Natural Extracts Pty Ltd (now called Benchmark Essential Oils Pty Ltd) in liq v Stotter, Glendon & Ors [1998] FCA 1636

Federal Court of Australia|1998-12-18|Before: Hely J

THE COURT ORDERS THAT:

In view of the undertakings by the respondents to the Court, the application for interlocutory relief is dismissed. 2. The costs of this application are reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: NATURAL EXTRACTS pty limited (now called benchmark essential oils pty limited) in liquidation)

LAND & ASSETS FINANCE PTY LIMITED (NOW CALLED MAINSTAR ONE FUNDS MANAGEMENT PTY LIMITED)

STOTTER MANAGEMENT SERVICES PTY LIMITED (NOW CALLED MAINCAMP MANAGEMENT PTY LIMITED)

LAND & aSSETS FINANCE (NO 2) PTY LIMITED (NOW CALLED AMALGAMATED LAND AND ASSETS FINANCE PTY LIMITED)

NATURAL OIL GAS & MINING PTY LIMITED (NOW CALLED MAINSTAR ONE HOLDINGS PTY LIMITED)

SUMMERLAND LANDS PTY LIMITED (NOW CALLED MAINCAMP HOLDINGS PTY LIMITED)

CORPORATE AND COMMERCIAL CUSTODIAN PTY LIMITED (NOW CALLED MAINSTAR ONE INVESTMENTS PTY LIMITED)

REASONS FOR JUDGMENT HELY J: Mainstar One Investments Pty Ltd holds all of the shares in Mainstar One Holdings Pty Ltd. On 16 June 1997 Hill J made orders in proceedings NG3192 of 1992 ("the original proceedings"). Those orders included: · A declaration that Mainstar One Investments Pty Ltd holds one half of the shares in Mainstar One Holdings Pty Ltd upon constructive trust for Natural Extracts Pty Ltd, subject to a lien in favour of Mainstar One Investments Pty Ltd to secure the cost to that company of acquiring the shares, and to a lien in favour of G M and G D Stotter to secure the amount of any just allowances which the court might subsequently award in favour of Mr or Mrs Stotter in respect of the constructive trust. · An order that Mainstar One Investment Pty Ltd execute and deliver to Natural Extracts Pty Ltd a transfer of those shares. · An account be taken of any profit which has accrued to the first, sixth, seventh or fourteenth respondents ("the accounting respondents") in respect of any business activity carried on by the fourth, fifth and eighth to nineteenth respondents ("the corporate respondents") in the period 1 January 1992 to 16 June 1997. In very broad terms, the business of the respondents consists of soliciting investment from the public in tea tree farming enterprises. The driving force behind the establishment of the respondents and the conduct of their business was Mr Stotter. Mr Stotter was also a director of Natural Extracts, and owed fiduciary duties to that company. The business of Natural Extracts was the development of one or more tea tree oil plantations by obtaining investment funds from members of the public. Again, in very broad terms, Hill J found that Mr Stotter acquired for the respondents, assets and opportunities which he ought to have pursued on behalf of Natural Extracts. It is fair to say that the judgment of Hill J is critical of Mr Stotter. He was found to have acted covertly in his dealings, as well as in breach of fiduciary obligation. He was not accepted as a witness of truth. There was a failure to keep, or at least to disclose, full and accurate accounting material of entities relating to the various structures which Mr Stotter had established. Hill J described the position in this way: "The relationship between the various companies in the groups is so complicated that it is virtually impossible to separate one company from the other. There is a chain of inter-company indebtedness which even an investigator skilled in pursuing the money trail left behind by the 1980's entrepreneurs would have difficulty in understanding." (Page 64)

Implementation of the orders A transfer was executed with respect to half of the shares held by Mainstar One Investments Pty Ltd in Mainstar One Holdings Pty Ltd, and delivered to Natural Extracts. The transfer has not been stamped, nor has it been lodged for registration. Thus, Natural Extracts has not acquired the status of a "member" of Mainstar One Holdings Pty Ltd, subject to any statutory expansion of that term (as to which, see later). The taking of the account directed by Hill J has not been completed. Annexure A to the affidavit of A J Cordato of 27 November 1998 is a chronology with respect to the account of profits proceedings. From that chronology it appears that initially, there were problems in relation to discovery, but by April 1998 an affidavit of account was sworn for the accounting respondents by G M Stotter and S L Law. Mr Law is the secretary of the Mainstar group. In May 1998 the matter was referred to the Registrar for further directions and for the account to be taken. On 28 July 1998 an affidavit of Anthony J Cordato was filed which gave notice of charges and errors which the applicant contends exist in relation to the account. The accounting respondents have not yet replied to that affidavit, although it is common ground that failure to respond to that affidavit at this point in time is not a breach of any direction given by the Court. The matter has been stood over to 20 January 1999 before the Registrar for further directions.

ASIC investigation Australian Securities and Investment Commission ("ASIC") is carrying out an investigation in relation to, amongst other things, suspected acts or omissions of G M Stotter, being acts or omissions that constitute or may constitute contraventions of ss 232(2) and 232(6) of the Corporations Law. These suspected acts or omissions are conduct as a director (whether formally appointed or not) of a number of companies including Project and General Finance Pty Ltd, MainCamp Management Pty Ltd, MainCamp Tea Tree Oil Ltd, MainCamp Tea Tree Oil (No 2) Ltd and Mainstar One Holdings Pty Ltd in relation to transactions entered into by them for his benefit or for the benefit of associated persons or entities. The companies to which I have referred, form part of the Mainstar group.

Directors Mr Stotter is the chairman of Mainstar One Holdings Pty Ltd. The board consists of himself, his son, John Knox and the former Premier of Tasmania, The Hon Robin Gray. Mr Knox has been managing director of Holdings since 1 July 1998. Mr Stotter resigned as executive director of the corporate respondent in August 1998, but remains chairman of the holding company and of some of the other corporate respondents. In his capacity as a non-executive director of those companies Mr Stotter is paid a total remuneration of $100,000 per annum. According to Mr Knox all decisions made by him in the day to day management of the corporate respondents are made exercising his own independent judgment, and in what he believes to be in the best interests of those companies.

The proceedings On 19 October 1998 Natural Extracts filed an application under s 1323 of the Corporations Law. In substance that application sought: · The appointment of a receiver of the companies forming part of the Mainstar One group. · An order prohibiting the corporate respondents from paying money to or transferring property to the accounting respondents in connection with any of the proposals referred to in a memorandum of 1 September 1998 from Mr Law to Messrs Stotter and Knox. · A Mareeva type injunction. A notice of motion was filed in those proceedings seeking by way of interim relief the appointment of a liquidator of Mainstar One Holdings Pty Ltd and an order, until the orders of Hill J made on 16 June 1997 were carried into effect, restraining the accounting respondents from dealing with the shares the subject of the constructive trust in any way inconsistent with the terms of the trust, and Mareeva type relief. Those proceedings are NG 3178 of 1998. On 4 December 1998 Natural Extracts made an application under s 246AA, s 260(2) and s 461(e), (f), (g) and (k) of the Corporations Law seeking an order for the winding up of Mainstar One Holdings Pty Ltd. Those proceedings are NG 3203 of 1998. That application was made returnable at the same time as NG 3178 of 1998 for the purposes of seeking interlocutory relief. On 10 December 1998 I gave leave to Natural Extracts to file a motion in the original proceedings. The relief sought in that motion replicates that sought in NG 3203 of 1998 and NG 3178 of 1998. Counsel for both the accounting respondents and corporate respondents told me that they were not in a position to deal with that motion because, amongst other things, the solicitors for the corporate respondents are not involved in the original proceedings, and different solicitors represent the accounting respondents in those proceedings from those who act for the accounting respondents in NG 3178 of 1998. In the light of the statements made to me by counsel, I declined to require them to proceed with that motion at this time.

Undertakings by the respondents The accounting respondents offer the following undertakings to the Court to abide the conclusion of the account of profits/just allowance components of proceedings number NG 3192 of 1992: (a) the first, sixth, seventh and fourteenth respondents undertake: (i) not to make any payments or transfer any funds or assets outside the jurisdiction; (ii) not to deal with any of the shares the subject of the trust declared in order 1 in proceedings number NG 3192 of 1992 in any way inconsistent with such declaration of trust or with any other order made in those proceedings. (b) The first respondent to abstain from participating in decisions or voting on resolutions having the effect, or likely to have the effect of causing corporations and entities listed in Annexures 1 and 2 to the amendment application, to: (i) discharge any liability, (ii) creating a charge, and (iii) dispose of any property. So far as (b) is concerned, other than in the ordinary course of business as that expression is sought to be defined in the Addendum to paragraph 2(c) of the amended notice of motion. The corporate respondents offer the following undertaking to the Court to subsist until the hearing of these proceedings or further order: · The corporate respondents will not without seven days prior notice to the writing to the applicant, or court order, make: (i) any payment; or (ii) forgive or release any debt or obligation of the Stotters; or (iii) assign, transfer or convey any property to: (a) Glen Stotter; or (b) Gail Stotter; or (c) Any entity owned or controlled by him or her or for his, her or their benefit; or make any payment or assign, transfer or convey any property to any entity, or forgive or release any debt or obligation to any entity, at the direction or request of Glen Stotter or his wife or for his or her benefit, other than the payment of directors fees to Glen Stotter not exceeding $100,000 per annum. In this undertaking "Glen Stotter" and "Gail Stotter" include GG Jay Investments Pty Ltd and Mainstar One Investments Pty Ltd. Nothing in this undertaking is intended to affect the day to day operation of the companies in the Mainstar One group.

No undertaking by the applicant The applicant declines to give any undertaking as to damages as a condition of the grant of interlocutory relief. The applicant is in liquidation, but no materials have been placed before me as to its financial position.

The financial position of the Mainstar One group The group has raised a large amount of money from investors. A summary of fundraising at 30 June 1998 (volume 3/615) suggests that total funds of about $557M have been raised, of which about $345M consists of non-recourse loans, leaving $198M of external funds subscribed or agreed to be subscribed by the public in cash. Of this $198M, $125M has been collected as at 30 June 1998, leaving about $73M to be collected in the future. Volume 1/321 is headed "five year financial statistics". It shows a projected net profit, rising from $37.4M in 1995/96 to $63.6M in 1997/98. It also shows projected shareholders' equity rising from $75.5M in 1995/96 to $195.3M in 1997/98. I know nothing of the provenance of this document, or of the assumptions on which it was prepared. Documents have been tendered showing the reported financial position of Mainstar One Holdings Pty Ltd and the group. That financial position is summarised in the following tables: Parent Company $ 000's 1995/96 1996/97 1997/98 Reported Profit after tax 12,407(1) (9,190)(3) (7,921)(5) Shareholders equity 12,714(2) 3,523(4) (4,398)(6)

(1) Volume 2/465 (2) Volume 2/466 (3) Volume 2/404 (4) Volume 2/405 (5) Volume 4/1289 (6) Volume 4/1290

Group $ 000's 1995/96 1996/97 (Draft) 1997/98 Reported Profit after tax 27,358(1) (54,542)(2) (9,990)(4)

Shareholders equity N/A (12,463)(3) (22,454)(5) (9,306)(6) 2521(7)

(1) Volume 1/319 "draft" (2) Volume 2/404 - after abnormal items (53,530) (3) Volume 2/405 (4) Volume 4/1289 - after abnormal items (22,931) (5) Volume 4/1290 (6) Another draft, Volume 3/662 shows (9306) (7) Which becomes 2521 after contingencies and other potential adjustments

Mr Knox, during the course of his oral evidence, stated his expectation that the 1998 accounts, when finalised, will show shareholders equity of $2.5M as a result of the incorporation into the accounts of post balance date adjustments. (But Volume 3/672 suggests that the figure of 2521 might be further adjusted "into the red".) That some care is needed when looking at the bald figures shown in these accounts is demonstrated by note 1(a) (Volume 2/407) to the 1997 accounts which is to the effect of the following: "These accounts have been prepared on the going concern basis which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The working capital deficiency as at 30 June 1997 of $24,438,607 has arisen because included in current liabilities is unearned interest, management and administration fees received in advance totalling $32,605,639 which have been deferred (refer note 18). These amounts are not due and payable. The Directors are confident that the company and the economic entity will continue for the foreseeable future due to the current cash position and forecast cash flows in the forthcoming year. The directors consider the abnormal losses in the current year are unlikely to continue. Based on the above factors, the Directors consider it is appropriate to prepare the accounts on a going concern basis. Should the company be unable to continue as a going concern, the recoverability and classification of recorded asset amounts and the amount in classification of liabilities may be effected."

Group transactions Mr Stotter negotiated a sale of the group's interest in a company called Snowleaf Pty Ltd for the sum of $7.5M (compared to a book value of $20,000). A memorandum from Mr Law (volume 3/658) of 1 September 1998 suggests that it was a condition of the purchase that the signed agreement include a non-competition provision to be binding on Mr Stotter personally, and that some agreement needs to be reached between the parties to ensure that Mr Stotter is paid a fair and reasonable amount to secure his consent to be bound by the non-competition clause. The memorandum also speaks of a need to calculate and agree upon severance payments for Mr Stotter. The memorandum also refers to the negotiation of a licence agreement with Mrs Stotter for use of the trade mark "MainCamp" in return for an agreed fee. It is undesirable that I should say anything more about these transactions than is necessary for the disposition of the motions before me. It is sufficient to say for present purposes, that I do not think that the applicant has established a serious question to be tried that these transactions involve impropriety. In any event, the undertakings offered by the corporate respondents will preclude any payments being made to Mr Stotter in relation to the Snowleaf transaction pending the resolution of these proceedings. Similarly, in relation to the licence agreement with Gail Stotter for the use of the trade mark "MainCamp". One may wonder how or why it was this trademark came to be registered in her name, rather than in the name of a company within the group, and this may have to be investigated in due course. But the evidence before me does not rise above the proposition that this is, in due course, a matter which might or might not require explanation.

Denial of information and lack of cooperation On 6 August 1998 the solicitors for the applicant expressed a concern to the solicitors for the accounting respondents, that the Mainstar One group was in the process of a corporate reconstruction, and it requested some undertakings, which were quite detailed in character. On 10 August 1998 the solicitors for the corporate respondents gave the applicant's solicitors some very generalised information in relation to proposed transactions, and declined to give the undertakings sought because it was said that there was no impropriety in what was intended. Paragraph 7 of the letter stated: "Your client has never sought any board representation. The corporate respondents respond to any reasonable and proper request for information concerning management decisions affecting those companies which your client may wish to put to them. Consolidated accounts are being finalised at the moment and will be available shortly." Similarly, the solicitors for the accounting respondents declined to give any undertakings, because there was no intention to participate in any change in the structure or method of operation of the group for the purpose of undermining the orders which the Court made on 16 June 1998 or which would have that effect. Apparently the applicant's solicitor decided to leave the matter there and not approach the Court for any relief because of want of evidence. Mr Knox, on his own initiative, decided to seek a meeting with Mr McIntosh, the liquidator of Natural Extracts, to put before him information which might assist in bringing about a resolution of the dispute between Natural Extracts and Mr Stotter and his interests. A meeting in fact took place on 11 September 1998 and Mr Knox produced to Mr McIntosh some documents relating to the financial position of the group. That included the memorandum from Mr Law of 1 September 1998 in relation to the sale of Snowleaf, and the non-competition covenant referred to above. According to the uncontradicted evidence of Mr Knox, he said to Mr McIntosh: "If there is anything you want to seek to verify what is here, you or any other staff from your office is welcome to come to Mainstar's office and conduct any audit you wish. You can also speak to our auditors, Deloittes." In a letter to Mr McIntosh of 14 September 1998, Mr Knox confirmed "my offer to assist in any way and to provide any further information that may help" in seeking a resolution of the dispute. On 15 September 1998 Mr McIntosh wrote to Mr Knox and said that he thought that Glen Stotter's claim for remuneration seemed excessive, and that any claim by him for compensation for non-competition or severance would be reviewed very closely in the light of the group's current financial position, and the claims being made by ASIC and ATO. Further exchanges took place between Messrs Knox and McIntosh on 13 October 1998 (Volume 3/693), 14 October 1998 (Volume 3/697) and 15 October 1998 (Volume 3/698). A fair reading of these communications does not, in my opinion, give rise to an inference of lack of cooperation on the part of Mr Knox; nor does it give rise to an inference that information is not being made available by Mr Knox in response to reasonable requests on the part of Mr McIntosh. On the contrary Mr Knox appears to have made some effort to provide Mr McIntosh with information. According to Mr Knox he was surprised to receive Mr McIntosh's letter of 13 October. He telephoned him on Friday 16 October to respond. Mr McIntosh was not available and did not return Mr Knox's call. The following Monday proceedings were instituted. Mr Knox gave evidence to the effect that the offer which he had made to Mr McIntosh to provide access to Mainstar's offices, to provide access to documents and to respond to enquiries will continue, even if these proceedings are unsuccessful. Defective account As indicated above, accounts have been filed on behalf of the accounting respondents pursuant to the order made by Hill J. The applicant's solicitor filed an affidavit on 28 July 1998 itemising the various charges and errors in relation to those accounts. The applicant contends that the accounting respondents have received sums from the corporate respondents in excess of those contained in the accounts. Some documents were tendered before me which, if taken at face value, and not otherwise explained, indicate there is at least a serious question to be tried as to whether the account given by the accounting respondents is accurate or complete. This, of course, is the issue which is to be determined by the Registrar.

The financial position of Mr and Mrs Stotter A document prepared as of 1 September 1998 (Volume 3/613) shows that Mr and Mrs Stotter have a deficiency of assets over liabilities of $2,428,697. That is upon the basis that the shares held by trustees for the Stotter family trust in private companies have a nil value. There is an earlier document, apparently prepared as of 27 November 1996 (Volume 2/472) which appears to record a positive statement of position of $40,827,000. That is on the basis that the shares in the MainCamp group have a value of $40M. I know nothing more about these documents than appears on the face of them.

The winding up proceeding against the corporate respondents Application is brought on the grounds of oppression (s 246AA, ss 461(e), (f) and (g)) and on the just and equitable ground (ss 461(1)(k)). Standing to bring an application under s 246AA depends upon the applicant being a "member" of the company. Section 246A(b) provides that a person is a member of a company if they agree to become a member of the company after its registration and their name is entered on the register of members. The name of Natural Extracts has not been entered on the register of members of the company because the transfer ordered to be executed by Hill J has neither been stamped nor lodged for registration. Section 246AA(5) provides that in s 246AA an in paragraphs 461(1)(f), (g) and (h) a reference to a member includes a reference to a person to whom a share in the company has been transmitted by will or by operation of law. Re Independent Quarries Pty Limited (1993) 12 ACSR 188 decides or confirms that: · "By operation of law" does not include the transfer procedure. · An equitable owner of shares cannot exercise the rights of a member, and is not a member. · Where the court would rectify the register of members so as to include therein the name of a legal owner of shares whose name has been wrongly omitted therefrom, then such person is a "member" for the purposes of the sections in question. It was submitted that this decision ought to apply by analogy to the circumstances of the present case, because the applicant is in a position to perfect the transfer of shares to it. I do not agree. Unregistered purchasers of shares, or equitable owners of shares, would ordinarily be in a position to perfect the transfer of the legal interest in their favour. But the fact that a person is in a position to take or compel the taking of steps which when taken may result in the person becoming a member, has never been treated by the courts as investing the person with the status of a member in advance of the taking of those steps, except in the very particular circumstances which existed in Re Independent Quarries Pty Ltd. C/f Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449. Accordingly, it seems to me that unless Natural Extracts is a person to whom shares in Mainstar Holdings Pty Ltd have been transmitted by operation of law, then it does not have the status of a member of that company. Standing to bring an application under s 461 depends upon the applicant being a "contributory" (s 462(2)(c)). The definition of "contributory" in s 9 includes a "holder" of fully paid shares in the company. The term "holder" refers to the legal owner of shares according to the register of members. Dalgety Downs Pastoral Co Pty Limited v Commissioner of Taxation (Cth) (1952) 86 CLR 335, 341. The applicant is thus not within the definition of a contributory. No authority was cited to me in support of the proposition that there has been, in the circumstances of the present case, a transmission of the shares by "operation of law". In my opinion, the reference is to a law (eg, the Bankruptcy Act) by which title to a share passes from one person to another by force of that law. I do not think that the phrase is apposite to cover a situation in which a court makes an in personam order against a member obliging the member to execute a transfer of his shares. In this case, the share as a piece of personal property passes from one person to another because the first person, in obedience to a court order, has executed a transfer which produces that result. A positive act by or on behalf of Mainstar One Investments Pty Ltd is required before the shares, as property, pass to Natural Extracts. It is the act of the parties which brings about the transmission. C/f O'Brien v Komesaroff (1982) 150 CLR 310, 320-1; Murray v King (1984) 4 FCR 1, 5-7 and Benjamin v Harding Corporation Pty Ltd (1995) 16 ACSR 376, 383 ("devolve by operation of law"). Accordingly, Natural Extracts does not, in my view, have standing at the moment to present the winding up application because it has chosen not to stamp the relevant transfer. Assuming that view to be wrong, and that Natural Extracts has the standing to present the winding up application, the question is whether a provisional liquidator should be appointed pursuant to s 472(2). Appointment of a provisional liquidator is sought not only on the grounds of oppression and upon the just and equitable ground, but also upon the ground of insolvency. It is said that s 459B of the Corporations Law would enable that to occur. Section 459B provides: "Where, on an application under s 246AA, 462 or 464, the Court is satisfied that the company is insolvent, the Court may order that the company be wound up in insolvency." Section 459P2(b) provides that an application by a contributory for a company to be wound up in insolvency may only be made with the leave of the Court. That leave may be given by the Court if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. (Section 459P(3). Except as permitted by s 459P, a person cannot apply for a company to be wound up in insolvency (s 459P(5)). No application for leave was made until the applicant's closing submissions. I would not be prepared to grant leave, if only because I am not satisfied that there is a prima facie case that the company is insolvent, and it appeared to me that the invocation of the insolvency ground was very much an afterthought. Section 459B has no operation in relation to an application for the appointment of a provisional liquidator. Constantinidis & Ors v JGL Trading Pte Ltd & Anor (1995) 17 ACSR 625 is a reminder that whilst there is a wide discretion as to the circumstances in which an appointment of a provisional liquidator will be made, the appointment of a provisional liquidator involves the taking of a serious step which requires the exercise of very great care. It is usually at least necessary to establish that the assets of the company are in some degree of jeopardy, and that there are good prospects that a winding up order will ultimately be made. Whilst Zempilas & Ors v J N Taylor Holdings Pty Limited (No 2) & Ors (1990) 3 ACSR 518 decides that there is no requirement of law or practice to extract an undertaking as to damages as a condition of the appointment of a provisional liquidator, the absence of such an undertaking is a factor which may be weighed in the balance in deciding whether an appointment should be made. C/f CAC (NSW) v Lombard Nash International Pty Ltd (1986) 11 ACLC 566, 511; Ward v Western Australia (21 December 1995, R D Nicholson J - unreported); Membery v Ranier Pty Ltd (20 October 1997, (NSWSC) Cohen J - unreported). Necessarily, the exercise of deciding whether or not to appoint a provisional liquidator involves the striking of a balance between the competing interests involved. From the applicant's viewpoint, the following factors might be thought to support the appointment of a provisional liquidator: · Mr Stotter was the driving force behind the corporate respondents, and notwithstanding changes in the composition of the board, he may still be, if not the driving force, at least one which exerts considerable influence. He is a person who was found by Hill J to have engaged in breaches of fiduciary duty owed to the applicants, and to have done so covertly. · The financial position of the corporate respondents has deteriorated significantly since the decision of Hill J. · The corporate respondents at least contemplated the making of payments to Mr and Mrs Stotter in connection with the sale of Snowleaf, and in connection with the "MainCamp" trade mark. · There is a serious question as to whether the account given by the accounting respondents is accurate and complete. A possible explanation for this (but by no means the only possible explanation) is a desire on the part of Mr Stotter to deny to Natural Extracts its just entitlements. Factors which operate in the opposite direction include: · The appointment of a provisional liquidator to the holding company might reasonably be expected to have a serious impact upon the operations of the group. Whilst it is true that it is subsidiary companies which occupy the role of manager in relation to the various projects, and whilst it is the appointment of a liquidator to the manager, rather than the ultimate holding company of the manager, which enables the Representative to require the manager to retire, there is a general power in the Representative to require the manager to retire if the Representative reasonably believes it to be in the best interests of the investors for that to occur. In any event, Mr Knox swore, that as a practical matter the appointment of a provisional liquidator to the holding company would have an adverse impact upon the position of the group, and I accept that this is probably so. · I am not satisfied the group is insolvent, although the balance sheets record an excess of liabilities over assets. No attempt was made to prove insolvency except by inference from the balance sheets. The audited balance sheet for 1987 addresses the issue of insolvency, yet concludes that the group is a "going" concern. There is no evidence before me that the apparent deterioration in the financial position of the corporate respondents is due to any improper conduct on the part of those who were in control of their affairs, nor is there evidence that it is due to deliberate action calculated to frustrate the Court's orders by reducing the value of Natural Extract's interest in the group, to the advantage of the Stotter interests. · I am not satisfied that the charge of lack of cooperation and withholding of information has been made out, even on an interlocutory basis. On the contrary, it seems to me that Mr Knox at least has used reasonable endeavours to acquaint Mr McIntosh with the financial position of the group, and to assist him in coming to grips with that position. · The information as to the 1996/97 financial position of the corporate respondents has been available to the applicant for some time, and the matters of which they complain in relation to the accounting given by the accounting respondents was adverted to in an affidavit prepared by its solicitor in July of this year. There has been delay in seeking interlocutory relief. · A large sum of money has been raised from investors in projects sponsored by the group. The appointment of a provisional liquidator, could operate to the detriment of those investors and others. If ultimately it were found that the appointment was not justified, they would have no recourse for any loss sustained in consequence of the appointment.

Conclusion on provisional liquidator I do not think, particularly in the light of the undertakings offered, that the applicant has established there is a serious risk that assets of the group will be siphoned off in the interests of Mr Stotter. An unsubstantiated view or suspicion that this might occur is not sufficient to justify the appointment of a provisional liquidator. Taking into account all of the circumstances, including the undertakings offered, I would not be prepared to make an order for the appointment of a provisional liquidator, even if I were otherwise satisfied that the applicant had the requisite standing to pursue this application. Section 1323 Proceedings against the corporate respondents Section 1323 of the Corporations Law empowers the Court to make a range of orders where paragraph (a), (b) or (c) of s 1323(1) is satisfied, and the Court considers it to be necessary or desirable to make such an order for the purposes of protecting the interests of an aggrieved person (here, Natural Extracts Pty Ltd) to whom the person referred to in paragraph (a), (b) or (c) ("the relevant person") is or may become liable to pay money, or to account for property. Mr Stotter is a relevant person in terms of para (a), because his conduct is the subject of investigation. Orders could be made under paras (d), (e) and (f) against the corporate respondents prohibiting them from making payments to Mr Stotter or his associates on account of any indebtedness to Mr Stotter, or, if the corporate respondents held any property on behalf of Mr Stotter or his associates, from parting with possession of that property or removing it from the jurisdiction. However, the undertakings offered to the Court by the corporate respondents are such that there is no occasion for the grant of interlocutory relief to prevent the corporate respondents from making payments to Mr Stotter or dealing with property (if there is any) held on his behalf. No submissions were put that the qualification to the undertakings, so as to exclude from them operation, the payment of directors fees not exceeding $100,000 per annum, called for any special treatment. The corporate respondents may themselves be a relevant person in as much as they are respondents to the original proceedings, and the original proceedings include claims under the Corporations Law. Mainstar Holdings Pty Ltd may be a relevant person because winding up proceedings have been begun against it. Whether the corporate respondents are a relevant person by virtue of the institution of the original proceedings is a difficult question, having regard to the fact that no relief was obtained against the corporate respondents in those proceedings, and the proceedings are, for all practical purposes, concluded so far as the involvement of the corporate respondents is concerned. It is not necessary to resolve this question because, assuming the corporate respondents are relevant persons, they are not liable to pay money, or to account for property to Natural Extracts. If there is no actual or potential liability in a relevant person to pay money or to account for property to an aggrieved person, then there is no interest of the aggrieved person to be protected by the making of an order against the relevant person. As was pointed out by Drummond J in ASC v Smith & Ors (1998) 28 ACSR 495, the object of s 1323 is essentially protective in character, pending the establishment of legal rights. Accordingly, a case for interlocutory relief on the s 1323 application has not been made out. Mareeva injunction against corporate respondents An injunction is sought restraining the corporate respondents from transferring assets outside the jurisdiction, or disposing of assets within the jurisdiction, subject to a qualification permitting disposition of assets in the ordinary course of the corporate respondents ordinary business. Alternatively, it is submitted that it should be a condition of the refusal of interlocutory relief that the corporate respondents undertake to the Court to abide by the statement made by Mr Knox in the course of his giving evidence, that the offer which he had made to Mr McIntosh as to access and information would continue even if these proceedings are unsuccessful. I do not think that it is appropriate to impose a condition to that effect. Offers of information and access have been made prior to the institution of proceedings and repeated afterwards. If it is later denied, that may provide an independent foundation for relief. The jurisdiction to grant Mareeva injunctions applies not only to cases where there is a danger of removal of assets from the jurisdiction, but also to cases where they will be dissipated within the jurisdiction. Meagher, Gummow and Lehane, Equity Doctrines and Remedies (2185). The source of the jurisdiction rests on the statutory power of the Court to interfere whenever it is "just and convenient" to do so. The corporate respondents are not liable to account to Natural Extracts Pty Ltd, nor are the corporate respondents liable to transfer any property to Natural Extracts Pty Ltd. However, consistently with LED Builders Pty Ltd v Eagle Homes Pty Ltd (1997) 78 FCR 65, there would be jurisdiction to grant Mareeva relief, if there was evidence of a sufficient risk that the business of the corporate respondents is being conducted so as to frustrate the Court's orders. That would be the case if the business is being conducted so as to diminish the value of the shareholding which Hill J ordered to be transferred to Natural Extracts. Whilst the apparent decline in the financial fortunes of the corporate respondents is troubling, there is no evidentiary foundation for a conclusion that it is as a result of a desire to frustrate the orders of Hill J by diminishing the value of the shares, the subject of the constructive trust. Natural Extracts has chosen not to register its shares, not to nominate representatives for appointment to the board of Mainstar, to leave Mainstar under the control of its present board since the decision of Hill J in June 1997, and, more recently, not to pursue overtures on the part of Mr Knox in relation to the provision of information and access to auditors and to records. Factually, this is a different case from LED. It is true that the Mareeva relief sought does not amount to as severe an intrusion upon the business of the corporate respondents as would be the case if a receiver were to be appointed. But nonetheless, it is an intrusion. In the context to which I have just referred, particularly where no undertaking as to damages is offered (c/f Southern Tableland Insurance Brokers Pty Ltd v Schomberg (1986) 11 ACLR 337), I do not think that it is an intrusion which it would be proper to impose upon the corporate respondents. Conclusion with respect to the corporate respondents I note the undertaking by the corporate respondents to the Court, the terms of which are set out above. On that undertaking, the claim for interlocutory relief against those respondents is dismissed. The accounting respondents Mr Stotter and the other accounting respondents have a potential pecuniary liability to Natural Extracts Pty Ltd on the account ordered to be taken by Hill J. One of them is the legal owner of the shares the subject of the constructive trust. An undertaking has been given not to deal with these shares in any way which is inconsistent with that trust. I did not understand that the fact that Mainstar Investments Pty Ltd remains as the legal owner of the share the subject of the constructive trust to form the basis of a claim to interlocutory relief. There is jurisdiction under s 1323 of the Corporations Law to make appropriate orders with respect to Mr Stotter because an investigation is being carried out by ASIC in relation to conduct on his part that might constitute a contravention of the Corporations Law, and because a civil proceeding has been begun against him under the Law. He is a person who is or may become liable to pay money to Natural Extracts Pty Ltd. The appointment of a receiver of the property of Mr Stotter or the other accounting respondents, whether under s 1323(h) or in aid of a Mareeva injunction is a drastic step not lightly to be taken. A clear case must be made out that such a remedy is necessary for the protection of Natural Extract's legitimate interests, and that a lesser remedy is not appropriate. Beach Petroleum NL & Anor v Johnson & Ors (1992) 9 ACSR 404, 406. Natural Extracts Pty Ltd is adequately protected by undertakings offered to the Court in relation to: · The encumbering or disposition of the shares the subject of the constructive trust. · Quarantining in the hands of the corporate respondents money or property that might otherwise be paid to or for Mr and Mrs Stotter or applied for their benefit. · The removal of money or assets of the accounting respondents from the jurisdiction. The question is whether, in addition to that protection, a Receiver should be appointed to the property of the accounting respondents, or an order made prohibiting disposition of assets within the jurisdiction subject to a qualification, in the case of individual accounting respondents, of reasonable living expenses, as in the case of the others, a qualification so as to permit dispositions in the ordinary course of business. There is a prima facie case against the accounting respondents. Is there a real risk of dispersal by these respondents of assets so as to defeat the value of Natural Extract's victory if the account ordered to be taken results in a balance in its favour? That there is a real risk should, it is submitted, be inferred from the following: · The conduct which gave rise to the liability to account was undertaken in breach of fiduciary duty, involving covert activities and complex structures. · The apparent change in the fortunes of the corporate respondents before and after the judgment. · The apparent deterioration in the financial position of Mr and Mrs Stotter. · The provision of a dishonest account. Whatever force might otherwise be inherent in the first proposition is blunted by the fact that no application for Mareeva relief was made on that ground in the 18 months following the judgment of Hill J. As indicated earlier, there is no evidence that the second factor is referable to any intention to defeat or frustrate the orders of the Court. The evidence as to the third factor is sparse. A comparison of the documents earlier referred to does not indicate a disposition of assets. The assets shown in the 1996 document substantially remain in the 1998 document. The principal change in the financial position reflected by the two documents is largely accounted for by the reduction in value of the shares in the Mainstar group to nil, and an increase in liabilities. I would not infer, on the basis of this, that there has been any material disposition of assets, let alone with a view to defeating a judgment. So far as the fourth factor is concerned, any discrepancies between the items mentioned in the account, and the documents, will be dealt with in the proceedings for account. I am not prepared to infer without evidence that the explanation for the differences is dishonesty. That is simply one of a number of possible explanations. That is especially so given that the time by which the accounting respondents are to respond to the charges and errors alleged to exist in relation to the accounts, has not yet been fixed. These differences were collected in an affidavit sworn by the applicant's solicitor in July 1998. If the applicant believed that the nature of the account given by the accounting respondents manifested or evidenced a real risk of dissipation of assets in order to defeat the result of the account, then application for relief on that ground would have been made much earlier. Accordingly, I do not think that a case has been made out for relief in the nature of a Mareeva injunction having a wider operation than the undertakings referred to above. That conclusion is reinforced by the absence of any undertaking as to damages. There is power under s 1323 to make an appropriate order, including an interim order, for which an undertaking as to damages is not required (s 1323(4)). Having regard to the various undertakings which have been given, the only meaningful relief which could be granted under s 1323 is the appointment of a receiver to the property of the accounting respondents. The conclusions which I have reached in relation to the grant of a Mareeva injunction have the result that I could not be satisfied that this is a proper case for the appointment of a receiver. Conclusion with respect to the accounting respondents I note the undertakings by the accounting respondents to the Court, the terms of which are set out above. On those undertakings, the claim for interlocutory relief against those respondents is dismissed. I certify that this and the preceding twenty-one (21) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely

Associate: Dated: 18 December 1998 Counsel for the Applicant: G Downes QC with P Menadue Mr Eassie

Solicitor for the Applicant: T Cordato Cordato Partners Solicitors

Counsel for the 4th, 5th, 8th-13th, 15th-19th Respondent: Gyles QC with G Lucarelli

Solicitor for the 4th, 5th, 8th-13th, 15th-19th Respondent: L Powers Minter Ellison Lawyers

Counsel for 1st, 6th, 7th & 14th Respondents: R. Dick

Solicitors for the 1st, 6th, 7th & 14th Respondents: Parry Carroll Kanjian Solicitors, Attorneys

Date of Hearing: 10 & 11 December 1998

Date of Judgment: 18 December 1998

At a glance

Court

Decision date

Before

Source

Judgment (34 paragraphs)

Cases Cited (5)

Cited By (3)