Australian Securities & Investments Commission v Bowesco Pty Ltd

Accounts 17 Ms Laurie Antonio, Bowesco's bookkeeper, prepared Bowesco's accounts as at 30 September 2007 from internal records and information provided by the receivers. These were then considered by Mr Carey and authorised by Ms Carey. 18 Bowesco's September 2007 accounts record the value of its shares in Lanepoint at $8,316,516. ASIC submits that Lanepoint is insolvent and the value of Bowesco's investment for the Dyson Family Trust in the form of intercompany loans or in the form of shares in Lanepoint should be entirely discounted to nil or as not likely to be available to meet debts of Bowesco as they fall due and payable. 19 Bowesco's September 2007 accounts record the value of a loan to Westpoint Corporation at $515,614. Bowesco accepts that, in fact, it does not have that value but submits that it is too difficult to determine its present value for the purpose of considering Bowesco's solvency or otherwise. ASIC submits, and I accept, the loan is not proven and in any event it is unrecoverable and not available to Bowesco to meet its debts as they fall due.

Communication Towers 20 Bowesco's September 2007 accounts indicate they carry the value of the leasehold interest in the Optus and Telstra communication towers at $245,000. The accounts indicate that figure is based on an independent valuation dated 8 August 2006, it appears, by Mr Worthington of Elders Real Estate. The value of the leasehold interest is based on an annual income of $30,000. ASIC submits that the rent, if any is received, is not proven; the basis for the rent not established; and, the value asserted is not demonstrated. 21 Bowesco relied on evidence provided by Mr Carey that Bowesco agreed to lease the site of the petrol station to Woolworths Ltd at a rent lower than it wished and in return received a right to lease a space on the adjoining property developed as a shopping centre for use as a site for telecommunication towers. According to Mr Carey, Bowesco occupies the area, free of rent and sub-leases the area for communication towers to Telstra and Optus. Mr Carey produced an "owner statement" from Westpoint Realty, a company in liquidation but in which he retains an interest, which he said indicated that the net rental was $30,597.69 [Exhibit 4]. 22 In cross-examination Mr Carey was taken to documents concerning the communication towers. Mr Carey acknowledged he provided the documents to Mr Bernie Worthington, a former employee of Westpoint Corporation, for the purpose of Mr Worthington preparing a valuation of Bowesco's interest. Mr Carey acknowledged his signature on one of those documents, which was an agreement to lease between the owners of the shopping centre and Bowesco, requiring Bowesco to pay $12,000 per annum to the owners of the shopping centre. Mr Carey said the documents provided to Mr Worthington did not comprise the completed agreement with the owners of the shopping centre and referred to another transaction involving another company, Eastlands Pty Ltd, which was referred to in the unsigned Optus sublease. Although Mr Carey complained that the completed documents were held by ASIC he conceded that he had made no direct inquiry for access to the relevant documents from ASIC. 23 ASIC submits that the evidence of Mr Carey is vague and too general to be of assistance. Mr Carey could not adequately explain how the agreement to which he referred to was not documented on any agreement in evidence and how it could be reconciled with the completely contradictory documents he provided to Mr Worthington for the purpose of providing a valuation. 24 Bowesco also called evidence as to the value of the communication towers from Mr Worthington. Mr Worthington's valuation dated 8 August 2006, assessed the value of Bowesco's interest as $245,000 based on the net rental of $24,500 per annum. The same report is relied upon by Bowesco as evidence that its interest in the lease over the communication towers is worth $300,000. 25 In cross examination Mr Worthington conceded that he had previously lost his valuer's licence for a period of 3 months as he was found liable for an allegation of negligence in the preparation of a valuation. Mr Worthington also conceded to his earlier association with Mr Carey and Westpoint Corporation. ASIC submits both of these concessions render Mr Worthington's evidence unreliable. 26 In cross-examination Mr Worthington conceded he did not check the veracity of the arrangements he was valuing. He did not see properly executed agreements and qualified his report on the basis that the documents were executed and provided that Bowesco could transfer its interest. Bowesco has not tendered executed agreements in order to meet the qualification. In a further affidavit by Ms Carey sworn on 10 April 2008, she deposed that despite conducting her own searches, including through her solicitors and directly with Telstra and in the respect of the Optus sub-lease with Minter Ellison solicitors, she had been unable to locate the lease and sub-lease. 27 Mr Worthington indicated that his instructions on the net rental were materially different to the evidence of Mr Carey. According to Mr Worthington, Bowesco received $24,500 net of the rent paid to the owners of the shopping centre. ASIC submits this difference of evidence was not reconciled by Bowesco and casts further doubt on the evidence of Mr Carey as to the arrangements concerning the communication towers. 28 Mr Worthington's valuation depended on his assessment that the interest should yield 10% per annum, but Mr Worthington conceded that his report identified no analysis by which he reached that opinion other than the nature of the interest being that a leasehold interest was riskier than a freehold interest. 29 I have afforded no weight to the valuation report of Mr Worthington, primarily because the lease and sub-lease documents, which are said to underpin his rationale and by reference to which he qualified his valuation report, have not been produced. It was, in other respects, flawed. For example, it did not refer to the sub-lessee's right to terminate the sub-lease without penalty on one month's notice; it did not refer to anecdotal sales evidence, which Mr Worthington said in evidence he relied upon; it did not compare the terms of the leases to any other similar leases or comment on the commercial merits of the subject leases; it did not consider technological or regulatory environment for communication towers and how that may affect the value; and finally that the valuation failed to account for rates and taxes that Bowesco may need to pay. Bowesco has failed to establish any value to be attributed to these communication towers.

Motor Vehicles 30 The September 2007 accounts disclose motor vehicles "at cost" at a value of $132,000. 31 Ms Carey said that the figure of $132,000 was an at cost valuation based on advice from the "Red Book". The "Red Book" was not tendered. Ms Carey conceded that the vehicles were not professionally valued. 32 Bowesco submits that $100,000 would be a "fair value for these vehicles". 33 I am not in a position to assess the value of these vehicles. It was for Bowesco to establish a fair value by admissible evidence. It has not done so. No value can properly be described to them for present purposes.

Income Tax and GST Liability 34 The Notice of Assessment annexed to the affidavit of Karen Carey sworn 20 May 2008 is sufficient evidence that there is no tax liability for the year ended 30 June 2007.

Inter Company Liabilities 35 Bowesco asserts that the Dalegrove Trust debt of $330,149 will not be enforced. 36 It also claims to have written off the following liabilities: (a) Dosius Pty Ltd $ 500,000 (b) Richstar Enterprises Pty Ltd $1,055,959 37 Bowesco asserts that the claims were written off because Dosius and Richstar had first written them off and had forgiven and released Bowesco. Each is a related company to Bowesco.

Richstar 38 Bowesco offered the evidence of Ms Carey as the sole director of Richstar Enterprises Pty Ltd. 39 The rationale for writing off the liability to Richstar is the decision by the Court appointed receiver to Richstar in preparing a report dated 24 November 2006 to the Federal Court on the solvency of Richstar. Ms Carey conceded she did not fully appreciate the meaning of writing off the debt. 40 ASIC submits, and I accept, that in assessing Richstar's solvency the receiver was seeking to establish which assets Richstar held that were or would be available to meet its obligations as and when they fell due. The receiver rightly assessed Bowesco, being in receivership, as incapable of repaying its loan within a period that would enable Richstar to meet its obligations. There is no admissible evidence that the Richstar receiver has written off the debt owed by Bowesco. 41 ASIC has also tendered the orders made against Richstar in the proceedings in the Federal Court (WAD 83 of 2006) in which Richstar's assets were placed under the control of a receiver and subject to asset preservation orders [Exhibit 6]. ASIC submits that by the terms of those orders, and since mid-March 2008, Richstar is prohibited from disposing of its assets without prior leave of the Court. The Bowesco debt may not be written off without the appropriate permission. There is no evidence that the permission was sought or if sought would be granted. It remains, in my opinion, a debt due to Richstar by Bowesco.

Dalegrove Trust 42 Bowesco relies on the evidence of Mr Carey concerning the Dalegrove Trust debt. He said that, as director of the trustee for the Dalegrove Trust, he would have no intention of making a demand for payment of the debt of $330,149. However, Mr Carey is not a director of Dalegrove Holding Pty Ltd according to ASIC records (Exhibit 2). This stands as prima facie evidence of the information it contains: Corporations Act s 1274(4C)(d). ASIC submits that Mr Carey's evidence should be discounted and therefore, the suggestion that Dalegrove Trust does not require the obligation to be repaid should be taken as not proven. 43 ASIC submits that, in the absence of that consideration, the purported waiver or forgiveness is without foundation and not binding on the interests asserted. ASIC submits that the evidence of a waiver or forgiveness should be discounted and given no weight. 44 The accounting records of Bowesco record an obligation to the Dalegrove Trust in the amount of $330,149. I do not accept that there is any enforceable waiver or release. It remains a debt owed by Bowesco to the Dalegrove Trust.

Dosius 45 A company search for Dosius discloses that as at 27 February 2008, the directors of Dosius were Norman Carey and Karen Carey and its company secretary was Norman Carey. 46 Mr Carey indicated that there was no demand for repayment of the Dosius debt of $500,000 by Bowesco and that it did not propose to issue a demand for this debt. This assertion was based on his view that the Dosius debt was released prior to 30 June 2006. He conceded that his evidence had not identified a deed of release for the Dosius debt. The deed of release dated 30 June 2006 was provided to the Court [Exhibit 5]. 47 By s 127(1) of the Act, a deed may be executed without use of Dosius' common seal if it is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company with a sole director who is also the sole company secretary - that director. 48 However, by subsection (4) "this section does not limit the ways in which a company may execute a document (including a deed)". 49 Dosius' Memorandum and Articles of Association provides alternate ways for executing specific documents in articles 68 and 84 but those provisions do not relate to a deed of release. The Memorandum and Articles of Association discloses no alternate way in which Dosius' directors could execute the release. 50 The deed of release by Dosius is not executed in accordance with the Act and the assumptions about the process of authorising the release and internal company procedures under s 129 of the Act do not apply. 51 I find that the debt of $500,000 is owed to Dosius and has not been the subject of an enforceable release by Dosius. 52 Bowesco has failed to establish that its liabilities do not include the obligations to the Dalegrove Trust for $330,149, Dosius for $500,000 and Richstar for $1,055,959.

Westpoint Corporation Preference Claim 53 The liquidator of Westpoint Corporation no longer pursues a preference claim and accordingly the amount of $1,150,000 may be disregarded in any consideration of the liabilities set out under para [16] above.

Receiver's Costs and Retentions 54 Bowesco does not acknowledge in its September 2007 accounts any liability for the remaining costs of the appointed receiver or the matters for which the receivers claim an entitlement to retain a provision. 55 ASIC tenders evidence of the remaining costs of the Suncorp receivers and the items where the receivers claim an entitlement to retain property to meet their anticipated exposure to claim. 56 ASIC submits that the retention for anticipated expenses to complete the administration is a liability of Bowesco. It was put to Mr Fraser in cross examination that if matters were resolved quickly without dispute that costs in the order of $100,000 would not be incurred. As mentioned earlier Mr Fraser conceded his anticipated costs reflected anticipated time. ASIC submits that no alternative estimate was put to Mr Fraser and no estimate other than the $100,000 is in evidence. I accept this submission.

$2m run-around 57 There was evidence of a series of complex transactions loosely described as the $2m run-around transactions and which, to an extent, involved Bowesco. 58 ASIC acknowledges that no claim has been made to date against Bowesco in respect to this amount. ASIC also concedes that the receiver appointed to Lanepoint by Westpoint Management is likely to proceed to a sale of Lanepoint's property and recover its loan. In those circumstances, Bowesco's financial position is to be assessed without reference to the potential exposure to other companies involved in the $2m run-around.

Cash Flow 59 Ms Carey produced a cash flow in respect of Bowesco. It includes anticipated rental income and anticipated costs. However, the cash flow expresses opinions as to the future and does so without establishing the assumptions on which those opinions may be based. Ms Carey accepted these criticisms. I would afford the cash flow no weight. 60 In any event, there is a significant shortfall as between Bowesco's assets and liabilities. The content of the cash flow, even if accepted, does not alter that position.

ASIC's Insolvency Submissions 61 The Suncorp Metway receivers, having paid Suncorp Metway's debt, await a release from taxation obligations and from Bowesco and Mr Carey. They retain some cash and the petrol station. If needed Suncorp Metway's security extends to the share of the lease of the Woodvale liquor store, the communication towers and the motor vehicles. Until the receivers retire, the assets of Bowesco are not available to meet its obligations, save that taxation obligations incurred during the receiver's appointment will be met from Bowesco's property in the receiver's possession. 62 The table of assets and liabilities set out at para [16] above falls to be re-stated in light of my findings, as follows:

ASSETS Accrued income 43,932 Rec'ables R&M 907,086 Woodvale liquor 233,000 Hale Rd Petrol 373,000 Total Assets 1,557,018 LIABILITIES GST R&M costs 100,000 Preference claim Dalegrove Trust 330,149 Dosius 500,000 Richstar Ent 1,055,959 Total Liabilities 1,986,108 NET ASSETS (429,090) (LIABILITIES)

Conclusion 63 The value of Bowesco's assets is insufficient to meet its liabilities. Bowesco is unable to pay its debts as and when they fall due. It has failed to displace the statutory presumption that it is insolvent. Accordingly, there should be an order that it be wound up.