Receiver and Manager Appointed for Companies at NSW Supreme Court

The Court appointed a receiver and manager to manage the assets of several companies due to concerns over asset dissipation and breaches of court orders. The decision was based on the risk to investor interests and the need to investigate potential preferential treatment of some investors.

New South Wales Supreme Court

CITATION : [NAME] v [COMPANY] & Ors (No 2) [2006] NSWSC 1264

HEARING DATE(S) : 21/11/06

JUDGMENT DATE : 28 November 2006

JUDGMENT OF : Gzell J

DECISION : [NAME] appointed [NAME] and manager of the assets of the [NAME].

CATCHWORDS : CORPORATIONS - Winding up - General - Application for appointment of [NAME] of a company and [NAME] and manager of the assets of a number of [NAME] of [NAME] not opposed - Evidence that moneys raised from investors had found their way into the [NAME] - Evidence that an individual defendant had caused some corporate defendants to breach asset protection orders - [NAME] and manager should be appointed

Corporations Act 2001 (Cth) LEGISLATION CITED : Australian Securities and Investments Commission Act 2001 (Cth) Supreme Court Act 1970

[NAME] v [COMPANY] & 9 Ors [2006] NSWSC 1130 [NAME] v Burke [2000] NSWSC 694 [NAME] v [COMPANY] (2002) 43 ACSR 340 CASES CITED : [NAME] v [NAME] (2001) 39 ACSR 443 [COMPANY]; [NAME] v [NAME] (2001) 38 ACSR 266 [NAME] v [COMPANY] (No 2) (2000) 35 ACSR 34 Cardile v LED Builders Pty Ltd (1999) 198 CLR 380

Australian Securities and Investments Commission - Plaintiff/Applicant [COMPANY] - 1st Defendant/Respondent [COMPANY] - 2nd Defendant/Respondent [NAME] - 3rd Defendant/Respondent [NAME] - 4th Defendant/Respondent PARTIES : [COMPANY] - 5th Defendant/Respondent [COMPANY]- 6th Defendant/Respondent [COMPANY] - 7th Defendant/Respondent [COMPANY] - 8th Defendant/Respondent [COMPANY] - 9th Defendant/Respondent [COMPANY] - 10th Defendant/[COMPANY] -11th Respondent

FILE NUMBER(S) : SC 2941/06

[NAME] - Plaintiff/Applicant COUNSEL : [redacted] [NAME] - [NAME]

SOLICITORS : [redacted] [NAME] - 3rd, 4th, 6th Defendants/Respondent & 11th Respondent

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

GZELL J

TUESDAY 28 NOVEMBER 2006

2941/06 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v [COMPANY] & ORS (NO 2) JUDGMENT

1 On the application of the Australian Securities and Investments Commission ("[NAME]") I appointed a [NAME] to [COMPANY] ("[NAME]"), the sixth defendant, and appointed a [NAME] and manager of the assets comprised in seven [NAME]. I made an order that [NAME], the third defendant, [NAME], the fourth defendant, [NAME] and [COMPANY] ("[NAME]"), the eleventh respondent, ("the relevant parties") have liberty to apply to the Court on 48 hours' notice to set aside the orders with respect to the appointment of the [NAME] and manager, that liberty not to be exercised before 13 December 2006. I said I would give my reasons for making these orders in due course. 2 The background to [NAME]'s claim and most of the facts thus far established are fully set out in the recent judgment of White J in [NAME] v [COMPANY] & 9 Ors [2006] NSWSC 1130. I will not repeat them. Suffice it to say that [COMPANY] ("[NAME]"), the first defendant, a company controlled by [NAME] raised over $5 million from investors by way of unsecured loans upon the representation that the moneys would be on-lent to approved development borrowers, defined to mean parties approved by [NAME] for the purposes of lending money for the development of a property development project. The moneys were on-lent to other companies controlled by [NAME] which were not developing property, with the exception of [NAME] and [COMPANY] ("[NAME]"), the tenth defendant. Its property was sold at a loss in the 2006 financial year. 3 Many of the investors were persuaded to roll over their investment in [NAME] to redeemable preference shares in [COMPANY] ("[NAME]"), the second defendant. It raised over $8 million. All the money raised was lent to companies controlled by [NAME]. 4 White J appointed [NAME] as [NAME] of the corporate defendants with the exception of [NAME]. He excluded [NAME] on the basis that the appointment of a [NAME] might have an adverse effect on marketing the apartments it held and depress their market price. 5 [NAME] made loans to, amongst other entities, the [COMPANY] of $20,000. It also made loans of $3 million to [COMPANY] ("[NAME]"), the fifth defendant, as trustee of the [COMPANY], the [COMPANY], the [COMPANY] and the [COMPANY] and $50,000 to [NAME] as trustee of the [COMPANY]. 6 [NAME] has formed the view that [NAME], [COMPANY] ("Melbourne"), the eighth defendant, and [NAME] have no substantial assets with the consequence that the loans made by [NAME] to them are unlikely to be repaid. He has also formed the view that the loans made by [NAME] to [NAME] and [COMPANY] ("[NAME]"), the ninth defendant, are unlikely to be fully repaid. [NAME] 7 The application for the appointment of a [NAME] was supported by an affidavit by [NAME]. His evidence established that [NAME] had entered into a number of "side deeds" with respect to the sale of its apartments under which some, but not all, investors were granted a discount on the purchase price of apartments related to the amount of their investment in [NAME]. There was a genuine fear that this process had diminished the market value of the apartments by creating the perception of fire sales. 8 There is, in my opinion, a serious concern that [NAME], in dealing with individual investors, is adversely affecting the value of [NAME]'s investment in the apartments such that the reservation that White J held on 27 October 2006 has been displaced. Unless there be an appointment of a [NAME] to [NAME] the interests of investors who are not parties to "side deals" will be further adversely affected. There is also a need to investigate the "side deals" that have been completed to ascertain whether some investors have received an unfair preference in terms of the Corporations Act 2001 (Cth), s 588FA(1) or uncommercial transactions have been made in terms of s 588FB(1) which, if entered into when [NAME] was insolvent would constitute insolvent transactions in terms of s 588FC and be voidable if within six months of the relation-back day or within two years of the relation-back day respectively under s 588FE. 9 Furthermore, there is serious concern that there is a lack of confidence in the conduct and management of the affairs of [NAME]. 10 I formed the view that it was appropriate that the [NAME] of the other corporate defendants be appointment [NAME]. The application was not opposed by the relevant parties. Appointment of [NAME] and manager 11 White J found that [NAME] had lent moneys to, amongst other companies controlled by [NAME] as trustee of the [COMPANY], the [COMPANY], the [COMPANY] and the [COMPANY]. In addition, [NAME] had lent moneys to, amongst other companies controlled by [NAME] as trustee of the [COMPANY], the [COMPANY], the [COMPANY], the [COMPANY] and the [COMPANY]. 12 The evidence now reveals that [NAME] has replaced [NAME] as the trustee of at least some of the [NAME]. [NAME]'s mother is sole director and shareholder. 13 [NAME] caused companies controlled by him to breach orders made by the Court that prevented them from dealing with or disposing of their assets. 14 On 4 September 2006 Barrett J, amongst other orders, ordered [NAME], its officers, servants, agents or employees to be restrained from removing, or causing or permitting to be removed, from the States of New South Wales, Victoria, Queensland and from Australia, or selling, charging, mortgaging, or otherwise dealing with, or disposing of, or causing, or permitting to be sold, charged, mortgaged or otherwise dealt with or disposed of, all or any of its assets including, but not limited to, any of its rights and interests provided that the order should not prevent [NAME] from paying any such moneys as were necessary in the ordinary cause of business and should not prevent [NAME] from paying costs reasonably incurred in relation to the proceedings up to an amount of $10,000. 15 On 7 September 2006, [NAME] caused [NAME] to exchange a contract for the sale of a property at Coogee for $2.87 million. 16 [NAME] was bound by the same order of Barrett J. The evidence reveals that in contravention of that order on 15 September 2006 [NAME] caused it to exchange a contract for the sale of a [NAME] property for $3.805 million. 17 In defence of the relevant parties it was said that the sale of the [NAME] property was of little moment because the consent of the [NAME] had been obtained on 20 November 2006. That consent records that it was given notwithstanding the injunction in the previous orders. The fact that the [NAME] was prepared to condone the sale does not excuse the breach of the injunction committed by [NAME]. 18 [NAME] has ascertained that [NAME] as trustee of the [COMPANY] entered into a contract for the purchase of a property at Maleny in Queensland in May 2006 with a settlement date of 18 November 2006 and that, of the deposit of $55,000, $44,000 was provided by [NAME]. There is nothing on the material before the Court to indicate that the payment was in the ordinary course of [NAME]'s business. 19 It was submitted that [NAME] entered into the contract for purchase of the Maleny property in error because it had been replaced by [NAME] as trustee of the [COMPANY] on 26 September 2005. [NAME] was not bound by the injunctions. Nevertheless, [NAME] caused [NAME] to execute the agreement and to incur a liability to part with assets in contravention of the injunction. 20 On 1 November 2006, White J, amongst other orders, varied the orders of 4 September 2006 with respect to [NAME] and ordered that, until further order or the written consent of the [NAME], whether by its officers, servants, agents or employees, be restrained from removing, or causing or permitting to be removed from the State of New South Wales, Victoria, Queensland and from Australia, or selling, charging, mortgaging or otherwise dealing with or disposing of, [NAME]'s assets, including but not limited to, any of their rights and interests provided that the order should not prevent [NAME] from paying any such moneys as were necessary in the ordinary course of business (including but not limited to the payment of salary and/or wages of employees and officers of [NAME]). 21 The evidence establishes that in November 2006, after White J had varied the earlier orders of the Court, [NAME] paid $5,000 to the [COMPANY]. Prima facie that payment was in breach of the orders made on 1 November 2006 as there is nothing to suggest that that payment was in the ordinary course of [NAME]'s business. 22 In his affidavit [NAME] had sworn to information provided by [NAME] of [NAME] with regard to the rescission or termination of contracts of sale of some of the apartments of [NAME] and a statement that [NAME] had advised Mr [NAME] that he was signing a contract for the sale of the remaining apartments en masse. Mr [NAME] took issue with these statements. In my view, however, that conflict does not detract from the evidence of breach of Court orders. 23 [NAME] has also discovered that [NAME] has caused various unit [NAME] to issue units to certain investors. [NAME] has received units in the [COMPANY] and [COMPANY] has received units in the [COMPANY]. In addition [NAME] has caused [NAME] to acquire a liability in respect of debts owed by some of the other corporate defendants to [NAME] for no consideration. 24 [NAME] had sought from the [COMPANY] a stop order on an account of [NAME] as trustee of the [COMPANY]. That led to the solicitors for [NAME] and [NAME] to inform [NAME] that [NAME] had been replaced by [NAME] as trustee of the [COMPANY] and neither [NAME] nor [NAME] gave [NAME] permission to deal with the assets of the [COMPANY] in any way. 25 [NAME] asserted that he, [NAME] and [NAME] and the beneficiaries of the [NAME] of which [NAME] was trustee, would be prejudiced by an order restraining the defendants in the manner sought in the interlocutory process because that would constitute an irremediable default under the terms of a loan facility guaranteed and entered into by those parties in relation to assets owned by the [NAME]. It would prevent the [NAME] from meeting their obligations under the respective loans and result in the mortgagees of the properties entering into possession. 26 The injunctive relief sought in the interlocutory process was in the alternative to the appointment of a [NAME] and manager. Counsel for the relevant parties stated that his instructions were that the same result would follow the appointment of a [NAME] and manager. 27 There is no guarantee that the mortgagees would take precipitate action in the event of an act of default under the loan facility. And the risk of such action must be balanced against the risk to the investors of the [NAME] remaining under the control of [NAME]. 28 It has been said that the appointment of a [NAME] over a person's assets is an extraordinary step for a Court to take, although it may be justified when associated with allegations of misappropriation of property though not necessarily exclusively fraudulent ([NAME] v Burke [2000] NSWSC 694 at [8]). But proof of actual or apprehended fraud is not a precondition to the appointment of a [NAME] and manager ([NAME] v [COMPANY] (2002) 43 ACSR 340 at [13]). Thus the appointment of a [NAME] may be justified even though asset preservation orders are in place where there is real doubt about the existence and location of assets and about the nature and identity of claimants and the nature of claims, and where defendants are engaged in business activities that entail that asset preservation orders allow assets to be turned over in the ordinary course of business (Burke at [8]). 29 An order will be made where the evidence demonstrates that there is a risk to the public interest that warrants protection ([NAME] v [NAME] (2001) 39 ACSR 443 at [119]). And an order will be made where, as here, it is inappropriate for the corporate defendants and the relevant [NAME] to solicit, manage and handle moneys that, it would appear, could only have been derived from moneys lent by [NAME] that had been derived from investors' funds. That is where there is a lack of confidence in the conduct and management of the affairs of the companies and [NAME] ([NAME] at [119]). 30 The Corporations Act 2001 (Cth), s 1323(1)(h)(ii) enables the Court to appoint a [NAME] and manager having such powers as the Court orders of the property or of part of the property of a body corporate. The power is exercisable once there is, in terms of s 1323(1)(a), s 1323(1)(b) or s 1323(1)(c) an investigation being carried out under the Australian Securities and Investments Commission Act 2001 (Cth), a prosecution begun for contravention of the Corporations Act 2001 (Cth), or a civil proceeding begun against a person under that Act, respectively. The jurisdiction arises even in the absence of strong evidence of dissipation of assets, and even in the absence of a prima facie or, at least, a reasonably persuasive case against the individual concerned ([COMPANY]; [NAME] v [NAME] (2001) 38 ACSR 266 at [7]). 31 The Supreme Court Act 1970, s 67 provides that the Court may at any stage of proceedings, on terms, appoint a [NAME] by interlocutory order in any case in which it appears to the Court to be just or convenient so to do. Under this power the Court will appoint a [NAME] of trust property where that property is in jeopardy through misconduct, waste, improper disposition, breach of the trustee's duty, or the unsuitable character of the trustee. The case in favour of the appointment of a [NAME] must be a strong one, but in assessing the risk to the trust, the Court will apply a qualitative judgment. A [NAME] will be appointed to preserve the benefit of a person who has an interest in the property ([NAME] v [COMPANY] (No 2) (2000) 35 ACSR 34 at [84]). 32 It was argued by the relevant parties that there was no evidence of a need for urgency, and no evidence of dissipation of assets. Reference was made to Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. But in that case, at [57], it was said that a mareva order might be appropriate against the third party if the third party held assets including claims and expectancies of a potential judgment debtor. 33 It was submitted that there was no evidence of a threat to the jurisdiction of the Court. 34 There is ample evidence to establish that funds invested with [NAME] have found their way into the various [NAME] of which [NAME] is now the trustee. There are potential claims that may be made on behalf of the investors against assets of those [NAME]. [NAME] has caused various defendants to breach the terms of orders already made by this Court and the Court can have no confidence in his continued conduct and management of the affairs of the [NAME]. [NAME] is not subject to the injunctions that bind the other defendants. 35 Notwithstanding the risk that the appointment of a [NAME] and manager may trigger an act of default under a loan facility, the overpowering public interest and that of the investors leads inexorably to the conclusion that a [NAME] and manager be appointed. 36 It was for these reasons that I appointed [NAME] and manager of the assets comprised in the [COMPANY], the [COMPANY], the [COMPANY], the [COMPANY], the [COMPANY], the [COMPANY] and the [COMPANY]. 37 Since the relevant parties had little [NAME] to meet the application, I made an order that they have liberty to move to set aside the orders relating to the appointment of [NAME] as [NAME] and manager, exercisable after a specified date. The latter part of the order was designed to give [NAME] to ascertain the position in relation to each of the [NAME]. **********

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