Courts have recently approved a number of means by which external administrators can realise value from insolvent agricultural managed investment schemes and deal with the rights of growers and sponsor creditors:
- winding up the schemes and selling the scheme property
- surrendering growers’ interests in the land and then selling the land and the plantations, and
- replacing the responsible entity and amending the scheme documents so that the scheme is economically viable under the new responsible entity.
Difficulties faced by some managed investment schemes
A feature of the financial turmoil of 2009 was a number of high profile collapses of agricultural managed investment schemes.
These schemes generally feature up-front investments by retail investors through the medium of a managed investment scheme, but involve direct subleases of land and ownership of agricultural assets. Investors can usually deduct all of their initial investment for tax purposes, while harvest proceeds are fully assessable.
The land is generally owned or leased by the sponsors of the schemes who charge fees for establishment and also harvesting. The gap in cashflows between plantations and harvesting has caused some of the distress, when combined with a falloff in sales of investment product due to the GFC and lack of alternative funding.
Insolvencies in this sector have been handled in several different ways:
- winding up the schemes or amending the schemes to facilitate surrender of the growers’ leases and then selling the land with the plantations (Environinvest and Timbercorp), and
- continuing the schemes but changing the responsible entity and restructuring the schemes to allow the costs up to harvest to be covered by increased charges on harvest (Great Southern).
Freehills assisted two clients in realising opportunities as a result of these insolvencies.
Olam International’s acquisition of Timbercorp almond assets
Neil Pathak and Paul Branston (M&A / Takeovers) assisted by Andrew Leadston and Sebastian Renato (Property / Water) advised Singapore listed company Olam International Limited on its acquisition of approximately 12,000 ha of almond orchards in Victoria and 90,000 ML of water rights from certain Timbercorp entities.
The transactions involved the purchase of almond orchards and water rights from the liquidators of certain Timbercorp entities (for $128 million) and from the receivers of Timbercorp Primary Infrastructure Fund entities ($160 million).
Aside from careful due diligence, a critical aspect of the transaction was the need to transfer clear title to the land and the plantations, free of third party claims.
This was achieved by the responsible entity (in liquidation) amending the scheme constitutions to give itself the power to surrender investor leases and gain title to the plantations. This was done on the basis that the managed investment schemes were ‘hopelessly insolvent’ and the sale of the land and the plantations was, in the circumstances, in the investors’ best interests. The liquidators sought confirmation that these acts were reasonable. The court agreed and granted orders to facilitate the sales, leaving the split of the sale proceeds between the financiers of the managed investment schemes (who had security over the property) and investors in the schemes to be determined via separate court proceedings.
A similar technique was adopted in the case of other schemes formerly managed by Timbercorp in the areas of forestry and olive plantations.
Gunns assuming management of Great Southern’s forestry schemes
Partners Robert Nicholson and Andrew Clyne led the Freehills team comprising members of the corporate, litigation and projects groups which advised Gunns Limited on its successful proposal to assume the role as responsible entity of nine forestry schemes formerly operated by Great Southern Limited.
Investors had contributed approximately $1.3 billion to these schemes, which covered 150,000 ha.
McGrath Nicol was appointed as Receiver and Manager of the responsible entity and of various other Great Southern entities which owned much of the land on which the plantations stood and which provided management services. The Receivers ran a process to elicit proposals for the schemes.
Gunns, which already operated a number of successful managed investment schemes, replaced the insolvent Great Southern entity as responsible entity of the schemes and agreed to fund the expenses through to harvest in return for increased fees from the net proceeds of harvest. Investors retained their interests in the schemes. Gunns also acquired assets used to operate the schemes.
An extraordinary resolution (50 per cent of all investors in each scheme whether voting or not) was required to change the responsible entity, as well as a special resolution to amend the scheme constitutions and associated leases and agreements between the responsible entity and the growers. Those amendments were effected by powers of agency and attorney included among the constitutional amendments.
Two other parties made alternative proposals, one by requisitioning their own meetings of investors. However the receivers recommended the Gunns proposal, which was ultimately well-supported by investors.
Court orders were obtained, first to confirm that the responsible entity was acting reasonably in calling the investor meetings and secondly, to confirm that Gunns, as the new responsible entity, would be acting reasonably in implementing the scheme restructure.
These transactions demonstrate unique and complex issues in the insolvencies of agricultural managed investment schemes. The winding up of those schemes has proved controversial. The Victorian Supreme Court recently dismissed an appeal by scheme investors to the Environinvest winding up, finding that the winding up process can deal with the investors’ interests in the trees and can be ordered where no party can be found to become responsible entity and there is no apparent means of funding the schemes. So this avenue is now firmly an option, along with the approaches adopted in Timbercorp and Great Southern.