2338/01 AUSTRALIAN SECURITIES & INVESTMENTS
COMMISSION -v- William Arthur FORGE & Ors
JUDGMENT
1 FOSTER AJ: In these proceedings the Australian Securities & Investments Commission ("ASIC") by Originating Process, dated 26 April 2001, sought various declarations and orders against each of the defendants in respect of conduct occurring in 1998, which was alleged to have been in contravention of certain provisions of the Corporations Law then in force. The application is made under s 1317EB of the Corporations Law, which section continues to apply to the 1998 conduct pursuant to s 1383 of the Corporations Act, when read with s 1473(1) of the Corporations Law. The application seeks civil penalty orders against each defendant being declarations under s 1317EA(2) and orders under s 1317EA(3) of the Corporations Law. ASIC alleges that the conduct engaged in by each of the defendants involved contraventions of provisions of the Corporations Law that were in force in 1998, namely ss 232(2), 232(4), 232(6), 243ZE(2) and 243ZE(3). The fifth defendant is in liquidation and the proceedings against it have been stayed.
2 It is convenient, by way of background, to refer to certain facts which are clearly established in the evidence. The second defendant, Jozsef Endresz ("Mr Endresz") and the third defendant, Dawn May Endresz ("Mrs Endresz") are husband and wife. The fourth defendant, Allan Paul Endresz ("Allan Endresz") is their son. The fifth defendant, Kamanga Holdings Pty Limited ("Kamanga") is a family company of the Endresz family.
3 The first defendant, William Arthur Forge "(Mr Forge") is a friend of the Endresz family and is the sole director and secretary of the sixth defendant, Bisoya Pty Limited ("Bisoya") which is his private family company.
4 Mr and Mrs Endresz and Allan Endresz were at different times directors of the company CTC Resources N.L. ("CTC") which, until 12 March 1991, was named Emu Hill Gold Mines N.L. From 1989 Allan Endresz and Mr Endresz held 51% of the issued shares in this company. Until 18 December 1990 the company was listed on the Australian Stock Exchange ("ASX") but, on that date, was delisted pursuant to an ASX discretionary rule.
5 In April 1991 Mrs Endresz was appointed a director of CTC. On 11 June 1993 Allan Endresz resigned as director and secretary and Mr Endresz was appointed as secretary in his place. Mr Forge was appointed a director of CTC on 9 September 1994.
6 In 1992, a registered fixed floating Charge of $1,000,000.00 was registered over all the assets of CTC in favour of Kamanga.
7 In the early 1990's CTC retained Davis Samuel Pty Limited ("Davis Samuel") as a corporate advisor. This company was owned as to 50% of its shares by Kamanga. In 1994 CTC brought a claim for damages in the Supreme Court of Western Australia against the ASX, alleging that its delisting had been wrongful. Damages were claimed, ranging between $37,000,000.00 and $1,500,000,000.00. Davis Samuel conducted the action on behalf of CTC, originally in consideration of its receiving 60% of damages recovered. A subsequent variation of these arrangements involved CTC purchasing half of the 60%, whilst the remaining 30% was sold to Kamanga. Instead of the previous arrangements Davis Samuel was given a fee of $60,000.00 per month from 1 May 1988 onwards in consideration of its continuing to prosecute the claim.
8 CTC has about 1,200 shareholders but no annual general meeting of the company was held between 1991 and 1997. On 23 March 1998 an annual general meeting was held in respect of those years. The accounts for 1991 to 1997 were produced to the meeting and were approved. These accounts referred to the fact that CTC was fully supported by Kamanga, the auditors (Messrs. Ernst & Young) expressing doubts as to CTC's ability to continue as a going concern unless provided by support from Kamanga. It was not possible to determine whether Kamanga had the relevant ability to provide support.
9 These accounts, when presented, indicated significant operating losses in the years 1994 to 1997. In 1994 there was a loss of $164,000.00. In 1997 the loss was $344,000.00. Accumulated losses had increased each year with the result that the accounts indicated that shareholders' equity was, in fact, a deficiency of $1,427,273.00 in 1997. The company had earned no income over that period.
10 The events with which these proceedings are concerned occurred in April 1998. In that month CTC received into its funds the amount of $6,000,000.00. This amount was received from the Commonwealth of Australia and was characterised as payment for 60,000 redeemable convertible non-cumulative A-Class preference shares called CTC Capital Bonds Series 1, the issue price being $10.00 per share. A dividend of 6.5% was to be paid annually and there was to be a guaranteed redemption of the capital at the end of four years.
11 The circumstances attending the entry into of this capital raising exercise and the receipt of the payment are not in issue in these proceedings. It is the manner in which the amount received was dealt with, by way of disbursement, that is called in question.
12 After portion of the amount received was invested in a Commercial Bill Facility, the whole of the balance, $3,596,348.90 was disbursed at various times in 1998. Eight transactions are alleged to have occurred in breach of relevant sections of the Corporations Law. It is convenient, at this stage, to set-out in full those parts of the originating process that deal with each transaction, describing it, and indicating the relief sought in the proceedings:-
"This application concerns conduct that occurred in 1998. The application is made under subsection 1317EB of the Corporations Law, which continues to apply to the conduct pursuant to subsection 1473(1) of the Corporations Law.
The conduct involved contraventions of certain provisions of the Corporations Law that were in force in 1998, namely subsections 232(2), 232(4), 232(6), 243ZE(2) and 243ZE(3) of the Corporations Law . This application seeks civil penalty orders under provisions of the Corporations Law that were in force in 1998 and which continue to apply regarding the conduct pursuant to subsection 1473(1) of the Corporations Law . The civil penalty orders that the application seeks are declarations under subsection 1317EA(2) of the Corporations Law and orders under subsection 1317EA(3) of the Corporations Law .
Transaction 1
1 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 1 ").
2 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 2 ").
3 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 3 ").
4 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 4 ").
5 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the fifth defendant has, by receiving $2,205,000 from CTC Resources N.L. ACN 009 061 036, on or about 20 April 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 5 ").
Transaction 2
6 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 6 ").
7 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 7 ").
8 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 8 ").
9 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 9 ").
10 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the sixth defendant has, by receiving $260,000 from CTC Resources N.L. ACN 009 061 036, on or about 20 April 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 10 ").
Transaction 3
11 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 11 ").
12 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 12 ").
13 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 13 ").
14 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant third defendant, and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 14 ").
15 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the fifth defendant has, by receiving $40,833.34 from CTC Resources N.L. ACN 009 061 036, on or about 28 May 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 15 ").
Transaction 4
16 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 16 ").
17 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 17 ").
18 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 18 ").
19 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 19 ").
20 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the sixth defendant has, by receiving $10,833.34 from CTC Resources N.L. ACN 009 061 036, on or about 28 May 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 20 ").
Transaction 5
21 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 21 ").
22 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 22 ").
23 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 23 ").
24 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 24 ").
25 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the fifth defendant has, by receiving $250,000 from CTC Resources N.L. ACN 009 061 036, on or about 28 October 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 25 ").
Transaction 6
26 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 26 ").
27 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 27 ").
28 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 28 ").
29 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 29 ").
30 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the fifth defendant has, by receiving $100,000 from CTC Resources N.L. ACN 009 061 036, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 30 ").
Transaction 7
31 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 31 ").
32 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 32 ").
33 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 33 ").
34 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 34 ").
35 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the sixth defendant has, by receiving $75,000 from CTC Resources N.L. ACN 009 061 036, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 35 ").
Transaction 8
36 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 36 ").
37 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 37 ").
38 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 38 ").
39 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 39 ").
40 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law, that the fifth defendant has, by receiving $150,000 from CTC Resources N.L. ACN 009 061 036, on or about 13 November 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036 (" Contravention 40 ")."
13 Before referring the evidence relied on in the hearing, it is convenient to refer to the sections of the Corporations Law which are involved. They or their effect are as follows:-
" s.79 A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
s.232(2) An officer of a corporation shall at all times act
honestly in the exercise of his or her powers and the discharge of the duties of his or her office.
s.232(4) An officer of a corporation shall at all times exercise
a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties.
s.232(6) An officer or employee of a corporation must not,
in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation.
s.234H(1) A public company must not give a financial benefit to a related party except as permitted by Part 2E.4 or 2E.5.
S.243F(1) of the Corporations Law defines a related party of a
public company to include the following:-
(a) a director of the public company;
(b) a director of a body corporate that is a parent entity of the public company;
(c) one of the persons constituting an entity (other than a body corporate) that is a parent entity of the public company;
(d) a spouse or de facto spouse of such a director or person;
(e) a parent, son or daughter of such a director, person, spouse or de facto spouse;
(f) an entity (other than a child entity of the public company) over which: a person of the kind referred to in paragraph (a), (b), (c), or (e) has control; or 2 or more such persons together have control;
(g) a parent entity or sibling entity of the public company.
s.243ZE
(1) This section applies if:
(a) a related party of a public company receives a financial benefit from the public company…
(b) the public company contravenes subsection 243H(1) …, by giving the benefit.
(2) The related party contravenes this subsection.
(3) Subject to subsection (4), a person contravenes this subsection if the person:
(a) is involved (as defined in section 79) in; or
(b) is, by act or omission, directly or indirectly, recklessly concerned in, or party to the contravention of subsection 243H(1) or (2), or the contravention of subsection (2) of this section.
s.1473(1) Part 9.4B of the old Law continues to apply in relation to:
(a) a contravention of a civil penalty provision listed in section 1317D of the old Law; or
(b) an offence committed against one of those civil penalty provisions;
despite its repeal.
s.1317D of the Corporations Law (as it then existed) provides, in effect, that ss 232(2), 232(4), 232(6) and 243ZE of the Corporations Law were all civil penalty provisions.
s.1317EA
(1) This section applies if the Court is satisfied that a person has contravened a civil penalty provision…
(2) The Court is to declare that the person has, by a specified act or omission, contravened that provision in relation to a specified corporation or registered scheme, but need not so declare if such a declaration is already in force under Division 4.
(3) The Court may also make against the person either or both of the following orders in relation to the contravention:
(a) an order prohibiting the person, for such period as is specified in the order, from managing a corporation;
(b) an order that the person pay to the Commonwealth a pecuniary penalty of an amount so specified that does not exceed 2,000 penalty units.
(4) The Court is not to make an order under paragraph 3(a) if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation.
(5) That Court is not to make an order under paragraph 3(b) unless it is satisfied that the contravention is a serious one.
s.206C of the Corporations Act now provides the Court with a discretion to disqualify a person from managing a Corporation for such period as the Court thinks fit where there has been a contravention of a civil penalty provision.
s.206E of the Corporations Act now provides the Court with a discretion to disqualify a person from managing a Corporation for such period as the Court thinks fit where there has been two or more contraventions of the Corporations Act.
s.1317G of the Corporations Law now provides, in effect, that a Court may order a person to pay a pecuniary penalty of up to $200,000 in respect of a serious contravention of a civil penalty provision."
14 Some of these sections have been the subject of judicial comment. I shall refer to relevant decided cases later in these reasons.
15 Allan Endresz represented himself in these proceedings. He was given leave, by consent, to represent the other defendants. He is not legally qualified but has an accounting and corporate background. It is clear that his decision to represent himself and the other defendants was not based upon financial considerations. He was, however, accorded at least, if not more than, the customary level of assistance provided to litigants in person. I shall consider matters raised by him in his defence and in defence of the other defendants later in these reasons. At this stage I shall refer to ASIC's case as presented against him and the other defendants.
16 A large part of the evidence in this case was documentary in form. ASIC tendered four bundles of documents which, together, became exhibit "A". A number of these documents related to the payment by CTC of the amounts in question in the impugned transactions and their receipt by the relevant defendants. These documents consisted of copy invoices, cheques, bank statements and the like financial records. In the result, the payment and receipt of the relevant monies is not in issue. Accordingly, I merely note that I have been taken to the relevant exhibited records and that they substantiate these payments and receipts. It is convenient, however, to consider at this stage and set out relevant parts of certain documents, to which I was taken by counsel for ASIC, in relation to transactions 1 and 2, as they provide a convenient introduction to the issues relating to those transactions and also to the other transactions in question. In particular, they illustrate the concerns of CTC's auditors, Ernst & Young in relation to the 1998 transactions and the way in which ASIC became involved.
17 I have already referred to the comments of Ernst & Young in relation to the accounts presented at the general meeting on 23 March 1998 in respect of the financial years 1991-1997. The receipt of the $6,000,000.00 and its disbursement were of concern to the auditors in relation to the accounts for the financial year 1998.
18 The amount of $6,000,000.00 was received by CTC on 20 April 1998. At 11.30am on that day there was a meeting of the company's directors, the minutes of which are in evidence. Those in attendance were Mr Endresz as Chairman, Mr Forge and Mrs Endresz. Under the heading "Management Fees and Retainer Kamanga Holdings Pty Limited", the minutes record the following:-
" The Chairman advised the meeting that the matter to be considered by the board concerned the past and future management fees and retainers with respect to Kamanga Holdings Pty Ltd.
In view of his common directorship with Kamanga, the chairman advised that he would not vote on the matter nor would he be present whilst the board considered the matter pursuant to Section 232A of the Corporations Law.
Accordingly, Mr Jozsef Endresz retired from the meeting and handed the chair over to Mr William Forge for the duration of this matter.
Mr Forge confirmed that pursuant to the Articles of Association and the Corporations Law, the remaining directors constituted a quorum and the meeting was declared open to consider this matter.
IT WAS RESOLVED to accept the invoice issued by Kamanga in respect of past management fees totalling $2,205,000 and calculated as to $245,000 p.a. over 9 years. This represented the enormous management contribution provided by Kamanga over the Company's most difficult and turbulent years in its Corporate history.
IT WAS FURTHER RESOLVED to execute the attached Management Retainer with Kamanga on the basis of a minimum of $245,000 p.a. for a period of 5 years. This is to ensure that the Company retains Kamanga and its professional staff for such a minimum period.
Payments to be made on a monthly basis commencing 1st May 1998.
Having concluded this matter, Mr Forge invited Mr Endresz to rejoin the meeting and resume the chair."
19 Under the heading "Management Fees Bisoya Pty Ltd., the following is minuted:-
"Mr Forge advised the meeting that the matter to be considered by the board concerned the past and future management fees and retainers with respect to Bisoya Pty Ltd.
In view of his common directorship with Bisoya Mr Forge advised that he would not vote on the matter nor would he be present whilst the board considered the matter pursuant to Section 232A of the Corporations Law.
Accordingly, Mr Forge retired from the meeting for the duration of this matter.
Mr Jozsef Endresz confirmed that pursuant to the Articles of Association and the Corporations Law, the remaining directors constituted a quorum and the meeting was declared open to consider this matter.
IT WAS RESOLVED to accept the invoice issued by Bisoya in respect of past management fees totalling $260,000 and calculated as to $65,000 p.a. over 4 years.
IT WAS FURTHER RESOLVED to execute the attached Management Retainer with Bisoya on the basis of a minimum of 465,000 p.a. for a period of 5 years.
Payments to be made on a monthly basis commencing 1st May 1998.
Having concluded this matter, Mr Endresz invited Mr Forge to rejoin the meeting and resume his board position."
20 It may be noted that the invoice referred to, relating to Kamanga, was dated 20 April 1998 and that relating to Bisoya was dated 21 April 1998.
21 The auditors raised questions in relation to the payments made under the authority of these resolutions, in a document of 30 June 1998, described as a "Summary Review Memorandum", in draft form. It appears to be in the nature of a discussion document between the auditors and CTC. It is erroneously referred to as relating to the year ended 30 June 1997. It is accepted that the reference should be to 1998. It records that the company made a significant loss of approximately $3.8 million for that year which was said to be "predominantly due to the following factors." These included the payment of "Management Fees of $2.25 million to Kamanga Holdings P/L, the family company of the Endresz family and Management fees of $0.27 million paid to Bisoya P/L, a company operated by the director, Bill Forge".
22 Under the heading "Significant Accounting and Auditing Issues", reference was made to the issue of the $600,000.00 redeemable convertible non-cumulative preference shares, referred to above and to the annual dividends payable in respect of them and that this should be recognised as a financial liability of CTC. Reference was then made to the payment of management fees to directors, it being noted that these payments were funded from the $6,000,000.00 resulting from the issue of the shares. The payments to Kamanga and Bisoya were considered under this heading. Then under the heading of "Potential Breach of Corporations Law" the following appears:-
"s 243 of the Corps Law govern financial benefits to related parties. S 243H states that a public company must not give a financial benefit to a related party except as permitted by Division 4 or 5.
Essentially, where the transaction is not at arms length, or the remuneration is not reasonable, the payment of the benefit must be approved in a general meeting by non-involved shareholders.
Given the financial performance of CTC, it appears difficult to maintain an argument that the remuneration was reasonable. CTC have not notified the ASIC of any of their related party transactions, thus it appears EY are required to notify the ASIC of the breach of s 243H."
23 Reference was also made to the agreement with Davis Samuel relating to the claim against the Australian Stock Exchange. In this regard, the following appears in the memorandum:-
"This agreement was amended in April 1998, whereby CTC paid Davis Samuel $300,000 (plus a monthly retainer of 46,000) in return for CTC increasing their share of any damages awarded to 70%.
CTC have attempted to capitalise these costs in the expectation of a substantial damages payment from the claim against the ASX. We have been unable to find adequate evidence supporting the Director's assertion that a damages payout is likely in the foreseeable future.
EY have discussed the status of the claim with Michael McPhee, Partner of Michell Sillar McPhee law firm running CTC's case. Per McPhee, the case has not yet gone to trial and is unlikely to do so before the middle of 1999. McPhee stated that proving CTC had incurred loss as a result of their delisting would be difficult, and that even if judgment was obtained then the ASX had the option of appealing to the full bench of the WA Supreme Court and ultimately the High Court (pending special leave).
Based on the above, EY consider any future benefit arising from the legal costs incurred to be uncertain and immeasurable. Client will be asked to expense all legal costs, and failure to do so will result in EY qualifying the audit report to reflect the disagreement with management (given the costs are material)."
24 Under the heading "Provision of Consultancy Services from Kamanga Holdings Pty Ltd the following appears:-
"CTC entered into a Consultancy agreement on 20 April 1998 with Kamanga Holdings Pty Ltd. The agreement provides for CTC to pay the Consultant, named as Allan Endresz, a retainer of $245,000 per annum for 5 years, with the first year of the contract commencing on 20 April 1998.
The portion of the first years payment relating to the period ended 30 June 1998 was expensed in the current year profit and loss statement, with the remaining portion recorded as a prepaid expense. In addition, Kamanga Holdings are a related party so the appropriate disclosure in the related party note has been made, as well as disclosure of the commitment remaining at 30 June 1998."
25 Additionally, on 24 September 1998, Mr Walsh, a partner in Ernst & Young wrote to the directors of CTC in relation to "a number of related party transactions" which had been encountered in the audit. Reference was then made to the payment of $2,205,000.00 to Kamanga and of $260,000 to Bisoya, as retrospective payments of management fees. There was further reference to Future Management Fees being payment of $245,000 per annum to Kamanga and $65,000 per annum to Bisoya for the next 5 years." The letter then continued as follows:-
"Based upon our review of the company's statutory records and register we are not aware of shareholder approval being obtained for these transactions, should it be required.
In order for us to make an assessment as to the adequacy of the disclosure of these transactions in the financial statements and to assist us in fulfilling any other statutory duties imposed by us in relation to these matters, would you please provide us with further clarification as to the circumstances surrounding these payments. In particular, our duties extend to making an assessment as to whether the transactions are at arms length, and whether the quantum of remuneration is reasonable.
Could you please provide the following details,
- how the transactions arose;
- how the amounts involved were arrived at; and
- what approval process was undertaken.
In addition, could you also provide us details as to the shareholding of directors in Kamanga Holdings Pty Ltd and Bisoya Pty Ltd, to assist us in determining whether those shares are held by all members of those entities as nominees for CTC."
26 The letter also referred to the auditor's duty to "notify the ASIC of any Corporations Law consequences."
27 Although this letter had been addressed to the Directors of CTC, it was answered by Allan Endresz, describing himself as "Corporate Advisor". His reply was dated 15 December 1998 and was addressed to Mr Walsh. The relevant parts of the letter read as follows:-
"I refer to your letter dated 24th September 1998 in respect of the related party transacations with CTC Resources N.L. and advise as follows:
1. Davis Samuel is a partnership owned equally by Quancorp Pty Ltd and Kamanga Holdings Pty Ltd. As Mr Jozsef Endresz does not control this entity pursuant to Section 243F(1)(f)(i), it is not a related party.
Any reference in the Financial Statement of Davis Samuel being a related party should be removed.
………………
4. With respect to the management fees of $2,205,000 paid retrospectively for the past 9 years to Kamanga Holdings Pty Ltd together with contracts committing CTC to future management fees of 4245,000 per annum for the next 5 years, we advise as follows:-
The Related Party issues above are exempt pursuant to Section 243K as a financial benefit may be given if it is reasonable to provide that remuneration or it was reasonable to make that contract. In this regard, the services provided by Kamanga include, but are not limited to, the full time involvement of three (3) persons, namely: Jozsef Endresz, Dawn Endresz and Allan Endresz. This equates to an effective annual cost to CTC of 481,666 per person. The hourly contribution by these parties exceeds 60 hours per week per person for their professional services. It is considered that in light of these onerous hours, extensive responsibilities and market comparisons, the management contracts (both past and present) are reasonable to CTC. However, from Kamanga's perspective, these fees represent payments for services well below their true market worth. In addition, Kamanga was deprived of the use of such money for a period of 9 years with no annual reviews to market even though CTC received such services with considerable benefits to CC and its shareholders.
5. With respect to the management fees of $2260,000 paid retrospectively for the past 4 years to Bisoya Pty Ltd together with contracts committing CTC to future management fees of $65,000 per annum for the next 5 years, we confirm that the Related Party issues are exempt pursuant to Section 243K as detailed in clause 4 above. The services provided by Mr William Forge are reasonable in view of the hours contributed and remuneration payable of $65,000 per annum.
I trust that the above satisfies your queries and welcome any further discussion in respect of these issues."
28 It is clear that this response was not regarded as satisfactory by Ernst & Young, with the result that Mr Walsh, on 15 January 1999 wrote to Allan Endresz indicating that he had "a number of follow-up queries" which he stated as follows:-
"I. Is there any further evidence other than in your letter dated 15 December 1998 as to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd during the period ended 30 June 1998?
II. When did the amounts specified in Point I become due and payable? What event triggered this date? What agreements existed that required the amounts to be paid?
III. Why was the portion of remuneration paid to Kamanga and Bisoya in the year ended 30 June 1998 which related to prior periods not disclosed as a contingent or actual liability in prior period accounts?"
29 On 15 February 1999, in a lengthy letter Mr Endresz, as director, answered Mr Walsh's specific queries as follows:-
"I. Further evidence with respect to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd includes the following:
As a result of Kamanga's business interests, particularly in Davis Samuel, CC benefits (at no cost) from an extensive research data base (both legal and corporate) and professional outsourcing. Professionals accessed have included Alan Myers Q.C., Alan Archibald Q.C., Blake Dawson Waldron and Michell Sillar McPhee.
In this regard, Kamanga brings to CTC an entire corporate package of not only professional advice but also a dedicated team of Board members who receive no direct salaries or fees as they undertake their duties. The extent of this professionalism is verified in the attached corporate profile of Davis Samuel.
During the past 9 years, Kamanga has incurred additional professional fees for outsourced work to the benefit of CTC. These fees have not (nor will be) invoiced to CTC as Kamanga considers them part of the overall service provided to CTC.
To verify this, I refer you to Kamanga's extensive legal and corporate work including (but not limited to) numerous leading Federal and High Court cases (ie ATO franking credits, Private Ruling System, SIB Resources N.L., Ando Minerals N.L.), drafting and completing numerous corporate proposals and funding packages (ie Information Memorandums for raising equity and asset acquisitions), major debt settlements (ie Westpac Banking Corporation), other debt and litigation settlements (ie Elders Finance and Tivmoss), creditor liaison (three unlisted companies and subsidiaries with over 150 individual creditors), taxation and corporate re-structuring, extensive research and advice on ASX $37 million Damages claim, proposed implementation of marketing and profile strategies for the CTC Premium Bonds, corporate and community based sponsorship programs together with unique and innovative utilisation of Davis Samuel products including substantial proposed takeovers.
Additional professional work undertaken by Kamanga has not been factored into the management fee structure of past years nor the current 5 year retainer. To measure the substantial benefits derived by CTC and therefore the reasonableness of such fees, I refer you to the $120,000 fee rendered by Ernst & Young with respect to taxation aspects of transferring franking credits. Although the concept and a majority of the research was developed and structured by Kamanga (together with external legal advises), Kamanga did not (nor has) received additional fees for this onerous service. Accordingly, the level of fees rendered must be placed in perspective.
The working hours engaged by Kamanga personnel, together with their extensive professional input and research, ensures that the fees rendered are reasonable.
With respect to Bisoya, Mr Forge brings to the CTC expertise by virtue of his external public company directorships in the resource sector. In this regard, I refer to his directorships with Growth Resources N.L., Kanowna Lights N.L., and Hallmark Gold N.L. Mr Forge delivers to CTC potentially a number of resource projects and other networking within the resource sector Management fees paid and or payable to Bisoya are therefore reasonable when compared with fees paid to public company directors.
II. The amounts specified in Point I, became due and payable upon receipt of the Invoices dated 20th April 1998. There were no previous agreements that required the amounts to be paid. The CTC board carefully reviewed and discussed the prospects of past management fees upon receipt of the proposed five year management agreements and invoices.
In light of the onerous and significant commercial projects now undertaken by CTC, the board concluded that not only should a further five year professional relationship be maintained with Kamanga & Bisoya, but that these entities were entitled to previous years management fees.
III. As detailed in Point II, above, the liability had arisen on 20th April 1998 and was therefore neither a contingent nor actual liability in prior period accounts."
30 Ernst & Young, obviously, were unimpressed and unpersuaded. In his response of 4 March 1999 Mr Walsh reminded the directors of CTC that it was a public company and that "the documentation previously forwarded has not been sufficient to enable us to form an opinion as to the compliance or otherwise of the transactions with the relevant provisions of the Corporations Law." He addressed the following queries:-
" Remuneration to director related entities
1. Is there any further as yet previously undisclosed evidence as to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd during the period ended 30 June 1998? For example, could the parties involved be requested to provide more detailed invoices (ie projects/tasks/hours) concerning the services provided?
2. Why was there no disclosure in prior year financial statements regarding an actual or contingent liability to pay management fees ' other remuneration to any director related entities?
3. As there were no previous agreement in place to bind CTC to paying retrospective management fees, why did CTC pay the amounts if they were not liable to do so?
4. Are there any other potential invoices to be rendered by Kamanga Holdings Pty Ltd or Bisoya Pty Ltd relating to the period prior to 30 June 1998 or after that date which would require recognition and/or disclosure in the financial statement as at 30 June 1998."
31 The letter also sought (inter alia) a list of all individuals and companies considered to be "related parties" and "a summary of the professional relationship between CTC and Kamanga Holdings Pty Ltd." Reference was also made to a possible need to notify ASIC, if the information was not satisfactory.
32 It appears that this letter was responded to by a letter from CTC's solicitors dated 15 September 1999, which referred to the transactions between CTC and Kamanga and Bisoya and stated that "our instructions contemplate that if necessary and appropriate we should seek to declaratory relief in the Courts in relation to the transaction." They sought, in effect, time to consider the matter.
33 Mr Walsh replied on 23 September 1999. He advised that CTC had "breached the time deadlines specified in the Corporations Law for issuing their annual report to members, lodging their financial report with ASIC, and holding their A.G.M. He indicated that, pursuant to the solicitor's request, he would refrain from completing the audit for 14 days, pending receipt of their advice. This produced a response from the solicitors that they would not be able to comply with that time limit.
34 On 1 February 2000 Mr Walsh sent a long letter to the directors of CTC, referring to the endeavours of the auditors "to finalise the audit for the year ended 30 June 1998 and 30 June 1999. It referred to the fact that ASIC had been previously advised that CTC was in breach of the relevant dead-lines and requested that the 30 June 1998 financial statements be completed immediately. It referred to relevant penalties under the Corporations Law which could be imposed upon directors. It enclosed a copy of a letter sent to ASIC in accordance with the obligations of the auditors. It pointed to the fact that "the most significant matters outstanding for the 30 June 1998 financial statements were in relation to payments made to entities associated with directors, namely the payment of $2,205,000.00 to Kamanga Holdings and a similar payment to Bisoya of $260,000 together with the commitment to each company for the payment of management fees for the next five years. It referred to the absence of shareholder approval in respect of these payments and that the information provided in respect of them was inadequate. It further indicated a lack of satisfaction on the part of the auditors that "the transactions are commercial". It sought additional information, in the following respects:-
" Payment to Kamanga Holdings Pty Ltd for management fees for the year ended April 1998 and the previous 8 years for a total of $2,2025,000.
Responses from Jozsef and Allan were inconsistent, with Jozsef's being based on remuneration of individuals (Jozsef, Dawn and Allan) and Allan's being based on payments for work performed.
Jozsef and Dawn were directors of other companies, including listed companies during those 9 years. Therefore payment based on a full-time salary, for a 60 hour week on CTC affairs, does not appear appropriate.
The amounts do not appear to directly relate to work performed, as the amounts do not vary from year to year to link to the projects nominated as having been completed.
We would like more information as to what CTC has paid for and when the events occurred.
The payable to Kamanga includes amounts paid by Kamanga on behalf of CTC Resources. A detailed analysis of the Kamanga and other payable accounts for the 9 years is required to ensure no double counting of payments by Kamanga.
Commitment to pay Kamanga Holdings Pty Ltd management fees of $245,000 for each of the next 5 years.
The term "consulting services" is used in the management contract with Kamanga. We believe that the services to be provided are too broad to establish a fixed price for future work.
We would like to know what alternatives to Kamanga were considered by the CTC board.
What oversight of the contract is being undertaken by CTC to ensure that it receives sufficient value for what is paid?
The apparent lack of alternatives and oversight of the contract indicate that the contract may not be on an arm's length basis.
Payment to Bisoya Pty Ltd for management fees for the year ended April 1998 and the previous 3 years for a total of $260,000.
Forge was and is a director of other companies, including listed companies. Therefore payment based on a full-time salary does not appear appropriate.
We would like to know what evidence the board had of the hours worked by Forge and the performance of Forge before making the payment.
Commitment to pay Bisoya Pty Ltd Management fees of $65,000 for each of the next 5 years.
As for the retrospective management fees, we would like to know what evidence the board had of the past performance of Forge to warrant the future management fees."
35 Reference was also made to the issuing of shares and options to Kamanga by CTC on 30 June 1998, with an indication that, on the information available to the auditors, there appeared to have been breaches of the Corporations Law under Chapter 2E (formerly Chapter 3.2A) Related Party Transactions, in that shareholder approval had not been obtained for the issue of the shares and options on 1 August 1998. The question whether the issue of the shares and options had been properly on an arm's length basis was raised. A number of further audit requirements were stipulated including "a confirmation from the Commonwealth Bank to support the Capital Guarantee of the CTC Capital Bonds - Series 1, as detailed in the relevant letter of offer. A reply was sought by 15 February 2000.
36 On 1 February 2000 Ernst & Young wrote to CTC's solicitors indicating that they were not satisfied that the relevant transactions were commercial or in compliance with the Corporations Law and stating that, if sufficient further evidence had not been received by Tuesday 15 February 2000, Ernst & Young would be required to notify ASIC that there was reasonable grounds to suspect relevant breaches of the Corporations Law. Advice was sought as to "the status as to any action…..being undertaken by CTC…generally and in particular with the Kamanga and Bisoya transactions."
37 On 1 February 2000 Ernst & Young wrote to ASIC indicating that until the directors of CTC had furnished them with a final set of financial statements, they were unable to finalise the audit and issue a report for the year ended 30 June 1998. The letter referred to the auditor's understanding, which was correct, "that CTC Resources' assets continue to be frozen and that the company is currently not operating due to litigation proceeding in the Australian Capital Territory." This litigation related to the payment to CTC of the $6,000,000.00 on 20 April 1998.
38 Transactions 3-8 are all the subject of documentation, copies of the relevant documents being part of exhibit "A". I have been taken through them by counsel for ASIC. There is no dispute as to their effect. They clearly establish the existence of the transactions the subject of the charges made in the relevant sections of the Originating Process. Accordingly, I will merely record in the following paragraphs the findings in respect of the making of particular transactions.
39 I find Transaction 3 established, namely a payment of $40,833.34 by CTC to Kamanga on 26 May 1998. This represents two monthly payments to Kamanga, pursuant to a Consultancy Agreement approved at the CTC board meeting of 20 April 1998. The Consultancy Agreement is in evidence and refers to the retainer sum of $245,000 per year, the Principal Officer of Kamanga being Allan Endresz. Kamanga is to perform and provide advisory services including strategic and business planning, marketing, financial and organisational services. It is also to carry out the role of Public Officer of CTC. The payment relates to management fees for the months of May and June. The directors involved in the authorising of the payments are Mr Forge, Mr Endresz, Mrs Endresz and, it is alleged, Allan Endresz. It will be necessary to consider in more detail the role of Allan Endresz later in these reasons.
40 Transaction 4 involved the payment of $10,833.34 by CTC to Bisoya. Again there is a Management Agreement dated 20 April 1998, the Principal Officer of Bisoya being Mr Forge. The amount represents management fees for May and June. The directors involved are Mr Forge, Mr Endresz and Mrs Endresz. Bisoya is involved as the recipient of the payment.
41 Transactions 5 and 6 involve a loan by CTC to Kamanga of $350,000 broken up into two payments, one of $250,000 and the other of $100,000 being, respectively, transactions 5 and 6. There is a Loan Agreement bearing date 27 October 1998 signed by Mr Endresz on behalf of Kamanga which confirms the acceptance from CTC of a loan in the amount of $350,000 dated that date and for the term of twelve months. It is a loan without security. The loan was approved on 27 October 1998 at a Directors' Meeting of CTC at which Mr and Mrs Endresz were present together with Mr Forge. As previously, because of the common directorship Mr Forge absented himself from the Directors' Meeting and Mr and Mrs Endresz resolved to confirm and ratify the loan of $350,000 to Kamanga. The documentation to which I have been taken clearly indicates the payment from CTC to Kamanga of $250,000 on 28 October as an unsecured loan.
42 Transaction 6 is the balance of the unsecured loan being the amount of $100,000. It is debited to CTC on 30 October. The documents indicate quite clearly that it represented the "balance of loan facility" to Kamanga.
43 Transaction 7 relates to a $75,000 loan to Bisoya. On 27 October 1998 a Loan Agreement was executed by Bisoya by Mr Forge as sole director and secretary. It was to be an unsecured loan from CTC for a period of twelve months. Relevant documentation shows its payment and receipt on 30 October 1998.
44 Transaction 8 was a loan of $150,000 by CTC to Kamanga, received on 13 November 1998. There was a Loan Agreement in the same format as the previous Loan Agreements. It is an unsecured loan. The loan is authorised in a meeting of CTC directors conducted in the same way as previous meetings to avoid relevant directors voting in matters in which they had an interest.
45 It is the general contention of ASIC that all these transactions were uncommercial, not in the interests of CTC or its shareholders and in breach of the relevant provisions of the Corporations Law. ASIC sought to establish these breaches by the calling of evidence, to which I shall now turn.
46 The first witness called was Graeme Leslie Barned, who had sworn an affidavit of 26 June 2001. Mr Barned in his affidavit and oral evidence did little more than confirm, through bank documentation, matters that I have already found to be established. He did, however, indicate that, at least from his viewpoint as a senior bank officer in Albury, where CTC conducted its operations, no guarantee had been given as to the redemption by CTC of capital involved in the Bond issue. I should add that there was no evidence from any other source that such a guarantee was put in place.
47 The next witness for ASIC was Roger John Craig Walsh ("Mr Walsh") who gave evidence, by affidavit dated 27 June 2001, and also orally. Mr Walsh was a partner in the Corporate Finance Division of Ernst & Young and was the partner responsible for the audit of CTC in the 1997 and 1998 financial years. His evidence, to a large extent, dealt with the financial documentary material which underpinned the findings that have been made as to the payments and receipts constituting the transactions, the subject of these proceedings. Additionally, he gave evidence that in those financial years he dealt with Mr Forge, Mr Endresz and Mrs Endresz as directors of CTC. He indicated that, from his duties as audit partner he believed that Allan Endresz "played a major role in managing the affairs of the company and that on a majority of occasions he asked for and spoke to him on audit matters. He said that, "in the absence of conclusive evidence" he could not reach the opinion that Allan Endresz was a defacto director of CTC at that time. He understood that Allan Endresz had an interest in Davis Samuel Pty Ltd which provided company advisory services to corporations, including, from time to time, CTC. He also became aware that Kamanga, with which company Mr Endresz and Allan Endresz were associated, could be regarded as a related party of CTC, as was Bisoya, in which Mr Forge had an interest.
48 Mr Walsh had been unable to obtain confirmation as to the existence of a Commonwealth Bank guarantee in relation to the Series 1 Capital Bonds. He regarded the redemption amount as a liability of CTC. He referred to the correspondence with CTC, which has been set out above, and supported the opinions expressed by himself and his staff as set-out in those letters.
49 In his oral evidence, Mr Walsh made reference to the draft accounts that had been prepared in respect of the financial year 1998 and that they showed an operating loss for CTC before tax of $3,782,240.00. He indicated, however, that the draft accounts had been the subject of further work since the making of his affidavit and that the operating loss for the company, as then ascertained, was "some millions of dollars higher". In particular, certain exploration assets, referred to in the previous draft accounts, had not been renewed by the Department of Mines, with the result that the tenements had been lost involving "an extra $2 million of loss in the financial statements."
50 He also indicated that, as at the time of the giving of his oral evidence, he had received no information indicating that any guarantee was in place relating to the redemption of the capital of the bond issue. In relation to the transactions which are the subject matter of these proceedings, referred to as "the related party transactions", he expressed the view that nothing had occurred to alter his opinion that the transactions were not commercial.
51 Mr Walsh was extensively cross-examined by Allan Endresz. The cross-examination produced many objections as to relevance, a large number of which were successful. During the cross-examination Allan Endresz tendered a large number of documents, some of which were used in cross-examination. I do not propose to refer in detail to the cross-examination or to the documents. However, the following matters emerged.
52 Mr Walsh regarded the question of whether Allan Endresz had acted, at relevant times as a defacto director as being in "a grey area". He agreed that Allan Endresz would not have been a director from 1993 because of "consideration as to prior issues with Corporations Law." That is why "the accounts now reflect, the three directors, Dawn Endresz, Jozsef Endresz and William Forge". It emerged later in the cross-examination that Allan Endresz had in fact been barred for a number of years from holding the position of director because of previous infringements of the Corporations Law. Mr Walsh gave as his understanding of "the Davis Samuel entity" that it was "a corporate advisor firm of which Allan Endresz was one of the principals". It was a company with a securities license.
53 In relation to the activities of Davis Samuel he gave the following evidence:-
"A. Yes, my understanding about the activities of Davis Samuel was it was engaged in a number of corporate deals or attempted corporate deals which were varying in nature, some of which involved public companies.
Q. Would you suggest small or sizeable deals in the corporate areas?
A. Tended to be deals on the fringe, smaller deals and deals which were high risk in nature.
Q. Takeovers that might not have been contemplated in the general marketplace, as to acquisitions in the normal course?
A. Yes.
Q. Innovative, would that be a word?
A. Yes, different."
54 Mr Walsh agreed that the audit of the 1998 financial year accounts was still incomplete and had been "an on-going programme for quite some time". He indicated that the auditors principal concern, in relation to the guarantee of repayment, was that it should be "classified as a liability in the balance sheet." In relation to the ongoing audit he agreed that there had been a meeting convened in the offices of CTC in Albury with himself and others and legal representatives "to canvass a lot of these issues in an open forum." Allan Endresz asked Mr Walsh what word he would use to describe CTC as an entity with its activities and what it had been doing over a ten or twelve year history. Mr Walsh responded that if he had to chose a word it would be "unusual". He also said, in answer to questions from Allan Endresz that, if he were advising someone who was contemplating being a director of that company, he "would tell them not to." He was asked a number of questions relating to the ongoing attempts to finalise the accounts and their audit. In relation to the fees in question paid to Kamanga and Bisoya he gave the following evidence:-
"ENDRESZ: Q. In relation to the review of those fees and the payments has this been a difficult task to balance out the commerciality in relation to the size of the fees?
A. Yes it has.
Q. The considerations you have given have been extensive?
A. Yes.
Q. You have received a lot of information from the directors?
A. We have received I believe as much information as they can provide us, yes.
Q. The issue is still uncertain in terms of coming to grips with this level of fees at this point?
A. We believe we have received all of the evidence available to us and the current status of our opinion in relation to those is that we have not received sufficient evidence to convince us that those fees were either validly incurred or commercial."
55 It is fair to say that Mr Walsh adhered to this opinion throughout his cross-examination. He agreed the matter was still open but expressed the opinion that:-
"A. In view of the fact that we have written to the company on no less than three occasions seeking that evidence, in view of the fact we visited the company's offices and had extensive conversations with the company about these transactions, in view of what we have received I think it is unlikely there is any further material to be provided to us in relation to these transactions."
56 In cross-examination, reference was made to the absence of payment of directors' salaries to the CTC directors over the relevant period. Reference was also made to the receipt of monies from CTC by director-related entities. There was no specificity in this evidence.
57 In the context of the "unusual" activities of CTC, reference was made to Article 2A of its Articles and some relationship of the Article 2A to a "shareholder incentive bonus concept". By questioning in cross-examination, Allan Endresz brought out the relationship between that scheme and the delisting of the company by the Australian Stock Exchange, leading to the company's claim for damages.
58 In answer to direct questions from Allan Endresz, the following evidence was given by Mr Walsh in relation to each of the defendants:-
"ENDRESZ: Q. Mr Walsh, if we could first take Mr Joseph Endresz, in the period - he is a continuing director, as you know now from 1991 through to present - if we could consider his position as to his honesty and forthcoming in terms of documentation, disclosures, et cetera, et cetera?
A. Yes. His role as a director of the company, he has, in my view, conducted himself with honesty, against a background that the company is a highly unusual company. We said that earlier on; the activities of the company are on the fringe and often pushing the boundaries of the law. There is a large amount of - there seems to be a large amount of litigation and legal matters involved in the company's activities and therefore, I guess you have to consider the company's activities are unusual from a starting point.
Mr Joseph Endresz, we have had contact with him in our capacity as auditors over the years and I think he, like the other directors, where there has been a question of the company being in breach of an accounting standard, or needing to make a change to the accounts in order to comply with the law, there have been vigorous debates over the years but, in the end, the company has generally taken advice from us in order to comply with the law.
Q. And moving on to Mrs Dawn Endresz?
A. I have not had a lot of contact with Dawn. Over the years, it has mainly been in a simply telephone type of conversation, where she has directed us to other directors. In terms of her honesty, we have no reason to question her. She is not a woman without opinions; generally, those opinions are consistent with the other directors.
Q. And Mr Bill - William Forge?
A. Mr Forge came along later into the group. I am not sure of his exact background. He really hasn't - his opinions have not featured strongly in terms of the direction of the company. He is more in the nature of making up the numbers.
Q. During the periods you have indicated in earlier evidence, my capacity as a corporate adviser through up to - I will put to you 18 January 2000 to now as a director, as to honesty, et cetera?
A. You have always had a very strong role in relation to the company's activities. In fact, I would say you were much more of a leader than a follower in relation to those activities. We have had occasions to question the logic of a great deal of the company's activities from time to time but, for the company's own reasons, it has chosen to pursue various transactions and avenues which have often not borne fruit.
Q. You have been the person who has sought out opportunities which perhaps others wouldn't have seen, in order to convert those opportunities to financial good for the company. One thing that has typified those opportunities has been they have been on the edge of the law. You have been not able to act in the capacity of director previously, so I guess that goes to overall assessment, but we have not found you, in our dealings, to be a dishonest person but, certainly, a person who is creative and prepared to push the boundaries of the law."