Australian Securities & Investments Commission v Allied Financial Pty Ltd [2002] VSC 204

Supreme Court of Victoria|2002-06-06|Before: Hansen J

CORPORATIONS - Liquidator appointed in ASIC v ABC Fund Managers - Seeks aid of ASIC to obtain information and records of company - Investigation by ASIC - Application for injunctions and ancillary orders under s 1323 and s 1324 of the Corporations Act 2001 - To restrain dealing with, and to account for, property of company in liquidation.

In a proceeding brought by ASIC, and tried last year by Warren J[1] it was ordered, on 15 October 2001, that Allied Securities (and four other companies and 22 unregistered managed investment schemes) be wound up. Lindsay Philip Maxsted of KMPG was appointed as liquidator of the companies and the schemes. Warren J granted a stay on the winding up order until 4:00 pm on 26 October 2001 or until further order. The defendants filed a notice of appeal and a summons seeking a stay pending the hearing and determination of the appeal. ASIC filed a summons seeking security for the costs of the appeal. The applications were heard by the Court of Appeal on 9 November 2001. The stay application was dismissed. The stay on the winding up order, which had been extended, expired at 6:00 pm on 9 November 2001. The Court of Appeal required the defendants to provide $25,000 as security for costs of the appeal by 4:00 pm on 7 December 2001. The defendants decided not to continue with the appeal and did not give the security. As a result, the appeal stood dismissed as from that time.

Since then the liquidator has sought to perform his duties but has been met by a claim that Allied Securities had acted as a trustee and not on its own account, that it had been replaced as such trustee on 9 November 2001 prior to the expiration of the stay, and that, as a consequence, it did not possess any records or property on its own account to deliver to the liquidator. Being without assets and information to enable him to carry out his duties, the liquidator referred the matter to ASIC. Earlier, in June 2000, ASIC had commenced an investigation into Allied Securities, Wharton Partners Pty Ltd ("Wharton Partners") and the four other companies ordered to be wound up on 15 October 2001. Then, on 31 January 2002, following the reference, and it appearing to ASIC that Allied Financial Pty Ltd ("Allied Financial") was claiming to be entitled to, and receiving, property of Allied Securities, ASIC commenced an investigation into the conduct of Allied Financial. A few days later it commenced the present proceeding.

(a) Allied Financial.

(b) Wharton Partners.

(c) Stephen Lynne Wharton.

(d) John James Gillies.

Wharton and Gillies are accountants. Gillies is a director, and Wharton is the secretary, of Wharton Partners. There is another director, John Gianchino, also an accountant, who holds 3 (or 25%) of the issued shares in the company. The balance of 9 (or 75%) of the issued shares is held by Tye Nominees Pty Ltd (in liquidation) ("Tye Nominees"). (Tye Nominees was one of the companies ordered to be wound up on 15 October 2001.) Wharton Partners conducts an accounting practice from serviced office premises it holds under licence at Level 1, 537 Malvern Road, Toorak. Both Wharton and Gillies, and Gianchino to an extent that is not clear to me, are engaged in the practice.

Allied Financial was registered on 3 December 2001. Since 13 December 2001 Wharton has been the director, and Wharton and Gillies the secretaries, of Allied Financial. Since 20 December 2001 its registered office has been at Wharton Partners. Allied Financial has no other place of business and no employees. Wharton Partners provides secretarial and accounting services for Allied Financial and stores its records at its office.

This company was registered by Gillies and Wharton in June 1994. Gillies is the director, and Wharton is the secretary. Wharton had been a director, but ceased to be when he became bankrupt in November 1994. Allied Securities has no employees, owns no plant or equipment and has no separate premises of its own. As with Allied Financial, its registered office is at Wharton Partners which provides secretarial and accounting services and holds its records.

ASIC v ABC Fund Managers and Others[2]

It was in this case that Warren J, on 15 October 2001, ordered that Allied Securities be wound up. I refer to the judgment to the extent necessary to indicate the position of Allied Securities insofar as it is relevant to the present proceedings. Attached to the judgment were several schedules, three of which (Schedules A, B and C) I attach to this judgment. They are corporate trees which conveniently refer to several entities, including Wharton Partners and Allied Securities. Schedules A and B together constitute the one tree with a single line of ownership running down from Tye Nominees. It should be said of Schedule C that it was tendered before me on the basis that the chain of ownership leading down to Levart (Vic) Pty Ltd ("Levart") was not proved; however the chain of ownership down from Levart was established.

(a) ABC Fund Managers Ltd ("ABC FM").

(b) Wharton Partners.

(c) Allied Securities.

(d) ABC Investment Management Ltd ("ABC IM").

(e) Tye Nominees.

(f) Lingus Pty Ltd ("Lingus").

With the single exception of Wharton Partners each of these companies was ordered to be wound up by Warren J on 15 October 2001. The winding up order was made on the just and equitable ground. The case involved round robin lending and investment transactions which produced a tax deduction in the context of a lending scheme that the Judge concluded was a sham. There was evidence of misleading conduct. There were also breaches of the Corporations Law, in particular, failures to keep proper accounting records. Wharton gave evidence, Gillies did not. Nor did a person called Hutchins give evidence. Warren J found[3] that Hutchins controlled the interests which controlled Levart.[4]

In her judgment[5] Warren J recorded that the registered office of each defendant was at the office of Wharton Partners, each defendant had the same director (Gillies), and Gillies and Wharton were co-secretaries of each company with the exception of Tye Nominees, of which Wharton alone was secretary.

Warren J made the following findings concerning the part played in the round robin transaction. Warren J found:

"[19] Essentially, the defendants engaged in a round robin transaction. It operated by way of moneys being lent by Allied Securities notionally to investors and these moneys were in turn paid to the trustee of the relevant trust who then invested those funds in other trusts in the ABC FM group which in turn lent the money back notionally to Allied Securities. These transactions all occurred on the same day and in each case in late June being the end of the relevant financial year. The round robin lending facility was described by Wharton as a "daylight credit facility". The procedure operated on the basis of starting with a notionally small balance or nil balance at 9 am on the relevant day in the account of Allied Securities. Cheques would then go out to other companies in the group and in turn the moneys came back into the account of Allied Securities from other companies to cancel out the debit entries and thus the debits and credits cancelled each other out."

The defendants submitted to Warren J that they should not be wound up as they conducted "other businesses". Warren J stated that:

"[136] Two forms of opposition were submitted against winding up. First, that Wharton does not control Allied Securities and Lingus. However, this assertion was contradicted by the evidence which shows he is company secretary and Gillies is a director. Second, the fact that the companies conduct "other businesses". This ground of objection is based on assumed prejudice which will be suffered by those persons' interest in the share capital of the defendants and joint ventures or business relationships with the defendants. Emphasis was placed by the defendants upon the ongoing business and interests of the defendants and their related entities, especially ABC FM, ABC IM, Tye Nominees, Bass Domino Wines, Veldara, Levart, Allied Securities, Lingus and Harcourt Ridge. I turn to consider each of these "other" interests. However, I consider any prejudice is outweighed by the public interest in a liquidation."

Warren J went on to deal with this submission in relation to each defendant. After dealing with the other defendants[6] her Honour dealt with the position of Allied Securities as follows:

"[144] Allied Securities was said to be a lender to the franchise of a liquid engineering franchise. Other than the recovery of outstanding loans, it has no apparent business (although it may have made some loans to "other projects"). A liquidator may recover or realise the value of these loans on behalf of those persons interested in the company. Allied Securities is also owned by Levart (Vic) Pty Ltd. An alleged affected party, Hutchins, did not give evidence regarding any concern over the winding up of Allied Securities. [145] The current status of loans between Allied Securities and the investors in the 22 trusts demonstrates the need to appoint a liquidator. Wharton stated that in June 2000, Allied Securities made a decision not to continue to roll over the loan facilities, that the loans by investors remain due and, further, that Allied Securities retains any distributions from the trusts on trust for the investors. [146] In the near future, the interests and rights of investors in relation to Allied Securities ought be clarified. I am satisfied this would be facilitated by a liquidator who has powers to control and gather evidence exercising powers under the Corporations Act. [147] It seems that Harcourt Ridge Pty and the franchisees are merely debtors of Allied Securities. There is no evidence that they will be prejudiced by the appointment of a liquidator. In any event, Harcourt Ridge itself may have received part of the cash funds paid by investors in the 22 ABC trusts."

"[153] I am satisfied that the appointment of a liquidator will give control of the assets and undertakings of the companies and their books and records to the liquidator. The powers available to a liquidator to control the assets and books and records of the companies and to obtain evidence will aid and facilitate further investigations. The appointment of a liquidator is in the public interest. It outweighs any prejudice to the shareholders which could arise from appointment of the liquidator. In any event, the extent of that prejudice and the objections of the owners/shareholders of the group have not been established. Gianchino and various other persons whose interests may potentially be affected by the winding up of the defendants gave no evidence on these matters. Their absence was unexplained. I am entitled to assume that they could not give any such evidence : see A S Nominees at FCR 515-6; ALR 10-11; ACSR 467-8. [154] The round robin transactions give rise to serious concerns about the propriety of the director and secretary of the trustees and managers of the schemes, Wharton and Gillies. For this reason alone I consider it is inappropriate that they not be left to deal with investors when winding up the schemes. [155] I am satisfied that a winding-up order should be made. In the event it was necessary to do so I would have been satisfied such as to order the appointment of a provisional liquidator."

It is evident that in the second sentence of [154] either the word "inappropriate" should have been "appropriate" or the word "not" was unintended.

Warren J published her reasons for judgment on 11 October 2001, and adjourned the matter to 15 October 2001 to enable orders to be prepared. On 15 October the defendants were represented by their solicitor Timothy Peter Davies of Oakley Thompson & Co who relied on an affidavit of Gianchino, sworn 15 October 2001, in seeking a stay of the orders to wind up the defendants. The affidavit was tendered in evidence before me. In the affidavit Gianchino stated his belief that it was not just or equitable that the companies be wound up, that the decision was appealable, and that her Honour had not had sufficient regard to the business activities of the companies outside of the matters complained of by ASIC. He expressed concern that the liquidator might assert control of companies by virtue of the shareholdings held by the defendants to be wound up. In relation to Allied Securities he stated:-

"11. Wharton Partners manages the lending activity of Allied Securities, which extends to matters unconcerned with the trusts and schemes referred to in these proceedings. Wharton Partners will be detrimentally affected by the winding up of that company. I have discussed the matter with the director of Allied Securities, Mr Gillies, who informs me and I verily believe that Allied Securities wishes to appeal the decision to wind it up."

Gianchino stated that if the winding up were not stayed and the appeal was successful, the defendants would suffer irreparable harm as a result of steps being taken by the liquidator in the winding up. In addition to the burden of the liquidator's costs, it would not be possible to restore the defendants to their former position if the liquidator had dealt with the assets of the defendants or their subsidiary companies.

The evidence before me includes the statement that at the hearing of the stay application before the Court of Appeal the defendants relied on affidavits sworn by Gillies, Wharton, Gianchino and Davies. Gillies' affidavit, sworn 1 November 2001, was tendered before me. The affidavit of Gianchino may well have been his affidavit referred to above; it was adopted by Gillies in his affidavit who said it was true and correct. The affidavits of Wharton and Davies were not tendered before me. In his affidavit Gillies developed concerns as to what might happen to the subsidiary companies and their assets if the liquidation proceeded. He referred to each subsidiary and described how each might be affected. He dealt with Allied Securities as follows:

"41. Allied Securities has entered into a large number of loan agreements with shareholders in Harcourt Ridge Limited and Franchisees in Liquid Engineering Industrial Pty Ltd Franchises. Now produced and shown to me marked 'JJG 1' is a true copy of the prospectus of Harcourt Ridge Limited. Now produced and shown to me marked 'JJG 2' is a true copy of the Information Memorandum of Liquid Engineering Industrial Pty Ltd. 42. The loans to the shareholders and franchisees are long term loans which are tied to the performance of either the Grower's Vineyard or Franchisee's Franchised Business. There is a risk in my opinion that if the winding up of Allied Securities were allowed to proceed such Liquidation would adversely affect the company, the borrowers and the companies which received the borrowed funds. The 'Loan Book' is a long term investment project, which if realised by the Liquidator as a sale of 'book debts' would realise a substantial loss of value as in my experience the sale of such book debts would be at a significant discount to the book value. 43. The loan repayments in the Harcourt Ridge project are not due by growers until 30 June 2004. In respect of the Liquid Engineering Franchises, some borrowers are in default and those loans require considerable management for recovery purposes. These factors would have a significant impact on the sale value of the loan book."

I accept the evidence of Blair Russell Ussher, who is employed as a Senior Lawyer by ASIC and was present during the hearing before the Court of Appeal, that the defendants relied on Gillies' affidavit and that Gillies' evidence was not qualified or altered in the hearing before that Court.

The reason why the defendants did not provide security and thereby let their appeal lapse was explained by Wharton in an affidavit filed in the present proceeding. The principal contention in applying for the stay was that Warren J had misdirected herself on the question whether the round robin of cheques amounted to a sham, which justified a winding up order. But in determining the stay application in the Court of Appeal their Honours stated that other grounds were disclosed on which a winding up order might nonetheless have been made on the just and equitable ground. Thus the Court of Appeal refused to grant a stay. Gillies and Wharton concluded that in these circumstances it would be a fruitless exercise to continue the appeal and it was let go.

While his hand was stayed in relation to the companies, the liquidator moved immediately to commence the winding up of the schemes. He called for the books and records. He was only provided with copies of several trust deeds for the schemes and the registers of unit holders for each of the unit trusts. These registers showed that Allied Securities was the majority unit holder in 20 of the 22 investment funds. The minority unit holders in all 22 funds were other companies subject to the winding up order. He was not given any other financial records from the director of the companies or the trusts. Until he received the books of account and records of the companies including Allied Securities, in which he expected the scheme transactions to be recorded and explained, he could not materially advance the winding up of the schemes.

Following the expiration of the stay on 9 November 2001 the liquidator moved to ascertain and take control of the assets and records of the companies in liquidation. He was informed by the judgment that investors in the schemes had paid about $2M to Allied Securities as their proportion of pre-paid interest on the loans provided by Allied Securities, and that Wharton Partners had collected a portion of the funds from individual investor tax refunds on behalf of Allied Securities. He was also aware of the reference in Gillies' affidavit to Allied Securities possessing a loan book for loans made to Liquid Engineering Franchisees and to growers of the Harcourt Ridge Estate Vineyard.

On 12 November 2001 the liquidator wrote to Gillies in relation to Allied Securities. The liquidator advised Gillies of his appointment as liquidator. Without referring to the full terms of the letter, the following matters were dealt with. The liquidator referred to the requirement to submit a Report as to Affairs to him within 14 days of the order to wind up, and requested Gillies to complete a Report within that time. He enclosed a blank form of Report and Statement Verifying Report for completion and return within the 14 day period, together with instructions for their completion. He enclosed a questionnaire for completion and return with the Report. He drew attention to s 530A of the Corporations Act and stated its requirements for the delivery up to a liquidator of the company's books in the possession of an officer and to inform the liquidator of the location of other books. He enclosed a notice requiring Gillies to deliver to him any of the company's money or property in his possession. He required Gillies to detail and identify each of the company's assets including the name of the company's banker. He stated that any moneys collected by Gillies or any other person on the company's behalf should be delivered to him (the liquidator).

It was not until 29 November 2001 that the liquidator received a letter from Gillies in response. The letter was on Allied Securities letterhead dated 26 November 2001. It requested an extension of four weeks in which to comply. In a response, on 7 December 2001, the liquidator gave Gillies until 14 December to provide the completed documentation.

Gillies did not provide the requested documentation on or by 14 December 2001. Nor were any books or records of Allied securities provided to the liquidator. The request in the liquidator's letter dated 12 November 2000 stood unsatisfied.

Then, on 9 January 2002, in the face of Gillies continuing non-compliance, a significant event occurred. The liquidator received a letter dated 28 December 2001 from Nicholson Clement, a firm of solicitors in Western Australia, who acted for one Browne who was a Liquid Engineering franchisee. The letter enclosed:

(a) A letter to Browne from Allied Financial dated 7 December 2001, signed by Wharton, with an attached loan statement, which requested Browne to pay $47.81 allegedly due under a loan agreement made between Browne and Allied Securities in relation to a Liquid Engineering franchise and in which Allied Financial claimed to be "the successor in law to Allied Securities" as the lender of a loan to Browne in relation to the franchise transaction.

(b) A letter dated 28 December 2001 from Nicholson Clement to Allied Financial which requested substantiation of the claim to be the successor in law to Allied Securities and evidence of a lawful assignment.

The letter from Allied Financial did not refer to the fact of the liquidation. Nicholson Clement had searched the ASIC data base and thus become aware that Allied Securities had been placed in liquidation. Nicholson Clement requested the liquidator to advise whether the loan from Allied Securities had been properly assigned to Allied Financial or whether it remained an asset of Allied Securities.

This correspondence from Nicholson Clement was the first indication to the liquidator that Allied Securities rights as lender under the Liquid Engineering Franchise transactions might have been dealt with in any way, let alone in favour of an entity called Allied Financial Pty Ltd. Hence, he took the matter up with Gillies and ASIC.

The liquidator wrote to Gillies on 14 January 2002 with reference to Allied Securities and recent correspondence. He stated that he had received a copy of a letter sent by Allied Financial which caused him concern. The letter purported to solicit money from a franchisee of the Liquid Engineering Industrial Franchise. He noted that Allied Financial had been incorporated on 3 December 2001. He requested Gillies to "explain how a company in liquidation can as lender either assign or sell its rights without the authority of the Official Liquidator" and requested advice as to "when this transaction took place to a company only registered 3 December 2001 and whether or not it was transacted with your knowledge". He reminded Gillies that he was yet to provide a Report as to Affairs, and the books, records and property of Allied Securities. This was a breach of the Corporations Act and had been reported to ASIC. He advised Gillies that his lack of compliance was hindering his investigation into the affairs of the company. Consequently, he instructed Gillies to submit to him "without further delay all records and property" of Allied Securities including the "Loan Agreement" documentation. He advised that he considered the demands to franchisees constituted a serious breach of the Corporations Act and possibly the Crimes Act and consequently the relevant authorities had been alerted.

On 15 January 2002 the liquidator wrote to ASIC. He advised that he had not received a Report as to Affairs nor any of the books and records of Allied Securities from the registered officers. He enclosed the correspondence received from Nicholson Clement, noting that Allied Financial's address was the same as that used by Allied Securities. He confirmed he had not had dealings with any person in respect to Allied Financial nor had he provided any documentation to its officers. He advised that the opening paragraph of Allied Financial's letter to Browne dated 7 December 2001 was "totally false". That was the sentence in which Allied Financial stated it was the successor in law to Allied Securities as the lender of the loan from Allied Securities to Browne and that it had acquired the right to the debt. The liquidator advised ASIC that he had written to Gillies but noted that he was not able to intervene in the affairs of Allied Financial. He expressed the view that it was probable that Allied Financial had made such a demand on other persons who had been deceived and who had accepted the demand at face value. Accordingly he requested ASIC to make enquiries into the demands made by Allied Financial.

In his evidence the liquidator stated that at about this time he received by facsimile the Questionnaire for Directors and Officers for Allied Securities signed by Gillies and dated 11 January 2002. According to the liquidator, the responses were of little assistance to his enquiries. The responses included: the company's business was "Trustee"; it had carried on business at the address of Wharton Partners; it ceased trading on 9 November 2001; it was removed as trustee on 9 November 2001; it kept the books and records "usual for trustee", and which were maintained by "The officers of the Company"; the books and records had not been delivered to the liquidator; Wharton Partners had acted as accountants for the company in the past three years; Oakley Thompson & Co had acted as solicitors for the company in the past three years; and, it had no current contracts. In a number of respects Gillies did not provide the required information at all. For instance, he did not provide details of the books and records of the company and their current location; he answered "not applicable" to the question what financial data, other than annual statutory accounts, were prepared for consideration by the directors, eg: management accounts, cash flow statements, etc; he left unanswered a question as to the period for which the last annual accounts were prepared and he did not supply copies of the annual accounts of the company for the last three years; and he left unanswered a question as to his awareness of any assets of the company which are not presently under the control of the liquidator. The information that was provided was an unsatisfactory and uninformative response to the liquidator.

Following the advice from the liquidator, ASIC commenced to enquire into the activities of Allied Financial and its officers, Wharton and Gillies. There was a concern about wrongful dealing with assets of Allied Securities, and wrongful claiming that Allied Financial was entitled to recover funds from franchisees. On 23 January 2002 Ussher had contact with a Liquid Engineering franchisee in Western Australia. That was one Hall who, like Browne, in December 2001 had received a demand from Allied Financial to pay an amount claimed to be owing under his loan agreement with Allied Securities. Hall had not heard of Allied Financial before receiving the letter. He sent copies of the correspondence and a copy of his loan agreement with Allied Securities to Ussher. Ussher also spoke to Nicholas Clement concerning the Allied Financial letter of demand to Browne on 23 January 2002.

As a result of this information Ussher forwarded a letter by facsimile to the director of Allied Financial on 24 January 2002. The letter stated that the evidence held by ASIC indicated that the allegation in demands recently issued by Allied Financial that it was the successor in law to Allied Securities as lender of moneys to Liquid Engineering Industrial franchisees was "entirely false". The letter required the immediate provision to ASIC of written undertakings as follows:

"1. All moneys received by your company pursuant to these demands must be paid to the Official Liquidator of Allied Securities Pty Ltd, namely Mr L Maxsted of KPMG, by no later than 4:00 pm Friday, 25 January 2002; 2. Your company will cease all such demands and notify the franchisees that they are not obliged to make any payment to your company. The notice must be mailed out to franchisees not later than 4:00 pm this Friday. A copy of the notice must be faxed to me by no later than 4:00 pm today; 3. To forward any sums subsequently received by your company, under the aforesaid demands, to the Official Liquidator immediately upon their receipt; 4. To provide to ASIC a complete accounting of all sums received pursuant to the aforesaid demands by no later than 4:00 pm Friday 25 January 2002; 5. To provide to ASIC a complete list of the names and addresses of all the franchisees to the Liquid Engineering Industrial Franchise; 6. To provide to ASIC complete details of all bank accounts operated or utilised by your company (whether in its name or not) by no later than 4:00 pm today."

The letter concluded with advice that unless a satisfactory response was received by 4:00 pm that day proceedings would be initiated by ASIC without further reference.

On 25 January 2002 the liquidator received a letter from Wharton Partners dated 23 January 2002 in reply to his letter of 14 January 2002. The letter was signed by Gillies. Omitting commencing and concluding paragraphs the letter stated:

"Allied Securities acted as trustee of the Allied Financial Services Trust "The Trust" up and until 9/11/01 when Denby Vale Pty Ltd was appointed trustee of the Trust in its stead. Under the trust deed, where a liquidator has been appointed to deal with the assets or undertaking of the trustee, the trustee is disqualified from holding office and another trustee must be appointed in its stead. Allied Securities, following the decision handed down by Warren J in the Supreme Court obtained a stay to the proceedings and appointment of the Liquidator and the Liquidator's administration of the affairs of the company pursuant to its appeal in the Supreme Court up and until the matter was dealt with in the Court of Appeal on 9/11/01. It was removed as trustee prior to the matter being heard. Subsequently, on 5/12/01 Allied Financial Pty Ltd "Allied Financial" was appointed trustee of the Trust. The lending activity conducted in the name of Allied Securities was contracted pursuant to a partnership agreement between the Trust and Lawnwood Pty Ltd. Consequently the loan documentation and assets arising from the loan agreements are assets of the partnership and not the partner. Allied Financial, as successor in law and as trustee of the Trust has acquired the right to and interest in the Debt (a partnership asset) as the contractual partner in the partnership and continues to conduct the partnership business. In that capacity it has issued correspondence to Liquid Engineering Industrial Franchisees. As a consequence of the above I do not consider that the "loan agreement" documentation you have requested me to submit to you constitutes records which would ordinarily be delivered to you as a consequence of the liquidation of Allied Securities. There are records of the Trust and are also records of the partnership. They are held by Allied Financial in that capacity."

The liquidator wrote to Gillies in response on 30 January 2002. He stated that any records held by Allied Securities at the date of his appointment, either in its capacity as a trustee or in its own right, were records which he was fully entitled to investigate in his capacity as liquidator. He stated that he had been advised that the loan documentation between Allied Securities and the borrowers made no reference to Allied Securities being a trustee. Gillies continued refusal to provide him with a Report as to Affairs, and the books, records and property of Allied Securities (and other companies subject to the winding up order) had been reported to ASIC.

At about 6:00 pm on 24 January 2002 ASIC received a facsimile from Allied Financial signed by Wharton. No undertaking was provided. The facsimile stated that a response would be given the next day, together with advice on the assertion that Allied Financial was not the successor in law to Allied Securities.

On 29 January 2002 Ussher received a letter from Wharton on Wharton Partners letterhead dated 25 January 2002 which had been faxed to ASIC that (Friday) night. The letter referred to ASIC's correspondence dated 24 January which it was assumed arose from a notification from KPMG. KPMG had been advised of the circumstances in which Allied Financial had become the successor to Allied Securities. It was presumed this response would set the matter straight and prove that it was out of KPMG's jurisdiction in respect of the liquidation of Allied Securities. The assertion that Allied Financial was making a false claim was disputed. Allied Financial had replaced Allied Securities as trustee and accordingly was its successor in law and was legally entitled to act as it had. Finally, the letter stated that a Report as to Affairs "is being prepared and the relevant records for the company will be delivered to the Liquidator".

On 29 January ASIC received from the Liquidator a copy of Wharton Partners letter to him dated 23 January 2002 referred to above.

The final thing to note as having happened on 29 January 2002 was that later in the afternoon Ussher attended the Wharton Partners premises at 537 Malvern Road, Toorak and served notices pursuant to s 30 and s 33 of the Australian Securities and Investments Commission Act ("ASIC Act") upon Allied Financial, Wharton Partners, Wharton and Gillies requiring the production of books and documents described in the notices to Ussher at 12:00 noon on 31 January 2002. The notices required the production of "books" of identified types relating to the Liquid Engineering Franchise and to the Allied Financial Services Trust, "books" having the meaning defined in the Corporations Act and the ASIC Act and including the originals, copies and drafts of financial records, bankers books, registers, records of written and all communications, reports, minutes of meetings, diaries, working papers and any other documents in the period 1 January 1997 to 29 January 2002 with respect to the promotion, management, administration, control, funding, offer of interests in, offers of loans or financial accommodation for, risks, returns and benefits associated with the Franchise and Trust. The notices stated that the "books" were required in relation to and for the purposes of ensuring compliance with the requirements of ss 180 - 184, Chapter 2D, s 590, s 592 and s 596 of the Corporations Act by, and/or arising out of the conduct of the affairs of, any one or more of Allied Securities, Denby Vale Pty Ltd ("Denby Vale"), Allied Financial, Mortgage and General Indemnity Co Australia Pty Ltd ("Mortgage and General Indemnity"), National Investments and Loans Australia Pty Ltd ("NILA"), and their respective officers, employees, agents, representatives and/or associates.

On 30 January Oakley Thompson & Co requested an extension of one week in which to comply with the notices. There were said to be boxes of documents which would take time to organise. Ussher refused the request. He observed that their clients had been using documents in relation to recent demands made by Allied Financial upon franchisees and that Gillies had referred to documents in recent correspondence to the liquidator.

No documents were produced by the due time under the notices. In the afternoon of 31 January Wharton sent a facsimile to ASIC advising that the material required to be produced was being put together but the deadline could not be met. An extension of time was requested. It was stated that not all of the records requested were available from the parties to whom the notices were addressed. Some records were now in the possession of Government agencies, some in the possession of ASIC and some had never been in the possession of the parties.[7] Later that day Ussher sent a facsimile to Wharton in which he advised that, without granting an extension of time, ASIC would refrain from further action provided the addressees provided all documents they could by no later than 10.00 am on 1 February 2001. ASIC would consider its options after assessing the responses. If the response was inadequate no further indulgence would be contemplated. As he had advised the addressees' solicitor, there was no reason why they could not produce to ASIC the documentation said to support the claim of Allied Financial to be the successor in law of Allied Securities as well as the accounting documents being used by Allied Financial in relation to its recent demands upon franchisees.

On 1 February 2002 Wharton sent a further facsimile to ASIC in which he stated that information would be provided that afternoon. Later that afternoon he sent a facsimile advising that documents would be delivered on Monday (4 February).

On 4 February 2002 Wharton delivered some documents to ASIC in response to the notices. Ussher described the production as being of "a small number of documents". They included:

(a) Allied Financial Services Trust Deed dated 21 June 1995.

(b) Deed of Retirement and Appointment of Trustee dated 9 November 2001 whereby Allied Securities retired as trustee and Denby Vale was appointed as trustee of the Allied Financial Services Trust.

(c) Deed of Retirement and Appointment of Trustee dated 5 December 2001 whereby Denby Vale retired and Allied Financial was appointed as trustee of the Allied Financial Services Trust.

(d) Minutes of meeting of directors of Allied Securities on 9 November 2001 at which it was resolved that Allied Securities retire as trustee of the Allied Financial Services Trust.

(e) Minutes of meeting of directors of Allied Financial on 5 December 2001 at which it was resolved that Allied Financial accept trusteeship of the Allied Financial Services Trust.

(f) Partnership Agreement between Allied Securities and Lawnwood dated 28 June 2001.

(k) Disclosure document for prospective franchisee 1999.

(l) Information Memorandum for Liquid Engineering Franchise 1998.

In ASIC's view the response to the s 33 notices was inadequate. No books of account for Allied Financial, no primary accounting records, no correspondence, no unitholder details, and no proper ledgers with respect to the borrowings, were produced. In an affidavit sworn on 5 February 2002 in support of the proceeding, and an urgent application for injunctions which I heard on 6 February 2002, Ussher said that none of the range of records that one would expect to exist in relation to a $25M "loan book" were produced. Nor, he stated, had Allied Securities produced any books of account to the liquidator. The investigation commenced by ASIC into the affairs of Allied Securities and its officers, Wharton and Gillies, in June 2000 was continuing. Ussher suspected, on the present evidence, that the officers of Allied Securities may have committed acts or omissions in contravention of ss 180-184, 286, 590, 592 and 596 of the Corporations Act. As to Allied Financial, ASIC had commenced enquiries on 23 January 2002, and on 31 January 2002 that became an investigation into the conduct of Allied Financial. Ussher suspected that the officers of Allied Financial may have committed acts or omissions in contravention of the same provisions of the Corporations Act.

It was in these circumstances that, on 5 February 2002, ASIC filed the originating process for orders under s 1323 and s 1324 of the Corporations Act. A range of restraining and other orders were sought. The purpose was to hold the situation while ASIC conducted its investigations, and to enable the liquidator to perform his duties. This would be achieved by the defendants being restrained from making further demands and disposing of monies received from franchisees, and requiring the provision of information including delivery up of books and records. Thus orders were sought for the provision of an account of monies received, the delivery to ASIC of all books and records relating to the Allied Financial Services Trust, the franchise, the franchisees, any partnership connected at any time with the Trust or Allied Securities, and the provision of any loans to the franchisees, to ASIC. Further orders were sought for the provision to ASIC of a list of persons who had provided monies to the Allied Financial Services Trust or Allied Securities, or any other person or entity, where the monies had been used in connection with the franchises or loans to the franchisees, and a statement of the current position of all loans provided to franchisees. A further order was sought that the defendants use their best endeavours to assist the liquidator in the performance of his duties in the liquidation of Allied Securities and provide such information to him as he may request. Finally, the originating process sought an order that Wharton and Gillies be prohibited from being officers of any corporation and from managing any corporation. This last application, to prohibit Wharton and Gillies from acting as officers or in the management of any corporation was abandoned shortly before the hearing of the proceeding.

On 6 February I heard an urgent application by ASIC for interim orders. On the defendants giving an undertaking I made orders by consent. The undertaking was that if the defendants made any demand for payment of monies on the franchisees of the Liquid Engineering Franchise they would, within seven days of the demand, give to the plaintiff a copy of the demand and an accounting of any monies received in the previous seven days. On that undertaking being given it was ordered by consent, in summary, that until 4.15pm on 1 March 2002 the defendants be restrained from transferring or otherwise dealing with or parting with possession of any funds received from the franchisees save and accept as ordered by the Court "or in the incurring of any necessary and reasonable expense in complying with this order". It was further ordered that by 4:00 pm on 14 February 2002 the defendants provide to the plaintiff a list of all monies received by them from the franchisees since 11 October 2001 and the details of any account or accounts into which such monies had been paid, a statement of the details of all loans provided to the franchisees, including but not limited to a list of the names and addresses of every franchisee who entered into a loan agreement with Allied Securities, a list of all monies owing to Allied Securities or any alleged successor thereto, and a list of each and every account of a bank or financial institution that holds or held any monies relating to repayments made by the franchisees, and deliver to ASIC all books and records in their possession or power relating to the Allied Financial Services Trust, the franchise, the franchisees, and any partnership connected, at any time, with the Trust, Allied Securities and the provision of any loans to the franchisees or in connection with the franchise or franchisees.

On 8 February 2002 Ussher wrote to the defendants' solicitors. He asked whether the defendants asserted that the loans provided by Allied Securities to the Harcourt Ridge Vineyard growers were contracted pursuant to a partnership agreement between the Allied Financial Services Trust and Lawnwood or whether they were provided through any other type of agreement. He also asked if the Harcourt Ridge loan book maintained by Allied Securities had been provided to the liquidator for Allied Securities and whether any of Oakley Thompson & Co's clients continued to hold any assets of any of the companies placed in liquidation by the order made by Warren J on 15 October 2001. In a response on 22 February 2002 the defendants' solicitors stated that they failed to see how any of the requests made related to the litigation. They provided none of the information requested.

In February 2002 the Liquid Engineering franchisee Hall, referred to above, provided ASIC with a copy of a position paper issued by the ATO with respect to the Liquid Engineering Franchisee investment offered in the 1998 and 1999 financial years. It is not necessary to refer to the detail of this paper. Among other things it expressed the view that the scheme was a sham and that it should not be accepted as giving rise to deductions to tax by investors in the scheme. I was told that the issue was still unresolved with the ATO.

The defendants produced documents to ASIC on 14 and 19 February 2002. But, apart from any other deficiency, the defendants did not comply with the order to provide a list of all monies received and details of any receiving account by 4:00 pm on 14 February 2002. On 15 February 2002 Ussher requested compliance. On 19 February 2002 the defendants delivered a box of documents to ASIC which included a document purporting to be a list of all monies received by the defendants from the franchisees since 11 October 2001 and the details of any account or accounts into which such monies had been paid. However, rather than a list, it provided one total figure. Nor was the balance of the order complied with.

On 19 February 2002 the National Australia Bank Limited produced documents to ASIC pursuant to a notice under s 33 of the ASIC Act. The documents related to the account of Allied Financial. On analysis of the documents it was seen that between 10 January and 5 February 2002, $22,650 of monies received from franchisees had been withdrawn from the Allied Financial account. The largest withdrawals involved payments to NILA.

On 20 February 2002 Ussher sent a facsimile to the defendants' solicitors in which he referred to a proportion of the funds received by Allied Financial from Liquid Engineering franchisees having been paid out to NILA. He noted that these payments were not disclosed in the statements provided to ASIC pursuant to the orders made by the Court on 6 February 2002. He requested a written undertaking from Gillies, Wharton and Davies (a director of NILA and the defendants' solicitor of Oakley Thompson and Co) that the sums received by NILA from Allied Financial will be held by NILA pending the Court's further consideration of ASIC's application and an explanation as to why these funds were paid to NILA.

On 22 February 2002 the defendants' solicitors stated that the order made on 6 February 2002 had been complied with and that the undertakings sought in relation to NILA were outside the scope of those orders. Davies was then overseas.

In his evidence the liquidator stated that in January and February 2002 his office received numerous complaints from individual franchisees and solicitors acting on behalf of their clients concerning the demands made upon them by Allied Financial. He was not challenged on this evidence.

On 19 February 2002 the liquidator wrote to P G Hutchins in Queensland and P R Hutchins in Victoria, they being recorded on the ASIC data base as the directors of Levart which, in turn, is recorded on the data base as the holder of all the issued shares in Allied Securities. The letters were in identical terms. They confirmed his appointment as liquidator of Allied Securities and Lingus on 15 October 2001. They stated that the sole director of the companies in liquidation, Gillies, had refused to cooperate with his investigation into the affairs of the companies and had neither provided him with his Report as to Affairs nor any of the books, records and property of the companies. The matter had been reported to ASIC for further action. He requested they assist his investigation into the affairs of the companies by providing him with all documents in their possession and any information which they believed to be relevant. It is to be noted that later in March 2002 the liquidator received a letter from P G Hutchins dated 4 February 2002 in which he stated that neither P R Hutchins nor himself had in their possession minutes of meetings and actual accounts of Allied Securities and Lingus.

On 21 February 2002 Gillies wrote to the liquidator with information concerning the various companies in liquidation. In relation to Allied Securities he advised that it operated a National Australia Bank account which had been closed, that payment and receipt summaries had been compiled, and that the Statement of Affairs would be completed and should be available in the near future. The letter referred to the office of Wharton Partners having experienced a number of difficulties in complying with its responsibilities. The office consisted of two people who had been placed under extreme pressure from ASIC in relation to Allied Financial. Approximately 25,000 copies of documents were provided to ASIC along with other documents. At the same time Wharton Partners had to satisfy the requirements of clients. There was also reference to medical problems with Gillies and his wife and, finally, a statement that every effort was being made to comply.

On 8 March, on the application of ASIC, I heard the parties again on the question of orders pending trial. On this occasion no undertaking was given. I heard submissions from counsel as to the necessity for, and the terms of, further orders pending trial. I made orders, in summary, that restrained the defendants from making any demands on the franchisees of the Liquid Engineering Franchise for the payment of any sum allegedly due and payable by the franchisees, from transferring or otherwise dealing with or parting with possession of any funds received from franchisees, and that required the defendants by 4:00 pm on 15 March 2002 to provide a list of monies received from franchisees since 11 October 2001 and of any such monies paid out from the account of Allied Financial, with particulars as to dates, identity of franchisee and recipient of payments.

Pursuant to these orders, on 2 April 2002 ASIC received from the defendants' solicitors a list of all payments received by Allied Financial from borrowers, a list of all payments made from the Allied Financial bank account and a statement as to the purpose for each payment.

On 3 April 2002 Ussher sent a facsimile to the defendant's solicitors to confirm that the funds held in the NILA account (having been received from Allied Financial) were subject to the restraining order made on 8 March 2002. He did this because he became aware that Wharton and Gillies were attempting to draw on that account although the liquidator, in his capacity as liquidator of ABC FM, had instructed the National Australia Bank not to permit withdrawals. On 4 April 2002 the defendants' solicitors sent a facsimile to ASIC concerning the NILA account. It stated that ASIC's letter dated 3 April 2002 presumed that the funds presently in the NILA account had been received from franchisees, whereas the solicitors were instructed there had been a number of other deposits into the account and withdrawals from it. ASIC was asked to advise how it identified the funds presently in the NILA account as having been received from the franchisees. I note [8] that at 16 April 2002 the Allied Financial account had a credit balance of $431.16. Prior to that, in the period since December 2001 there had been various deposits and withdrawals.

On 3 April 2002 the liquidator received by facsimile from Wharton a Report as to Affairs of Allied Securities. It was of little assistance to the liquidator.

In the first instance the evidence was on affidavit. ASIC called the following deponents: Ussher, Maxsted, Paul Stewart Andrews and Robert Gregory Mackay. The defendants called Wharton, Gillies and John Ronald Tunbridge. Their affidavits were tendered.[9] Each witness gave viva voce evidence, in some instances adding substantially to their evidence in chief.

I have already made a number of references to Ussher which indicate his role in the matter. He is involved in the investigations concerning Allied Securities and Allied Financial, swore affidavits in support of ASIC's case and acted as instructing solicitor at the trial. He was cross-examined. I found him a reasonable and honest witness.

Maxsted gave evidence of his attempts to obtain information to enable him to carry out his duties and his frustrations in that respect. He was a very experienced accountant and liquidator. No challenge was made to his competence or as to the way in which he has acted thus far. He was cross-examined, but not at length, the transcript of his evidence occupying a mere seven pages. He was undoubtedly a witness of truth whose actions were based on long professional experience, and his expressed opinions and statements were honestly and reasonably held. I accept his evidence.

Andrews has been the managing director and secretary of Liquid Engineering Ltd since its registration on 8 July 1996. It was incorporated to acquire the existing business of Liquid Engineering, which had been formed in 1990 to develop and market a range of environmentally friendly chemical products. It continued the Liquid Engineering business. From registration on 8 July 1996 until 16 November 2001 the company was known as Liquid Engineering International Pty Ltd ("Liquid Engineering International"). On 3 April 2001 the company was placed in administration. In September 2001 the company entered into a deed of company arrangement. On 16 November 2001 the company converted to an unlisted public company.

There is another Liquid Engineering company, of a slightly different name, with which Andrews is involved. This is Liquid Engineering Industrial Pty Ltd ("Liquid Engineering Industrial") which was registered on 2 March 1998 to put into effect the Liquid Engineering franchise scheme. Andrews is the sole director and secretary of Liquid Engineering Industrial having been appointed as such on 17 March 1998.

Andrews gave evidence about the Liquid Engineering franchise scheme, the Allied Financial demands, whether borrowers were liable to make repayments of their loans and other related matters. Andrews impressed me as an honest witness.

Mackay is an accountant currently in the employ of ASIC. At the request of Ussher he provided an opinion, on the materials provided to him, as to whether:

(a) any partnership, trust or corporation provided funds to Allied Securities to enable it to make loans to franchisees of the Liquid Engineering Franchise in 1998;

(b) Allied Securities had the financial resources to make any such loans in June 1998 and June 1999;

(c) Allied Securities made any such loans;

(d) the loans purportedly made by Allied Securities to the franchisees constituted a round robin of cheque entries, the expression "round robin" describing a mechanism whereby the payment and receipt of cheques is used to create a series of self-cancelling debit and credit entries with little or no underlying economic effect.

Mackay concluded that the accounts of the Liquid Engineering loan transactions in 1998 were not supported by any reliable audit evidence, that the banking documents indicated that the transactions were connected to the round robin entries in 1998 and that no loans to parties external to the group appeared to have been made.

Mackay was also asked for his opinion whether the audit trail of banking and accounting documents lent any support to the assertion that "The lending activity conducted in the name of Allied Securities was contracted pursuant to a partnership between the Trust (the Allied Financial Services Trust) and Lawnwood Pty Ltd". He concluded there was an absence of such evidence.

The principal witness for the defendants was Wharton. He swore two affidavits in which he described the Liquid Engineering Franchise scheme, the role of Allied Securities and its retirement as trustee of the Allied Financial Services Trust, and answered the affidavits filed by ASIC. In his first affidavit he foreshadowed that he may refuse to answer a question on the ground of self-incrimination but he did not make that objection in his oral evidence. His oral evidence ranged over more than two and a half days. I thus had the benefit of observing him answer questions over a long time. He took great care in the formulation of his answers, bringing to the task an intelligent and alert mind. He was aware of what he should say to ensure consistency with the defendants' case. He impressed me as being possessed of an artful disposition. He gave me no confidence that what he said should be accepted unless it was corroborated by cogent independent evidence. There was a studied, and in my view deliberate, lack of record keeping (or at least production of documents) accompanied by a presentation of legal documentation unaccompanied by contemporaneous and historical correspondence, notes and memoranda which might facilitate an understanding of what had actually occurred from time to time. I expressly conclude that he sought to mislead the Court, the liquidator, and ASIC, by his evidence that Allied Securities had retired as a trustee on 9 November 2001 when the winding up order had not commenced to operate.

In his short affidavit Gillies said nothing about the case. He said that since 1998 companies associated with him had been investigated by the ATO, the NCA and ASIC. Search warrants had been obtained alleging the investigation of offences by him. In his first affidavit Ussher had referred to the investigation of breaches of the Corporations Act. Apprehending that he was the subject of investigation and that anything he said might tend to incriminate him, he would not provide an affidavit. He also referred to ill health. In the end the defendants' counsel announced he would call him to give evidence, to avoid an adverse comment if he did not do so. He was in the witness box for a relatively short time, in terms of transcript his evidence running over only some 29 pages. He possessed the same interests as Wharton but in the circumstances was not subjected to a similar cross-examination.

The final witness for the defendants was Tunbridge. He is an accountant. He had been asked by the defendants' solicitor, Davies, to provide an expert accounting report on the Mackay affidavit. Did he agree with Mackay's approach to the brief he was given? Tunbridge's affidavit and oral evidence revealed that he took a narrow, critical approach to the task. Regrettably, in his affidavit he did not set out his instructions, and he disclosed in cross-examination that he had no notes of his conversations with Davies and Wharton in the time when he was considering his opinion. I formed the view that he refrained from seeking information from the defendants that was properly to be sought in the fair discharge, as an independent expert, of the task entrusted to him. He fell, I considered, after observing him and considering his evidence closely, into the role of an advocate for the clients cause. The sub-letting and secretarial arrangements he has with the defendants solicitors can not be overlooked as an influencing factor in that regard, in my view, or at least as bearing relevance to the matter of weight in the assessment of his evidence. In that respect I do not overlook that Mackay is employed by ASIC. Nevertheless, assessing these two witnesses overall I concluded that Mackay was an honest witness who gave evidence in a reasonable and sensible way. By comparison, I concluded that Tunbridge became a vehicle to achieve an end.

Yet a deal of the evidence of Mackay and Tunbridge was not strictly admissible as opinion evidence. Elements of it were more in the nature of kerbside commentary than opinion evidence. Some of the evidence suffered from being assertions, in the nature of ultimate conclusions on matters in issue, as distinct from being the expression of an opinion in relation to examinable criteria.[10] Both counsel recognised the deficiencies and the evidence was admitted subject to objection, as it were, on the basis that I might be assisted by it and would give it such weight as was appropriate. Counsel did not engage in an analysis of the evidence to establish the admissibility or weight of it, and I will not do so. On the way the case was conducted it is unnecessary to do so. Essentially, as I understood it, counsel relied on the evidence as assisting an understanding as to the nature of the records (including accounting entries) reasonably expected to be kept in relation to transactions of the sort involved in this case.

As mentioned earlier, Andrews registered Liquid Engineering International in 1996 to acquire and develop the Liquid Engineering business.[11] The business produced a range of products which Andrews was proposing to supplement with new products. The products were fuel additives and other like products such as a fuel conditioner concentrate, a multi-purpose lubricant and an anti-rust agent. The products were designed to aid in the better care and maintenance of machinery and equipment. Andrews had been selling the products to an industrial market but, considering they were ideal for the agricultural industry, wished to market them to farmers. The difficulty confronting Andrews was how to get the products out to farmers. In principle, having regard to the spread of agricultural activity in Australia, accomplishing that objective would require significant capital and a sales force. He lacked both. He spoke to his accountant in Western Australia. It seemed that a business structure based on a franchise model would suit the purpose. That required a legal structure in which persons would participate as franchisees and by their investment provide working capital with which to get the business going. Franchisees would be attracted by the taxation and other financial attractions of the scheme. Taxation advantages would be related to expenses and interest paid by franchisees in connection with the acquisition of a franchise. For this purpose there would be a borrowing and hence a lender was required. It was known, presumably to Andrews accountant but perhaps to Andrews himself, that Wharton Partners might be able to source the necessary funding under a franchise model. This ability would seem to have lain in the nature of Wharton Partners practice and in particular its access to a client base which might be attracted to investment in such a scheme.

This led to Andrews and his accountant meeting Wharton at Wharton Partners office in Melbourne in the first half of 1998. Andrews described the project which, as Wharton stated in evidence, was to establish a system of selling products by door to door sales to farmers and not through agents. He thought his business would be suitable for selling products through the franchise system. He referred to other businesses in Western Australia operating in that way.

Wharton said that he could assist with the financial arrangements for the proposed franchisees. He directed Andrews accountant to a firm of lawyers in Western Australia who could assist in preparing the various agreements and setting up the franchise and the franchise product marketing structures required. The matter proceeded accordingly, and documentation was prepared to establish a franchising scheme, the structure of which is diagrammatically represented in Schedule D, and which I now summarily describe.

Liquid Engineering International licensed Liquid Engineering Industrial (which was registered for the purpose in March 1998) to grant franchises for the sale of its products within Australia. Liquid Engineering Industrial entered into agreements by which they sold franchises to franchisees. Each franchisee was allocated an area called a market group which had a radius of not more than 250 kilometres and included a minimum of 96 farms and two country towns in Australia. A franchisee had the choice of personally selling the products, or employing a sales agent to do so, or appointing a pre-approved master sales agent. As it turned out, and as may have been expected, all franchisees took the third course of appointing a pre-approved master sales agent which engaged persons to act as salesmen of the products in the franchised areas.

An Information Memorandum was available for interested persons. I accept Andrews' evidence that also available for the consideration of prospective franchisees was an opinion of Queen's Counsel on the issue of tax deductibility of expenses. The documentation to effect the arrangements included the Franchise Agreement, Loan Agreement and Indemnity Agreement referred to [41]. The like documentation was used in the financial years ended 30 June 1998, 1999 and 2000. In his affidavit sworn on 21 February 2002 Andrews said that approximately 1,400 franchises were sold to about 850 individual franchisees. Wharton did not challenge those figures in his affidavit. However I note that in his affidavit sworn 17 April 2002 Ussher referred to the number of individual franchisees as 900, and in an answering affidavit Wharton accepted this number. I also note that in evidence in the ASIC v ABC Fund Managers trial, Wharton said that in 1998 there were possibly 500 borrowers and in 1999 there were possibly 800 borrowers. To an extent there were variations on these numbers in the oral evidence before me. There were also borrowers in 2000. Whatever the actual numbers be, it is apparent that a very large number of persons invested as franchisees.[12]

Under the arrangements Liquid Engineering Industrial sold franchises for a total price of $36,250 made up by the following items: establishment fee $750, franchise fee $13,000, advertising fee $9,000, service fee $6,000, training fee $4,000, hire fee $2,050, indemnity fee $270, and pre-paid interest $1,180. Franchisees had the option of taking up a loan from Allied Securities of $26,250 per franchise (that amount could differ; I am speaking generally by way of summary). The loan was of 20 years duration unless repaid earlier. In summary, after the initial year loan repayments at 26% per annum and interest were linked to, and deducted from, sales for each franchise. As it turned out every franchisee took the loan option and entered into a loan agreement with Allied Securities. On this basis franchisees were personally required to advance $10,000, the balance of the amount payable to Liquid Engineering Industrial being advanced by Allied Securities under the loan agreement. In his evidence at the trial in ASIC v ABC Fund Managers Wharton estimated that approximately $25M was lent by Allied Securities.

The loan agreement was drawn down and paid by Allied Securities to Liquid Engineering Industrial, as franchisor, on the grant of the franchise. The payment was to an account called "The Liquid Engineering Industrial Clearing Account" with the National Australia Bank. The account was controlled by Allied Securities. Liquid Engineering Industrial, although beneficially entitled to the franchise fees, had no control over or access to the funds in that account. Wharton stated that pursuant to an oral agreement between Allied Securities and Liquid Engineering Industrial the moneys in the Liquid Engineering Industrial Clearing Account were transferred to the NILA account held with the National Australia Bank. He stated that these moneys were held by NILA on behalf of Liquid Engineering Industrial and Strategic Rural Investment Fund. To explain that more fully, Liquid Engineering Industrial was trustee of the Liquid Engineering Industrial Trust, the unitholder in which was the Strategic Rural Investment Fund. That trust and fund - both controlled by Wharton - were brought into existence for the purpose of the Liquid Engineering transaction. The ultimate beneficiary down the line from the fund was an entity registered in the British Virgin Islands.

For completeness it should be noted that in his evidence Andrews denied the oral agreement, stated he did not recall hearing of the NILA account, and that he did not authorise or agree to the transfer of any funds to the NILA account. To Andrews statements in this regard Wharton pointed in particular to the information in the 1997/1998 taxation return for the Liquid Engineering Industrial Trust. It seemed to me that the explanation for any lack of understanding on Andrews part was that knowledge of the financial transactions lay very much in the complex web of Wharton's mind and that the tax return was relevantly based on information supplied by Wharton. I find that, as much as possible, Wharton kept to himself the intricacy of the web which he and Gillies spun for the benefit of his interests.

Wharton said in evidence that a franchisee was entitled to an immediate deduction against tax in the order of $34,050, assuming the claim was allowed. In addition to the apparent tax advantage, the indemnity agreement effectively made the loan non-recourse to the franchisee. Under the indemnity agreement, Mortgage & General Indemnity undertook to indemnify the franchisee for any balance of the loan, unpaid and owing to the lender, at the termination of the franchise agreement. Hence, if the loan was not repaid from product sales, and the indemnity payment had been maintained, a franchisee would be relieved of further payment and any outstanding balance became the responsibility of Mortgage & General Indemnity. It is seen in Schedule B to this judgment that Mortgage & General Indemnity is a subsidiary of Tye Nominees. Gillies is the director, and he and Wharton are the secretaries, of Mortgage & General Indemnity and its registered office is at the office of Wharton Partners.

Turning to the proceeds of sales of products, Liquid Engineering International was responsible for recording sales for the purpose of calculating, among other things, the loan repayments due by each borrower. The sales figures were provided to Liquid Engineering Industrial and the master sales agent quarterly. Sales made by the master sales agent were allocated to the franchised territories and recorded by Liquid Engineering Industrial against the name of the relevant franchisee. Each quarter Liquid Engineering International would deduct from the gross sales revenue 30% to cover product costs, 5% to cover distribution costs and transfer the balance to Liquid Engineering Industrial. Liquid Engineering Industrial would deduct from the gross sales revenue 5% for its franchise fee, then pay 25% to the master sales agent as commission, 26% to Allied Securities as loan repayments and the balance to franchisees.

There was a concentration in the evidence on the banking transactions which lay behind the lending by Allied Securities to franchisees. ASIC's case concentrated on the 1998 loan transactions which were carried out over a day or so in June by means of a round robin of cheques from Allied Securities to other entities controlled by Wharton and Gillies and back to Allied Securities. No external finance was supplied to Allied Securities for this purpose. The same method and structure was used by Allied Securities in 1999 and 2000.

In his evidence Wharton provided a chart[13] which purported to set out the flow of funds from and to the Allied Securities Liquid Engineering Clearing Account. It is a complex chart depicting a number of entities and trusts with many arrows and many sums of money going here and there. I do not make any finding as to its correctness. I am neither required to, nor was I asked to do so, for the proper determination of this case. The chart, together with Wharton's evidence, constitute Wharton's explanation of the manner in which the Allied Securities side of the transaction was implemented.

I referred earlier[14] to Mackay's evidence as to the transactions being of a round robin nature. In his affidavit he said that the simultaneous transactions had the effect of returning substantially all of the "funds" back to the Allied Securities account. The only funds actually cleared and deposited in the Allied Securities Liquid Engineering Clearing Account were nominal and went towards covering the bank fees and charges incurred by the round robin transactions. Wharton, and Tunbridge in particular, took issue with Mackay's evidence.

In his evidence the liquidator, Maxsted, stated that he was concerned to establish whether any loan funds were in fact provided by Allied Securities. Given the company's use of round robin funding techniques and information received from franchisees that they never received any loan funds, he expressed concern that the Liquid Engineering loans may also have been a sham. He has not been able to investigate this issue further as a result of Wharton and Gillies refusal to provide the books and records of Allied Securities.

There was thus raised an issue whether the loan transactions were a sham. Both counsel agreed that I should not determine that issue. It was neither appropriate nor necessary to do so in this case. It was preferable for the liquidator to carry out his investigation and for future action to take its course. I agree with this approach and do not consider the issue.

There were some differences between Andrews and Wharton on other aspects. It is not necessary for me to determine these issues, and I only mention them. They are better left to await investigation and consideration by the liquidator and such action as may follow. There is an issue whether the master sales agents ceased activity prior to July 2000 and whether there have been sales under the franchises since then. There is an issue as to the accuracy of records of sales obtained by Wharton from Liquid Engineering International. Andrews stated, and Wharton denies, that no sales occurred under the franchise agreements for the periods claimed in the Allied Financial letters of demand. Andrews claims that no sums are presently due and owing by the franchisees under any of the loan agreements with Allied Securities. Wharton disputes this, stating that amounts are due for the year ended 30 June 2000 and the quarters ended 30 September 2000 and 31 December 2000 and possibly for subsequent periods. There is an issue as to the effect of an apparent cancellation of the licence granted by Liquid Engineering International to Liquid Engineering Industrial. Andrews said that the franchises were not operating after 30 June 2000. These statements were made in the affidavits and were developed, and subjected to cross-examination, in the oral evidence. They raise issues of fact. I am not in a position to resolve these issues on the materials before me. Indeed, in my view, and I understood counsel to be of the same view, they are among the matters best considered by the liquidator in the first instance.

Another issue agitated at the hearing was whether Allied Securities acted in its own right or as trustee of a trust called the Allied Financial Services Trust when it lent money. The defendants' case is that it acted in the capacity of a trustee at all relevant times. The defendants contended that as trustee of that trust it had since June 1995 conducted business in partnership with Lawnwood as trustee of the Diversified Investment Unit Trust. The partnership was called Allied Acceptance. The defendants contend that by agreement of the partners Allied Securities conducted the business of the partnership. The business was the lending of funds. All relevant services in that regard were provided by Wharton Partners or performed by Wharton and Gillies or staff (and perhaps Gianchinio) from their office. In short, it was contended, Allied Securities never conducted business in its own right.

The defendants then contend that on 9 November 2001, but prior to the expiration of the stay on the winding up order, by written instrument Allied Securities retired as trustee of the Allied Financial Services Trust and Denby Vale was appointed trustee in lieu.[15]

Then, on 3 December 2001 Allied Financial was registered, and on 5 December 2001 by written instrument it was appointed as trustee of the Trust in lieu of Denby Vale.[16] As a result Allied Financial became a partner in the Allied Acceptance partnership. The defendants' case is that as such trustee Allied Financial occupied the role formerly held by Allied Securities. Accordingly, it was submitted that (all other things being equal) Allied Financial had been entitled to make demands upon the borrowers in December 2001 with respect to the Liquid Engineering franchise loans, and to deal with funds received for the benefit of the partnership.

It was submitted for the defendants that in these circumstances they had correctly and sufficiently responded to the liquidator's requests for books and records and other information.

These contentions have two essential elements. The first element is that Allied Securities relevantly acted as a trustee and never on its own account. The second element is that Allied Securities was replaced as trustee prior to the winding up order commencing to operate. ASIC submitted that, in truth, neither element existed. I now discuss each element in turn.

Wharton said in evidence that the Allied Acceptance partnership was orally agreed with Hutchins (who controls Lawnwood) in about June 1995 and that a written partnership agreement had been prepared providing for 21 June 1995 as the date of the agreement. The agreement had not been signed. Wharton said that the unsigned agreement was attached to a partnership agreement which the parties signed on 28 June 2001. The agreement was produced. He also produced a Deed dated 21 June 1995 between Allied Securities and Lingus whereby Allied Securities was appointed trustee of the Allied Financial Services Trust. This Deed contained a clause[17] which provided that a trustee shall be disqualified from holding office if being a company it goes into liquidation. By another clause[18] it was provided that if the retiring trustee is a sole trustee it shall appoint another trustee in its place. Wharton said in evidence that, it being possible Allied Securities would be wound up, he and Gillies had considered it prudent for Allied Securities to retire as trustee. Their decision in that regard, and the subsequent decision to appoint Allied Financial as trustee was reflected in minutes of meetings of directors of Allied Securities and Allied Financial.[19]

No party called Hutchins or any other person who might properly have been able to speak as to Lawnwood's position and as to the existence of the Allied Acceptance partnership. Late in the trial ASIC tendered correspondence from solicitors acting for Lawnwood, which stated that Lawnwood was a partner of the Allied Acceptance partnership. It was stated that if the fact of partnership was in dispute Lawnwood should have been joined as a party to the proceeding. The letter did not identify the other partner or partners. It concluded with a statement that Lawnwood would not give evidence. Being an out of court statement by a third party, the letter was not admissible as proof of the fact of the partnership, and in tendering the letter counsel for ASIC expressly disclaimed that a partnership was admitted. ASIC tendered the letter because of the further statement in it that Lawnwood supported the orders sought by ASIC.

Counsel for ASIC submitted that the contemporaneous evidence did not support the existence of the alleged trust and partnership, indeed it positively pointed to a conclusion that no such trust or partnership existed. This was elaborated on in detail in counsel's written submission.

The fact is that it was not until the provision of the questionnaire dated 11 January 2002 that reference was made to the company being a trustee. But no particulars were provided and there was no reference to a partnership. It was not until Gillies' letter dated 23 January 2002 that the liquidator was informed of the alleged trust and partnership. The defendants relied on the existence of the trust and partnership in opposing relief in the present proceeding. The existence of a trust and partnership was contrary to all the outward appearances until January 2002. Until then there was no suggestion by Allied Securities, whether to the Liquid Engineering borrowers, Andrews, ASIC or the Supreme Court in ASIC v ABC Fund Managers (both at trial and in the Court of Appeal) that Allied Securities had acted, in relation to the loan agreements, in any capacity other than its own. Neither in documentation or verbally had there been any such intimation. In his evidence before Warren J in ASIC v ABC Fund Managers, Wharton stated that Allied Securities was owed in the vicinity of $25M in respect of loans for the Liquid Engineering Franchise. While there were references to trusts in that case Wharton made no reference to a trust in respect of Allied Securities lending in the Liquid Engineering matter. Nor was there any such reference in the affidavits of Gillies and Gianchino. In his evidence in the present proceeding Wharton sought to explain the absence of any reference to a trust capacity or a partnership on the basis that he and Gillies had never been questioned as to the structure of Allied Securities lending activities. They were never asked "relevant" questions. It is clear from her judgment that Warren J dealt with the matter on the basis that Allied Securities acted in its own right.

It is not necessary to refer to the many facts and matters relied upon by ASIC's counsel in support of his submission on this part of the case. Overall the submission was that Allied Securities had acted on its own account and when Gillies and Wharton came to fear the worst they set about creating edifices and back door routes whereby Allied Securities' assets could be removed to, and "quarantined" (to use Wharton's expression to Andrews) in, other hands.

Notwithstanding the time taken on these issues of trust and partnership during the hearing, and substantial elaboration of them in ASIC's final written submission, in the end ASIC's counsel did not seek a finding on them. He did not abandon the contention that the trust and partnership had not existed. But, he submitted, it is not necessary to conclude on the issues, for the following reasons. If Allied Securities was a trustee, the liquidator possessed a lien over the assets of the trust to meet the costs and expenses of the liquidation and any claims against Allied Securities arising out of its trusteeship. For that purpose he required, and was entitled to, access to the books and records of the trust held or formerly held by Allied Securities. Further, if there was a partnership Allied Securities had had a 50% interest. If there was no partnership it had a 100% interest. Hence, if there was a partnership the liquidator had a right to at least inspect the books and records. In these circumstances it was not necessary to reach a conclusion as to whether there was a partnership. There was some difference between counsel as to the liquidators right to inspect the books and records of the trust. Otherwise, although for different reasons, counsel for the defendants also took the position that it was not necessary to determine the issues. In my view it is appropriate, having regard to all the circumstances including the interest of Lawnwood, that the issue of the existence of the trust and partnership not be determined in this proceeding and I do not consider it further.

That brings me to the second element which is the contention that Allied Securities was replaced as trustee on 9 November 2001 prior to the time when the winding up order commenced to operate. The question that arises here is whether Allied Securities was in fact replaced before the winding up commenced. Both counsel recognised this as being a threshold or primary point. The point may be considered on the assumption that Allied Securities was trustee of the Allied Financial Services Trust. If it remained as trustee when the winding up order commenced the subsequent act of retirement was invalid, as were the purported appointments of Denby Vale and Allied Financial. The consequence would be that Allied Securities remains as trustee and, as such, is entitled to hold or receive the property of the trust including that held as manager of the Allied Acceptance partnership. That is all the more so, if at all relevant times it acted in its own right. On either basis the liquidator is entitled to the books and records and other information, which he has been seeking, and to take control of the property, as he has been seeking, of Allied Securities.

This second element was essential to, and the underlying basis of, the defendant's contentions to the liquidator and ASIC, and to their case before me. Unless Allied Securities had retired as trustee before the winding up order commenced to operate, the defendants could not have taken the position they did in relation to the liquidator and ASIC. So much was really conceded by counsel for the defendants before me.

In his first affidavit in opposition Wharton produced the relevant instruments of retirement and appointment of trustee, the Deed of Trust dated 21 June 1995 and the Partnership Agreement dated 28 June 2001, and swore that Allied Securities retired as trustee "during the period of time in which the winding up order was stayed". That was no casual piece of swearing. The edifice that Wharton was carefully and deliberately setting up, and which had been put forward by Gillies in his letter dated 23 January 2002[20] was that Allied Securities had retired before the winding up commenced and therefore had no books and records or other information which were liable to be produced to the liquidator other than that which was produced. That was the end of the case, the liquidator and ASIC were wasting their time, Allied Financial was acting within its rights as the duly appointed trustee and it should be left to get on with its business.

Wharton gave some further evidence on the matter and Gillies' evidence also referred to it. In his oral evidence-in-chief, Wharton was asked why the step of Allied Securities retiring and appointing a new trustee "was taken on that day", meaning 9 November 2001 being the date of the Deed of Retirement and Appointment. In his answer he stated that under the Trust Deed an insolvent trustee is unable to continue as trustee of the Trust, and he referred to there being an appeal on 9 November and a stay. He went on to say that the "appeal was to be handed down on 9 November" and he said to Gillies it was imprudent for Allied Securities to continue as trustee and a new trustee should be appointed pursuant to the Deed and the Deed of Retirement and Appointment was prepared and executed.

It is to be noted that the premise in the first question to Wharton was that the step of retirement and appointment "was taken on" 9 November 2001. There was no greater elaboration of the date on which Wharton spoke to Gillies or as to when and by whom the Deed was prepared and when it was executed. I do not overlook the minutes of meeting of directors of Allied Securities on 9 November 2001. I do not however accept the premise without cogent supporting evidence that such a meeting occurred on that day.

In cross examination Wharton gave evidence that affirmed that the replacement of Allied Securities as trustee occurred on 9 November 2001. He said that on that day "we simply took a precautionary view in terms of the potential outcome of the proceeding under the Trust Deed". In this cross-examination, Wharton was not being directly pressed as to the actual date of execution. My impression was that ASIC's counsel was rather accepting that the Deed of Retirement and Appointment had truly been executed on 9 November 2001, the date it bears.

In his evidence Gillies threw light on the issue. In evidence-in-chief he was asked, as best as he could recollect, "roughly" when Allied Securities retired as trustee. He answered:

"Yes, I believe in November of 2001 Allied Securities was put into liquidation and as such the trust deed of the trust meant that that company could be no longer trustee of that trust and Denby Vale Pty Ltd was put into its stead at that period of time".

In cross-examination, Gillies said he was not present at the hearing in the Court of Appeal. He was advised the result, he believed by "my legal people". At some stage he spoke to Wharton about the loss of the case. The conversation was primarily that it would be of no benefit to proceed with the appeal. Counsel asked him whether, after finding out the Court of Appeal had refused the stay, he took any steps about Allied Securities remaining as trustee of any trust, and he said:

"Well the action was to replace Allied Securities with Denby Vale as trustee of the trust."

He believed he was certain of that. He said that Wharton arranged for the documents to be prepared; he believed that was after they decided that there was no point in going on with the appeal. He did not recall how long after the conversation Wharton gave him the documents to sign. He could not be sure but it would have been that day or the next, it was not a long time afterwards. When pressed, he said it was a very short period of time after. He could not be specific but it was not a long period of time. He believed that Wharton obtained legal advice whether Allied Securities should retire, he presumed from Oakley Thompson. He believed he signed the Deed of Retirement after legal advice had been obtained from the lawyers. At the very end of his cross-examination Gillies was asked if he thought the order to wind up would adversely affect Allied Securities. In answer he said he believed the order would not have the effect on Allied Securities "you would think ... because we replaced Allied Securities with Denby Vale and therefore the partnership was still in situation". I did not take this answer to qualify his previous evidence as to the timing of Allied Securities retirement as distinct from the continuation of the partnership. If it did mean to qualify it, I reject it.

In re-examination Gillies was asked if he was able to say when he actually signed the Deed of Retirement and Appointment of trustee. He answered that he could only presume they were signed "on the date on the actual - I cannot recall precisely now the date which is the answer I gave before". He did not believe he had spoken to anyone about what steps should be taken with respect to the trustee of the Allied Financial Services trust before the outcome of the Court of Appeal case.

The defendants did not give or call any evidence to establish by whom and when the Allied Securities Deed of Retirement and Appointment was prepared or as to any legal advice sought and received and by whom it was given. The critical issue concerned the day and time when the Deed of Retirement and Appointment was executed. The issue was a vital one, and was clearly recognised as being such by the defendants. The defendants carried the onus on the point. They produced no contemporaneous note, memorandum or correspondence on the matters mentioned. They set their case up to rest on the assertions of Wharton. Gillies was called at the last minute to avoid an adverse comment.

Counsel for ASIC submitted that I should accept Gillies evidence as establishing that the Deed of Retirement and Appointment was executed subsequent to the expiration of the stay on 9 November 2001 and, therefore, at a time when the winding up had commenced. Counsel for the defendants observed that Gillies' evidence in cross examination and re-examination was "in some respects" arguably inconsistent with Wharton's evidence. He submitted that the evidence of Wharton was to be preferred where there was an inconsistency between the two. He submitted that Wharton's evidence was logical "in a primary sense...because if matters were not undertaken in the way Wharton's described" everything that followed was an "elaborate nothingness".

Much later in the concluding stages of his address, counsel for the defendants returned to the present issue, and certain other issues, [21] and submitted there was no need to make a finding on them. This was understandable and appropriate in some instances. In the particular instance (of the retirement of Allied Securities as trustee) it was understandable having regard to the risk of an adverse finding with the consequences acknowledged by counsel. Counsel took the course, to which he returned in reply, of suggesting that having regard to the relief sought by ASIC and the lines of relief which the defendants' solicitor had indicated as a way of resolving the matter[22] that I could proceed to make orders, if I wished, on the basis of accepting the matters put by counsel for ASIC about the failure to keep proper books and records of transactions and to comply with the Corporations Act. On that basis the orders presented by ASIC or the orders presented by the defendants "ought to be made" and, thus, it was not necessary to make a final finding or a finding on the issue as to when Allied Securities purported to retire as trustee. The first thing to say about that is that counsel never expressly consented to the existence of jurisdiction to make orders under s 1323 or s 1324 of the Corporations Act. Whether jurisdiction existed was left for me to determine. There was also some daring in the submission as the point was the essential basis or justification for the defendants' conduct prior to the action and lay at the very threshold of the defendants' case before me which ran over seven contentious days preceded by two interlocutory hearings. The fact is that the defendants both created the issue and chose to run the case on it. They bore the onus on the issue. Knowledge of the issue lay with the defendants, and perhaps also their lawyer if he had been involved. They produced no contemporaneous note, memoranda or correspondence relating to it. They ran the issue as they considered appropriate. And as counsel for the defendants further said in his submission, I might take the view that I should determine the issue. I do take that view. I have reached the clearest conclusion on the issue. I consider it appropriate to express that conclusion. Not to express that conclusion would tend to permit, if not condone, continued mischief being perpetrated by the defendants continuing to assert their false position and thus render difficult the performance by the liquidator of his duties. I state my conclusion with little further development.

I do not accept Wharton's evidence. I have referred sufficiently to my observations of him as a witness. I reject his evidence that Allied Securities retired as trustee during the period of time in which the winding up order was stayed. I do not accept that Allied Securities executed the Deed of Retirement and Appointment during that time. In my view the evidence of Gillies accords with the likelihood as to what happened and I accept his evidence as indicating that he and Wharton considered the matter after learning the result of the case in the Court of Appeal, and that following a discussion legal advice was obtained and the appropriate documents were drawn and executed. I accept Gillies evidence. I can not make a finding as to the actual date of execution of the Deed. Light would be thrown on that issue if more extensive evidence of the sequence and date of events had been provided. Yet I am well satisfied, on the balance of probabilities, that the Allied Securities Deed was executed at a time when the winding up had commenced. As I say, I regard Gillies evidence, which I accept, as according with the probabilities. In addition I found him an honest witness in this regard. I might add as to Wharton's evidence that I regard it as having been given in a calculated way to avoid disclosing the actual sequence and time of events in respect of the retirement of Allied Securities. Wharton might have succeeded were it not for the fact that Gillies gave evidence and said what he did. I find that the Allied Securities Deed was back dated to 9 November 2001 in order to found the argument that Allied Securities had retired in the period of time in which the winding up order was stayed.

If, as Wharton said, Allied Securities retired as trustee before the winding up commenced, the question would arise as to why the Court of Appeal was not informed of that fact (indeed, why it was not informed of the trust and partnership) to ensure that the Court was correctly informed on all relevant matters that might affect the exercise of the discretion to grant a stay in respect of Allied Securities. Is it to be accepted that when counsel for the appellants addressed the Court of Appeal, he was not informed that Allied Securities had been, or was about to be on that day, replaced as trustee? Yet, on Wharton's evidence it would seem that that must have been the case. Surely the whole matter of Allied Securities retirement was not raised between Wharton and Gillies and concluded by them in whatever time remained on 9 November 2001 following the giving of judgment in the Court of Appeal and before the stay expired, or was it? But where is the evidence? As far as I know the course of argument and ultimate decision may have occupied much time, perhaps even concluding beyond normal court hours, and left little time to have the discussion and prepare the documentation, let alone to take legal advice as Gillies referred to. It is true that if the retirement had occurred, or was in contemplation, the failure to mention it to the Court of Appeal would be consistent with the failure to inform the Court of the trust and partnership. In the end, however, the answer on this aspect is that I find the fact to be that when the Allied Securities Deed of Retirement and Appointment was executed by Allied Securities, the winding up had commenced, and Wharton and Gillies were seeking to address the situation that then presented itself, which was of a trustee in liquidation.

This conclusion means that Allied Securities was and remains trustee, assuming there be a trust. If there is not a trust it holds the relevant property and assets in its own right. That is in relation to the Liquid Engineering and other matters. On either basis, the liquidator is now, and at all times has been, entitled to control of the company and the books and records as provided in the Corporations Act. This is a sufficient conclusion for me now to turn to the matter of the relief to be granted, but before doing so there are some other matters to mention.

This section deals with an issue which emerged in Wharton's cross-examination and on which Gillies also gave evidence. The issue concerns four of the companies shown on Schedule A, namely, NILA, Veldara Pty Ltd ("Veldara"), Mortgage and General Indemnity and Zadio Pty Ltd ("Zadio"). According to Schedule A, and the records in ASIC's data base, Tye Nominees held all the issued shares in ABC FM (which held all the issued shares in NILA), Veldara, Mortagage and General Indemnity and Zadio. The companies ordered to be wound up in ASIC v ABC Fund Managers included Tye Nominees and ABC FM.

Gillies and Wharton occupied the offices of director and secretary of NILA,[23] Veldara, Mortgage and General Indemnity and Zadio, and their subsidiaries shown on Schedule A.[24] By virtue of being liquidator of Tye Nominees and ABC FM, Maxsted could have acted upon his 100% shareholding control of NILA, Veldara, Mortgage and General Indemnity and Zadio and replaced Gillies and Wharton with directors and a secretary of his choice. Wharton gave some evidence of sabre-rattling by the liquidator's office in that regard, but Gillies and Wharton moved to head the liquidator off at the pass.

In cross-examination Wharton said that in February 2002, without any notice to the liquidator, he and Gillies exercised their control as officers of NILA, Veldara, Mortgage and General Indemnity and Zadio, and issued 500 shares in each company to Wharton at a cost of $1 per share which was duly paid. They gave as the reason for issuing the shares, or on Gillies evidence at least the predominant reason, the need to raise working capital to pay filing fees and accounts from Wharton Partners. Wharton produced accounts which he said were required to be paid and which established the need for working capital. The accounts were:

(a) NILA: two ASIC invoices totalling $400 and a Wharton Partners account for $192.50, a total of $592.50, and (b) for each of Veldara, Mortgage and General Indemnity and Zadio: an ASIC fee of $200 and an account from Wharton Partners of $192.50, a total of $392.50.

The issuing of the shares meant that Wharton held by far the dominant shareholding in each company. On that basis Wharton would be able to outvote the liquidator at a meeting of members. Among other things, that would mean that Wharton could control the election of office bearers of the companies. Wharton and Gillies denied in evidence that the purpose was to prevent the liquidator from exercising control over the assets of the four companies and their subsidiaries. It is clear though that Gillies appreciated that result. So did Wharton, I find. To deny that would have been absurd. These men - Wharton and Gillies - are street smart accountants, cunning operators who were concerned to protect assets from the liquidator. The provision of "working capital" could as easily have been dealt with as a loan. But it was not, and while the validity of the issue of the shares might arise for consideration hereafter, a matter on which I make no comment, it is not a matter for resolution in this proceeding. Nevertheless the manner in which Gillies and Wharton acted to protect their interests, without reference to the liquidator, is consistent with the view I have formed of them, namely, that they will take such steps as they conceive to be open to them to take to protect their interest and block the liquidator from getting into their house, so to speak.

In final addresses each counsel submitted, and spoke to, draft forms of order appropriate to be made under s 1323 or s 1324 of the Corporations Act. That was on the assumption, which may or may not be made out, that I determine that ASIC had established a case for such orders. In that respect each counsel advanced reasons why, on the one hand, and why not, on the other hand, the jurisdiction under those sections was enlivened in the circumstances. The submissions included analysis of the sections and references to authority in that respect. They also included argument concerning the extent of the obligation to keep books and records, the extent of the requirement of the trustee to maintain books and records of and pertaining to a trust, of a requirement (if at all) of a trustee to retain such books and records following replacement as trustee, of the extent of the liquidator's right to hold or copy such books and records including in the situation where the trustee had been replaced, of the application of the liquidator's right of indemnity and lien in such circumstances, and other matters. In the end I consider that resolution of the case does not require discussion of this extended range of issues.

For one thing, it is not established fact that Allied securities did act as a trustee when it lent money to the Liquid Engineering borrowers, or in respect of any other activity. Nor is it an established fact that there was a partnership with Lawnwood. It is now an established fact that the purported retirement of Allied Securities as trustee of the Allied Financial Services Trust did not occur until after Allied Securities commenced to be in liquidation. As a result, Allied Securities has continued to occupy office as such trustee, and the appointments of Denby Vale and Allied Financial were invalid and neither ever had (and Allied Financial still does not have) any right or entitlement to act in that respect. In simple terms, the purported appointments of Denby Vale and Allied Financial and Allied Financial's subsequent actions, were without authority and wrongful. The defendants' acts in this respect were significantly aggravated by the attempt to establish that Allied Securities had been replaced as trustee prior to the commencement of the winding up. That was an attempt to deceive the court, among other things, which should never have occurred. Moreover, as mentioned, it is not established that Allied Securities ever was, relevantly, acting as a trustee. The true position may be, as hitherto was indicated[25] that at all material times and in all relevant respects Allied Securities acted in its own right.

Regarding the circumstances generally, it may not have been all that surprising that ultimately counsel for the defendants, it seemed to me seeking to avoid a finding on the matter of the time of Allied Securities retirement as trustee, said that I could dispose of the case by making orders on the basis of accepting the matters put by counsel for ASIC about the failure to keep proper books and records and to comply with the Corporations Act. On that basis I could make orders either as ASIC proposed or the defendants proposed. In my view this statement, while general in terms, was readily to be understood in light of the many failures to keep proper books and records. I say in general terms because in his earlier oral address and in his written submission counsel had, with some exceptions, taken issue with ASIC's allegations of failure to keep proper books and records and of contraventions of the Corporations Act.

In all the circumstances it is not necessary to detail all that counsel said on the operation and application in this case of s 1323 and s 1324. I have regard to all that they said including the cases to which they referred on the operation of the sections,[26] and other matters.

In my view the jurisdiction under s 1323 (1) is enlivened. ASIC is conducting an investigation in relation to acts or omissions of Allied Financial and the defendants in ASIC v ABC Fund Managers. These investigations extend to and include acts or omissions of Wharton and Gillies as officers of entities in the Wharton Group. It is evident that the acts or omissions either constitute or may constitute a contravention of a provision of the Act. As stated, counsel for the defendants suggested that there had been contraventions of the Act. And there is the established fact that Allied Financial has, without authority or title to do so, been asserting a right to, and has dealt with, property of Allied Securities. Allied Financial has done that through the instrument of Wharton and Partners, Wharton and Gillies.

Then there is the requirement of an "aggrieved person", being a person to whom the person under investigation (called the "relevant person") is, or may be or become liable to, pay money, whether for debt, damages, compensation or otherwise, or to account for financial products or other property. It is not necessary to establish a nexus between such liability and an act or omission that does or may constitute a contravention of the Act.[27] Indeed the claim need not be based on the breach of the Act. Several persons may readily be seen as falling or potentially falling in the category of an "aggrieved person". They are the liquidator of Allied Securities, Liquid Engineering borrowers, the Commissioner of Taxation, and ASIC. There are also unresolved issues and claims or potential claims with the Liquid Engineering entities. Not only does the section not require that the issue of liability be determined now, but it would be inappropriate to do so on an application such as the present. For one thing, the liquidator has been prevented by the defendants from gaining information which would enable him to form an appreciation of the position of Allied Securities in relation to claims. For another, Allied Financial is liable to account to Allied Securities in respect of monies it has received from Liquid Engineering Borrowers.

Having regard to all the relevant circumstances the case is one in which an injunction might be granted under s 1323(1)(e) for the purpose of securing intact monies received by Allied Financial for Liquid Engineering borrowers, together with ancillary orders to inform the liquidator and ASIC of relevant details concerning monies received. The conclusion is overwhelming in my view, having regard to the conduct of the defendants since 15 October 2001, that the risk of detriment to potential claimants against a "relevant person" if orders are not made is far greater than any risk to a "relevant person" if orders are made. All that the orders sought by ASIC seek to do is to hold the situation in order that proper and lawful enquires may be made. Gillies said in evidence that he saw no detriment to Allied Financial in that. His evidence in that respect did no more than accord with the reality which I find in any event. Moreover, of course, it does not lie in the mouth of the defendants to allege detriment if an order is made because it is the defendants' wrongful conduct since December 2001 which has given rise to the present dispute. In my view, unless orders are made as sought by ASIC there is a real risk of monies being, or being sought to be, wrongfully applied or converted or dealt with in such a way as to make it difficult to sort out the true situation and recover monies if necessary, and of further unnecessary dispute and litigation.

In my view it is not merely desirable but necessary to grant injunctive and other relief for the purpose of protecting the interests of "aggrieved persons". Having regard to this conclusion it is perhaps unnecessary to deal with the application under s 1324. I should, however, say something about it.

Section 1324(1) confers power to grant an injunction where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute a contravention or attempted contravention of the Act. It extends to a person who, in summary, aids and abets or induces such conduct, is directly or indirectly knowingly concerned in a contravention or conspires with others to contravene the Act. In such circumstances the court may grant an injunction to restrain such acting and may also order the person concerned to any act or thing.

ASIC based its case under s 1324 on the contravention of a number of sections of the Act. These contraventions were committed by Allied Securities and were carried out by Wharton and Gillies as officers of that company. Allied Financial and Wharton Partners were knowingly concerned in the contraventions. The relationship between the defendants is very close. Gillies and Wharton control, and in effect are, the corporate entities, and they act through them. Wharton Partners has a central role; it holds all records, it manages the collection of the Liquid Engineering loans, it is seen to have actively disputed the claims of Allied Securities and to have advanced the entitlement of Allied Financial to collect the loans. Allied Financial, by the instrument of Gillies, Wharton and Wharton Partners, used Allied Securities information and records to demand payment of and collect monies owing to Allied Securities and has pressed its right to continue doing so. It possess the knowledge of Gillies and Wharton in all relevant respects. That includes knowledge that Allied Securities was never validly replaced as trustee of the alleged Allied Financial Services Trust.

I referred earlier[28] to the provisions of the Act which ASIC contend may have been contravened. Some other provisions were referred to in the submissions. For present purposes it is sufficient to identify that the relevant conduct of the defendants concerned the failure to keep proper books and records for Allied Securities, the trust and the partnership, which extended to the failure to prepare tax returns; to the diversion to their benefit of the property of Allied Securities; and to the unsatisfactory responses of the defendants to the requests of the liquidator and ASIC for information and production of documents. In the circumstances, and having regard to the approach of counsel for the defendants, it is not necessary to engage in a close analysis of a number of sections and the facts to identify one way or the other the existence of a past, present or likely future contravention. Mackay gave evidence, which I accept, of respects in which Allied Securities had not kept usual and proper accounting records and books. With some understatement, counsel for the defendants said, in his written submission, that the directors of Allied Securities had not prepared all required taxation returns with respect to the partnership or the Allied Financial Services Trust, nor had they yet prepared all financial accounts other than for the 1995 and 1996 years. I do no more than note the following from the points advanced by ASIC.

No accounts have been produced for the Allied Financial Services Trust in 1997 - 2000, while the accounts for 1995 and 1996 were only prepared in June 2001. Further, there was a failure to prepare tax returns for the trust and the partnership. There is no contemporaneous accounting evidence of a partnership conducting a lending business or sharing profits. No books of account referring to the partnership were kept between 1995 and June 2001. Accounts produced for 1995 and 1996 were created (it seems) at some time between June 2001 and (perhaps more likely) February 2002 when they were produced to ASIC following a court order. To summarise a point or two, if there was a trust and partnership as the defendants contend, Allied Securities should have lodged a tax return in the years 1995 - 2001 as a partner or trustee. No such return was lodged. A matter which the liquidator must investigate is whether the trust made a profit which should have been returned to tax. That is one matter only which the liquidator needs to be able to investigate.

Then there are the self evident failures, deliberate in my view, to respond both in a timely and sufficient way to the liquidator's request for information and documents. There were contraventions of the Act in respect to the questionnaire and report as to affairs. Consistently with the obfuscatory and deceptive attitude thus manifested, there was a failure by Wharton and Gillies to comply with the requirement in s 530A(2) to provide information to the liquidator, and a self serving finessing over the identification, and production, of books and records.

I am well satisfied that jurisdiction under s 1324 is established. I am also satisfied that it is appropriate to grant an injunction under that section.

Counsel for the defendants submitted that no order should or need be made against Wharton Partners, Wharton and Gillies. He further submitted that they need not have been made defendants. If there had been a contravention of the Act it was committed by Allied Financial only and thus it alone should have been sued. I reject this submission. The joinder of the additional defendants was necessary and appropriate for the proper determination of the issues raised. The conduct of those defendants required their joinder in my view and their presence was likely to conduce, by the production of documents and otherwise, to the attainment of justice in the proceeding. In my view it is necessary, desirable and appropriate that orders be made against all of the defendants.

I referred earlier to the fact that each counsel left me with a set of orders to consider. The fundamental differences between them are:

(a) Whether, as ASIC contends, the defendants should be restrained from making demands on Liquid Engineering borrowers or whether the defendants (as they contend) should be free to make such demands. (b) Whether, as ASIC seeks, the defendants should repay to Allied Financial a sum of $8,000.

There are also differences in some other respects that these two points are of a fundamental nature.

In my view the approach of ASIC is to be preferred on the first point. In the circumstances of this case it is evident that it is highly desirable, and necessary, in the interests of a range of persons, that the making of any further demands on Liquid Engineering borrowers, and the use of any monies received in consequence by the defendants, be restrained. Were the defendants not to be so restrained monies from borrowers would be received by a person (Allied Financial) not entitled to them, and enter a system of established failures to keep proper records, with a history or a least a claim of comingling with funds from other sources, with no guarantee of satisfactory unravelling, and with a risk that the funds or part thereof may not be recovered. The circumstances are such as to call for stringency in orders to preserve the situation to ensure the best protection of the rights of all parties while all due and lawful enquires are made.

I should say that I have considered the defendants' submission that they have detailed knowledge of the loan operation, will be more likely to be diligent than the liquidator in attending to the collection of loans and the general administration of the loans, and, by reason thereof, ought to be left to deal with the borrowers including making demands for repayment and receiving monies. For the reasons mentioned, any such advantages are far outweighed by the other considerations and matters referred to above.

For this reason the orders will be along the lines of those submitted by ASIC. As discussed at the trial those orders require some refinement.

That leaves the issue of the $8,000. That was part of an invoice for $15,400 dated 7 March 2002 rendered by Wharton Partners to Allied Financial for collecting and copying documents (28,000 pages) for provision to ASIC in response to its demands.

The defendants withdrew the $8,000 from the bank account of Allied Financial on 11 April 2002. ASIC submits that the withdrawal was a breach of the order made on 8 March 2002. That is because that order (by para 2) restrained the defendants from dealing with any funds received from franchisees. The fact is that funds received by franchisees have been paid into the Allied Financial bank account.

The defendants submit the withdrawal of the $8,000 did not contravene the order made on 8 March 2002. They rely on the earlier order which restrained the defendants from dealing with funds received from the franchisees with the exception of any necessary and reasonable expenses incurred in complying with the order. The defendants submit this exception reveals an intention that they be able to recoup such costs as were covered by Wharton Partners invoice dated 7 March 2002. Their contention is that when they withdrew the $8,000 they were, and believed they were, entitled to do so under the exception. In fact they had sought to withdraw $3,000 on 7 March 2002 but the bank would not honour the cheque as it understood the account was frozen. Subsequently, following discussions, the bank appreciated that was not the position and honoured a different cheque for $8,000.

In referring to their belief as to being entitled to act under the exception in the order of 6 February 2002, the defendants are submitting that even if they acted incorrectly as a matter of law they acted reasonably and should be able to keep the $8,000.

I would not conclude, on the evidence, that the defendants intentionally acted contrary to the restraint ordered on 8 March 2002. And it is true that the earlier order authorised recoupment of expenses. Yet the difficulty remains that the later order absolutely restrained dealing with any funds received from franchisees. The prudent course for the defendants to have taken was to have brought the matter on for mention and acted in accordance with such order or direction as I or another Judge may have made.

The defendants also sought an order that within 30 days Allied Financial pay Wharton Partners $7,400 being the balance of the invoice for $15,400. I would not make that order. It involves a further application of funds received from franchisees. And therein is exposed the underlying difficulty with the defendants' request to retain the $8,000.

That difficulty, regarding the matter broadly, is that Allied Financial never had any right to demand payment from borrowers. The demands on, and the payments by, borrowers led to the present litigation, the requirement to produce a mass of documents and the expense involved in doing so. It can be seen that the defendants' own acts have brought the burden of the litigation and those expenses on their head.

In my view it is appropriate, from all points of view, to require that the $8,000 be returned. This will aid the restoration and maintenance of the status quo and the ascertainment and adjustment by the liquidator of just claims. I think, however, having a regard to the intendment of the order of 6 February 2002 that liberty to apply should be reserved to the parties as to the allowance to the defendants of any necessary and reasonable expense in complying with the order made on that date.

I will stand the case over until tomorrow and hear counsel on the terms of the orders. I note that para 6 of the defendants' suggested orders was accepted as the preferred way of dealing with the provision of an affidavit identifying books and records of Allied Securities. I will also hear counsel on costs.

I certify that this and the 60 preceding pages are a true copy of the reasons for Judgment of Hansen J of the Supreme Court of Victoria delivered on 6 June 2002.

[1] Australian Securities and Investments Commission v ABC Fund Managers [2001] VSC 383; (2001) 39 ACSR 443.

[7] Government departments or agencies referred to in this respect, in the papers and in oral evidence during the trial, were the Australian Taxation Office ("ATO"), the Federal Police, the National Crime Authority ("NCA") and ASIC. There was also reference to documents being taken under search warrants.

[9] Although in Ussher's case not including his affidavit sworn on 21 March 2002.

[10] See Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705, [59] - [86]

[11] The history of the business is contained in the Information Memorandum referred to at [41].

[12] See, too, the lists of franchisees referred to [41] item (o) and (p).

[15] The instrument is the Deed of Retirement and Appointment of Trustee referred to at [41] item (b).

[16] The instrument is the Deed of Retirement and Appointment of Trustee referred to at [41] item (c).

[19] The respective minutes are referred to at [41] items (d) and (e).

[21] Namely, whether the lending transactions were sham transactions, whether there was a trust or partnership and a matter of the issuing of shares in companies (which I refer to below).

[22] See exhibit 13, being a letter to the liquidator from Oakley Thompson and Co. dated 13 May 2002.

[23] Wharton said in evidence that Davies ceased to be a director of NILA in late 2000, and that he (Wharton) became a director of NILA, Veldara and Zadio on 18 February 2002.

[24] These subsidiaries were also controlled by Gillies and Wharton. It is unnecessary to detail their office bearers.

[26] Corporate Affairs Commission (NSW) v Walker (1987) 11 ACLR 884; Corporate Affairs Commission v The Loan Star Exploration NL (1988) 50 SASR 24; Corporate Affairs Commission of NSW v Transphere Pty Ltd (1988) 15 NSWLR 596; Australian Securities Commission v AS Nominees Limited [1995] FCA 1663; (1995) 62 FCR 504; ICI Australia Operations Pty Ltd v Trade Practices Commission [1992] FCA 474; (1992) 38 FCR 248.

[27] Corporate Affairs Commission (NSW) v Walker (1987) 11 ACLR 884, 888, and Corporate Affairs Commission v Loan Star Exploration NL (1988) 50S ASR 24, 29, 32.

At a glance

Court

Decision date

Before

Source

Judgment (190 paragraphs)

Parties

Cases Cited (5)