ASIC v Krecichwost & Ors

Australian Securities and Investments Commission Act 2001 Bankruptcy Act 1966 LEGISLATION CITED : Corporations Act 2001 Federal Court of Australia Act 1976 Supreme Court Act 1970

ASIC v Burke [2000] NSWSC 694 Australian Securities Commission v A S Nominees Ltd (1995) 133 ALR 1; 18 ACSR 459; 13 ACLC 1822 Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266 Australian Securities and Investments Commission v Burke [2000] NSWSC 694; BC200004093 Australian Securities and Investments Commission v Ivey (1998) 29 ACSR 391 Australian Securities and Investment Commission v Wiggins (1998) 90 FCR 314 Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 Cardile v LED Builders Pty Limited (1999) 198 CLR 380 CASES CITED : Commission v Carey (No 14) (2007) 158 FCR 92 Corporate Affairs Commission v A.S.C. Timber Pty. Ltd. (1989) 7 ACLC 467 Corporate Affairs Commission v Lone Star Exploration NL (No 2) SASR 30; ACLR 504 Corporate Affairs Commission NSW v Walker (1987) 11 ACLR 884 Frigo v Culhaci (CA 17 July 1998 unreported; BC 9803225) Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) (2006) 57 ACSR 307 Ross v Internet Wines Pty Ltd (2004) 60 NSWLR 436 World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181

Australian Securities and Investment Commission (Plaintiff) PARTIES : Craig John Stubbs (Fifth Defendant) Graeme Ronald Byers (Sixth Defendant)

D R Stack (Plaintiff) COUNSEL : M Holmes (Fifth Defendant) M Ashhurst / L Gor (Sixth Defendant)

ASIC - Kim Turner (Plaintiff) SOLICITORS : McLachlan Thorpe Partners (Fifth Defendant) Gye Associates Lawyers (Sixth Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

14 August 2007 (ex tempore - revised 16 August 2007)

3487/07 ASIC v ERIC KRECICHWOST & 12 ORS JUDGMENT 1 HIS HONOUR: The Fincorp Group of Companies collapsed in March this year. Many people have lost all their investment. Many more have lost about half. Total losses are estimated at about $114 million. Administrators were appointed on 23 March 2007. They are conducting an investigation into a number of matters, including the possibility of insolvent trading. So too is the plaintiff (ASIC). Those investigations are incomplete. They will take many more months. ASIC seeks the appointment of receivers, or alternatively freezing orders, to preserve the assets of those who are involved in the investigations until those investigations have been completed.

The fifth and sixth defendants 2 The fifth defendant, Mr Craig Stubbs, was appointed as a director of Fincorp Group Holdings Pty Limited on 24 June 2005, and of a number of other companies in the Fincorp Group from various dates thereafter. 3 The sixth defendant, Mr Graeme Byers, was appointed as a director of Fincorp Group Holdings from 2 March 2007. He had been appointed director of some five other companies in the Fincorp Group from 8 November 2006. 4 It was Mr Byers who, together with other directors at the time, procured the appointment of the administrators. The investigations 5 ASIC referred to a number of matters that it said were the subject of investigation. It also referred to a number of other matters that, it said, warranted investigation. In my view, the matter of real substance for present purposes, that is the subject of investigation, is an allegation of insolvent trading. 6 Insolvent trading is dealt with in the administrators' report to creditors dated 18 July 2007. At s12.4.4 of that report, the administrators make the following points:

(1) The estimated shortfall at the time was about $110 million. (2) Bearing in mind that the question of solvency must be considered on a company by company basis, their review of the solvency of the companies in the group had not been concluded. (3) The key issue in assessing solvency is the recoverability (if at all) of intercompany receivables. They were still investigating when the group, and in particular Fincorp Investment Pty Limited, first became insolvent. Their preliminary view was that Fincorp Investment may have been insolvent from about mid 2006. 7 In support of that "preliminary view", the administrators pointed to some 12 matters: 12.4.4 Assessment of Solvency of the Group Any potential claim for insolvent trading is likely to be made against the directors of Fincorp Investments. We estimate that Noteholders in Fincorp Investments are likely to suffer a shortfall of approximately $110m, based on the anticipated asset realisations. The solvency positions of companies within the Fincorp Group must be considered on a company specific basis. To date we have not concluded our review of the solvency positions of Fincorp Investments and other entities within the Fincorp Group. The key issue in assessing the solvency of Fincorp Investments is the recoverability or otherwise of the intercompany receivables from the ten Fincorp property companies. We are still investigating when the Fincorp Group, and in particular Fincorp Investment, first became insolvent. Our preliminary view is that Fincorp Investments may have been insolvent from approximately the middle of 2006, for the following reasons, amongst others: · The Fincorp Group property development model was entirely funded by debt. It did not have the benefit of any equity investment by its shareholders; · The Fincorp Group required very significant fundraising from the public by way of further debenture issues in order to fund development costs and to meet Fincorp Investments' future redemption and interest obligations to Noteholders. Simply put, the Fincorp Group needed to raise large amounts of new debt to repay its existing debt and interest obligations and to fund development and other costs; · The majority of developments being undertaken by the Fincorp Group property division were still a long way from producing revenue and required significant further investment to unlock the potential development profit; · Certain financiers of the Fincorp Group in early 2006 put the directors on notice that they wanted their debt facilities with the Group refinanced. · There was no guarantee that Noteholders would rollover their investment and Fincorp Investments had substantial future redemption and interest obligations that it could not meet from the sale of the properties; · On 26 March 2006 ASIC issued an interim stop order preventing the Fincorp Investments raising any further funds from the public under the prospectus dated 9 January 2006. From this point in time, and until the 2006 Prospectus was reissued, Fincorp Investments could not raise further funds from Noteholders until it obtained a withdrawal of the interim stop order by ASIC and obtained ASIC's agreement to the issue of a new prospectus; · It was not until 31 May 2006, after a report had been completed by E&Y, that the 2006 Prospectus was issued and the Fincorp Group was again permitted to raise further funds from the public; · Subsequent to the E&Y report, several properties in the Fincorp portfolio were revalued downwards significantly around July 2006. · From August 2006, the directors of the Fincorp Group sought to address the issues confronting the Fincorp Group by attempting to: - Sell the Fincorp Group's business; - Raise equity; and - Joint venture some of the properties. · These efforts proved wholly unsuccessful. · In light of the above, the only way in which Fincorp Investments could meet its obligations to Noteholders was to raise further finance from members of the public by issuing further Notes. No other sources of funding appear to have been available to the Fincorp Group. · Furthermore, the likely realisable value of these properties meant that the property entities were unlikely to be able to repay the loans made by Fincorp Investments in full. Accordingly, Fincorp Investments should have considered reducing the recoverability of the loans. This would have had a detrimental impact on Fincorp Investments balance sheet and increased the net asset deficiency.

8 Thus, the administrators concluded: "We are of the opinion that there is a possible claim against the directors, including any person deemed by the Corporations Act to be a shadow director of the Fincorp Group for insolvent trading. We note however, that further extensive investigations are required prior to pursuing such a claim."

9 One of the administrators, Mr David Winterbottom, provided a little more detail on some relevant matters in para 43(f)-(l) of his affidavit sworn 29 June 2007: 43 on 29 March 2006 the ASIC issued an interim stop order preventing the Fincorp Group from raising any further funds from the public under the prospectus dated 9 January 2006. From this point in time, and until the 2006 Prospectus was issued, Fincorp Investments could not raise further funds from the public to meet its redemption and interest obligations to Noteholders. It was unable to raise any further funds from Noteholders until it obtained a withdrawal of the interim stop order by the ASIC and obtain the ASIC's agreement to the issue of a new prospectus; (g) on 18 April 2006 the ASIC issued a further interim stop order to the Fincorp Group; (h) the ASIC and the Trustee then required the Fincorp Group to obtain an independent expert opinion on the financial forecasts prepared by the Fincorp Group. Ernst & Young were retained by the Fincorp Group for this purpose and produced reports in mid to late May 2006 that relied upon the valuations of the Properties held by the Fincorp Group at that time;

(i) it was not until 31 May 2006, after Ernst & Young's report had been received, that the 2006 Prospectus was issued and the Fincorp Group was again permitted to raise further funds from the public;

(j) the draft financial statements of FGHPL reported that, as at 30 June 2006, it had a deficiency of assets compared to liabilities of $32 million. A copy of those draft financial statements is exhibited at DJW1-9 ;

(k) in July 2006 the Properties were revalued and many of their values were revalued downwards by a total of $40.1 million. It was thereafter apparent that the values of the Properties were significantly lower than had been previously estimated by the directors. The revaluation of the Properties most probably would have undermined the conclusions reached in the Ernst & Young reports (which reviewed earlier valuations);

(l) the write downs and the Fincorp Group's deficiency in assets compared to liabilities meant that it was very unlikely that the Fincorp Group could lodge a new prospectus for the 2007 year which would be accepted by the ASIC and the market. This in turn meant that by early 2007 it was very unlikely that fund raising through the issue of Notes could continue. The likelihood of a new prospectus being issued was even further reduced in early 2007 (see paragraph 50 below) and the fact that the accounts of Fincorp Investments to 31 December 2006 were never signed off by the Fincorp Group's auditor, PricewaterhouseCoopers; The Court's powers 10 The application stated that it was made on the following basis (I quote from the originating process): "...pursuant to section 1323 of the Corporations Act 2001, section 66 of the Supreme Court Act and the implied/inherent jurisdiction of the court."

11 In the course of argument, the reference to this Court's powers was expanded to include s23. For convenience, I set out ss23 and 66 of the Supreme Court Act 1970 (SCA): 23 Jurisdiction generally

The Court shall have all jurisdiction which may be necessary for the administration of justice in New South Wales.

(1) The Court may, at any stage of proceedings, by interlocutory or other injunction, restrain any threatened or apprehended breach of contract or other injury. (2) Subsection (1) applies as well in a case where an injury is not actionable unless it causes damage as in other cases. (3) The Court may restrain any threatened or apprehended waste or trespass pursuant to this section: (a) whether the person against whom the injunction is sought is or is not in possession under any claim of title or otherwise, or (if out of possession) does or does not claim a right to do the act sought to be restrained under any colour of title, and (b) whether the estate claimed by any party is legal or equitable. (4) The Court may, at any stage of proceedings, on terms, grant an interlocutory injunction in any case in which it appears to the Court to be just or convenient so to do. The statutory power 12 Section 1323 of the Corporations Act reads as follows:

1323 Power of Court to prohibit payment or transfer of money, financial products or other property

(1) Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person , being an act or omission that constitutes or may constitute a contravention of this Act ; or (b) a prosecution has been begun against a person for a contravention of this Act ; or (c) a civil proceeding has been begun against a person under this Act ;

and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person ) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person ), is liable, or may be or become liable, to pay money , whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property , the Court may, on application by ASIC or by an aggrieved person , make one or more of the following orders :

(d) an order prohibiting a person who is indebted to the relevant person or to an associate of the relevant person from making a payment in total or partial discharge of the debt to, or to another person at the direction or request of, the person to whom the debt is owed; (e) an order prohibiting a person holding money , financial products or other property , on behalf of the relevant person , or on behalf of an associate of the relevant person , from paying all or any of the money , or transferring , or otherwise parting with possession of, the financial products or other property , to, or to another person at the direction or request of, the person on whose behalf the money , financial products or other property , is or are held; (f) an order prohibiting the taking or sending out of this jurisdiction , or out of Australia , by a person of money of the relevant person or of an associate of the relevant person ; (g) an order prohibiting the taking, sending or transfer by a person of financial products or other property of the relevant person , or of an associate of the relevant person : (i) from a place in this jurisdiction to a place outside this jurisdiction (including the transfer of financial products from a register in this jurisdiction to a register outside this jurisdiction ); or (ii) from a place in Australia to a place outside Australia (including the transfer of financial products from a register in Australia to a register outside Australia );

(h) an order appointing: (i) if the relevant person is a natural person --a receiver or trustee, having such powers as the Court orders , of the property or of part of the property of that person ; or (ii) if the relevant person is a body corporate --a receiver or receiver and manager , having such powers as the Court orders , of the property or of part of the property of that person ;

(j) if the relevant person is a natural person --an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit; (k) if the relevant person is a natural person --an order prohibiting that person from leaving this jurisdiction , or Australia , without the consent of the Court . (2A) A reference in paragraph (1)(g) or (h) to property of a person includes a reference to property that the person holds otherwise than as sole beneficial owner, for example: (a) as trustee for, as nominee for, or otherwise on behalf of or on account of, another person ; or (b) in a fiduciary capacity. (2B) Subsection (2A) is to avoid doubt, is not to limit the generality of anything in subsection (1) and is not to affect by implication the interpretation of any other provision of this Act . (2) An order under subsection (1) prohibiting conduct may prohibit the conduct either absolutely or subject to conditions . (3) Where an application is made to the Court for an order under subsection (1), the Court may, if in the opinion of the Court it is desirable to do so, before considering the application, grant an interim order , being an order of the kind applied for that is expressed to have effect pending the determination of the application. (4) On an application under subsection (1), the Court must not require the applicant or any other person , as a condition of granting an interim order under subsection (3), to give an undertaking as to damages. (5) Where the Court has made an order under this section on a person 's application, the Court may, on application by that person or by any person affected by the order , make a further order discharging or varying the first-mentioned order . (6) An order made under subsection (1) or (2) may be expressed to operate for a specified period or until the order is discharged by a further order under this section. (7) Nothing in this section affects the powers that the Court has apart from this section. (8) This section has effect subject to the Bankruptcy Act 1966 . (9) A person must not contravene an order by the Court under this section that is applicable to the person . (10) An offence based on subsection (9) is an offence of strict liability .

Note: For strict liability , see section 6.1 of the Criminal Code . 13 Subsection (4) should be read in conjunction with s246(1) of the Australian Securities and Investments Commission Act 2001, which so far as it is relevant in these proceedings reads as follows: 246 Liability for damages (1) None of the following:

is liable to an action or other proceeding for damages for or in relation to an act done or omitted in good faith in performance or purported performance of any function, or in exercise or purported exercise of any power, conferred or expressed to be conferred by or under the corporations legislation , or a prescribed law of the Commonwealth, a State or a Territory.

Freezing orders and s1323 14 In Australian Securities and Investments Commission v Carey (No 14) (2007) 158 FCR 92, French J observed at 100 [29] that s1323 "does not provide for a general freezing order of the kind sought by ASIC" in that case. Finkelstein J had made the same point some years earlier in Australian Securities and Investment Commission v Wiggins (1998) 90 FCR 314 at 319. 15 Finkelstein and French JJ both accepted that the Court could make a freezing order even though it was not expressly authorised by s1323. However, they differed as to the nature of (and authority for) such an order. 16 Finkelstein J considered that such an order would not be an order under s1323. As a consequence, among others, ASIC would not have the benefit of s1323(4). French J considered that the order would be an order under s1323, but calling in aid s23 of the Federal Court of Australia Act 1976. 17 Mr D R Stack of counsel, who appeared for ASIC, relied on what Santow J had said in Re HIH Insurance (in provisional liquidation); Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266 at 268 [7(a)]. Since the whole of para [7] of his Honour's reasons is helpful, setting out as it does in distilled form the relevant principles, I quote it in full: Principles applicable to asset preservation orders sought by ASIC [7] By way of background to my earlier declining to make asset preservation orders ex parte, I explain what I consider to be the proper approach to the exercise of the discretion to make asset preservation orders under s 1323 of the Corporations Law:

(a) A distinction needs to be drawn between the power or jurisdiction to make asset preservation orders and when, as a matter of discretion, that power is ordinarily to be exercised. The court has power to make such orders under s 1323 of the Corporations Law, once there is as here a corporate investigation, a prosecution under the Corporations Law or, also as here, a civil proceeding under the Corporations Law: see s 1323(1)(a), (b) and (c). That suffices to enliven the jurisdiction to make such orders. That jurisdiction therefore arises even absent strong evidence of dissipation of assets and even absent a prima facie or at least reasonably persuasive case against the individual concerned. (b) Nonetheless, both evidence of dissipation of assets and at least a reasonably persuasive case are powerful discretionary considerations affecting the court's willingness to make an order at all and, if willing, affecting the scope of the orders justified in the circumstances. In that regard, the most intrusive order that could be made is the appointment of a receiver. Appointment of a receiver over a person's assets is in any circumstances an extraordinary step for the court to take, though it may be justified when associated with the allegation of misappropriation of property, particularly, though not necessarily exclusively, fraudulent. Austin J said in Australian Securities and Investments Commission v Burke [2000] NSWSC 694; BC200004093, "The fundamental issue is not the character of the alleged wrongdoing of the Defendants, but the overriding concern to protect assets for the benefit of those entitled to them . . .": at [6]. Similarly, in relation to the making of orders to surrender a passport (s 1323(1)(j) and (k)), "The Court is required to engage in a balancing exercise which includes a balancing of public and private rights": Australian Securities and Investments Commission v Ivey (1998) 29 ACSR 391 at 394 per Nicholson J. (c) In the case certainly of a private litigant, absence of appreciable risk of dissipation of assets and of an at least reasonably persuasive case against the individual concerned, should ordinarily lead to the denial of such asset preservation orders as a matter of discretion. Indeed the absence of either one of such factors would ordinarily be fatal. But here there is an ongoing investigation and ASIC as investigator seeks asset preservation orders in pursuit of its public interest role with responsibility to "promote the confident and informed participation of investors and consumers in the financial system". In those circumstances it is possible ASIC may have satisfied the court that the state of its investigations and the wider public interest justified some such orders, though I expressly make no finding on that. That wider public interest embraces both creditors and those affected by a corporate failure. In appropriate circumstances, speaking generally, such orders may be justified even absent evidence of a significant risk of dissipation of assets, though the potentiality may be there. (d) It would be unwise to attempt to delineate in advance the future exercise of discretion in such applications by ASIC beyond emphasising that the court, in giving a reasonable margin of appreciation to ASIC in its public interest role, does not abdicate from its responsibility to make sure that the orders that it makes operate in a manner that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that such orders will intrude upon private rights. (e) The foregoing principles in turn affect the court's approach when an urgent ex parte application is made by ASIC. In that circumstance, justification for ex parte relief would ordinarily centre around there being a significant risk of dissipation of assets. There may be exceptional circumstances where the evidence for this may still be in the process of collection and very brief ex parte orders to maintain the status quo may still be justified. That was not the case here. Had orders been made on an ex parte basis they would have had the inevitable effect of an appearance of oppression more especially if the orders had included the appointment of a receiver. (f) However, when such an application returns on a contested basis, as a matter of principle where ASIC is the moving party there may, based on the principles earlier stated, be a basis for persuading the court that asset preservation orders proportionate to the circumstances should be made. This is so, though the risk of dissipation of assets remains insignificant. Again, this is because of the requirement that the commission must act in the public interest rather than self interest. As was said in the decision of Australian Securities Commission v A S Nominees Ltd (1995) 133 ALR 1; 18 ACSR 459; 13 ACLC 1822 by Finn J at ACLC 1843: "As a matter of obligation in our system of government the ASC, like all other agents of government, is required to act in the public interest within its spheres of responsibility." (g) In making such asset preservation orders, or in granting an injunction pursuant to s 1324, balance of convenience considerations do enter into the matter. ASIC, unlike the typical litigant, does not give an undertaking as to damages. This will bear upon the appropriateness of the orders made, though that fact need not necessarily override public interest considerations centred round the interests of creditors, contributories and the wider public. 18 Pausing for the moment on subpara (a), I do not think that his Honour meant to use the phrase "asset preservation orders" out of, or in enlargement of, its statutory context. See at 267 [2], where his Honour noted "that there are two bases on which s1323...was invoked for asset preservation orders including receivership and surrender of passports". Thus, I do not regard what his Honour said at 268 [7(a)] as inconsistent with the views separately expressed by Finkelstein and French JJ. 19 Mr Stack submitted that the power to make a freezing order could arise from a number of ways. He referred to:

(1) section 1323(3), dealing with interim orders; (2) section 1323(7), preserving the Court's other powers; (3) implication from the express power to appoint a receiver, on the basis that the greater includes the lesser, read in conjunction with the conferral of jurisdiction on superior courts of record (s1337B). (4) SCA section 66(4) (as I have noted, reference was made in argument also to SCA section 23); and (5) the court's implied or inherent power, apparently apart from the statutory sources to which I have referred, to grant freezing orders. 20 Mr M A Ashhurst of counsel, who appeared with Mr L Gor of counsel for Mr Byers, submitted that there was no power under s1323 to make freezing orders. Mr M Holmes of counsel, who appeared for Mr Stubbs, submitted likewise. 21 Mr Ashhurst and Mr Holmes submitted that any power to make freezing orders must therefore derive from another source. Thus, they submitted, it was subject to the well-known principles informing the exercise of the Court's jurisdiction in relation to freezing orders generally. See (by way of example only) Cardile v LED Builders Pty Limited (1999) 198 CLR 380; Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319; and Frigo v Culhaci (CA 17 July 1998 unreported; BC 9803225).

Analysis: the statutory scheme 22 In Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) (2006) 57 ACSR 307, French J dealt at 316 [25] with the kinds of orders that can be made under s1323. His Honour noted that they were made to preserve the status quo pending investigation, and that they might be made even before evidence necessary to establish liability had been collected (or, for that matter, before liability itself had been established). His Honour said: "[25] The orders that can be made under the section are directed, inter alia, to the preservation of assets against which recovery may be sought in the event that liability to an "aggrieved person" is established on the part of a "relevant person". The orders are made in circumstances where "an investigation is being carried out", "a prosecution has been begun" or "a civil proceeding has been begun". That is to say the orders can be made before liability is established and indeed before the evidence necessary to establish liability has been collected. While an application under the section is not interlocutory in an existing criminal or civil proceeding, it is interlocutory in a wider sense. It preserves the status quo and the assets of the relevant person pending the outcome of the investigation, prosecution or civil proceedings which are on foot - Corporate Affairs Commission v Lone Star Exploration NL (No 2) at SASR 30; ACLR 504. At the stage an order is sought the court may not be in a position to identify with precision any particular liability owed by the person the subject of the proposed order. This consideration applies to final orders made under the section as well as to interim orders for which it expressly provides in s 1323(3). The final orders made under the section are necessarily of a temporary or holding character rather than finally disposing of the rights and liabilities of the relevant persons affected by them." 23 Mr Ashhurst submitted that this approach was inconsistent with authority. He referred to Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 at 662, as explained and applied by Bowen CJ in World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 at 185-186. I do not think, however, that it is possible to apply what their Honours said, as to the need for a prima facie case to be shown before interlocutory injunctive relief can be granted, to the facts of this case without taking into account the particular features of the statutory jurisdiction to which I have referred. 24 In my view, the approach described by French J in Carey (No 3) is the correct approach to take to the resolution of ASIC's claims for relief in this case. 25 One or more of the preconditions set out in s1323(a)-(c) must be met before any order can be made. If that is so, the next matter to consider is whether it is necessary or desirable for the protection of aggrieved persons that one or more of the specified orders should be made. 26 The focus of the section is on the protection of aggrieved persons. See Austin J in ASIC v Burke [2000] NSWSC 694 at [6]. Assuming the existence of the jurisdictional fact to which I have referred, the question of protection of aggrieved persons is the question to which the Court then turns. Each of the specified orders is to be tested by reference to the question: is it necessary or desirable for the protection of aggrieved persons? 27 Nonetheless, an assessment of necessity or desirability must take into account not only the interests to be protected but also the threats to those interests. For example, if the court were affirmatively satisfied that there was no risk that a relevant person might abscond, it would be difficult to conclude, regardless, that an order under para (j) or para (k) would be necessary or desirable. 28 In this case, ASIC says that the relevant risk is that of dissipation of assets. Before the Court could conclude that it is necessary or desirable to appoint a receiver, it must make some assessment of that alleged risk. However, as Santow J pointed out in Adler at 269 [7(c)], the Court may appoint a receiver even in the absence of significant risk of dissipation of assets if the case otherwise justifies it. 29 Leaving aside the considerations to which I have just referred, the statutory scheme does not in terms invoke the familiar calculus employed in assessing applications for interlocutory relief: the existence of a serious question to be tried; the insufficiency of damages as a remedy; the related question of balance of convenience; and other discretionary factors. 30 That is not to say that those matters are irrelevant. They remain of significance, as informing the exercise of the statutory discretion if and when it arises, for the reasons explained by Santow J in Adler. But (with the possible exception to which I have referred) they are neither prerequisites to nor fetters upon the exercise of the statutory jurisdiction. 31 If the Court decides (for example) that the appointment of a receiver is necessary or desirable for the protection of aggrieved persons, it may make such an order. But it need not do so: for example, if the making of such an order would cause damage out of all proportion to the likely benefit. 32 In such a case - and I do not intend by reference to it to define or limit what I am about to say - SCA ss23 or 66(4) may come into play. French J said in Carey (No 14) at 101 [33] that s1323 "does not...provide an exhaustive code of remedies to the extent that the power to appoint receivers excludes the lesser alternative of orders restricting or prohibiting dealings with...property". I agree. The "lesser alternative" power accrues once the conditions of s1323 have been satisfied, and the Court concludes (for example) that it is necessary or desirable for the protection of aggrieved persons to appoint a receiver. 33 Assuming one or more of the jurisdictional facts set out in s1323(1)(a)-(c), a finding of necessity or desirability enlivens the discretion to make orders. But it does not compel the exercise of that discretion, in a particular way or at all. The Court must consider all factors relevant to the exercise of that discretion; but it must do so bearing in mind the evident purpose underlying s1323 - a matter to which I shall return. 34 Further, once the discretion is enlivened, it may be exercised calling in aid all relevant powers of the Court. Subsection (7) makes this plain. For this Court, those powers include powers given by or implied under SCA s23, and perhaps s66(4). But those powers are powers available in aid of the jurisdiction conferred by s1323 through the mechanism of s1337B(2). They are not powers available to the Court, as it were, at large. 35 The significance of this is that any "alternative or lesser order" is one made under s1323(1). Such orders therefore may be made once the requirements of that subsection have been met. There is no alternative or additional requirement, of the kind that would be relevant if the orders were made without reference to s1323. In other words, no additional or alternative requirement, flowing from the familiar calculus to which I have referred, is of itself dispositive. 36 This conclusion flows from the nature of the power given by s1323(1), read (on the basis of subs(7)) in conjunction with other relevant powers available to the Court in any matter in which it has jurisdiction. The reasoning does not depend on some "greater includes lesser" process of construction. 37 Thus, I conclude, if the Court is satisfied that it is necessary or desirable, for the protection of aggrieved persons, to appoint a receiver, it may in an appropriate case make instead a freezing order. If it decides to do so, it does not need to be satisfied of all the discretionary factors outlined in Cardile, Paterson, Frigo and the many other cases on this topic, in addition to the factors set out in s1323(1). In considering the question, the Court may, however, take into account relevant discretionary factors, including the matters listed by Santow J in Adler. This process may be of particular relevance where the appointment of a receiver is "desirable" rather than "necessary". 38 For these reasons - which do not encompass the whole of the matters put forward by ASIC in support of its case - I conclude that I have power under s1323 to make a freezing order if the circumstances warrant it. 39 Before I move on, I wish to make it clear that I do not find it necessary to rely on s1323(3). I therefore consider the issues between ASIC and Messrs Stubbs and Byers on the basis that if relief is granted, it would be relief granted pursuant to s1323(1). Appointment of a receiver

40 Messrs Ashhurst and Holmes pressed me with the proposition that the appointment of a receiver is a drastic step. There are many cases that support this proposition. See, for example, Carey (No 14) at 103 [43] and Corporate Affairs Commission v A.S.C. Timber Pty. Ltd. (1989) 7 ACLC 467 at 478. 41 That of itself is not a dispositive consideration in this case. The policy to be considered is that set out in s1323. The legislature has provided the remedy of receivership as the only express remedy directed at "relevant persons" for the purpose of preventing them from dissipating their assets. So much was recognised (in relation to a predecessor of s1323) by Waddell CJ in Eq in Corporate Affairs Commission NSW v Walker (1987) 11 ACLR 884 at 888. His Honour said:

"The legislature clearly intended that drastic remedies should be available to protect the interests of persons who might have a claim in respect of such activity by freezing the assets of those responsible. In applying the section effect should be given to this legislative intention."

42 As his Honour had made plain earlier on the same page, giving effect to that intention "does not require that a prima facie case of liability should be made out as is necessary in order to obtain interlocutory relief for the preservation of property by way of injunction or the appointment of a receiver under the general law and the Supreme Court Act. ...In the case of an application made shortly after an investigation has begun, the evidence may be regarded as sufficient if it establishes the general circumstances, the nature of the investigation and the reason why it is thought that there may be some liability on the part of a relevant person." 43 His Honour continued by contrasting that position with the position on some hypothetical later application, and considered the further evidence that might be then required. 44 Further, as I have said, the "necessary or desirable" inquiry focuses on protection of aggrieved persons. The drastic nature of the remedy does not inform that inquiry. At most, it informs the subsequent inquiry, arising from the words "may order", as to the exercise of the discretion (that by hypothesis) has been enlivened. In this context I use the word "exercise" to include at least two matters. The first is whether any order should be made at all. The second, assuming a positive answer to the first, is the form of the order to be made. 45 In short, I think, in asking whether it is necessary or desirable for the protection of aggrieved persons to appoint a receiver, one looks at the needs of those persons, and at the threats or risks to those needs, and not at the drastic nature of the remedy. 46 As I have said, it is necessary to bear in mind the purpose underlying s1323. That purpose is to preserve the status quo pending the outcome of an investigation. What may be preserved includes the assets of those suspected of wrongdoing. The preservation is for the benefit of those who may have a claim against the suspected wrongdoers. It would be quite inconsistent with that purpose to apply, without thought or adaptation, principles developed in relation to the appointment of receivers in other contexts and for other purposes. 47 For example, and as Waddell CJ in Eq pointed out in Walker, it is inherent in s1323 that investigations may not have reached a stage where particular wrongdoing or particular wrongdoers can be identified with precision. But to deny an order on the basis that matters had not got to the point of identifying a serious question to be tried would be to eviscerate both the jurisdiction and the purpose. 48 Powell J confirmed this in A.S.C. Timber at 476. His Honour said that the power to appoint a receiver is one that may be invoked once the necessary jurisdictional facts have been established. However, as his Honour noted at 478, "something out of the ordinary [needs] to be demonstrated to justify the appointment of a receiver". What is or may be something out of the ordinary for that purpose is a matter that requires evaluation on a case by case basis. Disclosure orders 49 ASIC sought an order that Mr Byers disclose details of all his assets and liabilities. That order was to be subject to the right to claim privilege against self-incrimination or exposure to a penalty. 50 Mr Ashhurst raised two objections. The first was that such an order is not justified by s1323. I do not accept that submission. If the Court is satisfied that the appointment of a receiver is justified, a disclosure order would be ancillary to, and in aid of the effective implementation of, that appointment. For the reasons that I have given as to the powers that are available through subs(7) once the court decides to make an order under subs(1), the Court could make a disclosure order. 51 The second objection was based on what Mr Ashhurst said was the inadequacy of the protection against self-incrimination: particularly in circumstances where, if that privilege is claimed, ASIC seeks an order that Mr Byers provide full details of the claim in a second, confidential affidavit. 52 Giles JA (with whom Spigelman CJ and McColl JA agreed) pointed to the problems with such an order in Ross v Internet Wines Pty Ltd (2004) 60 NSWLR 436 at 450 [99] to 452 [104]. In my view, the same considerations apply in this case. 53 The Court has recognised the problem. See Practice Note SC Gen 14 at para 14, and see in particular the provisions of paras 8 and 9 as the draft ex parte freezing order referred to in para 14. In my view, if a disclosure order is to be made, it should reflect the wording of paras 8 and 9. Application of the principles in this case 54 The administrators presently believe that the Fincorp Group may have been insolvent since mid 2006: ie, for about nine months before their appointment. Over that time, it raised approximately $110 million from the public. Over the time that Mr Byers was a director (from November 2006) it raised almost $60 million from the public. Indeed, if one focuses one's attention only on this year, it raised some $32 million from the public between 1 January and the date of appointment of the administrators. 55 The administrators give reasons in support of their preliminary view. Those reasons are logical. In particular, the administrators provide what might be regarded as a rebuttal of inferences otherwise available from the terms of the Ernst and Young report to which they refer. In this context, I refer to the revaluation of the properties of which Mr Winterbottom gave evidence. Whilst there is no material on which the Court could now make a positive finding of insolvency, the administrators' reasons do demonstrate that their preliminary view is not irrational or groundless. 56 That preliminary view also finds support in the draft financial statements of the Fincorp Group (more accurately, Fincorp Group Holdings Pty Limited and its controlled entities) as at 30 June 2006. Those draft financial statements were not finalised at the time of appointment of the administrators. Nonetheless, to the extent that they can be taken as demonstrating the financial position of the group as at 30 June 2006, they show: · a net loss for the year of $17.2 million; · a deficiency of assets over liabilities of $32 million; · of particular relevance for present purposes, a deficiency of current assets compared to current liabilities (ie, an excess of current liabilities over current assets) in excess of $50 million. 57 When one bears in mind the statutory test of solvency posed in s95A of the Corporations Act, those draft financial statements - to the extent that they are accurate - do not undermine the administrators' preliminary view. 58 There are as I have said two investigations underway. Each - the administrators' investigation and ASIC's investigation - is at an early stage. The affairs of the Fincorp Group were complex. Much work will be required to disentangle them. The outcome of that work, in terms of solvency, cannot be predicted. 59 Of course, proof of insolvent trading does not without more make a director liable under s588G so as to render him or her liable to an order to pay compensation. It is necessary to show that, at the time a liability was incurred, there were reasonable grounds to suspect that the company was or would become thereby insolvent. There are the defences provided by s588H. Having said that, proof of insolvent trading is an important step along the way to liability. 60 By way of aside: it is at least likely that further investigation of the question of insolvent trading, with a view to demonstrating when the group became insolvent, is likely of itself to cast light upon the requirement set out in s588G(1)(c), to demonstrate reasonable grounds for suspecting insolvency. 61 It is clear that many people have suffered loss. They will include those who have invested since mid 2006 and who did not (or could not) redeem their investments. Those persons will have lost, in some cases about half and in others all, their investments. If insolvent trading be proved, those persons may well have a claim against directors at the relevant time. So may the liquidator. 62 There is no direct evidence that Mr Stubbs has sought to dispose of his assets. Mr Stack referred to a transfer by Mr Stubbs to his wife of an interest in a property at Daleys Point. Although the evidence is sketchy, the transfer that was identified (undated, unstamped and unregistered though it is) states a consideration for the transfer. There is no evidence that the consideration is, or was at whatever may have been the relevant time, insufficient. Equally, there is no evidence that the consideration has been paid. I have to say that I would have thought that Mr Stubbs was in a position to illuminate the Court on those matters if he chose to do so. Equally, I note that Mr Stack did not seek to cross-examine Mr Stubbs in relation to this transaction (or at all). 63 In addition, the evidence suggests that Mr Stubbs assisted other directors to transfer assets to their wives. He did so by causing Fincorp Group money to be used for the payment of stamp duty on those transfers. Those transactions - the total involved is approximately $100,000 - are among the matters under investigation by the administrators. 64 There is some evidence that might suggest that Mr Byers may have sought to disguise an asset - his ownership of York Capital Limited. There is, however, no direct evidence that Mr Byers has sought to dispose of his assets; and I note that he has given sworn evidence that he has no present intention of doing so. Although Mr Byers was cross-examined, he was not challenged on that assertion. I think that, notwithstanding some perhaps unsatisfactory aspects of other parts of his evidence, I should accept it. But present intentions may change. 65 In each case, I conclude, the risk of dissipation, whilst on the evidence low, cannot be discounted. 66 Mr Stubbs' evidence is that his assets are small. That may be so; but it does not follow that they should not be protected for the possible benefit of aggrieved persons. 67 Mr Byers said further that the making of any order (or, for that matter, the giving by him of an undertaking) would have a significant adverse impact on his reputation. I accept that as a real possibility. But I am required to consider the interests of aggrieved persons. I do not think that possible damage to reputation overcomes their interests; indeed, that damage follows (if at all) from the very scheme of the section. 68 Mr Byers gave no other evidence of adverse impact; and Mr Stubbs gave none. 69 I accept that the positive case against Messrs Stubbs and Byers, in relation to insolvent trading, is not at this stage strong. But, as I have said, the investigations are at an early stage. To adapt the words of Waddell CJ in Eq in Walker, the evidence satisfies me of the general circumstances, the nature of the investigations and the reasons why it is thought that there may be some liability on the part of Messrs Stubbs and Byers. 70 Balancing all the considerations as best I can, I have come to the conclusion that it would be desirable in the interests of aggrieved persons - including the thousands who have lost some or all of their investments - that a receiver be appointed to the assets of Messrs Stubbs and Byers. 71 I acknowledge that the evidence of risk is low. But the section contemplates that, as it does the drastic nature of the relief. And it contemplates that such relief might be granted at an early stage, as Waddell CJ in Eq observed in Walker. 72 In this case, the risk of dissipation needs to be assessed against the very large amounts of the potential claims. I have indicated the range of those claims: from $110 million at one extreme to $32 million at the other. They are not small sums of money. 73 I take into account the nature of the investigations, the relatively early stage (having regard to the complexity of the task) that they have reached and the surrounding circumstances to which I have referred. I take into account also the relatively short duration for which the orders are sought - some two months; and the availability of liberty to apply. I take into account the absence of any evidence of harm other than reputational damage. 74 Thus, I need to consider the precise manner of exercise of the discretion that, on my findings, has been enlivened. At this point it becomes relevant to take into account the drastic impact of receivership, and (among other things) the absence of any recourse in relation to damages. I also take into account that the evidence of risk of dissipation is inferential rather than direct; and of course I take into account the other circumstances to which I have referred. 75 Taking all those matters into consideration, I do not propose to appoint receivers but instead to make a freezing order. It seems to me that this less intrusive order, again for two months and subject to liberty to apply, balances the public interest that ASIC seeks to vindicate with the private interests of Messrs Stubbs and Byers. 76 I accept that such an order may cause reputational damage, as Mr Byers has said. That is unfortunate. But the extent to which the making of an order will really add to such damage may have accrued to date from publicity to date is a matter of conjecture. 77 I make orders in accordance with paragraphs 3 (as amended) and 6 to 9 of the short minutes of order initialled by me and dated today's date. 78 I will hear ASIC and Mr Byers on the form of any disclosure order to give effect to what I have said on this topic. 79 I will hear the parties on costs. (For submissions re costs see third last and second last pages of the transcript for 14 August 2007.)

80 HIS HONOUR: By consent, I make no order as to the costs of the application.

(For submissions re form of disclosure order see last two pages of the transcript.)

81 HIS HONOUR: I reserve liberty to apply in chambers with respect to the disclosure order.

17/10/2007 - section 1323(9) to section 1323(7)Subsection (9) to Subsection (7)subs(9)) to subs(7))subs(9) to subs(7) - Paragraph(s) 19, 34, 36 and 50

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