Affidavit of Karen Sandra Carey
90 Karen Sandra Carey, also known as Karen Sandra Carey-Hazell, is the sole director of Richstar, Bowesco and Keypoint. Mr Carey is the sole director of Westpoint Realty, Silkchime and Healthcare. Ms Carey-Hazell says she is authorised by Mr Carey to swear her affidavit on behalf of those companies of which he is a director and also on behalf of Mr Carey himself. Ms Carey-Hazell confirmed the statements made by Mr Carey in his affidavit of 14 December 2006 in relation to the ASIC investigations. She then set out the nature of the business which she said was operated by each of the corporate defendants. A table embodied in her affidavit set out the current status of the corporate defendants. Richstar, Westpoint Realty, Redchime and Keypoint all have Court appointed receivers. Bowesco has a privately appointed receiver as does Healthcare. Silkchime had no Court appointed receiver at the time of swearing of her affidavit. Since then Westpoint Realty has appointed an administrator.
91 Ms Carey-Hazell referred to the orders made in relation to the companies and then proffered an explanation of delays that may have occurred in fulfilling the obligations of the corporate defendants. She said that the corporate defendants delivered their books and records to the corporate receivers. She also said that since the end of May 2006 the corporate receivers have had an electronic copy of the Triumph Accounting System which stores all of the financial books and records for each of the corporate defendants.
92 Ms Carey-Hazell reflected on the conduct of the receivers. She accused them of exceeding their function which was limited to identifying, preserving and securing the assets of the corporate defendants. Rather, she said, they had in effect operated and run the businesses of the corporate defendants. Their conduct had obscured, slowed, and at times, prevented the corporate defendants from operating in the ordinary course of business. She said that Keypoint, Redchime and Healthcare are now dormant in their activities and that Westpoint Realty is subject to insolvency accusations. It is worth pointing out in this context that Healthcare does not have a Court appointed receiver. Its receiver is privately appointed. Westpoint Realty, as noted earlier, has subsequently appointed an administrator.
93 Ms Carey-Hazell claimed to have experienced difficulties in communicating with the corporate receivers. She accused them of adopting an aggressive and overpowering manner towards her efforts to build a reasonable working relationship with them. She pointed to what she called decisions or delays in making decisions by the corporate receivers that had caused loss to, or hampered the corporate defendants in the conduct of their business. She set out a list of examples of losses which she said had made dealings with the corporate receivers difficult and costly. There were delays in the payment of wages for employees of Westpoint Realty, Keypoint and Richstar. The corporate receivers had refused to honour a loan agreement between Keypoint and Richstar. She exhibited Keypoint's writ issued in the Supreme Court of Western Australia against Richstar claiming approximately $9 million by way of damages. Some of Ms Carey-Hazell's complaints related to the conduct of the private receivers of Bowesco and Healthcare.
94 Her affidavit then turned to the Receivers' Report which was exhibited to Mr McMaster's affidavit and which has already been outlined. In relation to the delivery of books and records she repeated what she had said earlier in her affidavit. She also took issue with the contention that there had been a deletion of the computer records. Because of difficulties with a computer server files were transferred under her instructions to a stand alone computer so that the pre-existing network which was crashing could be restored. When the transfer occurred the relevant server, presumably the Redchime server, recorded the files transferred as deleted. Ms Carey-Hazell denied that they had been deleted. They had merely been transferred and stored on another device. She said that Mr McMaster had at no time raised with her the issue of the transferred files. The first time she became aware that there was an issue was when he raised it in these proceedings. Had he simply asked her about the files she could have provided him with a CD Rom with the files on them. This could have been done within a matter of hours. She asserted that the reconstruction of the allegedly deleted files by the corporate receivers was unnecessary.
95 Ms Carey-Hazell dealt with claims of legal professional privilege. In that context she asserted that the Court appointed receivers had a conflict of interest because in several instances they were also the receivers and managers of entities with competing claims.
96 On her alleged failure to cooperate, Ms Carey-Hazell repeated what she had said in relation to the delivery up of documents. She denied that there had been any attempts to try to coerce the receivers to adopt certain courses of action. She said that the allegation that there had been no cooperation and that the corporate defendants had been confrontational with a disregard for the orders and the authority of the receivers, was surprising and concerning.
97 Ms Carey-Hazell offered responses to particular allegations relating to the transactions involving Richstar, including the employment of staff by it allegedly without the prior approval of the receivers. She dealt separately with allegations relating to Westpoint Realty and Redchime. She referred to a loan from Westpoint Corporation to pay for her legal fees in relation to a tort claim she brought in the Federal Court arising out of a heart operation. She said that she had provided security to Westpoint Corporation by way of mortgages over her personal properties. At the conclusion of the proceedings which were unsuccessful, she sold the properties and repaid the loan to Mr Carey. In or around 2004 she reached an agreement with Mr Carey under which Westpoint Corporation would forego the balance owing by her under the loan and she would transfer the right of Westpoint Corporation to tax the costs of the various solicitors and retain her funds received.
98 Ms Carey-Hazell dealt with allegations relating to Bowesco and the transfer of $1.15 million to it. She said that there were actually nine transactions from 1 July 2005 to 15 December 2005. Bowesco lent Westpoint Corporation $2,850,000 and Westpoint Corporation repaid Bowesco $2,106,932.99 pursuant to a charge. This demonstrated, she said, that Bowesco lent Westpoint Corporation $744,067.01 in excess of the funds repaid. This, she said, refuted the allegations of Messrs Turton, Gomm and Zohar that the transactions were done to deprive Westpoint Corporation of assets at a time when it was expected to go into external administration. She also denied that the repayment was made from funds belonging to the Mezzanine Companies. This relied on the assumption that the only source of funds into the Westpoint Corporation bank account were mezzanine funds. She said this was not supported when the cash deposits from Bowesco to Westpoint Corporation were considered.
99 Ms Carey-Hazell dealt with allegations concerning Richstar and in particular the transfer by Westpoint Corporation of $1,370,000 to Richstar and its loan of $1,891,268. The former transfer, she said, was pursuant to a loan agreement under security to facilitate a property development by Richstar's subsidiary, Lanepoint. The $1,891,268 loan to Richstar was made in order to enable it to purchase a property at Point Piper. Ms Carey-Hazell referred to the company Renaissance Mezzanine. She said that Rold Corporation had entered into a debenture with Renaissance Mezzanine for $1.5 million in around September 2005. It was a condition that funds would be repaid on demand. Rold Corporation demanded repayment of the $1.5 million in December 2005 and that amount was repaid ".. using the Westpoint Corporation central treasury function".
100 Ms Carey-Hazell made some general contentions about the effect of the involvement of the receivers. She said that it had resulted in a curtailment of the businesses of the corporate defendants and had impacted on the profitability and sustainability of those businesses. She said that the corporate defendants had suffered loss and damage and that their assets had been diminished. She set out a table which she said illustrated the position of the corporate defendants before the Receiver Orders as against their current position.
101 Ms Carey-Hazell set out figures relating to the costs of receiverships or external administration of some 33 entities within the Group. She observed that KordaMentha had been appointed to 15 of them. The relevance of this material was not clear. Presumably it meant to support a proposition that there are uneconomic costs associated with the use of Court appointed receivers.
Affidavit of Gregory John Nairn sworn 14 December 2006
102 Mr Nairn worked in the role of General Manager-Special Projects in the Westpoint Group from 7 April 2004 until July 2005 when his title changed to General Manager-Financial Accounting. After the collapse of the Westpoint Group on 23 January 2006 he was retained for a short period by KordaMetha to assist them with their inquiries. He had been released by KordaMentha on 10 March 2006 and since then had worked for Mr Carey for a total of five days.
103 Mr Nairn referred to recording arrangements within the Group. He talked about the difficulties of getting access to books and records seized by ASIC and gave general responses to allegations contained in the ASIC affidavits. He asserted that to his knowledge there was never any attempt to dissipate assets or transfer assets outside the reach of creditors or to defraud creditors. He was not aware of any transactions that related to the acquisition of private assets in the name of any of the corporate defendants nor of any transfers to offshore or unrelated bank accounts. He gave responses to a number of issues raised in ASIC affidavits including the assignment of loans, the so-called "$2 million run around", the "Central Treasury Issue" and the Lanepoint/Kingdream transfer. He mentioned in the course of his affidavit that Mr Anthony Douglas-Brown had been engaged in September or October 2005 to review the Westpoint Group and make recommendations.
104 In relation to the loan assignment issue Mr Nairn referred to Mr Zohar's evidence that Tracey Fox, an accountant who worked under Mr Nairn's supervision, said that Mr Nairn and Mr Carey had instructed her to effect the assignment of loans in anticipation of Westpoint Corporation being placed into voluntary administration. Mr Nairn rejected the suggestion that he had advised Ms Fox to effect the assignment of loans in anticipation of Westpoint Corporation being placed into voluntary administration. He referred to answers that Ms Fox had given in her s 19 examination on 13 February 2006. As to that I make no finding. He asserted that the $11 million odd alleged to have been transferred to the benefit of Carey controlled entities had a nil effect on the net asset position of Westpoint Corporation as at 30 June 2006. He recreated a balance sheet which he exhibited to his affidavit to show that the net asset position after the loan assignments was exactly the same as the net asset position before then. Nothing had been transferred out of Westpoint Corporation from a net asset perspective. The intention of the loan assignments was never to enhance the asset position of specific entities to the detriment or exclusion of others. He denied that there had been any loan assignments in respect of amounts owing by Keypoint and Keyworld. He said, however, that there was an accounting error which required reversal.
105 Mr Nairn defended what he called the "central treasury issue". He said it was mischievous to infer that development companies lent funds to the Westpoint Corporation. Funds transferred from Mezzanine Companies to Westpoint Corporation on behalf of development companies were to repay amounts already expended by Westpoint Corporation and owing by the development company to Westpoint Corporation. At no time did Westpoint Corporation receive loans from, or owe money to, the development companies. He also dealt with the Lanepoint/Kingdream transfer of funds.
106 Mr Nairn attributed the collapse of the Westpoint Group to ASIC for being "bloody minded" and "working against the Group" rather than "with the Group".
Affidavit of Anthony Hayes Douglas-Brown sworn 18 December 2006
107 Mr Douglas-Brown is an experienced liquidator and trustee in bankruptcy. He was associated with the Westpoint Group when asked to advise on the preparation of Deeds of Company Arrangement for York Street Mezzanine Pty Ltd and later for Westpoint Corporation. He was also engaged by Richstar, Silkchime and Healthcare to advise with respect to a workable, commercial alternative to having receivers appointed to supervise their operations.
108 Mr Douglas-Brown described the appointment of receivers as "an option of last resort for most lenders". He referred to the negative effects of the appointment of a receiver on a company's business. Receivers, while having financial skills, would not necessarily have the detailed knowledge or skills to make all decisions for operating businesses on a long term basis unless they could work effectively with management. Even then, they might never reach a position where they would operate the business as effectively as management staff. In the current commercial environment, according to Mr Douglas-Brown, many lenders use the voluntary administration process, restructuring or refinancing to resolve issues regarding their debts. This is particularly so where there is a trading business involved.
109 While Mr Douglas-Brown did not know all the details of the business operations of the corporate defendants and had not been involved in any management or business decisions, he was provided with an overview. He referred also to the affidavits of Mr McMaster sworn 24 November 2006 and that of Ms Carey-Hazell sworn 13 December 2006. On the basis of those affidavits he expressed his opinion that the current Receiver Orders appear to be stifling the commencement of any new projects as the receivers have not and will not authorise new ventures without considerable due diligence. He said that the receivers seem to have been effectively undermining the businesses of the corporate defendants.
110 Much of what appears in Mr Douglas-Brown's affidavit was by way of argument which does not seem to fall readily within any area of expertise. Indeed, I think it better to be treated as submission than as expert opinion. In that vein Mr Douglas-Brown proposed the alternative form of order reflected in the minutes submitted on behalf of Mr Carey and the corporate defendants.
111 In my opinion there is, with respect to Mr Douglas-Brown, as air of unreality about the premise upon which his opinions are based. That premise seems to be that there are substantial on-going businesses which would continue to operate if it were not for the ham fisted intervention of the receivers. This stands in contrast to Mr Carey's own theories about the cause of the Westpoint collapse in which he pointed out that ASIC's action in bringing winding up applications in relation to the Mezzanine Companies caused the calling up of guarantees which in turn forced 40 other Westpoint companies to become insolvent as a result of demands made on loans to them. There were flow-on technical defaults to all lending facilities within the Westpoint Group allowing receivers to be appointed to complete property projects and to sell finished properties.
112 In my opinion and with all due respect to Mr Douglas-Brown, his contentions, based in part upon the commercial impact of privately appointed receivers, do not establish a reliable foundation upon which to base the orders proposed on behalf of the defendants.
Whether the Receiver Orders ought to be extended
113 The statutory framework and principles relevant to the making of the Receiver Orders and ancillary orders were set out in the reasons for judgment given on 20 April 2006. It is not necessary to repeat them here.
114 In substance ASIC submits that, having regard to the complexity and scale of its investigations and the less than fulsome level of cooperation which it has so far received from Mr Carey, the Receiver Orders ought to be extended for six months and be subject to review at that time. There is evidence of potential claims that may be brought against Mr Carey and the possibility of claims against the corporate defendants.
115 The evidence of the receivers is to the general effect that their receiverships have met their object of identifying and securing the assets of the corporations and individuals to whom they apply. The receivers' inquiries are on-going having regard to the volume of documents relevant to each of the corporations to which they seek access. They support the extension of the Receiver Orders.
116 Mr Carey and the corporate defendants rely upon the extraordinary character of the discretion conferred by s 1323 of the Corporations Act. They contend that the discretion should only be exercised in extreme circumstances. They argue that there must be uncertainty about the existence and location of assets and the number and identity of potential claimants. There must be continuing activity in the business operations of the relevant entity and allegations of serious fraud. None of these requirements appear in terms of s 1323 as a necessary condition of the power to make orders under it albeit they may be relevant factors to be taken into account: Australian Securities and Investments Commission v Burke [2000] NSWSC 694 at [8]. But the power cannot be read down for all cases by reference to factors which may be appropriate for one subset of case. In the present proceedings the Court is dealing with the collapse of a major national property development group and potential claims of many small and not so small investors and other creditors against the members of the Group.
117 I accept the evidence given on behalf of ASIC, through Mr Turton, as to the state of the investigations it is undertaking. I also accept that there may be claims against one or more of the defendants. I accept that the Receiver Orders were appropriate means, in the circumstances of this case, of identifying, securing and preserving the assets of the defendants to whom they applied. Counsel for the defendants argued that I should accept, on a prima facie basis, the matters deposed to by Mr Carey, Ms Carey-Hazell and Mr Nairn. It is acknowledged, however, that the Court cannot, in the time available, reach any firm conclusion regarding issued such as the assignment of loans.
118 The Court cannot, on the basis of conflicting, and otherwise untested affidavit evidence, arrive at definitive findings of fact on the many disputed issues. It is sufficient to say that I continue to apprehend a risk to potential claimants in relation to the assets of Mr Carey and of the corporate defendants. In my opinion, absent appropriate restraints, the assets may be dissipated to the disadvantage of creditors. The defendants do not in fact contend that preservation or control orders of some sort should not be made. Their objection is to the ongoing appointment of the receivers. As noted above, they rely upon the evidence of Mr Douglas-Brown in that respect. I have already indicated that I do not accept the critique offered by Mr Douglas-Brown as a foundation for the proposed alternative orders.
119 There is sufficient reason, given the ongoing ASIC investigations and their scope and complexity, to support the continuance of the Receiver Orders. The alternative proposed by the defendants does not, in my view, constitute a sufficient protection of the assets. I do not accept that the ongoing difficulties of the corporate defendants can be laid at the door of the receivers or at the door of ASIC. The events surrounding the collapse of the Westpoint Group are suggestive of significant financial vulnerability and internal organisational weakness that cannot simply be sheeted home to ASIC and poor legal advice.
120 The Court was presented with separate submissions relating to Silkchime and Healthcare. The making of orders in the form proposed by the defendants effectively concedes, and counsel did not dispute, the appropriateness of some form of protective order under s 1323 of the Corporations Act and s 232 of the Federal Court of Australia Act 1976 (Cth). I do not propose to canvass the evidence relied upon to support the orders sought by ASIC. The justification for making Receiver Orders in relation to Silkchime is the same as the justification for continuing the Receiver Orders in relation to the other corporate defendants to which they apply. Healthcare has receivers and managers appointed. I am inclined to make Asset Preservation Orders in respect of Healthcare along the lines of the orders made in respect of Bowesco.
121 The question of the costs of the receivership is still open. It is not an obvious proposition that the fees of receivers appointed to carry out a public statutory function of identifying and protecting the assets of individuals and corporations for creditor and other claims should be taken out of the assets to be protected. The appointment of the receivers is inextricably linked to the discharge by ASIC of its statutory and regulatory functions in the public interest.
122 The other question that was agitated although not at great depth, was the question of possible conflict of interest where the receivers have also been appointed as private receivers in respect of other entities which are associated with the defendants or may have claims against them. I accept that a conflict of interest or duties is not necessarily going to arise given the limited cope of their duties as Court appointed receivers. Clearly, however, it is a possibility. In one case where a conflict did arise there was an application to the Court by the receivers for directions relating to the expenditure of legal fees in connection with the QBE litigation. In my opinion it would be prudent to establish in each of the Receiver Orders a mechanism for ensuring that any occasion of possible conflict is identified and is the subject of advice from counsel so that any necessary application can be made to the Court.
Conclusion
123 I am prepared to extend the Receiver Orders to such of the defendants to whom they may properly be applied until 30 June 2007 and to make appropriate asset preservation orders in respect of Healthcare. Other asset preservation orders will be extended. I will make orders allowing ASIC to bring in minutes of orders in respect of each of the defendants to give effect to these reasons. The extension of the orders will be until 30 June 2007. The position of Rold has been stood over for separate argument to Wednesday, 31 January 2007. The costs of the interlocutory application are reserved for further submission.
I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French J.