When aspiring developers offer units in a trust in exchange for funds from investors, and those investors then sell units in their own sub trusts to less sophisticated sub-investors, it can present any external administrators who might subsequently be appointed with quite the conundrum.
“That being said, this proposed distribution method also appropriately and fairly allows for trade creditors to be prioritised, given that those creditors advanced funds or provided goods or services with the intention of being repaid a certain amount which was not dependent upon the Scheme’s success.” Justice Tim McEvoy.
As is illustrated in Algeri, in the matter of Gem Management Group Pty Ltd (in liq)  FCA 1229, this is especially so when the units were sold at different prices to different investors depending on the nature of the relationship the investors had with the vendors in circumstances where ASIC determined that the endeavour qualified as an unregistered managed investment scheme and ASIC took the initiative to have it wound up.
For the liquidators appointed to wind up the Gem Management Group Pty Ltd (GMG) in its capacity as trustee of the VKK Investment Unit Trust (the Trust), the upside was that they had a surplus to distribute after payment of their fees and costs and paying a dividend to priority creditors.
The challenge was how to appropriately distribute that surplus given the complexities around how investors and unit holders were brought into the scheme and on what terms.
There were three methods under consideration by the appointees, Deloitte partners Sal Algeri and David Wood which they put before Federal Court judge Tim McEvoy in hopes of resolving the conundrum.
Distribute pursuant to the terms of the Trust deed; distribute in accordance with the contributions paid into the Trust or make a pro rata distribution on the basis of payments by unitholders and sub-trust unitholders.
The Deloitte duo, whose application for guidance relied to a great extent on the findings of former Federal Court judge Michelle Gordon in Australian Securities Investments Commissioner v Letten (No 7) (2010) 190 FCR 59, favoured the latter option and Justice McEvoy was of the same mind.
“This method recognises the difficulty posed in determining the intention behind any investments and tracing those funds,” his honour said.
“On that basis it collapses the classes of investors so as to remove any distinction, which would be unfair in circumstances where it appears most if not all investors intended to invest in the same Scheme.
“As with the investors in Letten, the investors here shared a “common misfortune” and to the extent that the funds they contributed were not paid to the Trust, that was the result of mismanagement of the Trust by the Company: see Letten at 132 , citing Lehman Brothers.
“That being said, this proposed distribution method also appropriately and fairly allows for trade creditors to be prioritised, given that those creditors advanced funds or provided goods or services with the intention of being repaid a certain amount which was not dependent upon the Scheme’s success.”
Declaring it the “fairest” of the three methods proposed honour made the orders sought, which included protections for Algeri and Woods in respect of the method of distribution adopted. One can’t be too careful when resolving a conundrum.