Australian Executor Trustees v Provident Capital [2012] FCA 728

Provident Capital a well known mortgage lender raised its money through a debenture fund. On 29 June 2012, a receiver was appointed by the Federal Court. This appointment was made even though Provident had not defaulted on its debentures.

The application to the court was made by the trustee of the debenture trust deed, Australian Executor Trustees Limited.

At the date of the hearing Provident owed to 3000 debenture holders approximately $128 million. The debentures were redeemable at various times but ranked equally in priority in proportion to their face value and were secured over Provident’s loan book.

The trustee brought the application because its projections showed that Provident would not be in a position in the future to repay all debenture holders equally as and when they were due for payment. The circumstances that gave rise to this situation included the fact that 90% of that property portfolio consists of non performing loans.

Provident had issued, earlier this year, a booklet to its investors in which it explained the blowout in non performing loans saying:

One of the main reasons for this has been the extra time required to resolve these matters (a significant number of loans have been in arrears for well in excess of 180 days), particularly in the dispute resolution and litigation processes, in dealing with local councils for approvals, and because of changes in the property sale market.” (emphasis added)

The trustee retained PPB Advisory to report on Provident’s liquidity, key findings included:

A number of assets in Provident’s accounts had no recoverable value. These included a deferred tax asset and what had been recorded as the unsecured balance outstanding due in respect of loans for which the security properties had already been sold. Some of those unsecured amounts were Provident’s assessments of the value of its claims in proceedings against guarantors or borrowers on personal covenants, while others were based on the assessed value of negligence actions against valuers or solicitors. All of the proceedings included in the total figure for this asset appear to have been supported by solicitors’ opinions indicating that Provident had reasonable prospects of success in each action.

That if their forecast deficiency in net assets was correct, there would not be sufficient property available to meet claims from all debenture holders based on the updated carrying values. PPB said that Provident was unlikely to be able to reduce the deficiency in the short to medium term through trading profits.

The judge concluded by saying:

Until recently Provident has been able successfully to meet its obligations to persons who have lent it money and that the current difficulties with which it is confronted in its loan book have arisen through no fault of its own, as the evidence of PPB makes clear. I also accept that Provident is managing the arrangements for realising the properties in an appropriate way.

Nevertheless, the statutory provisions for appointing a receiver are activated in a situation in which debentures have not fallen due for payment but all the evidence shows that the borrower is insolvent and will not be able to pay the debentures when the time for payment arises.

Click here to read the full judgment

Scroll to Top