Consideration
24 ASIC submits that, having regard to the matters highlighted in Part C of its August Submissions, and the further matters addressed in the Perrywood affidavits and the Deloitte Report, it is appropriate to make orders for the appointment of receivers and managers over the Keystone property.
25 ASIC submits that, having regard to the significant work performed by Mr Tracy and Ms Palaghia, their familiarity with Keystone, the SMF and the ADPF, their earlier appointment by the Court (at the request of Keystone), and their positions as officers of the Court, Mr Tracy and Ms Palaghia should be appointed as the receivers and managers.
26 Keystone opposes the application on the basis, in summary, that there is a less drastic option available, namely the appointment of an independent person to act as the agent of Keystone, with the agent being tasked with the responsibility of winding up the fund. This alternative is set out in draft orders attached to Keystone's outline of submissions dated 26 August 2024 in support of an adjournment application. Keystone does not suggest that its alternative orders could be made today, as it does not yet have agreement from an independent person to act in the agent role.
27 For the reasons that follow, I consider that it is appropriate to appoint receivers and managers to Keystone as proposed by ASIC.
28 I am satisfied that the present application satisfies the first two preconditions to the exercise of power under s 1323 of the Corporations Act. The application is made by ASIC in circumstances where ASIC is carrying out an investigation in relation to an act or omission that constitutes or may constitute a contravention of the Corporations Act.
29 I am also satisfied that the evidence establishes that the appointment of receivers and managers is necessary or desirable for the purposes of protecting the interests of aggrieved persons to whom Keystone may be liable (being investors in the SMF and ADPF).
30 ASIC's investigation indicates that there has been a significant dissipation of SMF funds. This fact strongly supports the exercise of discretion in favour of appointing a receiver and manager.
31 As outlined in Part C.5 of ASIC's August Submissions, a large sum of ADPF Loan funds has been drawn down and paid (by Chiodo Corporation) to lead generators for the purposes of sourcing new investors for the SMF and/or the ADPF. This is despite "development costs" being the only approved purpose specified by the ADPF loan agreements.
32 A further large sum in ADPF loan funds has been paid to entities related to Keystone, including for expenses that cannot reasonably be characterised as development costs: see Part C.6 of ASIC's August Submissions.
33 Deloitte has been unable to verify the application of a further large sum of money: see Part C.2 of ASIC's August Submissions. Further, Deloitte could not allocate a large sum in shared project costs: see Part C.3 of ASIC's August Submissions.
34 As a consequence of the apparent dissipation referred to above, and the apparent mismanagement of SMF and ADPF funds, there is a substantial shortfall when comparing the moneys invested in the ADPF, against ADPF assets. This also supports the appointment of a receiver and manager.
35 In particular, a large sum of money (excluding redemptions) was invested in the SMF. Of this, the SMF invested a large sum in the ADPF. However, Deloitte assesses that (as at 31 May 2024), the net assets attributable to ADPF unitholders is a significantly lower sum. This indicates a substantial shortfall, and a further shortfall between the sums invested in the SMF by unitholders and the current value of SMF.
36 The extent of Keystone's mismanagement confirms that there is a need to protect the interests of investors from what appear to be conflicts of interest and breaches of trusts.
37 A large sum in ADPF loan funds was transferred to Chiodo Corporation, apparently pursuant to the Development Management Agreement. Of that amount, it appears that a large sum has been paid to City Built or Mr Filippini (City Built's director). This is despite Mr Filippini not holding a building licence (until May 2024), City Built not being required to tender or quote for any of the work it undertook, and there being no written contracts.
38 Notwithstanding this and other concerns as to Chiodo Corporation's role and the performance of its obligations, Keystone entered into a Development Management Fees Reconciliation Agreement on 18 June 2024 (i.e., after this proceeding was commenced). By that agreement, Keystone purports to acknowledge Chiodo Corporation's entitlement to a large sum in development management fees.
39 On the basis of the material before the Court, I do not have confidence that the SMF and ADPF are being managed in the best interests of investors, or that Keystone is capable of providing such management.
40 Further, the evidence indicates that Keystone's financial records are incomplete and unreliable. As a result, there are real doubts about the status and value of investments in the SMF and ADPF. The proposed receivership would enable the further ascertainment of the Keystone property.
41 Under ASIC's proposed orders, the receivers and managers will have three principal tasks:
(a) identifying what Keystone has done with the investor funds it has received;
(b) taking steps to secure the Keystone property and, where possible, to recover investor funds; and
(c) preparing a report that will enable a decision to be made about the future of Keystone and whether the SMF should be wound up.
42 Deloitte has already undertaken much of the work involved in the first task. However, that work is not complete. In particular, the evidence suggests that Deloitte was unable to: verify the use of a sum of money provided by the ADPF to Chiodo Corporation; identify a further sum as relating to a specific project; and verify the use of more than a certain amount paid from ADPF bank accounts.
43 The proposed orders will facilitate the completion of the work involved in the first task, including by requiring Keystone to provide relevant books and records to the receivers, and giving the receivers additional powers to conduct investigations. Further, the proposed orders will require the receivers to address what has occurred since 31 May 2024.
44 The June Orders preserved investor funds by imposing an oversight and approval process as to the transactions that could be undertaken by Keystone. Unlike the June Orders, the further orders proposed by ASIC are concerned to give the receivers an active role in the ongoing operations of Keystone and the SMF. In particular, they give the receivers: the ability to determine the steps that should be taken in the best interests of investors; and powers to take those steps to secure the Keystone property and recover investor funds.
45 The matters identified in the Deloitte Report and the Perrywood affidavits make it appropriate that decisions about the ongoing operations of Keystone should be made by independent officers of the Court, rather than by the management of Keystone. Those matters also confirm the importance of securing the Keystone property where necessary, and otherwise recovering investor funds.
46 ASIC's proposed orders require the receivers to prepare a further report. This report will deal with the steps that the receivers take in their receivership, and will set out opinions and information that will be relevant to deciding whether Keystone and the SMF should continue in operation or be wound up. Among other things, the report is to include information about the likely returns to creditors and investors in the event that Keystone and the SMF are wound up. The information in the report will be valuable to ASIC, the Court, SMF unitholders and investors, in determining what further steps should be taken in relation to Keystone and the SMF.
47 I do not consider the alternative proposal put forward by Keystone to be a desirable alternative. As already indicated, the proposal cannot be implemented now because no person has yet agreed to act in the agent role. Senior counsel for Keystone submitted that the Court should defer appointing a receiver for two weeks to enable the Keystone proposal to be developed. However, on the material before the Court, I do not consider it realistic that this could be achieved in two weeks. I therefore do not consider the proposal put forward by Keystone to be a realistic one in the near future.