On 15 October 2010, Suncorp Metway Bank appointed Ernst & Young as receivers of three Prime Trust villages over which it holds security for money it had lent to Prime Trust. This appointment was followed on 18 October 2010 by the appointment by National Australia Bank and Bank of Scotland of Korda Mentha as receivers over a further six Prime Trust properties.
ME Bank which also has security over other properties against which it has lent money to Prime Trust, has retained Ferrier Hodgson as advisers. The Responsible Entity, Australian Property Custodian Holdings Limited (the RE), has appointed Lawler, Draper & Dillon as voluntary administrators of the RE and other companies owned by Prime Trust.
For the year ended 30 June 2009, Prime Trust reported a loss of almost $255 million before an income tax benefit of $3.4 million that will probably be lost. The village rents received in that year and at least the two preceding years can only be described as abysmal and quite unable to provide a base for distributions to unit holders.
The above appointments, together with the foregoing loss and a forecast further write down of asset values announced in June 2010, give rise to enormous losses to unit holders and possibly to a total loss of value of Trust units.
A number of unit holders have undertaken a detailed analysis of the activities of the RE and have identified a number of decisions made by the RE that are considered to be imprudent or improper and that have contributed directly to the losses that unit holders are likely to suffer. These decisions are outlined in more detail below. Under the circumstances, it is considered to be appropriate to engage the services of a litigation funding company to conduct a full and proper investigation of the events that have led to the present parlous state of affairs.
A litigation funding company will need to be satisfied as to the merits of the case against potential defendants and also that its involvement is supported by a significant proportion of unit holders. The group of unit holders that has issued this Notice is working assiduously to assemble the information that will be needed by a litigation funding company to establish the merits of our case and for it to proceed to the first stage of its work, namely to conduct its own investigation that would form the basis of subsequent court action.
If court action is taken, a litigation funding company would work on a “no win, no fee” basis. It would recover its costs from awards of the court and also receive a proportion of awards above its costs. There would be no recourse to unit holders for any of the costs that have been incurred. Unit holders will understand that a strong case must be established a priori if a litigation funding company is to take the case.
The cost of mounting direct action by the unit holders against the potential defendants would be prohibitive. We simply could not mount direct action. Therefore it is imperative that unit holders satisfy the second leg of the requirements of a litigation funding company, that is, signify support for the proposed course of action by completing and returning the form that accompanies this Notice. If unit holder support were not to be forthcoming, there is nothing that we can do beyond informing ASIC of our findings.
ASIC has already been advised of most of our findings to this point in time and is now conducting its own investigation. However, whilst ASIC’s enquiries may lead to it taking legal action, that action of itself would not be expected to lead directly to restitution of unit holders’ losses.
Matters that our small group are continuing to examine are summarized below.
RESPONSIBLE ENTITY FEES
The scheme constitution was amended in August 2006 to provide for fees to be paid from the Trust Fund to the RE in the event of the units being listed on ASX and in the event of the removal of the RE by the unit holders or by ASIC except in the event of proven wilful negligence or fraud (proof of either of these would require a finding by a court) or the loss of its license to act as RE. The fee in each case was 2.5% of the gross value of assets. It is noteworthy that listing of the units on ASX was an obligation under the PDS dated 30 August 2005. If listing did not occur within two years of the date of that PDS, the assets were to be sold, the net amount of the fund distributed to unit holders and the Trust was to be wound up.
The amendment was made without seeking the approval of unit holders, without informing them of the RE’s intention of making the amendment and without notifying them after the event.
Whilst the Corporations Act provides for amendments to a scheme constitution to deal with administrative matters that do not adversely affect unit holders’ rights, unit holder approval is required in all other cases. We believe that the payment of additional fees as provided for in the August 2006 variation of the constitution required the approval of unit holders.
In August 2007, the RE entered into an arrangement with the management company that manages a number of Prime Trust’s villages. These villages are those that are currently retained by Prime Trust. The management company was owned by W. Lewski who, at the time, was the managing director and major shareholder of the RE.
Prior to this arrangement, Prime Trust received the deferred management fees paid by village residents and paid a fee to the management company for its management of the villages. Following the arrangement, the deferred management fees were received by the management company and Prime Trust received a rent from the management company. We believe that Prime Trust received no consideration for this reconstruction of the management arrangements. We have already commented on the abysmal level of rents received by Prime Trust.
We understand that, in the case of Prime Trust’s acquisition of certain villages, the management rights were included in the sale to Prime Trust. In other words, the management rights became the property of Prime Trust on and from the dates of acquisition of those villages.
DISTRIBUTIONS TO UNIT HOLDERS
Distributions paid to unit holders by Prime Trust for the financial years ended 30 June 2006, 2007 and 2008 were only possible because of unrealized capital gains (that have since turned into huge realized and unrealized losses) from then current revaluations of Prime Trust’s villages. A further distribution of one cent was made for the quarter ended 30 September 2008 notwithstanding the imminent write down of property values that led to the massive loss for the year ended 30 June 2009.
In our opinion, Prime Trust would have been unable to raise further capital off the back of its June 2007 PDS if distributions had not been paid for 2006 and 2007 or if the source of distributions had been properly disclosed. Whilst it was not illegal for the distributions for 2006, 2007 and 2008 to be paid, we believe that their payment was imprudent in the extreme because it was evident that the Trust was not generating sufficient cash income from its operations to pay distributions. The shortfall in cash income was chronic. The distributions paid could only be sourced from accumulated cash (which was replenished by new investments and which could only be temporary source), from borrowing or from capital raised.
We believe that the payment of regular distributions over an extended period may have misled existing and potential unit holders as to the true financial performance and the true financial condition of Prime Trust.
POTENTIALLY MISLEADING AND DECEPTIVE CONDUCT
There were a number of statements made in the PDS issued by the RE in June 2007, in relation to the funds that would provide Prime Trust with the ability to make distributions to unit holders.
We believe that these may have led potential investors to believe that the income generated by Prime Trust would be higher than it subsequently proved to be and that expenses would be lower. We believe that some of these statements were repeated from earlier PDS’s issued by the RE.
After examining these matters, we believe that many unit holders may have been induced to invest in Prime Trust by statements that ought not to have been made. Our further investigation is continuing. If our further investigation confirms our opinion that unit holders have a strong legal case to recover at least some of their losses, the results of that investigation will be made available to a litigation funding company.
We seek your support for the continuation of our investigation and to our seeking a litigation funding company to consider our evidence. That company will make its own investigation and its assessment of our evidence. It will mount legal action against persons and organizations that have caused the Trust’s losses if its investigation and assessment support that action. A litigation funding company would have a considerable sum riding on any case that it takes to court action. Accordingly, no undertaking that court action will be mounted can be given at this stage.
We intend to keep you informed as our plans proceed towards action that will result in appropriate legal action being taken.
To contain costs, it is imperative that email addresses be provided for further communications*.
It is also a requirement that a responsible entity act in the interests of the unit holders at all times. Plainly the August 2006 amendment was beneficial to the RE and detrimental to the unit holders. The RE was required to certify that the amendment did not impact on the rights of unit holders. The amendment provided the means of depriving the unit holders of some of their accumulated funds and therefore impacted adversely on their rights.
The listing fee was drawn following listing in August 2007, the amount being $32,943,000 and represented more than 7% of the unit holders’ funds at that time. It is our position that the listing fee paid must be restored to the Trust together with interest calculated and compounded at the rate of 1.5% per month for the period from the date of its payment to the date of its restitution. We note that the rate of interest sought is lower than the rate charged on most unsecured credit card debts.
In September 2007, the management company sold the management rights to Babcock and Brown Communities for $60 million. These rights were subsequently acquired by Lend Lease Primelife and are the same rights over which the RE had an option expiring on 30 June 2010, to purchase for between $40 million and $45 million. The option could not be exercised because Prime Trust’s cash was exhausted by listing fees paid, realized investment losses, payment of distributions from unrealized capital gains and massive expenses. The Trust’s financial position was so poor that it was unable to borrow the sum required.
The ongoing ownership of the management rights by Lend Lease Primelife is a serious impediment to a fair market for the villages. The receivers would be expected to sell the villages to repay the debts to the banks. It would now appear that Lend Lease Primelife is the only potential buyer. It could be expected to drive a hard bargain that might be little or no more than sufficient to pay out the secured creditors.
In its announcement to the ASX on 10 June 2010, the RE advised that Prime Trust would need to write down the value of its properties by between $130 million and $150 million if it did not own the management rights.
We believe that it was improper to transfer the management rights to interests associated with Mr Lewski for no consideration and that the restructuring of the management fees and the externalizing of the management rights were detrimental to the interests of unit holders.
The 30 August 2005 PDS stated that a cap of 0.65% applied to the Management Expense Ratio. We believe that the cap has been vastly exceeded but no explanation has been made to unit holders.
* Please note that this communication, which does not constitute advice, is confidential and any reproduction or distribution of this document, without the author's written consent, is expressly prohibited. This document is intended solely for the use of Prime Retirement & Aged Care Property Trust unit holders (who are not affiliated in any way to Australian Property Custodian Holdings Ltd) and their independent advisers. Confidentiality and privilege are not waived if you are not the intended recipient.