Bennett Street Developments Pty Ltd v Weerappah [2009] FCA 164 | Case summary

REASONS FOR JUDGMENT 1 The Australian Securities and Investments Commission ("the Commission") seeks urgent interlocutory relief against two individuals and eight companies until 26 February 2009. The urgent interlocutory relief which is sought can be generally described as asset protection orders and orders in relation to the use of, or application for, passports by the two individual defendants. The application for the orders are sought pursuant to ss 1323 and 1324 of the Corporations Act 2001 (Cth) ("the Act"). Other sections of the Act and s 23 of the Federal Court of Australia Act 1976 (Cth) are also drawn in aid of the application as is the inherent jurisdiction of the Court. 2 In general terms, s 1323 of the Act entitles the Court on the application of the Commission, in the particular circumstances of this case, where an investigation is being carried out under the Act or under the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") in relation to an act or omission by a person, being an act or omission that constitutes, or may constitute, a contravention of the Act, and a court considers it necessary or desirable to do so for the purpose of protecting the interests of certain persons (to whom I refer colloquially as "investors") to whom the persons or corporation the subject of the investigation may be liable or may well become liable to pay money, whether in respect of a debt by way of damages or compensation or otherwise, or to account for financial products or other property, make a range of orders. Section 1324 empowers the Court to grant injunctive relief where a person has engaged, is engaging or is proposing to engage in conduct that constitutes, inter alia, a contravention of the Act. 3 The corporate defendants, at relevant times, were controlled, or had involved in their activities, one or both of the first defendant, Clestus Weerappah, and the second defendant, Andrea Hawkins. The material upon which the Commission moves is found in a number of affidavits by a senior manager of the Commission, Mr Andrew James Price. There is also another affidavit from the Commission which is not necessary to refer to at the present time. Mr Price sets out, in paragraphs 22 and 23 of his first affidavit, the corporations of which Mr Weerappah and Ms Hawkins either are, or were, directors. The Commission has commenced an investigation pursuant to s 13 of the ASIC Act into suspected contraventions of the Act, the ASIC Act and other statutory provisions, by a number of companies, up to 15 in number, including the eight corporate defendants. 4 As is set out in paragraph 24 of Mr Price's first affidavit, the Commission is conducting the investigation into suspected contraventions of a number of provisions of the Act, the ASIC Act and the Victorian Crimes Act 1958 (Vic), by officers, employees, agents and representatives of the 15 companies whose names are set out in paragraph 24. In particular, it is said that the Commission believes that a company, Dollarforce Financial Services Pty Ltd ("Dollarforce"), may have operated an unregistered managed investment scheme, and the manner in which that investment scheme is alleged to have been conducted is set out in detail in Mr Price's first affidavit, particularly in paragraphs 7 and 29(a). 5 For present purposes, it is not necessary to set out in any detail what is said to be the components or aspects of that unregistered management scheme because, on the present application, the allegations made by the Commission were not particularly challenged, the submissions being in a more confined respect. The Commission also believes that the tenth defendant, Elite Wealth Builders Pty Ltd, has taken over what are described as the services formerly provided by Dollarforce to members of what was called the Dollarforce Investment Club, and there is a belief in the Commission that Dollarforce has transferred assets to Elite Wealth Builders Pty Ltd for this purpose. 6 In general terms, that belief was confirmed by Ms Hawkins, a director of Elite Wealth Builders Pty Ltd, who said that that company had purchased the Dollarforce business. The Commission also believes that a company, Altitude Property Limited, which has raised money from the public, may have omitted to disclose a significant fact about the cost to the company of a property development proposal referred to in the prospectus it issued, failed to make proper disclosure of certain non‑cash consideration and improperly used money raised from persons who subscribed for shares in the company. 7 There are also allegations or beliefs expressed by officers of the Commission in relation to a number of the other corporate defendants, which I need not go into in any detail at this stage. I refer, in particular, to My Building No 1 Pty Ltd, and also the Bennett Street development entity; that is Bennett Street Developments Pty Ltd. A key matter being investigated by the Commission is the transfer of over $400,000, and possibly up to $500,000, from My Building No 1 Pty Ltd, Lewmac Investments Pty Ltd, and a company called Alamanda Property Investments Pty Ltd to Elite Wealth Builders Pty Ltd. 8 The Commission is also investigating Ms Hawkins' claim that she made loans to Mr Weerappah totalling $1.2 million, and that the payments made to her by a number of the corporate defendants, totalling between $400,000 and $500,000, were in repayment of her loans to Mr Weerappah. Overall, the Commission's concerns, which arise from the investigation, relate to assets within the corporate defendants which are being investigated and which the Commission says may be at risk of improper dissipation. There is also concern that Mr Weerappah and Ms Hawkins may leave the country, and evidence has been given as to requests to them to surrender any passports they may hold, and the seeking of undertakings not to apply for further passports. 9 Mr Hutton of counsel appeared for the first to third, and seventh to tenth defendants. A director of the fourth and sixth defendants was present in Court. On behalf of those companies he did not oppose the orders sought by the Commission, and he played no further part in the proceeding. 10 Substantially, the submissions made in the hearing related to the form of orders which should be made against Elite Wealth Builders Pty Ltd, Ivory Property Group Pty Ltd, and Lewmac Investments Pty Ltd, having regard to their ongoing business and financial commitments which, it was submitted, would be significantly affected by the orders sought in relation to the limitations on the money they could spend. There were also limited submissions in relation to the orders sought concerning the passports of Mr Weerappah and Ms Hawkins. 11 Mr Hutton called evidence from Ms Hawkins and Mr Weerappah who were also the subject of cross‑examination, and I summarise the relevant parts of their evidence as a matter of record together with some of the evidence which was led by the Commission. 12 Ms Hawkins said that she reported that her passport was lost or stolen over the telephone to the passport office. She had only held the lost passport and held no other passport. Ms Hawkins produced a computer printout of a profit and loss statement for Elite Wealth Builders Pty Ltd for the period September through to, and including, December 2008, prepared by the company's accountant, and she also produced rental invoices for properties leased by the company at 342‑344 South Road. 13 Ms Hawkins said that Elite Wealth Builders Pty Ltd's business started in or about July 2008. The business involved the refinancing of mortgages and the budgeting for clients and mentoring of clients. The company acquired the finance broking and residential loans business of Dollarforce by a contract of sale dated 1 May 2008 for $150,000. That business included the receipt of what are called trail commissions. 14 Ms Hawkins identified the income of Elite Wealth Builders Pty Ltd as follows: trail commissions, approximately $10,000 per month, a total of $120,000 per annum; upfront commissions on mortgages placed, $5,000 per month; and mentoring of clients approximately $400 per week based on the fact that the annual charge to a client was $4,900, and she considered that three to four clients would signed up each week. 15 Elite Wealth Builders Pty Ltd's expenses included the rental of two premises, 481 Centre Road, Bentleigh and 342 South Road, Hampton East. According to the invoices tendered, the monthly rental of the South Road property was of the order of $5,400. Other expenses of Elite Wealth Builders Pty Ltd were: salaries, $50,000 per month; accounting fees, $2,500 per month; phone bills, $5,000 per month; and outsource costs, which were not particularised as to quantum. Ms Hawkins estimated that the total expenses of the business were approximately, $100,000 per month. Ms Hawkins said that the following companies, My Building No 1 Pty Ltd, Lewmac Investments Pty Ltd, Alamanda Property Investments Pty Ltd, Retail Treasury Pty Ltd, have transferred approximately $500,000 to Elite Wealth Builders Pty Ltd on the basis of those amounts being repayments of a loan Ms Hawkins made to Mr Weerappah personally and his companies. 16 Ms Hawkins' evidence in relation to this loan was confusing to me. She said, variously throughout her evidence, that there was one loan to Mr Weerappah, and there was one loan to My Building No 1 Pty Ltd, Retail Treasury Pty Ltd and others. She said there was a verbal agreement to lend over $1.2 million and that the money was lent in one sum. She said that her house was used as security for a loan that Mr Weerappah and the companies took out. She said there were two loans of $200,000 and $1 million, that she lent $200,000 to My Building No 1 Pty Ltd, in her language, "via Mr Weerappah." She said she lent the $200,000 to My Building No 1 Pty Ltd and Mr Weerappah. She also said that, when her house was sold, the loan to Mr Weerappah was not repaid, so the lender took $1 million from her in discharge of Mr Weerappah's loan. 17 Ms Hawkins also said that the Dollarforce Group - and she used the word "group" - owes her money. She said that if Mr Weerappah paid Ms Hawkins back the amount owed to her via a company, that was money owed to her, and I interpolate, presumably by Mr Weerappah. Ms Hawkins said that the money she lent to Mr Weerappah had been repaid by other companies and not Mr Weerappah. She said that she lent a million dollars to Mr Weerappah via Lewmac Investments Pty Ltd, and that Mr Weerappah was the borrower. She also did not dispute that Dollarforce provided the deposit and $133,000 for the purchase of a property at Bennett Street, but it was not clear to her who received the sale proceeds of Bennett Street. 18 Mr Weerappah said he has lost his passport. Ivory Property Group Pty Ltd holds certain residential real estate comprising five properties. The properties are mortgaged for approximately $1.5 million and the majority of which are tenanted. The costs for servicing the mortgages are of the order of $10,000 per month, and there are other costs of $2,000 per month with an income from the properties of the order of $2,000 per month. There is a pending transaction whereby four properties are to be transferred from Lewmac Investments Pty Ltd to Ivory Property Group Pty Ltd. Counsel for those defendants said he did not seek the consent of the Court for that transaction to be completed. 19 Mr Weerappah also said that Altitude Property Limited had put out a prospectus which said that the cost of purchasing units in the Darling Street Unit Trust, the asset of the trust being a property in Lorimer Street Port Melbourne, would be $1.8 million. The company had agreed to pay Alamanda Property Investments Pty Ltd incentive payments but no maximum amount was specified, and this was not disclosed in the prospectus. The last incentive payment made had been $1.4 million. Mr Weerappah said that he was the sole director, and is a shareholder in, Alamanda Property Investments Pty Ltd. Lewmac Investments Pty Ltd owed Westpac Banking Corporation $1.3 million. The loan repayment was of the order of $8,000 per month, and the company would not be prejudiced by a restriction of $2,000 per week being allowed to be spent by the company so long as the company could meet the mortgage payments. 20 On the second day of the hearing, after I reserved my judgment for the purpose of delivering reasons later in the day, the Commission, applied to amend the originating process to include a claim to wind up Elite Wealth Builders Pty Ltd and appoint a provisional liquidator to it. (Leave was given to make that amendment). It supported this claim by producing documentary evidence that the $1 million that had been lent to Mr Weerappah had been lent to him personally by Traditional Values Management Limited pursuant to a loan facility agreement dated 25 January 2007, and that security for the loan included a guarantee from Ms Hawkins, secured by a second mortgage over Ms Hawkins' property. 21 It followed, submitted the Commission, that, as the lender had called on Ms Hawkins' guarantee, any indebtedness to her for $1 million was by Mr Weerappah personally so that the payments to her of between $400,000 and $500,000 by the various companies were not in discharge of any indebtedness of them to her or Elite Wealth Builders Pty Ltd, and were liable to be repaid by Elite Wealth Builders Pty Ltd to those companies. The Commission submitted that, as Elite Wealth Builders Pty Ltd's financial position was that it cannot repay this money, it should be wound up and a provisional liquidator appointed to preserve the assets in the company for the benefit of the companies and the investors in them to whom I have already referred. 22 The Commission did not in its closing submissions, press for the appointment of a provisional liquidator at this point of time in the proceeding. The Commission's case, in substance, is that the corporate defendants, with whom the personal defendants have been intimately involved, have been involved in a number of transactions which require further investigation because they appear to involve investors putting money into projects, one or more of which may be an unregistered managed investment scheme. The money has been transferred into companies and entities under the control of Mr Weerappah and Ms Hawkins in circumstances that raise an issue whether there may be breaches of the Act, the ASIC Act, and perhaps other legislation. 23 The Commission has identified in the affidavit material upon which it relied a number of ongoing transactions which are sufficiently complex to require explanation, and without explanation raise inferences of inappropriate dealings with investors' money. The consequence is, according to the Commission, that, as Mr Weerappah and Ms Hawkins are an integral part of the investigation, they should remain in Australia while the investigation is current because the Commission may seek further information from them. The Commission also contends that the nature of the transactions involve the transfer of large sums of money in circumstances where the transactions and transfers are either not documented or are documented in a way which requires explanation. The Commission submits that there is a risk, having regard to what has happened to date, which might continue or is imminent in relation to the preservation of the investors' funds and that the money within this group of companies should be frozen for the moment pending the determination of the investigation. 24 The authorities upon which the Commission relies, and it is not necessary to set them out or analyse them for the purpose of this judgment, having regard to the way the matter was argued, establish that, on the basis of the material, it is open to me, subject to the exercise of a proper discretion, to grant the relief sought. Counsel for the defendants did not challenge, or seek to make submissions in relation to, the nature or significance of the Commission's investigation, or my jurisdiction to make the orders sought. Rather, Counsel's submissions were directed to the balance of convenience, and whether a proviso to the restraint orders sought by the Commission, that is a proviso allowing the defendants to pay $2,000 per week each for ordinary expenses, was appropriate in all the circumstances. 25 He also challenged the appointment of a provisional liquidator to Elite Wealth Builders Pty Ltd. As the Commission did not ultimately press for the appointment of a provisional liquidator, I do not need to make findings in relation to that issue which remains to be dealt with on another day. In any event, having regard to the orders which I propose to make, to which I will refer shortly, I do not consider it would have been appropriate to appoint a provisional liquidator at this time as the protection sought by the appointment of a provisional liquidator can be obtained, in substance, by the orders which I propose to make. 26 In relation to Lewmac Investments Pty Ltd, there was no submission that the expenditure to be allowed to that company should be more than the $2,000 per week proposed by the Commission. In relation to Ivory Property Group Pty Ltd, there was no submission that the amount allowed for that company to spend per week should be more, although it was said that its expenses were slightly higher than $8,000 per month. In relation to Elite Wealth Builders Pty Ltd, it was submitted that $2,000 per week was inadequate, and would result in the company having to be shut down in a manner of minutes. 27 My task is to make appropriate protective orders as contemplated by s 1323 of the Act while, at the same time, recognising the following matters: · the investigation, although significantly advanced, has not yet reached a position where the Commission can make a final determination as to whether, and by whom, particular legislative provisions have been breached; · the defendants are entitled to continue their normal activities, personal and commercial at least insofar as those activities are not seen to be involved in, or seen to be a continuation of, the conduct being investigated by the Commission, which may be said to be a contravention of the Act, and perhaps other legislation; · I consider it necessary and desirable to make protective orders for the purposes of protecting the interests of the investors who invested money in the various ventures and entities referred to by Mr Price; · the present orders sought are only to operate until 26 February 2009 when the position will be reviewed. 28 According to the evidence of Ms Hawkins, Elite Wealth Builders Pty Ltd has a number of ongoing financial commitments and expenses for rent, salaries, accounting fees and outsourcing costs. These may be incurred or accrue on a weekly basis, but they are not necessarily payable on a weekly basis. I was told that salaries of $20,000, or thereabouts are payable, per fortnight, and that the salaries were payable yesterday, Thursday, 12 February 2009. 29 I made an interim order which allowed those salaries, save for payments to Ms Hawkins, to be paid yesterday. So the next salary payment which has to be made by the company, will be on Thursday, 26 February 2009 when the matter will be before the Court with a starting time of either 9.30am or 10.30am. The submission made on behalf of Elite Wealth Builders Pty Ltd was that an order should be made that permitted its business, as it currently operates, to continue to operate. 30 The Commission submitted initially that there was significant doubt that either Ms Hawkins or Elite Wealth Builders Pty Ltd had any legal justification for the receipt of some $400,000 to $500,000 from the other defendant companies to which I have already referred. When the loan documentation in relation to Mr Weerappah was produced, the Commission submitted that the claim that money was inappropriately obtained by Ms Hawkins and Elite Wealth Builders Pty Ltd was unanswerable, and that it wanted to trace these funds and not have the assets of Ms Hawkins or Elite Wealth Builders Pty Ltd, available for recovery, diminished. 31 I am satisfied that I should make an order, firstly, preserving substantially the amount Elite Wealth Builders Pty Ltd has in its bank account and, secondly, limiting Elite Wealth Builders Pty Ltd's expenditure. I am particularly concerned about Ms Hawkins' seeming inability to identify the particular borrowers and lenders involved in a number of transactions which were the subject of evidence by her, and her inability to distinguish which company in the group of companies with which she was involved is entitled to receive, or obliged to pay moneys, or discharge liabilities of other companies in the group. 32 Having regard to the fact that Ms Hawkins is in control of the business and the finances and the funds of Elite Wealth Builders Pty Ltd, I consider it desirable that there be significant limitations on that company's ability to dispose of moneys and assets presently under its control. Subject to anything further counsel may wish to say, I propose to make orders that the time for service of the originating process and the supporting affidavits be abridged to 10 February 2009 and that until 4.00pm on 26 February 2009, or further order, each of the defendants be restrained in the terms of paragraph 2 of the minute of order, which has been proposed by the Commission. 33 In relation to the proviso to paragraph 2 of the minute of order proposed by the Commission, I would propose to order to vary paragraph 2.1 in the minute so as to provide that the order shall not prevent: · each of the first, second, eighth and ninth defendants from paying operating expenses incurred in the ordinary course of business or living expenses up to an amount of $2,000 per week (commencing on a Monday and ending on, and including a Sunday); · the tenth defendant from paying ordinary operating expenses incurred in the ordinary course of business up to an amount of $4,000 per week. I have particularly taken into account the fact that salaries were paid yesterday in accordance with a proviso to an interim order I made, so that the next payment of salaries due on Thursday, 26 February 2009 will be when the matter will be back before the court early in the morning. I would also propose to make orders in terms of paragraphs 3, 4, 5, 6 and 7 and 8 of the minute of the order proposed by the Commission. 34 In the course of the hearing yesterday, Mr Cook appeared to seek leave to intervene on behalf of a number of investors in the schemes' projects, properties and entities, the subject of the Commission's investigation. That leave was refined into an application for those investors to be joined in the proceeding as defendants and cross‑claimants pursuant to O 6 r 8 of the Federal Court Rules so they could make a cross‑claim to seek to wind up what they say is an unregistered managed investment scheme, the Dollarforce scheme, and the appointment of a provisional liquidator to a number of the defendant companies. 35 Mr Cook said that he had not had the opportunity to see the material which the Commission had filed. It seems to me, in all those circumstances, having regard to the orders which I propose to make today, that Mr Cook's application for joinder be adjourned to the further hearing of this proceeding on 26 February 2009, and I would propose to order that the application, on behalf of a number of investors to be added as defendants, cross‑claimants to the proceeding, be adjourned to that date. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.

Bennett Street Developments Pty Ltd v Weerappah

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Judgment (10 paragraphs)

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Legislation Cited (4)

Cited By (1)