The responsible entity of the LM First Mortgage Investment Fund went into liquidation and liquidators were appointed to manage the responsible entity to wind it up as well as the scheme itself under section 601NE(1) of the Corporations Act pursuant to court orders. A receiver was also appointed to ensure the scheme was wound up under section 601NF(2) pursuant to court orders The liquidator applied to the court for directions to ascertain the delineation of powers and responsibilities of the liquidator and the receiver given the overlap of the duties and powers. The receiver sought directions that they had responsibility for determining the responsible entity’s entitlement to indemnity from the scheme property.
The court noted that the unwieldly state of the law for winding up a managed investment scheme made it necessary to resolve these questions but lamented that resort to the court only served to make the winding up extremely costly. The court noted that the receiver’s expenses to date had significantly diminished the assets and said:
The investors who are members of the scheme already face a huge shortfall between the amounts that they invested in the scheme and any distribution they might receive on the winding up of the scheme. They have no interest in the resolution of legal questions that will not see the scheme property realised to better advantage or distributed at a minimum of expense.
The court noted that a scheme unlike a company does not have a separate legal personality, which is a reason why there are greater procedural difficulties with winding up a scheme as opposed to a company. The assets of the scheme are not the property of the responsible entity, except for the right of indemnity that the responsible entity has against the trust assets for properly incurred liabilities. In the case of scheme, no liquidator is appointed to wind up a scheme as a separate legal personality and the rights of creditors are not converted into a right to prove in the winding up of the scheme. Instead, the court may order another person to wind up the scheme to provide some independence so as to consider the responsible entity’s conduct and to this end, the court appointed a receiver. The court said:
In a practical sense, the winding up of the [scheme] requires that the debts of the [responsible entity] properly incurred as responsible entity and trustee (and other debts properly incurred by the receiver) be ascertained and paid from the property of the [scheme]. The debts of the [responsible entity], including those it incurred as responsible entity and trustee, are liabilities that the liquidators would ordinarily deal with by the process of proofs of debt in the winding up of the [responsible entity].
The court held that the distribution of powers between the responsible entity (as managed by the liquidator) and the receiver is to be ascertained from the terms of the court orders.
The court noted that while the language of section 60NF(1) refers to an order appointing a person to take responsible for ensuring the winding, that does not mean that the receiver’s role is secondary – that depends on the orders themselves. The court found that a receiver has no power to deal with the debts of the responsible entity in its winding up and no power to deal with the responsible entity’s right of indemnity out of the scheme property. Those powers are to be exercised by the liquidators. The court noted that if the order had authorised the receiver to carry on the business of the scheme, only then would it have power to pay the debts of the responsible entity incurred in carrying on that business. The court rejected that the liquidator’s role was limited to not much more than maintaining its suspended financial services licence. The court found that the receivers had no role to play in the winding up of the responsible entity. The liquidators were tasked with the job of ascertaining creditors of the responsible entity. The court found that it has power to make a necessary order to deal with the right of indemnity, particularly as it may only be exercised by the liquidators and proposed the following process:
It seems to me that the process should require the [responsible entity] to identify debts or claims for which it claims to be entitled to an indemnity and to submit the same with any reasonably requested information to the [receiver]. The [ receiver] should be empowered by order to admit or reject the claimed right against the assets of the FMIF. If necessary, either party should be able to apply for the Court’s approval of the outcome or determination of any dispute.
The court found that the responsible entity was not in possession of any part of the scheme property and so cannot retain any such part to meet the scheme’s liabilities. These powers of the liquidator cannot be engaged. Hence the entity’s obligation to make any distribution to members cannot be exercised until it is in possession. That will not occur unless an order is made that the receiver go out of possession. In effect, this suspends the responsible entity’s obligations to manage the scheme. When the receiver has completed collecting and realising the assets, he is not obliged to relinquish possession of them to the responsible entity and is in fact not authorised to do so without an order of the court. But the receiver is also not authorised by the terms of the order or the law to make distributions to members because the orders were no drawn that widely. The orders were specifically drawn in relation to realising the scheme property.
The court directed the receiver not to make a distribution to members without an order from the court. The court also found that to the extent that the responsible entity cannot get relief in terms of financial reporting obligations, the receiver must provide it with reasonably requested information to enable the responsible entity to comply with its obligations. The court found that the final audit of the scheme is the job of the liquidators but this will not be needed for many months.