Application of Principles to the Present Case
33 The evidence filed by ASIC establishes that interest payments have been made to investors from funds received by way of new investments from other investors. The defendants have not adduced any evidence to suggest that this is not the case. To the contrary, the evidence adduced by the defendants tends to confirm that this has been occurring.
34 In my view, the appointment of a provisional liquidator is supported by a justifiable lack of confidence in the management of the affairs of the Companies. That lack of confidence arises as a result of the defendants' inability to provide explanations for many of the concerns that ASIC has raised, despite having the opportunity to do so during the s 19 examinations and by affidavit.
35 When ASIC put its concerns to Mr Grujicic in his s 19 examination, Mr Grujicic gave the following evidence in response:
(a) IMCG borrowed around $7.2 million from Boston Pacific Capital and CME from funds Mr Grujicic knew were raised from investors.
(b) The funds were advanced on IMCG pursuant to oral and written loans without security, to be repaid when Mr Grujicic was "comfortable with the trading", at an interest rate of 13%, without Mr Grujicic having any track record to demonstrate that IMCG would be able to repay the principal and pay interest.
(c) IMCG owes money to Boston Pacific Capital and CME, but (despite being the sole director of IMCG) he does not know how much IMCG owes to either company. He does not know how much he received from each company.
(d) Mr Petrou has asked Mr Grujicic to send money back at various times. Mr Grujicic returned the funds but could not say whether the payments were of interest or principal. Mr Grujicic said he was simply operating on the basis that "the agreement was for me to send money when I feel comfortable". Payments have been made even though IMCG is not making a profit.
(e) None of IMCG's accounts are profitable. There are two trading accounts and each has lost money. $2 million has been lost. If the securities were to be liquidated now there would be a $2.5 million shortfall. Mr Grujicic accepts that interest of $742,000 has accrued but not been paid.
(f) IMCG pays for a vehicle and fuel used by Mr Grujicic, from funds advanced by Boston Pacific Capital and CME. IMCG pays Mr Grujicic's salary but this is not recorded in its accounts. Mr Grujicic's personal account has been used to deal with IMCG's funds, including $1 million paid from IMCG into Mr Grujicic's personal account for the purpose of trading.
36 ASIC has raised concerns about Mr Grujicic's lack of expertise and experience in managing several million dollars of investors' funds. ASIC also says it has concerns about the terms on which the first four defendants have lent funds to IMCG.
37 When ASIC put its concerns to Mr Petrou in his s 19 examination, Mr Petrou confirmed that the Companies' only, or primary, source of income is funds received from IMCG and "incoming investor funds".
38 Mr Petrou has also given evidence that:
(a) He is aware that IMCG has sustained $2 million of losses.
(b) IMCG has returned the sum of $1.6 million to other companies voluntarily, at Mr Petrou's request. The funds were sought from IMCG for "Capital adequacy requirements, liquidity".
(c) Aside from interest payments coming in from new investors the Companies have no other source of income.
(d) The records lodged with ASIC reflecting Mr Grujicic's shareholding in the Companies are correct (which is contrary to evidence given by Mr Grujicic).
(e) The Companies' funds were used for recent overseas travel for eight people, which included Mr Petrou and Mr Grujicic, and which was "part business". Mr Grujicic's evidence was that Mr Petrou had funded his recent holiday overseas and that Mr Grujicic's travel was not for work.
39 ASIC has raised concerns about the terms on which investors' funds have been lent to third parties pursuant to documents drafted by Mr Petrou in respect of which, it appears, he received no external advice.
40 ASIC has also raised concerns that despite deposing to the financial affairs of Berkshire, of which Mr Petrou is the sole director, no books and records disclosing its financial position have been provided to ASIC (in circumstances where more than $1.7 million of investors' funds have been transferred to a foreign, related entity).
41 The winding up of a company on the just and equitable ground is appropriate where there is evidence of serious mismanagement or repeated breaches of the Corporations Act. The evidence suggests that the first to fourth defendants may have contravened ss 113, 283AA, 601ED(5), 727, 911A and 1041H of the Act. The evidence of Mr Petrou that he believed offers to have been made only to "professional investors" is not a sufficient response, at least for present purposes. The provisions of the Act referred to above do not require a contravenor to know that the impugned conduct constitutes a contravention of the Act in order for the contravention to be established. The evidence indicates that offers were made to persons who were not professional investors as contemplated by s 708 of the Act. Further, Mr Petrou has acknowledged that no PDS was issued and no financial services licence is held.
42 ASIC also contends that Mr Petrou's affidavit supports a conclusion that the Companies are operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Act. ASIC points to Mr Petrou's evidence to the effect that his investment business raises capital and then makes investments directly or indirectly in a range of asset classes. ASIC submits that the scheme described by Mr Petrou has the features of a managed investment scheme identified in s 9 of the Act, being a scheme by which:
(a) investors contribute money to acquire a financial benefit;
(b) investors' contributions are to be pooled or used in a common enterprise to produce the financial benefits; and
(c) the investors do not have day to day control over the operation of the scheme.
It is not necessary for present purposes to reach a concluded view on these contentions.
43 The evidence suggests that IMCG may have been involved in contraventions of ss 113, 283AA, 727, 911A and 1041H. IMCG received the funds raised from investors. ASIC contends that Mr Petrou (who ASIC contends was a de facto director of IMCG) had knowledge of the essential facts giving rise to primary contraventions.
44 The matters referred to above raise concerns that the affairs of the Companies have not been carried out with due regard to legal requirements.
45 The evidence indicates that:
(a) The first to fourth defendants do not earn sufficient income from the reinvestment of investors' funds or any other source to meet existing and likely future obligations to investors. Mr Petrou's evidence that the Companies "always held more than sufficient cash reserves to meet cash needs" seems to reflect the fact that the Companies were using new investments to fund interest obligations to existing investors, continuing to incur further obligations to investors.
(b) Although Mr Petrou has said that Berkshire is "generating positive cash flows from its operations", the documentary evidence does not substantiate this contention. Berkshire has received more than $1.7 million of investors' funds.
(c) IMCG has received more than $7 million of investors' funds and incurred losses of more than $2 million. Despite Mr Petrou deposing to having caused IMCG to return $1.55 million, the funds do not reflect any net income earned by the reinvestment of investors' funds.
46 As noted above, since the filing of ASIC's interlocutory process, joint and several administrators have been appointed to the first to fourth defendants. They are Dennis Turner and Luke Targett of BDO. Mr Turner has prepared two affidavits which have been filed in this proceeding. In his first affidavit, which was not long after the appointment of the administrators, Mr Turner outlined his reasons for seeking a short adjournment of the proceeding. One of the reasons was to enable further investigations to be made in relation to the possibility of a DOCA. That adjournment was granted and, yesterday, Mr Turner swore a second affidavit. In that affidavit Mr Turner states that, in his opinion, it is not in the interests of creditors to allow the administrations of the first to fourth defendants to continue to consider the DOCA proposal.
47 Mr Turner's second affidavit sets out, carefully and in detail, concerns about how the first to fourth defendants have been managed. His view on these matters provides independent support for the concerns raised by ASIC.
48 Mr Turner's second affidavit also details approaches that have been made to IMCG over recent days. It is important to note that, unlike the first to fourth defendants, IMCG is not under administration. Mr Turner instructed his solicitor to approach IMCG's solicitors to see whether IMCG had any proposal for its assets to form part of a DOCA (as funder) of the entities in voluntary administration. IMCG's solicitors responded that they do not have instructions to put forward any proposal in relation to funding by IMCG under a proposed DOCA. Mr Turner says that, given that $7.2 million of the funds of the first to fourth defendants was lent to IMCG, he believes it is critical to an outcome which could be in the interests of all creditors of the first to fourth defendants that the assets of IMCG comprise part of an equitable return of funds to creditors; and that without those funds it would be almost impossible, in his view, for a DOCA proposal to be in the interests of creditors.
49 Later in his affidavit Mr Turner says that, given his views, he has also formed the view that it would be unworkable for him to:
(a) continue as administrator of the first to fourth defendants; and
(b) be appointed by the Court as receiver and manager of IMCG.
50 He says that he has formed this view because he would be unable to achieve the objectives of obtaining the maximum return to creditors of the first to fourth defendants as a Court-appointed receiver and manager of IMCG. He says that he would be in control of the assets of IMCG but, for example, would not have the power to appoint an administrator if a global DOCA proposal was in his professional opinion in the interests of all creditors of the first to fourth defendants.
51 In light of the above, I am not satisfied that it is in the interests of creditors of the first to fourth defendants for the administration of those companies to continue. It follows that s 440A(3) does not preclude the appointment of a provisional liquidator to the first to fourth defendants.
52 Further, in light of the evidence referred to above, I consider it appropriate for a provisional liquidator to be appointed to each of the first to fifth defendants. There are, on the available evidence, possible contraventions of the Act and grounds for a lack of confidence in the management of the affairs of the Companies. There is a need for a provisional liquidator to be appointed to enable an independent person to investigate the affairs and transactions of each of the Companies and, if necessary, to take steps to protect and preserve their interests. It also is a case in which it is appropriate to appoint a provisional liquidator in the public interest as there is a need for an independent examination of the state of accounts of the Companies by someone other than the directors. I am satisfied that there is a reasonable prospect that a winding up order will be made, and that there is good reason for intervention prior to the final hearing of the winding up application.
53 On behalf of IMCG and Mr Grujicic, it was submitted that appointment of a receiver and manager was preferable to a provisional liquidator. For the reasons adverted to in Mr Turner's affidavit, I consider it preferable for a provisional liquidator to be appointed given the wider set of powers that would be available.
54 On behalf of Mr Petrou and Berkshire, it was submitted that if I formed the view that a provisional liquidator should be appointed to IMCG, and if I appointed Messrs Turner and Targett to that role, it would be best to allow the administration of the first to fourth defendants to continue for a short period of time to explore whether, in that scenario, the proposed DOCA was in the interests of creditors, given the ability of a provisional liquidator to appoint an administrator and given the views expressed in Mr Turner's affidavit. In my opinion, it is simpler and preferable, in all of the circumstances, to appoint a provisional liquidator to each of the first five defendants.
55 There remains the question of who should be appointed as provisional liquidator. In my view, it is appropriate for the two individuals proposed by ASIC, namely Ross Blakeley and Quentin Olde of FTI Consulting, to be appointed. They have the necessary qualifications and experience and have consented to act. Although the administrators of the first to fourth defendants have indicated that they would be content to be appointed, and it may be said that some efficiencies could be derived from their appointment, I consider it appropriate in the circumstances that the appointment be of the individuals proposed by ASIC. I should make clear that this does not reflect in any way on the current administrators whose material has been of considerable assistance to the Court.
56 For these reasons, I will make orders for the appointment of joint and several provisional liquidators to each of the first five defendants.
I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.