Australian Securities and Investments Commission v Koops

Federal Court of Australia|2010-01-25|Before: Stone J

1 This is an application by the Australian Securities and Investments Commission (ASIC) for orders that the first and second defendants be prohibited, until further order, from leaving Australia and that they deliver all their passports to the Court. The application is made pursuant to ss 1323(1)(j) and (k) which (relevantly) state. (1) Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; or … and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: … (j) if the relevant person is a natural person - an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit; (k) if the relevant person is a natural person - an order prohibiting that person from leaving this jurisdiction, or Australia, without the consent of the Court. 2 It is not in contention that the first defendant, Mr Rolf Koops, is a German citizen and entitled to a German passport. The second defendant, Ms Sandra Martin, is the wife, and to a large extent the business partner, of Mr Koops. It is also not in contention that, in the next few days, the defendants are proposing to leave Australia for England and propose to be away for an extended period, probably for some years if not permanently. 3 Both defendants are directors of LKM Capital Limited (ACN 091 379 930) (Receivers and Managers appointed) (LKM). LKM was incorporated on 31 January 2000 as LMS Securities Limited. Its name was changed to LKM Capital Limited on 23 February 2001. Mr Koops has been a director since the company was incorporated. Ms Martin was a director from 21 February 2000 to 30 June 2002 and again from 21 January 2008 to the present. On 1 August 2008, Mr Andrew John Cummins and Mr Brian Raymond Silvia of BRI Ferrier Sydney were appointed as Receivers and Managers of LKM.

4 In his affidavit of 19 January 2010, Paul Raymond Rowland, a senior financial investigator with ASIC, summarised the grounds of the application as follows: (a) there is an investigation being carried out under the ASIC Act into the actions of Koops [the first defendant] in his capacity as a director of LKM … which appear to be contraventions of the Corporations Act and which appear likely, inter alia, to be breaches of his duties as a director pursuant to sections 180 to 184 of the Corporations Act; (b) there are aggrieved persons (for the purposes of paragraph 1323(1)(c) of the Corporations Act) to whom Koops may become liable to pay money by way of damages or compensation arising out of the collapse of LKM; (c) a civil proceeding has been or will be begun today against the defendants; and (d) the defendants have stated (through their solicitor) that they intend to depart Australia permanently on 29 January 2010; and (e) in those circumstances it is necessary or desirable to restrain the international departure of the defendants for the purpose of protecting the interests of aggrieved persons to whom the defendants are or may be or become liable to pay compensation in connection with the matters the subject of ASIC's investigation in (a) and the proceeding in (b) respectively above.

5 LKM was the holder of an Australian Financial Services Licence (number 270056) issued on 10 May 2004. Pursuant to this licence LKM was authorised to carry on financial services business, the primary focus of which, according to ASIC, was to issue debentures to retail clients. The money raised by those debentures was invested in mortgages and property investments and various business assets. On 3 February 2000 LKM entered into a trust deed in relation to the issuing of debentures; see s 283 Corporations Act. The present trustee of the debentures scheme is Sandhurst Trustees Limited ACN 004 030 737 (Trustee). The investors are said to be retail investors who have invested their superannuation and personal savings in LKM.

6 Various provisions of the Trust Deed, in particular those set out below, are relevant to the allegations made by ASIC. They are: Clause 6.4(d) and (l) The Company covenants with the Trustee that it will so long as any Debentures are outstanding: … (d) within one month after the end of each quarter, the Company must give the Trustee a quarterly report that sets out the information required by Section 283 BF(1) of the Corporations Act; … (l) procure that its Directors notify the Trustee immediately they are aware that any event referred to in Clause 12 has occurred or that any of the provisions of this Deed cannot be fulfilled; Clause 11.1 The Company covenants with the Trustee that the Principal Moneys received by the Company in respect of the Issued Debentures (without limiting the Company's ability to invest or deal with any of its other moneys) will be invested by the Company in one or more of the following investments: (a) loans on mortgage of real property comprising freehold estates to third parties and/or Controlled Entities where: (i) subject to Clause 11.3, the Company is named as mortgagee in the mortgage; and (ii) in all cases the amount advanced under the mortgage does not exceed 70% of the value of the real property as certified by an Approved Valuer; Clause 11.2 The Company shall ensure that it maintains sufficient liquid assets, being no less than 3% of the value of the Issued Debentures at any time, to meet redemptions of Debentures from time to time.

7 Clause 12 of the Trust Deed lists events of "enforcement and default". These include the company failing to comply with any of the relevant provisions of cl 11. 8 By letter dated 1 August 2008 the Trustee gave Mr Koops notice pursuant to clause 12 of the Trust Deed that there had been a number of events of default under the Trust Deed. The letter alleged, inter alia, that LKM had breached the liquid asset requirement under cl 11.2 of the Trust Deed as well as the investments restriction under cl 11.1(a)(ii) of the Deed. The Trustee also alleged that LKM was insolvent within the meaning of s 95A of the Corporations Act and that it intended to appoint controllers of the mortgaged property. 9 According to Mr Rowland, ASIC commenced its formal investigation on 17 February 2009 following the receipt of the first report to debenture holders. Despite having been commenced almost a year ago it would appear that the ASIC investigation has not made a great deal of progress. Mr Rowland admitted that its main objectives were to allow the Receivers to carry out their role subject to ASIC being informed of their progress and the principal steps taken by them. In the course of the Receivers' investigation of LKM's affairs Mr Koops was examined in the Supreme Court of New South Wales for three days in May 2009. Mr Koops states that he gave extensive answers to questions at that time and has not been requested by either the Receivers or by ASIC to provide any further information since that date. 10 Mr Rowland asserts that on the basis of the investigation so far, he believed it was likely LKM had breached the Trust Deed and other relevant agreements and that "in each case these breaches were not reported to the Trustee as required". In Mr Rowland's affidavit and in oral submissions made to the Court, ASIC placed emphasis on the extent to which it believed that the loan to valuation ratio (LVR) of 70% required under the Trust Deed had been grossly exceeded. In support of this proposition ASIC pointed to allegations made by the Receivers in the statement of claim filed in support of the proceedings commenced against the first and second defendants in the Supreme Court of New South Wales. The statement of claim refers to a number of cases where LVR was between five and 10 times over the 70% limit. Mr Rowland also gave detail of other alleged breaches however it is not necessary to repeat all that detail here.

11 ASIC expresses concern that the defendants may have assets that could be made available to debenture holders and which might not be available if the defendants are permitted to leave the country before ASIC completes its investigation. Mr Rowland expressed concern about more than $7 million in dividends that had been paid by LKM in the last four years. ASIC wanted to know what had happened to that money. Mr Rowland also referred to various property sales, between 23 April 2009 - 14 January 2010, including the sale of the defendants' family home in Coffs Harbour which, he believed, might impact on the defendants' ability to satisfy claims on them. He stated in affidavit evidence that: I am of the belief that Koops and Martin have (since April 2009) taken steps to dispose of assets within Australia which may have the effect of reducing such incentive as they have to cooperate with proceedings issued in Australia. 12 The first defendant, on behalf of himself and Ms Martin, strenuously denies all allegations made by ASIC and by the Receivers. In his affidavit of 20 January 2010 he stresses that he has an unblemished record as a solicitor of the Supreme Court of New South Wales since 1986. He states that during this period he practised extensively in commercial law, banking and finance, corporate law and litigation and that he was an accredited business law specialist from about 1993 to about 2005. He states that during his period in practice as a solicitor he was required to operate trust accounts and never received any complaint or adverse comment by the Law Society in relation to those trust accounts. 13 He further states that in its eight years of operation "LKM received unqualified audit reports on every occasion and to the best of my knowledge there were no complaints by investors either to LKM or ASIC in relation to its operation or administration". Mr Koops attributed the failure of LKM to the extremely adverse economic circumstances in which LKM found itself, in particular at a time in which property prices and asset values diminished by 50% or more in a period of several months and the atmosphere of fear, confusion and complexity resulting from adverse media and policy statements by ASIC which resulted in the investing public losing confidence in debentures as an appropriate investment class in late 2007/early 2008. Mr Koops claims, and ASIC does not deny, that to date he has co-operated fully with the investigation conducted by ASIC and by the Receivers.

14 According to Mr Rowland the following additional tasks need to be undertaken to complete ASIC's investigation: (a) detailed analysis of documentation recently received and expected shortly from the Receivers; (b) interviewing further employees and possibly further investors; (c) making detailed enquiries of the Trustee; and (d) conducting examinations under section 19 of the ASIC Act of Koops and possibly the other directors of LKM. 15 Mr Rowland said it was difficult to estimate how long it will take to finalise the ASIC investigation. He also anticipated that the scope of the investigation might change as evidence is gathered in the course of the investigation. Mr Rowland says that his best estimate is that it will take ASIC "at least 4 months" to complete the tasks listed above and that the investigation would likely not be finalised until the end of May 2010. 16 The fact that ASIC is carrying out an investigation into conduct of the defendants that may constitute a contravention of the Corporations Act is sufficient to enliven the jurisdiction conferred by s 1323. I am satisfied that the retail investors in LKM who are likely to lose some or all of their investments as a result of the company's failure are persons to whom the defendants "may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise". They are "aggrieved persons" within the meaning of the section. It is for the Court in its discretion to decide if the orders sought by ASIC are "necessary or desirable" to protect the interests of the aggrieved persons. 17 It is, as others before me have remarked, a serious matter to interfere with a person's freedom of movement and such a step is not to be lightly undertaken; Australian Securities and Investments Commission; in the mater of Richstar Enterprises Pty Ltd v Carey (No 19) (2008) 65 ACSR 421 at 427 per French J. However, it is also a serious matter for the aggrieved persons that they should not be deprived of any opportunity to be compensated in one way or another should the defendants be found to be culpable for their loss. It is, as French J has commented, a matter of risk assessment and management. 18 On one hand ASIC has made comprehensive allegations against the defendants. The Receivers have commenced proceedings against them. It is not necessary, indeed it would be entirely inappropriate, for me to express any view as to the likelihood of the allegations made in the statement of claim being made out or ASIC's allegations being vindicated. I am however, prepared to accept that reputable receivers do not commence Supreme Court proceedings lightly. Similarly, I accept that, as a responsible statutory authority, ASIC does not pursue investigations such as this other than bona fide and does not lightly seek to interfere with an individual's freedom to travel. 19 In his affidavit of 20 January 2010, Mr Koops states that he has experienced significant difficulty in obtaining employment as a solicitor in Sydney since October 2009. Mr Koops submits that the reason for this difficulty is that he is considered an inappropriate candidate because of his involvement in a number of companies that are currently in receivership. Although ASIC was inclined to suggest that there were other avenues that Mr Koops could pursue, it is a credible submission. 20 Mr Koops claims, however, that he has been offered a position in the United Kingdom, as Chief Executive Officer of Backrow Productions UK Limited. According to Mr Koops, Backrow is partially owned by his sister, Liz Koops, and is a substantial enterprise promoting theatre entertainment worldwide. He says the opportunity is available to him because of his knowledge, experience and understanding of the entertainment industry which he has acquired over 20 years of acting as lawyer and advisor to Backrow. Mr Koops states that the position at Backrow Productions is intended to be for one year initially and will be extended for a further two years if successful. The starting date for this role, according to Mr Koops, is 2 February 2010. 21 Mr Koops has not offered any independent evidence of this offer from Backrow or of the alleged starting date. Conspicuous by its absence is any evidence, or indeed any submissions, as to the inflexibility or otherwise of the starting date. Given the family connection it is not unreasonable to suppose the starting date might be postponed, at least for a short time. If the position was only to be available if Mr Koops starts on 2 February one would expect the point to have been clearly made and supported by evidence from the company. In the absence of such evidence I have no reason to believe that the starting date is critical. 22 Mr Koops states that he has now been issued with a German passport and that his children expect to receive German passports shortly. There is no evidence as to whether Ms Martin is entitled to a German passport but there has been no submission or evidence to the effect that she would not also be entitled to remain in the UK with Mr Koops. It would seem therefore that the way is open for the whole family to remain in the UK indefinitely. There would be a powerful incentive to remain there if, ultimately, compensation (in some form or other) were to be required from the defendants. 23 In their respective affidavits both Ms Martin and Mr Koops have stated in the strongest terms that they have every intention of cooperating with ASIC in its investigation. Their conduct to date is consistent with this statement. They gave evidence to the effect that neither of them had ever disposed of any assets to avoid a possible judgment and that they would not attempt to evade their responsibilities. Ms Martin also noted that her family had invested approximately $1,000,000 in LKM debentures and that it "would be a matter of deep affront to my parents if I, or Rolf, were not to fully discharge our obligations arising from the affairs of LKM". Ms Martin describes the idea of leaving the jurisdiction to avoid the consequences of ASIC's investigation as "completely repugnant". The defendants have also offered ASIC an undertaking to return to Sydney for examination by ASIC at anytime on six weeks' notice. While I have no wish to doubt the sincerity of the offer it is true that such an unsecured undertaking could not provide ASIC with any security, as such an undertaking could be made alike by the honest and the dishonest. 24 Taking all of these issues into account, I have decided that appropriate risk management requires that I should make orders along the lines sought by ASIC. It should be clearly understood that, consistent with the statutory provision, the purpose of the orders is the protection of aggrieved persons in respect of compensation or other remedy to which they may in due course become entitled. Nothing in these reasons finds or implies that the defendants have been guilty of improper conduct. That is a matter that awaits the outcome of the investigation and such proceedings, including the Supreme Court proceedings, as may eventuate. 25 Although I have decided to make the orders I have, however, decided that the duration of the orders should be limited to 31 May 2010 or until further order. That is in line with ASIC's expectations as to the time required to complete its investigation. Given the onerous restrictions that the orders will place on the defendants, I do not wish to create a situation where ASIC has any temptation to adopt a leisurely approach to the investigation. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

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