Australian Securities Commission v AS Nominees Ltd

REASONS FOR JUDGMENT 1 The applicant ("ASIC") has applied under s 461(k) of the Corporations Law for an order that the respondent ("Austimber") be wound up on the "just and equitable" ground. 2 The applicant has filed the material upon which it relies, including the report of Mr Paul Pattison who was appointed as the provisional liquidator of the respondent. 3 The application is put on several grounds. First, there was a breach of the prescribed interest provisions of the Corporations Law that has continued. The second is that the company is insolvent. Finally, misleading and deceptive conduct in the conduct of the affairs of the company has been relied upon. 4 I requested that counsel address me on the insolvency and misleading conduct grounds, as if those grounds were clearly established, it would be unnecessary and, in the absence of a contradictor, inappropriate that I consider whether the prescribed interest provisions have been breached. Plainly, there is an arguable issue about breach of the prescribed interest provisions, however, it seemed to me that in the absence of full and proper argument on the matter it is preferable that I not determine that issue as it could affect the rights of third parties. In the events that have occurred I have not found it necessary to decide this matter on the basis of breach of the prescribed interest provisions. 5 Reliance on the just and equitable ground by a regulatory authority, such as ASIC, was considered by Finn J in Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504. His Honour (at 530-533) discussed the case law in respect of a winding up order on the just and equitable ground, which has been relied upon where it is appropriate for investor protection, where there are regular or repeated threatened breaches of the Corporations Law and also where there has been mismanagement or misconduct in the conduct of the affairs of the corporation. There has been a long-standing resort to the just and equitable ground in similar circumstances, see Re Chemical Plastics Ltd [1951] VLR 136 at 142 and Re Producer's Real Estate and Finance Co Ltd [1936] VLR 235 at 246. In the latter case Mann CJ said that it was appropriate to wind up a company on the just and equitable ground where a company's business cannot be carried on consistently with candid and straightforward dealings with the public, from whom further capital must be obtained if the company's existence is to be prolonged. 6 I turn to consider the grounds relied upon in the present case. First, in relation to the evidence as to insolvency, the provisional liquidator Mr Pattison has given a fairly detailed report in respect of the solvency of the company. In substance his report, even on the directors' estimated realisable value of the assets, shows a deficiency of some $80,000. However, more relevant for the present purposes is Mr Pattison's estimate of the company's financial position as at December 1998, the date of his appointment. The total assets of the company were said to be of a value of $179,000, creditors $308,000, with an estimated deficiency of $129,000. 7 Mr Pattison also assessed the future trading prospects of the company and considered that there would be a negative cash flow, and added in his report that the shortfalls in cash flow would occur without taking into consideration his concerns about the collectability of accounts receivable. In those circumstances Mr Pattison considered that Austimber is, and will continue to be, insolvent. No material has been filed on behalf of the respondent, notwithstanding orders directing it to do so, which contradicts or challenges the evidence put forward by Mr Pattison. In those circumstances I am satisfied that the company is insolvent and that if trading by it were allowed to continue it would engage in insolvent trading in contravention of s.588G of the Corporations Law. 8 The second ground relied upon relates to misleading and deceptive conduct. The material supports the case put forward by the applicant in its outline of argument. However, I am content to rest my decision in the present case on two particular aspects of the conduct of the business of the company. 9 The first relates to the land identified as being the subject of the franchise business conducted by it. In the affidavit of Alfonse Joseph Thomas De Roza sworn 16 December 1998, which was relied upon by the applicant, evidence was adduced as to two matters relating to the land, which is also supported by the report of Mr Pattison in respect of the same matters. Mr Pattison's summary of the matters which is supported by the evidence, is as follows: "The company sold 196.5 wood lots up until 30 June 1998 and of this total 10 wood lots were sold in the financial year ending 30 June 1997. Attached to the report is a list of 109 franchisees who purchased the wood lots in the project. Although the company sold 196.5 wood lots, that's hectares, it currently has only about 125 hectares available to it to commence planting. The other 20 hectares of the land it currently leases from Austimber Properties Pty Ltd is not suitable for planting. I'm advised by the directors there was no upper limit on the number of wood lots to be sold and at the date of the report it is over-subscribed as the number of wood lots sold exceed the land currently available. To overcome the shortage of land and to remedy the overselling of wood lots Austimber Properties Pty Ltd intended to lease further land in close proximity to the first plantation site. As at the date of this report the additional land has not been acquired. I have inspected the property at Combienbar and noted that it was undulating land, cleared areas of grass and patches of native trees scattered throughout the land. I've conducted some limited property maintenance but no significant work has occurred since my appointment. The allocation of wood lots to the franchisees has not occurred as yet. The company has prepared a draft plantation plan and I'm advised by the directors they intend to place markers at 100-metre intervals around the perimeter of the land. These markers will be coded and franchisees will be issued with certificates with the coded grid reference for each wood lot. On information presently available a franchisee would not be able to identify the boundaries of their specific wood lot once they moved towards the centre of the plantation." 10 The effect of the evidence is that there has been an over‑subscription by franchisees of the land available, which means there has been a doubling up. Secondly, the land that was advertised as being the land the subject of the franchises has not transpired to be the land which in actual fact is franchised. Thirdly, it appears that notwithstanding that money is said to have been advanced for the maintenance and management of the land and the planting of trees, apart from some minor clearing, no tree planting has occurred. 11 It seems to me that, putting it at its best in favour of Austimber, there is a serious risk that investors are likely to be misled and deceived if any further trading on these terms is allowed to occur. I am also satisfied that what has been disclosed in the evidence before me constitutes serious misleading and deceptive conduct on the part of Austimber, which has established the enterprise in the manner it has, without having a proper basis for doing so. 12 The second matter which I regard as extremely serious in relation to misleading and deceptive conduct, is the evidence before me as to the issue of false or incorrect receipts by Austimber. The scheme in respect of plantation of trees for franchisees is obviously one that was tax driven. The evidence in Mr De Roza's affidavit makes it quite clear that receipts have been given in fairly significant amounts to a number of investors for the purpose, it would appear, of claiming tax deductions. Yet the records of the company, in respect of persons from whom the money was meant to have been paid and who were issued with receipts, disclose not only that no money was paid but that the moneys said to have been received are still shown as receivable. 13 It seems to me that the company's conduct in that regard, particularly with the obvious implication that it was for the purpose of granting tax deductions, is one that might be said to be fraudulent. I need not go that far but I am quite satisfied, using the words of Mann CJ, that this is a case where the company has not carried on its business with candid and straightforward dealings with the public. 14 I am satisfied that the insolvent trading that would occur if the company were allowed to carry on its business and the serious misleading and deceptive conduct it has engaged in, and would continue to engage in if these franchises were allowed to continue to be marketed and sold to the public, constitute grounds why it is appropriate that the company be wound up