Australian Securities Commission v AS Nominees Ltd

REASONS FOR JUDGMENT Under s 588FF of the Corporations Law a court, on the application of a company's liquidator, is empowered to make a variety of orders if it is satisfied that a transaction of the company is voidable because of s 588FE. The time limited for bringing such an application is within three years after "the relation-back day" - for present purposes that being the day on which the application for the winding up order was filed - or within such longer period as the court orders on the application of the liquidator "within those 3 years": s 588FF(3). On 27 July 1995 the Australian Securities Commission applied to this court under s 462(2) of the Corporations Law for winding up orders against Ample Funds Ltd ("Ample") and AS Nominees Ltd ("ASN"). These companies conducted businesses as trustees respectively of unit trusts and superannuation trusts: see generally Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1. Winding up orders were made on 17 November 1995 after a twenty-one day trial conducted episodically over four months. The present applicant was then appointed liquidator of both companies. Mismanagement and impropriety on a large scale were revealed in those proceedings. Beneficiary investors in the various trusts have sustained heavy losses. The subsequent unravelling of the affairs of the companies - they were inextricably interwoven - has proved to be a formidable problem for reasons it is unnecessary to enlarge upon here. The present application is for an extension of time under s 588FF(3) in respect of one of the transactions I considered in the winding up proceedings. It involved the transfer of a mortgage by Ample to Woden Constructions Pty Ltd ("Woden"), Woden being a creditor of ASN in respect of a debt in default. Woden I should add was a construction company, though, from the period 1993 to 1995 it became ASN's financier. It is convenient simply to narrate extracts from my earlier judgment to explain the setting in which the transaction in question took place. It was referred to in the principal proceedings as the "fourth Woden loan". I should note that in what follows (i) "SIP1" was the name of one of ASN's trusts; (ii) Napper was, at the relevant times, chairman of both ASN and Ample and was Woden's solicitor through his firm in Canberra; (iii) Cahill was likewise a director, and also the accountant of both companies; (iv) Windsor, though not formally a director of either company, dominated the AS group of companies of which the present two were part; and (v) Sutherland, a solicitor in private practice, was a director of Ample and ASN. 1. "Fourth Woden loan On 14 February 1995 a loan of $300,000 was made to SIP1. Coupled with this loan was a charge over the assets of ASN. The charge is dated 22 February 1995. Napper on behalf of Woden lodged it with the ASC on 3 April 1995. This loan was needed, according to Cahill, because of Windsor's failure to repay the Constant loan. The associated charge over all of ASN's assets to secure this loan was not considered by Cahill to be excessive. The justification given by Cahill for using Woden as a lender (it not being a financial institution) was that it was more flexible than a bank and did not charge the usual bank fees. The latter is not surprising given the interest rates it charged. The prevailing Reserve Bank rates at the times of these loans have been put in evidence. At the time of the first Woden loan that rate was between 9.4 and 9.5 per cent. The Woden rate was 15 per cent. As to the second Woden loan, the prevailing rate was between 8.95 and 9.5 per cent. The Woden rate was 20.5 per cent. The prevailing rate for the third Woden loan was unchanged from the time of the second. The Woden rate was 14 per cent. For the fourth loan the prevailing rate was between 10.6 and 11.5 per cent. The Woden rate was 13 per cent on compliance and 15 per cent on default. Cahill in cross examination did not accept that the higher rates made the loans unsound or that (taking into account bank charges) they would still have been substantially higher than borrowing from a bank. He denied that the pattern of higher interest rates and lack of security (save for the last loan) indicated that Woden was a lender of last resort." Australian Securities Commission v AS Nominees Ltd, above, at 40. 2. "Transfer of the Ample mortgage The manner in which this transaction was effected gives reason for some concern. (a) Facts As has been seen, on 22 February 1995 SIP1 borrowed $300,000 from Woden repayable on 1 May 1995 (the Fourth Woden loan). That loan was not repaid and remains in default. On 16 June the corporate respondents were served with the first application in this matter (the s1323 proceedings). At a time which Sutherland could not recall exactly (but which was before 20 June and, it is the better view, after the proceedings were served), Napper advised ASN that his client, Woden, was considering appointing a receiver under the charge given it as security for the loan. No written threat was received from Woden that it would take this action. The board of ASN resolved to placate Woden by granting it a sub-mortgage over the Tristania Road property, the subject of the mortgage given to Ample in the Constant loan. On 19 June 1995 Sutherland obtained a precedent mortgage from agents in Queensland. The precedent was used to prepare a mortgage in Woden's favour, of Ample's interest as mortgagee of the property. Napper prepared the form. It was executed on 20 June 1995 by Ample (the "sub-mortgage"). Executed on the same day was a guarantee by Ample in Woden's favour of ASN's debt limited, though, to money owing to Ample under its mortgage from Constant. On 20 June, as noted previously, Windsor sacked the Ample board. On 21 June, Sackville J made orders and received undertakings the effect of which were to restrain the respondents from dealing in any way with their property (including trust property) until further order, subject to exceptions of no present relevance. This precluded any disposal of Ample's or ASN's interest in the mortgage over the Tristania Rd property. A Brisbane solicitor, Mr Meiklejohn, advised Napper by fax on 27 June 1995 at 10.33am that the sub-mortgage could not be registered. I am informed that the reason for this was that legislative changes in Queensland in 1994 precluded this method of dealing with mortgages. At 2.45pm on the same day Meiklejohn faxed Napper a precedent Form 1 Transfer of Mortgage "as requested". This form, I am prepared to infer, was used by Napper (or at his direction) to draft a Transfer of Mortgage. This was engrossed and executed. It is dated 20 June. Sutherland sent it to law stationers in Brisbane for registration with a covering letter dated 28 June 1995. Sutherland denied that the document was backdated. Nonetheless I find that his recollection of the sequence of events points to execution on 27 June. He did not advance any evidence to contradict the applicant's case of backdating. In my view, the facts in this point strongly to execution on 27 June. Given (a) that the Transfer was prepared by Napper; (b) that a convincing alternative explanation is required if that date is not to be found the date of execution; and (c) that Napper has not given evidence, the fair inference to be drawn is that the Transfer was backdated. I draw that inference. I would note that both Cahill and Sutherland deny that the additional security was given to Woden as a result of these present proceedings. I would also note that the Transfer is signed by Napper and Sutherland under Ample's seal. They were not directors of Ample on 27 June." Australian Securities Commission v AS Nominees Ltd, above, at 49. It is the above transfer that the liquidator is considering challenging and for which he seeks an extension of time to 17 November 1998. The only additional fact I need note of the anterior loan transaction was that, as with the earlier Woden loans, it was proposed to Woden by Napper who simultaneously was acting as Woden's solicitor. This application is opposed by Woden on the dual grounds that the liquidator has no prospects of impugning the transaction and that he has not provided adequate reasons for the grant of an extension of time. There is some justice in the complaint made about the adequacy of reasons given by the liquidator in his affidavit and I was minded, but in the event decided not, to require a further affidavit to be put on by him. The difficulty in the material before me arises in this way. After the winding up orders there has been a series of applications and proceedings before me involving in some instances issues of astonishing complexity (brought about by the manner in which the businesses were conducted and the astonishing lack of, or else unreliability of, records kept) in which the liquidator has been involved directly or indirectly. I have been required in consequence to acquire a familiarity with the financial circumstances of the companies and their trusts and with the enormous evidentiary difficulties that confront any examination of the affairs and dealings of the companies. The liquidator's affidavit, while referring to matters of subsequent history and of his involvement in other proceedings, to his financial difficulties, to his evidentiary problems, etc has done so in a way that virtually presupposes a knowledge of what has transpired since liquidation. Despite the assertion by counsel for the liquidator that my judgment in the winding up proceedings and then subsequent actions are for the most part matters of public record, it is fair to say that a person reading the affidavit without actual knowledge of what has transpired would not find particularly convincing or illuminating what he has had to say by way of explanation of why the bringing of a challenge to the mortgage transfer was not decided upon earlier or why an extension was necessary. This is regrettable. I raised with counsel for the respondent the difficulty I felt given the differential knowledge between us. A further affidavit was not insisted upon. With some misgivings I am prepared to treat that filed by the liquidator as adequate - though barely so - to explain why proceedings have not been brought with the three year period: Oates v Attorney-General (Cth) (Cth) (1998) 156 ALR 1 at 7. It indicates, albeit in generalities (a) the complexity of the affairs of the companies and the gross deficiencies in records; (b) the lack of assets in the companies and hence lack of financial resources to fund an investigation into the Ample transfer; (c) importantly, the need to obtain, and the time lag involved in obtaining, financial backing for the investigation; (d) the place of this event in the web of matters in respect of which legal proceedings could be considered and on which advice was necessary; (e) the other proceedings that have already been brought; and (f) the course he is now taking in having a s 596A examination of Mr Napper for the purpose of obtaining further evidence. The remaining question concerns whether the circumstances are such that any challenge would be so devoid of prospects that it would be unfair to allow the liquidator an extension, or to expose the other party to the continuing prospect of suit. The applicant has done little in this application to elucidate the basis of his possible claim beyond indicating it would be to seek orders under s 588FF(1). The respondent contends that Ample held the mortgage for ASN by virtue of a declaration of trust in the latter's favour of 5 November 1992. In consequence, the mortgage was beneficially the property of ASN and ASN had previously changed its property to Woden for value in any event. In the winding-up proceedings the evidence before me was that the mortgage was executed as part of a loan transaction involving another AS Group company, Constant. As stated in my reasons, 133 ALR at 33, in the Constant loan: "the moneys were advanced from SIP1, an ASN trust. None the less all the documentation, including the mortgage that was executed and registered to secure the loan, showed Ample as the lender. If this was a mistake, as the respondents allege, there is no explanation for it. A declaration of trust was executed (the actual date of this is in dispute) under which Ample declared itself to be trustee of the mortgage for ASN. There are no records in the minutes of Ample or of ASN of the decisions (i) to lend money to Constant; (ii) to extend the term of the loan to 12 months; or (iii) to execute the declaration of trust." Given what is known of the alleged provenance and accuracy of documents of these companies from the principal proceedings - the veracity of information in the mortgage transfer document itself illustrates this: see 133 ALR at 49-50 - inquiry into the authenticity of the declaration of trust can properly be said to be not unreasonable. And if the declaration is be impeachable, a challenge to the transfer based on s 588FE would itself seem a course reasonably to be investigated. The extension the liquidator seeks is not for the purpose of bringing proceedings but for putting himself into a position where he properly can decide whether or not to do so. I emphasise that for this reason. In a case of the present variety it would ordinarily be appropriate for the court in exercising its discretion to have some regard to the merits of the application to be made. In this, an application of the present variety differs somewhat, in my respectful view, from an exercise of ministerial discretion under s 1316 of the Corporations Law, see Oates v Attorney-General (Cth) (Cth), above, at 8; cf Hunter Valley Development Pty Ltd v Minister for Home Affairs and Environment (1984) 58 ALR 305 at 311. But a merits inquiry, even of a preliminary character, may not always be necessary. Where the liquidator is not in the position to consider the merits but has proper grounds for inquiring into the matter because of suspicion it invites (or that is cast on it) or of the explanation it requires, then provided he can satisfactorily explain his delay in inquiring sufficiently into the matter, he should not be closed out from an extension because he is unable to say he has a meritorious claim. In some instances, as here, it will be sufficient if he can say "I do not know if I do, but there is reason to inquire". In saying this I bear in mind in particular the purpose and objects of the provisions of the Corporations law with which s 588FF is concerned - to prevent the depletion of a company's assets: see Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548. It is appropriate to have regard to that policy (amongst others) as a factor relevant to the exercise of the discretion given by s 588FF(3). Finally, I would note that despite the countervailing policies that inhere in limitation periods (particularly as here ones that extend into years: see Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 555) there is no evidence before me of likely actual prejudice resulting from the grant of an extension. I will allow the extension sought despite my misgivings about the affidavit material put on. It is appropriate, though, that the liquidator pay the costs of Woden. More revealing material may well have produced no opposition to the application. I will make orders accordingly. I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn