(D) 1999 - January to October
55 In January 1999, LLMDC commenced to operate the "Business" at the Coburg Premises. The invoicing for the business however continued to be performed by LMC. This "arrangement" was not formalised. Craven described it in the following terms at para [6] of her affidavit sworn on 9 December 2008:
LMC continued to invoice the customers of LLMDC where LMC would account to LLMDC each month and deduct an administration charge for the invoicing and administrative service.
56 On 26 February 1999, Paul Brodie ceased to be a director of LLMDC.
57 Despite the ASIC ban, Jorgensen was appointed a director and secretary of Dynacast (Aust) on 18 March 1999. He ceased to be a director on 31 March 1999. On 1 June 1999, Janine Brodie was appointed a director of Dynacast (Aust).
58 On 20 April 1999, an administrator was appointed to LLMC. On 22 April 1999, LLMC was wound up in insolvency with creditors of $943,349. The liquidator's report described the company as "inadequately capitalised and poorly managed".
59 On 12 May 1999, Paul Brodie was banned by ASIC under s 600(3) of the Lawfor a period of two years and two months from being a director or promoter of or being concerned in the management of a company. He ceased to be a director of LMC, Riton and LLMC.
60 During the course of May or June 1999 (and it matters not which month), Jorgensen approached McGregor and told him he needed about $400,000 urgently to settle the purchase of some die casting equipment in Sydney. On 11 June 1998, Callawadda was incorporated. Using that entity, a syndicate of lenders advanced approximately $120,000. The loan was described by McGregor as "on the basis of a substantial establishment fee, a high interest rate and was secured by a debenture". As with many facts and matters in this case, the evidence about it was devoid of detail. According to McGregor, the loan was repaid and yielded a profit to Callawadda.
61 One or two months later, Jorgensen contacted McGregor and requested a further loan as he urgently needed funds for his die casting business at the Coburg Premises. The "business" was conducted by LLMDC: see [53] and [55] above. At that point in time, the ASIC extract for LLMDC records Craven as the sole director and a secretary. Janine Brodie was also a secretary until 6 July 1999 having been replaced by a "Jmieale Jorgensen" (spelt various ways throughout the documents) on the same date.
62 On 8 July 1999, LLMDC executed a fixed and floating charge over its assets and undertaking in favour of Callawadda. The prospective liability was $100,000. The Deed of Charge was executed by Craven and what appears to be the signature of a person with the surname "Jorgensen". In addition to the Charge, McGregor's evidence was that there was a Loan Deed between LLMDC and Callawadda which provided for interest at a rate of about 32.5% per annum. He was unable to produce the Loan Deed. McGregor's evidence was that pursuant to the Loan Deed and the Deed of Charge, Callawadda advanced the following sums to LLMDC in July 1999:
8 July 1999 $25,000
14 July 1999 $10,000
20 July 1999 $15,000
22 July 1999 $5,000
63 In the midst of this, on 22 July 1999, Paul Brodie appointed a trustee under s 188 of the Bankruptcy Act.
64 In late July 1999, LLMDC faced serious challenges. On 23 July 1999, Simon Wallace-Smith ("Wallace-Smith") was appointed as interim receiver and manager of LLMDC and Dynacast (Aust) upon the application of ASIC. On 29 July, Gregory Andrews was appointed administrator of Dynacast (Aust). Over the next three weeks, Wallace-Smith incurred fees of about $130,000.
65 On 26 July 1999, Gregory Andrews was appointed administrator of LMC. (A receiver and manager had been appointed on 2 July 1999). As noted earlier, LMC was the registered proprietor of the Coburg Premises. Two days later, on 28 July 1999, the receiver and manager of LMC served a Notice of Forfeiture on LLMDC in relation to the lease from LMC of the Coburg Premises: see [54] above. At this point in time, the sole director of LMC was Jmieale Jorgensen who had been appointed on 4 July 1999. She remained the sole director until 3 September 1999 when she was replaced by Trudy Jorgensen.
66 On 8 August 1999, Craven borrowed $50,000 against her residential home in Bundoora to lend funds to LLMDC to meet a current liability of $49,000 to the ATO.
67 On 20 August 1999, LMC was wound up in insolvency with a deficiency in excess of $2.5 million. Four days later, on 24 August 1999, Dynacast (Aust) was wound up in insolvency with a deficiency of $406,000. Six days later, on 30 August 1999, Jorgensen filed a composition under the Bankruptcy Act. On 1 September 1999, Paul Brodie was made bankrupt on petition by the ATO. At this point in time, the Coburg Premises, on which LLMDC conducted its business, were still in limbo: see [65] above.
68 In early September 1999, Jorgensen asked McGregor for $250,000 which he said he urgently needed for a settlement with ASIC to facilitate the removal of the receiver and manager of LLMDC. McGregor refused to advance the funds.
69 Jorgensen then approached Graham for funds. Graham agreed to advance $250,000 to LLMDC for six weeks on the following terms and conditions:
1. if the loan was not repaid within four weeks, there would be a further penalty of $50,000;
2. if the loan was not repaid within six weeks, there would be a further penalty of 30% interest per annum payable on all outstanding monies; and
3. a first ranking Deed of Charge over LLMDC.
70 Shortly after McGregor's meeting with Jorgensen (see [68]), McGregor was asked to, and did, attend a meeting with Henry Kalus ("Kalus") at Kalus Kenny. Kalus acted for Graham. Kalus told McGregor that Graham had agreed to lend LLMDC $250,000 on the security of a fixed and floating charge over the assets and undertaking of LLMDC, the funds were to be advanced by an entity related to Graham, being Cosmick, and that in addition to the charge, Graham wanted Cosmick to have priority ahead of Callawadda not only for the loan of $250,000 but also an establishment fee of $110,000, interest and costs. McGregor agreed on behalf of Callawadda to execute a Deed of Priority in favour of Cosmick in respect of the sum of $300,000.
71 On 10 September 1999, a number of documents were executed. First, ASIC and LLMDC executed a Deed of Settlement. Craven was the sole director of LLMDC. In general terms, ASIC agreed to the discharge of the orders and termination of the appointment of Wallace-Smith as the receiver and manager to LLMDC subject to a number of conditions including:
1. the appointment of an administrator to LLMDC "to pursue the realisation of the assets of [LLMDC] in an orderly fashion and without being placed in liquidation"; and
2. Craven entering to an agreement with Cosmick for the advance of $250,000 to LLMDC for its use in prescribed ways.
72 Other deeds and agreements dated 10 September 1999 were also executed. One bundle concerned the advance of $250,000 by Cosmick to LLMDC evidenced and secured by a Loan Agreement, a Debenture (defined as the "Charge" (see [2] above) and a Guarantee and Indemnity all dated 10 September 1999. The guarantors were Craven, Jorgensen and Jmieale Jorgensen. The last document was a Deed of Priority between Callawadda, Cosmick and LLMDC. Kalus recalled meeting Jorgensen and a woman and telling Jorgensen that he was putting his business at risk and that Jorgensen expressed confidence that the loan would be repaid.
73 On 10 September 1999, the appointment of Wallace-Smith to LLMDC was discharged and Anthony Cant ("Cant") was appointed administrator of LLMDC. At the same time, however, the receiver and manager of LMC commenced proceedings in the Supreme Court of Victoria against LLMDC for possession of the Coburg Premises: see [65] above.
74 First thing in the morning on 30 September 1999, LLMDC's solicitor, Mr Robin Settle ("Settle") telephoned Kalus and asked whether Cosmick would be voting in favour of a proposed Deed of Company Arrangement ("DOCA"). Kalus responded by saying that he did not have instructions and he was interested to know about the progress of the refinancing and the likelihood of the repayment of the Cosmick loan by the due date. That same day, Jorgensen telephoned Kalus and told Kalus that Cosmick would be repaid $200,000 from factoring debts and $100,000 from another source. 30 September 1999 was also the last day for LLMDC to exercise the option to renew the lease for a further term of one year. LLMDC did not exercise that option. As a result, LMC was the registered proprietor of land with a tenant with a lease that was due to expire on 31 December 1999. The status of the Property Option under the Ratification and Amendment of Sale of Business and Assets Agreement (see [54] above) was uncertain. It could be exercised for up to two years from 31 December 1998.
75 On 1 October 1999, Kalus was sent a copy of a letter from ASIC to Cant dated 29 September 1999 concerning the administration of LLMDC. Amongst other things, ASIC suggested that it was "not appropriate [for Cant] to publish and proceed with the draft [Report to Creditors] in its current form". ASIC specifically referred to a number of inconsistencies in the material on which Cant had relied in preparing the draft report. The issues identified by ASIC included:
1. LLMDC had been highly profitable in the past which suggested that the accounting material relied upon by Cant was wholly or substantially unreliable and required thorough investigation;
2. the recommendation that LLMDC enter into a DOCA was on the assumption that LLMDC was a going concern and that it would continue to operate from the Coburg Premises when, in fact:
· the receiver and manager of LMC had served LLMDC a Notice of Forfeiture requiring the surrender of the lease with LLMDC vacating the Premises;
· the receiver and manager of LMC had instructed the selling agents that the Coburg Premises would be sold with vacant possession;
· under cl 7 of the Lease between LMC and LLMDC, LMC had a right to re-enter and end the lease when LLMDC was placed under official management, had a receiver and manager or administrator appointed;
3. the LLMDC Draft 1999 Annual Report recorded unpaid capital of $890,000. ASIC noted that the draft report referred to the fact that Craven had given evidence in the Supreme Court of Victoria that she held 760,000 shares paid to one cent and that the "majority of the balance of shares paid to one cent are owned by parties whom [Cant] indicates he is not able to identify". However, ASIC noted that under the terms of the draft DOCA, Craven would avoid the call on her unpaid capital and yet at the same time would inherit a profitable corporation.
ASIC recommended that the meeting of creditors be adjourned to address these and other issues.
76 A copy of the Administrator's Report and the draft DOCA sent to creditors was attached to an affidavit filed by Wallace-Smith seeking assessment of his remuneration: see [87] below.
77 On 5 October 1999 (and despite ASIC's concerns), LLMDC executed a DOCA. On the same day, Cant exercised a lien over $300,000 of LLMDC's debtors. At the same time, without the knowledge or consent of Cosmick or Callawadda (each with the benefit of a Charge over LLMDC's assets and undertaking), there was a purported contract of sale of LLMDC's assets to Dynacast (Int) Pty Ltd (ACN 061 234 642) ("Dynacast (Int)") for $650,000. This was another of the issues raised by ASIC in its 29 September 1999 letter: see [75] above.
78 On 7 October 1999, LLMDC's solicitor, Mr Settle, telephoned Kalus and told him that Cant had retained all LLMDC's debts and that "his client" wanted to pressure Cant into releasing the debtors so that the debts could be factored. During this conversation, reference was also made to a refinance with Colonial, the detail of which would be explained to Kalus by Jorgensen or Craven.
79 That did not occur and, on 11 October 1999, LLMDC failed to repay $310,000 to Cosmick. In accordance with the Loan Agreement terms (see [69] above), the amount owing by LLMDC to Cosmick increased to $360,000. On the same day, a number of significant events occurred:
1. Kalus sent a letter to LLMDC (marked to the attention of Craven) advising her that the amount of $360,000 was now due on 29 October 1999. Kalus' letter reiterated some of the issues raised by ASIC including the alleged non disclosure of unpaid capital on the shares in LLMDC offered as security to Cosmick and the tenuous rights of occupation of LLMDC's business at the Coburg Premises. In the circumstances, Kalus requested to be provided with weekly financial information.
2. Kalus sent another letter to Cant in the following terms:
As you are aware the first repayment date for monies owed by [LLMDC] to Cosmick Pty Ltd is 10 October 1999. Payment was not made on that date. The consequences of [LLMDC's] failure to make the repayment due by 29 October 1999 are likely to be disastrous for all concerned including all unsecured creditors.
I understand that you propose retaining control of all preadministration and administration debtors in the amount of some $511,000.00. We were advised by the Director, Barbara Craven that [LLMDC] hopes to raise an advance on available debtors in order to assist in repayment of monies owing to Cosmick.
We would like to explore with you the possibility of taking control of certain debtors on behalf of our client after retention by you of those that you consider necessary to discharge your responsibilities.
Our client's rights in relation to its security documentation are obviously reserved and as each day passes my client becomes increasingly inclined to exercise those rights.
3. Jorgensen sent a handwritten facsimile to Graham from Mauritius which, in part, read as follows:
I have been desperately trying to get together the $300,000 by today to avoid the $50,000 penalty, as you can imagine.
Between Melb & Mauritius contacts, I haven't been successful, but am confident that it won't be far away.
A letter was sent to [Kalus] last week, which I presume you got a copy of … I tried to explain that it would help our refinancing very much, if [Kalus] is able to negotiate with the ex administrator (Tony Cant) or his office, about COSMICK taking control of the $500,000 of Debtors we now have, less an allowance for the Administrator to cover his liabilities (as per the letter). This will then allow you (Cosmick) to hand back to our COMPANY, say $300,000 of debtors (under your entitlement of your debebture charge) to FACTOR and raise say 80% of ie $260,000?
We can then raise the other $100,000 or so, from our bankers on the plant & equipment to pay you out in full.
The Administrator has "done the dirty" on us (contrary to his assurances) by trying to retain all the debtors to cover all sorts of contingencies including excessive fees …
Cosmick, as the secured lender, is NOT bound by the Deed, that was prepared by its solicitors, hence has the absolute right to demand the debtors be handed to it!!!
I know this sounds messy but I believe it's (sic) quite straight forward. Why doesn't [Kalus] call Cant's office & feel them out?
…
… in short, the business is going strong with plenty of forward orders, $500,000 of Debtors, $120,000 of stock & work in progress, creditors of $200,000 of which $175,000 have agreed to be paid on the "Drip" over next six months (as per Deed).
…
I note [Kalus'] comment about the tenancy of Coburg.
We have a contract to purchase it from the Hong Kong Bank for $650,000. We also have a lease til 31/12/99, with 2 x 2 year options!
Accordingly, there is no worry about our right to occupy the premises.
80 The contents of this handwritten facsimile indicate the problems faced and caused by Jorgensen. To name just a few:
1. Jorgensen was managing a company when he was subject to an ASIC ban.
2. Jorgensen asserted factual and legal positions which were erroneous - LLMDC did not have an ongoing right to occupy the Coburg Premises: see [43], [54], [65], [67], [73] and [74] above.
3. Jorgensen (or some entity or person associated with him) had contracted to buy the Coburg Premises.
81 This last fact (whether or not accurate at the time) is important. Its importance stems from the nature of the equipment in the die casting business and the manner of its attachment to the floor of the premises. That requires some explanation. A list of equipment sold by LMC to LLMDC was attached as Annexure A to the Ratification and Amendment of Sale of Business and Assets Agreement: see [53] above. At least some of that equipment was, or ran the risk of being considered, a fixture which an owner of the Coburg Premises would inherit if LLMDC was placed into liquidation or simply no longer occupied the Coburg Premises. As will become evident, that issue would be (and subsequently was) of serious concern to the secured lenders - Cosmick and Callawadda. Moreover, the practical outcome of Jorgensen (or some entity or person associated with him) buying the Coburg Premises was possibly that he (or some entity or person associated with him) would end up with the die casting machines which constituted fixtures, being machines which were critical to operate the die casting business, at nil cost.
82 Jorgensen contacted McGregor again in about mid October and asked McGregor to lend him funds to refinance the Cosmick debt. McGregor told Jorgensen he would wish to inspect LLMDC's business. McGregor's evidence was that he spent about a week or two at the Coburg Premises and concluded that the business was in a very poor state. Although McGregor was cross-examined on this subject, that cross-examination did not challenge McGregor's sworn evidence that in his view, amongst other problems, the plant and equipment was run down and out of date, a proportion of the equipment did not work, the asbestos roof of the Coburg Premises was in disrepair and there was a lack of books and records. That is not surprising. A valuation of LLMDC's plant and equipment by Dominion Valuers & Auctioneers dated 11 November 1999 came to a not dissimilar conclusion: see [99] and [102] below.
83 Regardless of the truth about the condition of LLMDC's business, McGregor obtained Graham's contact details from Kalus and spoke to Graham directly for the first time. Prior to this, he did not know and had not spoken to Graham. McGregor telephoned Graham and told Graham he needed to go and look at LLMDC's business. McGregor met Graham at the Coburg Premises. This inspection took place before 13 October 1999 (a fact recorded in the facsimile at [84] below). McGregor told Graham that if LLMDC defaulted on the Cosmick loan, as seemed inevitable, then Cosmick would need to go into possession and that nothing could be ruled in or out including that they might need to buy LLMDC's business to protect their investment in the LLMDC.
84 On 13 October 1999, Jorgensen sent another handwritten facsimile from Mauritius to Kalus which referred to Graham's visit to the Coburg Premises and asked him to consider "picking the eyes" out of LLMDC's debtors and claiming those debtors under Cosmick's security.
85 At about the same time that McGregor and Graham inspected the Coburg Premises, McGregor was asked to attend a meeting with ASIC. During that meeting, ASIC told McGregor that ASIC was investigating Jorgensen's companies, Jorgensen personally was under investigation for dishonesty and fraud offences and that many companies associated with Jorgensen had been liquidated and millions of dollars had been lost.
86 As a result of his time at the Coburg Premises and attending the meeting with ASIC, McGregor formed the view that the LLMDC business was in a poor state. McGregor became concerned that LLMDC would lose the bulk of its plant and equipment and the secured lenders would lose the value of their security. McGregor telephoned LMC's receiver and manager, Malcolm Orders ("Orders"), who confirmed that he had an offer on the table from Jorgensen to buy the Coburg Premises which he might accept because it was above the bank's valuation. Orders told McGregor that if McGregor wanted to make an offer he had better be quick because he was selling it, he "could not care less" about LLMDC's business, he had been instructed to sell the property and that under no circumstances would he give any warranties regarding occupation to a purchaser of LLMDC's assets. McGregor decided that either he and / or Graham needed to buy the Coburg Premises before Jorgensen. McGregor contacted Graham and told him his views.
87 On 15 October 1999, Kalus was told by Cant's solicitors that Cant would not release the debtors. On the same day, Cosmick was served with a copy of a summons filed by Wallace-Smith seeking assessment of his remuneration. Ordinarily that event would go unannounced but the documents exhibited to the affidavit in support included the First Report by Wallace-Smith of 30 July 1999 where he concluded that he had no option but to permanently close LLMDC's business and noted that an amount of $480,177 was still owing to LMC under the Ratification and Amendment of Sale of Business and Assets Agreement (see [54] above) but that the debt was probably $350,000 higher because Orders had told him that there was no evidence that the original purchase price was received by LMC. A copy of the Administrator's Report and the DOCA was also attached to the affidavit of Wallace-Smith.
88 On 29 October 1999, a Notice of Demand was issued by Cosmick on LLMDC for $324,744.90 comprising $250,000 principal, $110,000 establishment fee and $12,744.90 interest. The facsimile transmission sheet recorded that the Notice of Demand was sent to Craven at LLMDC at 17:31pm in the afternoon. 29 October 1999 was the Friday before the Melbourne Cup Long Weekend. The "race that stops the nation" is the first Tuesday in November. The Monday preceding the Tuesday is often taken as a holiday.
89 Not long afterwards, McGregor learnt that LLMDC had failed to repay the Cosmick loan. At about this time, McGregor offered Orders $625,000 to purchase the Coburg Premises and paid a deposit of $62,500. A receipt for the deposit was issued dated 1 November 1999.