Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd

REASONS FOR JUDGMENT 1 At a hearing on 23 March 2012, the Mews Receivers sought, inter alia, the following order: 1. The claims received by the Mews Receivers against the assets of the Mews Scheme, as set out in Schedule B to these orders, are (as the case may be) either: (a) admitted to proof; or (b) rejected, in accordance with Schedule B to these orders; together with a number of procedural orders, which were unopposed and which were made on 23 March 2012. 2 The application for order 1 was also unopposed. 3 The proceeding has a long and complicated history. The immediate background to the application is set out in my reasons for judgment dated 21 December 2011. 4 In summary, for present purposes, it suffices to note that: The Mews Scheme is an unregistered managed investment scheme with the stated objective of constructing a retirement village on the Mews Land. Funds for the Mews Scheme were raised through a network of partnerships comprising 14 partners. A number of these partners are other/further partnerships, referred to as "sub-partners". GDK Financial Solutions Pty Ltd ("GDKFS") is the Partnership Manager of the Mews Scheme. WRVM was the registered proprietor of the Mews Land. MVN was appointed to act as a bare nominee for the Mews Scheme and was to hold the Mews Land (this transaction did not complete). In accordance with orders of the Court, the Mews Land was sold in March 2008 by the Mews Receivers. The funds held in the Mews Scheme are the net proceeds of that sale, less costs and payments as ordered by the Court. 5 The application for admission or rejection of proofs was, in the first instance, supported by: (1) the affidavit of Simon Charles Preston Harris sworn on 22 March 2012; and (2) the affidavit of Brian Keith McMaster sworn on 17 February 2012 annexing a supplementary report of Korda Mentha dated 17 February 2012 ("February 2012 supplementary report"). 6 Mr Harris, a director of Korda Mentha with day-to-day conduct of the relevant files, deposed that pursuant to the 21 December 2011 orders, the Mews Receivers on 20 February 2012 sent a circular with a claims schedule to all persons who had made a claim against the assets of the Mews Scheme, together with a copy of the 21 December 2011 orders ("December 2011 orders"). 7 The circular referred to the proposed interim distribution to admitted claimants and the February 2012 supplementary report. The claims schedule set out the name of each claimant, the nature of the claim, and the amount, if any, in relation to each claim for which the Mews Receivers proposed to seek the approval of the Court to admit or reject (whether in whole or part). 8 The circular stated that any person who wished to challenge the recommendations to admit or reject any of the claims must file objections no later than 13 March 2012. 9 Mr Harris deposed that on 19 March 2012, the Mews Receivers received a letter dated 15 March 2012 from the trustee in bankruptcy of the estate of Samoir Novak, the rejection of whose claim the Mews Receivers recommended. The trustee stated that he was without funds in the administration and consequently was unable to file an objection and would not be represented at the hearing. He nevertheless sought that the matter be brought to the court's attention. 10 Mr Harris referred to an unresolved claim by First Delta Group (on behalf of AVS Property Pty Ltd) for $2,110,000 for development costs and management fees. He deposed that the Mews Receivers could not currently assess this claim, which was nevertheless being asserted. Relevant correspondence was annexed. 11 Mr McMaster (who, with Mark Mentha, is a joint and several receiver of the Mews Scheme and a liquidator of the third defendant, Western Retirement Village Management Pty Ltd ("WRVM") and the fourth defendant, the Mews Village Nominees Pty Ltd) deposed to the steps taken in relation to the proposed interim distribution to be made to investors and creditors of the Mews Scheme in accordance with the orders made on 21 December 2011. 12 As stated in the December 2011 reasons, the December 2011 orders required the Mews Receivers to advertise for new claims on the Mews Scheme (including new priority claims) within 28 days, following which within 14 days, the Mews Receivers would provisionally assess and prepare a report on the new claims, and then circulate to all known claimants a provisional assessment of all claims, including the Mews Receivers' recommendations of acceptances or rejections. Any claimant objecting to any provisional assessment was required to file and serve an interlocutory process within 21 days. 13 Mr McMaster deposed that on 13 January 2011, the Mews Receivers issued a circular to all known claimants setting out their provisional assessment of the claims. 14 Mr McMaster also attached the February 2012 supplementary report which set out whether the Mews Receivers, on the basis of the information in their possession, considered that particular new claims should be accepted or rejected, together with the Mews Receivers' proposal in regard to each claim. 15 The February 2012 supplementary report referred to the Mews Receivers' previous reports to the Federal Court dated 22 February 2007, 5 May 2007, 27 August 2007, 14 November 2008, 16 January 2009 and 15 November 2011. 16 The February 2012 supplementary report dealt with the new claims received from: (1) the Trustee for the Bankrupt Estate of Samoir Novak / Lionheart Management Group Pty Ltd; (2) Donald Wright; (3) Phillip Clements / Luke Atkins / Annette Atkins; (4) Touma Pty Ltd; and (5) First Delta Group, and made recommendations in relation to each new claim. 17 In relation to Samoir Novak, the February 2012 supplementary report stated: 4.3 The Trustee for the Bankrupt Estate of Samoir Novak / Lionheart Management Group Pty Ltd ('LMG') Mr Samoir Novak submitted an affidavit dated 8 February 2012 claiming LMG has an interest in the Mews Scheme in the sum of $4,164,000. A copy of Mr Novak's affidavit is attached as Annexure D. This claim is based on: • Mr Novak claims that GDK Financial Solutions ('GDKFS') owed LMG commissions totalling $5,076,236 (we note that based on the documents provided, only $4,449,236 of these commissions relate to the Mews Scheme) • Mr Novak claims that he came to an agreement with Mr David McLeod, on behalf of GDKFS, that $4,164,000 of the commission owing to LMG would be applied to pay for the investments by LMG's clients in the Mews Scheme, and LMG was not otherwise paid for those invoices • A partnership agreement (not provided) which Mr Novak claims showed LMG had a 22% interest in the Mews Village Partnership (we note that the copies of the Mews Village Partnership agreement which we have been provided by the Australian Securities and Investments Commission do not include the schedule which purports to show the investor partners) • Financial records of the Mews Village Partnership showing LMG holding an interest of $4,164,000 in the partnership. We have not received: • Any evidence substantiating the basis of the invoices • Any evidence that any of LMG's clients invested in the Mews Scheme • Any evidence that any cash payments were made by either LMG or any of its clients into the Mews Scheme. In line with our approach to assessment, as set out above, we do not consider that LMG has substantiated its claim. Conclusion: We do not recommend this claim for acceptance. 18 The February 2012 supplementary report annexed the affidavit of Samoir Novak sworn on 8 February 2012 and exhibits thereto. 19 In relation to Donald Wright, the February 2012 supplementary report stated: 4.4 Donald Wright Mr Wright submitted a statutory declaration dated 6 February 2012 (Annexure E) claiming an investment of $17,000 in the Mews Scheme through the Merinda Gardens Mews Partnership. Turtle Point Management Pty Ltd ('TPM') is the bare nominees of the Merinda Gardens Mews Partnership, and submitted a claim on behalf of the partnership. In our report dated 14 November 2008, we recommended that TPM's claim be accepted. Conclusion: To avoid duplication, we recommend this claim not be accepted. 20 In relation to the claims of Phillip Clements, Luke Atkins and Annette Atkins, the February 2012 report stated: 4.5 Phillip Clements / Luke Atkins / Annette Atkins Mr Clements submitted an affidavit dated 7 February 2012 claiming $346,665 on behalf of himself and Luke and Annette Atkins, as follows: • Phillip Clements $173,332 • Luke and Annette Atkins $173,332. A copy of Mr Clements' affidavit is attached as Annexure F. The claims are based on an agreement between Mr Charles Morton, Mr Luke Atkins and Mr Phillip Clements, in their capacity as directors of Mango Properties Pty Ltd ('Mango'), giving up Mango's interest in the Mews Land in favour of Western Retirement Village Management Pty Ltd (In Liquidation) ('WRVM'). The agreement is dated 27 June 2000 and is part of an Annexure D to Mr Clements' affidavit. Mr Clements has submitted claims previously in the Mews Scheme, both in his own capacity, and as a director of Mango. In our previous reports we have not assessed Mr Clements' claim. Mr Clements, Mango, Luke or Annette Atkins did not advance any funds to the Mews Scheme. We are unable to assess the commerciality or appropriateness of the agreement with WRVM dated 27 June 2000. Mr Clements has previously advised us that he will seek to press his claim before the court. Conclusion: We do not recommend this claim for acceptance. 21 In relation to Touma Pty Ltd, the February 2012 supplementary report stated: 4.6 Touma Pty Ltd ('Touma') Touma claimed interests in the Mews Scheme based on acquiring the following investors' interests: • Paul Keen • Bronak Pty Ltd • Embridge Trial Pty Ltd • ZMB Australia Pty Ltd • Francis Street Pty Ltd (acquired via ZMB Australia Pty Ltd) • Seachange Management Pty Ltd (acquired via ZMB Australia Pty Ltd) • WRVM (acquired via ZMB Australia Pty Ltd). In accordance with orders made by the Court on 2 August 2011, we note that the following claims have been settled: • ZMB Australia Pty Ltd • Seachange Management Pty Ltd (acquired via ZMB Australia Pty Ltd) • WRVM (acquired via ZMB Australia Pty Ltd). The following claims remain in existence as "Touma Recommended Claims": • Paul Keen • Bronak Pty Ltd • Embridge Trial Pty Ltd • Francis Street Pty Ltd. Full details of the Touma Recommended Claims and our adjudication were set out in our report dated 14 November 2008. 22 The 14 November 2008 supplementary report relevantly stated in relation to the "Touma Recommended Claims": 6.2.8 Paul Keen / Touma Mr Keen submitted a Statutory Declaration dated 9 August 2007 (Annexure AA) claiming an investment of $200,000, together with a copy of a receipt issued by MVN. The Michael Brereton & Co trust account extract indicates that the sum of $200,000 was received from Mr Keen on 15 June 2000. Touma claims to have acquired Mr Keen's interest in the Mews Scheme. Touma's solicitors provided a copy of a Purchase Deed between Touma and Mr Keen dated 21 December 2007 (Annexure AB). Mr Keen confirmed by email on 27 October 2008 (Annexure AC) that Touma had purchased his interest in the Mews Scheme. Conclusion: We recommend this claim be accepted in the name of Touma. 6.4.2 Embridge Trial Pty Ltd ("Embridge") / Touma We received a Statutory Declaration dated 21 August 2007 prepared by Mr Dean Grant in his capacity as director of Embridge (Annexure AF). Mr Grant claims that on or about 24 April 2001 Embridge invested $125,000. The Michael Brereton & Co trust account extract indicates that the sum of $125,000 was received from Embridge. Touma claims to have acquired Embridge's interest in the Mews Scheme. Touma's solicitors provided a copy of a Purchase Deed between Touma and Embridge dated 14 December 2007 (Annexure AG). We wrote to Embridge on 24 October 2008 seeking confirmation of this however, we have not received a response to date. Conclusion: We recommend this claim be accepted in the name of Touma. 6.5.1 Bronak Pty Ltd / Touma We received a Statutory Declaration dated 21 August 2007 prepared by Mr Dean Grant in his capacity as director of Bronak Pty Ltd (Annexure AK) claiming an investment of $50,000. We also received a Statutory Declaration from Mr Charles Morton in his capacity as director of Bronak confirming this. The Michael Brereton & Co trust account extracts indicates that the sum of $50,000 was received from Bronak. Touma claims to have acquired Bronak's interest in the Mews Scheme. Touma's solicitors provided a copy of a Purchase Deed between Touma and Bronak dated 20 December 2007 (Annexure AL). We wrote to Bronak on 24 October 2008 seeking confirmation of this however we have not received a response to date. Conclusion: We recommend this claim be accepted in the name of Touma. 6.8 Francis Street Pty Ltd ("FS") / Touma Mr Graham Bristow, a director of FS, submitted an affidavit dated 22 December 2006 (Annexure AY) claiming an investment in the Mews Scheme. On 15 January 2007 we requested further information from Mr Bristow. Mr Bristow responded on 31 January 2007 indicating that he had invested $100,000 cash and issued to WRVM 4,199,100 shares (at a value of 20 cents each) in Meridian Pacific Capital Pte Ltd in full and final payment of FS' investment. Mr Bristow has stated that he was not in a position to provide any of the supporting documentation as requested (Annexure AZ). Information extracted from the database maintained by the Accounting and Corporate Regulation Authority, Singapore, (Annexure BA) indicates that WRVM is not a shareholder in Meridian. The Michael Brereton & Co trust account extract indicates that $100,000 was received from Mr Bristow. We wrote to FS on 7 October 2008 seeking further information in relation to his claim. No response has been received. Touma claims to have acquired FS's interest in the Mews Scheme. Touma's solicitors provided copies of: • A "Purchase Deed" between ZMB and FS dated 30 May 2007 (Annexure BB); and • A "Purchase Deed" between Touma and ZMB dated 25 September 2007 (Annexure BC). On 11 November 2008 we wrote to: • Touma to provide a copy of our letter to FS seeking further information; and • SM and ZMB to advise that Touma had claimed FS's interest in the Mews Scheme. We note that Touma's solicitors advised on 12 November 2008 (Annexure BD) that Touma would not propose to make any claim in relation to the balance of FS' claim (being the value of the shares Mr Bristow claimed were issued to WRVM) if certain other claims, are recommended as accepted. We wrote to Touma on 14 November 2008 to advise of our position (Annexure BE). Conclusion: We recommend this claim be accepted in the name of Touma in the amount of $100,000. We do not recommend acceptance of any claim in relation to the shares. 23 In summary, only two claimants, Mr Phillip Clements and AVS Property Group Pty Ltd, gave notice of any challenge to the assessment. 24 Mr Clements issued an interlocutory application filed on 14 March 2012 challenging the recommendation, for which a timetable was fixed. AVS Property Group Pty Ltd also filed and served an interlocutory application dated 4 April 2012. 25 As stated above, the trustee in bankruptcy of a third claimant, Samoir Novak, (the rejection of whose claim was recommended) requested that the court be notified that he was without funds. No challenge or formal objection was made or foreshadowed. Having perused the material filed on behalf of Mr Novak I was satisfied that there was no evidence that funds were paid into the Mews Scheme or through the Michael Brereton & Co trust account, and that the receivers concluded on reasonable grounds that the claim was not substantiated. 26 The provisional assessments and recommendations in relation to the claimants referred to in paragraph 16 were supported by the affidavits of Simon Harris sworn on 22 March 2012 and the affidavit of Mr McMaster sworn on 17 February 2012 annexing the February 2012 supplementary report. 27 Schedule B, however, contained a large number of older claims, the assessment of which was based on material previously filed at various times. Given the number of claims, the lengthy history of the matter, which was previously managed in another docket, and the large volume of materials and reports filed, it was not possible to deal with those claims at the hearing on 23 March 2012. The matter was, accordingly, thereafter dealt with on the papers. 28 As it was not possible readily to locate the material relevant to the balance of the claims in Schedule B, a chart was provided to the Court by the solicitors for the Mews Receivers on 3 April 2012, but proved inadequate for that purpose. Subsequently, a further affidavit of Mr McMaster sworn on 15 June 2012 was filed annexing a further supplementary report to the Court dated 13 June 2012 ("June 2012 supplementary report") and four volumes containing the documents on which the Mews Receivers relied in the assessment of the claims of 59 claimants. 29 The June 2012 supplementary report set out the history of the matter and summarised elements of the earlier reports to the Court dated 22 February 2007, 5 May 2007, 27 August 2007, 14 November 2008, 16 January 2009, 15 November 2011 and the February 2012 supplementary report (particularly the reports of 14 November 2008, 16 January 2009 and the February 2012 supplementary report). 30 The June 2012 supplementary report reiterated that the Mews Receivers had not received complete records or obtained adequate books and records for the Mews scheme. 31 The June 2012 supplementary report stated that the Mews Receivers employed the following methodology in assessing the claims they had received: 1. If the amount claimed can be traced to the Michael Brereton & Co trust account, we have recommended that no further information be sought from the claimant. Our analysis of the transactions of that trust account is attached as Annexure B. 2. If the amount claimed cannot be traced to the Michael Brereton & Co trust account, we have undertaken the following additional steps: i. Claims by head partnerships: • Sought documentation to evidence funds advanced. ii. Claims by investors in sub-partnerships: • Ascertained whether the business of the sub-partnership was in respect of the Mews Land; and • Sought documentation to evidence funds advanced. If we have been able to satisfy ourselves with respect to each of these matters for each investor, we have recommended that no further information be sought from the claimant. In the alternative, we have requested further information which has not been received to date. 3. In some instances, the head partner has provided sufficient evidence to substantiate the claim on behalf of all of the respective sub-partners. In this instance we have assessed the head partner's claim. In circumstances where we have recommended that a claim by a head partner be accepted and we have also received claims from investors to the respective sub-partnership, we have recommended that, in order to avoid a duplication of claims, that the claims of the investors in the sub-partnership be rejected. 4. In the alternative, where the head partner has either not claimed or not provided sufficient evidence, we have assessed the claims of the respective sub-partners. 32 The June 2012 supplementary report stated that the Mews Receivers considered that the above methodology allowed all substantial claims to be assessed. 33 In relation to the evidence upon which the Mews Receivers relied, the June 2012 supplementary report stated: 5.1 Evidence Relied Upon As mentioned above, we have received very limited books and records of the Mews Scheme. Accordingly, in assessing investors' claims, we have relied heavily on the information provided by the investor. The detail of information provided has varied and accordingly where possible we have sought to cross-reference the investors' claims with the trust account records maintained by Michael Brereton & Co. To date we have not received any correspondence from any investor disputing the entitlement of another investor. We are satisfied that the information provided to substantiate the claims we are recommending for acceptance meets a reasonable criteria for substantiating the claim. 34 The June 2012 supplementary report stated that the Mews Receivers had received a total of 64 claims against the Mews Scheme, 58 of which would be covered by order 1 of the orders sought on 23 March 2012. 35 A further claim received from Donald Wright had also now been included in a summary schedule identifying the Mews Receivers' assessment of each claim, which sub-partnership, if any, the claimant belonged to, the earlier reports in which the claim was originally assessed and tab numbers permitting identification of the documents relating to each claim. 36 The five claims were as follows: Claim Status Mr Luke Atkins / Ms Annette Atkins Subject to mediation (with Clements claim) Mr Phillip Clements Subject to mediation (with Atkins claim) First Delta Group (development cost/management fee claim) Subject to mediation Swan Valley Partnership (GDK Financial Solutions Pty Ltd (In Liquidation) Costs claim from non-cash investors' representative (Tenth Defendant). Claim to be submitted to Court for assessment. Western Retirement Village Management Pty Ltd (In Liquidation) Claim settled by cash investors' representative (Seventh Defendant).