 Project was established by a Deed dated 13 April 1995. That scheme and the WGG unregistered schemes comprise plantations on the unencumbered Bombala land, which is not subject to any securities or under the receivers’ control.

101    WGG maintained that the Bombala land was scheme property. If it was, on any change of responsible entity, the relevant land would be transferred to the new responsible entity.

102    Mr Bland deposed that the liquidators were trying to prepare the schemes for liquidation, based on the premise that they were not viable due to the insolvency of the responsible entity. In Mr Bland’s view, the liquidators’ application for directions was therefore premature, because a growers’ meeting was imminent regarding the proposal for a new responsible entity for the 1995-99 Project, a proposal for a new manager for the unregistered schemes was under development, and there was a potential dispute about whether the Bombala land was scheme property.

103    In his second affidavit sworn on 20 June 2011, Mr Bland deposed that the growers’ meeting notified in the second notice of meeting was adjourned to 23 June 2011, but the proposal was still on foot.

104    He deposed that the Willmott schemes differed, and some were viable. Due to the differences between the schemes, generalisations regarding their viability and legal and financial obligations were inaccurate. He stated that the liquidators had failed to treat the schemes individually and that the issues raised by Mr Crosbie hinged upon the insolvency of WFL, not the schemes.

105    Mr Bland contended that a transfer to a new responsible entity for the 1995-99 Project would resolve the problems. Further, some schemes had the potential to be continued, and the problems regarding WFL’s insolvency could be resolved. There was insufficient evidence to establish that various projects were non-viable.

106    Mr Bland deposed that the liquidators had not explained the nature of the growers’ rights in each scheme, nor acknowledged whether they were proprietary in nature, despite seeking to extinguish them.

107    He challenged the liquidators’ claim that the land of the growers could not be accessed, maintaining that each lot in the 1995-99 Project and unregistered schemes could be accessed by road or firebreak or access route.

108    Mr Bland asserted that the Bombala land was scheme property, so it would be the responsibility of a new responsible entity, rather than the lessor, to arrange insurance.

WGG’s submissions

109    The position of the WGG was that both the liquidators and receivers underestimated the potential viability of the 95-99 scheme and certain other schemes for which it had proposed a restructure and a replacement responsible entity, and underestimated the value of the growers’ assets under those and/or other schemes. The liquidators’ proposed global marketing of the assets, freed from the encumbrance of growers’ assets (which the directions were intended to facilitate), insufficiently considered the very different position of individual schemes, would sacrifice the interests of the more potentially viable schemes to the overall interests of all schemes collectively and other parties, would result in the members of schemes with better potential receiving almost nothing for their assets (which currently had a high value), and would impede the salvaging of schemes with potential by means of a restructure.

110    In that context, the WGG submitted that a landlord could not disclaim its interest under a lease (without in any event surrendering the entire freehold interest), so such a purported disclaimer would not, in any event, achieve the liquidators’ stated goal of freeing land of encumbrances and should not be implicitly authorised by the court’s directions.

111    WGG also argued that the proposed constitutional amendment should not be authorised by the directions of the court, as the evidence did not support a reasonable belief that the amendment would not adversely affect members’ rights. WGG initially appeared to contend that any amendment conferring a power to extinguish, terminate or sell existing members’ rights, albeit in exchange for others, must necessarily adversely affect the members’ rights. Ultimately, WGG acknowledged that the factual context was relevant to a determination whether rights would be adversely affected, but argued that there must be a financial disaster before a modification of a constitution allowing rights to be extinguished or diminished would not adversely affect members’ rights, which was not the case here.

DISCUSSION

112    In my opinion, it was, in all the circumstances, appropriate to make directions broadly in the terms sought by the plaintiffs.

113    Section 601GC of the Act states:

(1)    The constitution of a registered scheme may be modified, or repealed and replaced with a new constitution:

(a)    by special resolution of the members of the scheme; or

(b)    by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members’ rights.

(2)    The responsible entity must lodge with ASIC a copy of the modification or the new constitution. The modification, or repeal and replacement, cannot take effect until the copy has been lodged.

(3)    The responsible entity must lodge with ASIC a consolidated copy of the scheme’s constitution if ASIC directs it to do so.

(4)    The responsible entity must send a copy of the scheme’s constitution to a member of the scheme within 7 days if the member:

(a)    asks the responsible entity, in writing, for the copy; and

(b)    pays any fee (up to the prescribed amount) required by the responsible entity.

114    In ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444, Barrett J considered s 601GC in detail. His Honour referred, inter alia, to authorities on the variation of class rights.

115    Barrett J stated at [95] to [96]:

The test applied by the English Court of Appeal in [White v Bristol Aeroplane Co Ltd [1953] Ch 65] (and by the same court some two months later in Re John Smith’s Tadcaster Brewery Ltd [1953] Ch 308) was whether the rights of persons holding relevant shares, as created by the company’s constitution, remained the same, not whether enjoyment of the rights was impaired or diluted.

It is consistent with what was said by Young J in Smith v Permanent Trustee Australia Ltd and approved by Conti J in Seabrook to apply this test to s 601GC(1)(b). The task of the responsible entity, when approaching that provision, is first to ascertain the rights of members created by the constitution, as they exist immediately before the modification. The responsible entity must then decide whether those rights — as distinct from the enjoyment of them or their value — will be changed or impinged upon by the modification. If that question is answered in the affirmative, the responsible entity must undertake a process of comparison and assessment in order to decide whether the impact is within the “adversely affect” description.

116    Section 601GC permits the alteration of rights in the broadest possible terms, as it contemplates that an entire constitution may be repealed and a new one substituted. The provision thus assumes that the radical alteration or extinction of existing rights may properly be effected, subject to the qualification that the alteration must not adversely affect the members’ rights. The factual circumstances in which a constitutional amendment may be made are not, in my opinion, limited to a “total financial disaster”.

117    I was satisfied that, in the present case, the constitutional amendment could be made. The material before the court established that it was, in the prevailing circumstances, in the interests of the schemes to put in train the proposed marketing campaign likely most effectively to maximise prospects of a return for growers, creditors and all interested parties. The factual context rendered reasonable the responsible entity’s belief that the relevant amendment would not adversely affect growers’ rights, as the existing rights were currently very precarious and potentially subject to disclaimer or termination in any event. Further, they would not be terminated or disclaimed without the court’s consent and without the payment of the value of the rights.

118    The WGG also alleged that as the Bombala land may be scheme property, that uncertainty constituted an impediment to making the directions sought. The only immediate effect of making the directions would be, however, the making of the amendment, rather than the exercise of any powers thereunder, unless and until the plaintiffs again approach the courts. That would be upon the basis stated and with the compensation set out. I was not persuaded that the directions would impede any restructure or replacement of a responsible entity which was otherwise validly open for any scheme, including the 1995 to ’99 scheme. The intervener’s arguments were, in my view, premature and anticipatory, being directed at apprehended developments or outcomes which, if they arose at all, would be in the future.

119    The existence of unresolved questions, such as whether the Bombala land was scheme property or the effect of a landlord’s disclaimer of leases as onerous property, did not preclude the directions. Their determination was unnecessary in the context of the application given its essentially preliminary and facultative nature and the safeguards, protocols and requisite consideration it incorporated. At worst, the resolution of those outstanding issues may ultimately limit the liquidators’ ability to achieve a total unencumbered sale, if a new responsible entity were introduced and parts of the Bombala land vested in it, or if some or all of the growers’ interests under leases could survive disclaimer and were not susceptible of termination under a constitutional amendment.

Associate:

Dated:    29 June 2011

Schedule 1 - Registered Managed Investment Schemes

(a)    Willmott Forests 1989 - 1991 Project (ARSN 092 516 651)

(b)    Willmott Forests 1995 - 1999 Project (ARSN 089 598 612)

(c)    Willmott Forests Project (ARSN 089 379 975)

(d)    BioForest Dual Income Project 2006 (ARSN 119 153 623)

(e)    BioForest Sustainable Timber and Biofuel Project 2007 (ARSN 124 135 535)

(f)    Willmott Forests Premium Forestry Blend Project (ARSN 131 549 589)

(g)    Willmott Forests Premium Forestry Blend Project - 2010 Project (ARSN 142 722 585)

(h)    Willmott Forests Premium Timberland Fund No. 1 (ARSN 136 768 520)

Schedule 2 - Unregistered Managed Investment Schemes: Professional Investor Schemes

(a)    Willmott Forests - Professional Investor - 2001 Project - 2001 Information Memorandum

(b)    Willmott Forests - Professional Investor - 2002 Project - 2002 Information Memorandum

(c)    Willmott Forests - Professional Investor - 2003 Project - 2003 Information Memorandum (2003) and 2003 Information Memorandum (2004)

(d)    Willmott Forests - Professional Investor - 2004 Project - 2004 Information Memorandum and 2004 Information Memorandum (2005)

(e)    2005 BioForest Wholesale Project No. 2 - 2005 Wholesale Forestry Memorandum (Bioforest)

(f)    Willmott Forests - Professional Investor - 2006 Project - 2006 Information Memorandum

Schedule 3 - Unregistered Managed Investment Schemes: Contractual Schemes and Partnership Schemes

Contractual Schemes

(a)    1983 (No Project)

(b)    1984 (No Project)

(c)    1985 (No Project)

(d)    1986 (No Project)

(e)    1987 (No Project)

(f)    1989 (No Project)

(g)    1990 (No Project) Interest Only Offer

(h)    1991 (No Project)

(i)    1995 (No Project) (Custom)

(j)    Sharp/Reed Plantation Project -1998 Information Memorandum

(k)    2001 (No Project)

Partnership Schemes

(l)    McKenzie & Partners - Forestry Partnership No.1 (1993)

(m)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 1 (1994)

(n)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 2 (1994)

(o)    Grimsey & Associates Pty Ltd - Forestry Partnership No. 3 (1994)

(p)    McKenzie & Partners - Forestry Partnership No. 2 (1994)