Reasoning on WIF liability issue
31 I indicated earlier that Lanepoint borrowed from Suncorp to fund the acquisition, construction and financing costs of the Regency Motel redevelopment. Suncorp advanced funds against progress certificates relating to the progress of the redevelopment signed by a quantity surveyor. As at 31 March 2006, the amount drawn from Suncorp including interest was $5,535,949.64.
32 Mr Carey was cross-examined as to these matters. He conceded that the Westpoint Group was under professional management where the accounting administration and finance functions were delegated. Each entity had a general manager and a financial manager who was a senior accountant. Financial controls were delegated to a group of senior chartered accountants across four States in Australia. They were assisted by amongst others, Mr Gregory Nairn. Reporting on financial matters went from a senior financial accountant who would "sign off" then Mr Nairn, or a Mr Rundle, who would also "sign off" and then find its way to Mr Carey. He would "sign off" he said, on the basis of their "sign off". Mr Carey said that the various systems of reporting and signing off were implemented to avoid fraud.
33 Lanepoint did not have a bank account. Lanepoint's income and expenditure was channelled through Westpoint Corporation central treasury. When Lanepoint drew down against its WIF facility the money was paid direct to Westpoint Corporation central treasury account and this would be credited as an inter-company loan.
34 Unlike funding from Suncorp the loan facility arrangement which Lanepoint had with WIF had no requirement for a quantity surveyor to certify that costs had been incurred on the Regency Motel before making payment on behalf of Lanepoint. Mr Carey agreed that Lanepoint had loaned money to other Westpoint Group companies such as Keypoint Developments and Keyworld Investments whose projects did not relate to redeveloping the Regency Motel.
35 Lanepoint's 2007 tax return was compiled by Mr Duncan Melbin, a chartered accountant and a director of the accounting firm DPM Consulting (WA) Pty Ltd. This firm had been Lanepoint's accountants since about September 2006 with some input from Mr Carey, who accepted that he was satisfied that the financial accounts required to prepare the return were in order. He said that in the normal course he would review the return. Although he couldn't actually recall doing so in respect to this particular return he remembers it "coming in". He said he was monitoring this tax return because Lanepoint wanted to get it done. Lanepoint's tax returns aggregate the costs of the Regency Motel redevelopment in the amount of $8,920,557 and interest expenses of $1,001,601. These amounts are significantly higher than Lanepoint says were its costs of redeveloping the Regency Motel.
36 Mr Carey said that he was not aware that Lanepoint had applied to WIF for an advance of $6m in January 2005. He said his understanding was that it was $4m but that he was not personally involved. He may have had in mind that under the Loan Agreement made between Westpoint Management for WIF, as lender, Lanepoint, as borrower and Perpetual Nominees Ltd, as custodian of 23 March 2005 the Facility Limit was $4m. However, the amount originally sought from WIF by Lanepoint as contained in its written Investment Proposal to WIF was indeed $6m. He said that he did not read or understand the WIF loan facility document when he signed it. This I take it to be a reference to the Lanepoint/WIF Loan Agreement. In his written evidence Mr Carey set out in some detail just how Lanepoint's drawings from the Suncorp facility were utilised for the Regency Motel redevelopment. He was the Westpoint Group managing director. I do not accept that he did not know the amount for which Lanepoint had applied from the WIF, the extent of its approved facility or the effect of the terms of the WIF Loan Agreement.
37 Mr Carey acknowledged that he signed the relevant Lanepoint draw down notices for the Regency Motel redevelopment against the WIF facility. For example, when asked about a draw down notice for $500,000 said to be for the Regency Motel redevelopment, he accepted this to be a significant amount of money and that a number of employees would check this and other such transactions. Mr Carey would not accept that his signature was required for the draw down notice to be put into effect. Nor would he concede that his signature was a necessary check that the proposed draw down was in order. I do not accept his evidence in that respect. Were he to have conceded these propositions to be correct there would have been little if any doubt as to the extent of Lanepoint's liability to the WIF. I find that thisrefusal to make these concessions was motivated by his appreciation of this fact. There are four draw down notices dated 13 October 2005, 19 October 2005, 20 October 2005 and 25 October 2005 for the amounts of $500,000, $700,000, $500,000 and $800,000 respectively. Each notice is headed "ref: drawdown on regent loan (lanepoint) - westpoint income fund" and specifies the benefactor as being "Perpetual Nominees Ltd a/c Westpoint Income Fund and the beneficiary as being "Westpoint Corporation Pty Ltd". Westpoint Construction was Lanepoint's construction company for the Regency Motel Redevelopment. Each notice states that "this payment is a drawdown on the "Regent Development Loan" and is signed by both Mr Carey and Mr Nairn. "Regent Development Loan" is plainly, in context, a reference to Lanepoint's Regency Motel redevelopment financed by loans from WIF.
38 Lanepoint was part of a corporate group with sophisticated accounting systems designed, amongst other things, to stop fraud. I do not accept that the draw down notices, amounting to $2.5m and signed by Mr Carey, were the result of errors not only on his part but also on the part of others within the group responsible for financial administration.
39 Mr Carey strenuously denied that the October 2005 draw down notices were made in the context of ASIC's inquiries about the WIF. It was put to him that Lanepoint drew down funds under the WIF facility and placed with Westpoint Corporation central treasury to meet Lanepoint's actual and anticipated costs on the Regency Motel redevelopment. Mr Carey denied this. Mr Carey's understanding, however, was that the effect of the ASIC Stop Order of 25 October 2005 which was issued immediately after Lanepoint's drawings on WIF was that WIF could not thereafter lend money.
40 Mr Gregory Nairn, a former general manager for special projects as well as Group Financial Controller for the Westpoint Group, said that in December 2005 Mr Chris Glasson, a Lanepoint accountant responsible for looking after Lanepoint's records, came to see him together with Mr Chin Liew, a WIF accountant or fund manager. They told him that there was an imbalance between Lanepoint's loan balances and the WIF. They thought this involved an amount of $2m. The WIF Facility Limit had been exceeded. This, said Mr Nairn, indicated to him that there was a problem. He said that he would normally have asked Mr Chris Fairman, the finance manager of the Westpoint Funds Management Group, to look into this but said that he had "dropped the ball" concerning funding, financing and accounting matters so he carried out his own investigation. He said he discovered three draw downs from mid to end October 2005 totalling $2m that had been incorrectly recorded as draw downs to Lanepoint or by Lanepoint. These funds he said belonged to a project being operated by Kingdream Pty Ltd in Melbourne and had been incorrectly debited to Lanepoint's Regency Motel redevelopment. He said he had, at the time, prepared a schedule regarding these matters but did not have it with him because ASIC had it. He then described other errors in the accounting for WIF draw downs under the "stewardship" of Mr Chris Fairman. Mr Fairman did not give evidence nor was that failure explained. He was also highly critical of the role played by Mr Craig Francis, the WIF manager in Sydney. He said that on prior occasions he had had to correct draw down notices prepared by him which showed on their face the incorrect borrower. Again Mr Francis was not called nor was the failure to call him explained. He concluded Lanepoint had been advanced somewhere between $3.5m and $4m as at October 2005. The loan balance with WIF was $6.5 million which was $2.5m outside Lanepoint's approved facility limit. Mr Nairn "corrected" the accounting entries for these three draw downs by reducing the WIF balances with Lanepoint and increasing the WIF balance with Kingdream by $2m in each case.
41 Mr Nairn said he did not specifically report major outflows of money to Mr Carey and that this was the responsibility of Mr Ray Ellis. Mr Nairn was a director of Westpoint Management Ltd. He acknowledged that the reason that he and Mr Carey signed draw down notices was to ensure that appropriate levels of authority attached to them: two directors of Westpoint Management Pty Ltd had to sign.
42 Mr Nairn agreed that before signing the draw down notices he checked with Mr Craig Francis, an accountant, that the funds drawn were appropriate and required and within the approved facility limit of $6m. Mr Nairn said he saw no other documentation supporting the draw downs. It is to be remembered that his earlier evidence was that he had concerns about the reliabilityof Mr Francis.
43 Mr Nairn acknowledged his concern was to establish why the two loan accounts did not agree between the two entities, that is, why the balances in the ledgers were different. He said that his analysis of expenditure on the Regency Motel redevelopment as against the funding sources disclosed that Lanepoint could not have drawn down $2m that had been allocated to it.
44 However, he conceded that he did not make inquiries as to the costs actually incurred and whether these had been paid or were payable. Nor did he consider the possibility that Lanepoint had drawn down excess funds in anticipation of costs to be incurred on the Regency Motel redevelopment. Mr Nairn accepted that he did not consider costs outside of the Regency Motel redevelopment, including Lanepoint's investment in projects in its subsidiary companies Keypoint Developments Pty Ltd and Keyworld Investments Pty Ltd.
45 These concessions by Mr Nairn diminish the probative value of the investigation by Mr Nairn. The possibility that Lanepoint drew down the WIF facility for reasons unconnected with the Regency Motel redevelopment is rendered more probable in light of Mr Carey's evidence that Lanepoint had loaned money to other companies within the Westpoint Group for purposes unrelated to the Regency Motel redevelopment.
46 Mr Nairn was questioned about his involvement in the so-called $2m run-around. I deal with this in some detail below. He authorised or approved the recording of the transactions in the $2m run-around in the general ledgers but said that he only checked with Mr Ray Ellis that they had occurred. He said he did not check any underlying reason for the various transfers. I do not accept Mr Nairn's evidence in this respect. Mr Nairn held a very senior position within the Westpoint Group. I do not accept that his approvals to record very large and significant transactions were in effect a mere 'rubber stamp' approval absent an appreciation of the underlying reason for each transaction.
47 The submissions of Lanepoint, to the extent that they rely upon the affidavit evidence of Mr Honey, to which I have referred, are misconceived.
48 In his report, Mr Honey concluded that as at 2 June 2006 Lanepoint was insolvent. It was however not tendered in evidence by ASIC. It obviously did not have regard to evidence given at the hearing in March 2008. Significantly in this respect at para 4.30 Mr Honey, in his report recognised the controversy over the amount of Lanepoint's indebtedness to WIF. He deposes:
In a letter dated 27 September 2006 from Brian McMaster, one of the WIF Receivers, to Simon Read as liquidator of Westpoint Management Ltd, the responsible entity of the Westpoint Income Fund, Mr McMaster expresses the opinion that the secured debt owing to Westpoint Income Fund as at 31 January 2006 is $6,607,978 and not $2,266,557. The difference arises as a consequence of two series of transactions totalling $4,341,422, the validity of which are being challenged by the WIF Receivers and the liquidators of Westpoint Management Ltd. I do not have sufficient information available to determine the precise consequences for the balance sheet of Lanepoint of the relevant transactions being found to be invalid other than it will result in the Westpoint Income Fund loan increasing to $6,607,978.
49 Furthermore, Mr Honey's affidavit does not take into account the continuing interest on the WIF loans due and payable after 2 June 2006. Mr Honey's opinions do not assist Lanepoint.
50 Mr Read, one of the liquidators of Westpoint Management, in addition to the passage relied upon by Lanepoint set out at [26] above, also said at [14]:
I have not conceded and am not in a position to concede that the amount owing by Lanepoint to Westpoint Management is other than as indicated in my affidavit sworn on 29 September 2006 being $6,607,978.41 excluding interest, costs, taxes and disbursements.
51 I do not accept that the above WIF draw downs were incorrectly made. It follows that these amounts remain a liability of Lanepoint to WIF. The true position is as found in Lanepoint's financial records before these were "corrected" by Mr Nairn.
52 When the draw downs in question were effected it was in the context of an ASIC investigation. I find that Mr Carey approved them and did so to ensure the funds were available prior to funding being stopped, as he thought would be the case because of the looming ASIC Stop Order of 25 October 2005.
53 I find that Lanepoint did draw down the WIF funds in the amount of $6.6 million and is obliged to repay those amounts. That amount will, of course, now be substantially more because of interest. This amount alone exceeds Lanepoint's total assets of $5,729,937. The transactions in the form of the $2m run around and Kingdream transfers which purported to reduce or extinguish the amount of Lanepoint's indebtedness to WIFwere, I find, ineffective or liable to be set aside. These findings alone are sufficient to dispose of this application.