Winding up the Banksia Mortgage Fund by portfolio sale Should a meeting of members be convened? 1 Background Banksia Mortgages Limited (BML) is presently considering a proposal that would involve the winding up of Banksia Mortgage Fund (BMF) by way of a portfolio sale of the scheme loans (the Proposal). This Proposal would provide the opportunity for an accelerated realisation of the assets of BMF. BML is coming to the view that, provided the Proposal incorporates certain features designed to protect the position of BML and BMF members (which are currently being discussed with the Receivers), the Proposal would be in the best interests of BMF members. In forming this view, BML has had regard to the following factors: In an attempt to achieve the continuation and regeneration of BMF, BML undertook a competitive bid process for the sale of the BMF management rights. However, that process was ultimately unsuccessful despite a six-month due diligence and negotiation process. BML has given consideration to whether any of the parties who participated in the sale process may be interested in assuming the role of temporary or replacement responsible entity (RE) of BMF. BML has also invited ASIC to identify potential parties that may be suitable candidates for this role. However, BML is not aware of any parties that are prepared to take on the RE role, and ASIC has similarly confirmed that it is not aware of any such parties. BML is entirely reliant on funding support from Banksia Securities Limited (BSL) under existing funding arrangements with the Receivers of BSL. Were this funding to be withdrawn, BML would be required to appoint a voluntary administrator. In light of the above, BML considers that BMF cannot continue to operate and the most appropriate course of action is for BML to take steps to conduct an orderly winding up of BMF. If such winding up were to occur strictly in accordance with the terms of the BMF constitution, this would involve a 'terming-out' of the scheme loans, with repayment of investors' principal at the expiry of each loan (assuming there is no borrower default). However, BSL has expressed an unwillingness to support BML to allow a 'terming-out' of the scheme loans. Against this background, the Proposal represents the only viable alternative to the appointment of a voluntary administrator, which would inevitably follow if BML were to allow a 'terming out' of the scheme loans and, as a result, BSL were to withdraw funding support. There is no doubt that the appointment of a voluntary administrator would cause unnecessary value destruction for the members of BMF. The Proposal, on the other hand, provides the opportunity for value preservation, and the potential to most effectively maximise the prospects of return, for BMF members. 2 Implementing the Proposal In broad terms, the Proposal currently contemplates the following steps: (a) an application by BML to the Court, under section 601ND of the Corporations Act 2001 (Cth) (Corporations Act) (as contemplated by clause 10.4 of the BMF constitution), for orders directing BML to wind up BMF on 'just and equitable' grounds; sojs A0125823433v4 120305720 5.7.2013 page 1 Allens is an independent partnership operating in alliance with Linklaters LLP.
(b) (c) (d) BML seeking judicial advice that it is justified in amending the BMF constitution unilaterally to insert provisions that will permit a winding up of BMF by way of a loan portfolio sale; if judicial advice is obtained, an appropriate marketing campaign undertaken for the BMF loan portfolio (with any sale contract to be conditional on subsequent Court approval); and once a conditional sale contract is executed, BML making a second Court application for judicial advice that it is justified in completing the sale. This two-stage process is consistent with the approach that has been adopted by the Courts in a series of recent cases to effect a 'de facto winding up' of managed investment schemes that have been considered non-viable, by way of a sale of the underlying scheme assets. 1 A threshold question for BML, and which ASIC has also raised, is whether, instead of seeking judicial advice that BML is justified in amending the BMF constitution unilaterally (as described in paragraph (b) above), BML should convene a meeting of members of BMF to approve the proposed amendments. A perceived advantage of convening a members' meeting is that members would be afforded the opportunity to express their views and cast their vote on the future of BMF. However, given the circumstances in which BMF presently finds itself, it is questionable whether this perceived benefit is a real one. This is discussed further in section 3 below. There are also a number of practical and technical issues arising from any proposal to convene a meeting of BMF members in this context. These matters are discussed in section 4 below. 3 Should a meeting of BMF members be convened to consider the future of BMF? As matters presently stand, for the reasons discussed above, the Proposal represents the only viable alternative to the appointment of a voluntary administrator to BML (which, based on the views expressed by BSL to date, would be expected to follow if the Proposal were not implemented). Needless to say, BML does not consider the appointment of a voluntary administrator to be in the best interests of members, particularly in circumstances where an alternative course of action that would avoid an insolvency is available to BML. This is not a situation where BML is able to present to members, for their consideration, alternative strategies regarding the future of BMF. BML's attempts to date to regenerate BMF have been unsuccessful, and BML continues to be entirely dependent on funding support from BSL. Nor is this a situation where BMF members have a realistic choice between terming out their loan or enabling a portfolio sale. BSL has indicated that at this time it would not be willing to support a 'terming out' of the scheme loans in the absence of a loan portfolio sales process being undertaken. On that basis, the only alternative that would be available, should the Proposal not be implemented, is the appointment of a voluntary administrator to BML. Any perceived benefit resulting from BMF members being afforded the opportunity to approve the proposed amendments to the BMF constitution at a meeting of members, or being given a 'voice', is somewhat illusory, when faced with the consequences that would be likely to follow in the event that the amendments are not made. 1 Re Timbercorp Securities Ltd (in its capacity as responsible entity of the 2005 Timbercorp Citrus Project) [2010] VSC 50; Re Timbercorp Securities Ltd (in liq) [2011] VSC 83; In the matter of Willmott Forests Limited (receivers and managers appointed) (in liq) [2011] FCA 1517; Re Elders Forestry Management Ltd [2012] VSC 287. sojs A0125823433v4 120305720 5.7.2013 page 2
The circumstances in which BMF finds itself are analogous to the factual circumstances surrounding the 'de facto winding up' cases mentioned above. For example, in In the matter of Willmott Forests Limited (receivers and managers appointed) (in liq) [2011] FCA 1517, which related to forestry managed investment schemes, the liquidators of the responsible entity sought directions that they were justified in procuring the responsible entity to amend the scheme constitutions unilaterally to allow them to terminate the project documents in order to facilitate a sale of the assets relating to the scheme. In making the directions sought, Dodds-Streeton J 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 return for growers, creditors and all interested parties 4 Practical and technical considerations In addition to the issues discussed above regarding the merits of convening a meeting of BMF members, there are also numerous practical and technical issues that cast doubt over the appropriateness or desirability of convening a BMF members' meeting in these circumstances. (a) Court application still required Even if a meeting of members were to be convened to consider a special resolution to amend the BMF constitution (in accordance with section 601GC(1)(a) of the Corporations Act), it would still be necessary for BML to apply to the Court to obtain orders authorising it to wind up BML (under section 601ND(1)(a) of the Corporations Act as reflected in clause 10.4 of the BMF constitution). The alternative methods for winding up BMF would be: (i) (ii) by way of an extraordinary resolution of BMF members at a meeting of members initiated by the members (under section 601NB of the Corporations Act as reflected in clause 10.3 of the BMF constitution). Section 601NB and clause 10.3 refer to the meeting in question being convened by the members, rather than the RE, so it does not appear possible for BML to initiate a meeting of members to consider a resolution to wind up BMF, even if it wished to do so; or for BML to follow the procedure set out in section 601NC of the Corporations Act (as reflected in clause 10.5 of the BMF constitution) to notify members of its intention to wind up BMF on the basis that BMF's purpose cannot be accomplished, and to inform members of their right to convene a meeting to consider a resolution regarding the winding up of BMF. Even if BML were to follow this procedure, it would not be able to align this process with any parallel meeting that may be convened by BML to consider the proposed amendments to the BMF constitution. Potentially, there would need to be two separate meetings to deal, first, with the constitutional amendment and, subsequently (if a meeting were ultimately to be convened by BMF members), with the winding up of BMF. BML's preferred course of action is to apply to the Court for orders directing it to wind up BMF on just and equitable grounds. The Corporations Act clearly permits BML to initiate a winding up by application to the Court, and also provides flexibility by empowering the court to make other ancillary orders in relation to the winding up (under section 601NF of the Corporations Act). This means that, if a members' meeting were to be convened, the only resolution that would need to be considered at that meeting would relate to the proposed amendments to the BMF constitution. It would still be necessary to apply to the Court for orders sojs A0125823433v4 120305720 5.7.2013 page 3
relating to the winding up of BMF. This adds unnecessary complexity, cost and duplication to a process that could otherwise be undertaken in a relatively streamlined manner. (b) (c) Possible need for separate meetings of each sub-scheme As a contributory mortgage scheme, BMF comprises a large number (approximately 150) of 'sub-schemes', each representing a scheme loan in which a group of members have invested. It is possible that each sub-scheme constitutes a separate managed investment scheme, with each individual scheme requiring registration. In ASIC Class Order [CO 02/238] Mortgage Schemes Chapter 5C and disclosure relief, ASIC has provided relief from the need to register each individual sub-scheme, so long as the 'umbrella scheme' comprising the collection of sub-schemes is itself registered. The 'multi-scheme' structure of BMF raises a question as to how meetings of members of BMF ought to be conducted. Is it necessary to convene separate meetings of each subscheme, or is it sufficient to convene a 'whole-of-scheme' meeting, with the effect that a resolution passed by the relevant majority of the members as a whole is binding on members of all of the sub-schemes? There is no clear answer to this question. Historically, BML has never convened a meeting of BMF members, so it is unable to rely on past practice. We note that ASIC has expressed the view that, consistent with its policy in [CO 02/238], a single 'whole-of-scheme' meeting of members is all that is required, and that a meeting passed by the relevant majority of members will be binding on all BMF members (including members of each sub-scheme). However, this policy is not reflected in [CO 02/238], so the legal position is not free from doubt. In addition, BML has an overriding duty to ensure that it treats members of different classes fairly (section 601FC(1)(d) of the Corporations Act). To the extent that each subscheme constitutes a separate class of members, there is a risk that a 'whole-of-scheme' meeting may be inconsistent with this statutory duty. BML has not formed a definitive view in relation to these complex issues at this stage. The proposed court process overcomes these concerns. There can be no suggestion that BML is treating members of different sub-schemes unfairly by seeking judicial advice from the Court, as envisaged under the Proposal. Restrictions on the power of the majority to bind all members Even if BML were to form the view that a single 'whole-of-scheme' meeting of members could be convened, and that separate resolutions did not need to be passed by members of each sub-scheme, there is a further legal question regarding the effectiveness of a special resolution of members to bind all members of BMF in the current circumstances. In ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444, Barrett J stated: The power of modification that section 601GC(1)(a) vests in the members is a plenary power. There is no kind of modification that can be made in the exercise of the power and by the means it prescribes, although the power is no doubt subject to the implied limitations that generally attend any power enabling a majority to bind a minority. The implied limitation to which Barrett J is referring is the equitable doctrine of fraud on the power. Under this principle, an amendment power must be exercised bona fide, for sojs A0125823433v4 120305720 5.7.2013 page 4
the purpose for which it is given 2. Moreover, the power to amend must not be exercised for a purpose, or with an intention, beyond the scope of, or not justified by the instrument creating, the power 3. A special resolution passed by members of BMF as a whole, which purports to bind members of each of the sub-schemes, may be open to challenge on equitable grounds, including the doctrine of fraud on a power. Members of particular sub-schemes may challenge the resolution on the basis that those members are subject to rights, terms and conditions (unique to their underlying scheme loan) that are distinct from the rights, terms and conditions that apply to other sub-schemes, and therefore the amendment power under section 601GC(1)(a) cannot properly be exercised in a way that affects every subscheme in the same way. Again, BML has not yet formed a definitive position on this question. However, the risk can be avoided entirely by seeking judicial advice (instead of convening a meeting of members), as contemplated under the Proposal. (d) Timing and cost considerations As alluded to above, if a meeting (or meetings) of BMF members needed to be convened, this would add considerable cost and delay to the winding up timetable, which may also prejudice the portfolio sale process (if it ultimately proceeds). For example: BML would need to prepare a notice of meeting and explanatory memorandum in relation to the members' meeting, which would most likely need to contain detailed information regarding each scheme loan so as to enable members of each sub-scheme to make an informed decision as to how they will vote. Essentially, this means the detailed analysis that, under the Proposal, would be undertaken by BML at the conclusion of the sale process (prior to the second Court hearing) would instead need to be undertaken at the commencement of the process. The costs associated with convening the meeting would most likely be borne by members of BMF, out of scheme assets, because it is most unlikely that BSL would be prepared to fund this additional layer of costs. Members would need to be provided with at least 21 days' notice of the meeting, in accordance with statutory requirements. As noted earlier, an application to the Court would still need to be made, so parallel workstreams would need to be co-ordinated, thereby resulting in additional costs and potential duplication. (e) Members' right to participate in Court process It is also relevant to note that a meeting of BMF members is not the only, or indeed the most effective, method to achieve engagement with BMF members throughout the winding up process. BML proposes to continue to engage with BMF members through an active member communication strategy. Members will also be given notice of the Court proceedings and of their right to appear, both at the first and second Court hearings. The two-stage process ensures that no scheme loan may be sold without the approval of the Court, and members will have the right to make submissions to the Court should they disagree with the decision made by BML to sell, or not sell, a particular loan. 2 Cachia v Westpac Financial Services Ltd (2000) 18 ACLC 293 3 Cachia v Westpac Financial Services Ltd (2000) 18 ACLC 293 sojs A0125823433v4 120305720 5.7.2013 page 5
Moreover, in the circumstances, BML considers that a Court is best placed to supervise the winding up process and to give directions and orders having regard to the status of BML and BMF, and the interests of members as a whole. As Robson J observed in In Re Elders Forestry Management Ltd [2012] VSC 287: often, in the reconstruction of managed investment schemes by constitutional amendment, the responsible entity has asked the Court to give directions in relation to the restructure. This Court has done so regularly in the context of insolvency. Allens 5 July 2013 sojs A0125823433v4 120305720 5.7.2013 page 6
Schedule Below we have highlighted some of the factual similarities between the Willmott Forests case and BMF's current circumstances. the application for Court directions concerned numerous schemes, and there were multiple projects within each scheme; there was a degree of urgency which accompanied the application, due to the requirement to market growers' interests and the funding urgently required to maintain the schemes; the responsible entity did not have its own funding to keep the schemes going; the individual schemes had very different interests / positions; some schemes were potentially more viable than others; expressions of interest for a new responsible entity had been sought, with no success; there was no available funding and no proposal for a new responsible entity and accordingly, there was no guarantee that the schemes could continue; the proposed marketing campaign was most likely effectively to maximise prospects of return for growers, creditors and all interested parties; the existing rights of members were 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; and the only immediate effect of making the directions would be the making of the amendment, rather than the exercise of any powers thereunder, unless and until the plaintiffs again approach the courts. sojs A0125823433v4 120305720 5.7.2013 page 7