Australian Securities & Investments Commission In the Matter of Richstar... [2008] FCA 45 | Case summary

REASONS FOR JUDGMENT Introduction 1 By a motion filed on 21 January 2008 Brian Keith McMaster, as Supervisor of the fifth defendant, Richstar Enterprises Pty Ltd (Richstar), and as Corporate Receiver of the tenth defendant, Silkchime Pty Ltd (Silkchime), seeks directions as to whether he should consent to their entry into a proposed 'joint venture' transaction involving the development of land belonging to Silkchime with money provided by Richstar. For the reasons that follow, I am of the view that he should not consent to the transaction either as proposed to him or subsequently varied by those parties. Factual and procedural background 2 These proceedings were commenced on 29 March 2006 by way of an application for orders under s 1323 of the Corporations Act 2001 (Cth). On 20 April 2006 I made orders appointing receivers to the property of all those then named as defendants, including various companies in or associated with the Westpoint Finance and Property Development Group and to four individuals associated with them. There have been numerous orders made since that time additional to, or by way of, variation of the original orders. In varied form the orders have also been extended from time to time. 3 On 5 February 2007, orders (the February orders) were made in respect of a number of the defendants including Richstar and Silkchime. Messrs Brian McMaster and Mark Korda of KordaMentha, Chartered Accountants were appointed jointly and severally as receivers and managers of the property of Richstar and the property of Silkchime until 30 June 2007. Those orders were continued in effect beyond that date. On 1 June 2007, Mr Korda was removed as Court-appointed receiver of Silkchime's property following a restructuring of the firm of which he and Mr McMaster were partners. Mr McMaster continued as the sole Court-appointed receiver of Silkchime. 4 The Februaryorders in relation to Richstar were replaced by a fresh set of orders on 5 September 2007 (the September orders). Mr McMaster was referred to as the 'Supervisor' and was to continue as Supervisor of Richstar with powers and duties defined in those orders. 5 Paragraph 9 of the February orders relevant to Silkchime provides that it can only enter into certain transactions if it obtains the prior approval of its Corporate Receiver. Relevantly it provides: 9. These Orders shall not prevent: 9.1 the Corporate Defendant by its officers other than the Corporate Receivers from continuing to operate in the ordinary course of its business(es), provided that the said limitation on the power of the Corporate Receivers shall not apply to the extent that the exercise of the said power is necessary to do the things referred to in Order 5 and provided further that it must obtain the Corporate Receivers' prior consent to any transaction that would result in the transfer or disposition of any part of the Corporate Property exceeding a value in excess of $5,000 or a series of transactions that would result in the transfer or disposition of any part of the Corporate Property totalling a value of in excess of $5,000 within any seven (7) day period; and 9.2 the Corporate Defendant, with the prior written approval of the Corporate Receivers (or any of them), from: 9.2.1 selling Corporate Property; or 9.2.2 applying for new advances from any Bank; 9.2.3 granting new security in favour of any Bank over Corporate Property (acquired prior to or after the date of this Order); or 9.2.4 paying any creditor. … Order 13 provides that in exercising the discretion to consent to any transfer or disposition contemplated in these orders the Corporate Receiver has the power to make all necessary and incidental inquiries into the affairs of Silkchime, including inspecting its books and records and any other information held by it or its agents relating to those affairs. Silkchime is required to give the Corporate Receiver such assistance as is reasonably requested in the course of such inquiry. 6 Paragraph 10 of the September orders affecting Richstar relevantly provides: These Orders shall not prevent the Corporate Defendant with the prior written approval of the Supervisor from engaging in the following transactions (Transactions): 10.1 purchasing or selling real property; … 10.5 developing and/or subdividing real property for sale; provided that at least 10 days prior to entering into any such Transaction the Corporate Defendant provides to the Supervisor: 10.6 a summary of the proposed Transaction detailing: 10.6.1 any real property the subject of the proposed Transaction; 10.6.2 the other party or parties to the proposed Transaction; 10.6.3 whether any other party to the proposed Transaction is related to or associated with the Corporate Defendant or one or more of the other defendants to these proceedings, and if so, in what way; 10.6.4 the terms of the proposed Transaction (providing a copy of any proposed terms); and 10.7 a statutory declaration made by a director of the Corporate Defendant verifying in relation to the proposed Transaction that: 10.7.1 the information provided pursuant to para 10.6 of these orders is correct; and 10.7.2 the director is satisfied, due inquiry having been made, that the proposed Transaction is bona fide, commercially viable and in the best interests of the Corporate Defendant; 10.8 in the case of a proposed Transaction being the proposed purchase of any real property: 10.8.1 other than by public auction or public tender; or 10.8.2 where any other party to the proposed Transaction is related to or associated with the Corporate Defendant or one or more of the other defendants to these proceedings; a valuation from a licensed valuer, expressed as being provided for the benefit of the Corporate Defendant and the Supervisor, which is not more than 60 days old, unless the Supervisor waives the requirement and accepts a market appraisal from an independent and reputable real estate agent; 10.9 in the case of a proposed Transaction being the proposed sale of any real property, written reports from two independent and reputable real estate agents specifying the recommended method of sale, a suggested marketing timetable and budget, the anticipated selling price and an outline of selling commission and any other costs (Marketing Submissions); 10.10 in the case of a proposed Transaction being the development of real property, any information as may be reasonably required by the Supervisor. 7 The Supervisor is empowered under order 11 to refuse to authorise any proposed transaction if it appears to him, inter alia, that the transaction is with another defendant to these proceedings (11.1) or that it is not bona fide (11.2). The Supervisor may also refuse to authorise the transaction if it appears to him that the information provided by Richstar is incomplete, inaccurate or otherwise unsatisfactory and that a reasonable person in Richstar's position would not enter into the proposed transaction. 8 Mr Norman Carey is a director of Silkchime. He is also the company's secretary. His two fellow directors reside in Singapore. His sister, Karen Carey, is the sole director of Richstar, having been appointed on 12 April 2006. 9 On 26 October 2007, Mr McMaster received an email from Mr Carey attaching draft documents for a proposed joint venture between Richstar and Silkchime in respect of the development of land in Warwick, Western Australia, being land registered in the name of Silkchime. The draft documents included an agreement between the two companies entitled 'Warwick Land Joint Venture'. The proposed agreement defined the participants in the joint venture as Richstar and Silkchime and their duly appointed representatives. The joint venture was defined as 'the association of the Participants for the purposes set out in Part 2 [of the Agreement] to be known as the Warwick Land Joint Venture'. 10 Part 2 of the document included the following: (1) Manner of Contribution (a) Silkchime shall as at the Commencement Date do all things necessary and sign all necessary documents to make available the Land for the purposes and use of the Joint Venture. (b) Richstar shall provide for and fund the Project Costs and shall contribute its expertise in subdividing and developing the Land. The 'Project Costs' were defined in Part 1 of the document as 'all costs incurred in relation to the Project whether before or after the Commencement Date…' including various specified classes of costs. 11 Part 2(6) provided that the respective 'Individual Shares of the Participants' would be in the following percentages: Richstar 20% Silkchime 80% or in any other percentages as may from time to time result from any sale, assignment, transfer or disposal of or the acquisition of the whole or any part of a Participant's Individual Interest in accordance with this Agreement. Each participant was to be separately entitled to that proportion of the income from the project as corresponded to its individual share. 12 Between 15 November 2007 and 16 January 2008 Mr McMaster and his solicitors negotiated with the solicitors acting for Norman and Karen Carey about the terms of the transaction and what would be necessary for Mr McMaster to approve it. 13 On 15 January 2008, Mr McMaster received from CB Richard Ellis (C) Pty Ltd (CBRE) a valuation of the land the subject of the proposed joint venture. The land comprises five lots located within Warwick Commercial Park adjacent to Centro Warwick Shopping Centre. One of the lots contains a warehouse style building providing accommodation suitable for conducting a children's play centre operation. The remaining lots are vacant land. The land was inspected and a valuation conducted on 11 December 2007. The valuation of each of the lots was as follows: Lot 944 $980,000 Lot 946 $740,000 Lot 956 $950,000 Lot 961 $1,160,000 Lot 965 $3,320,000 The total valuation was $7,150,000 on an 'as is' vacant possession basis. 14 On 16 January 2008 a summary of the proposed transaction was sent to Mr McMaster's solicitors in accordance with [10.6] of the September orders. It was accompanied by a statutory declaration from Karen Carey in relation to the proposed transaction in accordance with [10.7] of the September orders. The essential elements of the transaction as summarised were as follows: . Silkchime shall make the land available to the joint venture but will retain ownership of the land and be paid for the land out of the joint venture based on market valuation; . Richstar shall make funding available to the joint venture by way of a loan to Silkchime in the sum of $1,500,000 to be secured over the land for the cost of sub-division, development and sale of the land; . Upon sales of the land Richstar shall receive 50% of net proceeds until its loan is repaid, Silkchime shall receive 50% of the net proceeds until it has received the valuation of the land; . Profit sharing in the joint venture is in accordance with the shares in the joint venture, being: . Richstar 80% . Silkchime 20% . Richstar shall be responsible for developing the project and will have an option to acquire the land at valuation plus 5%. 15 In her supporting statutory declaration Ms Carey, as sole director of Richstar, said: 2. I have a copy of a document titled 'Summary of Proposed Transaction' (Summary) and confirm that the information provided in the Summary is correct. 3. Having given the matter due consideration, inquiry and having considered the commercial merits of the proposed transaction described in the Summary I am satisfied that the proposed transaction is bona fide, commercially viable and in the best interests of the Company. 16 On 17 January 2008, Mr McMaster received a new version of the proposed joint venture documents. The documents reflected a number of suggested amendments agreed between the parties having regard to matters discussed at meetings between Mr McMaster, the Careys and their respective legal advisers. Mr McMaster spoke to Mr Carey on 17 January 2008 about amendments that Mr Carey wished to make to the draft joint venture document. 17 On 18 January 2008, Mr McMaster's legal advisers received an email from the offices of Mony de Kerloy, solicitors acting for Silkchime and Richstar, attaching an amended version of the draft joint venture document. In his affidavit in support of his motion for directions, Mr McMaster points out that it was only on 18 January 2008 that the commercial basis of the proposed transaction in its then form was put forward. Before that the commercial terms proposed were substantially different. Prior to 18 January 2008 Silkchime was to share in the profits derived from the successful completion of the development to be undertaken by the joint venture. That arrangement was altered in the version of the document put forward on 18 January 2008 so that Silkchime will only receive the value of the land which it owns and will not be entitled to share in the profits of the joint venture. 18 Mr McMaster described the key elements of the proposed transaction in its most recent form, prior to 31 January 2008, as follows: (a) Silkchime shall make the land available to the joint venture but will, subject to subparagraph (b) below, retain the ownership of the land for the duration of the joint venture; (b) Richstar shall be responsible for developing the project and will have an option to purchase the land at any time (and to bring the joint venture to an end) by paying to Silkchime an amount calculated in accordance with clause 7A(b) of the Joint Venture Agreement; (c) On the sale of the land, Richstar and Silkchime shall each receive 50% of the sale proceeds until such time as Silkchime has received an amount equal to the full valuation of the land, being the valuation and amount (of $7.15 million) given by CBRE on 15 January 2008 after which all land sale proceeds would be payable to Richstar. (d) Silkchime will not be entitled to share in the profits of the joint venture. (e) Richstar will advance a maximum of $1,500,000 to Silkchime for the purpose of assisting Silkchime with the subdivision, development and sale of the land. (f) As security for and in consideration of the advance referred to above Silkchime will provide Richstar with a mortgage over the land and a fixed and floating charge over the present and future rights, property and undertakings of Silkchime. (g) The duration of the joint venture is unspecified. He sent copies of the proposed transaction documents to the Australian Securities and Investments Commission (ASIC) through his solicitors. On 15 January 2008, the Australian Government Solicitor wrote back to his solicitors indicating that ASIC was currently considering the proposal and expected to get back to Mr McMaster's solicitors by 25 January 2008. 19 On 15 January 2008, Ms Carey sent a fax to Mr McMaster on Richstar letterhead indicating that she had received a notice from Silkchime informing her that due to the continual delays, unless Richstar could sign the joint venture agreement and proceed with the project by 23 January 2008, Silkchime would pull out of it. She asserted that as a director of Richstar she had 'created another opportunity for Richstar to earn substantial income and significantly increase its asset position' only to find that she was prevented from doing so because of Mr McMaster's actions as the real controller of Richstar. The notice she attached was a notice from her brother, Mr Norman Carey, on Silkchime letterhead. It was in the following terms: Richstar Enterprises Pty Ltd ("Richstar") joint venture to develop Silkchime Pty Ltd ("Silkchime") land had been proposed prior to June 2007 and was to be finalised with the project proceeding shortly thereafter. Richstar to date has been unable to sign the Joint Venture Agreement ("JVA") and proceed with the project. Silkchime hereby gives Richstar seven (7) days notice from the date of this letter to sign the JVA. In the event that the JVA is not signed and Richstar does not proceed with the project, Silkchime will no longer proceed with the joint venture due to Richstar's continual delays. As I observed in the course of the hearing of Mr McMaster's motion, Mr Carey's notice threatening termination and his sister's letter to Mr McMaster, which was a thinly veiled threat of a claim for damages if the transaction did not proceed in a timely fashion, were both pieces of cosmetic nonsense. There was no third party involvement driving a particular timetable. The letter and notice have implications for the extent to which the transaction is based upon independent consideration by the directors of each company of that company's best interests. Mr McMaster's dilemma 20 In his principal affidavit in support of his motion Mr McMaster said that it is his view that the proposed transaction creates a potential conflict of interest by virtue of his appointments in respect of Richstar and Silkchime and the nature of the proposed transaction between them. He described the proposed transaction as one concerning entry into a joint venture between the two companies in which Silkchime owns the land to be developed by the joint venture but all of the profits from the development beyond the value of the land, will be earned by Richstar. This is in circumstances where Silkchime is obliged to provide half of the development costs for subdivision and where the duration of the joint venture is unspecified. The question whether there is a sufficient commercial benefit for Silkchime from the proposed transaction is a matter of judgment. Because of his position as Supervisor of Richstar he expressed concern that there might be an apprehension that he would be unable to make such a judgment on behalf of Silkchime independently of his role as Supervisor of Richstar. For that reason he seeks directions from the Court. The notice of motion 21 By his notice of motion filed 21 January 2008, Mr McMaster sought the following orders or directions: 1. A direction as to whether the Supervisor of the Fifth Defendant and Corporate Receiver of the Tenth Defendant should consent to the Fifth Defendant and the Tenth Defendant, by their proper officers, entering into the Proposed Transaction, as defined in the affidavit of Mr Brian Keith McMaster sworn on 21 January 2008. 2. Such further or other orders as may be just or necessary. 3. The parties have liberty to apply. 4. The Fifth Defendant pay the costs of this Notice of Motion. The Careys' evidence 22 In response to Mr McMaster's motion, Mr Carey swore an affidavit on 25 January 2008. He explained that the whole of the Warwick land, comprising approximately 38,000 square metres, was purchased for $3.6 million in 1995 by Silkchime as trustee for the Silkchime Unit Trust. The remaining land is approximately 16,000 square metres. On a pro rata basis he put its original cost at $1.5 million. The land was purchased subject to a restrictive covenant by the owner of the adjoining shopping centre. The object of the restrictive covenant was to ensure that the owner of the land could not develop any uses on it that would compete with the adjoining shopping centre. Silkchime, he said, spent some time attempting either to extinguish or modify the terms of the covenant without success. Mr Carey said that the land was approved for development and subdivision into a commercial park. That approval lapsed during a receivership, no steps having been taken to extend it and so the land has no current development approval. The development and subdivision approval which was granted accorded with a development plan for a number of uses which he set out in his affidavit. Some lots were sold with specific development approvals over a period of years. 23 In September 2005, CBRE valued what Mr Carey called the residual land, Lots 944, 946, 956, 961 and 965, at $3,680,000. 24 Private receivers were appointed to Silkchime in 2006. Mr Carey said the land has remained dormant for about two years while Silkchime has been in receivership. During that period the privately appointed receivers engaged real estate agents, Burgess Rawson, to sell the land in its current form. No serious offers were received which, according to Mr Carey, reflects the effect of the very prohibitive restrictive covenant on the land which has a significant impact on its value, marketability and realisation. 25 Early in 2007 Mr Carey formulated a proposed joint venture proposal which he '… submitted to Richstar's director Karen Carey for approval'. He said that she subsequently approved the proposal in which Richstar would use part of its cash of approximately $2.5 million and his expertise to rezone and subdivide the land into an upmarket residential subdivision. The joint venture proposal, he asserted, had significant benefits for both parties combining the cash resources and 'specific expertise' of Richstar to fulfil Silkchime's objective of realising the land within a reasonable time and at its highest value by transforming it into a higher and better use for which there is now significant current demand. 26 Mr Carey said that when the joint venture proposal was put to Mr McMaster on 18 October 2007 and discussed with him it was on the basis that the value of the land was between $3,800,000 and $4,000,000 and that the profit from the development would be in the vicinity of $10 million over 3.5 years. He then referred to the ongoing negotiations with Mr McMaster, none of which are material to the question which the Court has to determine. In the course of his affidavit he referred to his concerns about the lack of progress and delays in having the project approved. His sister wrote to Mr McMaster on 6 December 2007 about that. 27 Mr Carey dismissed the most recent valuation of the land at $7.15 million. He does not agree with it and offered various criticisms of it. That aspect of his affidavit was essentially argumentative and I give it no weight as evidence of the value of the land. 28 Mr Carey raised with Mr McMaster his concerns about the valuation. There is conflict between his evidence and that of Mr McMaster about their conversations concerning the valuation and acceptable amendments to the joint venture proposal. It is not necessary for present purposes that I resolve those conflicts. Neither person was cross-examined on his affidavit evidence. In any event, Mr Carey instructed his solicitor to amend the joint venture agreement to reflect the requirement that Silkchime receive $7.15 million by the end of the joint venture. Mr Carey contended that absent the joint venture Silkchime would have to sell the land at a much lower price than the $7.15 million guaranteed under the proposed arrangements or contemplate attempting to locate an occupier for each lot and then package each lot by gaining a specific development approval with a design and construction contract which would take five years and would realise less than $7.15 million. He asserted that his proposal was put forward in good faith with a genuine desire to see value realised for both companies. Richstar would receive interest and profits secured by a mortgage. Silkchime would realise much more for its land than it could by a fire sale in circumstances where it remained the owner of the land until sold to ultimate purchasers. 29 Mr McMaster swore an affidavit in reply on 29 January 2008 largely concerning Mr Carey's evidence about exchanges between them relating to the proposed transaction. It is not necessary for me to resolve those conflicts as, in my view, they have little bearing on the matter which I must decide. 30 Karen Carey swore an affidavit on 23 January 2008 setting out what she described as an itemised inventory of assets and liabilities of Richstar. She claimed assets of $2,354,867.24 comprising cash in the bank and GST receivables. She also included choses in action by way of claims against other companies of up to $19,300,000 in all. I attach no value to that for present purposes. She asserted that Richstar's liabilities total $64,334. These liabilities were said to be made up of employee provisions and a loan payable to Keyworld Investments Pty Ltd. 31 Ms Carey said she had been advised of claims by Westpoint Corporation against Richstar but asserted that the company has no liability to Westpoint Corporation. She said that in an effort to develop and augment the financial resources of Richstar she had been attempting to pursue opportunities for it. The most significant of those was the proposed joint venture with Silkchime. It would provide for the development of Silkchime's property while utilising Richstar's funds. She said that Richstar would have no difficulty carrying the necessary level of expenditure for the development should it be permitted to operate in the ordinary course particularly given the anticipated returns from the proposed joint venture. 32 Mr Carey swore a further affidavit on 30 January 2008 stating that he had received the most recent valuation of the land on or about 11 December 2007 well after the joint venture documentation had been resolved. He had told Mr McMaster that neither he nor his sister was happy to proceed on the basis that Silkchime received $7.15 million for its land before anybody else got paid and a 20% profit on top of that. He claimed that Mr McMaster said that if Silkchime received $7.15 million for the land then, from an asset preservation point of view, he would have done his job. According to Mr Carey, the documentation was redrafted on that basis. 33 So far as the Effect on the creditors of Silkchime and Richstar are concerned, Mr Carey referred to claims or potential claims by receivers and liquidators against them. He did not consider that any had a realistic chance of success. As to that, I make no judgment and could not do so in proceedings of this nature. 34 Mr Carey went on to say that although the joint venture has no time limit, he believed that realistically it would take three years to complete the entire project. ASIC's opposition 35 ASIC opposed the transaction on the basis that Silkchime would receive no commercial benefit for its participation in the joint venture. At best it would receive the cost of the land progressively out of the proceeds of sale. It would lose any opportunity to make profits from developing the land on its own account. ASIC posed the question - why would the directors of Silkchime contemplate participation in a joint venture proposal in which that company is exposed to the risk of loss but has no opportunity of profit making? 36 ASIC pointed to what it characterised as Mr Carey's previous history in exercising control over entities apparently under the control of and/or owned by his brother, Alan Carey, and his sister, Karen. ASIC noted that Karen Carey became director of a number of Westpoint related companies, including Richstar, on 12 April 2006 replacing Alan Carey. It referred to transactions going back to 2006 supporting the proposition that Mr Carey's brother and sister effectively acted as his nominees. 37 ASIC's case was that Mr Carey effectively has an interest in Richstar through his sister and that he wishes to vest a significant benefit in that company via the proposed joint venture. The proposal would place the development land outside the reach of Silkchime's creditors. 38 ASIC referred to a variety of claims which it said are likely to be brought against Silkchime and Richstar in the near future. Again, it is not necessary to catalogue those for present purposes or to make any judgment as to their likelihood or merit. 39 ASIC identified the vices of the proposed joint venture thus: 36.1 Silkchime contributes to the Joint Venture its land with a current valuation of some $7.15 million (by contrast Richstar simply undertakes an obligation to lend up to $1.5 million). 36.2 Silkchime takes no profit under the Joint Venture proposal. Instead, it will only receive the $7.15 million, ie the value of what it has at present. However: 36.2.1 Silkchime only recoups the $7.15 million on a piecemeal basis as the land is developed, sub-divided and sold - and then only 50% of the land sale proceeds of individual lots; 36.2.2 given the time value of money, Silkchime is immediately disadvantaged by entry into the Joint Venture and deferring realisation of the value of its land - $7.15 million today is more valuable than $7.15 million to be received by instalments at some future indeterminate time (especially when the future $7.15 million is subject to development risk). This detriment increases day by day as the $7.15 million, otherwise available by sale today as is, is paid over time when (and if) Richstar proceeds with development. 36.3 Although obtaining no profit, Silkchime is obligated to provide half the development costs for the subdivision … To that end it must enter into a loan agreement and grant a registered mortgage over the land together with a debenture. However, the profit to be derived from the proposed Joint Venture is wholly for the benefit of Richstar. Silkchime is making available its assets, and assuming liabilities, for the benefit of Richstar, and not for the purpose or benefit of Silkchime. 36.4 Silkchime is also obliged to provide to Richstar: 36.4.1 a right of first refusal (clause 7(2)) which, among other things, in its terms suggests that Silkchime may only offer to [sic] its interest to any other person with the consent of Richstar - that may make the interest virtually unsaleable in the event of external administration of Silkchime; and 36.4.2 an option to acquire the land (clause 7A) - being something for which no consideration is payable and at a purchase price which may not be the then market value, but rather a value based on current zoning. 36.5 The joint-venture is for an indeterminate time. Richstar is to implement the project plan: clause 3(2). But there is no covenant as would see development and realisation on a timely basis. Completion delay is something that would see further detriment to Silkchime, and corresponding advantage to Richstar. 40 ASIC submitted that the wholly improvident nature of the proposed joint venture is patent from the draft legal documents themselves. There was no need to go further to sustain the submission that no reasonable director of Silkchime could cause the company to enter into the proposed transaction. A change on the run - ASIC maintains its opposition 41 In the course of argument on the motion, counsel for Silkchime and Richstar, indicated that he had instructions that the joint venture could be varied to provide for Silkchime to receive 20% of the profits of the joint venture on top of 50% of the sale proceeds of the land capped to its value of $7.15 million. The day after the hearing Mr Carey filed an affidavit sworn 31 January 2008 setting out the proposed amended joint venture documentation to give effect to that change. 42 In a letter to Mr McMaster dated 30 January 2008, the solicitors for Silkchime and Richstar wrote: How our client anticipates this working … is that as land is progressively sold, joint venture liabilities are duly paid as and when they fall due and net proceeds are divided equally between Silkchime and Richstar up until Silkchime has received $7.15 million (being the value of the land). Thereafter, net proceeds are to be divided 20% to Silkchime and 80% to Richstar to ensure Silkchime receives its share of the profits from the joint venture. 43 ASIC responded to the varied proposal today with a written submission maintaining its opposition to the transaction. It accepted that the latest version offers, on its face, a theoretical prospect of benefit but submitted that it does not eliminate the detriments identified in its earlier submissions. It remains the case that Silkchime will be liable for one half of the development costs, is exposed to any joint venture losses and must grant Richstar a first registered mortgage over the land, an option to purchase the land and a right of first refusal for its acquisition. 44 ASIC also made the point that the variation was offered at the hearing by counsel for Silkchime and Richstar as a concession by Mr Carey. The concession was on the part of Richstar, of which Ms Carey is the sole director. ASIC submitted that this supports its contention that Mr Carey effectively controls both companies. ASIC also repeated its submission that the joint venture proposal should be seen as a device by which a valuable asset will be placed under the control of Richstar and so quarantined to the detriment of potential claimants against Silkchime. 45 ASIC also pointed to the absence of any feasibility study or cash flow analysis to support the existence of real, as distinct from theoretical, benefits flowing from the proposal. 46 ASIC pointed to uncertainty about how the alternative joint venture proposal will work in practice. It referred to the letter from the solicitors for Silkchime and Richstar to Mr McMaster on 30 January 2008 and pointed out that the $1.5 million contribution by Richstar would be paid out in priority. Proceeds of sale would be shared equally between Richstar and Silkchime until Silkchime had received $7.15 million. By that time Richstar would also have received $7.15 million, but its $7.15 million would all be profit whereas Silkchime would merely be recouping the value of its 'as is' asset. Silkchime would never obtain a 20% profit share. Its 20% entitlement would be of net profit after the initial $7.15 million in profit to Richstar. Whether Mr McMaster should approve the proposed transaction 47 The first and principal question in this case is whether Mr McMaster, as Corporate Receiver of Silkchime, should consent to it entering into the proposed transaction. He would not be required to exercise any function as Supervisor of Richstar in answering that question. It is only if the answer to that question were in the affirmative, that it would be necessary to consider whether consent should be given to Richstar's participation. 48 The question in relation to Silkchime is to be answered in the light of the purpose of the orders presently in place which prevent it from dealing freely with the land. That purpose is to preserve the asset, for the time being, so that the position of possible claimants against Silkchime may be protected while ASIC's investigation proceeds. That is subject, of course, to the time limit which has already been placed on the orders which expire on 12 March 2008. 49 In my opinion, while the orders remain in place the proposed transaction is inconsistent with their purpose. It is a transaction which is not entered into at arms length. It is effectively between Mr Carey, who controls Silkchime, and his sister who controls Richstar. I am not satisfied that she acts or has acted independently of Mr Carey or other than at his direction in connection with this transaction. The faintly ridiculous correspondence referred to earlier in which Mr Carey, on behalf of Silkchime, threatened to terminate the transaction leading Ms Carey to write a letter to Mr McMaster on Richstar letterhead, provides a recent basis for these concerns. So too does the fact that the variation proposal was offered as a concession by Mr Carey when the concession was Richstar's. 50 Under the proposed joint venture Richstar will acquire various powers with respect to Silkchime including as a security holder over its principal asset which is the land, and as the holder of an option to purchase that asset. I accept the submission that the benefit, such as it is, is theoretical. Moreover, on the analysis offered by ASIC of the profit distribution, it appears to operate unfairly against Silkchime. 51 Given the nature of the transaction, its effect upon the major asset of Silkchime, which is the subject of the orders, and the relationship between the directors of the two companies, I am not satisfied that as proposed or as it might be effected it is, or is likely to be, in the best interests of the preservation of Silkchime's assets or the interests of those who may have claims against Silkchime. If the development of the land is commercially viable, then it should be possible for Silkchime to find an independent co-developer. No doubt it may be said that to enhance the position of Richstar, is to enhance the position of another member of the Westpoint Group and thus possibly the position of persons who may have claims against it. In my opinion, however, the correct approach involves a separate consideration of the position of each company. 52 In my opinion, Mr McMaster should not consent to Silkchime's entry into the proposed transaction and I will direct accordingly. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Australian Securities & Investments Commission In the Matter of Richstar Enterprises Pty Ltd ACN 099 071 968 v Carey

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Judgment (12 paragraphs)

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