ASIC v Sydney Investment House Equities Pty Ltd & 9 Ors

Sydney Investment House P/L 2,138,435 - Sydney Investment House (Newcastle) P/L 1,276,182 - Sydney Investment House (Beaconsfield) P/L 489,841 - Melbourne Investment House (Hawthorn) P/L 210,524 - SIH atf NC49 Unit Trust 173,078 - Goulding Family Trust 15,142 - Melbourne Investment House (Collingwood) P/L 583,587 - Sydney Investment House Capital Ltd 22,996 - Discretionary Property Trust 140,782 - WSS Unit Trust 1,500 - Melbourne Investment House P/L 237,164" 10 Many of these loans were not to property developers. So far as the evidence reveals, House did not carry on business as a property developer. Its balance sheet as at 30 June 2004 showed that it owned no real property. Its principal assets consisted of debts owed to it of $2,809,756. Of this debt, about half was owed by trade debtors and the balance by other companies in the group. It had lent money to Collingwood, the Goulding Family Trust, the third defendant, Capital, the SAH Discretionary Property Trust ($813,420), Hawthorn, "NC49" (a reference to another trust of which House was trustee), and the WSS Unit Trust. House, as trustee of the WSS Unit Trust, carried on a storage business from premises in Wickham. 11 It appears from Beaconsfield's financial statements as at 30 June 2004 that it was not a property developer. Its only substantial assets consisted of loans to related parties of $365,554. It owned no property plant and equipment, nor inventories. Of its advances of $339,378 to related parties, $243,018 was advanced to the Goulding Family Trust. The balance was lent to House and to Collingwood. It had also borrowed moneys from Newcastle and from Mr Edwin Goulding, as well as from Equities. 12 Hawthorn held land for resale. Its financial statements for the years ended 30 June 2004, 30 June 2005, and 30 June 2006 did not suggest that it was engaged in property development as distinct from holding and renting property with a view to resale. 13 House was the trustee of the various trusts to which moneys were advanced. Officers of ASIC deposed that ASIC's searches and investigations have revealed no evidence that House had carried on business as a property developer, either in its own right or as trustee of the trusts. 14 The financial statements of Melbourne as at 30 June 2004 disclosed that it had received loans of $319,965 from related parties, namely Equities and House. It had a deficiency of assets of $168,201. It is not possible to identify from the financial statements what activities it carried on. However, it does not appear to have carried on a property development business. It owned no land. 15 The financial statements of Collingwood as at 30 June 2004 disclosed it held land as an asset for the purposes of resale, and that to that point it had incurred development costs, which it had capitalised, of $109,770. Its subsequent financial statements also showed that it carried on business as a developer of land. The property was sold at a loss in the 2006 financial year. 16 Newcastle was, and is, a property developer. It owns a development at 11/13 Roslyn Avenue, Islington, which is a suburb in the metropolitan area of Newcastle. The development involves the conversion of three-storey woolstore buildings into 96 residential apartments. A valuation prepared by CB Richard Ellis Pty Ltd for Challenger Managed Investments Ltd dated 23 May 2006 was tendered. It stated that House had advised that the development was expected to be fully completed towards the end of that month. According to the valuation, 56 contracts had been exchanged, and 41 apartments remained to be sold. 17 Accordingly, the only loans made by Equities to persons who could be described as Approved Development Borrowers were the loans to Newcastle and Collingwood. 18 By mid-2004, Equities was unable to repay the loans to investors. Many of the investors who had lent money to Equities were persuaded to "rollover" their loans into the acquisition of redeemable preference shares in Capital. There are three classes of issued shares in Capital, namely, cumulative redeemable preference shares, "H" class shares, and ordinary shares. The "H" shares and ordinary shares are issued to House. Eight million, four-hundred and forty-five thousand redeemable preference shares have been issued to investors. 19 Capital issued a prospectus dated 12 October 2004, which was replaced by a further prospectus dated 25 October 2004. The prospectus described the "Sydney Investment House Capital Fund" as having "a core purpose of making strategic investments by way of loan or equity in real estate or property development projects. The Fund provides an opportunity for investors to participate as shareholders in a Company highly poised to take advantage of property investment opportunities." The purpose of the funds to be raised by the issue of redeemable preference shares was described as follows: " The purpose of the Fund is to invest in real estate and property development projects within Australia in accordance with its Investment Plan. For financial control, investment funding or liquidity purposes, funds could be invested in liquid assets such as bank bills, interest bearing deposits, or other forms of securities. " 20 The prospectus stated under the heading "Fund Investment Approach" the following: " The Company will utilise investors' funds to make loans and investments in accordance with the Investment Plan. Types of security, which may be taken for loans or investments, include registered mortgages, unregistered mortgages supported by caveats, personal guarantees and charges. Further details on available securities and indicative levels of securities sought can be found in the Investment Plan. " 21 The prospectus included what was said to be an extract from the "2004 edition of the Investment Plan". The purpose of the plan was stated to be to provide guidelines for the "Investment Team to use when making a decision to invest or in the managing of the Sydney Investment House Capital Fund". The plan was also said to provide "a set of parameters within which any investor into the Sydney Investment House Capital Fund knows the Investment Team is subject to." It was stated that any departure from the parameters would require adequate justification to be substantiated in writing to investors at the investors' request. 22 The Investment Plan went on to describe parameters which would be applied in making decisions to invest in property development projects, parameters for investing in residential, commercial, industrial, or construction developments, a diversifications strategy, and like matters. The prospectus stated that "[Capital] may invest in seed capital, mezzanine, equity or first mortgage investments in companies or entities which are related to, or associated with [Capital] or its directors. In such circumstances, any member of the Investment Team having a conflict of interest shall not vote or participate in Investment Team discussions or meetings dealing with such project. The conflict shall be noted and referred to the Board when an investment recommendation is made to the Board." 23 The prospectus stated that Capital would primarily invest all funds raised from the prospectus in the financing of, or in the taking of an equity position in, property development projects. 24 Between 2 November 2004 and 16 June 2005, over $8,400,000 was raised by Capital by the issue of redeemable preference shares. Much of this capital was by "rollover" of loans made to Equities. The shares carry the right to a 9% cumulative dividend payable out of available profits. The redemption date was 36 months after the date of issue of the shares or as otherwise agreed between the company and the shareholder. Representations were made to some investors that their shares would be bought back by Capital or bought by House within a shorter time frame. That has not happened. 25 All of the moneys raised were lent to companies controlled by Mr Goulding. Whilst the possibility of investment in related entities was noted in the prospectus, the prospectus also indicated the companies' intention to diversify their investment portfolio. The prospectus described the "due diligence process" that would be undertaken before considering investment in property development proposals. The prospectus did not disclose that it was intended to apply all of the moneys raised in making loans to group companies. No loans were made to any developers that were not associated with Mr Goulding. 26 The balance sheet of Capital for the year ended 30 June 2005 discloses that it had issued redeemable preference shares to the value of $8,037,600. Prima facie, this sum is understated unless there were selective redemptions or buy-backs of some shares. 27 The balance sheet of Capital as at 30 June 2005 showed that it had net assets of $7,190,339. It earned no income in the year, but recorded an expense of $763,048 comprising "expenses from ordinary activities" and "borrowing costs". It is not clear what these expenses were. After taking into account accumulated losses, the balance sheet disclosed net equity of $7,190,339. This was substantially represented by loans made to related parties totalling $7,342,991. The following loans are recorded in the company's balance sheet at 30 June 2005: " LOANS TO RELATED PARTIES - Sydney Investment House P/L 2,120,640 - Sydney Investment House (Newcastle) P/L 1,503,857 - Sydney Investment House Equities P/L 1,356,381 - Sydney Investment House (Beaconsfield) P/L 51,110 - SIH Discretionary Property Trust 333,213 - Melbourne Investment House (Collingwood) P/L 649,527 - Melbourne Investment House (Hawthorn) P/L 144,787 - Melbourne Investment House P/L 299,334 - NC49 Trust 668,910 - WSS Unit Trust 157,320 - Alcorn Trust 40,050 - Goulding Family Trust 17,862 " 28 Again, only the loans to Newcastle and to Collingwood could be described as loans made for the financing of property development projects. None of the loans was secured by registered mortgage. Unregistered second mortgage securities were taken from Collingwood, Newcastle, House and Hawthorn. A loan agreement with House for a loan of $500,000 was secured by a "debenture over Sydney Investment House Pty Ltd". A loan agreement with Melbourne for $500,000 also provided for it to be secured by a "registered debenture over Melbourne Investment House Pty Ltd". However, there is no evidence of "debentures" being taken. 29 Various loan agreements were entered into, but there is no correlation between the loan agreements entered into and the loans recorded as having been made as at 30 June 2005. 30 No documents were produced by Capital to ASIC in the course of ASIC's investigation which showed that any investment decision was taken by Capital in accordance with the Investment Plan described in the prospectus. 31 In response to a subpoena, Capital and Equities also produced balance sheet and profit and loss statements as at "June 2006". The documents appear to be management accounts. They are not accounts adopted by the director or directors of the companies. The balance sheet of Capital as of "June 2006" disclosed that it then had total assets of $6,822,078.70. It incurred a loss for the year of $156,990.90. It derived no income in the year. The principal component of the loss was attributable to "investor interest", but it is not clear what that is. The balance sheet discloses redeemable preference shareholders to a value of $7,825,500. Again, this may be an understatement. Even so, if the preference shares were treated as liabilities rather than as equity, the company would have a deficiency of liabilities to assets of over $1,000,000. The companies' total assets were recorded as $6,936,243.26. All save $1,107.48 was attributable to loans made to other group entities. The loans to related parties as at June 2006 were described as follows: " Loan Accounts Loan acc SIH Pty Ltd $1,908,351.39 Loan acc SIH Equities $710.00 Loan acc SIH Newcastle $1,503,857.33 Loan acc SIH Beaconsfield $51,110.00 Loan acc SIH Disc Prop Trust $333,213.02 Loan acc MIH Collingwood $649,597.34 Loan acc MIH Hawthorn $121,310.88 Loan acc MIH HAW PT -$4,490.00 Loan acc MIH Pty Ltd $299,334.26 Loan acc SIH NC49 $382,718.48 Loan acc SIH NC41 -$2,790.00 Loan acc SIH SKW -$42,830.00 Loan acc SIH WSS ut $357,720.00 Loan acc SIH Alcorn Trust $40,050.00 Loan acc Goulding Family Trust $18,762.15 Total Loan Accounts $5,616,624.85 Non-Current Assets Loan - SIH Equities $1,318,380.63 Loan acc E. Goulding $130.30 " 32 The loan to Equities of $1,318,381 was treated as a non-current asset. As the balance sheet of Equities shows a deficiency of net assets of $1,691,000, with total assets of only $586,588 represented by inter-group receivables, there must be serious concerns as to the recoverability of that amount. The loan to Newcastle was still recorded at $1,503,857. 33 As Capital recorded no revenue in either the year ended 30 June 2005, nor the year ended 30 June 2006, it would appear that none of the loans was made at interest. The prospectus represented that the "Fund" would endeavour to negotiate the best available rate of investment return dependent on the nature of the investment made. It stated that "The Investment Criteria shall include an investment return no lower than 2% above the offered rate on the Sydney Investment House Capital Fund to investors for general Investment Share type shares." The loan agreements made by Capital provided for the payment of interest "as required under this agreement". The loan agreements specified a rate of interest which was usually 15%, but did not specify the times as at which interest would be payable. The loan agreements provided for the making of a minimum annual payment as would be required to avoid the loan being taken to be a dividend under income tax law, or such other amount agreed in writing by the borrower and the lender. No interest has been paid. It also appears from the financial statements of the other group entities that no provision is made for the accrual of a liability for interest. 34 The evidence on this application provides cause for serious concern that the majority of the moneys raised from the public by Equities and Capital has not been invested in the ways described in the information memorandum and the prospectus, but has been lent without interest to various entities controlled by Mr Goulding. There is a risk that these moneys have been, or are in danger of being, dissipated. 35 On 12 September 2006, the defendants' solicitors advised ASIC that the defendants had retained KPMG to conduct an audit of, and report upon, the financial affairs of each of the corporate defendants and of Mr Goulding. They advised that those reports should be finished on or around 1 October 2006, and would be made available to ASIC for its review. The defendants explained their failure to comply fully with subpoenas issued to them on the basis that the balance of information would be "caught by the audited financial reports currently being prepared by KPMG". No such reports were provided to ASIC prior to the hearing. 36 The failure of the defendants to comply fully with subpoenas to produce records of their financial information, their failure to comply with orders for the swearing of affidavits of assets and liabilities required in conjunction with the Mareva injunctions, and their failure to supply the reports which KPMG was to have prepared, provide further evidence for the need for the appointment of provisional liquidators to ascertain the true financial position of the companies and to take appropriate steps to secure or realise available assets. 37 There is a property development on foot at Islington being conducted by Newcastle. Apart from any cash balances or other assets which may be held in the trusts (for which financial statements were not provided during the course of the hearing), the Islington property development appears to be the only asset from which a return to investors may be made. The valuation of that development suggests there is a reasonable ground to expect a substantial surplus available to Newcastle after discharging secured debt. The loan agreement between Capital and Newcastle provided for Capital to make available to Newcastle a $3,000,000 line of credit secured by "unregistered mortgage caveat over 13 Roslyn Avenue, Islington NSW". Caveats have been lodged over lots in the development from which it appears that Newcastle may hold the land as trustee of the "NC13 Hybrid Trust". The difficulty from the perspective of investors in Capital is that so far as the financial statements disclose, Newcastle only owes $1,503,857.33 to Capital. 38 Orders are already in place restraining the defendants from dealing with their assets otherwise than in the ordinary course of business. The orders do not restrain Newcastle from selling the units in the Islington development, subject to certain undertakings in relation to the disposition of the proceeds of sale. However, I am satisfied that further protection of investors is required. There is an urgent requirement for an investigation into the financial affairs of the group, including the trusts. The orders made to date for the filing of affidavits and the providing of detailed information as to the assets and liabilities of the defendants have not been complied with, although there has been an attempt at partial compliance. However, the investigation needs to go further. 39 A company may be wound up on the just and equitable ground where there is a lack of confidence in the management of the affairs of the company and a risk to the public interest that warrants protection (Australian Securities Commission v AS Nominees (1995) 62 FCR 504; Australian Securities and Investments Commission v ABC Fund Managers & Ors (2001) 39 ACSR 443). Each of the corporate defendants is controlled by Mr Goulding. In the case of the loans made to each of the corporate defendants, other than Newcastle and Collingwood, there is a prima facie case that the company receiving the money was aware that it was being applied contrary to the representations made to investors as to how the moneys raised from the investors would be used, and was being applied in breach of Mr Goulding's fiduciary duties. In the case of Collingwood, it appears from the latest balance sheet that the company is insolvent. It has liabilities of over $2,600,000 and its only asset is $22.17. There is a strong case for it to be wound up in insolvency. 40 The defendants expressly raise no issue about the standing of ASIC to apply for the winding-up of any of the corporate defendants. 41 Unless the appointment of a provisional liquidator or liquidator to the corporate defendants would materially prejudice the interest of investors by creating a risk that the units in the Islington development would be sold at less than their fair market value, it is desirable that a provisional liquidator or liquidator be appointed to the corporate defendants so that a proper investigation into the affairs of the defendants can be conducted, and to ensure that there is no dissipation of any property of any of the defendants. There are serious grounds for concern that millions of dollars raised from investors on the promise that the moneys would be lent on security to property developers have instead been diverted to other companies and trusts controlled by Mr Goulding, who did not carry on such a business. Even if those entities and trusts have in turn used their funds to support property development projects of other companies in the group, including Newcastle, the application of the funds raised by investors in this way would be contrary to the terms of the information memorandum and prospectus on the basis of which the funds were raised. Claims Made by ASIC in its Amended Statement of Claim 42 By its amended statement of claim, ASIC makes a number of allegations that the defendants have contravened the Corporations Act 2001 (Cth). ASIC alleges that Equities operated an unregistered managed investment scheme contrary to s 601ED of the Act. It alleges that Mr Goulding and Mr Geagea aided and abetted and were knowingly concerned in that contravention. ASIC also alleges that Equities advertised financial products for acquisition by members of the public as retail clients without identifying that Equities was the issuer of the product, without indicating that a product disclosure statement was available for the product and where it could be obtained, and without indicating that a person should consider the product disclosure statement in deciding whether to acquire the financial product. ASIC alleges that Equities thereby contravened s 1018A(1)(a) of the Act. It alleges that Mr Goulding, Mr Geagea and House aided and abetted and were knowingly concerned in that contravention. 43 ASIC also alleges that Equities contravened s 727 of the Act by making an offer of securities, that needed disclosure to investors under Pt 6D.2, without a disclosure document for the offer having been lodged with ASIC. It alleges that the advertisements placed by Equities contravened s 734(2) of the Act. It alleges that Mr Goulding, Mr Geagea and House aided and abetted and were knowingly concerned in those contraventions. 44 ASIC alleges that Capital contravened s 315 of the Act by failing to send its financial statements, directors' report and auditor's report or a concise financial report to its members. ASIC also alleged that Capital contravened s 319 of the Act by failing to send such financial reports to ASIC. 45 ASIC alleges that Equities and Capital carried on financial services businesses without a licence contrary to s 911A of the Act, and that Mr Goulding, Mr Geagea and House aided and abetted and were knowingly concerned in that contravention. 46 ASIC alleges that Equities and Capital engaged in misleading and deceptive conduct. It alleges that Equities misrepresented to investors the return they would receive on their investments. It also alleges that Equities and Capital misrepresented to certain investors that if moneys lent to Equities were rolled over to purchase shares in Capital, Capital would buy back the shares within 1, 2, 3, or 6 months. It also alleges that Capital represented to certain investors that it would buy back shares to provide a return to the investors of the principal and agreed interest in less than three years. It also alleges that Capital misrepresented that it would negotiate the most optimal level of security on loans made by it. 47 The amended statement of claim does not allege that Equities and Capital engaged in misleading and deceptive conduct by representing that moneys raised would be lent to property developers, or by failing to disclose that Equities and Capital intended to apply the moneys raised in making loans to companies and trusts associated with Mr Goulding. This was a central part of ASIC's submissions on the present application. It may be that ASIC only received documents showing the disbursement of the moneys raised by investors after the amended statement of claim was formulated. It may be an oversight. 48 ASIC does allege that Mr Goulding, Mr Geagea and House acted in the affairs of Capital in their own interests, rather than in the interests of the redeemable preference shareholders as a whole, and in a manner which was unfair or unjust to the latter. It alleges that Mr Goulding, Mr Geagea and House engaged in conduct which was oppressive or unfairly prejudicial to, or unfairly discriminatory against, the preference shareholders of Capital. It alleges that Mr Goulding and Mr Geagea breached their duties as directors by causing Capital to enter into loan agreements with Collingwood, Newcastle, House, Melbourne and Hawthorn. Amended Interlocutory Process 49 By its amended interlocutory process, ASIC seeks some of the final relief sought in its amended originating process and amended statement of claim. It also seeks interlocutory relief. The final relief sought is a declaration that Equities and Capital contravened s 601ED of the Corporations Act by operating an unregistered managed investment scheme, an injunction restraining those defendants from operating an unregistered managed investment scheme in contravention of that section, and an order that Equities, Capital and House be wound up. It also seeks and order that a receiver be appointed to wind up the scheme. 50 The interlocutory relief sought is that provisional liquidators be appointed to each of the first, second and fifth defendants. ASIC also seeks a variation to existing injunctions restraining the defendants from dealing with their assets. 51 During the course of the hearing, ASIC sought leave to amend the originating process and the interlocutory process, to seek orders that the sixth to tenth defendants be wound up. I granted leave for the originating process to be amended to that effect, and for the interlocutory process to be amended to include a claim for the appointment of provisional liquidators to the sixth to tenth defendants. Should Final Relief be Given? 52 The defendants objected to the grant of any final relief on the interlocutory process. The principal ground advanced was that the defendants were not in a position to deal with those claims. Senior counsel for the defendants said that he had only recently been briefed. 53 That is not a sufficient reason for not dealing with the claims for final relief. The defendants have had ample notice of the application. As explained below, their conduct of the litigation has been marked by continuous defaults in complying with orders for the filing of defences and the serving of affidavits. If the defendants were prejudiced in their ability to defend the claim owing to the late briefing of counsel, they have only themselves to blame. 54 There was no defence to ASIC's amended statement of claim, although counsel made it clear that the defendants wished to defend the allegations. A draft defence had been served on ASIC on or about 27 September 2006. Orders for the filing of defences had been made on 16 June, 28 August and 25 September 2006. The order of 25 September 2006 required a defence to be filed by 27 September 2006. No defence was filed pursuant to that order, but on 27 September 2006, the defendants sent to ASIC a draft, unverified defence. The draft defence contained a number of admissions. It also included a number of bare denials or non-admissions, and assertions of inability to plead. On 9 October 2006, Barrett J ordered the defendants to "file and serve a verified defence which traverses each material fact or conclusion of law pleaded in the Amended Statement of Claim, the declarations and other relief sought in the Amended Interlocutory process and the Amended Originating Process, and each particular set out in ASIC's letter to Porter Davies, Lawyers, dated 5 October 2006, and which identifies a basis in fact and law upon which any material fact, conclusion of law, or particular, is denied, the evidence upon which each defendant relies to deny any material fact, conclusion of law, or particular, and the basis in fact or law upon which it is contended that the relief sought in the Amended Interlocutory Process and Amended Originating Process should be varied or refused." 55 Barrett J also ordered the defendants to file and serve an affidavit by 10 October 2006 explaining the steps taken to comply with orders made on 16 June, 28 August, 4 September, 7 September and 25 September 2006, and any explanation for the failure to comply with the Court's orders made on those dates. 56 The orders not complied with included orders requiring the defendants to file and serve affidavits of assets. These affidavits had been ordered as ancillary to the grant of Mareva relief. 57 On 13 October 2006, Barrett J noted various defaults by the defendants in complying with orders for the filing of defences. His Honour noted that no affidavits had been served by the defendants in answer to the relief sought in the amended originating process or the amended interlocutory process in default of orders made on 28 August and 25 September 2006. His Honour noted that no affidavits as required by an order made on 4 September 2006 had been filed, in default of orders made on that day, and on 25 September and 9 October 2006. His Honour noted that the defendants were in default of the order made on 9 October 2006 referred to in paragraph [54]. Having noted those defaults, his Honour made the following order: " That except to the extent that (a) any verified defences (being defences complying with order 5 made on 9 October 2006) and affidavits are filed and served by 4pm on 16 October 2006; or (b) the Court may by specific order otherwise allow: 1. The Interlocutory Hearing listed before White J on 18 October 2006, with respect to the relief sought in the Amended Interlocutory Process, proceed on the basis that the allegations pleaded in the Amended Statement of Claim are admitted. 2. The First to Tenth Defendants are not permitted to rely on any evidence at the Interlocutory Hearing listed before White J on 18 October 2006 in answer to the relief sought in the Amended Interlocutory Process. " 58 No affidavit or defence complying with this order was filed. I declined to make any "special order" to allow the withdrawal of the deemed admissions. 59 However, the deemed admissions only applied in respect of the relief sought in the amended interlocutory process of 4 September 2006. They did not apply to the claims introduced by amendment during the hearing for the appointment of provisional liquidators to the sixth to tenth defendants. I declined to grant leave to the defendants to file in court a defence which consisted of bare statements of admission, non-admission and denial, as such a defence still did not comply with the orders of 9 October 2006. Nonetheless, I have proceeded on the basis that the defendants propose to seek leave to file a defence in due course which will comply with the orders made on the 9th October 2006. 60 The question remains whether I should deal with the claims for final relief in the amended interlocutory process. No order was made for the trial of separate questions in the proceedings. Counsel for ASIC accepted that such orders would need to be made if the Court were to grant some, but not all, of the final relief sought in the originating process. That concession was correctly made. 61 The various causes of action described in the amended statement of claim and the claims for relief in the amended originating process arise out of the same course of conduct by the defendants. A declaration that the first defendant operated an unregistered managed investment scheme appears to be sought as a prelude for the making of an order for the winding-up of the scheme. The same conduct of the defendants in relation to the raising of moneys by Equities would need to be considered in determining at a final hearing whether the first to fifth defendants engaged in, or were knowingly concerned in, misleading or deceptive conduct, whether the first defendant advertised and offered securities without the required disclosure documents, and whether it carried on a financial services business without a licence. Likewise, the claims to wind up the first, second and fifth defendants on the just and equitable ground are based upon the same conduct as gives rise to the claims that the third and fourth defendants breached their duties as directors, as well as upon conduct relevant to ASIC's claim that the manner of investment of the funds raised by Equities and Capital showed that they, House and Messrs Goulding and Geagea, engaged in, or were knowingly concerned in, misleading and deceptive conduct. 62 These are not promising grounds for the making of orders for the separate determination of questions in the proceedings, particularly as any necessary findings may give rise to issue estoppels relevant to other claims, although the findings may be based on facts which the defendants are taken to have admitted only for the purpose of the relief sought in the amended interlocutory process. 63 The question then is what utility there would be in ordering a separate trial of the claims for final relief in the Amended Interlocutory Process. As I have said, the claims for a declaration that Equities operated an unregistered managed investment scheme is a precursor to the claim for an order for the winding-up of the scheme. The scheme involved the borrowing of money from investors and its being lent to other defendants. It appears to me that the work of winding-up the scheme would be no different from the work involved in winding-up Equities. 64 The question then is whether final winding-up orders should be made in relation to Equities, Capital or House. 65 It appears to me that the interests of the investors would be sufficiently protected by the appointment of a provisional liquidator to Equities, Capital and House, as well as to the seventh to tenth defendants. A different issue arises in relation to the appointment of a provisional liquidator to the sixth defendant, Newcastle, to which I will return. 66 I see no utility in appointing a liquidator to House at this stage. House is the trustee of numerous trusts. It has borrowed money from Capital and from Equities in its capacity as trustee. The trust deeds provide for the retirement or removal of the trustee if it goes into liquidation. In some cases, this occurs automatically. In some cases, it depends upon a resolution of unitholders. ASIC has not sought the appointment of a receiver to the trusts. A liquidator, or provisional liquidator, of Equities and Capital may well wish to trace the proceeds of the loans made by Equities and Capital to House in its capacity as trustee of the various trusts. It would not be in the interests of Equities or Capital, or their creditors or preference shareholders, for there to be a change in trustee, or even for there to be doubt as to who holds the office of trustee. 67 As the matter will proceed to a final hearing in any event, I do not think there is any advantage to investors, or any public interest, in making final orders for the winding-up of the corporate defendants, as distinct from making orders for the appointment of a provisional liquidator to the corporate defendants. Because the various claims will arise from an investigation of the same facts, and because of the likely overlap of issues between the claims for winding-up of the scheme and the winding-up of the corporate defendants, I think it undesirable to order a separate trial of the claims for final relief. Appointment of Provisional Liquidator 68 For the reasons I have given, there is a compelling case for the appointment of provisional liquidators to all of the corporate defendants. This would permit further investigations to be made as to the flow of funds and ensure assets are secured against the risk of dissipation. 69 The defendants accepted that there was a serious question to be tried of the contraventions alleged by ASIC. However, they submitted that provisional liquidators should not be appointed to any of the corporate defendants because this could prejudice an orderly sale of the apartments in the Islington development being conducted by Newcastle. It was said that if provisional liquidators were appointed, there could be a "fire sale" of those apartments. 70 The valuer of that development expressed the opinion that the market value of the 41 apartments remaining unsold as at 23 May 2006, exclusive of GST, was $18,115,431. His opinion was that the "forced sale" value of the 41 apartments remaining for sale was $16,303,888. That is to say, the valuer adopted a 10% discount in the event of a forced sale, whilst expressing the opinion that "due to the good quality of the apartments remaining for sale within the subject development, we would expect the subject apartments to achieve a forced sale value of no less than 90% of the estimated gross realisations provided within this valuation." 71 The defendants' submission assumed that the appointment of provisional liquidators would lead to a forced sale. The defendants pointed out that Capital is a secured creditor of Newcastle. However, I would not assume that a provisional liquidator of Capital would call up the debt owed by Newcastle, assuming it can be called up, if to do so would prejudice the claims of Capital's preference shareholders. 72 There are other secured creditors with mortgages over the Islington development. They are Challenger Managed Investments Ltd, the Abacus Property Group, the builder, Hickory Developments Pty Ltd, and a company associated with Hickory Developments, Soque Management Pty Ltd. The defendants did not identify any provision in any facility agreement or security taken by any of the secured creditors which would entitle such creditors to accelerate the mortgage debt, or exercise their powers of sale as mortgagees, if an order were made appointing provisional liquidators to any of the corporate defendants, including Newcastle. Following the hearing of the application on 18 October 2006, the defendants' solicitor forwarded documents relating to the securities held by Hickory Developments and Soque Management. I will admit those documents as exhibits. The solicitors referred to clauses 3, 6 and 8 of a priority agreement between Hickory Developments, Soque Management, Capital, Newcastle and Mr Goulding. However, those clauses do not deal with the consequences of the appointment of a provisional liquidator or liquidator to any of the group companies. Nor do the facility agreements between Newcastle and Abacus Funds Management Ltd, or between Newcastle and Challenger Managed Investments, or the mortgage between Newcastle and Perpetual Trustee Company Ltd, contain such a provision. The mortgage incorporates provisions contained in memorandum number 6321899, but that document was not tendered. 73 I am, nonetheless, prepared to accept that the appointment of a provisional liquidator to Newcastle, which is the vendor of the apartments, may have an adverse effect on the marketing of the apartments. I would not expect a provisional liquidator to have the same expertise in the marketing of the units as do the officers of Newcastle. Moreover, the fact of the vendor being in provisional liquidation may have a depressive effect on the price. 74 I would not make the same assumption about the appointment of a provisional liquidator to the other companies in the group. In any event, for the reasons previously given, I would be concerned that as little as $1,503,857 might be realised by Capital from the proceeds of sale of the Islington development. The balance of the proceeds would prima facie flow to other group entities in repayment of loans and any surplus would be payable to Newcastle's shareholder, namely, House. In order to ensure that the preference shareholders of Capital receive whatever amounts they may be entitled to, it is important that external administrators be appointed to the corporate defendants. 75 No undertaking as to damages is proffered by ASIC in relation to the appointment of provisional liquidators. The defendants have made no submissions about the absence of such an undertaking. In the circumstances of this case, I think it appropriate to make the order in the absence of an undertaking as to damages. That is consistent with the principles contained in subs 1323(4) of the Corporations Act, which would apply if ASIC sought the appointment of a receiver and manager to the corporate defendants pursuant to subs 1323(1)(h). 76 If a provisional liquidator is appointed to Capital, but not Newcastle, there is not a substantial risk that the proceeds of sale of the apartments in the Islington development could be improperly dissipated. Capital has lodged caveats over all of the units in the development. The consent of the provisional liquidator will be required for the withdrawal of the caveats. At present, the proceeds of sale will be used to reduce the debts owed to third party secured creditors. Injunctive relief is in place precluding the third and fourth defendants dealing with Newcastle's assets. 77 For these reasons, I will order that a provisional liquidator be appointed to each of the corporate defendants, except Newcastle. Mr Olde of Taylor Woodings has consented to act as liquidator or provisional liquidator of the corporate defendants. It is not suggested that he is not an appropriate person to appoint. I will make orders for him to be appointed as provisional liquidator of Equities, Capital, House, Beaconsfield, Melbourne, Hawthorn, and Collingwood. Variation of Interlocutory Injunctions 78 On 4 September 2006, orders were made restraining the first to fifth defendants from removing or dealing with their assets, otherwise than in the ordinary course of business or in payment of a certain amount in relation to legal costs. Similar orders were made in relation to the sixth to tenth defendants. The orders relating to the sixth to tenth defendants were varied on 25 September 2006. Counsel for ASIC said that if a liquidator or provisional liquidator were appointed to the corporate defendants, or a receiver was appointed to wind up the managed investments scheme operated by Equities, the existing injunctive relief should be varied to allow for the first to fifth defendants to deal with their assets in the ordinary course of business only with the consent of the person so appointed. 79 Such an order will be unnecessary in the case of the first, second and fifth defendants as a provisional liquidator will be appointed to them. 80 The existing injunction does not prevent Newcastle from paying such money as is necessary in the ordinary course of business. I think it appropriate that the injunction be modified to require the consent of Mr Olde to the making of any such payments above a nominated figure per week. If the parties cannot agree upon the appropriate monetary amount for which Mr Olde's consent to the making of a payment would be required, I will hear the parties further on that matter. 81 I do not think it practicable to require the third and fourth defendants to obtain Mr Olde's consent to every dealing in the ordinary course of business by them with their own assets. There should be an exclusion in relation to the order affecting them to permit the payment of ordinary living expenses. There is no evidence that Mr Goulding or Mr Geagea carry on business personally, as distinct from being officers of the corporate defendants which carry on business. I do not think the exception in relation to the ordinary course of business should apply to the natural defendants in the absence of evidence that they personally carry on such businesses. However, there should be an exception in the order for reasonable living expenses of the natural defendants. If the parties cannot agree upon the terms of such an exception, I will hear further argument on that matter. Orders 82 For these reasons, I appoint Quentin Olde of Taylor Woodings, Level 14, 56 Pitt Street, Sydney, 2000, provisionally as liquidator of the first, second, fifth, seventh, eighth, ninth and tenth defendants. 83 The amended interlocutory process sought an order that a provisional liquidator provide a report to the Court and to the plaintiff as to the financial position of the first, second and fifth defendants, as to whether proper records are being kept, and certain other matters. Section 533 of the Corporations Act provides that if any of the matters in paragraphs 533(1)(a)-(c) appear to the liquidator, he or she must provide a report on those matters to ASIC. At present, it appears to me to be sufficient to make an order under s 472(3)(a) conferring on the provisional liquidator the functions of liquidator for the purposes of s 533 of the Act. 84 If any party proposes that the provisional liquidator be given any further functions or powers in addition to those conferred by the Corporations Act, or by the rules of Court, I will hear the parties further on that. 85 The parties should bring in short minutes consistent with these reasons for the modification of the existing injunctive relief to reflect the fact that a provisional liquidator is appointed to the corporate defendants other than Newcastle, and modifying the existing relief so far as it affects Messrs Goulding, Geagea, and Newcastle as indicated in these reasons. Otherwise, the amended interlocutory process will be dismissed. 86 Notwithstanding this dismissal, ASIC has had substantial success on the application. The hearing was also prolonged due to the defendants' failure to comply with earlier orders, and repeated attempts made by counsel for the defendants to avoid or mitigate the consequences of the order made on 13 October 2006 following such earlier defaults. I will hear the parties on costs.

At a glance

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Judgment (12 paragraphs)

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