Australian Securities and Investments Commission; In the Matter of Richstar... [2006] FCA 1617 | Case summary

REASONS FOR JUDGMENT ON FURTHER VARIATION TO RECEIVER ORDERS Introduction 1 On 20 April 2006 the Court made orders under s 1323 of the Corporations Act 2001 (Cth) appointing receivers to the property of Westpoint Realty Pty Ltd (Westpoint Realty) and a number of other companies and individuals connected with the Westpoint Finance and Property Group (Westpoint Group): Australian Securities and Investments Commission, In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 3) [2006] FCA 433. The receivers appointed were Brian McMaster, Oren Zohar and Mark Korda. Orders were made at the same time requiring the authority of the receivers to approve transfers or dispositions of the property of the company to a value in excess of $5,000 within any seven day period. 2 The orders made on 20 April 2006 were varied on 30 June 2006 by more elaborate orders. These included an order that, subject to the receivers' satisfaction as to the solvency of the company, they could approve payments by it to meet "reasonable legal expenses" incurred in these proceedings or in connection with proceedings brought against the company by the Australian Securities and Investments Commission (ASIC) or others in the future. 3 The condition requiring satisfaction as to solvency before payments could be approved was modified by further orders made on 26 July 2006. By those orders the receivers were permitted to disregard, for the purposes of their satisfaction as to solvency, the potential liability of the company under guarantees it had given to so called Mezzanine companies in the Westpoint Group. The Mezzanine companies had raised funds from retail investors for property developments in the Westpoint Group. The receivers were also entitled to disregard the company's potential GST liability for the supply of sales and marketing services to other entities in the Westpoint Group. The modification of the condition requiring satisfaction as to solvency has been referred to in these proceedings as a "carve-out" from that condition. 4 On 13 November 2006 Westpoint Realty filed a motion seeking a further carve-out in relation to its potential liability to QBE Insurance (Australia) Ltd (QBE) in connection with a Deed of Indemnity and Guarantee relating to certain QBE bonds. The motion sought a modification of the relevant part of the orders made on 26 July 2006 to read as follows: 'Subject to the Receivers being satisfied as to the solvency of the Sixth Defendant, save for: (a) potential liability under the guarantees in respect of Your (sic) Street Mezzanine Pty Ltd, Mount Street Mezzanine Pty Ltd, Bayshore Mezzanine Pty Ltd, Emu Brewery Mezzanine Pty Ltd, Ann Street Mezzanine Pty Ltd (all in liquidation) (Mezzanine Companies); (b) potential GST liability for the supply of sales and marketing services to North Sydney Developments Pty Ltd, Ann Street Brisbane Trust and Scots Church Development Ltd for December 2005 quarter; and (c) potential liability to QBE Insurance (Australia) Limited in connection with the QBE Deed of Indemnity and Guarantee with respect to QBE Bonds Numbered AO 1868308BON and AO 1868309 BON, the Receivers may, in relation to the Sixth Defendant approve: (a) payments by the Sixth Defendant to pay reasonable legal expenses incurred in these proceedings or legal costs that may be reasonably incurred in the future that are either incidental to these proceedings or in anticipation of, or in preparation for, the proceedings the Plaintiff or others may bring against the Sixth Defendant which includes payment of monies on trust to solicitors on account of such expenses; (b) reasonable expenses required to maintain, realize or preserve assets; (c) Automatic Bank Debits from any Corporate Bank Account required to effect a transaction otherwise permitted by these orders; and (d) changes to security and facility arrangements with any Bank.' 5 The need for the proposed variation to the orders made on 26 July 2006 is said to arise because of a liability asserted by QBE in proceedings pending in the Supreme Court of New South Wales based upon a Deed of Indemnity and Guarantee entered into by Westpoint Realty and others. The guarantee related to the performance by Westpoint Corporation Pty Ltd (Westpoint Corporation) of its obligation to guarantee payments made under Bonds issued at its request by QBE in favour of a developer Bayshore Port Melbourne Ltd (Bayshore) and a financier, Perpetual Trustees Pty Ltd (Perpetual) in connection with building works at Port Melbourne. QBE made payments to Bayshore on the strength of demands pursuant to the Bonds. The demands were made by a privately appointed receiver of Bayshore who is a member of the same firm as the Court appointed receivers of Westpoint Realty. A concern about a possible conflict of duty in the Court appointed receivers' assessment of the potential liability to QBE has led to the proposal for the modified carve-out. For the reasons that follow I propose to authorise an additional carve-out conditioned upon the opinion of independent counsel as to the prospects of successfully defending the QBE claim. The grounds for the variation 6 Two affidavits were filed relevant to the motion brought by Westpoint Realty. One was sworn by the company's sole director, Norman Carey, on 10 November 2006. The other was sworn on 15 November 2006 by Brian McMaster, one of the Court appointed receivers. 7 As appears from the affidavits a summons issued out of the Equity Division of the Supreme Court of New South Wales on 5 October 2006 in which QBE is named as plaintiff and Westpoint Realty and Mr Carey are named as defendants. By that summons QBE claimed a sum of $3,562,656 from the two defendants. It also claimed interest of $57,978.56 under s 100 of the Civil Procedure Act 2005 (NSW) together with court filing fees of $1,318, service fees of $159 and solicitors costs of $914. The total sum claimed was $3,623,025.56. 8 In a Commercial List Statement filed with the summons QBE alleged that in or about early 2003 Westpoint Corporation and Mr Carey asked it to consider applications from time to time to issue bonds. QBE agreed to that request subject to undertakings from Westpoint Corporation and a number of guarantors including Westpoint Realty and Mr Carey. The terms of a Deed of Guarantee and Deed of Variation into which they subsequently entered were pleaded. A copy of the deed was exhibited to an affidavit sworn by Mr Carey in connection with the present application. Under the deed Westpoint Realty, Mr Carey and others guaranteed the punctual performance by Westpoint Corporation of its obligations under the Deed. Clause 2.1 provided: 'The Guarantor must upon demand immediately pay to QBE any Guaranteed Money owing by the Contractor under this deed which is not paid on its due date.' The bonds related to the financing of a construction project at 50 Knott Street, Port Melbourne. 9 QBE alleged that on 8 October 2004, at the request of Westpoint Corporation, it issued a guarantee indemnity to Bayshore and Perpetual, being Bond No AO 1868308BON. This 'First Bond' contained terms including an unconditional undertaking by QBE to pay on demand from Bayshore or Perpetual any sum of money up to a maximum of $1,781,328. Payment of the demand would be made at the direction of Perpetual without reference to Westpoint Corporation. Every demand made was required to include a statutory declaration that Westpoint Corporation had defaulted under a Head Contract between itself and Bayshore and that the amount demanded was owing by Westpoint Corporation under that Head Contract. A Second Bond was issued by QBE on 10 October 2004 to Bayshore and Perpetual. The undertaking to pay was on the same terms and for the same maximum amount as provided for in the First Bond. 10 According to QBE, Bayshore made demand on 12 July 2006 requiring that it pay the maximum amounts for which the First and Second Bonds provided. The demand was said to be in writing and contained in a letter from Craig Shepard, one of two privately appointed receivers and managers of Bayshore. I interpolate that both receivers and managers are members of the firm KordaMentha, the same firm in which Mr McMaster, the Court appointed receiver of Westpoint Realty, is a partner. The letter was said to have been accompanied by a statutory declaration and a written direction from Perpetual dated 5 July 2006. QBE said it paid Bayshore the sum of $3,562,656 on 21 July 2006 in accordance with its obligations under the First Bond and the Second Bond. 11 QBE then alleged that it sent a written demand to Westpoint Corporation on 9 August 2006 requiring payment of the sum of $3,562,656. The demand required payment by 18 August 2006. 12 On 21 August 2006 QBE sent demands to the guarantors, Westpoint Realty and Mr Carey requiring payment of the sum of $3,562,656 by 28 August 2006. Neither Westpoint Realty nor Mr Carey have paid it the sum allegedly owing pursuant to the Deed of Guarantee. 13 On 29 August 2006 Clavey Legal, acting for Westpoint Realty and Mr Carey, wrote to the solicitors for QBE requesting copies of the statutory declarations required to be provided to QBE by the party making the demand under the Bonds. Mr McMaster wrote to Mr Carey on the same day attaching the letter received from QBE's solicitor and directed to Westpoint Realty. He wrote again on 31 August 2006 seeking a response regarding the demand. Clavey Legal wrote to the solicitors for QBE on 1 September 2006 referring to a telephone conversation held on that day and confirming their request for a copy of the Perpetual Loan Agreement and the statutory declaration provided to QBE with the call on the Bonds. The solicitors for QBE responded on 12 September 2006 forwarding copies of the two Bonds and the statutory declaration by Mr Shepard dated 12 July 2006. 14 According to the statutory declaration Mr Shepard, who made the demand, is one of the joint and several receivers and managers of Bayshore. In his statutory declaration he said that the Bonds were issued at the request of Westpoint Construction as support for its performance of its obligations under a contract made with Bayshore for building works at 50 Knott Street, Port Melbourne. He alleged that Westpoint Construction had defaulted under that contract. It had failed to bring the works to practical completion by the Date for Practical Completion required by the contract, which was 28 February 2005. Under cl 35.7 of the Head Contract Westpoint Construction was indebted to Bayshore for liquidated damages calculated at the rate of $28,000 per day from the Date for Practical Completion until the works reached practical completion or the date that the Head Contract was terminated. The works under the Head Contract had not reached practical completion and it had not been terminated. On that basis a notice had been issued under the contract claiming liquidated damages as at 15 May 2006 in the sum of $12,348,000. A demand for payment in that amount had been made by Bayshore to Westpoint Construction on 19 May 2006. The sum had not been paid. 15 On 20 October 2006 Mr Clavey of Clavey Legal wrote to the solicitors for QBE saying that its demand had been reported to Mr McMaster as one of the Court appointed receivers of Westpoint Realty and of Mr Carey's assets. He said that the demand had potentially placed Mr McMaster in a position of a conflict of interest as his partners in the firm KordaMentha were the privately appointed receivers of Bayshore. According to the letter their conduct could be called into question in any proceedings commenced by Westpoint Realty and Mr Carey against QBE. 16 Clavey Legal said in its letter that Westpoint Realty and Mr Carey disputed their claimed liability to QBE. Their position was that the "bonding facility" entered into between QBE and Westpoint Corporation was to have been issued on the strict basis "… that only the financee (sic) could have the benefit of any call made pursuant to a Bond issued by QBE". The demand had been made by KordaMentha as the private receiver of Bayshore, the developer. Clavey Legal said it was further instructed that, had it been made known to Westpoint Realty and Mr Carey by QBE that QBE intended to issue a bond under which a developer could call for payment, his clients would not have agreed to execute the guarantee under which QBE had made its demand. The credit risk undertaken in the circumstances was substantially different to the risk which Westpoint Realty and Mr Carey would have been prepared to guarantee. His clients also contended that the sum demanded by QBE did not constitute "loss" for the purpose of cl 1.4 of the Deed of Indemnity and Guarantee. A number of other contentions were advanced to which it is not necessary to refer for present purposes. 17 According to Mr Carey's affidavit he was managing director of Westpoint Corporation at the time the bonding facility agreement was negotiated. That company was a related entity to Bayshore and had effective control over the development which it was conducting. The primary financier for the project was Perpetual. The requirement for the issue of the bond was its stipulation on the basis that the bond was to be for its benefit. 18 Mr Carey claimed that Mr Graeme Rundle, formerly the Chief Financial Officer of Westpoint Corporation, made arrangements for the bonding facility to be made available on the basis that any bond issued was to be in favour of Perpetual. He said he has been informed by Mr Rundle and believes that the bond facility was negotiated on the limited basis required by Perpetual. It was not a requirement of the developer, Bayshore. His recollection of the bonding facility agreement terms and correspondence between QBE and officers of Westpoint Corporation was "… that there was a clear agreement between Westpoint Corporation and QBE that bonds issued under the QBE facility would be issued on a limited basis that excluded a party other than the primary financee (sic) having any right to call for payment under a bond issued by QBE". Mr Carey asserted that it was never intended that a bond be issued under the QBE facility on the basis that any party other than Perpetual would be entitled to call on payment. The credit risk for Westpoint Corporation and Westpoint Realty as guarantor was narrow because Perpetual's exposure was insured by Bayshore purchasing mortgagee insurance and the bond was to be issued in favour of Perpetual only. 19 Mr Carey went on to deal with the issue of the demand and stated his belief that Mr Shepard, the relevant receiver and manager of Bayshore:

Is either a partner or employee of KordaMentha and is one of the joint and several receivers and managers of Bayshore.
That in his capacity as the private receiver and manager of Bayshore he called upon QBE to make payments totalling $3,562,656 pursuant to the Bonds.
That he asserted that Westpoint Construction had defaulted under the Head Contract. Mr Carey contended that Westpoint Construction did not default under the Head Contract. He did not explain the basis upon which he made that claim. He also asserted that he had legal advice from Clavey Legal that Westpoint Realty does not owe QBE any money under the terms of the Deed of Indemnity and Guarantee and that there are defences and triable issues, but that further investigation would be required by obtaining orders that QBE produce documents. 20 Mr Carey said that he met with the legal representative for Mr McMaster on 22 September 2006 and was told that Mr McMaster could not be informed of the substance of the legal advice provided by Clavey Legal as he had a likely conflict of interest by reason of his partners' private appointment as the receivers and managers of Bayshore. He was informed by his solicitor and believes that Mr McMaster's solicitors proposed a resolution of the conflict by the instigation of a "separation protocol" to ensure that information regarding the QBE claim would remain confidential. 21 Mr Carey then referred to the originating process issued out of the Supreme Court of New South Wales and said he had been informed by Mr McMaster and believed that unless an order were made excluding the QBE claim from his consideration as to Westpoint Realty's solvency he would be unable to approve payments in the normal course of Westpoint Realty business and would be unable to approve any funding of its legal costs so as to defend the proceedings commenced by QBE. Because of Mr McMaster's apparent conflict of interest he could not, according to Mr Carey, form any view at all as to the merits of QBE's claim against Westpoint Realty because he could not be informed of the substance of the legal advice provided to Westpoint Realty in that regard. There was further material in Mr Carey's affidavit going to the solvency of Westpoint Realty. He asserted, inter alia, that it has no outstanding GST liability. 22 Mr McMaster also swore an affidavit. He said, inter alia, that he is still not satisfied that Westpoint Realty is solvent. He remains unable to form a concluded view on its financial position as he has not been able to positively determine: (a) whether Westpoint Realty is liable for GST in the sum of $629,304 for marketing fees credited to it in its general ledger; (b) whether Westpoint Realty is currently liable for the debts of the Mezzanine companies, being a total of approximately $287,136,573.50. He referred to the orders made on 30 June 2006 whereby the Court appointed receivers of Westpoint Realty were authorised to pay legal expenses and reasonable expenses required to maintain, realise or preserve assets subject to their satisfaction that Westpoint Realty was solvent. He said: 'Given my views regarding the solvency of Realty, I was unable to approve expenses. I was concerned that this may seriously affect the ongoing operation of Realty. Realty did not seek to vary the orders to allow the Receivers to authorise essential operating expenses. Accordingly, the Receivers sought and obtained a direction from this Honourable Court to the effect that the Receivers could "carve-out" the potential GST Liability and Mezzanine Liability from their consideration of the solvency of Realty. Orders to this effect were made on 26 July 2006.' 23 Mr McMaster then referred to letters which he had received from the solicitors for QBE on 11 and 21 August 2006 and the demand made by QBE for repayment of $3,562,656. He also confirmed that QBE had commenced proceedings in the Supreme Court of New South Wales. 24 As a result of a search of ASIC records in respect of Bayshore, Mr McMaster believes the following to be the case: (a) Perpetual has a fixed and floating charge over the assets of Bayshore. (b) On 22 December 2005 Perpetual appointed Craig Shepard and Mark Mentha of KordaMentha as receivers of Bayshore. They are partners in the firm based in KordaMentha's Melbourne office. 25 Mr McMaster has been informed by Corrs Chambers Westgarth (Corrs), acting for the receivers, that they received a letter from Mr Clavey on 29 September 2006 attaching the documents earlier referred to which related to the QBE claim. Corrs have not provided him with copies of those documents nor have they disclosed the copies of those documents to him. I interpolate that it is not clear why those documents could not be provided to Mr McMaster. Given that they form the basis of the QBE claim against Westpoint Realty, they would not appear to attract either privilege or commercial confidentiality. 26 Mr McMaster referred to discussions about whether KordaMentha or Corrs had a conflict of interest in considering the QBE claim. Based on the information provided to him by Corrs and by Clavey Legal at a meeting held on 29 September 2006, he stated his understanding of the position thus: (a) Matters identified in the QBE documents are material to the Bayshore receivers. (b) Clavey Legal and Westpoint Realty are concerned that either Corrs or the Court receivers may have a conflict of interest in considering the QBE claim. There had been some discussions between Ms Sutherland of Corrs and Clavey Legal in the course of which they have discussed the need for Westpoint Realty to bring an application to "carve-out" the QBE liability and for the Court receivers to inform the Court of the potential conflict of interest. The solution proposed included: (a) A separation protocol separating the KordaMentha personnel engaged in the Bayshore receivership from those engaged in the Court receiverships. The Bayshore receivers are separately represented by Arnold Bloch Liebler. (b) Disclosing the relevant facts and issues to the Court and seeking a determination as to whether or not there is a genuine dispute. (c) For Westpoint Realty to brief an independent barrister to form a view as to whether or not there is a genuine dispute. Mr McMaster said he was informed by Corrs, and believed it to be true, that the preferred solution on the part of Mr Carey was for an independent barrister to be briefed. Mr McMaster said that solution is acceptable to the receivers. 27 Since he became aware of the QBE liability he has received repeated requests from Westpoint Realty to approve expenses. He has repeatedly responded that he cannot authorise such payments unless he is satisfied as to solvency and that Westpoint Realty should seek a further direction in respect of the QBE claim. Because Mr Clavey was on leave between 22 October and 6 November 2006 he was unable to bring the application before that time nor to respond to Corrs on proposed solutions for the resolution of the potential conflict. 28 Mr McMaster said that the Court receivers do not oppose the application. He is concerned, however, that he has once again obtained notice of a potentially significant liability from a third party rather than from Westpoint Realty itself. He is also concerned that this is the third such liability which it is proposed to exclude from the receiver's consideration of solvency. In addition he is concerned that Westpoint Realty has been demanding that he authorise payments since the potential liability was disclosed in circumstances where he was not satisfied as to the solvency of Westpoint Realty. The need for the application was identified at the end of September, but no application was made until 10 November 2006. These issues may have a serious impact on Westpoint Realty's business and its ability to pay creditors. The interim order 29 After hearing argument on the motion filed 13 November 2006 I reserved judgment until today and made the following interim orders: '2. The receivers and managers of the sixth defendant are hereby authorised to approve expenditure, out of funds of the sixth defendant, of up to $10,000 for legal advice and representation including the filing of any necessary appeals in case number SO160 of 2006 in the Equity Division of the Supreme Court of New South Wales between QBE Insurance (Australia) Ltd ACN 003 191 035 and the sixth defendant. 3. Notice of this motion and the supporting affidavit be served forthwith on QBE Insurance (Australia) Ltd ACN 003 191 035. 4. Costs today reserved.' 30 The order for authorisation to approve expenditure of up to $10,000 for legal advice and representation was made on the basis, inter alia, that absent the filing of an appearance and the taking of preliminary steps in response to the QBE summons, judgment against Westpoint Realty might be entered by default. Whether the orders proposed should be made 31 A consideration of the proposed additional "carve-out" requires a brief reflection upon the purpose of the orders made on 20 April 2006 as subsequently varied. As I said in the reasons for judgment delivered on 20 April 2006 (at [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.' The nature and duration of the orders can be framed to reflect the Court's assessment of any risk of dissipation of the assets of a person under investigation. 32 The difficulty in this case arises, in essence, because the Court appointed receivers are members of the same firm as the privately appointed receivers and managers of a company connected with the Westpoint Group. The privately appointed receivers and managers made the relevant demand under the Bonds issued by QBE. That demand has ultimately given rise to the proceedings against Westpoint Realty. 33 There is undoubtedly the potential for difficulty and conflict of duties when a Court appointed receiver over a group of companies accepts appointment as a private receiver and manager over any of those companies or associated entities. A similar potential for difficulty arises when the privately appointed receiver and manager is a member of the same firm as the Court appointed receiver. 34 The complexity and scale of the issues surrounding the Court's appointment of receivers to various Westpoint companies and officers and the appointments of various private receivers under charges over some of those companies or related companies requires a careful but at the same time pragmatic approach to the issue of potential conflict. The guiding principle in each case must be the maintenance of the protective purposes of the orders made on 20 April 2006 and subsequently. Necessarily the protective purposes are served by ensuring that the company the subject of the orders under s 1323 is not subjected by default to additional and unwarranted liabilities simply because of the Court imposed constraints on its capacity to deal with its assets including constraints on its capacity to provide legal representation in the defence of claims against it. 35 The proposed carve-out creates an artificial "blind spot" in the judgment to be made by the receivers and managers of Westpoint Realty in the discharge of their functions under the Court order. That blind spot would be created by the external and accidental fact of the appointment of an associate of the Court appointed receivers as the receiver and manager of Bayshore. 36 In my opinion the question whether the Court appointed receivers should have regard to the potential liability of Westpoint Realty to QBE should be determined upon the opinion of an independent barrister engaged by the receivers for that purpose. If in the opinion of an independent barrister there is a reasonable prospect of defending the proceedings, then the receivers can proceed on the basis that they may disregard the potential liability to QBE in determining whether they are satisfied as to the solvency of Westpoint Realty. If, on the other hand, the barrister is of the view that there is no reasonable prospect of defending the action, then the receivers and managers may consider the potential liability to QBE in assessing the solvency of Westpoint Realty and, in any event, in determining whether it is reasonable to approve the expenditure of Westpoint Realty funds in legal representation in connection with the action. 37 The independent barrister engaged for that purpose should be entitled to have regard to all such materials as may be provided to him by the solicitors for the receivers and by the solicitors for Westpoint Realty relevant to the alleged liability to QBE. Conclusion 38 For the preceding reasons I propose to make an order effecting a conditional carve-out of the requirement that the receivers be satisfied as to the solvency of Westpoint Realty before authorising legal expenses. The condition will require the advice of independent counsel that there is a reasonable prospect of successfully defending the QBE claim. Absent such advice the receivers are to assume the existence of the claimed liability of QBE in assessing the solvency of Westpoint Realty. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Australian Securities and Investments Commission; In the Matter of Richstar Enterprises Pty Ltd ACN 099 071 968 v Carey

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