Part IV—Aftermath of failed MIS: winding up schemes, compensation for
losses and lessons to be learnt
Agribusiness MIS were complex financial products and the
problems due to this complexity became increasing evident as some schemes began
to fail and external administrators tried to salvage the businesses and
ultimately manage the liquidation process.
In this part of the report, the committee examines the
difficulties external administrators faced in endeavouring to rescue a failing
scheme. It deals with appointing a replacement responsible entity; the
functions, responsibilities, obligations of, and complexities confronting
administrators including disentangling the affairs of related entities and
reconciling competing interests.
The committee also examines the effects of failed MIS on the
environment and on farmers who leased land to such enterprises and, overall,
the future for agribusiness MIS in Australia with a particular emphasis on
using tax concessions as an incentive to invest.
Evidence before this committee has highlighted the complicated task of
untangling the interests of the various parties affected when an MIS gets into
financial difficulties and ultimately fails. In this regard, it should be noted
that in November 2010, the government commissioned a review by the Corporations
and Markets Advisory Committee (CAMAC) into the current statutory framework for
all MIS. This review was in the context of the problems that had arisen for
scheme members and creditors where a scheme became financially stressed and the
uncertainty around arrangements for dealing with unviable schemes.
CAMAC delivered its report to government in July 2012.
In this chapter, the committee considers the difficulties involved in
winding-up an agribusiness MIS and the findings of CAMAC's review.
In 2010 in a submission to the then Treasurer the Hon Wayne Swan, the
Law Council of Australia described how the collapse of an agribusiness MIS
the group of companies, including the RE, becomes insolvent—often
blaming the recent GFC, but usually as a result of being unable to refinance
a secured creditor (generally a bank) issues default notices
under its facility agreements;
the RE can no longer afford to maintain the crop and there is a
risk that it will die, thereby creating a substantial loss value to the
investors/growers and risking the landowner's ability to sell the property;
the land owning entity seeks to cancel its head lease with the
RE, which in turn will cancel the subleases to the investor/grower;
the secured creditor of the land seeks to sell the land;
a dispute arises as to what proportion of the sale price relates
to the value of the land vis-à-vis the scheme property (which usually
comprises the crop and some other hard assets).
MIS in external administration
When the RE of an MIS goes into external administration, control of the
company and its operations passes from the directors to the insolvency
practitioners appointed to conduct the administration. According to ASIC:
Depending on the nature of the external administration, the insolvency
practitioner may be an administrator (appointed by the directors or a secured
creditor under the voluntary administration regime in Pt 5.3A of the
Corporations Act), a receiver, or a receiver and manager of the property of the
responsible entity (usually appointed by a secured creditor), or a liquidator.
Once an insolvency practitioner is appointed to the RE, the external
administrator's first priority is to determine whether or not the MIS is
viable. If viable, either its members can appoint a new RE or the Court can
appoint a temporary RE.
Under the Corporations Act, ASIC may suspend or cancel the AFS licence of an RE
that becomes an externally administered body corporate. ASIC informed the
committee that generally it would discuss this proposal with the external
administrator to determine whether such action could potentially cause issues
with the ongoing operation of the schemes. Where ASIC has not cancelled the AFS
licence, it would monitor the conduct of the RE in external administration, including
its compliance with key conditions of its licence.
ASIC's approach to the appointment of external administrators to a RE generally
involves engaging with them to:
discuss the terms of appointment and identify whether they are
independent and sufficiently resourced to conduct the administration;
establish lines of communication and contact points between ASIC
and the external administrator;
inform the external administrator of ASIC's expectations in
relation to the administration, including having due regard to the interests of
members of the schemes operated by the responsible entity; and
obtain information about the entities involved and the potential effects
ASIC would also consider proposals about the future of the schemes; of
the responsible entity's AFS licence; and what action ASIC should take in
response to the administration. According to ASIC, it monitors the
administration generally through regular meetings with the external
One of the insolvency practitioner's most challenging tasks is to find a
suitable or willing replacement RE. ASIC described this process:
It takes an external administrator some time to understand
the arrangements of the entities that they have been appointed to and potential
avenues for dealing with the schemes. External administrators will generally
obtain reports from experts about the viability of schemes, while also
commencing campaigns to determine whether there are any responsible entities
interested in becoming the responsible entity for some or all of the schemes
the responsible entity operates.
But, finding a replacement RE can be problematic. In this regard, CAMAC
In some situations, the responsible entity (RE) of a viable
scheme may act in a manner, or in some other capacity suffer financial loss, that
makes that RE ineligible or unsuitable to continue in its role as operator of
the scheme. However, the future of the scheme may be placed in jeopardy through
difficulties in immediately securing a suitable replacement RE, given that a
scheme cannot continue without an RE.
Numerous people involved in the external administration of a struggling
agribusiness MIS have highlighted the impediments to securing a replacement RE.
Responsibilities of the replacement
With few exceptions, if the RE of a registered scheme changes, the new
responsible entity assumes all the rights, obligations and liabilities in relation
to the scheme of the former RE.
In this regard, Justice Barrett, Judge of the Supreme Court of New South Wales,
observed that if a temporary RE is to be appointed, there must be some
qualified company willing to be appointed. He noted that this may be a problem:
When a new responsible entity takes office, it becomes, under
s 601FS, the statutory inheritor of the rights, obligations and liabilities of the
old responsible entity in relation to the scheme...In our postulated situation,
the successor will come to owe the debts that brought the old responsible
entity undone and to have the rights of recoupment that were insufficient to allow
it to continue. Simple replacement of the responsible entity in liquidation therefore
does not seem a practical possibility. The automatic vesting of the non-viable combination
of liabilities and inadequate rights of recoupment must mean that, in the real
world, there will never be a new responsible entity.
ASIC in its submission to the court hearing the matter of Timbercorp
Securities Limited in liquidation also drew on the above quote from Justice
ASIC informed the committee that, historically, it has been difficult for
external administrators to find replacement responsible entities, due to a
number of issues, including:
the effect of s 601FS and s 601FT of the Corporations Act to
transfer the rights and obligations of the existing RE to any replacement RE in
the context of an enterprise scheme where the extent of the liabilities and
obligations are extensive, or at least uncertain;
the lack of funding available to the replacement RE for the
continuing operation of the scheme;
doubts about the viability of the scheme(s); and
a limited number of potential responsible entities with the
experience and resources to take on the scheme(s).
Ultimately, where a replacement RE cannot be found, a scheme may need to
be wound up.
Willmott Forests Limited (WFL) provided an example of the difficulties
involved in securing a replacement RE. The scheme was a forestry
scheme, involving 14 plantations, with each grower taking a lease of one or
more hectares of land on which to grow timber. That timber was to be harvested
and sold about 16 to 25 years after planting. The leased land was registered in
the name of WFL. The liquidators found that the Willmott schemes could not
continue to operate.
They considered that:
...it was 'very unlikely' that 'a party would be willing to
take over as responsible entity and manager of the Willmott Schemes in circumstances
where that party would be required to assume the liabilities of WFL and fund
the continued operation of the Willmott Schemes without any income or
contributions from [individual investors] until harvest'. The liquidators
further concluded that it would not be practicable to maintain separately, or
harvest separately, the trees on any individual lot leased to a particular
investor and that the individual investors' 'right to maintain and harvest
their own trees is a theoretical right which cannot be exercised'.
PPB Advisory informed the committee of the steps it followed in endeavouring
to salvage and wind-up this company. It advised that, by order of the Federal
Court of Australia on 26 October 2010, Mr Ian Carson and Mr Craig Crosbie, partners
of PPB Advisory, were appointed joint and several administrators of WFL and its
As administrators, and later liquidators, of WFL, they were required to deal
with WFL's role as responsible entity/manager/trustee of the WFL schemes. Early
on, they engaged a forestry expert to 'undertake a technical view and
verification of the viability of the WFL schemes, including assumptions and cash
flow forecasts'. That review found that 'over the life of the WFL schemes, WFL
would require funding in excess of $300 million (in absolute terms) and that
the vast majority of the schemes would not be viable'.
The administrators commenced a campaign seeking expressions of interest
from parties wishing to (among other things) take over the obligations of responsible
entity/manager/trustee for any or all of the WFL schemes. Unsuccessful in
finding a party willing to step into that role on an unconditional basis,
resolutions were passed at a meeting of investors in one of the schemes to
appoint another party as responsible entity.
But unable to find a replacement responsible entity for all schemes, the
liquidators obtained directions from the Federal Court of Australia to enable
them to commence a sale process for the WFL scheme assets.
As administrators and later liquidators for Gunns Plantations Limited,
PPB Advisory followed a similar process—engaged a forestry expert, undertook a
campaign seeking expressions of interest for a replacement RE and following
this unsuccessful attempt obtained directions from the court to commence a
competitive sale process for the Gunns scheme assets.
A second major difficulty for external administrators involved
unravelling the intricate web of agreements comprising the scheme.
Network of agreements and competing interests
CAMAC observed that the problems encountered with the operation of
schemes in recent years had arisen principally, if not exclusively, in the
context of common enterprise schemes. These problems centred on the difficulties
that occur from the intermingling of the affairs and property of the scheme
itself and of its members.
Relevantly, CAMAC noted that common enterprise schemes are often
structured as a series of bilateral or multilateral executory agreements
between the member, the RE and various external parties:
The 'scheme' in that case is not a pool of assets under
management, but rather the common enterprise carried out over time in
accordance with those agreements. For instance, for taxation or other reasons,
various agribusiness common enterprise schemes were structured so that scheme
members ('growers') operated their agribusiness investment in their own right,
entering into agreements with the RE or external parties to perform the
cultivation and management activities associated with the member's enterprise.
Scheme members would hold various forms of proprietary or contractual interests
in allocated parcels of land, which may be owned by an external party.
According to CAMAC, with that type of scheme, complex problems could
arise 'in determining the nature of the rights of scheme members'. Furthermore,
there could be difficulties 'clearly distinguishing during the operation of the
scheme between the property of the scheme and the property of scheme members
used in the enterprise'.
Recent experience with the collapse of some agribusiness
common enterprise schemes points to the possibility of confusion arising in attempting
to untangle these arrangements, with a range of involved parties, including
scheme members, each seeking to assert what they perceive to be their
proprietary and other rights and attempting to determine the way forward, often
in an environment of conflict and resort to litigation.
ASIC also highlighted the difficulties that administrators face when
winding up a failed MIS, which involved undoing the series of interlocking
contracts between the growers and the RE, the sub-leases of the land and
management agreements for the planting, husbandry and harvest. Based on its
experience, ASIC explained the complications facing administrators and
liquidators of MIS:
...external administrators of responsible entities that operate
forestry schemes are faced with a complex web of arrangements with limited
resources available for the continued operation of the schemes. They also face
conflicts in their responsibility to creditors and their duties to members of
In particular, ASIC noted that the effect on ownership rights is 'not
always clear as a matter of law'. It observed that this difficult task of
unravelling ownership rights and the lack of clarity in the law has meant that
external administrators seek judicial guidance.
In this regard, ASIC observed:
Generally, external administrators have sought directions
from the courts about the winding up of forestry schemes because it generally
involves dismantling arrangements with a variety of parties, including land
owners and investors to sell assets (such as land owned by the responsible
entity or other third party on which trees are planted) to meet the claims of
creditors of the responsible entity and members of the scheme.
WFL exemplified the hurdles encountered when winding up an agribusiness
MIS and the liquidators recourse to the courts. According to PPB Advisory,
following the unsuccessful attempt to secure a new RE, the sale of WFL scheme's
assets was a complex process involving numerous applications to the courts. For
example, the liquidators applied to the Supreme Court of Victoria for
directions and orders about the sales that had been negotiated. The court determined
that the liquidators were not able 'to disclaim the Growers' leases with the
effect of extinguishing the Growers' leasehold estate or interest in the
subject land'. The Appeal Court, however, confirmed by the High Court, set
aside the order and determined that the liquidators did have the power to
disclaim the leases to investors.
When a purchaser was identified from the competitive sale process, the liquidators
sought further approval from the Supreme Court of Victoria to proceed with the
The liquidators conducted a competitive sale process for WFL scheme assets and
'sold the assets for the best price obtainable in a sale process that was
approved by the Supreme Court of Victoria'.
Interests of the members
Sections 601FC and 601FD of the Corporations Act (duties of RE and their
officers) impose an obligation on the RE and its officers to act in the best
interests of the members of the scheme and, where there is a conflict of
interest, to prefer the members' interests. ASIC noted, however, that the
external administrator of a responsible entity has to manage the competing
secured creditors, whose ultimate interest may be having the
schemes (which relates to the land) wound up if the effect is to free the land
from these encumbrances; and
growers, whose ultimate interest is to realise the long-term
production of their crops.
According to ASIC, when a company is insolvent, the interests of its
creditors come to the fore in deciding where the company's interests reside. In
MIS, secured creditors of the responsible entity often have security over the
land that is used by growers in the managed investment schemes. ASIC noted:
The secured creditors will generally have a significant
commercial interest in 'un-encumbering' the land over which they have security.
The encumbrances on the land include leases and forestry of varying degrees of
value and maturity, which are held by investors or by the responsible entity
subject to an obligation to hold in accordance with its duties to members on
The committee has described the general arrangements whereby growers
leased portions of land which the RE or related company owned or leased. The growers'
leases were made at various times and for a fixed period. Some leases provided
for the whole of the rent due to be paid in advance while others required rent
to be paid annually.
The Australian Restructuring Insolvency & Turnaround Association
(ARITA) explained the complexities of winding up such schemes, including
determining the rights of investors, and also referred to WFL:
The decision of the Court was to allow the liquidator of WFL
to 'disclaim' leases that had been granted to investors, in some cases, with
the whole of the rent paid in advance, leaving them to prove for their losses
in the winding up, with little prospect of a return. The investors lost any
right to maintain and harvest trees that had been planted on the leased
The facts of that case reflected the particular circumstances
of agribusiness schemes, where multiple long-term and often low-rent leases can
encumber rural properties, causing those properties to become difficult to
The High Court's decision has broader implications for more
common types of leasehold arrangements, particularly in situations where the
liquidator of a landlord forms the view that a property may be more readily
saleable, or sell for a higher price, without the existing leasehold
arrangements in place. This was the case in Willmott Forests.
As noted earlier, many investors were unclear on what they actually
owned. Their rights became particularly contentious when the external
administrators began the process of winding up the schemes. For example, in his
judgement on 14 September 2009 relating to an MIS growing almonds,
Justice Robson explained how growers' rights can be relinquished:
The growers do not own the almond trees but rather have
certain rights to crop the trees. The liquidators are of the view that to
realise the maximum value for the land, equipment, and cropping rights (that is
in effect the whole business) it may be necessary to offer the lot for sale or
recapitalisation as a whole. To that end, the liquidators have amended the
constitution of the relevant almond schemes to allow the responsible entity to
surrender any interest the growers have in the almond groves. Such a power will
enable the liquidators to offer the almond groves on an unencumbered basis to a
buyer or a party willing to recapitalise the almond groves.
The relevant land is mortgaged to banks. If insufficient is
realised to pay out the mortgagees, then any sale depends on the mortgagee
banks agreeing to discharge their mortgages in exchange for a sum less than
they are owed. Naturally, the banks will be seeking to have as much as necessary
allocated to the land value to discharge the mortgages.
Many of the growers who wrote to the committee believed that in the
process of untangling this complicated network of interests, they were the ones
who lost out. Mr Jeff Chin noted:
Whilst the current regulatory regime recognises that
consumers of financial products and services require special protection, in
liquidation these protections disappear. Significant powers and trust are
delegated to the Liquidators—it is a privileged position where fair and
objective behaviour is assumed. However, as has been discussed in other
submissions, the Liquidator appointment process makes it very likely that
Liquidators will pursue the interests of banks (as large repeat clients).
In Mr Chin's view:
...in situations where the impact is wide, and where there
are impediments to victims seeking justice, regulators of the Liquidator (ASIC)
and Consumer Law (ACCC) ought to be intervening to assist grower borrowers to
assert their rights. If not, the Liquidator's intimidatory approach is
likely to simply steamroll many innocent victims, cause widespread unnecessary
distress and incur substantial unnecessary legal costs.
ASIC acknowledged that, in practice, receivers and liquidators,
experience difficulties managing 'the tension between their obligations to
scheme members and their obligations to the creditors' of the RE.
In recent failures in the sector, it is apparent that
(whatever the legal position) the fact that there is no person charged solely
with representing members' interests has undermined investors' confidence in
the capacity of the existing insolvency laws to protect their position.
Many submitters dissatisfied with the winding up or liquidation process
of the schemes were especially galled by the success of a scheme that had been
sold by the liquidator. One submitter noted:
The Liquidator KordaMentha, has closed all Timbercorp
companies except Timbercorp Finance, and has since sold all assets including
the Almond Trees. They were subsequently purchased by a Singaporean Consortium,
Olam Foods, who have just had their first successful harvest. Meanwhile we are
left with nothing except the debt, which has increased nearly 200%. We
purchased a product, that product was taken from us and sold to another, so
while the new owners receive the profits, we are now being hounded to pay for
the product we never got.
Indeed, a common complaint levelled against the liquidators of MIS projects
was that assets were sold at below their market value.
For example, Mr Trevor Burdon, an investor in Willmott Forests 2000
and in Gunns Plantations, witnessed PPB Liquidators disclaim viable pine assets
and sell them at fire-sale for no net return or a very poor return. As noted
earlier, however, the liquidators conducted a competitive sale process for WFL
scheme assets and 'sold the assets for the best price obtainable in a sale process
which was approved by the Supreme Court of Victoria'.
KordaMentha also referred to the significant level of court oversight of
the insolvencies as they attempted 'to navigate the complexities inherent in
realising (and distributing the proceeds of) MIS related assets'. It stated:
The material prepared for the courts during these and other
MIS related engagments, and the resultant judgements, has provided clarity for
stakeholders that will presumably inform the structure of any future projects
and bring into sharp focus the risks associated with these types of tax-effective
investments where little of a capital nature is acquired by Growers.
In addition, the issues faced in realising the assets has highlighted
a number of areas of possible regulatory change.
In KordaMentha's view, CAMAC had undertaken valuable work in this area
of insolvency and agribusiness MIS.
ASIC spoke not only of the competing interests of the secured creditors
and the growers but of the owners of property who leased their land to the
schemes and who also have a vital concern in the winding up of a failed MIS. Referring
to landowners and their status as creditor, Mr Steel, Rural Affairs Manager, TGFA,
noted that identifying the rights among a range of conflicting interests was one
of the difficulties unravelling some of the complexity associated with
agribusiness MIS. He said:
We are still unsure whether the landowners are creditors of
GPL [Gunns] as the entity or of the individual schemes. If the latter, there is
potential that they might get back-rent. But the liquidator has put options to
the landowner which, in most cases, will cancel out any back-rent. So that is
probably better for the grower-investor. That is another issue: you have got a
liquidator who is looking after two interests. One of those interests is the
landowner and the other is the grower-investor. So which one are they actually
looking after? In our interests, it would have been better to have separate
liquidators looking after the entities themselves so you know that they are
actually looking after your interests and not looking over their shoulder. That
is still going ahead.
Mr Jim Crowley, whose property is surrounded by plantation developed
land through an MIS, noted the difficulty he was having identifying the current
owner of the property.
KordaMentha informed the committee that it supported CAMAC's proposed
regulatory reforms to the extent they would 'streamline the process and reduce
the complexity for stakeholders in distressed MIS'. In its assessment, 'the
benefits of any changes of this type would clearly extend to reduce the burden
on landowners with distressed MIS plantations on their land and the wider rural
According to CAMAC, another important distinction to be drawn when
dealing with a financially stressed MIS was between sole-function REs and
multi-function REs. In this regard, it noted that there was the potential for
complexity where schemes were run by multi-function REs. It noted that:
...the task of administering an insolvent multi-function RE can
be made more difficult by having to disentangle its own dealings in its
personal capacity from its dealings as operator of a number of schemes, and
then determine which dealings as scheme operator go with which schemes. This process
can be further complicated by disputation amongst a range of affected parties
about the nature of their rights and remedies where the RE fails.
This potentially complex untangling task would not arise if
schemes could be operated only by sole-function REs.
The difficulties facing external administrators when attempting to
reconcile competing interests means that they often resort to the courts for
direction as demonstrated by the experiences of PPB Advisory and KordaMentha.
Call for reform
Mr Carl Möller,
member of the Victorian Bar, commented on the reliance on the courts for
guidance when winding-up an agribusiness MIS. He wrote that when a company goes
into voluntary administration or liquidation, it was usual for the relevant
administration to be conducted without a court's involvement. He noted,
however, that the opposite applied in respect of MIS and applications to the
courts were common, observing that:
The time, expense and effort in such applications are
Overall, according to Mr Möller,
MIS 'have not coped well with the challenges of insolvency' due in the main to
'the absence of a comprehensive regime governing how schemes should be wound
Likewise, the Australian Restructuring Insolvency & Turnaround Association
noted the extensive case law on forestry schemes that clearly point to the
'complex and unsatisfactory nature of the law'.
It referred to the insolvency practitioners involved in the administration of
Willmott Forests, Great Southern, FEA applying to the courts for guidance and
directions on how Chapter 5 of the Corporations Act (external administration) operates
in respect of these schemes.
It also noted that many decisions of liquidators have been strongly contested
in the courts, including the High Court.
Similarly, ANZ identified the need to reform the insolvency regime that
applied to MIS, urging the committee to 'press for reforms' in this area which
may 'benefit future scheme investors'. It cited the findings of the CAMAC
report on MIS, mentioning, in particular, to the issue of 'restructuring
financially distressed schemes via the introduction of a voluntary
administration scheme of the kind that applies to companies'.
Noting that currently there was no voluntary administration procedure available
for MIS, KordaMentha also referred to the findings of CAMAC.
As mentioned earlier, KordaMentha supported CAMAC's proposed regulatory changes
with regard to 'the procedures for restructuring financially distressed
schemes, and winding up schemes where restructure is not possible, to the
extent they would streamline the process and reduce the complexity for
stakeholders in distressed MIS'.
CAMAC's very thorough examination of managed investment schemes enabled
it to identify potential areas for reform.
It produced many recommendations that would address weaknesses when it comes to
dealing with a financially stressed agribusiness MIS and if necessary the winding
up of such a company.
Importantly, it noted:
Much of the complexity, disputation, delay and costs that
have surrounded the external administration of some common enterprise schemes
in recent years can be traced to earlier failure by REs to ensure:
adequate separation and recording of the affairs of each of the
schemes that they operate; and
clear identification of scheme property and its separation from
the proprietary interests of scheme members utilised in the schemes.
CAMAC formed the view, however, that it may not have been possible for
the Corporations Act introduced in 1998 to 'anticipate the extent to which
schemes would continue to develop beyond primarily passive pooled investment
vehicles'. It noted that MIS now 'encompass large business enterprises,
adopting the common enterprise scheme structure for taxation and other
It recommended that while it might not be practical to require the redesign or termination
of existing common enterprise schemes, there was 'considerable merit in
forestalling future problems through a legislative initiative to prohibit the
creation of new common enterprise schemes'.
As noted earlier, ANZ, KordaMentha and ASIC supported the findings of
CAMAC. The Australian Restructuring Insolvency & Turnaround Association
also referred to the number of law reform recommendations proposed by CAMAC that
would serve to address a range of legal and other difficulties with the
operation, regulation and winding up of schemes under Chapter 5C of the
Corporations Act (managed investment schemes).
The FSI similarly recognised the work of CAMAC and briefly referred to the
difficulties CAMAC identified in managing schemes in financial distress and the
consequent consumer harm. It recommended that the government review CAMAC's
recommendations, giving priority to matters such as those relating to consumer
detriment, including illiquid schemes and freezing of funds.
Unquestionably, the winding up of agribusiness MIS has encountered many
practical difficulties not contemplated by current legislation. Indeed, the
collapse and liquidation of some high-profile agribusiness MIS exposed the difficulties
finding a replacement RE and the complexities in disentangling the rights and
obligations of the various parties. It is clear that legislative change is
required: that this area of the law is crying out for reform.
Clearly, CAMAC has prepared the ground work for more concrete action.
The committee is strongly of the view that the valuable work produced by CAMAC
in respect of the managed investment schemes especially the very difficult
problems of dealing with MIS companies in financial stress provides an ideal
starting point for reform.
The committee recommends that the government use CAMAC's report on
managed investment schemes as the platform for further discussion and
consultation with the industry with a view to introducing legislative reforms
that would remedy the identified shortcomings in managing an MIS in financial difficulties
and the winding-up of collapsed schemes.
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