CONDUCTED BY MR STIRLING HORNE,
ADMINISTRATOR OF PRIME RETIREMENT AND
AGED CARE PROPERTY TRUST
Unitholder briefings were conducted by the administrator in Brisbane (10 January 2011), Sydney (11 January 2011) and Melbourne (12 January 2011).
All three briefings were very well attended, particularly the Brisbane briefing which attracted more than 200 unitholders, a very strong indication of unitholder concern about the Trust, especially given the timing of the meetings and the Brisbane flood crisis.
At each of the briefings, Mr Horne provided an update on the work he was undertaking as administrator. Matters covered included the following:
• Mr Horne noted that he was initially appointed as administrator by Daytree Pty Ltd, a creditor of the Trust, and a company associated with Mr Bill Lewski.
• Although Mr Horne’s appointment as administrator was challenged by National Australia Bank, and the Court found that Daytree did not have the power to appoint Mr Horne, the Court came to the view that the appointment should stand as it expected the directors of Australian Property Custodian Holdings Ltd (the Responsible Entity of the Trust or RE) to have appointed Mr Horne.
• Mr Horne conducted the First Creditors Meeting on 11 November 2010 and, after applying for and being granted a six-month extension by the Court, is now required to convene the Second Creditors Meeting by May 2011.
• Mr Horne confirmed that several unitholders have already been recognised as contingent creditors and confirmed that all unitholders would be given the opportunity in due course to be classed as contingent creditors.
• The appointment of receivers to the Trust’s retirement villages was discussed, and it was noted that Ernst & Young and Korda Mentha are now each in control of several of the Trust’s retirement villages. It was noted that the receivers had taken no action at this stage to sell villages, and it was noted that there were a number of serious issues associated with the management rights currently held by Lend Lease Primelife which required further investigation.
• Mr Horne acknowledged the poor relationship that existed between the RE (as trustee of the Trust) and Lend Lease Primelife (as manager of the retirement villages), which had resulted in a Term Sheet being determined to govern several practical and financial matters between the parties.
• Mr Horne advised that the netting-off arrangement, whereby Lend Lease Primelife was using surpluses from some villages to subsidise shortfalls on other villages, had now ceased.
• Mr Horne advised that the only assets of the RE are a $5m deposit (held for licence purposes) and moneys due to the RE.
• Mr Horne reported that a rental retirement village in Gawler had been sold as BankWest (as secured creditor) had intended to appoint receivers. The sale proceeds of $3.3m, less the loan to BankWest of $0.9m, would be paid to the Trust.
• Mr Horne reported that the RE’s professional indemnity insurance policy was being maintained via the continued payment of premiums but was prevented, due to confidentiality provisions, from being able to provide specific details as the amount of cover and various conditions.
• It was noted that the RE’s office is being maintained with a staff of four employees.
• A report will be prepared by Mr Horne and distributed to all stakeholders, including unitholders, by April 2011. This report will cover the position of the Trust and contain a recommendation as to whether the Trust should be liquidated, returned to the directors or subject to a Deed of Company Arrangement. Mr Horne confirmed that all three options were being considered.
Following the address by Mr Horne, the opportunity was given to the Prime Trust Action Group and to unitholders in general to raise issues of concern. At each of the briefings, a large number of issues was raised from the floor and each question time session lasted approximately 1 ½ hours. The matters raised at the briefings included the following:
Matters Raised by Prime Trust Action Group
1. Section 601GC of the Corporations Act and Clause 25 of the Trust’s Constitution both require that unitholder approval is required before the RE can introduce new fees. In August 2006, the RE changed the Trust’s Constitution to provide itself with a listing fee of 2.5% of the gross assets without first obtaining unitholder approval. This issue was brought to the administrator’s attention at the First Creditors Meeting on 11 November 2010 and also in various written submissions made to Mr Horne by representatives of the Prime Trust Action Group. Mr Horne was asked whether he agreed that the RE acted illegally in providing itself with a listing fee of $33 million.
2. Section 601FC of the Corporations Act requires that the RE must act in the best interest of unitholders, and if there is any conflict between unitholders’ interests and the RE’s interests, must give priority to unitholders’ interests. Mr Horne was asked to concur that the RE, by taking $33 million from unitholders without approval, failed to give priority to unitholders’ interests.
3. Mr Horne was asked whether he was prepared to order the parties that received the listing fee repay $33 million to the Trust together with interest at commercial rates.
4. As the Constitutional amendment providing for the listing fee was prepared by the legal firm Madgwicks, Mr Horne was asked to state whether he thought that Madgwicks are also guilty of breaching Section 601GC of the Corporations Act. Mr Horne was asked to state whether he thought Madgwicks must share the responsibility for reimbursing the Trust the $33 million plus interest.
5. The Trust’s auditor has a statutory responsibility to report any illegal conduct to ASIC. Mr Horne was asked whether the Trust’s auditor failed in its statutory duty by not reporting the listing fee. Mr Horne was also asked to state whether he thought that the auditor should share responsibility for reimbursing the Trust the $33 million plus interest.
1. The ownership of the management rights by the Trust is crucial for the values of the villages. Mr Horne was asked what investigations he had carried out in order to determine how the management rights came to be vested in parties other than the Trust.
2. The management rights were transferred to interests associated with Mr Lewski who then sold them to Babcock & Brown Communities for $60 million. As the management rights were a Trust asset, Mr Horne was asked whether he thought that the Trust has been defrauded to the tune of $60 million by this transaction. Mr Horne was asked to confirm that Mr Lewski did not pay a commercial consideration to the Trust for the acquisition of the management rights. Mr Horne was asked to comment on the suggestion that Mr Lewski should be ordered to repay the $60 million plus interest at commercial rates.
3. After discussions with parties that sold retirement villages to the Trust, the Action Group is aware that not only the villages but the associated management rights were both sold to, and became assets of, the Trust. Mr Horne was asked to confirm that the management rights were indeed assets of the Trust and whether he believed that these rights had been misappropriated by the RE.
4. In July 2007, the fees payable to the holder of the management rights (Mr Lewski) increased dramatically (and correspondingly, the revenue payable to the Trust declined dramatically). A few weeks later, Mr Lewski then sold the management rights to Babcock & Brown Communities for $60 million. Mr Horne was asked whether he agreed that there were major irregularities with this transaction.
5. By Mr Lewski transferring the management rights to an external party, with such rights now being held by a hostile third party and competitor in Lend Lease, there has been a $150 million write-down in the value of the Trust’s properties. Further write-downs are likely. Section 601FC of the Corporations Act requires that a Responsible Entity “act in the best interests of the members and, if there is a conflict between the members' interests and its own interests, give priority to the members' interests”. Bearing in mind the RE’s actions, Mr Horne was asked whether Mr Lewski and the RE failed in their statutory duty and whether they should now be ordered to compensate unitholders for the associated losses of $150 million plus interest.
6. As Mr Lewski did not have proper title to the management rights, Mr Horne was asked to comment on the suggestion that the transaction to transfer the management rights to Babcock & Brown (and later Lend Lease Primelife) must be voided.
7. Bearing in mind that the RE is bound by law to act in the best interests of unitholders at all times, Mr Horne was asked whether he believed that the RE acted contrary to law by transferring the management rights to a competitor of the Trust. Mr Horne was also reminded of Section 601FC of the Corporations Act which requires the RE to clearly identify Trust property and hold this separately from RE assets.
8. Now that the management rights are held by Lend Lease, it is of course impossible to sell any retirement villages at fair value. Mr Horne was asked whether he believed that the RE and Mr Lewski should be made responsible for the diminution in unitholder value arising directly from the externalization of the management rights.
Deferred Management Fees - Restructuring of Fee Arrangements
1. Prior to July 2007, the Trust received 100% of the deferred management fees. These fees are typically 3% of the incoming resident contribution each year. In June 2007, the RE produced a PDS stating that the Trust would no longer receive 100% of the deferred management fees but would only receive 40%. Interests associated with Mr Lewski were to receive a staggering 60% of the deferred management fees. Mr Horne was asked whether this this fee restructure was in the best interests of unitholders, or whether instead it was in the best interests of Mr Lewski.
2. Although the 2007 PDS states that the Trust will only be receiving 40% of the deferred management fees, we understand that the Projected Revenues and distributions are based on 100% of the deferred management fees. By doing this, the PDS projected distributions of 8.50 – 8.85% whereas the revenue on the new fee arrangements would have been substantially lower. Other irregularities have been noted in relation to the Trust’s financial projections. Mr Horne was asked to comment whether such a blatant misrepresentation of Trust income, if proven, would represent misleading, deceptive and unconscionable conduct and whether the RE must indemnify unitholders for the losses sustained on their investments.
3. As the RE clearly intended to move to a 40% deferred management fee arrangement, it is highly misleading and deceptive if the PDS projections assume that the Trust continued to receive 100% of deferred management fees. The management restructure whereby deferred management fees fell from 100% to only 40% resulted in a huge reduction in revenue, and yet the RE stated in the PDS that: “The Responsible Entity considers that the management restructure will not be adverse to Prime Trust or Unitholders.” Mr Horne was asked to comment whether the RE misled and deceived investors.
4. Had the 2007 PDS shown the impact of the new fee arrangements, we understand that the revised distribution yield would have been expected to be below the rates available on term deposits at the time. Mr Horne was asked whether he believed the capital raising would have been likely to fail had investors been properly informed of likely distributions.