(c) Just and equitable ground - application
75 In my view, the following factors justify winding up both Bilkurra and Foscari on the just and equitable ground.
76 First, I have little confidence in the management of these companies. Stephens does not have control or day-to-day management of the companies. Skinner had no meaningful involvement in the management of the companies when he was a director. Grochowski is and always has been responsible for all aspects of the day-to-day business of those companies.
77 Second, the financial records of these companies are in an unsatisfactory state to say the least. Let me elaborate on this aspect.
78 It is not possible to have confidence in the financial statements produced by Stephens for the following reasons.
79 The financial statements appear to contain various errors and in other respects are doubtful.
80 Further, financial statements for Foscari and Bilkurra only exist up to and for the period ending 30 June 2015. No statements exist that disclose the true financial position of the companies today. Since June 2015, the following transactions have occurred:
(a) Lezak Nominees and Adelaide Properties have lent a further $2.465 million to Bilkurra and Foscari (AP & LN Loan);
(b) Rotal Investments lent $500,000 to Foscari (Rotal Loan). Stephens is unsure if that loan is secured by a fifth mortgage over the Foscari land; and
(c) Laycon Investments Pty Ltd lent money to Bilkurra and Foscari.
81 Further, significant uncertainty exists as to whether amounts paid to Bilkurra and Foscari by Midland are properly recorded as equity rather than debt. Stephens has prepared the statements on the basis that those amounts, entered in the books as loans, should be characterised as equity investments. He did so based on "discussion[s] with Mr Grochowski that these advances were made as equity investments … at the direction of Mr Wood" (the now deceased former director of Midland) and because Wood was "a specified beneficiary in respect of the shares in Foscari". These transactions were not properly documented by Bilkurra and Foscari so as to make it clear what the transactions were. There should have been no need for any "discussion" with Grochowski to work out what transactions Bilkurra and Foscari had entered into. Grochowski also had doubts about the true nature of the transactions. During his section 19 examination, Grochowski first said that the transfers were undocumented loans. But later he said that they were an opportunity for Midland to "invest" in the projects, suggesting that it was an equity transaction. At one stage, Grochowski referred to the payments as "equity loans".
82 Generally, I have no confidence in the accuracy or completeness of the books of Foscari and Bilkurra. Further, there have been clear breaches of s 286. Further, if s 1305 applies to the recently prepared accounts, I would give them little weight in any event as prima facie evidence.
83 Third, in my view Foscari and Bilkurra are insolvent.
84 Fourth, the bank accounts for Foscari and Bilkurra would appear to be in the name of PMA and controlled by Grochowski. Grochowski is a shadow director of Foscari and Bilkurra. On 27 April 2012, Grochowski was banned by ASIC from providing financial services for four years as I have said at [32] above.
85 Fifth, funds raised from investors who entered into option deeds were transferred (via EEL's trust account) to PMA and then transferred between Foscari, Bilkurra, Midland and Brookfield at the direction of Grochowski with apparent disregard to the obligations that may be owed to investors and without documents recording the purpose of the transactions.
86 Sixth, Stephens, Skinner and Grochowski have been unable to provide an adequate explanation for the transactions. Nor have they been able to produce adequate or accurate written financial records documenting those transactions.
87 Seventh, investors in the schemes may have invested in the land banking schemes on the basis of misleading representations, with the defendants involved in various contraventions of the Act.
88 Eighth, millions of dollars invested in the schemes appear to have been lost. Liquidation will allow a full investigation. It will also enable potential recovery proceedings that only a liquidator can pursue. Generally, it is in the best interests of the creditors, including investors, that the winding up orders be made. It is also in the public interest. Let me elaborate on some aspects of potential recoveries.
89 The evidence reveals the existence of a number of transactions that may be voidable under Part 5.7B, Division 2 of the Act. Only a liquidator can take advantage of the relevant provisions in that Part. The transactions which may be voidable include the following. I should note that the defendants said little of substance against the following analysis.
90 Between 5 July 2012 and 7 December 2015, PMA caused Foscari to pay $1,445,548.78 to PMA itself from account 193-879 447252255 (the Foscari bank account which was operated by PMA and in its name). Some or all of those payments may be uncommercial transactions or unreasonable director-related transactions and therefore voidable under ss 588FE(3), (4) and (6A) of the Act. Grochowski is a shadow director of Foscari.
91 Further, between 2 July 2012 and 25 July 2014 Foscari paid $115,930 to Skinner from the Foscari bank account. He appears to have done nothing or very little to earn more than $50,000 per year from Foscari. There are grounds to believe that Skinner was a director of Foscari in name only. He left, inter alia, the operation of the company's bank accounts up to Grochowski. Some or all of the payments made to Skinner may be uncommercial transactions or unreasonable director-related transactions and therefore voidable under ss 588FE(3), (4) and (6A) of the Act. ASIC does not currently have bank statements for Bilkurra, however, Skinner has acknowledged that he received $4,000 to $5,000 per month for each company of which he was a director. Payments made to Skinner by Bilkurra may also be voidable transactions.
92 Further, one or all of the following loans may be unfair loans and therefore voidable under s 588FE(6):
(a) On 5 August 2015, a further $2.465 million was advanced under the AP & LN Loan at an "agreed rate" of 4.25% per month compounding (equivalent to an annual rate of 64.78%) and a "discounted rate" of 3.25% per month compounding (equivalent to an annual rate of 46.78%).
(b) On 17 June 2015, NWC Finance Pty Ltd lent Foscari $2.12 million at a "lower rate" of 24% per annum and a "higher rate" of 60% per annum. On 24 June 2015, NWC and Foscari entered into a deed of variation of loan by which the principal amount loaned to Foscari was increased to $2.63 million.
(c) At some time in October 2015, it appears that Laycon Investments Pty Ltd entered into a loan agreement with Bilkurra and Foscari by which Bilkurra and Foscari borrowed $230,000 at an interest rate of 3% per month compounding (42.58% p.a.). The principal sum was increased in November 2015, December 2015 and January 2016 and the balance (as at January 2016) was $577,857.07.
(d) On 5 July 2013, Bourke & Queen Mortgages Pty Ltd (a company owned by Henry Kaye and Julia Feldman) lent Foscari $1.37 million at an interest rate of 2% per month compounding (26.82% p.a.) and a default rate of 4% per month compounding (60.1% p.a.). The repayment date was 30 days from the date of the agreement or any later date at Bourke & Queen's discretion. If Bourke & Queen did not agree to an extension (and there is no evidence that it did), interest has presumably been payable at the default rate since August 2013 and continues to be charged at that rate.
(e) On 24 December 2013, pursuant to the AP & LN Loan, Foscari and Bilkurra borrowed $3.5 million at a "discounted rate" of 12.75% per annum and an "agreed rate" of 18.75% per annum.
93 The above loans warrant investigation if a liquidator is appointed.
94 Further, the 30 June 2015 profit and loss statement for Bilkurra records forgiven debts of $1,244,320.52 as an expense. No substantial explanation has been given for those transactions in terms of the benefit to Bilkurra flowing from that forgiveness. They may be uncommercial and require further investigation.
95 Further, the Bilkurra balance sheet includes as an asset a loan to Greater Bendigo Consolidated Pty Ltd for $5.4 million. The balance sheet produced to ASIC on 13 November 2015 did not include that asset. It may be an uncommercial transaction and in any event requires further investigation.
96 Further, there are a number of inter-company payments for which no legitimate explanation has been given. For example, between 5 April 2013 and 4 December 2015, the Foscari bank account had debits totalling $609,000 and credits totalling $1,875,000 as a result of payments between Foscari and Brookfield (a company involved in the Veneziane scheme). Some or all of those payments may be uncommercial transactions and therefore voidable under s 588FE of the Act. Similarly, between 5 April 2013 and 23 February 2016, the Foscari bank account had debits totalling $682,500 and credits totalling $26,794 as a result of payments between Foscari and Bilkurra.
97 The transactions identified by ASIC are not a comprehensive list of potentially voidable transactions. Upon further investigation by a liquidator, additional voidable transactions may be identified. But importantly also for present purposes, only a liquidator can bring an action under Part 5.7B, Division 2 of the Act.
98 Finally, the defendants contest the proposition that funds raised from investors who entered into option deeds were transferred between Foscari, Bilkurra, Midland and Brookfield with apparent disregard to the obligations owed to investors. The defendants dispute this on the following basis:
This submission again highlights ASIC's failure to distinguish Bilkurra and Foscari from Midland, for the purpose of this proceeding: has there been any conduct by Bilkurra and Foscari which disregards the obligations in fact owed by them to investors? In that regard, it must be remembered that no option deeds were entered into by Bilkurra so no obligations are owed to option-holders by that company. Second, the option deed with Foscari (and Midland to the extent it might be relevant) expressly provided that those companies were free to use the option fee as they saw fit.
99 But that submission lacks commercial reality. As ASIC rightly submitted, Midland, Bilkurra and Foscari were controlled by Grochowski at the time the funds were raised and dissipated. The funds were raised on the basis of promises to develop land in a way that would benefit the investors. Further, even if there was no express contractual restriction on the use of funds paid by investors, that is beside the point. The funds raised from investors were wrongly dissipated through the payment inter alia of extraordinarily large fees to misleading spruikers and to Grochowski's company. That left such insufficient funds for the developments that the companies undertaking them were forced to borrow from lenders of last resort at usurious interest rates. I refer to what I have said at [44] to [47] above.
100 Further, as to the point that only Midland and Foscari, and not Bilkurra, entered into option deeds, Bilkurra at one stage had regarded itself as "bound" by the Midland options.