JTS Property & Investments No 1 Pty Ltd (In Liq) v Sadri

Judgment 1On 10 October 2011, I gave directions pursuant to s 479(3) of the Corporations Act 2001 (Cth) that the applicant is justified: (a) in treating Roslyn Therese Sheen as the only member or shareholder of the first respondent ( JTS 1 ) and the second respondent ( JTS 2 ); (b) in treating certain persons identified in the order as creditors of either JTS 1 or JTS 2, notwithstanding any failure by them to prove their debts. In this judgment, I give my reasons for making those orders. 2Both JTS 1 and JTS 2 were incorporated on 8 March 2005. Each company's sole director and shareholder at the time of incorporation was Roslyn Therese Sheen, who is the sister of Barbara Cavanough. Ms Cavanough controlled a company known as SMS Advisory Group Pty Ltd, which provided financial advisory services to clients, many of whom operated self managed superannuation funds. Many of those clients are elderly. In 2006, ASIC revoked SMS's financial services licence and banned Ms Cavanough from providing financial advice for 10 years. 3There are almost no records in existence for either JTS 1 or JTS 2. Neither has any financial records, such as a general ledger or cashbook. The liquidator, Mr Smith, has, however, managed to construct cashbooks for the companies, although in the case of JTS 1 there is a discrepancy of approximately $40,000 that cannot be accounted for. 4Both JTS 1 and JTS 2 acquired real property in Tasmania. In particular, on 22 March 2005, JTS 1 entered into a contract to acquire a property at New Norfolk which was part of the site of the former Royal Derwent Hospital. There is some evidence that JTS 1's intention at the time was to refurbish the buildings on the land and operate a private education facility for overseas students. The purchase price of the property was $1.4 million. On exchange, JTS 1 paid a deposit of $140,000. Settlement was to take place on or before 30 June 2005. 5Shortly before contracts were exchanged, on 17 March 2005, JTS 1 issued an information memorandum ( IM ) which included an application form by which investors could apply for redeemable preference shares in JTS 1. Applicants were required to invest a minimum of $10,000. It appears that the investment was promoted by SMS and Ms Cavanough and that application forms for the proposed investment were received by SMS. In all, JTS 1 raised more than $4.8 million. 6Of the funds paid by investors, $240,000 was paid directly to Derwent Valley Real Estate. Large amounts were also paid to companies controlled either by Mr Harold Adams, Ms Cavanough's husband, or by Ms Cavanough. 7JTS 1 ran into difficulties in borrowing the balance of the purchase price. Ultimately, it obtained a loan for $1,500,000 for a period of 90 days from Mountainview Retreat Retirement Village Pty Ltd ( MRRV ). Interest on that loan was payable at the rate of 4 percent per 30 day period, with a default interest rate of 5 percent per 30 day period. Using money borrowed from MRRV, JTS 1 settled on the purchase of the land on 30 June 2005. Ultimately, in December 2005, it refinanced with the company known as RMBL Investments Limited. RMBL is a mortgage aggregator and the sole contributor to the loan was a Mr Sadri. RMBL lent JTS 1 $2.2 million. However, of that amount, $520,000 was paid to Mr Sadri. How that came about is not important to the present application. 8JTS 1 soon defaulted on the loan and eventually Mr Smith was appointed as administrator on 16 June 2006 and as liquidator on 5 July 2006. 9Following the appointment of Mr Smith as liquidator, JTS 1 commenced proceedings against Mr Sadri to recover the $520,000 on the basis that the payment of that amount to him was an uncommercial transaction. Those proceedings succeeded before Bryson AJ: see JTS Property & Investments No 1 Pty Ltd (In Liq) v Sadri [2010] NSWSC 1384. A subsequent appeal has been settled for an amount of approximately $600,000, including interest and costs. 10As I have said, the records of JTS 1 are largely non-existent. Moreover, many of the investors are unable to provide any assistance to the liquidator concerning the investments made on their behalf. According to the liquidator, what appears to be the share register of the company only records the company as having issued one share to Ms Sheen. A number of investors received a document described as a "Share Certificate" with the heading "Australia - Tasmania College of Technology". Those documents were described as having been issued by "JTS Property & Investments Pty Ltd" and were signed by Ms Sheen. The company's constitution does not permit the issuing of redeemable preference shares and the liquidator has found no evidence to indicate any attempt to amend the constitution. The IM is, to say the least, an unsatisfactory document. Relevantly, it was misleading in a number of important respects: (a) it stated that JTS 1 was seeking to raise "up to $1 million". In fact, JTS 1 raised more than $4.8 million; (b) it stated that the money would be used to refurbish the existing buildings. In fact, substantial proportions of the money were paid to companies associated with Ms Cavanough and her husband and other amounts were paid to service interest on the land acquisition loan and to pay interest to investors; (c) it stated that money would be drawn down in stages as required by JTS 1 based on the progress of the development whereas, as I have said, that did not happen. (d) it stated that JTS 1 would borrow a further $1 million to fund the refurbishment works whereas no money was borrowed for that purpose. Based on these representations, the investors appear to have a strong case that they were misled into paying subscription amounts and are entitled to damages under s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) or to relief under s 12GM for breaches of s 12DA of that Act. 11JTS 2 was the registered proprietor of 3 parcels of land in New Norfolk. The information concerning it is even more scant than the information relating to JTS 1. It appears that Mr Sadri lent money to JTS 2 secured by mortgages over the 3 parcels of land. In addition, the liquidator has managed to identify 4 investors who provided money to JTS 2, although there was no information memorandum relating to those investments. The 4 investors are: (a) Howard and Lynne Dearing, who are said to have invested $70,000, but who assert that the transfer of funds occurred without their consent; (b) John and Janet Argyle who, as trustees as the Syzygy Retirement Fund, paid $200,000 and completed an application form addressed to JTS 1, but who received a receipt of $200,000 from JTS 2; (c) Sciberras Pty Ltd, as trustee of the Sciberras Retirement Fund, which asserts an amount of $20,000 was transferred from the Sciberras's bank account to JTS 2 without its authority; (d) Warwick Nichols Superannuation Fund. An amount of $37,000 was paid from the bank account of this fund to JTS 2. Mr Nichols asserts that that transfer was made without his consent. 12On or about 4 August 2011, pursuant to directions made by the court on 1 August 2011, the liquidator sent a report to the persons he has identified as investors in JTS 1 and JTS 2. Attached to the report where schedules setting out details of the amount each person paid to those companies and the dates of those payments. On 10 August 2011, a copy of that report was sent to Mr Sadri. The report indicated that the liquidator proposed to excuse the investors he had identified from submitting formal proof of debts and to admit each claim by an investor in the winding up of JTS 1 and JTS 2, as the case may be, for the amount shown on the schedules. The report also gave notice of the liquidator's intention to make the application the subject of this judgment and notice that the matter was next before the court on 19 September 2011. 13On 17 August 2011, the liquidator caused to be published in The Australian newspaper an advertisement giving notice that any creditors of JTS 1 and JTS 2 whose debts have not already been admitted were required to prove their debts or claims on or before 12 September 2011. 14On 12 September 2011, Mr Sadri submitted a proof of debt in the winding up of JTS 1 claiming $1,461,810 based on a shortfall in the security in respect of the loan to that company. Mr Sadri also lodged a proof of debt in the winding up of JTS 2 in the sum of $646,091. The liquidator has not decided whether to admit those proofs or not. JTS 2 has no other creditors. JTS 1 has two: a firm of solicitors that is owned $797 and the Tasmanian State Revenue Office, which is owed $433. 15No other creditors have come forward. If the proofs of debt lodged by Mr Sadri are not admitted the liquidator expects to pay a dividend of approximately 4 to 5 cents to investors in the winding up of JTS 1 and approximately 12 cents in the winding up of JTS 2. 16The matter was called on 19 September 2011. There was no appearance at that time by Mr Sadri or anyone else. The matter was then stood over ultimately to 10 October 2011. 17Section 479(3) of the Corporations Act provides: The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up. 18In my opinion, this is an appropriate case for the liquidator to seek directions from the court. The treatment of the amounts paid by the investors and whether those investors should be required to lodge formal proofs of debt are clearly matters arising under the winding up. They raise issues that go beyond the mere exercise of commercial judgment so as to make it reasonable for him to seek the protection of a direction: see Re United Medical Protection of Queensland [2004] NSWSC 14 at [61] - [63] per Austin J. 19The directions sought by the liquidator are justified for a number of reasons. 20First, on the material before me, the evidence that any of the investors became shareholders of JTS 1 or JTS 2 is scant. In the case of JTS 1, there is no evidence that shares were actually issued by JTS 1. The highest the evidence goes are the share certificates issued to some investors. However, those share certificates were issued in the name of a different company. There is no share register or other documents recording the issuing of the shares by JTS 1 and it did not have power under its constitution to issue redeemable preference shares. It is possible that, as a result of the IM and the payment of money, JTS 1 became contractually bound to issue preference shares. However, it did not have power to perform those contracts without amending its constitution. Moreover, no investors have sought to enforce them. In the case of JTS 2, the position is even clearer. The only evidence is that unauthorised transfers of money were made to JTS 2 from the accounts of the investors. There is nothing to suggest that those payments were made to acquire shares. 21Second, on the evidence before me, the investors have good claims against JTS 1 for misleading and deceptive conduct and good claims against JTS 2 for money had and received. Both those claims are provable in the liquidations of JTS 1 and JTS 2. The claim by investors in JTS 2 would be provable whether or not they became shareholders: Sons of Gwalia Ltd v Margaretic [2007] HCA 1; 231 CLR 160. 22Third, the effect of putting the investors to proof of their claims is likely to lead to the result that many of the investors will not recover in the winding up of the companies despite the fact that they have good claims. As I have said, many of the investors are elderly and have not been able to assist the liquidator with his enquiries. The dividend that they will receive, particularly in the case of JTS 1, is only small. In those circumstances, the liquidator has an understandable concern that they will not pursue their claims if they are required to lodge formal proofs of debt. There is, however, no doubt about the amounts of money paid by them and that that money has been lost in circumstances where, on the available evidence, they have good claims against the companies. 23Fourth, having regard to what I have said, it is not in the interests of any creditors that the liquidator incur further costs in investigating the investors' claims. 24Fifth, the only other significant potential creditor of the two companies is Mr Sadri. Consequently, he is the only person who may be affected in a significant way by the orders sought by the liquidator. The liquidator has yet to make a decision to admit Mr Sadri's proof. However, Mr Sadri was on notice of the application by the liquidator for directions and chose not to appear.