Australian Securities and Investments Commission, in the matter of Richstar... [2006] FCA 366 | Case summary

REASONS FOR JUDGMENT 1 This is an ex parte application by the Australian Securities and Investments Commission ('the Commission') brought under s 1323(3) of the Corporations Act 2001 (Cth) ('the Act') for the appointment on an interim basis of receivers to the property of the defendants, alternatively for the making of interim asset preservation orders against each of the defendants; and for interim orders prohibiting the first to fourth defendants from leaving Australia. The Commission also makes its application for the interim asset preservation orders in reliance on the powers of the Court to make orders under s 23 of the Federal Court of Australia Act 1976 (Cth). In its substantive originating application the Commission seeks relief under s 1323(1) of the Act for the appointment of receivers to the property of the defendants and for the surrender by the first to fourth defendants of their passports. I gave Mr Thomson leave to appear on behalf of the nominated potential receivers of the defendants' property. 2 The Commission relied upon two affidavits sworn by Mr Gomm, an officer of the Commission sworn on 29 March 2006, an affidavit of Mr Zohar sworn on 29 March 2006, an affidavit of Mr Chin sworn on 30 March 2006 and an affidavit of Mr Claridge sworn on 29 March 2006. Mr Zohar is one of the two joint and several receivers and managers of Westpoint Corporation Pty Ltd ('Westpoint Corporation'), having been appointed to that office on 24 January 2006. Each of Mr Chin and Mr Claridge is an officer of the Commission. 3 This application was brought on an urgent basis because the Commission had been informed that the fifth defendant had entered into a contract for the sale of property in New South Wales which was due to settle on 31 March 2006. The Commission was concerned that in the absence of orders being made the monies paid on the settlement of the contract would be dissipated. At the conclusion of the hearing, I made orders and said that I would give my reasons at a later time. These are my reasons. The Westpoint Group 4 In June 2005, the Commission commenced investigating the affairs of a number of companies within a group of companies known as the Westpoint Group and those investigations have been progressively expanded since that time. 5 Westpoint Group comprised a group of approximately 147 interrelated companies and trust entities. At the heart of the operations of the Westpoint Group, was Westpoint Corporation. That company operated as a central treasury, employed the staff for the group operations and provided accounting services, information technology services and management services to the other companies in the Westpoint Group. 6 Westpoint Corporation was placed into liquidation on the application of the Commission by order of this Court made on 16 February 2006 on the grounds of insolvency. A number of other companies in the Group are also in one form or another in external administration. 7 The operations of the Westpoint Group involved the purchase and development of large residential and retail buildings. The general practise followed in respect of each such property development project, was to establish a single purpose development company to carry out the development. Thus, for example, in respect of the Emu Brewery development on the corner of Mounts Bay Road and Spring Street in Perth, a single purpose development company, Emu Brewery Developments Pty Ltd, was established. Generally, Westpoint Constructions Pty Ltd, another company within the Westpoint Group, would undertake the construction of the development, and was entitled to pre‑invoice at least 65 per cent of the construction price in advance for any project. The sixth defendant would act as the licensed real estate agent earning revenue from the sale and leasing of properties. Another company in the Westpoint Group, Westpoint Finance Pty Ltd ('Westpoint Finance'), acted as finance broker procuring finance for potential purchasers of properties developed by the Westpoint Group companies. 8 Finance for the developments was provided by loans from Westpoint Corporation and from banks and other lending institutions. Those banks and lending institutions took primary security over the developments through registered mortgages, registered fixed and floating charges and by means of intercompany guarantees secured in the same way. 9 In addition, there was finance provided by companies within the Westpoint Group known as mezzanine companies. For each of the developments a related mezzanine company was established. Thus, for example, in respect of the Emu Brewery development there was a mezzanine company established called Emu Brewery Mezzanine Pty Ltd. 10 There were 11 such mezzanine companies. These companies raised money by issuing promissory notes to the public. In order to induce members of the public to advance monies, each of the mezzanine companies issued information memoranda. The Commission submitted that these documents contained representations that the money raised by the mezzanine company would be lent to, and used for the development undertaken by, the related single purpose development company. The investors in the mezzanine companies who loaned the monies did so on an unsecured basis. Each of the mezzanine companies was the beneficiary of guarantees from other companies within the Westpoint Group, including Westpoint Corporation, for the repayment of the monies which were borrowed by the mezzanine company and the amount of the interest payable on the promissory notes issued by that company. 11 Mr Zohar says that proofs of debt totalling $289 173 641.39 were lodged on behalf of 10 mezzanine companies in the voluntary administration of Westpoint Corporation. 12 The first defendant is the sole director of Westpoint Corporation and the director of many of the companies within the group. The first defendant, and Heca Nominees Pty Ltd, a company of which the first defendant is the sole director and shareholder, each hold one of the two shares in Westpoint Corporation. The second defendant was the chief financial officer of the Westpoint Group and was by and large the secretary of most of the companies within the Westpoint Group. The third and fourth defendants are directors of each of the mezzanine companies. There is evidence that during examinations carried out under s 19 of the Australian Securities and Investments Commission Act 2001 (Cth) ('the ASIC Act'), statements were made by witnesses that the first and second defendants controlled the mezzanine companies and the third and fourth defendants in general acted in accordance with instructions given by the first and second defendants. The Commission submits that on the basis of this evidence, the first and second defendants are to be treated as directors of the mezzanine companies within the meaning of s 9 of the Act. 13 The fifth to eighth defendants are companies related to the first defendant which are not under external administration. The fifth defendant is the trustee of the Richstar Enterprises Trust. Mr Allan Carey, the brother of the first defendant, is the sole shareholder and director of the fifth defendant. The sole director and secretary of the sixth defendant is the first defendant. The seventh defendant is the trustee of the Dyson Family Trust. The director of the seventh defendant is Mr Allan Carey. Both shares in the seventh defendant are held by Heca Nominees Pty Ltd. The eighth defendant is a company, which according to the evidence of Mr Zohar, is also under the control of Mr Allan Carey. Mr Zohar says that this company is one of several companies being used by the first defendant as part of a plan to carry on the business of several Westpoint Group companies not under external administration, under a restructured operation. 14 The Commission submitted that there was a need for receivership orders or partial receivership orders or, alternatively, asset preservation orders because there were potential claims against the defendants, and so far as possible, the defendants' assets should be secured so that they would be available to satisfy any judgment subsequently obtained against them. 15 Counsel for the Commission submitted that there was evidence upon which civil claims could be brought against each of the first to fourth defendants based on the representations made in the information memoranda that were used by the mezzanine companies to raise monies from the public, and the manner in which those monies had been dealt with by the directors. 16 Counsel also said that there was evidence that prior to the appointment of external administrators, transactions had occurred, which appeared to have the objective of benefiting companies which were under the control of the first defendant and members of his family to the detriment of Westpoint Corporation. There is a potential for these transactions to be impugned and for the external administrators to recover monies from these companies for the benefit of creditors, and for action to be taken against the directors in respect of these transactions. 17 Further, the Commission submitted that there were companies under the control of the first defendant that were engaging in transactions which would have the effect of potentially disadvantaging the companies in external administration and their creditors. 18 As to the potential causes of action based on the representations in the information memoranda, counsel for the Commission referred to two main categories of representation in the documents which were misleading. Firstly, there were representations that the monies raised would be used for the purpose of a specific property development project - namely, that project being undertaken by the related single purpose development company. Mr Chin deposed that his investigations revealed that the monies raised by the mezzanine companies were not used exclusively for the specific development nominated, and were not segregated, but were mixed with pooled funds in the central treasury company, Westpoint Corporation. The consequence was that the funds raised by the mezzanine companies were used for many different purposes. 19 Secondly, there were representations as to the amount of money that would be raised by way of the issue of promissory notes. Mr Chin deposed that amounts in excess of the represented amounts were in fact raised by some of the mezzanine companies. 20 The Commission submits that these facts and circumstances found the basis for actions against the directors for misleading and deceptive conduct, breach of ss 180, 181, 182 and 183 of the Act and common law claims for liability as constructive trustees. Attempts to divert assets from Westpoint Corporation 21 Mr Zohar deposed that as a consequence of investigations which he has undertaken he is aware of transactions which occurred within the Westpoint Group which in his view appear to be designed to remove assets from Westpoint Corporation and from other entities which the first defendant perceived as being vulnerable to claims by creditors. 22 Mr Zohar says that between December 2005 and January 2006 the first defendant gave instructions to staff employed by Westpoint Corporation to effect a series of assignments of loans between entities within the Westpoint Group in anticipation of Westpoint Corporation being placed into voluntary administration in order to remove the debts owing to Westpoint Corporation and assigning the benefit of the debts to entities of which the first defendant or his relatives retain control. As a consequence of the assignments of the debts the asset position of those entities was enhanced, their liabilities to Westpoint Corporation were reduced and the asset position of Westpoint Corporation was diminished. Mr Zohar says that although the majority of the deeds of assignment and journal entries by which the assignments were effected, are dated February 2005, June 2005 and July 2005, he has been told by an accountant with Westpoint Corporation at the time that those documents and entries were backdated. 23 Mr Zohar and Mr Gomm say that that on 24 November 2005, Westpoint Corporation made payments in the sums of $1 million to Renaissance Mezzanine Pty Ltd and $1.15 million to the seventh defendant, and that on 25 November 2005 Westpoint Corporation made a payment of $1.370 million to the fifth defendant. Mr Gomm's evidence is that these payments were made at around the time that monies totalling the sum of $3 675 000 were paid into the Westpoint Corporation central treasury account by various mezzanine companies that had issued promissory notes or debentures to members of the public. These payments had the effect of substantially reducing the cash assets of Westpoint Corporation. 24 Mr Zohar has also deposed to matters relating to the impending sale by the fifth defendant of two units it owns in Wolselsey Road, Point Piper, New South Wales. It is said that the fifth defendant has entered into a contract for the sale of the units for a total of $7.1 million and that at settlement due to take place on 31 March 2006, there will be surplus funds payable to the fifth defendant of approximately $3 million, after the repayment of the first mortgage. 25 Mr Zohar says that his investigations reveal that the fifth defendant borrowed $4.1 million from the Hong Kong Shanghai Banking Corporation to purchase the units and that funds provided by Westpoint Corporation were used to service the repayment of that loan. Mr Zohar further deposes that by reason of several inter company related party transactions, including the granting by the fifth defendant on 23 January 2006 of a charge to the seventh defendant for 'no apparent reason', it now appears that, notwithstanding that it serviced the loan repayments and advanced monies in the sum of $2.11 million to the fifth defendant, Westpoint Corporation will not receive any funds following the sale of the Point Piper property. 26 Further, Mr Zohar also gave evidence about a transaction referred to as 'the Bowesco option' which he characterises as a further attempt to deprive Westpoint Corporation of assets. Mr Zohar says that Westpoint Corporation purported to assign an option to purchase shopping centre land known as Warnbro Fair Shopping Centre to the seventh defendant for consideration of $100. Mr Zohar deposes that in December 2005, a purchaser offered to purchase the option from Westpoint Corporation for $1 million. 27 There are other transactions referred to by Mr Zohar in his evidence as 'irregular transactions' to which it is not necessary to make specific reference in these reasons. 28 Mr Zohar has also deposed to the ongoing activities of the first defendant and the sixth and eighth defendants. Mr Zohar has been informed that the sixth defendant is currently collecting commissions from the sale of various apartments in a development known as Europa Development in North Perth. These commissions would normally be payable to Westpoint Finance. In the past few weeks approximately $150 000 by way of commissions has been collected by the sixth defendant and cheques for these amounts have been drawn in favour of the eighth defendant. 29 Mr Zohar has also deposed that he has been informed that there have been further withdrawals from the sixth defendant's account in favour of the eighth defendant. These withdrawals have included amounts for the payment of the wages of the staff employed by the eighth defendant. There are other withdrawals which are not satisfactorily explained. On the basis of information he has received from a former employee of Westpoint Corporation, Mr Zohar believes that the sixth defendant's account is being cleared because of the expectation that a guarantee provided by the sixth defendant to the mezzanine companies may be called on in the near future. 30 Mr Zohar deposes in the concluding paragraph of his affidavit as follows: '97 On the basis of the information set out above, I have formed the view that: (a) since about mid‑2005, there appears to have been a designed and systematic attempt by Mr Carey, and presumably on Mr Carey's instructions Mr Rundle and Mr Nairn, to diminish the available assets of a number of the Companies in Receivership and the companies likely to be placed into liquidation at some future time due to guarantees provided to the Mezzanine Companies; (b) the transactions set out above are outside the ordinary course of business, and hence involve the disposition of charged assets by the Companies in Receivership; (c) the transactions set out above may constitute a breach of the duties of the director/s of the relevant entities; (d) the affairs of the Defendants are so intertwined that it is not possible to properly investigate all possible transactions which involve the disposal of charged assets outside the ordinary course of business without having access to all of the books and records of each of the Defendants; (e) given the apparent attempt referred to in sub‑paragraph (a), there is a significant risk that the Defendants will make further disposals of their assets, or of their books and records, if the Defendants are potentially liable to return charged assets or are accountable for the disposal of charged assets.' 31 A court is normally very reluctant to make orders on an ex parte basis, particularly where the orders have a propensity to affect drastically the rights of the parties that are not before the Court. Where applications are made under s 1323 of the Act it is not necessary for the Commission to show that there is a risk of a dissipation of assets order to enliven the jurisdiction to make interim orders under s 1323(3) of the Act. A jurisdictional foundation for the making of orders at the instance of the Commission is that there is a relevant investigation being undertaken by the Commission. I am satisfied that the Commission has commenced and is carrying out such an investigation. 32 In making an application under s 1323 of the Act the Commission is acting in the public interest and in the protection of the interests of those persons ('aggrieved persons'), to whom the persons who are the subject of the investigation, may be, or become, liable to pay compensation. 33 In determining whether, and if so, the extent of, any interim orders that should be made, it is necessary to balance against the interests of the 'aggrieved persons', the rights of the defendants to control and operate their own assets and to depart Australia at such times as they might desire. I am not prepared to make any orders appointing receivers to the property of the defendants - that relief would only be granted on an ex parte basis in most exceptional circumstances. I do not think that such relief would be warranted in these circumstances. The immediate concern of the Commission is to ensure that the monies which will be disbursed to the fifth defendant on 31 March 2006 are not dissipated and, in particular, that those monies are not disbursed to the seventh defendant pursuant to the charge which the fifth defendant granted on 23 January 2006 to the seventh defendant for, in the words of Mr Zohar, 'no apparent reason'. Rather, in my view, the interests of the aggrieved persons will be sufficiently protected by the making of interim asset preservation orders. 34 In light of the urgency created by the proposed settlement of the contract for the sale of the Point Piper property by the fifth defendant on 31 March 2006, the evidence of Mr Zohar of the 'irregular transactions' which in his view were designed to defeat creditors, the evidence as to the means whereby the monies raised by the mezzanine companies were used for general corporate and related party purposes, the evidence demonstrating a good arguable case of unlawful conduct by the first to fourth defendants giving rise to potential recovery actions, the large amount of money which was loaned by members of the public to the mezzanine companies that has been lost and the large number of persons affected by the loss of that money, I am of the view that interim preservation orders should be made until 4.00 pm on Friday, 7 April 2006 pending the return of the application to Court for hearing on a contested basis. For the same reasons, I will make interim orders precluding the first to fourth defendants from leaving Australia without the consent of the Court until 4.00 pm on Friday, 7 April 2006. 35 Even though the asset preservation orders are sought on an interim basis and the matter will return to Court to be dealt with on a contested basis in a week's time, I am concerned about the impact of the orders on the defendants ‑ particularly the proposed order which limits the expenditure of the defendants to $2 000 per week. I will increase the amount that can be disbursed by each, or on behalf of, the defendants to $4 000 per week and give liberty to apply to vary the orders on the giving of reasonable notice.

Australian Securities and Investments Commission, in the matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey

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Judgment (12 paragraphs)

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