Liquidator’s application to obtain greater role in managed investment scheme winding up

In LM Investment Management Limited v Whyte [2019] QSC 233, the Supreme Court of Queensland considered an application by a Liquidator to:

1. replace the court-appointed Receiver in the winding up of a managed investment scheme as well as for a complex remuneration and costs regime to be put in place; and
2. to access the scheme property in order to defend a breach of trust claim against the company in liquidation.

The facts

The LM First Mortgage Income Fund (the Fund) was a mortgage fund, loaning monies principally to developers and holding mortgages over real property as security for those loans.

LM Investment Management Limited (LM) was the responsible entity of the Fund. It held virtually no assets in its own right, and extracted fees from the monies held by the Fund as a consequence of its right of indemnity as trustee. LM is now in liquidation.

Subsequently in August 2013, the Receiver was appointed by Court order as receiver of the Fund and the person responsible for ensuring that the Fund is wound up in accordance with its constitution.

Since being appointed receiver of the Fund, the Receiver has had control of the winding up of the Fund, largely to the exclusion of the Liquidator. As a result, the Liquidator has experienced significant cash flow problems in the liquidation. The Receiver has realised all of the security properties and the Fund has significant cash assets. The principal matters remaining in the winding up are several Court proceedings.

This includes a proceeding brought by the Receiver, known as the “Clear Accounts Proceeding”, against LM for breach of trust, seeking orders that LM restore to the Fund the amount lost due to the breach of trust.

The Liquidator’s application

The Liquidator brought an application for:

1. control of the winding up of the Fund (except for existing litigation) to be transferred from the Receiver to him;
2. the Liquidator to be appointed contradictor in two proceedings concerning the Fund, being the “Clear Accounts Proceeding” and the “Feeder Funds Proceeding”; and
3. a remuneration and expenses regime to be put in place whereby both the Liquidator and the Receiver would be required to estimate their costs, which would be approved by the Court, and then have 50% of the estimated amounts paid on varying timetables, with a further hearing to occur at the conclusion of the winding up where final amounts would be determined and paid.

The Court’s decision 

The Court observed that the Liquidator’s application was principally brought to obtain access to the funds of the Fund. That is because the Liquidator is only able to receive payment from the Fund for work properly performed on behalf of the Fund.

The Court refused to make any of the orders proposed by the Liquidator.

In regard to who should control the winding up of the Fund, the Court held that, because the Liquidator proposed that the Receiver would retain control of existing litigation, and because that litigation formed the largest tasks remaining in the winding up, there was no reason to hand the other tasks remaining, which are of an administrative nature, to the Liquidator.

The Court held it was unnecessary for the Liquidator to be appointed as a contradictor in the Feeder Funds Proceeding given that proceeding had been settled.

In regard to the Clear Accounts Proceeding, the Court held firstly that there was no basis for the Liquidator to be appointed contradictor on behalf of the unitholders.

Secondly, the Court observed that the Liquidator was seeking to defend breach of trust proceedings brought by beneficiaries against a trustee by recourse to the trust funds. In that regard, the Court held that the usual rule is that a trustee defending such proceedings cannot access trust funds to do so, but if the trustee is successful, the trustee may be indemnified from trust funds for their costs. The Court could see no reason to depart from the usual rule and refused to make the order sought.

As regards the remuneration and costs regime sought by the Liquidator, the Court held that, although the Court is empowered under section 601NF(1) of the Corporations Act 2001 (Cth) to make such orders, there was no justification for doing so in this case.

The proposed regime would unnecessarily add to costs, while there was no evidence of any excessive costs being incurred by the Receiver. The Receiver was also required to maintain the registry of members of the Fund under the terms of ASIC relief from reporting requirements. Further, it was necessary for the Receiver to have access to the cash funds of the Fund for the further conduct of the litigation that he would, under the Liquidator’s application, continue to conduct.

Accordingly, the Liquidator’s application was dismissed.

Key takeaway / conclusion

A trustee cannot normally defend a breach of trust claim brought by beneficiaries by use of trust funds, but may indemnify themselves from the trust funds if they are successful.

The Court is unlikely to approve a regime for payment of remuneration and expenses in the winding up of a managed investment scheme involving estimation, approval and prepayment.

Authored by:

Scott Couper, Partner

Craig Melrose, Solicitor