Australian Securities and Investments Commission v Letten

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 95 of 2010

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: GORDON J DATE: 4 NOVEMBER 2011 PLACE: MELBOURNE

INTRODUCTION 1 On 25 February 2010, the schemes numbered 1, 4 to 9 and 13 to 16 in Annexure A to the Order made on 25 February 2010, were wound up pursuant to s 601EE(1) of the Corporations Act 2001 (Cth) (the Act). Also on 25 February 2010, Mr Damian Templeton and Mr Phillip Hennessy of KPMG (the Receivers) were appointed as joint and several receivers and managers of certain property of each of the second to sixteenth and eighteenth to forty-fifth defendants (the Corporate Defendants) and as joint and several receivers and managers of identified property of each of the schemes listed in Annexure A to the 25 February Orders (the Schemes) except for the scheme numbered 12: Australian Securities and Investments Commission v Letten [2010] FCA 140 (the 25 February Orders). 2 The 25 February Orders required the Receivers to file and serve a report in respect of, inter alia, the nature and identity of the property of each Scheme, any claims by third parties in relation to the property of each Scheme, and the identities of investors and the nature of their investment (the Disclosure Reports). 3 On 13 April 2010, the Receivers filed Disclosure Reports in relation to the Schemes except for the Schemes numbered 6, 15 and 16. The Disclosure Reports for the Schemes numbered 6, 15 and 16 were filed on 28 April 2010. 4 By order made on 30 July 2010 (the 30 July Orders), the Receivers were also appointed joint and several receivers and managers of certain property of five additional schemes, being the Schemes numbered 17 to 21 (the Additional Schemes). The Receivers were also appointed as joint and several receivers and managers of identified property of each of the forty-sixth to fifty-fourth defendants. The Schemes numbered 19, 20 and 21 were wound up pursuant to s 601EE(1) of the Act. Disclosure reports for the Additional Schemes were filed on 30 August 2010. 5 The Disclosure Reports reported on, amongst other things: 1. the nature and identity of the property of the Schemes and the Additional Schemes; 2. the claims of third parties in relation to the property of the Schemes and the Additional Schemes; and 3. the identities of the investors and the nature and extent of their interests in the Schemes and the Additional Schemes. 6 On 13 May 2011, the Australian Securities and Investments Commission (ASIC) sought orders, and orders were made, pursuant to s 461(1)(k) of the Act that the second to sixth, ninth, tenth, sixteenth, eighteenth to twentieth and forty-sixth to fifty-fourth defendants be wound up.

CURRENT APPLICATION 7 ASIC now seek orders pursuant to s 461(1)(k) of the Act that the seventh, eighth, eleventh to fifteenth (inclusive), the twenty-first to forty-fifth (inclusive) defendants be wound up. ASIC relies upon the Further Amended Originating Process it filed on 30 July 2010. I am satisfied that notice of the application, together with the supporting material, was served on all relevant parties and stakeholders or their legal advisers by no later than 26 October 2011. 8 No one has objected to ASIC's applications. 9 Notices of the filing of an application for the winding ups (Form 519 of the Corporations Regulations) have been lodged and an Affidavit of Lodgment has been filed. In addition, an advertisement of the application has been published and a memorandum of the advertisement has been filed. There is, however, a problem with the advertisement. 10 Section 465A(c) of the Act requires that where a person applies under ss 459P, 462 or 464 of the Act for a company to be wound up, he or she or it must advertise the application as prescribed by the relevant Court rules. Rule 5.6 of the Federal Court (Corporations) Rules 2000 (the Rules) provides that unless the Court otherwise orders, the plaintiff must publish a notice of the application for an order that a company or companies be wound up. The notice must not only be in accordance with Form 9 but be published in accordance with r 2.11 at least three days after the originating process was served on the company and at least seven days before the date fixed for hearing of the application. In the present matter, the notice ought to have been published on or before 27 October 2011, but was not published until 28 October 2011. 11 Rule 1.10 of the Rules provides that unless the Act, the Australian Securities and Investments Commission Act 2001 (Cth) or the Rules otherwise provide, the rules of the Court that provide for the extension or abridgment of a period of time fixed for the doing of any act or thing in relation to a proceeding apply to a proceeding to which the Rules apply. 12 Rule 1.39 of the Federal Court Rules 2011 (the Court Rules) provides that the Court may, at any stage of a proceeding, by order of the Court extend or shorten a time before or after the time expires, and whether or not an application for extension is made before or after the time expires. Moreover, r 1.32 of the Court Rules provides that the Court may make any order the Court considers appropriate in the interests of justice. ASIC submitted, and I accept, that the error in respect of advertising the application ought not to prevent the Court winding up the companies, if the Court is otherwise satisfied that it would be just and equitable to do so, for the following reasons: 1. Pursuant to s 467A of the Act, an application for winding up must not be dismissed merely because of a defect or irregularity in connection with the application, unless the Court is satisfied that substantial injustice has been caused that cannot otherwise be remedied. 2. The notices and advertisement pursuant to s 465A of the Act are part of "a proceeding" within the meaning of s 1322(2) of the Act, and the winding up application in respect of the companies is not invalidated merely because of a procedural irregularity. 3. The problem with advertising the application is a defect or irregularity, and no injustice has been caused because the advertisement was only one day late, and a week's notice has effectively been given; the application has been served on the relevant interested parties and there has been no indication that the application for the winding up of the companies is opposed. In those circumstances, ASIC submitted and I accept that it would not be just to declare the proceeding to be invalid, but rather no injustice is or would be caused by the late advertising of the applications.

ANALYSIS 13 Against that background, I turn to consider whether each of the named defendants should be wound up pursuant to s 461(1)(k) of the Act on the grounds that it is "just and equitable" to do so. Before turning to consider the applicable principles, it is necessary to address ASIC's standing to make the application. Under s 462(2)(e) of the Act, ASIC may apply for an order to wind up a company in connection with an investigation under the Australian Securities and Investment Commission Act 2001 (Cth). I am satisfied that these proceedings were commenced as a result of an investigation conducted by ASIC: see Australian Securities and Investments Commission v Letten [2010] FCA 140. 14 What then are the principles relevant to an application under s 461(1)(k)? The principles were summarised in Australian Securities and Investments Commission v Letten (No 10) [2011] FCA 498 at [12] - [15] as follows: … [U]nder s 461(1)(k) of the Act, the Court may order the winding up of a company if the Court is of the opinion that it is just and equitable that the company be wound up. The categories of circumstances that satisfy the just and equitable ground are not closed or rigid: Australian Securities and Investment Commission v Storm Financial Ltd (2009) 71 ACSR 81 at [65] and Re Westbourne Galleries Ltd [1973] AC 360. In the past, orders under s 461(1)(k) of the Act have included cases: 1. where, on application by a public authority, it is in the public interest that a company be wound up because there is a 'justifiable lack of confidence in the conduct and management of the affairs of the company': Australian Securities and Investments Commission v Green Pacific Energy Ltd (2006) 59 ACSR 142 at 181 [137] to [139]; 2. where the winding up will serve to protect investors: see Australian Securities and Investments Commission v Pegasus (2002) 41 ACSR 561 at 579 [96] to [98]; and 3. the affairs of the company have been conducted in a way which demonstrates a lack of probity productive of a justifiable lack of confidence in the administration of the company, or where there has been misconduct or illegality in the conduct of the affairs such as it is in the public interest in the protection of investors that the company be wound up: Loch v John Blackwood Ltd [1924] AC 283 at 788; Australian Securities Commission v AS Nominees Pty Ltd (1995) 62 FCR 503 at 530-533; Australian Securities and Investments Commission v ABC Fund Managers Ltd (2001) 39 ACSR 443 at [116]-[129]; Deputy Commissioner of Taxation v Casualife Furniture International Pty Ltd (2004) 9 VR 549 at [449]-[464]; Australian Securities and Investments Commission v International Unity Insurance Pty Ltd [2004] FCA 1059 at [135]-[139]; Australian Securities and Investments Commission v West (2008) 66 ACSR 143 at [140]-[160]. It is now well established that in determining whether to make an order for the winding up of a company on the just and equitable ground, the Court must itself evaluate the factual matrix in order to form a view as to whether a sufficient reason for making the order is demonstrated: Australian Securities and Investments Commission v Green Pacific Energy Ltd (2006) 59 ACSR 142 at 181 [139]. In Australian Securities and Investments Commission v Storm Financial Ltd (2009) 71 ACSR 81 at 109 [67], Logan J observed: That Parliament intended that ASIC would act as a scrutineer of the public interest in a case like the present is evident from s.1(2)(a) and (b) of the Australian Securities and Investments Commission Act 2001(Cth), which materially provide that it is to strive to: (a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty ...; and (b) promote the confident and informed participation of investors and consumers in the financial system. 15 In the present case, the evidence demonstrates that the seventh, eighth, twelfth to fifteenth (inclusive) and twenty-first to forty-fifth (inclusive) defendants operated an unregistered management investment scheme or schemes that was or were required to be registered under s 601ED(1) of the Act. This is a contravention of s 601ED(5) of the Act which gives rise to an offence under s 1311 of the Act: see Sch 3 item 163. The eleventh defendant, LGH Finance Pty Ltd, is in a different position. Its role was limited. In the Disclosure Report filed by the Receivers on 9 June 2010 in relation to the "LGH Companies", its role was described as follows: It appears that [LGH Finance Pty Ltd's] only role was to hold units in the Reef House Unit Trust on behalf of investors in the Reef House Resort. Therefore the solvency of [LGH Finance Pty Ltd] depends on whether investors in the Reef House Resort have any direct claims against [LGH Finance Pty Ltd] and, if so, the outcome of the realisation of the assets of the Reef House Resort after the payment of the outstanding bank debt. The realisation of the assets of the Reef House Resort and the financial position of LGH Finance Pty Ltd after the payment of the outstanding bank debt were addressed in Australian Securities and Investments Commission v Letten (No 4) [2010] FCA 571 (the power of sale) and Australian Securities and Investments Commission v Letten (No 8) [2010] FCA 1458 (approval of the sale). The proceeds of sale were insufficient to meet the outstanding bank debt. 16 ASIC therefore submits and I accept that the seventh, eighth, eleventh to fifteenth (inclusive) and twenty-first to forty-fifth (inclusive) defendants should be wound up under s 461(1)(k) of the Act because: 1. In contravention of s 601ED(1) of the Act, these companies operated an unregistered management investment scheme or schemes that was or were required to be registered under the Act; 2. These companies owe investors large sums of money in principal and capital gains in circumstances where investors have good contractual claims to these moneys and these companies are either no longer trading or with no real prospect of these companies continuing their former business; 3. These companies formed part of a web of companies whose combined operations raised substantial sums of money from investors for the purpose of investing in commercial and/or retail property joint venture projects which were required to be registered as managed investment schemes under the Act but were not registered; 4. The manner in which these companies raised funds, in particular the lack of disclosure has resulted in investors being misled as to the true nature of the application to be made of the funds and the risks associated with their investment; 5. These companies misapplied investors' funds without the knowledge and consent of investors to other joint venture projects and to such non-investment purposes as to other related companies and persons of these companies; 6. The properties acquired by these companies with the funds received from investors have been sold; and 7. There is no good reason to maintain the registration of these companies. 17 In those circumstances, the Court is justified in making each of the winding up orders sought by ASIC. I therefore propose to make an order that each of the seventh, eighth, eleventh to fifteenth (inclusive) and twenty-first to forty-fifth (inclusive) defendants be wound up pursuant to s 461(1)(k) of the Act, and that Damian John Templeton and Philip Hennessy of KPMG be appointed as joint and several liquidators of each named defendant. 18 It is appropriate that ASIC's costs of this application be taxed and reimbursed in accordance with s 466(2) of the Act. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.