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[2005] VSC 506
Supreme Court of Victoria
2005-12-23
Mandie J
Original judgment source is linked above.
CORPORATIONS - application by ASIC for winding up of company on the just and equitable ground.
Introduction
1 By originating process dated 16 June 2004 the plaintiff, Australian Securities and Investments Commission ("ASIC"), sought orders for the winding up of four companies, namely, Kingsley Brown Finance Pty Ltd ("Finance")[1], Kingsley Brown Properties Pty Ltd ("Properties")[2], Kingsley Brown Holdings Pty Ltd ("Holdings") and Kingsley Brown (Cowes) Pty Ltd ("Cowes"). Those companies are the first, second, third and fourth defendants respectively. The fifth defendant, who is an accountant, is Robert Kingsley Brown ("Mr Brown"). The grounds relied upon for the winding up of the companies were the just and equitable ground and the ground of insolvency. The companies, other than Properties (to which a provisional liquidator has been appointed), are now in liquidation. The application for the winding up of Properties was opposed by Mr Brown and the issues raised by that application were the subject of the trial.
History of the proceeding
2 The application was primarily supported by an affidavit of Glen Josiah Cook ("Cook") sworn 15 June 2004. The affidavit comprised some 179 pages together with a considerable number of exhibits. The affidavit summarised an ASIC investigation into what the deponent referred to as the "Kingsley Brown Group" of companies (comprising the defendants Finance, Properties, Holding and Cowes). It will be convenient to refer to these companies as the Kingsley Brown Group but that is done without prejudice to Mr Brown's contention that Properties should be regarded separately and as an independent entity. The affidavit referred to the activities of one or more of the companies in the Kingsley Brown Group in relation to three property developments in the town of Cowes on Phillip Island and the fundraising for those projects, and a quantity of other material in support of the grounds relied upon for the winding up of the defendant companies.
3 The originating process initially came on for hearing on 25 June 2004 when, by agreement, certain interlocutory orders and directions were made and the proceeding was fixed for hearing on 4 August 2004. Mr Bigmore QC and Mr Gilbertson appeared for the defendants on 25 June 2004.
4 On 4 August 2004 orders were made, which were not opposed by the solicitor then appearing for the defendants, that Finance and Holdings be wound up on the just and equitable ground and that Paul Antony Pattison ("Mr Pattison") be appointed liquidator, and further that Mr Pattison be appointed provisional liquidator of Properties and Cowes. It was further ordered, inter alia, that Mr Pattison provide to the Court and to ASIC, within 28 days, a report as to the assets and liabilities and solvency of the defendant companies and as to a number of other matters. A number of further orders were made which are unnecessary to mention and the further hearing of the originating process was adjourned to 10 September 2004. Prior to the next hearing date Mr Pattison provided reports[5] to the Court and to ASIC.
5 On 10 September 2004 the solicitors for Properties, Cowes and Mr Brown filed an affidavit of Mr Brown sworn 9 September 2004 opposing the making of an order to wind up Properties. Exhibited to Mr Brown's affidavit was a 16 paragraph statement ("Mr Brown's Statement") setting out a number of matters upon which he relied and attached to the statement were a number of documents.
6 On 10 September 2004, there being no opposition from Mr Bigmore QC who on that date appeared for Properties, Cowes and Mr Brown, orders were made for the winding up of Cowes and the appointment of Mr Pattison as liquidator. The proceeding (now in substance an application to wind up Properties) was adjourned to 24 September 2004 in order that further answering material might be filed.
7 On 24 September 2004 Mr Brown appeared in person and orders were made, inter alia, extending the time for Properties and Mr Brown to file answering affidavits and adjourning the proceeding to 8 October 2004. An affidavit of Mr Brown sworn 7 October 2004 was filed on 8 October 2004. On the latter date orders were made for the filing of any further material and for ASIC to provide an outline of submissions, including submissions which indicated precisely the material which it relied upon in support of the order sought for the winding up of Properties. Mr Brown was represented by Mr O'Hara of counsel who subsequently appeared for him at the trial of the proceeding.
8 On 25 October 2004 Mr O'Hara sought a further adjournment and the proceeding was adjourned to 10 November 2004. The trial of the proceeding commenced on 10 November 2004, and continued on 11 and 12 November 2004 after which it was adjourned. Further substantial written submissions on behalf of Mr Brown and ASIC were then provided and the trial was completed on 20 June 2005.
Facts
9 The Kingsley Brown Group carried on the business of property development. For the purpose of that business funds were raised from certain persons by the issue of "redeemable preference shares". No prospectus or disclosure document was issued in relation to such fundraising.
10 Mr Brown was the sole director and secretary of each of the companies in the Kingsley Brown Group. Mr Brown was also the holder of the single ordinary share which was issued by each of those companies. The registered office and principal place of business of each of the companies was 6-8 Floriston Road, Boronia ("the Boronia office").
11 As at June 2004, Finance had issued 61,100 redeemable preference shares which were held in 19 parcels by a number of proprietary companies and individuals and a superannuation fund.
12 Since 6 May 2004 a fixed and floating charge has been registered over Properties and Cowes in favour of Wisewoulds Nominees Pty Ltd.
13 The Kingsley Brown Group had completed two, and commenced a third, property development project on Philip Island. The first project comprising shops, a restaurant and apartments was at 17 The Esplanade, Cowes. The second project was a larger complex of retail and residential units at 15-16 The Esplanade and 1-3 Warley Avenue, Cowes. The third project was a planned hotel development at the corner of Thompsons Road and Church Street, Cowes.
14 In addition to the members of the Kingsley Brown Group a number of other companies associated with Mr Brown have or had their registered office at the Boronia office:
(a) Carmichael's Food Services Pty Ltd ("Carmichael's") (now in liquidation and formerly the subject of a deed of company arrangement) is one such company, although its principal place of business was at Unit 5, The Esplanade, Cowes ("Unit 5"). Carmichael's was formerly called Carmichael's Restaurant Pty Ltd.[6] Mr Brown is the sole director and secretary of Carmichael's and the holder of all 100 ordinary shares in the company.
(b) On the Spot Tax Refunds Pty Ltd (subject to deed of company arrangement) is another such company. It was incorporated on 18 February 1993 as Robert K Brown and Co (Boronia) Pty Ltd.[7]
(c) Robert K Brown and Co Pty Ltd is another such company. It was incorporated on 11 February 2002. Mr Brown is the sole director, secretary and shareholder of Robert K Brown and Co Pty Ltd. Robert K Brown and Co Pty Ltd was the joint owner, with On the Spot Tax Refunds Pty Ltd, of the business name "Robert Brown & Co" from 18 March 1993 to 18 March 1999 when the name was deregistered. The business name "Robert Brown & Co" was subsequently reregistered on 18 February 2002 in the name of one Elizabeth Dalton. The nature of the business was described as accounting services.
(d) Cashflow Solutions Ltd is an unlisted public company incorporated on 20 October 1999. Mr Brown is the sole director and holds 65 of 100 ordinary shares.
(e) Floriston Nominees Pty Ltd was incorporated on 7 September 1999. The sole director and secretary is Mr Brown and he holds one of the two ordinary shares.
15 On or about 6 February 2003, ASIC received a complaint relating to the issuing of redeemable preference shares by Holdings and the undertaking by Holdings of property development projects. On 11 March 2003 ASIC served statutory notices on each of the companies in the Kingsley Brown Group requiring the production of certain books and records including financial reports and financial statements. On 18 March 2003 ASIC officers attended at the Boronia office and took possession of 4 boxes of books and records (including cheque books, deposit books and bank statements) but no financial reports or financial statements relating to the Kingsley Brown Group were produced.
16 On 20 March 2003 ASIC commenced an investigation pursuant to s.13(1) of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") into a number of suspected contraventions of the ASIC Act including a contravention of s.727 (offering securities without a current disclosure document) and, since 4 July 2003, the investigation was widened to cover other suspected contraventions including a failure to keep financial records (s.286). In April 2003 ASIC served further statutory notices and Mr Brown produced documents relating to Finance, Properties and Holdings each described as an "Account Inquiry". These documents appeared to list these companies' bank account transactions but no other financial records or statements were produced.
The first examination
17 On 27 March 2003 Cook and another ASIC officer conducted an examination of Mr Brown pursuant to s.19 of the ASIC Act ("the first examination"). Mr Brown was represented by Counsel. The examination was recorded and the transcript is in evidence. Mr Brown said that he was born on 21 July 1940, that he was an accountant by occupation and that his business address was 6-8 Floriston Road, Boronia. In answer to questions, Mr Brown agreed that on 18 March 2003 he produced books to ASIC pursuant to statutory notices in relation to the Kingsley Brown Group and that no financial statements for any of those companies were produced at that time because none had been prepared.
18 Mr Brown said that Finance had been involved in three property developments at Cowes and Philip Island. Mr Brown was asked how did Finance basically finance the first project and he answered:
"Shareholders lent to Kingsley Brown Properties which actually developed it."
19 Mr Brown said that redeemable preference shares in Finance were issued to the investor shareholders. I note that despite Mr Brown's reference to Properties it subsequently appears that the funds were advanced by the investors to Finance. Mr Brown said that the first project, at 17 The Esplanade, Cowes, Philip Island, was completed, that a number of the redeemable preference shareholders redeemed their investments and others decided to stay in the second project, which was "Bayview Grand" 15-16 The Esplanade, Cowes, Philip Island, and took an interest through Holdings in the second project. Mr Brown said that the investors didn't take any shares in Holdings. The project was done in Holdings name "but it was all known that ... Finance had a proportionate interest". Mr Brown said that Finance and Holdings were "partners" although there was no agreement or documentation relating to their relationship.
20 Mr Brown said that the first project was successful and that a dividend was declared and paid to the preference shareholders. He was asked whether tax returns were ever lodged in relation to Finance and said that he was not sure. He was asked whether when he was paying the dividend that the tax component was withheld by Finance and said that he was not certain. He was asked whether there was a sizable tax bill relating to Finance and said that he didn't believe so. The following exchange then occurred:
"Q: How is it that it can make a profit, but there be no tax paid?
A: Privilege. I think we changed the arrangements in respect of how the dividend was paid.
Q: Can you explain that please?
A: Privilege. I think we started off saying that we were going to give a dividend - impute a dividend and then said it wasn't going to be. We were treating the dividend as interest and that they make their own arrangements.
Q: So when you were saying you were treating the dividend as interest, can you explain what you mean by that?
A: Privilege. That it's not a dividend, it's interest.
Q: Like a loan?
A: Privilege. Yeah.
Q: And you talked about initially the dividend having the imputation credit. Was any tax actually paid by Kingsley Brown Finance?
Q: You mentioned that financial statements have never been prepared for the company. Is that correct?
Q: And you've said that the project was profitable. How can you determine that the project was profitable without having ever prepared any financial statements?
A: Privilege. Because Kingsley Brown Properties did the project and it was just a case of whatever they chose to pay Finance.
Q: Sorry, can you explain that answer a bit further?
A: Privilege. Kingsley Brown Properties actually did the project.
Q: Has Properties done any accounts?
A: Privilege. No.
Q: And what moneys did it pay to Kingsley Brown Finance?
A: Privilege. It determined what rate of profit it was going to pay to Finance.
Q: What was the arrangement between Properties and Finance?
A: Privilege. No firm arrangement at all.
Q: Are you the driving force behind Properties?
A: Privilege. Yes.
Q: Are you the sole director of Properties?
A: Privilege. Yes.
Q: So on what basis did you determine that Kingsley Brown Properties would make payments to Kingsley Brown Finance?
Q: You prepared no financial statements for either company for this project at all. Is that correct?
Q: So how did you come about deciding how you saw the project and what payments should be made?
A: Privilege. Wasn't very hard on 17. There wasn't a lot of items to add up in reality.
A: Privilege. Off the top of my head, about 3.2 million or something like that.
Q: 3.2 million? Do you have any working papers or anything like that that record how you worked out how this payment was to be made?
A: Privilege. There probably should be in amongst that other stuff.
Q: So was Kingsley Brown Properties actually the registered proprietor of the land? Is that correct?
Q: And the redeemable preference shareholders in Kingsley Brown Finance, how were redeemable preference shares promoted to them to get them to invest? What was Kingsley Brown Finance going to do?
A: Privilege. Be involved in developing 17 The Esplanade.
Q: Was it going to be involved in developing it or actually developing it?
A: Privilege. Only to be involved; it didn't own it.
Q: Were shareholders aware that Kingsley Brown Finance didn't own the property?
A: Privilege. I wouldn't know.
Q: Did you tell any of them?
A: Privilege. I believe I would have.
Q: Did you produce any promotional material to be provided to potential preference shareholders?
A: Privilege. Yes, I believe there would have been.
Q: Can you recall whether Kingsley Brown Properties was at all mentioned in that promotional material?
21 The questioning continued in relation to a document entitled "Operational Overview":
"Q: ... I'll show you a copy now. It's got the bar code M00580301 and it's titled Kingsley Brown Finance Pty Ltd Operational Overview May 1998. If you could just have a look at that, please. Have you had a chance to have a read of that Mr Brown?
A: Yes.
Q: Do you recall having seen that document before?
A: Privilege. Yes.
Q: Can you explain what the purpose of that document was and how it was used?
A: Privilege. To inform people of what they were doing.
Q: So by that you mean it was given to potential preference shareholders prior to them investing in Kingsley Brown Finance?
A: Privilege. I believe so.
Q: And did you prepare that document?
A: Privilege. No, I don't believe so.
Q: Did you have any input into its preparation?
A: Privilege. Yes.
Q: In fact on the front page of the document down the bottom, it says in part, "This document has been produced by the directors of Kingsley Brown Finance Pty Ltd to outline the intended operations of the company." We've established before you're the sole director of that company, aren't you?
22 The Operational Overview document dated May 1998 referred to an invitation being made to a limited number of related parties to subscribe for shares in Finance. The document stated that Finance intended to operate two lines of business: the ownership of commercial property with the intention of providing security to the company and the operation of a debt factoring finance business to provide income. The property investment referred to by the document was a vacant land development site in Cowes, Philip Island and reference was made to a recommended development of a four-storey building comprising four shops, a restaurant and six apartments. The "details" of the investment were described as being redeemable preference shares of $1 par value issued at $10 including a premium of $9. It was intended to largely retain profits earned but it was proposed to distribute some profits as dividends, fully-franked (where available). The document stated that the expected fully-franked dividends were 10% (Year 1), 15% (Year 2) and 20% (Year 3), and that substantial capital gains were expected over a 2-3 year period. The document further stated that the shares were redeemable after 12 months from the date of issue on 3 months notice and the redemption price was the "net tangible asset value per share as calculated on the previous 30 June or 31 December".
23 The Operational Overview document does not disclose any basis for Mr Brown's statement that he was entitled to one-half of the profits generated from the first project. The Operational Overview document was not registered or lodged with ASIC, nor was any prospectus registered or lodged with ASIC.
24 I interpolate that it appears from the evidence that on 16 February 1998 the articles of association of Finance were amended by inserting a new article 12A dealing with redeemable preference shares. Article 12A refers to one million redeemable preference shares of $0.20 each in the authorised capital of Finance. The effect of article 12A is that preference shareholders were entitled to such dividend, out of profits, as might be declared by the directors of Finance. Unlike many preference shares, article 12A does not give shareholders a right to a specific dividend rate or indeed to any dividend at all. The article contains a definition of "Dividend Rate" as being the profit per preference share determined by the directors to represent a proportionate entitlement to the profits of the company, less various fees and expenses. However, the term "Dividend Rate" is not picked up elsewhere in article 12A and the entitlement to a dividend is defined in relation to the "Dividend Amount" which is defined as being "the amount declared by the directors".
25 It appeared from records produced to ASIC that Finance had issued a total of 103,688 redeemable preference shares, representing an investment of $1,036,880 to 36 shareholders and that, after redemptions, there remained 23 preference shareholders in Finance with investments totalling $757,628.
26 The questions in the first examination continued in relation to the Operational Overview document as follows:
"Q: That document I think refers to, as you mentioned earlier, two aspects or proposed aspects of the business; one being property development, and the other being debt factoring. Did the debt factoring side of the business ever get off the ground?
A: Privilege. We would have done some.
Q: Does that mean that you can't recall ....?
A: Privilege. I believe we did some; very little.
Q: For how long?
A: Privilege. I can't recall; not a long period of time.
Q: What happened to that side of the business?
A: Privilege. Nothing.
Q: You did it for a short time?
A: Privilege. Yes.
Q: Did it not make any money, did it make money, was that business sold to another company?
A: Privilege. The funds were used in relationship to the property development.
Q: As far as the debt factoring business went, you seem to think it did a little bit of debt factoring, not for long. What happened to the debt factoring business?
A: Privilege. The business hadn't been substantially established.
Q: You decided not to pursue it or you closed it down or ...?
A: Privilege. We didn't undertake any more."
27 The questioners then returned to the subject of profits on the first project and related dividend payments and taxation issues:
"Q: When you were previously talking about - you suggested that there was no tax outstanding on the profits; can I just put to you an example and then maybe I can probably better understand what you've told me. If I was a $100,000 investor, you said that the return was 47 per cent. Is that correct?
Q: So my profit return would have been $47,000 if I had been a $100,000 investor?
Q: Were in fact you then writing a cheque out to this hypothetical investor for $47,000?
A: Privilege. I believe what we did was we initially said we were going to do it as a dividend imputed dividend, and then changed our mind and wrote to the shareholders and told them, "We'll treat it as an interest payment, and they've got to make their own tax arrangements".
Q: Initially though the letters that you sent out were 47,000 less the tax rate at that time?
A: Privilege. Yes I think that would have been correct.
Q: So was that the payments that went out?
A: Privilege. In the first instance I think that's correct.
Q: When you say "the first instance", what do you mean?
A: Privilege. I think there was subsequent arrangements made with people in respect to the balance.
Q: So you're saying that letters were sent out saying they had to look after their own taxable ...?
A: Privilege. Yes. In fact I think most of the initial shareholders are clients of the accountancy.
...
Q: I'm trying to work out what are the debts of Finance at the moment, and which we're saying at this stage, since no returns have been prepared and lodged, the Tax Department hasn't yet requested any payments of you in relation to Finance?
A: Privilege. That's correct.
Q: Just in relation to the 47 per cent paid to the shareholders - and you're saying, as I understand it, that's basically interest on the loan is the way you've treated it. Is that correct?
A: Privilege. Correct.
Q: Were there any loan agreements with the shareholders?
A: Privilege. No.
Q: They only ever invested by way of purchasing redeemable preference shares?
A: Privilege. Correct.
Q: How can you make a payment to redeemable preference shareholders as a dividend or interest or whatever you want to call it out of anything other than profits?
A: Privilege. Depends on how you treat it.
Q: Can you explain that a bit further?
A: Privilege. Yes. You can treat it as a loan from those people across to Properties.
Q: How do you justify treating it as a loan from those people?
A: Privilege. From that company.
Q: From Kingsley Brown Finance to Kingsley Brown Properties?
A: Privilege. Correct."
28 Mr Brown was then asked about the flow of monies from shareholders and what accounts were kept:
"Q: Go back a bit: when the shareholders first invested in Kingsley Brown Finance, did they usually pay by cheque, I assume?
A: Privilege. Yes.
Q: And was that paid into a bank account in the name of Kingsley Brown Finance?
A: Privilege. Yes.
Q: And what happened to their money then?
A: Privilege. Used for all sorts.
Q: Was it on-lent to Kingsley Brown Properties?
A: Privilege. When a set of accounts are done, that's how it will be shown.
Q: When a set of accounts are done, at the time - and I presume we're talking about three to four years ago now, or is it longer - on what basis were those payments in fact made to Kingsley Brown Properties?
A: Privilege. As a capital contribution toward the property being developed."
29 Mr Brown was asked some questions about the relationship between Finance and Properties and related matters including the topic of Unit 5 retained by Properties:
"Q: Mr Brown, just during the break while we were changing the tapes, you've had a word to Mr Lyon [Mr Brown's barrister] and he has indicated that you would like to clarify the relationship between Kingsley Brown Finance and Kingsley Brown Properties, if you'd like to do that for us?
A: Privilege. To give you - there's reasons for some of the things. If you disclose to a person that you're borrowing from, financier, your financier, the involvement of a lot of people - they therefore start chasing guarantees from them all.
Q: From the shareholders?
A: Shareholders or something. By doing it as a dual company exercise, as it were, there's some advantages. In the Properties, I'm standing there as the only shareholders, only director. If you finance it, you can only get my guarantee. So that's why - one of the reasons why we separated the two companies. The other reason we separated the two situations was that I was always proposing to keep part of the building, and in keeping it within the original entity, you're keeping it at cost, not its value at the time that you - whereas in fact if we'd done it the other way round, we would have had to buy it back and irrespective of what arrangements there might be, it wouldn't be at cost - it would be - somebody is going to say, "This is what it's really worth now," sort of ...
Q: Presumably capital gains tax?
A: That's right. So I have retained part of that 17 project, and yes, if I ever sell it - I'm up to the eyeballs in tax but until I sell it, I'm clean. So provided we don't sell it, it's wonderful, but if you sell it, your base figure is substantially lower. Then, from Properties' point of view - so from Finance's point of view, tax-wise, it receives an interest payment from Properties as an income, 47 per cent, and it pays out, and the expense of interest, 47 per cent, and there's not tax. So the tax is payable by the end shareholder ..."
30 I interpolate that by letter dated 20 October 1999 to James Vincent and signed by Mr Brown and Ian Westcott, Finance advised one of the preference shareholders that it could now finalise a dividend payment for the first project. The letter stated that the dividend represented a return of 47.19% and then set out the gross dividend amount, the amount of the imputation credit and the net fully-franked dividend amount. The letter stated that Finance expected this to represent the final calculation and adjustments, if any, would be very minimal. It appears that similar letters were written to the other redeemable preference shareholders in Finance at or about that time.
31 Mr Brown was then asked about the above letter to James Vincent:
"Q: ... I've got a document here. It's marked bar code M00580418. It's dated 20 October 1999. It's on Kingsley Brown Finance Pty Ltd letterhead. It's addressed to James Vincent. It's headed Reinvestment: Kingsley Brown Finance. This document basically talks about the 47.19 per cent dividend that was paid, and it's got a gross dividend amount, imputation credit and then the net amount, being - can you have a look at that document, please. Are you familiar with that type of document that was sent out to the shareholders?
A: Privilege. Yes.
Q: Now, isn't it correct that those shareholders would have received a cheque net of the tax amount?
A: Privilege. In the first instance, yes.
Q: So therefore isn't it correct that Finance retained the tax component in the first instance?
A: Privilege. Correct.
Q: So therefore Finance does have a tax debt in relation to the first instance?
A: Privilege. It would have if it hadn't subsequently remitted the balance to the shareholder.
Q: So let's talk about James Vincent. He subsequently received another payment that would be the amount of the imputation credit?
A: Privilege. I believe so.
Q: So that's how you're saying that the individual investors are responsible for the taxable amount?
A: Privilege. Correct.
Q: Thank you. One of the reasons you just mentioned as to keeping the property being developed and the names of Kingsley Brown Properties and Finance separate was - basically sounded like tax considerations, that rather than Kingsley Brown Finance make a profit and have to pay the company rate of tax and then distribute a dividend to the shareholders, that it would receive income, pay out a certain amount of interest by way of an expense and have no tax liability. Was that correct?
A: Privilege. It's intertwined with the shareholders and our own part of it. The basis of the company was that in fact we would get half the profit, or our management situation.
Q: When you say "we", who do you mean?
A: Privilege. Myself. Privilege. So by organising it in a fashion that part of the property is retained at its cost value, I have in fact not earned any profit. I'll only earn a profit on my part of it when I actually sell it.
Q: So you're saying that the part of the property that you said you've retained, that is your half of the profit from the project. Is that what you're saying?
A: Privilege. In general terms, yeah.
Q: Okay. Which part of the property is it that you have retained?
A: Privilege. The restaurant.
Q: So that's the premises that Carmichaels Restaurant trades from?
A: Privilege. Correct.
Q: That's owned by Kingsley Brown Properties still?
A: Privilege. Correct.
Q: Now, you said the arrangement was for you to receive half of the profit for you, I guess, management skills and all you work. Is that correct?
A: Privilege. Yes.
Q: Were you to receive any other forms of payment by way of directors' fees, management fees, wages, drawings or anything else?
A: Privilege. Expenses.
Q: What sort of expenses?
A: Privilege. Expenses.
Q: Can you say what sort of expenses? Expenses directly referable to the property development, or what type of expenses?
A: Privilege. Yes.
Q: General expenses that you might incur that weren't related to the property development, credit card debts or anything like that?
A: Privilege. No.
Q: Any payments made to other members of the family or related companies or anything like that?
A: Privilege. No.
Q: Now, as far as Kingsley Brown Properties making the interest payment to Finance, have Finance in fact advanced shareholder funds to Properties in the first place?
A: Privilege. Yes (indistinct) paying some of the expenses direct or what have you. Privilege. All the payments that we would have - been made out of Finance will ultimately - when the settled accounts be done, will be called loans to Properties.
Q: Did Finance pay expenses on behalf of Properties during this development, while it was going on, or did it just pay money over to Properties and then Properties paid the expenses?
A: Privilege. I just paid money and costs or paid bills on behalf of whoever or what have you, as it rattled on, rattled along.
Q: Were accounts, journals, whatever kept at the time that those payments were made, entries made, to reflect that, you know, "This is a payment on behalf of Kingsley Brown Properties"?
A: Privilege. No.
Q: How do you propose to now, three or four years after the event, to go back and properly attribute those payments?
A: Privilege. Just about, I would think, with very few exceptions, every payment that Finance made is a loan to Properties. The only exceptions will be some very direct expenses of Finance.
Q: How will you be able to determine which ones are loans to Properties? By the payee details or --?
A: Privilege. Finance on its own as a pure entity will not have much in the way of expenses.
Q: Because it didn't really do anything. Is that right?
A: Privilege. Correct.
Q: Okay. Was there any loan agreement between Finance and Properties?
A: Privilege. No.
Q: No? Any sort of formal agreement at all?
A: Privilege. No.
Q: So Finance basically owned nothing, is that correct, at any time?
A: Privilege. It had a loan to Properties.
Q: Which hadn't been documented?
A: Privilege. Correct.
Q: And Properties owned the property that was being developed?
A: Privilege. Correct."
32 A little later on the following exchange occurred. Mr Brown was asked what profit was made on the first project and replied that it was "a matter of your definition of profit". He was asked whether profit meant total revenue less total expenses and said that it didn't work that way - "part of the property has been retained within Properties, and that's as a cost factor." He agreed that what he was saying was that the part of the property (the restaurant or Unit 5) that had been retained was his share of the profits, "putting the value of the restaurant as its deemed value at the time, you could say it made $900,000 or something like that, I think, was the figure".
33 Mr Brown was then asked whether any remaining shareholders in Finance had requested redemption of their shares. He said that they had but none of them had put in an appropriate request for redemption in accordance with the articles. He added that Finance also had an interest in a substantial asset, namely a property owned by Cowes. He then conceded that Finance was not a shareholder in Cowes and had no security over that property. He indicated that Finance's interest in the property was "in his head" and agreed that it was just him knowing that Finance had an interest in the property and he would somehow see that that was reflected whenever that property was realised. Mr Brown said that the remaining shareholders in Finance had left their capital in to be invested in the project to be built by Holdings but that there were no documents to show that the Finance investors had any interest in Holdings' project.
34 Later Mr Brown was asked how the articles dealt with the redemption of the investors' shares and indicated that they had to return their share certificates but that he had not written to them informing them of this, adding "I would think they've all got a copy of the specific article, if nothing else." He said that Finance did not currently have any cash to pay them but additional funds might be raised "from my family". The evidence indicates that 12 of the 23 current preference shareholders in Finance have requested redemption of their redeemable preference shares, for a total of $339,000, but none of them have had their investment redeemed.
The second examination
35 On 28 April 2003 Cook and another ASIC officer conducted a second examination of Mr Brown pursuant to s.19 of the ASIC Act ("the second examination"), that was also recorded and the transcript is in evidence. During the course of that examination Mr Brown was asked and answered a question in relation to the Kingsley Brown Group as follows:
"Q: Mr Brown, we've looked at some of the payments between the various companies and I think it's fair for me to say that we've established that these companies effectively operate as one group and they make payments on behalf of other entities within the group as and when need be. Is that fair enough to say?
A: Privilege. Yes."
36 During the course of the second examination, Mr Brown said that a person called Ian Westcott had had the role of raising funds from investors. Mr Cook deposed that Mr Westcott did not hold a dealer's license or proper authority.
37 Evidence before the Court shows that a restaurant business was conducted in Unit 5 (which was owned by Properties). The restaurant business was conducted by various entities, one of which was Carmichael's Food Service Pty Ltd (formerly Carmichael's Restaurant Pty Ltd). Mr Brown as sole director of that company (which had gone into voluntary administration) had proposed a deed of company arrangement which was executed on 17 October 2003. The deed has subsequently been terminated and issues debated early in the trial concerning the deed are no longer relevant.
The second project
38 It was indicated by Mr Brown during the first examination that Finance had joined with Holdings for the development of the second project on land owned by Holdings. Mr Brown said that although Finance held no shares in Holdings, it had a "proportionate interest" in the second project. Mr Brown said that some of the monies invested by preference shareholders in Finance had been used for the purposes of the development of the second project by Holdings. Mr Brown said that there was no documentation showing the rights of the shareholders in relation to the second project and no accounts showing inter-company indebtedness.
39 The evidence also shows that redeemable preference shares were issued in Holdings to a number of members of the public who had been solicited by Mr Brown and Ian Westcott by means of another "Operational Overview" document. No prospectus or other fundraising document was lodged with ASIC. It appears that there are 40 redeemable preference shareholders in Holdings with a total investment of $1,692,850. Article 12A of the articles of association of Holdings is similar to the same article concerning redeemable preference shareholders in Finance, save that redeemable preference shareholders in Holdings are entitled to one-half of the net profits.
40 It further appeared from Mr Brown's statements in the first and second examinations that whether there was a profit from the second project depended on the outcome of a dispute with the builder, although at other points Mr Brown said that the second project had made a loss. Despite those statements, Mr Brown also stated in his first examination that interim dividends had been paid to some redeemable preference shareholders in relation to the second project and that he had calculated this dividend purely on the basis of how things appeared to be going. Mr Brown also indicated that some of the investors in the second project had had their shares redeemed on the basis of "net asset value" which he had determined purely on the basis of how things appeared to be going because no financial statements had been prepared for Holdings. The evidence shows that 32 of the 40 current preference shareholders in Holdings have requested but not obtained redemption of their shares for a total investment of $1,341,200.
41 Substantial material was provided in Mr Cook's supporting affidavit concerning unexplained or questionable payments between companies in the Kingsley Brown Group and between companies in that Group and other companies associated with Mr Brown. It is unnecessary to set out the details. When this proceeding was instituted the only active development being pursued by the Group was a third project being developed by Cowes and evidence was provided as to the status of that project and as to grounds for the appointment of a liquidator or provisional liquidator to the members of the Group.
Other Affidavits filed on behalf of ASIC
42 ASIC relied upon an affidavit of Shannon McGuire sworn 23 June 2004. Mr McGuire is a senior investigator employed by ASIC. His affidavit disclosed that Properties had borrowed the sum of $715,000 in May 2004 secured on Unit 5, 17 The Esplanade, Cowes, which site had been valued by the lender at $1.1m. The purpose of the loan was to refinance an existing loan $536,250 and for other purposes including the prepayment of interest. The affidavit also disclosed that Properties had guaranteed a loan of $585,000 to Floriston Nominees Pty Ltd and a loan of $2.35m to Cowes.
43 ASIC relied upon an affidavit of Ronald Cremean sworn 3 June 2004. Mr Cremean had been a client of Mr Brown's accountancy firm for many years. In 1997 he was approached by Ian Westcott and asked to invest in redeemable preference shares in Finance. He was given a document indicating that Finance proposed to purchase a commercial real estate property with good potential capital gain and also to operate a debt factoring business. The initial target property was described as a shop building in Boronia and there was also material describing the business of debt factoring. A sketchy outline of the "features" of the preference shares was also contained in the document. In late 1997 and early 1998 Mr Cremean invested $30,000 from his superannuation fund in redeemable preference shares. He was later advised that the focus of the investment had shifted to a development at Cowes. In October 1999 he received a letter from Finance in the same form as that received by Mr Vincent together with a cheque for the net fully-franked dividend amount. Mr Cremean deposed that he did not recall ever subsequently receiving another cheque to the value of the imputation credit and did not recall being advised by Mr Brown that he would need to treat the dividend differently for tax purposes. Mr Cremean was subsequently introduced to the second project and reinvested his original $30,000 together with an additional $20,000 for additional redeemable preference shares in Finance. He subsequently received correspondence from Holdings about the second project but did not notice the change in company name. He had sought to redeem his shares but had been unsuccessful in doing so. Mr Cremean deposed that he had invested in the second project in the belief that Finance was the owner thereof in the same way that it had owned the first project. His affidavit also refers to an investment in another company associated with Mr Brown in respect of which he had obtained a judgment of some $43,000.
44 ASIC relied upon an affidavit of Grant Brice McCandlish sworn 10 June 2004. Mr McCandlish deposed that in or about 1999 he had heard of an investment opportunity through a colleague of his wife and was subsequently approached by Ian Westcott and was given an Operational Overview document in relation to the second project. He invested $120,000 in redeemable preference shares in Holdings. The money was obtained by a bank loan of $100,000 and a loan from his son of $20,000. Mr McCandlish received reports as to the progress of the second project and of certain delays and, in February 2002, received a letter from Holdings advising that shares could be redeemed and that redemption requests would be met as funds became available in the order in which requests were received. He faxed a redemption request to Holdings on three occasions but his shares were never redeemed. Mr McCandlish deposed that he believed that his money was to be invested in the second project but had since been led to believe by Mr Brown that Holdings could not redeem the shares because a very significant amount of money had been spent in relation to the third project (owned by Cowes).
45 ASIC relied on an affidavit of Kevin James Vincent sworn 22 June 2004. Mr Brown had been Mr Vincent and his wife's accountant for about 15 years. In November 1997 he invested $30,000 from his superannuation fund in redeemable preference shares in Finance. In March 1998 he received an Operational Overview document.[8] At about that time Mr Brown asked him to increase his investment to $50,000, which he did. At the stage when Mr Vincent's investment had reached $60,000 he received cheques for the net fully-franked dividend amounts applicable to $50,000 and $10,000 respectively. Subsequently there were a number of additional amounts invested by him, resulting in a total investment of $120,000 in redeemable preference shares in Finance. In December 2001 Mr Vincent told Mr Brown that he wanted to redeem all of the preference shares but was told to wait in order that he might receive the benefit of the dividend. In March 2003 an informal meeting of shareholders was held at which Mr Vincent learnt for the first time of the existence of the company Holdings. Shortly thereafter he sought by letter to redeem his investment but received no reply. He engaged solicitors to act for him. Mr Vincent then received a letter dated 12 May 2003, bearing a letterhead endorsed with the initials KB and the heading "Kingsley Brown Group" and signed by Mr Brown. The letter bore the names of Finance and Holdings at the bottom so it would appear that the letter was forwarded on behalf of those two companies. The stated purpose of the letter was to "ensure shareholders are aware of the pertinent facts surrounding the Companies and their current status". The letter went on to refer to Finance investing in the development of 17 The Esplanade, and then, towards the end of that project, assisting in the finance for the purchase of the second development site. The letter said that at the conclusion of the [first] project a number of shareholders redeemed their capital as well as the declared dividend. The letter said that the "remaining investors are represented by [Finance] having equity in the [second] project". The letter went on to refer to the role of Holdings in the second project which had resulted in a loss. The letter also stated that Cowes held the site for the third project on behalf of Finance and Holdings. The letter continued at length to explain difficulties which had occurred in relation to the third project and that all current redemption requests would have to be deferred.
Mr Brown's first affidavit
46 The Court ordered on 25 June 2004 that Mr Brown provide certain information by affidavit and this he did by an affidavit sworn 2 July 2004. The affidavit refers to the bank accounts and assets and liabilities of the companies in the Group. In relation to Properties the affidavit referred to a first mortgage in favour of Wisewoulds Nominees Pty Ltd for $715,000 and a second mortgage for $121,000 to certain lenders. The assets of Properties were stated as being Unit 5, 17 The Esplanade Cowes, and units in the unit trust of Floriston Nominees Unit Trust. Mr Brown deposed that there were no current or non-current liabilities of the corporate defendants other than the abovementioned mortgages and certain mortgages granted by Cowes. No reference was made to any liability in relation to the redemption of preference shares.
Mr Brown's second affidavit
47 In his affidavit sworn 9 September 2004 Mr Brown stated that he opposed the winding up of Properties for the reasons set out in a statement which was exhibit A to his affidavit and which he deposed was to the best of his knowledge, information and belief true and correct in every particular. I turn to the contents of Mr Brown's Statement.
48 Mr Brown stated that Properties did not owe any money to any of the other defendants and was solvent. He said that the property at 17 The Esplanade, Cowes was purchased in the name of Properties because the financier for the first project required personal guarantees from all of the shareholders and he was the sole shareholder of Properties. Mr Brown stated that for the years 1998 and 1999 Properties acted as a trustee and held the property at 17 The Esplanade in trust for Finance. Properties did not operate a bank account or commence trading in its own right until February 2000 upon completion of the first project.
49 Mr Brown stated that at the practical completion of the first project he made an assessment of the profit. He assessed the profit in the sum of $642,766. Mr Brown said that the redeemable preference shareholders in Finance were entitled to a half-share of the profit in accordance with an overview statement which was attached to his Statement. Mr Brown said that, accordingly, the sum of $321,383 was distributed to the redeemable preference shareholders in Finance.
50 The overview statement attached to Mr Brown's Statement was a different overview statement than that referred to by Mr Vincent and it was also the subject of questioning during the first examination. The overview statement attached to Mr Brown's Statement said:
"The Dividend policy of [Finance] as defined by the Articles of Association states that the profits derived from the project are to be distributed 50% to the Redeemable Preference Shareholders and 50% to the Ordinary Shareholders."
51 The above statement was incorrect because, so far as the evidence shows, the Articles of Association of Finance, as amended, made no provision for the profits to be divided in half between the preference and ordinary shareholders.
52 Mr Brown's Statement went on to say that Properties was entitled to the remaining profit as the developer of the project and retained Unit 5 "which was valued at $400,000".
53 In support of the valuation of Unit 5 in the sum of $400,000 Mr Brown attached to his statement a valuation as at 8 April 1998 by Preston Rowe Patterson, valuers, dated 22 April 1998. I note that this valuation was prepared prior to the erection of the building and the value of the restaurant on level 2 (i.e. the future Unit 5) in the sum of $400,000 is to be found under the heading "Anticipated Gross Realisations". The valuation for Unit 5 was based on, inter alia, retail sales evidence (comparable sales) and economic conditions at that time (in 1998).
54 Mr Brown explained in his Statement that Unit 5 was encumbered in the sum of $330,000 leaving a net equity of $70,000 (i.e. he applied the 1998 valuation). Mr Brown went on to state that the balance of the "profit entitlement" was distributed by Finance to Properties "or at my direction". Mr Brown added that since the year 2000 Properties, or he and his family, had met all mortgage repayments and other outgoings on Unit 5. Mr Brown said that since completion of the first project there had been no mixing of funds between Properties and Finance. Mr Brown said that Unit 5 was, at April 2004, valued at $1.1m (based on a mortgagee's valuation).
55 Mr Brown's statement concluded by stating that Properties was solvent, and if placed into liquidation the shareholders would be severely prejudiced and financially disadvantaged.
56 Attached to Mr Brown's statement was a copy of a company income tax return for Properties for the year ended 30 June 2000 which showed a trading profit of $114,912 which was arrived at in substance as follows:
57 After an amount for "losses transferred in" of $114,912, the return showed no taxable income.
Provisional liquidator's report dated 3 September 2004
58 Mr Pattison provided a report dated 3 September 2004 which was subsequently verified by affidavit. The report was primarily concerned with the companies in the Kingsley Brown Group other than Properties. However Mr Pattison noted that the companies, including Properties, did not keep proper financial records.[9] Mr Pattison also noted that financial accounts for Properties for the year ended 30 June 2003 had been prepared by Mr Brown after Mr Pattison's appointment as provisional liquidator.
Mr Brown's third affidavit
59 By an affidavit sworn 7 October 2004, Mr Brown deposed that he was the sole director and secretary of Properties. He said that he was 64 years of age and married with 5 children and that his first involvement in the building industry was at the age of 15 when he helped his father in the renovation of houses. Mr Brown further deposed that his building activities continued and in 1972 he commenced a building business together with his sister through a company that was a registered builder (Coromandel Pty Ltd). Coromandel Pty Ltd designed and built low rise units over a period of about 20 years. The development at 17 The Esplanade, Cowes, was he said, on a larger scale than his previous developments. He carried out the fundamental design supervision for 17 The Esplanade and subsequent developments.
60 Mr Brown deposed that all of the investors in the development at 17 The Esplanade had either "received back the investment with dividend or, as requested, funds were reinvested in another project."
61 After dealing with a number of issues no longer of relevance, Mr Brown mentioned that a number of shares in Properties had, as at 30 June 2003, been issued to his children and to some related companies.
62 As to the keeping of records, Mr Brown deposed:
"I accept that any payments and dealings between [Properties] and other defendants should have been recorded with a greater degree of formality and precision. However, I was aware at the time of any payments or dealings what were the respective entitlements and obligations of the defendants.
...
Although [Properties] has at all times acted honestly I accept that there have been deficiencies in the keeping of proper accounts. This is a matter which I will ensure is not repeated."
63 Mr Brown deposed that Properties was not carrying on any business other than seeking to lease Unit 5 as a restaurant and had no intention of being involved in any property development business or otherwise to deal with the public.
64 As to the profit on the first project, Mr Brown deposed:
"The profit was assessed having regard to calculations recorded in writing but informally."
Mr Pattison's affidavit sworn 22 October 2004
65 An affidavit was sworn by Mr Pattison on 22 October 2004 in his capacity as provisional liquidator of Properties and liquidator of the other defendant companies. In his affidavit Mr Pattison deposed that he had received from Mr Brown the documents listed in the schedule attached to his report dated 3 September 2004. That schedule stated as follows:
Kingsley Brown Properties Pty Ltd
(Provisional Liquidator Appointed)
Cheque Book 1 to 50 (Used 1 to 21)
Deposit Book
Period 29/12/03 to 30/6/04
Bank Statements: 29/12/03 to 30/6/04 (No. 1 to 7) - By Facsimile on 11/8/04
Lease agreement dated 1/7/00 between KB Properties and Leona Joy Brown
Balance Sheet and Profit & Loss and list of journal entries for the years ended 30 June 2000, 2001, 2002 & 2003
66 Mr Pattison further deposed that, apart from the documents listed in the above schedule, he had not received any other documents of Properties. In a letter from Mr Brown to Mr Pattison dated 6 September 2004, Mr Brown had stated that there were no taxation returns for the defendant companies other than Properties. In relation to all of the defendant companies, Mr Brown advised Mr Pattison that the following documents did not exist: general ledger posted and balanced to the date of liquidation, journal book, cash book reconciled to date of liquidation, purchase journal and purchase invoices, sales journal and folio copies of sales invoices, petty cash book, wages book and employee records, debtors ledgers, creditors ledgers and payment vouchers.
67 Mr Pattison deposed that in order to prepare the financial statement of Properties underlying account records and source records presumably existed but that these documents had not been provided to him.
68 Mr Pattison also referred to an asset of Properties, namely, a debt owed by another Brown company, Floriston Nominees Pty Ltd, in the sum of $157,500 and deposed that Mr Brown said that Floriston was currently unable to pay that debt.
Submissions on behalf of Mr Brown dated 8 October 2004
69 In preparation for the hearing fixed for 25 October 2004 (which was subsequently adjourned on Mr O'Hara's application) Mr O'Hara provided a short written submission the essence of which encapsulates Mr Brown's continuing grounds of opposition to the winding up of Properties. After dealing with the issue of solvency, the submission dealt with the just and equitable ground and Mr O'Hara submitted that a strong case was required in relation to a solvent company. Mr Brown submitted that Properties was a family company and not a trading company or a company that dealt with the public. There was no allegation of dishonesty or fraud. Properties recognised the deficiencies in some of its practices but there was no public interest in winding up Properties and no benefit to be secured by such an order. Mr O'Hara submitted that a winding up order should not be made for punitive reasons and that the exercise of the discretion "should be seen in the context that orders have already been made that the other 3 corporate defendants be wound up necessarily occasioning shame to Robert Brown". An order for winding up was not called for and was not proportionate to the plaintiff's complaints.
Submissions on behalf of ASIC dated 20 October 2004
70 Further, in preparation for the hearing fixed for 25 October 2004, ASIC provided written submissions dated 20 October 2004, some of the relevant points of which are as follows. It was submitted that Properties was inextricably bound up with the Kingsley Brown Group which had operated as a single entity - there was a mixing of funds from the start and it was a confusion of the defendant's creation. Investments of money were taken from the public into Finance and paid to Properties which owned the real estate and undertook the development - this was done without disclosure to the public investors. There were no accounts or financial statements recording the transactions. The funds of redeemable preference shareholders who invested in Finance were effectively represented by the assets held by Properties. Properties had been a trustee for Finance and had never properly accounted for the profit from the first project. No accounts had been produced for period during which Properties was trustee of a multi-million dollar development. Finance had raised $549,000 from 24 shareholders but had never lodged a prospectus or other disclosure document in breach of s.1018 of the then Corporations Law. There were no loan agreements between Finance and Properties in relation to funds advanced to Properties nor did Finance take any security over the assets of Properties. The submissions, in some detail, referred to the distribution of part of the profit from the first project to various Brown entities and contended that there had never been any proper accounting or justification for the distribution as between these entities and the investors. It was noted that Mr Brown had deposed that the profit was calculated in writing but informally however Mr Brown did not produce evidence of any such calculations. In fact there was no proof of a profit on the first project. The submissions also dealt with the issue of solvency. It was submitted that it was in the public interest to wind up Properties having regard to the scale of the investment by members of the public in the Kingsley Brown Group, the manner in which the invested funds had been handled and the various breaches of the corporations laws involved.
Hearing on 10-12 November 2004
71 It was in the context of the foregoing affidavit material and submissions that the trial commenced on 10 November 2004. Mr Cook and Mr Pattison gave evidence but it is unnecessary to refer to their evidence. Mr Brown gave evidence and was cross-examined. A good part of Mr Brown's evidence is no longer of significance because it dealt with liabilities of Properties that no longer exist.
72 In cross-examination Mr Brown confirmed that Properties acted as trustee for Finance in respect of the development at 17 The Esplanade Cowes, but that there were no trust accounts and there was no trust deed. Mr Brown said that none of the shareholders in Finance knew that Properties was the registered proprietor of the property at 17 The Esplanade Cowes.
73 Mr Brown admitted that he still had not produced an accounting of the profit from the first project, "not in conventional accounting format". He said that he had ascertained what was "left over" at the end of the project "compared that with the shareholders' capital and got to an equation". He continued:
"I did a rough check as to what the resale value of the- how much we'd sold the place for and that's a very rough sheet, just off the- it was purely off the top of my head, how much I'd sold it for, what we reckon it had cost us and to verify that the first figure I got looked as if it were correct."
74 Mr Brown said that there were members of the public involved in the investment of money in Holdings but that "most" of the investors in Finance were "a bit closer, they are mainly clients of the accounting business".
75 Cross-examination of Mr Brown evinced a confusing picture as to the manner in which the profits from the first project (if any) were distributed both to investors and to various Brown entities. It was abundantly clear that there were not appropriate or adequate records that could be produced to show what in fact Mr Brown had done.
Submissions
76 Mr O'Hara submitted that Properties was to be distinguished from the other defendant companies. Properties was not involved in the raising of finance or the carrying on of business as an unlicensed dealer in securities. The matter of questionable payments to related entities did not arise. Failure to lodge notices with ASIC as to correct shareholder details did not arise in relation to Properties. Mr O'Hara said that ASIC seemed to be saying that because there were unsatisfactory practices by a range of companies and because there was a controlling influence common to all of them "then it's more or less guilt by association".
77 Mr O'Hara conceded that the record in relation to keeping of accounts was not satisfactory but said that did not really impact on Properties because it was not a trading entity, at least until after the first project was finished.
78 Mr O'Hara said that while there had been an intermingling of funds with the other companies this had not been the case in relation to Properties.
79 Mr O'Hara said that there was no need to protect the public in the future in relation to the activities of Properties and that the relevant authorities on the just and equitable ground could be distinguished on this basis.
80 There were also submissions in relation to the solvency of Properties which need not be referred to in the light of subsequent developments.
81 At the conclusion of the hearing the submissions were not completed because I gave Mr O'Hara the opportunity to provide written submissions in relation to the breaches of the Corporations Law alleged by ASIC. It was anticipated that ASIC might wish to respond to these written submissions. It was anticipated that the delay involved might also lead to clarification in relation to certain liabilities of Properties (as in fact happened).
82 I turn to Mr O'Hara's written submissions dated 30 November 2004 as to the statutory breaches alleged by ASIC.
(a) Failure to lodge prospectus/fundraising documentation with ASIC (s.1018 Corporations Law; ss.718, 727 Corporations Act)
Mr O'Hara correctly said that Properties did not raise funds from the public but he said that it was not disputed "for the purpose of these proceedings only" that Finance did not comply with s.1018(1) of the Corporations Law. In my opinion the concession was soundly made but having regard to it being made it is unnecessary to say more.
(b) Lack of adequate disclosure to investors on the basis upon which assets of the companies in the Kingsley Brown Group would be held and probable misleading and deceptive conduct through silence/non-disclosure in the "Operational Overview" of key aspects of the investment (eg identity of property holding companies, proposed movement of funds or regarding the 50% interest in profits claimed by Brown)
Mr O'Hara submitted that these allegations were simply irrelevant to Properties but in any event were denied. Under the articles of Finance the share of profit was at the discretion of the directors and they in fact received 50% of the profits. The investors had either been repaid or as requested their funds had been reinvested in another project. It was conceded that investors were not told that the land would be owned by Properties but it was beneficially owned by Finance and there was no suggestion of any resulting loss.
(c) Failure to lodge with ASIC [notice] of share issues resulting in investors' interests in Properties, Holdings, Cowes not being publicly recorded.
Mr O'Hara submitted that no member of the public invested in Properties and there had been no breach by Properties but that "for the purpose of these proceedings only" it was accepted that ASIC was not informed of all share issues in Finance or Holdings.
(d) Failure to keep written records to correctly record and explain the financial position of the companies in the group.
Mr O'Hara said that this breach was denied and it was in the most sweeping and broad terms and not particularised. Mr O'Hara said that the companies in the group had retained source documents and that ASIC had taken possession of many of them. It is fair to say that Mr O'Hara did not contend that the companies had kept written records to correctly record and explain their financial position and did not point to any evidence of the existence of such records.
(e) Payments to related parties/family members of sole director without proper records/accounts...
I have not set out this alleged breach in full as it is somewhat confusing. It was denied by Mr O'Hara who rightly complained of its lack of specificity. The ground was not properly canvassed during the trial and I will disregard it.
(f) Failure by director to act with required level of skill and care and diligence, eg to preserve, protect and secure Finance's company funds ... or to document transactions or record payments between the companies in the group.
This breach was denied. Mr O'Hara said that transactions between the group were recorded in the respective bank records including cheque butts.
(g) Failure by director to act with required level of skill and care and diligence, eg failure to preserve and protect interests of investors in the group.
This breach was denied. Mr O'Hara submitted that it did not relate to Properties and was otherwise the same as allegation (f).
(h) Failure to redeem preference shares in compliance with articles.
Mr O'Hara said that this allegation was not relevant to Properties and that any failure to redeem preference shares arose from adverse trading conditions.
(i) Withholding of "imputation credit" on franked dividend to investors in Finance, failure to remit tax to ATO, change in "character" to payment of interest on loan raised serious questions as to whether a fraud has been committed on either or both of the investors and the Tax Office.
Mr O'Hara said that this allegation did not relate to Properties and while there was a tax debt owing by Finance, the allegation of fraud was denied.
(j) Carrying on "securities business" without a license; carrying on "financial services" business without a financial services license.
Mr O'Hara submitted that there was no requirement for Properties to hold such a license but that " for the purpose of these proceedings only" it was accepted that none of the defendants was the holder of a license to carry on a securities business or a financial services business.
83 In response to the foregoing written submissions from Mr O'Hara, ASIC filed written submissions on 24 December 2004 comprising 38 pages. These submissions were not available to me until February 2005 and the resulting delay necessitated a further hearing which, in the event, took place on 20 June 2005.
Hearing on 20 June 2005
84 In preparation for the hearing on 20 June 2005, which was to be concerned only with the current financial position of Properties, two affidavits were filed by Mr Pattison from which the following relevant matters appeared. Unit 5 (the restaurant) was sold by the mortgagee on 23 April 2005 for the sum of $1,166,000 with an anticipated settlement date of 22 June 2005. The provisional liquidator was to receive at settlement the sum of $70,000 (plus $7,000 GST) for the plant and equipment of the restaurant. There was to be a shortfall at settlement of approximately $7,491. As I understood the evidence, that shortfall was able to be met out of the said sum of $70,000. Properties has no other liabilities because an actual or potential liability, that was the subject of much evidence at the hearing in November 2004, no longer exists.[10] Properties has two remaining assets: the units in the Floriston Nominees Unit Trust (value unknown) and the debt of $157,500 from Floriston Nominees Pty Ltd said not to be recoverable. The provisional liquidators' fees and expenses are subject to approval of the Court but, if approved, the liquid funds of Properties would be insufficient to cover those fees and expenses. However the provisional liquidator's fees and expenses must in my view be disregarded in assessing whether Properties is insolvent. I am not satisfied on the foregoing material that Properties is insolvent. Apart from the assets referred to it has a small amount in liquid funds and no pre-provisional-liquidation liabilities. The question to be decided, therefore, is whether Properties should be wound up on the just and equitable ground.
The Just and Equitable Ground
85 In Loch v John Blackwood Ltd,[11] a public company was registered in order to carry on a testator's business and to divide the profits between the family beneficiaries under the will. The shareholders who were not directors sought a winding up order where the directors had not held meetings, submitted accounts or recommended a dividend. The judgment of the Privy Council was delivered by Lord Shaw of Dunfermline who said:[12]
"It is undoubtedly true that at the foundation of applications for winding up, on the "just and equitable" rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up."
86 Lord Shaw referred to what was said by Cottenham LC in Ex Parte Spacman:[13] "There must be something in the management and conduct of the company which shows the Court that it should be no longer allowed to continue, and that the concern ought to be wound up."
87 Lord Shaw also referred to In re Bleriot Manufacturing Aircraft Co[14] where Neville J said: "the words "just and equitable" are words of the widest significance and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances ..."
88 In re Netsor Pty Ltd[15] involved an application to wind up companies on the just and equitable ground, but also on the ground that the directors had acted in their own interests. In the course of what was in substance a pleading summons, Powell J said[16] that the words "just and equitable" were words of the widest import and not to be confined by the creation of categories within which a case must be brought, but that "the facts or conduct which make it, in any case, 'just and equitable' that a company be wound up must be facts or conduct which have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company or the conduct of its business", referring to what was said by Lord Shaw in Lock v Blackwood and to a number of other authorities.
89 Australian Securities Commission v AS Nominees Ltd[17] was a proceeding by the ASC to wind up companies operating superannuation and unit trusts, involving allegations that the trustee companies had been run for the benefit of the founder and the directors. There were findings that the directors had little appreciation of their responsibility as directors or of trustee obligations, that there were regular breaches of trust, repeated breaches of corporations law, reckless investments, some fraud, and that the companies were being treated as if a single entity and that there was deficient record keeping.
90 Finn J said[18] that the justice and equity to which regard was had was usually as between intra-company contestants but the ground was not limited to resolving the disputes of members nor was it available only to members. Rather, where a statutory authority was authorised to apply on the just and equitable ground "there seems to be no reason at all why a court entertaining such an application should not have regard to such actual public interest considerations as have ... or may have induced the governmental body to seek a just and equitable winding up order"[19].
91 The following matters were referred to by Finn J:
• a lack of propriety and competence in the management and conduct of the affairs of the three companies (irrespective of solvency);
• a distinct public interest in the ASC securing compliance with the corporations law where regular and repeated breaches had occurred, especially where investor protection was affected;
• misconduct and mismanagement in the conduct of trust business to such a degree as to make it unacceptable for the companies to hold investors' money on a fiduciary basis;
• that winding up was not only a convenient means of removing companies from the control of the trusts but also "the appropriate expression of the lack of confidence one must have in the directors of these companies in their conduct and management of the affairs of their companies"[20].
92 In Deputy Commissioner of Taxation v Woodings[21], the Court ordered that a company be wound up because its de facto director had with associates engaged in a course of conduct whereby a series of companies which had accumulated significant tax debts had been systematically stripped (by selling their undertakings to other companies controlled by the director and his associates) leaving behind indebtedness to the ATO. It was therefore in the public interest for the court to exercise its discretion to prevent further "commercial immorality".
93 In Australian Securities Commission v Roheyh Rohani & Ors,[22] the ASC was seeking to wind up a company. Beaumont J applied the concept of "a justifiable lack of confidence in the conduct and management of the company's affairs" to a case where the application was by the ASC rather than by a shareholder. He found that the conduct complained of did not occur in the ordinary course of business or for any genuine commercial purpose and that therefore the test of a justifiable lack of confidence was satisfied.
94 ASIC v Chase Capital[23] involved the winding up of a managed investment scheme. Owen J[24] referred to public interest considerations which justified intervention where it was required for investor protection or where there had been regular or repeated breaches of the law. He said that it was important for the Court to identify the aspects of the public interest that would be promoted by the making of a winding up order.
95 In Deputy Commissioner of Taxation v Casualife Furniture International Pty Ltd,[25] the plaintiff successfully relied upon the following grounds in support of the application for a winding up order: lack of confidence in the conduct and management of the companies; the requirements of fairness; and that it was conducive to commercial morality and in the public interest to wind up the companies so that their affairs would be brought under the control of a liquidator and further commercial immorality prevented. In his reasons Hansen J referred to and relied upon the above authorities and a number of others.
96 I discern in the cases recognition of the following pertinent principles and criteria, which I adopt:
• lack of confidence in the conduct and management of the company's affairs lies at the foundation of applications for winding up on the just and equitable ground;
• the classes of conduct justifying an order are not closed and there is no necessary limit to the generality of the words 'just and equitable';
• the facts or conduct which make it just and equitable must have a direct or immediate relationship to, or bearing upon, the management or administration of the affairs of the company or the subject of its business ("a sufficient nexus");
• fairness was a relevant criterion thus freeing the Court, where appropriate, from technical considerations of legal rights;
• relevant public interest considerations included the protection of investors and the prevention or condemnation of repeated breaches of the law;
• a stronger case might be required where the company was prosperous, or at least solvent, and/or where there was an established business being carried on.
97 In relation both to general principle and, in particular, to the failure to keep proper books and records I would also refer to and adopt what was said by Warren J (as she then was) in ASIC v ABC Fund Managers (No.2)[26].
Should Properties be wound up on the just and equitable ground?
98 In my opinion, by reason of the following serious and fundamental matters in relation to the conduct and management of the affairs of Properties itself, there is a justifiable lack of confidence in such conduct and management:
• the absence of financial records clearly explaining the financial position and affairs of Properties;
• the absence of any trust accounts or written records concerning the relationship and transactions between Finance and Properties, including the movement and expenditure of investors' moneys;
• the absence of proper records or any written records of the calculation and distribution of the profits of the first project to, by or through Properties.
99 I am satisfied that Properties was an integral member of the Kingsley Brown Group and cannot be regarded on the evidence as a stand-alone company unaffected by the conduct and management of the affairs of the group.
100 More particularly, in my opinion, there was a sufficient nexus, indeed a very close one, between Properties and the following serious and fundamental deficiencies in the conduct and management of the affairs of Finance during the period when Properties was used as a vehicle for, or a tool in, the implementation of the first project:
• Finance raised money from the public without the required prospectus or other disclosure document;
• redeemable preference shares were issued by Finance without notifying ASIC, without proper disclosure to investors of the nature and structure of the first project or the terms of the share issue or the existence of Properties;
• the absence of financial records clearly explaining the affairs of Finance, including the costs of the first project, the transactions with Properties and the calculation and distribution of profits;
• the "confusion" as to whether Finance paid investors by way of franked dividend or by way of interest (and the tax consequences thereof for Finance and for investors).
101 I am therefore further satisfied that there is a justifiable lack of confidence in the conduct and management of the affairs of Properties by reason of the matters relating to Finance set out above.
102 The serious and gross mismanagement thus involved in the affairs of Properties and in the inter-related affairs of Finance, and Mr Brown's cavalier approach to his responsibilities as director of each of those companies, are well illustrated by his answers to the questions put to him in his examinations, as set out at some length above.
103 I take into account the specific breaches of the law that were not disputed for the purposes of this proceeding, namely, the failure by Finance to lodge prospectus/fundraising documentation with ASIC and the failure by Finance to inform ASIC of the issue of preference shares. In addition I have, as indicated, taken into account the failure by both Properties and Finance to keep written records that correctly record and explain their financial position as required by law.
104 I consider that there is a public interest established in this case in relation to the protection of investors, whose moneys were advanced to Properties, and in relation to the fulfilment of the wider legal obligations of all companies in the Group, in particular those obligations relating to the raising of finance, the keeping of proper records and the proper management of their affairs in the respects indicated. Although Properties has no current or intended business or trading activity, that public interest should be recognised and vindicated.
105 I am not satisfied that a winding up order will cause any appreciable prejudice to Mr Brown that has not already been caused by the winding up of the other defendant companies. Nor am I satisfied that there is any or any sufficient prejudice to the shareholders of Properties by the making of a winding up order. I have considered that there may be some financial prejudice caused to some person or persons by virtue of the liquidator attempting to get in the debt owed by Floriston Nominees Pty Ltd or to sell the units held by Properties in the Floriston Nominees Unit Trust but that does not, in all the circumstances, outweigh the factors I have mentioned that support a winding up order.
106 An order for the winding up of Properties is in all the circumstances an appropriate expression of a justifiable lack of confidence in the conduct and management of the affairs of Properties. I am satisfied that it is just and equitable that a winding up order be made.
107 There will be an order that Kingsley Brown Properties Pty Ltd be wound up pursuant to s.461(1)(k) of the Corporations Act 2001 (Cth) and that Paul Antony Pattison of Level 14, 461 Bourke Street, Melbourne be appointed liquidator for the purposes of the winding up.
108 Subject to any submissions to the contrary, there will be an order that the costs of this proceeding including reserved costs be costs in the winding up of the first, second, third and fourth defendants. I will hear the parties as to any further orders that are sought, whether as to costs or otherwise.
[1] Finance was incorporated on 24 November 1997.
[2] Properties was incorporated on 3 March 1998.
[3] Holdings was incorporated on 23 March 1998.
[4] Cowes was incorporated on 24 May 2001.
[5] By an affidavit sworn 23 September 2004 Mr Pattison verified the contents of his principal report which was exhibit "PAP-1" to an affidavit sworn by him on 17 September 2004.
[6] Another company associated with Mr Brown, Cowes Restaurants Pty Ltd was the former owner of a business name "Carmichael's Restaurant" but that company was wound up on 13 June 2001.
[7] There was an earlier company, incorporated on 14 August 1987, which commenced its life as Robert K Brown and Co (Boronia) Pty Ltd and which was the subject of a number of name changes thereafter. A receiver and manager was appointed to that company and it was wound up in February 2002.
[8] This document was in the same or similar form as that which was produced by Mr Brown to ASIC and was the subject of questions put to him in the first examination.
[9] He provided particulars at page 5 of his report.
[10] The liability was said to arise under the deed of company arrangement of Carmichael's that has since been terminated.
[12] [1924] AC 783, 788
[13] [1849] EngR 488; (1849) 1 Mac. & G. 170, 174
[14] (1916) 32 TLR 253, 255
[16] (1982) 1 ACLC 73, 77
[17] [1995] FCA 1663; (1995) 18 ACSR 459
[18] [1995] FCA 1663; (1995) 18 ACSR 459, 516-519
[19] [1995] FCA 1663; (1995) 18 ACSR 459, 517
[20] [1995] FCA 1663; (1995) 18 ACSR 459, 519
[22] [1998] 1432 FCA
[23] [2001] WASC 27; (2001) 36 ACSR 778
[24] [2001] WASC 27; (2001) 36 ACSR 778, 793
[26] [2001] VSC 383; (2002) 20 ACLC 120, 136-7, 140-2
Australian Securities & Investments Commission
Kingsley Brown Properties Pty Ltd [2005] VSC 506
(1995) 13 WAR 189