ASIC v Global SDR Technologies Pty Ltd [2004] VSC 402

8. On 14 October 2004, there were two applications before the Court. ASIC sought the appointment of a provisional liquidator to Global by interlocutory process dated 20 September 2004 and also, within the relief sought by the originating process, orders that the second defendant (Roger May) and the third defendant (Jason May) deliver all the books and records of another company, SDR Communications Technologies Pty Ltd ("SDRCT") to its liquidator (Kenneth Wayne Lamb) and that Roger May and Jason May deliver all the books and records of a third company, SDR Technologies Pty Ltd ("SDRT") to its liquidator (Malcolm John Orders).

11. ASIC's application was supported by an affidavit of Richard Daniel Vandeloo, a senior investigator in the Melbourne office of ASIC. Mr Vandeloo has had 19 years corporate investigatory experience with Corporate Affairs Victoria and ASIC and was appointed as a Senior Investigator in June 1990. He has accounting and other qualifications. Mr Vandeloo summarised his concerns on the basis of his and other affidavits as being that Global was being mismanaged, had inadequate accounting and financial reporting measures in place and had failed to keep proper books and records, was insolvent and was indebted to SDRT for work performed by the employees of SDRT to enhance intellectual property in Global's possession or control. Mr Vandeloo was also concerned that Roger and Jason May (collectively "the Mays") had misused their position as directors of SDRT for the advantage of Global within the meaning of s.182 of the Corporations Act 2001 (Cth) ("the Act"), had acted without proper regard to the rights and interests of the employees of SDRT and SDRCT and had allowed both of those companies to trade while insolvent.

14. In addition to the companies already mentioned, other companies involved, according to Mr Vandeloo, are Advanced Communications Technologies (Australia) Pty Ltd (subject to a deed of company arrangement) ("ACTA"), Global Investment Fund Pty Ltd ("GIF") and Global Communications Technologies Pty Ltd ("GCT").

17. ACTA (which was incorporated on 24 March 1999) is subject to a deed of company arrangement filed with ASIC on 24 October 2002, which is administered by Gideon Isaac Rathner. The directors of ACTA are the Mays. The shareholders of ACTA are GCT (700 shares), Advanced Publicity Pty Ltd (100 shares) and Advanced Communications Technologies Inc (200 shares).

20. SDRCT (which was incorporated on 29 July 2002) was wound up by this Court on 7 May 2003 and its liquidator is Kenneth Wayne Lamb. The directors are the Mays.

23. Global (formerly called Military SDR Technologies Pty Ltd before changing its name on 12 May 2004) was incorporated on 4 July 2002. Its directors are the Mays. Of 1,000 ordinary fully paid shares of $1 issued in Global, the principal shareholders are May & Sons Pty Ltd (280 shares), Military Communications Technologies Inc ("MCT"), California USA (200 shares), GIF (170 shares and it "holds" a further 180 shares) and Leonard Family Company Pty Ltd ("LFC") (60 shares).

26. GIF was incorporated on 28 October 2002. Its current director and secretary is Roger May. GIF is apparently a trustee for the May Family Trust.

29. SDRT (formerly SpectruCell SDR Pty Ltd) was incorporated on 4 July 2002. Its director and secretary is Jason May (and Roger May is a former director) and it is a wholly owned subsidiary of Global. SDRT was wound up by the Court on the application of the Deputy Commissioner of Taxation on 1 September 2004.

32. During 2004 ASIC received six complaints from employees or former employees of SDRT. These employees had previously been employed by SDRCT and prior to that by ACTA. As a result of these complaints in or about May 2004, the matter was referred to ASIC's National Insolvency and Co-ordination Unit ("NICU") which commenced inquiries as to SDRT and Global.

35. Before continuing with the summary of the matters deposed to by Mr Vandeloo, it is necessary to refer to the affidavit of Rita Coorey sworn 17 September 2004. Ms Coorey was, between 1 March 2004 and 8 September 2004, a Senior Accountant with a section of ASIC in Melbourne and was also seconded to NICU. Ms Coorey is experienced in corporate insolvency and has accountancy qualifications and experience. NICU is the unit within ASIC responsible for the conduct of a compliance program known as the "National Insolvent Trading Program" which monitors and encourages compliance by directors with their duties under the Act, particularly in relation to the duty to prevent insolvent trading.

38. During February 2004 ASIC received two complaints from former employees of SDRCT which indicated that those employees were employed by ACTA until 31 August 2002, that a voluntary administrator was appointed to ACTA on 18 July 2002, that those employees were then employed by SDRCT from 1 September 2002, that a liquidator was appointed to SDRCT on 7 May 2003, that those employees were subsequently employed by SDRT, that SDRT had failed to pay their wages and that each of ACTA, SDRCT and SDRT were controlled by members of the May family.

41. In early April 2004, ASIC gave a notice to Jason May to produce specified books and records of Global and of SDRT to Ms Coorey on 20 April 2004. On 19 April 2004, Roger May obtained an extension of time for production of the documents to 28 April 2004. On 26 April 2004, the Mays requested a further extension of time and it was agreed that the date for compliance with the notice be extended to 5 May 2004.

44. On 5 May 2004 Ms Coorey and a colleague met with Jason May and SDRT's bookkeeper, Karen Miller, at the premises of SDRT in Queen Street, Melbourne, where lengthy discussions took place. Jason May said that Global was a holding company only, did not trade, and had no bank account and no accounting records. He said that Global was set up on legal advice. Ms Coorey deposed that Jason May:

"appeared to interchange references to SDRT and [Global] during the meeting. On a number of occasions I asked him to clarify which entity he was referring to. ... He referred to the entities conducting the business as "we". He did not always make a clear distinction between the two entities."

48. In substance Jason May told Ms Coorey, as she understood it, that SDRT carried out the day-to-day trading activities and Global held assets such as the intellectual property of the business and obtained funding. In substance Jason May told Ms Coorey that they had had a history of trouble. They started the business in 1999 as ACTA. ACTA went into voluntary administration and had a receiver and manager appointed as a consequence of a dispute with the Australian Taxation Office (ATO) and matters concerning ACTA and the ATO were still before the courts. He said that the intellectual property (IP) developed by ACTA known as the SpectruCell was "assigned" from ACTA to Global on terms that provided for royalty payments to be paid to the Deed Administrator of ACTA.

51. I interpolate here that Jason May subsequently produced to ASIC (Ms Coorey) a copy of an executed deed dated 13 August 2003, whereby ACTA "as beneficial owner" assigned "absolutely" to Global "all of ACTA's right, title and interest in and to the Technology Assets and the Related Assets, free of all mortgages, charges, encumbrances or other adverse third party interests...". The recitals to this deed provide that the directors of ACTA confirm that ACTA is the absolute beneficial owner of the Technology, the Intellectual Property and the Related Assets as described in the attached schedules and as developed by ACTA, and that ACTA wishes to assign and transfer to Global all of its entire right title and interest to the same. The schedules refer to a portfolio of patent applications and contain a description of the designs, implementations, tools, source code and applications comprising SpectruCell. The deed provides for completion to be effected on the date of the deed. The consideration provided for the assignment is an agreement by Global to pay royalties at the rate of 10% on net revenue derived by Global from products or other commercialisation of the technology assets "until the current ACTA creditors have been satisfied, or AUD$5M, whichever is the later and at a rate of 6% thereafter".

54. Jason May told Ms Coorey that SDRT had continued the development of the IP and was thus a continuation of the business operations of ACTA. The business operations of SDRT were funded by its shareholders and investors. ACTA had been awarded a $13M grant by AusIndustry of which $8M had been drawn down. They were negotiating with AusIndustry to transfer the balance of the grant to Global or to SDRT.

57. Jason May told Ms Coorey that SDRT employed about 30 staff who had been transferred first from ACTA to SDRCT and then from SDRCT to SDRT and that SDRT had taken on the accrued entitlements of employees outstanding at the date when the employees were transferred. Jason May said that employee superannuation entitlements incurred and payroll tax incurred since SDRT had commenced trading had not been paid, and that SDRT had remitted only one month's PAYG tax since it had commenced trading. There was some discussion of SDRT's business prospects and its fundraising activities. Jason May said that SDRT had experienced "cashflow issues" since it commenced trading. He referred to the raising of $2M from shareholder loans and investments since January 2004, including loans from GIF and GCT. Jason May said that GIF held a fixed and floating charge over the assets of Global.

60. A loan agreement dated 1 September 2003 between GIF and Global was produced to ASIC. The loan agreement recites that Global carries on a telecommunications business in Australia. The loan agreement further recites that GIF has since May 2003 advanced funds to Global to enable Global to carry on its business prior to Global's business becoming profitable. The loan agreement further recites that the aggregate funds so advanced at the dates of the agreement were in the sum of $1.98M. I note that Global has been unable (or unwilling) to produce to the Court any documentary or accounting evidence that these sums were in fact advanced. Under the loan agreement Global covenants to repay the moneys already advanced and any further moneys advanced and to pay interest thereon (in September 2004 and thereafter annually in arrears). A number of events of default under the loan agreement are specified including the non-payment of interest, the making of an application for Global to go into liquidation and the commencement of any investigation of Global by ASIC under the Act. The loan agreement is secured by a debenture charge.

63. A document called "Military SDR Technologies Pty Ltd [i.e. Global] Financial Model" was produced to ASIC which purported to provide a cashflow budget or forecast for the years from 2004 to 2008. Jason May said to Ms Coorey that the document was prepared only for the purpose of being provided to third parties for fundraising and that it reflected the affairs of SDRT (rather than Global). Jason May referred to other funds that were expected from investors, of which $1M would be used to "clear liabilities". Jason May said to Ms Coorey that Global held the "assets" but the "physical assets" were held by SDRT. The "Financial Model" is dated April 28 2004, and purports to show receipts from the sales by Global of "development kits" for the months January 2004 to April 2004. However I suspect that these figures were forecasts made at an earlier time and that the date placed on the cover of the Financial Model document is considerably later than the original date of the production of the document.

66. On 20 May 2004, Ms Coorey telephoned Jason May and asked whether Global owned the IP that was assigned to it by ACTA, and he answered that Global had an option to buy the IP at a price to be determined by an independent valuation. I interpolate that it is clear that this answer was and remains, without some further explanation, entirely inconsistent with the contents of the deed of assignment from ACTA, to which I have referred. Jason May also informed Ms Coorey on that date that the outstanding liabilities to the ATO and the State Revenue Office remained, and that the authorities had not as yet accepted proposed repayment plans.

69. By letters dated 24 June 2004 and 5 July 2004 respectively, ASIC (Ms Coorey) wrote to Jason May in his capacity as director of SDRT and Global respectively, summarising the matters which had been discussed and expressing ASIC's concerns and its positions on various aspects. Among other things the letter of 5 July 2004 expressed concern that the affairs of Global were not being conducted in accordance with the Act in relation to the maintenance of books and records, and that Global might be trading whilst insolvent. A response was sought by 12 July 2004 but none was received.

72. I return to Mr Vandeloo's affidavit. On 17 August 2004, Mr Vandeloo commenced an investigation into the affairs of SDRT, SDRCT and Global, pursuant to s.13 of the ASIC Act 2001 (Cth) in relation to suspected contraventions of various provisions of the Corporations Act. Mr Vandeloo then deposed to a number of matters, based on his inquiries, and also on information obtained from an affidavit of George Khouri of the ATO sworn 8 August 2002 and filed in Supreme Court proceeding number 6401 of 2002. It appears that ACTA carried on the business of developing telecommunications technology from 1999 to October 2002, and owned IP associated with that technology. In July 2002 an administrator and receiver and manager were appointed to ACTA and SDRCT entered into written employment contracts with ACTA's employees. From January 2003 SDRCT was late in paying wages and SDRCT's employees subsequently received partial payments of those wages from GCT. SDRCT went into liquidation in May 2003 but the staff were not informed until late July or early August 2003. On or after 1 September 2003 the employees of SDRCT were informed that they were then employed by SDRT, but no written contracts were entered into. SDRT was unable to pay the salaries of its staff from about May 2004 and from July 2004 a number of its staff refused to work until their wages were paid.

75. ASIC prosecuted the Mays on 19 September 2003 for failing to prepare a report as to affairs (RATA) of SDRCT pursuant to the Act, and for failing to provide the books and records of SDRCT to the liquidator (Mr Lamb). They were each convicted and fined $1,600 plus costs by the Magistrates' Court at Melbourne. Mr Vandeloo deposed that a RATA was subsequently supplied to the liquidator, but that books and records were not, as at 16 September 2004, provided to Mr Lamb. The RATA completed by the Mays in relation to SDRCT showed outstanding liabilities to employees of $550,672 (less $159,760 being loan advances) and $139,773 for outstanding leave. Mr Lamb said in an affidavit filed herein that SDRCT had no source of income other than loan advances from the Mays and no assets at the date of liquidation, other than related party loans, and that its main liabilities were to the ATO and to its employees.

78. Mr Vandeloo obtained from Mr Lamb a copy of a letter from the receiver and manager of ACTA to Roger May of SDRCT which appears to set out the terms and conditions upon which SDRCT took over the business of ACTA but which provides that the development of the IP would be for the sole benefit of ACTA, subject to various conditions. The details of this "agreement" are not entirely clear and Mr Lamb has been unable to establish what payments, if any, the receivers and managers made to SDRCT for SDRCT's work on the development of the IP for the benefit of ACTA. Mr Vandeloo expressed concern about the commercial basis for SDRCT accepting the liability for employee entitlements, and taking on the responsibility for developing the IP for the benefit of ACTA, given that SDRCT did not appear to have any independent source of income.

81. Mr Vandeloo said that as a result of the failure by Global to produce accounting records to ASIC, ASIC was unaware if Global had in fact received $1.98M from GIF as recited in the loan agreement, unaware how Global had accounted for the receipt of such funds (if received) unaware where those funds were deposited (in the absence of Global having a bank account) and unaware how those funds had been expended. He further noted that SDRT's financial statements showed a non-current liability of about $2M to GIF, but that no loan agreement or other explanation has been received in relation to this amount. SDRT had a net loss of $2.691M for the period ending March 2004 and a balance sheet deficiency at the same date of $2.677M.

84. Mr Vandeloo deposed that Roger May is the Executive Director of MCT, a company based in the United States and listed on the "Over the Counter Bulletin Board". A quarterly report prepared for the purposes of the USA Securities and Exchange Commission for the quarter ending 31 March 2004, stated that MCT had become the marketing and distribution arm for Global and that MCT was the exclusive sales agent for Global and its core products (including SpectruCell) and that it would receive a commission of 25% of the gross revenues once the gross revenues equalled at least $1M. I note that the quarterly report showed that MCT had minimal assets and liabilities of nearly US$1M.

87. Mr Vandeloo deposed that on 2 September 2004 MCT had issued a press release (which is exhibited) stating that it had finalised an agreement to acquire the majority of the assets of Global from the majority owner of Global, namely GIF, including the controlling interest in the exclusive license for the SpectruCell SDR (tm) and PC4 intellectual property, and that at the conclusion of the transaction MCT would own a minimum of 60% of the Global assets and IP. Mr Vandeloo expressed concern that the assets of Global were intended to be transferred to MCT, and that any such transfer would frustrate any claims that the liquidators of SDRCT and SDRT might have in relation to those assets and in particular the IP.

90. An affidavit of Kenneth Wayne Lamb, the liquidator of SDRCT, outlined his dealings with the Mays in some detail, and their failures to produce the RATA and books and records. Mr Lamb estimated unpaid wages as being from $400,000 to $800,000 and employee entitlements associated with cessation of business at $1M. He said that he was not able to quantify unpaid superannuation. He said that in the absence of books and records he was not in a position to fully investigate the affairs of SDRCT.

93. An affidavit of Malcolm John Orders, the liquidator of SDRT, deposed that he and Philip Newman were appointed as liquidators of SDRT on 1 September 2004. Mr Orders referred to dealings with the Mays in early September 2004. Jason May told Mr Orders that a Controller had been appointed to the assets of Global by GIF. Mr Orders deposed that he had been unable to obtain all of the books and records of SDRT from the Mays, and was unable to determine the assets and liabilities of SDRT. However, Mr Orders said that a balance sheet of SDRT indicated that it had payroll liabilities of approximately $1.7M at 13 September 2004, and generated revenue during its nine months of operation totalling only $9,000. Mr Orders said that there was a discrepancy in the sum of about $550,000 in the assets of SDRT between the balance sheet provided to him by ASIC and the general ledger provided to him by Jason May. He said that the labour of SDRT's employees appeared to have been used to enrich IP assets of Global, that SDRT has incurred debts in relation to employee wages but received no benefit for the exertions of its employees, and that SDRT may have been insolvent prior to his appointment.

96. An affidavit of Rudolf Ladyzhenskii, an engineer, deposed as to his employment by ACTA as a digital signal processing engineer, in the design and development of software defined radio technology that later became known as SpectruCell. He said that SpectruCell is the name of a product that relates to the whole concept of a standard hardware base station for mobile telephones, where everything is done by software rather than dedicated hardware. The software enables different mobile telephone protocols to be carried and negotiated without the need for multiple sets of hardware. He was employed in the development of algorithms relating to how that software would behave and then in the implementation of them. Mr Ladyzhenskii deposed as to his employment being transferred to SDRCT where he continued with the same work, but during which period (from January to August 2003) he was paid by GCT in the form of a loan on account of his wages because, as Roger May told him, SDRCT could not afford to pay him wages. He was not paid in full, and no superannuation was paid or income tax deducted. He deposed that he received a letter from Jason May on behalf of SDRCT in about August 2003 (although dated 7 May 2003), advising that his employment contract with ACTA had been transferred to SDRCT on 27 September 2002 and that SDRCT had been placed into liquidation on 7 May 2003 and that his employment had been terminated as of that date. Mr Ladyzhenskii said that he was unaware until August 2003 that SDRCT had been placed into liquidation in May 2003. As he was not being paid, he obtained leave and advised Jason May that he would only return when he was paid all moneys owing. In late September or early October 2003, he received a pay advice from SDRT for wages for the month ending 30 September 2003, although he had never agreed to work for this company. He did not return to work. He calculated that he was owed about $50,000 in lost wages, entitlements and superannuation from ACTA and SDRCT.

99. An affidavit of Kevin John Anderson, senior design engineer, deposed that he entered a contract of employment with ACTA on 16 March 2001, at which time there were about 60 employees. He deposed that in about September 2002, the Mays addressed the staff of ACTA using words to the effect that ACTA was being wound up, and the company would "change its name" to SDRCT, entitlements would be transferred to SDRCT or they could make a GEERS claim (a reference to the Government scheme for employees of insolvent companies). Mr Anderson stayed on with SDRCT, but from about November 2002 payments of wages were made late and he was paid less than he was owed. He began receiving cheques from a company called GCT and Roger May explained this change to staff using words to the effect that this was so SDRCT did not have to pay tax, and the payments were loans, and that "Anyway, I am expecting to get a lot of money in August, which I can use to pay back your loans for you." Mr Anderson was very worried, but continued to receive payments from GCT, from which no tax was deducted and he understood that he was still accruing annual leave and superannuation entitlements. He was not told prior to August 2003 that SDRCT had been placed into liquidation in May 2003. In August 2003 he received two salary payments by personal cheques from May & Sons Pty Ltd, but the pay advices were from SDRT for whom he had not agreed to work. Thereafter he believed that he was employed by SDRT and in October 2003 was asked to sign an employment contract with SDRT. He continued to perform the same tasks in relation to the SpectruCell project using the same equipment. He had ascertained that there was only one superannuation contribution made for his benefit during the entire period of his employment with ACTA, SDRCT and SDRT. He continued to work for SDRT until June 2004, when he commenced strike action with a number of other employees. He was owed six weeks salary and eight months superannuation.

102. A further affidavit of Mr Orders deposed as to further attempts to obtain the books and records of SDRT and a RATA from the Mays. Mr Orders deposed as to what he said was the limited documentation received from the Mays on 15 September 2004 and as to the books and records which he believed were likely to exist (and should have existed) and which had not been delivered up. He expanded on the discrepancies in the documentation which he had received and expressed his belief that the accounts presented to ASIC for SDRT were likely to represent group accounts, or an aggregation of the financial affairs of SDRT and Global. He said that SDRT had a net asset deficiency of about $4M that was likely to increase, and that it was unlikely that there would be any funds available to repay Global's unsecured loans to SDRT of $2,311,354. Mr Orders said that SDRT has incurred operating losses totalling in the vicinity of $4M for the sole purpose of enriching the intellectual property assets held by Global and that this arrangement appeared to have been uncommercial. Mr Orders deposed that he had reasons to suspect that Global had contravened s.588V of the Act and that the creditors of SDRT might have a claim against the assets of Global pursuant to s.588W of the Act.

105. The reference to ss. 588V and 588W relates to the provisions of the Act which establish a contravention by a holding company of a company which incurs debts when insolvent, where there are reasonable grounds for suspecting such insolvency and the holding company or one or more of its directors is or are aware of such grounds or ought to have been so aware (having regard to the nature and extent of the holding company's control over the insolvent company's affairs). Section 588W provides, in the case of such a contravention, for the liquidator of the insolvent company to recover from the holding company the amount of loss and damage suffered because of the company's insolvency, by persons in relation to the debts so incurred to them. I should say that, on the evidence before the Court, there would appear to be a reasonably arguable case by the liquidators of SDRT against Global pursuant to those provisions. That is because Global, through the Mays, had control of this subsidiary and, given the circumstances of the incurring of debts to employees and the revenue authorities, it must at least be reasonably arguable that Global and its directors had (or ought to have had) relevant suspicions about the insolvency of this subsidiary.

108. An affidavit of Jason May sworn 11 October 2004 denied most of the substantive allegations contained in the affidavits filed on behalf of ASIC. Many of the denials were in very general terms but I recognise that, apparently due to lack of funds, the Mays had been unable until shortly before that date to obtain legal assistance for the preparation of answering material. However, a number of more specific denials and assertions were contained in Jason May's affidavit.

111. Jason May asserted in his affidavit that the only financial transactions undertaken by Global were the arranging of funding advanced from GIF via Global, to SDRT. Jason May deposed that this funding was accurately recorded in the books of SDRT and that no further records were required to manage the affairs of Global, the holding company. Mr Sifris SC, who appeared with Ms Mavroudis as counsel for ASIC, strongly (and rightly) criticised Jason May's assertion that such records were not required. In my opinion this was an entirely unsatisfactory explanation for the failure to properly record moneys borrowed by Global and advanced to SDRT, the details of which are still obscure, even if the total liability of SDRT is apparently recorded in SDRT's balance sheet. It is asserted by Jason May that the only debt of Global is owed to GIF, which is secured by a registered debenture but, as I have said, no financial records are produced to verify this either.

114. Jason May deposed that SDRT's prime activity was to develop the SpectruCell technology for sale to a South Korean company pursuant to a contract between that company and SDRT, but that SDRT had failed to deliver pursuant to the contract. However other evidence before the Court suggests that SDRT was performing general research and development work on Global's IP.

117. Jason May denied that the Mays allowed SDRCT and SDRT to trade whilst insolvent. However, as I have indicated, it seems to me that it is at least reasonably arguable that the Mays permitted SDRCT and SDRT to continue incurring debts to their respective employees and to the ATO and the State Revenue Office while suspecting that those companies were unable to pay those debts.

120. Jason May deposed that there was no transaction purporting to transfer any assets of Global to MCT (despite the terms of the press release). MCT was simply purchasing shares in Global from GIF.

123. Jason May deposed as to the efforts by the Mays to raise funds for Global so that it could continue its business objectives which included "the funding of the companies" and "the finalisation of any IP transfer and the resurrection of SDRT". A number of "funding initiatives" were referred to. Jason May said that the appointment of a provisional liquidator to Global would cause substantial harm to Global, the creditors of SDRT and Global's shareholders, including the Mays, MCT (a US-based public company) and two Melbourne-based private investors (including a Mr Leonard of LCT). Jason May swore that the Mays would be personally affected because they had invested over $25M in SpectruCell and were the largest secured creditors. He deposed that a provisional liquidator would have no ability to sell the IP, for reasons that he set out. Jason May deposed that the concerns of ASIC would be met by a continuation of the existing undertakings (not to dispose of Global's assets) and the appointment of an independent person to examine the affairs of Global (but not in the form of any official or public appointment).

126. I have read and taken into account the whole of Jason May's affidavit, but do not purport to summarise every matter that it covers.

129. A further affidavit of Jason May sworn 13 October 2004, was filed on 14 October 2004. The affidavit provided some detail as to the IP encompassed by the name SpectruCell. Notwithstanding the deed of assignment, his affidavit stated that the copyright ("the core protection of the SpectruCell IP") is "held by ACTA". How it can be said in the light of the deed of assignment that any part of the IP is held by ACTA when it has been assigned to Global, I do not understand. Mr Hayes QC, who appeared as senior counsel for the defendants, suggested, on instructions, that the failure by Global to pay royalties to ACTA had in some way entitled ACTA to retain or take back the IP. In circumstances where the royalty payments are calculated on net revenue and it is not suggested that there has been any net revenue, there does not appear to be any logical basis for that contention. The assertion by the defendants that ACTA rather than Global is or may be the owner of the SpectruCell IP raises a serious matter of concern if such IP is an asset of substantial or potentially substantial value (as the defendants clearly believe). The Mays would seem to have a conflict of interest arising from their dual capacities as directors and/or controllers of Global and as directors and/or controllers of ACTA. This, it seems to me, is a relevant factor to be taken into account on this application.

132. Jason May's further affidavit also referred to a fundraising transaction said to be in the final stages of completion and being organised through a European investment bank ("Swiss Corp"). Jason May deposed that the funds would be more than sufficient to repay all past debts of ACTA, SDRT and SDRCT, but that if a provisional liquidator were appointed to Global it would jeopardise this fundraising transaction, causing the European investors not to invest. The existence of the fundraising transaction was corroborated, if vaguely, by an affidavit of the defendants' solicitor sworn 14 October 2004.

135. I asked Mr Hayes QC, in the course of the hearing, how it was that investors proposed to advance $42M (this was the sum mentioned although it is not referred to in any affidavit) to a company, namely Global, which was the subject of an application for winding up by ASIC. The response to my question from Mr Hayes, again on instructions, was that the money was to be advanced not to Global but to MCT (the US company). In the absence of evidence I do not understand how it could be the case that investors would advance $42M or any other substantial sum to MCT, a company with virtually no assets and liabilities of nearly $1M. If the inducement for such investment is MCT's interest in the SpectruCell IP through its shareholding in Global, again I do not understand how investors would advance such funds provided that the existence of ASIC's proceeding were to be disclosed to them. It seems to me that the protection of these investors is a relevant factor to be taken into account in considering whether to appoint a provisional liquidator.

138. In a written Outline of Submissions, ASIC put forward (and I briefly summarise) the following bases for the appointment of a provisional liquidator:

* The threatened purchase by MCT of Global's IP assets;

* The insolvency of Global by virtue of the event of default (ASIC's investigation) under the loan agreement with GIF;

* The potential liability of Global as the holding company of SDRT pursuant to s.588W of the Corporations Act;

* The "strong prima facie case" that Global should not be allowed to continue to operate under the control and management of the Mays due to their history in relation to ACTA, SDRCT and SDRT such that it was strongly arguable that it would be just and equitable to wind up Global. In that regard reference was made to the conduct of the Mays in relation to the employees of the various operating companies, the lack of records, the failure to cooperate with liquidators and so on.

145. In oral submissions Mr Sifris drew attention to a variety of factors which he said should be taken into account. He emphasised the absence of any books and records of Global. He pointed to statements in Global's Business Plan and other documents that indicated that Global had been carrying on business itself. He said that these statements were either misleading to investors or, if true, contradicted what had been stated by the Mays to ASIC and on affidavit. He criticised the absence of records showing the alleged flow of funds from GIF to Global and its subsidiary. He relied on the dissipation of assets which he said was threatened on the wording of the MCT press release.

148. For the defendants, Mr Hayes at the outset conceded that the Mays had demonstrated a lack of appreciation of the proper principles of corporate governance. He said that a provisional liquidator should be appointed only in exceptional circumstances. He said (and I accept) that there was no evidence that Global was insolvent in the sense that there was no evidence of any unpaid debts due and payable by it. Mr Hayes said that there was no real threat of the dissipation of Global's assets but I note, as stated earlier, that there was considerable equivocation as to whether the only real assets of Global (the IP) were in fact and law the assets of Global (rather than ACTA). I asked Mr Hayes why it was that Global was unable to produce even a balance sheet showing its assets and liabilities and he replied, on instructions, that the information was available (as I understood it, on computer) but that Global could not afford to print it out. When I expressed consternation that Global was unable to print out a balance sheet, it was explained that the form in which any data was stored was such that it was not an automatic process to produce a balance sheet. Mr Hayes stressed the harm that would be done to Global and to its shareholders, which included outside investors, by the appointment of a provisional liquidator. Mr Hayes accepted that there were substantial questions to be answered about the financial affairs of Global and the conduct thereof and that there had been a lack of attention to corporate responsibilities. Mr Hayes characterised his submissions as "a plea for mercy". He stressed that the Mays had derived little personal benefit, had invested and lost a great deal of their own money and that they had done their best to pay the employees of the subsidiary companies now in liquidation. He said that there was no demonstrated benefit by the appointment of a provisional liquidator and submitted that the preferred course would be, subject to the requirements of natural justice, an expedited hearing of the application for winding up.

151. Mr Hayes raised a preliminary objection to ASIC's standing to make a winding up application. It is unnecessary at this juncture to deal with the insolvency ground. So far as ASIC's application for a winding up order against Global is based on the just and equitable ground contained in s.461(1)(k) of the Act, I am satisfied that ASIC has standing to rely upon this ground by virtue of s.462(2)(e) and s.464 of the Act, in that ASIC is investigating Global and its affairs under Division 1 of Part 3 of the ASIC Act. Mr Hayes did not submit to the contrary but rather relied upon the fact that these provisions were not expressly referred to in the originating process. I do not think that that is necessary but, even if it were, it could be cured by a simple and non-prejudicial amendment. I am satisfied that ASIC has standing to rely upon the just and equitable ground for a winding up order.

154. It was common ground that the Court has a complete and wide discretion in relation to the appointment of a provisional liquidator. Counsel did not canvass the authorities. It is well established, nevertheless, that the exercise of the power to appoint a provisional liquidator is a serious interference with a company, which freezes the company's activities from a commercial point of view and which should not be entertained without good reasons. An applicant must establish the need for the appointment of a provisional liquidator and generally persuade the Court that the balance of convenience favours such appointment. The Court should take into account the interests of the company and its members, the interests of creditors and, in appropriate cases, the public interest. In Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd,[1] Young J said that, if the company was represented at the hearing and there were suspicious circumstances, the Court might appoint a provisional liquidator even if the assets of a company were not in danger. In Omarjee v Lincoln Hunt Australia Pty Ltd[2] a provisional liquidator was appointed where the relevant factors relied upon included unethical and irresponsible business conduct, no audited balance sheets, a need to protect assets from a mortgagee and a refusal by the company to provide information. In other cases reference has been made to such factors as the casual conduct of a corporation's affairs without regard to legal requirements,[3] and the need in the public interest to examine the accounts of a company that are in disarray[4].

157. On this application I was satisfied that a provisional liquidator should be appointed for the following reasons. There is a prima facie case of some strength that Global should be wound up on the just and equitable ground.[5] The conduct of the Mays in relation to the affairs of SDRCT and SDRT arguably involved the incurring of debts to employees and the revenue authorities when the companies under their control ought to have been seen or suspected by the Mays to be insolvent. There appears to have been a cavalier attitude to the obligation of SDRCT and SDRT for the payment of wages, superannuation and other employee entitlements and a like cavalier attitude to their obligation to meet related and other tax obligations. There appears to have been a serial failure by the Mays to prevent companies from incurring debts which they were unable to pay, and a willingness to transfer employees from one entity to another so as to continue the same business but without resolving any of the liquidity problems. The conduct of the Mays in relation to those companies also arguably demonstrates a lack of willingness or ability to see to the keeping of proper records and accounts. Coupled with the foregoing, there has arguably been a demonstrated reluctance and failure to cooperate with the liquidators of those companies. There are grounds for a real apprehension, in my view, that conduct of the same nature or other irresponsible conduct of a like nature might occur in relation to Global itself. In addition, the apparent failure to keep proper or any accounting records for Global, a company said to be the owner of valuable IP and said to have been in receipt of, or the conduit for, some millions of dollars of investors' funds, is another important factor in favour of the appointment of a provisional liquidator. It seems to me that the appointment is called for because of a consequent lack of confidence in the Mays and in order to protect, among others, the very investors who are said to have been assembled and on the verge of advancing very substantial sums to or for the benefit of this apparently ill-managed company. Furthermore, the question of the ownership of the IP (whether by Global or by ACTA) needs to be urgently investigated by someone who is both independent and clothed with legal authority. It is important that a provisional liquidator should urgently investigate the financial position and business affairs of Global.

160. The balance of convenience is, to my mind, nearly all one way. The operating subsidiary of Global (SDRT) is already in liquidation. The ownership of the IP assets is, as the Mays' contentions show, in doubt. There is, so far as appears, no business currently being conducted. It is hard to see how any prudent investor knowing all the facts, including the existence of ASIC's proceeding, would wish to invest at this stage in Global (or in MCT for that matter). In my opinion, the appointment of a provisional liquidator can cause no more than minimal harm additional to that already caused by the many public setbacks to this enterprise including the deed of company arrangement and the long history of litigation affecting ACTA, the insolvency and liquidation first of SDRCT and then of SDRT, and the application by ASIC in this very proceeding. Further, it is in my view now in the public interest to immediately protect potential employees, investors and others who might be induced to become employed by or to invest money in Global, or to otherwise alter their position in reliance upon representations of the kind which have been made and still might be made by the Mays in a last ditch endeavour to keep afloat their enterprise (what Mr Hayes described as the "dream"). It is in the public interest to appoint a provisional liquidator for the foregoing reasons and that is so, I think, irrespective of whether those who have already been harmed will be ultimately compensated.

163. For those reasons a provisional liquidator was appointed.

166. The other outstanding interlocutory matter is the application by ASIC for orders that the Mays produce to the respective liquidators the books and records of SDRCT and SDRT. I am not at the moment satisfied whether such further books and records have not been produced, or have been produced, or simply do not exist. This application should be deferred to the hearing of the originating process, subject to further order. In the meantime, the provisional liquidator of Global may, through his investigations and report to the Court (as provided by the order made on 14 October 2004), throw some light upon what books and records may exist, both of Global and also of its subsidiary (SDRT).

169. The originating process, currently adjourned to 22 October 2004, will be adjourned to Friday 26 November 2004.

[1] (1986) 10 ACLR 865.

[2] (1986) 4 ACLC 205.

[3] Montgomery Windsor (NSW) Pty Ltd v Illope Pty Ltd (1984) 2 ACLC 224; ASC v Solomon (1995) 19 ACSR 73.

[4] Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493; Re Huntford Pty Ltd (1992) 12 ACSR 274; ASC v Solomon (1995) 19 ACSR 73.

[5] See and compare: Deputy Commissioner of Taxation v Casualife Furniture International Pty Ltd [2004] VSC 157.