Transactions with connected companies
331 For the reasons just described, HML has changed its corporate purpose in ways that have not been proved to have been properly authorised by shareholders, and not because it was an attractive strategic direction, but because of a catastrophic collapse in the company's financial position. Of cause for further concern is that the collapse is at least partly attributable to large investments, the lawfulness of which is open to question, and many of which were outside the original corporate purpose. Their lawfulness is open to question because the counterparties may have been related parties of HML or Mr McAuliffe and, in any event, the transactions may have involved breaches of legal duties on the part of HML's directors.
332 As I have said, it was common ground that I need not and should not make findings that the transactions were unlawful. It is enough for present purposes to say that they exhibit troubling features that warrant investigation.
333 The troubling features centrally concern the fact that each of the companies in which HML invested by way of the transactions concerned was connected with, and quite possibly controlled by, Mr McAuliffe. The connections between the companies and the reasons why it is quite possible that Mr McAuliffe controlled them have also been canvassed at several points in the course of the narrative. In summary:
(1) The Prospectus referred to Mr McAuliffe as HML's founder [117]. It emphasised, as important to HML's future success, Mr McAuliffe, his 'multistrand skills', and his position as HML's Managing Director and as Managing Director and Chief Investment Officer of JBL, HML's investment manager [116]-[118]. Mr McAuliffe's experience and skills were one of HML's 'key strengths' [125]. In contrast to Mr McAuliffe's repeated assertions in cross examination, it would be surprising if a director who is that important to the company's operations simply permitted decisions to be made by others such as non-executive 'independent' directors.
(2) Mr McAuliffe's own evidence was that his various positions at HML and other companies have given him approximately seven years of experience managing listed and unlisted investment companies and managing all aspects of their operations [102]. This suggests that he was able to influence the operating and management policies of HML and other connected companies.
(3) Under the Management Services Agreement, JBL was responsible for the conduct of HML's investments. Until shortly before the hearing of this matter, investing was HML's sole business enterprise. At material times JBL controlled a substantial proportion of HML's issued shares [10], [199], [278], also Diagrams 1, 2 and 3. So it can be inferred that JBL had considerable influence over HML's activities. JBL was also responsible for a wide range of services supporting that business, including office services, corporate support and information technology services support [103], [111], [141]. JBL had the same registered office as HML, and when JBL relocated, so did HML [257]. Mr McAuliffe was at all material times Managing Director and Chief Investment Officer of JBL. He held approximately 22% of its issued shares [103], [214]. In those capacities he must have had substantial power to influence the activities of both companies at all levels (including how it would vote its shares in HML). In cross examination Mr McAuliffe gave at least limited acceptance to the proposition that he had oversight of JBL's business and that it was his responsibility to ensure that it complied with significant agreements such as the management agreement with HML [213].
(4) As of late 2015, the common directorships between HML and JBL, including that of Mr McAuliffe and his father, led HML to describe them as related parties in its own Prospectus [132].
(5) KPMG's audit report for FYE 2018 noted the relationship between HML and JBL, and JBL's role as 'the parent entity of a diverse group of companies with complex cross shareholdings' in the course of noting that related party transactions were a 'key audit matter' [212].
(6) Mr McAuliffe was Group CEO of JBFG at all material times from May 2017 and a director of JBFG from December 2016 to February 2018 [17]. It is likely that in those capacities, and in particular in the capacity of Group CEO, he had the power to influence decisions about the operating and financial policies of JBFG until JBFG's receivership in October 2019 [15].
(7) The affairs of the connected companies were further intertwined by the fact that until JBFG's receivership, it employed all the accounting staff used by HML [103], [180], [280]. In fact, it is not clear that HML ever had any staff of its own.
(8) The first transaction of concern appearing in the evidence in which HML engaged was to acquire 25% of the shares in JBFG, on 8 August 2016, for the relatively modest sum of $50,000 [140]. At that time Mr McAuliffe was Managing Director of HML and the Chief Investment Officer and Managing Director of JBL, the company that had been contracted to manage HML's investment portfolio. Further, the shares were acquired from Bartholomew Roberts, of which Mr McAuliffe was a director as was his father and fellow HML director, John McAuliffe, and his fellow HML director, Ross Patane (the only other director of Bartholomew Roberts at that time was one Bryan Cook). Those connections do not take into account cross shareholdings that also connected at least some of the companies at this time.
(9) The next transaction on 13 October 2016 was not for a modest sum - it was an investment of $1.2 million in Bartholomew Roberts [142]. The common directorships have already been mentioned.
(10) The next transaction was also substantial. On 9 December 2016, JBFG (Group CEO, Stuart McAuliffe) issued 235 shares to HML (Managing Director Stuart McAuliffe) for a total of $6.25 million [144]. The change in pricing of this and the earlier issue implies that between 8 August 2016 and 9 December 2016, the shares in JBFG had increased in value from $167.02 to $26,667. Nothing in the evidence explains how an increase of that magnitude could have occurred in such a short period of time and thus how a price of $6.25 million paid by HML was justified.
(11) On the same day, and inconsistently with the Investment Mandate, HML loaned $500,004 to RSM. But within ten days that was converted into an investment in the shares of Bartholomew Roberts (of which Stuart McAuliffe, John McAuliffe and Ross Patane were directors) [145]. By 31 December 2016, HML owned over one third of the shares in Bartholomew Roberts, and had provided consideration of $1.7 million for them [147]. HML's own half year report described this as a related party transaction, albeit one said to have taken place on normal commercial terms and conditions. By the end of May 2017 it had invested even more in Bartholomew Roberts - a total of over $4 million [148]. This included another loan (inconsistently with the Investment Mandate) that was converted to shares.
(12) On 10 July 2017, HML loaned $450,000 to Capital Credit, a subsidiary of JBFG [160]-[164]. This was inconsistent with the Investment Mandate. Mr McAuliffe was a director of Capital Credit, Group CEO of its 50% indirect shareholder JBFG, a director of Bartholomew Roberts its other 50% shareholder, and Managing Director and Chief Investment Officer of Bartholomew Roberts' parent company and investment manager, JBL. In June 2019, the loan was novated so that it became a loan from HML to JBFG rather than to Capital Credit. In cross examination, Mr McAuliffe professed ignorance of the reasons for the novation and what HML received in return for agreeing to it [228].
(13) On 17 November 2017, HML paid over $2.8 million for shares in JBL, its own investment manager, of which Mr McAuliffe was Managing Director and Chief Investment Officer [175]. While JBL was a listed company at this time, the Prospectus had identified investing in listed companies as not a primary part of HML's investment strategy [119], [122]. ASX considered that this transaction required shareholder approval because of JBL's relationship to Mr McAuliffe [182]. HML's response to ASX, that Mr McAuliffe did not have the power to control decisions about the financial and operating policies of either company, was implausible [184]-[186]. He was its Managing Director and both the Managing Director and the Chief Investment Officer of its investment manager. While HML said it did not agree with ASX's view, it said it would seek shareholder approval for the transaction [187], but instead the transaction was effectively cancelled when JBL bought back the shares [197].
(14) That was not, however, the end of the matter, because two days after HML announced that the transaction for the $2.8 million acquisition had been cancelled, it proceeded to lend over $2.4 million to JBL on an unsecured basis [197]. In a letter sent to ASX less than two weeks after the loan, HML referred to the buy back but made no mention of the loan and it does not appear that it was disclosed until over a month later [198]. If ASX was concerned about a purchase of shares in JBL because of Mr McAuliffe's association with it, it is hard to see that it would not have been concerned about an unsecured loan of nearly as much money to the same company immediately after the share purchase had been reversed. Also, the loan to JBL may have been in breach of the Investment Mandate in the Management Services Agreement which governed investments by HML's investment manager, that is, by JBL.
334 The above transactions are limited to those involving HML. There are a number of other transactions involving companies such as JBL, JBFG, Benjamin Hornigold and Bartholomew Roberts disclosed by the evidence which have not been canvassed.
335 The need for investigation of the transactions I have described speaks for itself. They may involve breaches of Chapter 2E of the Corporations Act, concerning related party transactions, or of listing rules on that subject. Mr McAuliffe accepted in cross examination that HML had never called meetings to approve loans to related companies, although he did not accept that they were related companies. As to that issue, s 228 in Chapter 2E defines related parties of a company to include a director of the company, and any entity controlled by such a director: see s 228(2)(a) and s 228(4). At the relevant times, Mr McAuliffe was a director of HML, and there is also, at least, substantial cause to investigate whether he controlled counterparties to the transactions including JBL, JBFG and Bartholomew Roberts at relevant times. That is so at least because of Mr McAuliffe's board and executive positions with those companies, and even before their shareholdings in each other, and Mr McAuliffe's shareholdings, are taken into account.
336 Further, I have made comments in the narrative of evidence above about the unreality of Mr McAuliffe's apparent view that these transactions were all the result of decisions made by directors who were independent of him. The transactions may involve breaches of directors' statutory duties or duties at common law or equity, for example because they may not have been carried out bona fide in the interests of the company as a whole. They warrant investigation in order to ascertain whether such breaches have occurred.
337 More broadly, from the evidence in the proceedings detailed above, it is possible to see that at least $13 million flowed out of HML by way of share investments in and loans to connected companies [140], [144], [148], [160], [197]. It appears that the bulk of those funds will not be recovered from those companies. On that basis, it can be said that the transactions described above have contributed to the collapse in HML's financial position.
338 It is also relevant that the transactions involve a significant departure from the purposes of HML that were explained so clearly in the Prospectus. Investors provided their funds on the basis of a document which repeatedly emphasised that the company's investment would be limited to deeply liquid, high volume global markets, primarily through investments in exchange traded futures contracts. The Prospectus said very specifically that under normal market conditions the company would be able to liquidate at least 90% of its portfolio quickly. Instead, from at least August 2016, HML engaged in a program of providing many millions of dollars to companies connected with Mr McAuliffe, several of which were unlisted. For the reasons I have given, the resolution passed in October 2016 and the resolution passed in December 2021 were not sufficient to authorise that fundamental change of purpose. Nor does it appear that a decision to change the strategic direction of the company was ever disclosed to shareholders or the market. That is despite an assurance in the Prospectus that any material change in HML's risk profile or strategy would be disclosed. These transactions indicate that the abandonment of the company's original purpose occurred much sooner than the time that it became inoperative, or the time at which it decided that its main activity was to investigate legal action against ASX.
339 HML submits that if an investigation is needed, then ASIC is the most appropriate body to do so. I do not accept that. While HML points to evidence that ASIC is investigating, that evidence dates back to October 2019 at the latest. There is nothing to indicate whether the investigation is ongoing. HML submits that ASIC has extensive investigative powers. It does, but so does a liquidator. It is true, as HML submits, that a liquidator requires funding and, speaking broadly, ASIC already has funding. But it is notorious that liquidators have many possible avenues of funding available to them, such as litigation funders and interested creditors and shareholders. In contrast, given that the last evidence of ASIC taking steps to investigate HML dates from October 2019, the prospect that it remains willing to expend public funds to investigate the company further is at least equally uncertain. Further, ASIC's regulatory functions of pursuing persons for breaches and penalties is different to the likely purpose of a liquidator, which is to recover funds for creditors and shareholders. The transactions detailed above provide ample scope for investigation for the latter purpose.