Australian Securities and Investments Commission v ABC Fund Managers
[2001] VSC 383
•11 October 2001
Bnnnnnnnnnnnnnnn
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 7654 of 2000
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Plaintiff |
| v | |
| A.B.C. FUND MANAGERS LIMITED AND OTHERS | Defendants |
---
JUDGE: | Warren J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28, 29, 30 and 31 May 2001 | |
DATE OF JUDGMENT: | 11 October 2001 | |
CASE MAY BE CITED AS: | ASIC v A.B.C. Fund Managers Ltd & Ors (No. 2) | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 383 | Revised 16 October 2001 |
---
Corporations – winding up – just and equitable ground – ASIC investigation ground – sham transactions – round robin shift of funds – funding of taxation deductions – fraud on investors – fraud on Australian Taxation Office.
Financial records – corporation – obligation to keep records – accounting standard – audit requirements.
Managed investment schemes – obligation to register – obligation to keep financial records.
Prescribed interests – obligation to register – obligation to keep records.
evidence – privilege against self-incrimination – adverse inference from failure to call witness – adverse inference from claim for privilege against self-incrimination.
australian securities and investments commission act 1989 – s.19 – examination on notice – transcript of examination.
Corporations act 2001 – ss.9, 282, 285, 286, 295, 461, 464, 601ED, 601EE, 601HA, 601HG, 1066, 1069, 1071, 1323, 1324.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J.W.S. Peters | Australian Securities and Investments Commission |
| For the Defendants | Mr P. Crutchfield | Oakley Thompson |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 2
Background......................................................................................................................................... 3
The ABC FM Group........................................................................................................................... 4
The 22 Trusts....................................................................................................................................... 5
The Trusts and Related Borrowings............................................................................................... 8
Change in Legislative Provisions Relating to Prescribed Interest Schemes.......................... 9
Statutory Financial Reporting Requirements............................................................................. 14
Defendants' Activities Post 1998 Amendments......................................................................... 16
The evidence relied on by ASIC................................................................................................... 17
The Broder Evidence.................................................................................................................. 17
The Coghlan Evidence................................................................................................................ 18
The Lalor Evidence..................................................................................................................... 22
The Section 19 Examinations......................................................................................................... 22
The Defendants' Evidence.............................................................................................................. 28
The Basic Round Robin Transaction............................................................................................ 30
Misconduct in Management of Companies................................................................................ 33
Misconduct in the Management of the 22 Trusts...................................................................... 35
The Misleading of Investors in Relation to the 22 Trusts........................................................ 36
Inferences to be Drawn from Refusal of Wharton to Answer Questions............................. 39
Inferences to be Drawn From Failure to Call a Witness........................................................... 41
Legal Principles with Respect to Winding Up on the Just and Equitable Ground............ 41
Opposition to Winding Up............................................................................................................ 49
Injunctive Relief............................................................................................................................... 54
Conclusion......................................................................................................................................... 54
SCHEDULE OF TRUSTS & BORROWINGS............................................................................ 59
HER HONOUR:
The Australian Securities and Investments Commission ("ASIC") seeks to wind up the defendants pursuant to s.461 of the Corporations Act on the just and equitable ground and pursuant to s.464 being the ASIC investigation ground. ASIC seeks, also, orders under s.601EE of the Act to wind up 22 related trusts. In addition, the Commission seeks injunctive relief pursuant to ss.601EE, 1323 and 1324 of the Corporations Act restraining the defendants from further breaches of the Act together with associated declaratory relief.
Introduction
The actions of the defendants involved a round robin of lending and investment transactions that were typically completed within a single day at the end of each financial year over a number of years. The transactions usually followed a modus operandi that late in the month of June of each year a company would lend moneys to individual investors who then, on the same day, invested those moneys in certain managed investment trusts and the trustee company of the particular trust, again on the same day, lent the moneys back to the company that had lent the moneys to the investor in the first place. The company was one of a number associated with one Stephen Lynne Wharton. The investment trusts and trustee companies were associated with Wharton also. The transactions were usually arranged by an accountant usually associated with Wharton but often not. As a result of signing various documents and without any outlay of moneys the clients of the relevant accountant were able to claim a tax deduction. The total amount of funds lent and in turn invested and then repaid over the period 1995 to 1998 was in the order of $100,000,000. The actual cash subscribed by the investors was in the order of $4,000,000 to $8,000,000, largely funded by taxation refunds.
Upon the attention of ASIC being attracted to the transactions, its investigations culminated in these proceedings.
I turn to consider the detailed background to the defendants and the related parties.
Background
In 1985 and again in 1988, a dealer's licence under the Securities Industry (Vic) Code was issued to the first defendant, ABC Fund Managers Limited ("ABC FM") by the Victorian Commissioner for Corporate Affairs for a total of 12 securities with an approved deed. The 12 securities were: Australian Share Market Participation Fund, the Martin Simpson High Technology Fund, No Load Growth Trust, No Load Property Trust, No Load Earnings Growth Trust, No Load Resource Trust, No Load Gold Trust (called "MEG 2"), ABC Aggressive Growth Fund, ABC International Fund, No Load Fixed Interest Trust, No Load Takeover Trust (called "MEG 1"), and ABC Trading Fund. These 12 securities were generally known as "the 12 funds". The dealer's licence no longer remains current.
The records of ASIC reveal that at their peak the 12 funds that were the subject of the dealer's licence and enjoyed a portfolio in the order of $90,000,000. The 12 funds were managed by Permanent Trustee Company Limited ("Permanent Trustees") as trustee. Following the share market crash of October 1987, Permanent Trustees restructured the 12 trusts named in the dealer's licence held by ABC FM. Subsequently, on 30 September 1988, Permanent Trustees informed unit holders in the 12 trusts that eight of the trusts (Australian Share Market Participation Fund, the Martin Simpson High Technology Fund, No Load Growth Trust, No Load Property Trust, No Load Earnings Growth, No Load Resource Trust, No Load Gold Trust and No Load Takeover Trust) were to be closed down. Permanent Trustees informed unit holders in those eight trusts that they would need transfer to the remaining three trusts (ABC Aggressive Growth Fund, ABC International Fund and ABC Trading Fund). Nothing appears to have been said by Permanent Trustees about the twelfth trust, the No Load Fixed Interest Trust.
In about September 1993, a small firm of accountants associated with Wharton known as Wharton Partners took control of ABC FM and the 12 associated trust funds. The funds at that stage were dormant. Control was gained through the corporate entity known as Wharton Partners Pty Ltd, the second defendant in these proceedings.
Upon gaining control of ABC FM, Wharton Partners, the firm, and Wharton Partners Pty Ltd, embarked upon the creation and promotion of a total of 22 trusts encompassing the 12 trusts that were the subject of the dealer's licence together with additional trusts. Before considering the 22 trusts it is appropriate to consider the structure of ABC FM and its related entities.
The ABC FM Group
ABC FM has as directors, John James Gillies, Sharon Lee Smith and John Gianchino. Robert Cincotta ceased to be a director on 19 January 1995. Stephen Lynne Wharton was a chartered accountant of over 25 years experience. He ceased to be a director on 3 November 1995. ABC FM has two secretaries, Gillies and Wharton. ABC FM is the fund manager of all of the 22 trusts and its name appeared on the promotional documentation for those trusts. It was also the initial unit holder of many of the trusts.
On 28 June 1994, Gillies and Wharton incorporated four companies and appointed themselves as directors. The companies were Allied Securities Pty Ltd, the third defendant in this proceeding ("Allied Securities"); ABC Investment Management Pty Ltd, the fourth defendant ("ABC IM"); and two other companies, Lingus Pty Ltd and Denby Vale Pty Ltd. The two latter companies were incorporated as subsidiaries of another company, Levart (Vic) Pty Ltd.
Schedule A contains a chart depicting the ownership and control of ABC. It shows that Tye Nominees and Wharton Partners Pty Ltd have respective interests in one another, that is, a cross‑shareholding. Tye Nominees owns 75 per cent of Wharton Partners, and Wharton Partners owns 50 per cent of Tye Nominees. One Lotte Wharton holds the shares in P.L. Wharton Pty Ltd which in turn holds 100 per cent of the shares for Stephen Lynne Wharton. Lotte Wharton is the mother of Stephen Lynne Wharton. He holds and controls 50 per cent of Tye Nominees. Wharton Partners is 25 per cent owned by one John Gianchino who is also engaged as a consultant accountant at Wharton Partners, the firm. Hence, Wharton Partners Pty Ltd is owned one‑quarter by Mr Gianchino and three‑quarters by Tye Nominees.
Tye Nominees has a number of subsidiaries. The first subsidiary is ABC FM and it in turn controls the shares in ABC IM, ABC Resources and National Investments and Loans Australia. The subsidiaries of Tye Nominees include a company, Veldara Pty Ltd and its subsidiaries. Schedule B contains a chart depicting the ownership and control of Veldara Pty Ltd. One of the entities related to Veldara is Mortgage & General Indemnity Co Australia Pty Ltd. It was an indemnifier of loans. Schedule B sets out the subsidiaries and entities related to Levart. Levart Vic Pty Ltd is a company controlled by one Peter Hutchins. It has as subsidiaries Allied Securities, Allied Technical Services Pty Ltd, Denby Vale and Lingus.
On 6 November 1994, Wharton became bankrupt and ceased to be a director of ABC IM, Allied Securities, Tye Nominees, Lingus, Denby Vale Pty Ltd and P.L. Wharton Pty Ltd. Wharton remained as co‑secretary of those companies. Each of ABC FM, Alllied Securities, ABC IM, Tye Nominees and Lingus shared the same registered office, 537 Malvern Road Toorak, the same director, Gillies, and the same secretaries, Gillies and Wharton save that Tye Nominees had as its secretary Wharton only.
The 22 Trusts
Investigations by ASIC revealed that between June 1995 to June 1998 the defendants promoted a total of 22 trusts including the original 12 trusts under the dealer's licence of ABC FM. The 22 trusts and the dates of the relevant trust deed were:
TRUST
DATE OF TRUST DEED
A.B.C. Maxi Earnings Growth Fund No. 1 ("MEG 1")
16 June 1995
A.B.C. Maxi Earnings Growth Fund No. 2 ("MEG 2")
16 June 1995
A.B.C. Maxi Earnings Growth Fund No. 3 ("MEG 3")
25 June 1997
A.B.C. Maxi Earnings Growth Fund No. 4 ("MEG 4")
26 June 1998
A.B.C. Maxi Income & Growth Fund ("MIGF")
26 June 1998
A.B.C. Income & Growth Trust No. 1 ("ABC IG 1")
31 May 1996
A.B.C. Income & Growth Trust No. 2 ("ABC IG 2")
24 June 1996
A.B.C. Income & Growth Trust No. 3 ("ABC IG 3")
25 June 1996
A.B.C. Income & Growth Trust No. 4 ("ABC IG 4")
25 June 1996
A.B.C. Income & Growth Trust No. 5 ("ABC IG 5")
25 June 1996
A.B.C. Income & Growth Trust No. 6 ("ABC IG 6")
25 June 1996
A.B.C. Income & Growth Trust No. 7 ("ABC IG 7")
25 June 1996
A.B.C. Income & Growth Trust No. 8 ("ABC IG 8")
25 June 1996
A.B.C. Income & Growth Trust No. 9 ("ABC IG 9")
25 June 1996
Leveraged Equity Investment Trust No. 1 ("LEIT 1")
23 June 1997
Leveraged Equity Investment Trust No. 2 ("LEIT 2")
23 June 1997
Leveraged Equity Investment Trust No. 3 ("LEIT 3")
23 June 1997
Leveraged Equity Investment Trust No. 4 ("LEIT 4")
23 June 1997
Leveraged Equity Investment Trust No. 5 ("LEIT 5")
23 June 1997
Leveraged Equity Income & Growth Fund No. 1 ("LEIG 1")
26 June 1998
Leveraged Equity Income & Growth Fund No. 2 ("LEIG 2")
26 June 1998
Leveraged Equity Income & Growth Fund No. 3 ("LEIG 3")
26 June 1998
There were other trusts promoted by the defendants. All of the trusts they promoted, including the 22 trusts, appear to have fallen into four categories. First, the public trusts, comprising the original 12 trusts under the dealer's licence held by ABC FM. Second, those that were termed "the maxi trusts", comprising the ABC Maxi Earnings Growth Funds Nos. 1 to 4. The maxi trusts required a minimum investment of $500,000. Third, those that were termed "the mini trusts", comprising the ABC Income & Growth Trusts Nos. 1 to 9, the Leveraged Equity Investment Trusts Nos. 1 to 5, and the Leveraged Equity Income & Growth Fund Nos. 1 to 3. The mini trusts required smaller investments, less than $500,000. The fourth category, consisted of other remaining trusts about which little seems to be known.
On 16 June 1995, two relevant supplementary trust deeds were executed. First, a trust deed relating to the "No Load Takeover Trust". ABC FM was manager and appointed Tye Nominees as trustee. The name of this trust was amended to "ABC Maxi Earnings Growth Fund" hence, "MEG 1". The second trust was "No Load Gold Trust". ABC FM was manager and appointed Tye Nominees as trustee. The name of the trust was amended to "ABC Maxi Earnings Growth Fund No. 2", hence, "MEG 2". The supplementary trust deeds relating to MEG 1 and MEG 2 were executed two weeks before the end of the financial year. On 29 June 1995, an investment promotional programme was implemented by ABC FM and Wharton Partners Pty Ltd. The programme was known as A.B.C. Maxi Earnings Growth Fund – Leveraged Equity Investment Programme. A promotional document was prepared listing the features of the investment programme.
Another related entity was the company, Charter Tax and Management Pty Ltd. It was the trustee of two trusts, the LEIT 1-5 Trust of 1997 and the LEIG 1-3 Trust of 1998. One Tim Khor was a director of Charter Tax and Management. It was deregistered in September 1998.
In late June 1996, the ABC Income & Growth Trust Fund No. 1-9 ("ABC 19") was established, appointing ABC IM as trustee and Tye Nominees as the initial unit holder. Similarly, on 25 June 1996, the ABC Maxi Earnings Growth Fund No. 2 Trust was established, that is MEG 2, with Tye Nominees as trustee and ABC FM as initial unit holder. On 27 June 1996, a promotional memorandum relating to ABC FM and the funds was signed by Wharton setting out a description of the investment activities of ABC FM. On 23 June 1997, the LEIT 1-5 Trusts were established with Charter Tax and Management as trustee and Lingus as the initial unit holder. On 25 June 1997, the ABC Maxi Earnings Growth Fund No. 3 Trust was established with Tye Nominees as the trustee and ABC FM as the initial unit holder. In late June 1998, each of the LEIG 1-3, MEG 4 and MIGF trusts were established with ABC FM as initial unit holder in each trust.
Essentially, the defendants engaged in a round robin transaction. It operated by way of moneys being lent by Allied Securities notionally to investors and these moneys were in turn paid to the trustee of the relevant trust who then invested those funds in other trusts in the ABC FM group which in turn lent the money back notionally to Allied Securities. These transactions all occurred on the same day and in each case in late June being the end of the relevant financial year. The round robin lending facility was described by Wharton as a "daylight credit facility". The procedure operated on the basis of starting with a notionally small balance or nil balance at 9.00 a.m. on the relevant day in the account of Allied Securities. Cheques would then go out to other companies in the group and in turn the moneys came back into the account of Allied Securities from other companies to cancel out the debit entries and thus the debits and credits cancelled each other out.
It came to light that of the 22 trusts no person had sought registration as a responsible entity pursuant to the managed investment scheme legislation. Indeed, none of the 22 funds sought transition under the managed investment scheme legislation introduced in 1998 and applicable to the funds in 2000. Notwithstanding that each of the trusts involved the issue of a prescribed interest, none of the trusts had a prospectus or approved deed lodged or registered with ASIC. Hence, over $100,000,000 went in and went out and there was no record of the transaction or record as to where the money went. Furthermore, there was no investment in shares in public companies, in properties, or in any of the usual investments that would reasonably be expected to earn income for which a tax deduction could be claimed by way of borrowing expenses and interest.
The Trusts and Related Borrowings
Schedule D sets out a schedule of the relevant trusts and their respective borrowings.
In 1995, the MEG 1 Trust had 26 investors who borrowed $23,000,000 in principal with pre‑paid interest in the sum of $3,128,400, a total of principal and pre‑paid interest of $26,128,400.
In 1996, the trust fund ABC IG 1-9 had 123 investors who borrowed $25,924,500 in principal, together with $3,774,500 pre‑paid interest, a total of combined principal and pre‑paid interest of $29,699,000. Again in 1996, the trust MEG 2 had 25 investors who borrowed the principal sum of $26,375,000 together with pre‑paid interest of $3,587,400, a total of combined principal and pre‑paid interest of $29,587,775.
In 1997, the trust LEIT 1-5 had 53 investors who borrowed the principal sum of $9,300,000 together with pre-paid interest of $1,155,020, a combined total of principal and pre‑paid interest of $10,455,020. In the same year, 1997, the MEG 3 Trust had four investors who borrowed $3,000,000 by way of principal together with pre‑paid interest in the sum of $396,000 a total of combined principal and pre‑paid interest of $3,396,000.
In 1998, the LEIG 1-3 Trust had 45 investors who borrowed $6,950,000 by way of principal together with pre‑paid interest in the sum of $894,050, a total of combined principal and pre‑paid interest of $7,844,050. Again in 1998, the MIGF Trust had one investor, that is, Chartered Tax as trustee for LEIG 1-3. The MEG 4 Trust had nine investors who borrowed $4,500,000 by way of principal and $504,000 pre‑paid interest, a combined sum of $5,004,000. The total of the loans for the period 1995‑1998 relating to the various trusts was by way of principal the sum of $98,674,875, by way of pre‑paid interest a sum of $13,439,370, a combined total sum of $112,114,245.
The principal borrowings for LEIG 1-3 in 1998 was $6,950,000 and in the same year the principal borrowings for MEG 4 was $4,500,000. The total of these two amounts in 1998 was the sum of $11,450,000.
Change in Legislative Provisions Relating to Prescribed Interest Schemes
The Corporations Law provisions relating to prescribed interest schemes were altered effective from 1 July 1998.
In summary, the key elements of the old system were:
(1)The regulation depended upon definitions of "prescribed interests" and "participation interests";
(2)The definitions themselves depended upon other factors including a right to participate or an interest in profits or common enterprise or other matters;
(3)Certain rights and interests were excluded including rights in time sharing schemes;
(4)Only a public company was permitted to offer prescribed interests for investment;
(5)Save for excluded offers, offers of prescribed interests for investment could not be made without an approved deed;
(6)The approved deed was required to contain specified covenants;
(7)The manager was required to hold a dealer's licence and the trustee was required to be an approved trustee.
Under the earlier provisions a "prescribed interest" was defined by s.9 of the Law as meaning a participation interest or a right to participate in a time sharing scheme (subject to specified exempt interest). Section 9 defined a "participation interest" as meaning any right to participate or any interest in any profits, assets or realisation of any financial or business undertaking or scheme or in any common enterprise with an expectation of profit, rent or interest from the efforts of the promoter of the enterprise. A participation interest could be based in Australia or elsewhere and did not include time share schemes, life insurance policies and other specified interests.
The earlier provisions prohibited anyone other than a public corporation making available, offering or inviting the subscription or purchase of a prescribed interest (see s.1063). The provisions required a deed to be approved before the issue, offer, purchase or invitation of any prescribed interest (see s.1065). Relevantly, for present purposes, s.1066 of the Law provided that a deed was an approved deed if approval had been granted under the then Law or a corresponding previous law and that approval had not been revoked and the deed was lodged with the NCSC before the commencement of the then Part 7.12 of the Law.
Section 1069(12) of the Law provided that the undertaking, scheme, enterprise, contract or arrangement may be continued in operation during such period as agreed upon by the trustee or management company if it appeared to be in the interest of the holders of the prescribed interest.
Section 1071 imposed obligations on a management company of a prescribed interest to complete a return containing a listing of holders and certain prescribed particulars and documents at the end of each financial year. Division 5A of Part 7.12 of the old provisions was concerned with unlisted property trusts and imposed certain obligations on trustees of such trusts where redemption was intended.
The Managed Investments Act 1998 imposed a new regulatory system that commenced on 1 July 1998.
The essential elements of the new system were:
(1)A prescribed interest was replaced with the concept of an interest in a "managed investment scheme".
(2)Managed investment schemes were required to be registered with ASIC if it had more than 20 members or was promoted by a person in the business of promoting such schemes.
(3)Each managed investment scheme was required to be operated by a single responsible entity, rather than a trustee and a separate manager.
(4)The responsible entity was required to be a public company and to hold a securities dealer's licence authorising that entity to operate the managed investment scheme.
(5)As part of the registration process, the responsible entity was required to submit to ASIC a compliance plan containing measures to ensure compliance with the requirements of the law and the law and the constitution of the particular managed investment scheme and also to set out the custodial arrangements to be provided for scheme property and, further, stating the arrangements for monitoring compliance with the individual compliance plan.
(6)Performance of the compliance plan was required to be audited annually.
(7)Penalties were imposed for failure to register a managed investment scheme.
(8)Fund raising by managed investment schemes was to be regulated under the prospectus provisions of the Law.
(9)Special provisions were imposed with respect to financial statements, audit and annual returns of managed investment schemes.
For present purposes the compliance and audit requirements of the new regime with respect to managed investment schemes was important.
With respect to the obligation imposed upon a managed investment scheme to provide a compliance plan as a prerequisite to registration, s.601HA(1) of the Law required arrangements for ensuring that all scheme property was clearly identified and held separately and imposed obligations for the auditing of the compliance plan and adequate record keeping. The sub‑section provided:
"SECTION 601HA CONTENTS OF THE COMPLIANCE PLAN
601HA(1) [Compliance plan] The compliance plan of a registered scheme must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with this Law and the scheme's constitution, including the arrangements for:
(a)ensuring that all scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme (see paragraph 601FC(1)(i)); and
(b)if the scheme is required to have a compliance committee (see section 601JA) – ensuring that the compliance committee functions properly, including adequate arrangements relating to:
(i)the membership of the committee; and
(ii)how often committee meetings are to be held; and
(iii)the committee's reports and recommendations to the responsible entity; and
(iv)the committee's access to the scheme's accounting records and to the auditor of the scheme's financial statements; and
(v)the committee's access to information that is relevant to the responsible entity's compliance with this Law; and
(c)ensuring that the scheme property is valued at regular intervals appropriate to the nature of the property; and
(d)ensuring that compliance with the plan is audited as required by section 601HG; and
(e)ensuring adequate records of the scheme's operations are kept; and
(f)any other matter prescribed by the regulations."
Section 601HG required that at all times a registered company auditor be engaged to audit compliance with the compliance plan. The auditor was required to conduct an audit of compliance with the plan within three months of the end of each financial year and to provide a report to the responsible entity stating whether compliance had occurred and whether the plan continued to meet the requirements of the Law. The auditor was bound to notify ASIC if the auditor had reasonable grounds to suspect contravention of the Corporations Law that could not otherwise be dealt with adequately by comments in the auditor's report.
There was a transitional phase during the period 1 July 1998 to 30 June 2000 when interests created on or after 1 July 1998 were subject to the new system but interests created before 1 July 1998 were subject to the old regime. However, interests created before July 1998 were subject to requirements for conversion to the new regime by 30 June 2000.
Hence, up until July 1998 the defendants were able to continue the management of the various trusts under the deed approved in 1988 and again in 1999 subject to little or no restriction, supervision or compliance obligations, although there were transitional requirements to be met.
Circumstances changed once the defendants were subject to the new regime as of 30 June 2000. On any view, the trusts constituted managed investment schemes under the new regime.
Statutory Financial Reporting Requirements
There are many separate statutory requirements concerning record keeping, financial statements, directors' responsibilities, auditing, reporting to members and lodging documents with ASIC that lie upon a company.
Pursuant to s.286 of the Corporations Act every company must keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited. The obligation is imposed on every disclosing entity including managed investment schemes: see s.285(3). The financial records must be retained for seven years in accordance with s.286(2) and the obligation to keep financial records of transactions extends to transactions undertaken as a trustee: see s.286(1). Section 286 requires written financial records also. A director who fails to take all reasonable steps to secure compliance with the record keeping requirements of the Corporations Act[1] contravenes s.344(1) of the Act. It is important to observe that the expression "Financial records" is defined in s.9 of the Corporations Act to include:
[1]Part 2M.2 and 2M.3
"(a)invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b)documents of prime entries; and
(c)working papers and other documents needed to explain:
(i)the methods by which financial statements are made up; and
(ii)adjustments to be made in preparing financial statements."
In summary, the Corporations Act identifies five categories of documents concerning the financial affairs of an entity: the financial report for a financial year, the directors' report for a financial year; the auditor's report on the entity's financial report for a financial year; the half-year report; and the auditor's audit report or review of the half‑year report. Section 295(1) of the Corporations Act provides that the financial report for a financial year consists of the financial statements for the year, the notes to the financial statements and the directors' declaration that the financial statements comply with accounting standards, give a true and fair view and that there are reasonable grounds to believe that the entity is solvent.
Usually, there are three fundamental components of the financial statements of a company, namely, the balance sheet, the profit and loss account and the cash flow statement.[2] A balance sheet is conveniently defined in Ford's Principles of Corporations Law[3] as " … a financial statement in which the assets of the enterprise and the equities in the enterprise, at a given date, are listed separately." Whilst a balance sheet will provide a picture of the financial statement of the company at a particular point in time, a profit and loss account has been defined as "a summary of operations which occur between the dates at which the periodic balance sheets are prepared."[4] The third component of the financial statements of a company are the statement of cash flow. It has been defined as a record that discloses " … the cash in‑flows and out‑flows of the entity for the financial period".[5]
[2]HAJ Ford, RP Austin, IM Ramsay, Ford's Principles of Corporations Law (9th ed) [10.150]
[3]ibid
[4]ibid
[5]ibid
Over and above these obligations of a company to keep financial records, s.296(1) of the Corporations Act requires that the financial report for a financial year must comply with the accounting standards.
In Van Reesema v Flavel (1992) 10 ACLC 291 the Full Court of the Supreme Court of South Australia was concerned with the previous provisions under the companies code with respect to the keeping of books or accounting records of a company. In that case the company had kept no books or accounting records, maintaining that such record keeping was unnecessary as the company had not entered into any transactions. At first instance and ultimately on appeal it was held that transactions had been entered into by the company. King CJ (at 294) observed that the obligation is not met simply by keeping the source materials from which a set of books may be written up. The learned Chief Justice cited with approval (as was agreed by Bollen and Prior JJ) (at 295) that the accounting records should be kept on a regular basis so as to disclose the financial position of a company at all times and at any time. In the present case that never occurred.
Defendants' Activities Post 1998 Amendments
As at 30 September 1998, ABC FM continued to promote the various trusts. On 8 June 2000, a meeting was convened between ABC FM, ASIC and the various permanent trustees. On the same day, 8 June 2000, Gillies and ABC FM wrote to ASIC advising that the various trusts were consolidated down to three remaining funds and that, as a consequence, only three funds were managed by ABC FM when the current management took control of ABC FM in 1993. On 27 June 2000, ASIC staff commenced surveillance of the premises of ABC FM and Wharton Partners. On 15 August 2000, a formal investigation of ABC FM and its related entities was commenced by ASIC. As a consequence, examinations were conducted of one Khor on 5, 26 and 28 September 2000, of Gillies on 13 and 26 September 2000, 29 September 2000 and of Wharton on 5 and 6 October 2000. The examinations were conducted pursuant to s.19 of the Australian Securities and Investments Commission Act 1989 and proved to be significant in the course of the trial of the present proceeding.
The evidence relied on by ASIC.
ASIC relied upon the evidence of Morris Haim Broder, a senior investigator at ASIC, Matthew John Burton Coghlan, an accountant seconded to ASIC from Deloitte Touche Tohmatsu, and Anita Simone Lalor, an officer of the National Australia Bank.
The evidence of ASIC was committed to affidavits at the direction of the Court. The affidavits and their respective exhibits were served upon the defendants well in advance of the commencement of the trial.
Broder was the primary investigator of ASIC in relation to this matter. He deposed in two substantial affidavits the outcome of his investigations. The Broder affidavits and exhibits ran to some five volumes in length. Similarly, Coghlan set out in an affidavit the outcome of his accounting analysis of the subject transactions. Lalor set out in affidavit and exhibited thereto the formal matters concerning the relevant banking transactions. I will deal with each affidavit in turn.
The Broder Evidence
The primary affidavits relied upon by ASIC were the affidavits of Broder in particular that sworn on 17 November 2000 ("the Broder affidavit"). Broder was the principal witness for ASIC. His two affidavits and related exhibits were tendered in evidence on behalf of ASIC. His primary affidavit, the Broder affidavit, was the subject of relatively few objections by the defendants. There were no objections to the second affidavit. Mr Broder is a highly qualified officer holding degrees in commerce and law and has over 20 years experience in investigations. He was duly authorised by ASIC to conduct the investigations into the defendants' activities.
The affidavits set out in considerable detail the history of the defendants, the transactions, trusts and schemes. The preceding description of events, activities and transactions is based upon the affidavits of Broder and the documents exhibited to those affidavits. Broder attended court and was called on behalf of ASIC. He confirmed the contents of his affidavits and, furthermore, through him ASIC tendered all the investigation files produced in a discrete form relating to each transaction. The investigation files as tendered ran to some seven boxes of documents. The Broder primary affidavit exhibited the transcripts of examinations conducted by ASIC of Wharton, Gillies and Khor under s.19 of the Australian Securities and Investments Commission Act. Broder was not cross-examined and his evidence was unchallenged (save for those parts of his affidavits where objections were upheld). I accept the matters deposed to by Mr Broder in his affidavits as finally tendered and the exhibits thereto. I accept, also, that the documents produced by Broder both as exhibits to his affidavits and as produced separately in court make out the allegations of ASIC against the defendants. The facts as already described set out the matters deposed to by Broder and as set out in the exhibits to his affidavits and the investigation files tendered by ASIC.
The Coghlan Evidence
Coghlan was an accountant who assisted ASIC in its investigations into the defendants. He analysed the accounting mechanism used by the defendants in the round robin transactions. As part of his task Coghlan analysed the actual banking records of ABC FM and its related entities. In so doing, Coghlan considered the documents produced to ASIC by the National Australia Bank. The latter documents were largely exhibited to the affidavit of Lalor. Essentially, Coghlan provided an accounting analysis of the round robin transactions.
The evidence of Coghlan was given on affidavit. The affidavit was subject to relatively few objections. He was not cross‑examined. There was no expert evidence called on behalf of the defendants to rebut the evidence of Coghlan.
Coghlan gave evidence, also, of accepted accounting and auditing practice in the control and management of unit trusts of the type operated by the ABC FM group. Coghlan said that generally accepted accounting and auditing practice would require certain matters to be attended to by the various trusts and entities making up the ABC group. They were the following:
(a)the provision of signed loan agreements between the entities within the ABC group or adequate accounting notation of such agreements;
(b)the provision of signed investment agreements between the entities within the ABC group or adequate accounting notations of such agreements;
(c)the provision of investigator certificates for the investments by entities within the ABC group;
(d)the provision of signed agreements for the relevant company to act as a treasury company or cash box for Allied Securities, ABC FM or other entities in the ABC group or adequate accounting notations of such agreements;
(e)the existence of written authorisations with respect to funds paid to and paid out by the company acting as a treasury company or cash box for Allied Securities, ABC FM or other entities in the ABC group;
(f)the existence of general ledgers for each unit trust fund;
(g)the existence of cash receipt journals for each unit trust fund;
(h)the existence of cash payment journals for each unit trust fund.
Coghlan gave evidence that where investment contributions or loan funds were paid to another party at the direction of ABC FM as fund manager, Allied Securities as lender or Charter and Tax or Tye Nominees or ABC IM as the trustees of the relevant funds he would expect to see appropriate documentation. He said that he would expect to see documentation directing payment to the nominated party and bank statements in the name of the third party showing receipt of the investment contribution or loan funds. Coghlan said that the same practice would apply to funds received by the company acting as treasurer or cash box. Coghlan said that he would have expected to find accounting treatment for the sums paid to and by the treasury company as funds were passed from Allied Securities to the treasury company by ABC FM. He also said that he would have expected to see accounts for the work performed by the fund managers, trustees and Wharton Partners with respect to the unit trust funds and Allied Securities transactions. Furthermore, Coghlan was of the view that he expected to find accounting documentation and calculations to establish the increase in value of the units in each of the trusts. Furthermore, it was his evidence that every transaction, both the receipt and the payment of loans or investments funds, should have been entered into a cash book setting out the date of the transaction, the entity from whom the money was received, the particular fund to which the transaction related and details or the nature of the transaction. Coghlan gave evidence that each deposit should have been recorded in the general ledger of the particular entity. It was his view that such ledgers should have been maintained in complete and accurate form and in accordance with the cash book and bank statement deposits. It was the view of Coghlan that such accounting treatment would have applied to the rollover transactions. He considered that there should have been back up or original documentation to support the bank deposits, cash book entries and other accounting entries.
It was the evidence of Coghlan that the documentation he described would be considered reasonable to provide a sufficient audit trail for the receipt and investment of loan funds and investment or payment of such funds in accordance with generally accepted accounting and auditing principles. He considered this was more so as the total transactions involved funds exceeding $100,000,000. Coghlan confirmed the evidence of Broder that none of these documents existed.
It had transpired, earlier, that in the course of the s.19 examinations Gillies and Wharton stated that further accounting documentation was not required because they had access to base or primary accounting material such as bank deposits and because they were unable to complete such documentation due to various investigations to which they were subject. Coghlan expressed the opinion that the base or primary accounting records available to the fund managers and trustees as considered by him were not sufficient to document the transactions. He observed that no accounts had been prepared for any of the mini or maxi trust funds. He observed, also, that there was no material that met the generally accepted accounting and auditing principles to establish the transactions said by Gillies and Wharton to have occurred in relation to the mini and maxi funds. Importantly, Coghlan expressed the view that as a consequence of the way in which the mini and maxi funds had been conducted the audit trail of those funds had been concealed.
Further arising from the s.19 examinations, Gillies and Wharton had said that the round robin mechanism had an "economic effect" in the sense that the mechanism created a chain of liabilities. Coghlan expressed the view that the explanation of Gillies and Wharton was not borne out by his examination of the actual records relating to the transactions. He re‑stated his view that the accounting and audit trail was not explicit and had been concealed. As a consequence, Coghlan expressed the opinion that the round robin mechanism did not create a chain of liabilities in the way suggested by Wharton and Gillies in their s.19 examinations. He gave examples that there were no journal entries in any way dealing with the receipt and transfer of funds by Tye Nominees. Similarly, he observed that there were no accounting records dealing with the receipt and transfer of funds by the trustee of the mini funds, Charter and Tax. In addition, Coghlan observed that in relation to Charter and Tax, there were no banking or other primary records in relation to the alleged transactions.
Ultimately, Coghlan expressed the opinion that the round robin mechanism had no underlying economic effect. He considered that purported payments had been cancelled by purported receipts and that on his analysis of the banking transactions neither Allied Securities nor members of the ABC group had sufficient funds to provide the loans made to investors and borrowers in the LEIG 1 to 3 or MEG 4 funds as at 30 June 1998.
Save for few objections, the affidavit of Coghlan was not challenged by the defendants. He was not cross‑examined. I accept the evidence of Coghlan as set out in his affidavit as finally tendered and the exhibits thereto.
The Lalor Evidence
Essentially, the evidence of Lalor in her affidavit was to produce the banking records of the National Australia Bank relating to the defendants and the relevant transactions and, in particular, as relied upon by ASIC to establish the round robin transactions. Ultimately, it was resolved between the parties that only a few cheques were tendered in evidence from the Lalor affidavit and the affidavit itself and the bulk of its exhibits were not relied upon. The evidence of Lalor was not challenged. She was not cross‑examined. I accept the evidence of Ms Lalor as tendered.
The Section 19 Examinations
ASIC tendered the transcripts of s.19 examinations.
Section 19 of the Australian Securities and Investments Commission Act (the "ASIC Act") 1989 empowers the Commission to serve notice on a person requiring that person to attend for examination on oath and to answer questions in relation to an investigation. Section 19(1) and (2) provides:
"19(1) This section applies where the Commission, on reasonable grounds, suspects or believes that a person can give information relevant to a matter that it is investigating, or is to investigate, under Division 1.
19(2) The Commission may, by written notice in the prescribed form given to the person, require the person:
(a)to give to the Commission all reasonable assistance in connection with the investigation; and
(b)to appear before a specified member or staff member for examination on oath and to answer questions."
The reference in Division 1 in sub-s.(2) of s.19 is a reference to Division 1 of Part 3 of the ASIC Act. Division 1 is concerned with investigations and contains sections empowering the Commission to conduct investigations as it considers expedient "for the due administration of a national scheme law" where it suspects a contravention of the law has occurred.[6]
[6]Section 13.
Section 24 of the ASIC Act permits a record to be taken of a section 19 examination.
Section 49 of the ASIC Act empowers the Commission to cause a prosecution of a person to be commenced if it appears to the Commission as the result of an investigation or from a record of an examination that a person may have committed an offence. At this point in time no prosecution has been commenced by the Commission against any of the defendants or related parties.
Section 50 of the ASIC Act empowers the Commission to commence civil proceedings where it appears to be in the "public interest" to do so as a result of an investigation or from a record of an examination conducted under Part 3 of the Act. The section provides:
"50. Where, as a result of an investigation or from a record of an examination (being an investigation or examination conducted under this Part or a corresponding law), it appears to the Commission to be in the public interest for a person to begin and carry on a proceeding for:
(a)the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct, committed in connection with a matter to which the investigation or examination related; or
(b)recovery of property of the person;
the Commission:
(c)if the person is a company – no cause; or
(d)otherwise – may, with the person's written consent, cause;
such a proceeding to be begun and carried on in the person's name."
Section 68 of the ASIC Act provides that it is not a reasonable excuse for a person to refuse or fail to give information, sign a record or produce a book for the purposes of Part 3 of the Act if so doing might tend to incriminate the person or make the person liable to a penalty. Sub-section 3 of s.68 provides that a statement or the fact that the person has signed the record is not admissible in evidence against the person in a criminal proceeding or a proceeding for the imposition of a penalty. Section 76(1) provides that a statement at examination is admissible in evidence against a person save for four grounds. First, because the statement is not admissible as a result of s.68(3) of the Act; secondly, the statement is not relevant and the person objects; thirdly, the statement is qualified or explained by some other statement made at examination which is not tendered in the proceeding and the person objects to the first mentioned statement being admitted; or, fourthly, the statement discloses matter in respect of which the person could claim legal professional privilege in the absence of s.76(1) of the Act and the person objects to the admission of the evidence. Section 76(1) of the ASIC Act provides:
"76(1) A statement that a person makes at an examination of the person is admissible in evidence against the person in a proceeding unless:
(a)because of sub-section 68(3), the statement is not admissible in evidence against the person in the proceeding;
(b)the statement is not relevant to the proceeding and the person objects to the admission of evidence of the statement;
(c)the statement is qualified or explained by some other statement made at the examination, evidence of the statement is not tendered in the proceeding and the person objects to the admission of evidence of the first‑mentioned statement; or
(d)the statement discloses matter in respect of which the person could claim legal professional privilege in the proceeding if this sub-section did not apply in relation to the statement, and the person objects to the admission of evidence of the statement."
Section 77 of the ASIC Act provides that where a person has made a statement that would be admissible but that person does not give evidence in the proceeding the statement may be admitted into evidence. In order to be admitted into evidence in the absence of the particular person as a witness a court may do so if it appears to the court that the absent witness is dead or unfit, is outside the jurisdiction and it is not reasonably practicable to secure attendance or all reasonable steps have been taken to find the absent witness but that person cannot be found. Section 77(b) of the Act provides that where direct evidence by a person of a matter would be admissible a statement made by that person at examination that tends to establish "that matter" is admissible as evidence of "that matter" if it does not so appear to the court or tribunal. The provision is difficult to comprehend. Section 77(b) appears to provide that an examination statement by a witness who does not appear is admissible in the proceeding as evidence if it does not appear to the court that the statement tends to establish the relevant matter.
Section 78 of the ASIC Act is concerned with the weight to be attached to evidence admitted under s.77. Section 78(2) provides that in determining how much weight, if any, is to be attached to a statement as evidence of a particular matter a court shall have regard to three factors:
"(a)how long after the matters to which it related the statement was made;
(b)any reason the person may have had for concealing or misrepresenting a material matter; and
(c)any other circumstances from which it is reasonable to draw an inference about how accurate the statement is."
Section 78(4) provides that evidence of a matter is not admissible if the person had been called as a witness and denied the matter in cross‑examination evidence of the matter would not have been admissible if adduced by the cross-examining party. Section 79(1) provides that a party may give not less than 14 days' notice before the first day of the hearing of a proceeding that the adducing party will apply to have specified statements made as examination admitted in evidence and for that purpose will apply to have evidence of those statements admitted in the proceeding. Section 79(7) provides that where a notice has been given in accordance with s.79 the other party is not entitled to object at the hearing of the proceeding to a statement specified in the notice being admitted in evidence unless that party has objected to the statement being so admitted or the court gives the other party leave to object to the statement being admitted.
The Broder affidavit deposed to the fact of the holding of the examinations of Wharton, Gillies and Khor. The affidavit deposed to the convening of the examination of Wharton under s.19 of the ASIC Act on 5 and 6 October 2000 and exhibited the entire transcript of the examination. The affidavit exhibited, also, the transcript of examination of Gillies conducted on 13, 26 and 29 September and 2 and 5 October 2000 and exhibited the entire transcript of the examination of Gillies. The Broder affidavit exhibited, further, the transcript of examination of Khor under s.19 of the ASIC Act on 5 October 2000 and exhibited the entire transcript of that examination.
The Broder affidavit was sworn and filed on 17 November 2000 and served on the defendants around that time. It is apparent from the Broder affidavit and the transcript of the s.19 examinations of Wharton, Gillies and one Khor that the transcript of those examinations provided the foundation of the case of ASIC and that the Commission intended to tender the Broder affidavit and the exhibits, including the transcripts of the examinations of Wharton, Gillies and Khor. Hence, the defendants had a period of about six months in which to object to the tendering in evidence by ASIC of the s.19 examination transcript of Wharton, Gillies and Khor. No objection was ever taken before or at trial to the tendering of the transcript. On that basis alone the transcripts were received into evidence. Even if that was not appropriate for the purposes of the relevant sections of the ASIC Act it is appropriate that the transcripts of Wharton, Gillies and Khor be admitted to evidence.
In the s.19 examination Wharton made a number of important admissions. He admitted that ABC FM had not lodged returns with ASIC for some time. He was uncertain whether accounts for each year for ABC IM had been prepared. He was similarly uncertain with respect to the accounts of Allied Securities. Wharton admitted during the s.19 examination that it was the business of ABC FM to manage a number of trusts for which it received management and advisory fees; he admitted, also, that Allied Securities was a lender of funds. Wharton admitted that he was aware that as of 1 July 1998 there were obligations consequential upon the changes made to managed investment schemes. With respect to the No Load Resource Trust and the No Load Fixed Interest Trust, during the s.19 examination Wharton admitted that none of Wharton Partners, ABC FM or any of its associated entities had any documents relating to those two trusts. He admitted that there were no loan agreements with respect to funds loaned to the No Load Resources Trust and the No Load Fixed Interest Trust. He admitted that no records were available with respect to deposits held by those trusts. During the s.19 examination Wharton was unable to explain why there were no records disclosing the investments relating to the two trusts and, further, he was uncertain as to whether there were any records containing the investment returns of those particular trusts. In addition, during the s.19 examination Wharton was uncertain as to whether investment registers were maintained for the MEG Trusts or the No Load Trusts. He admitted that there was no register of unit holders maintained for the ABC IG 1-9 trusts. He further admitted that there were no meetings of unit holders convened and that no financial statements, balance sheets or annual reports had been prepared. He admitted that no bank account had been opened for ABC IG, that it had not sought registration as a managed investment scheme and that no investment register or asset register was kept for that particular trust. In addition, Wharton was uncertain as to how various investors were allocated or divided between the various trust deeds.
During the s.19 examination Wharton acknowledged that there were no invoices with respect to the LEIT Trust. Furthermore, he admitted that proper books and records were never maintained with respect to that trust, nor was there an investment register. Furthermore, Wharton admitted that no financial accounts, annual reports, balance sheets, profit and loss statements had ever been prepared for the LEIT trusts.
In the section 19 examination of Gillies he made a number of significant admissions. He admitted that the round robin arrangement was created by Wharton as an employee of Wharton Partners. He was unable to say how the various trust funds paid dividends. He admitted that there were no investment registers for the various trusts. He admitted that with respect to the 22 trusts no‑one had applied for registration pursuant to the requirements of the then Corporations Law, that none of the funds had applied for transition into a managed investment scheme as provided by the amendments to the Law, and that none of the trusts had a prospectus or other disclosure document lodged with ASIC. Gillies admitted, also, that there were no accounts of any type or balance sheets prepared for the 22 trusts. He admitted, further, that none of the trusts had been audited on an annual basis. He admitted that there had not been any unit holders' meetings convened for the 22 trusts.
In summary, arising from the s.19 examinations of Gillies and Wharton it was revealed that of the 22 trusts no accounts, balance sheets or other accounting documentation had been prepared. Secondly, there was no audit of any of the trusts on an annual basis or at all, and no unit holders meetings had been held. Furthermore, the examinations revealed that commissions had been paid to induce persons to invest or take loans. In addition, Gillies and Wharton were unable to inform ASIC during the examinations of the net assets of any of the trusts as at October 2000. There were no investment registers kept for any of the trusts.
The Defendants' Evidence
Following an order by the court[7] Wharton was not required to file a witness statement in advance of the commencement of the trial. He was called for the defendants. He gave evidence‑in‑chief with respect to the corporate structure and the related trust structure of the defendants on a general basis. In general terms Wharton did not demur from the description of the round robin of the transaction described in the evidence of Broder and as set out in these reasons earlier. In cross‑examination Wharton made a number of important admissions. He admitted that balance sheets and profit and loss statements had not been prepared for Allied Securities, ABC IM, Tye Nominees or Lingus. He was uncertain as to whether balance sheets and profit and loss statements had been kept for ABC FM. Wharton said in cross‑examination that he was aware that Lingus was the trustee of a number of trusts but he was unable to identify those trusts. He was also unable to identify the trusts of which ABC FM was trustee. I considered that generally the evidence of Wharton was very vague about the corporate structure and commensurate trustee structure. I found Wharton to be an unreliable and evasive witness. Whilst the evidence given by Wharton essentially admitted the round robin transactions engaged in by the defendants, when asked for the finer details of those transactions Wharton claimed privilege. In the course of the initial cross‑examination of Wharton he was requested to produce documents relating to the various entities. After an overnight adjournment he produced some documents of ABC FM consisting of a "set of financial statements" for the years 1995, 1996, 1997 and 1998. He produced, also, limited financial documents relating to Tye Nominees and Allied Securities. All these documents were incomplete and unsatisfactory in terms of the record keeping requirements of the Act. Notwithstanding the production of these documents it was apparent that the general financial record keeping with respect to the defendants and the related trusts was most unsatisfactory. There were persistent breaches throughout of the financial record keeping requirements of the Corporations Act previously adverted to.
[7]See ASIC v ABC Fund Managers Ltd [2001] VSC 92
In his evidence during the trial Wharton did not demur from the matters admitted in his s.19 examination.
Gillies did not give evidence at trial. Similar to Wharton, as a result of an earlier order of the court, Gillies was not required to provide a witness statement in advance of trial.[8]
[8]See [2001] VSC 92
Khor was, also, the subject of a s.19 examination. The transcript of his examination was tendered.
The Basic Round Robin Transaction
The documents relating to the various trusts and investments are complex and voluminous. The simplest way to comprehend the essential modus operandi of the defendants is to take a modest investment example and trace it through the subject financial year.
A regular participant in the transaction was Khor, a suburban accountant in Footscray who had a client base primarily Vietnamese, and more often than not recent immigrants to Australia.
A typical example was an investment arranged by Khor for a client, one Duc Thinh Nguyen, for immediate purposes referred to as "the investor". He was a client of Khor who sought taxation advice. In his s.19 examination, Khor admitted that he arranged investment in the various trusts associated with the defendants. Indeed, the example of the investor, Duc Thinh Nguyen, was the subject of specific consideration during the s.19 examination of Khor. A schedule of borrowers produced by Broder included the investor. The schedule disclosed that the investor held 247,000 units in the IGA-1 Trust, one of the mini funds, that the sum of $247,000 was "borrowed", that an amount of interest of $33,700 was borrowed, that there was pre‑paid interest of $39,258 and that a loan fee of $500 was charged. The schedule disclosed that the loan balance was $286,800 and that the loan was rolled over in each of the years 1997, 1998 and 1999. It disclosed, further, that in 1997 the relevant trust distributed $39,918 but that interest was charged in the sum of $39,803 leaving a balance or surplus of $115. Thus, the relevant trust distribution exceeded the interest payment. Hence, the 1997 loan balance was reduced from $280,700 less $115 to a loan balance in 1998 of $280,585. The loan was continuously rolled over in 1998 and 1999 with similar outcomes.
I turn then to consider the loan documents relating to the investor. The loan documents commence with a "master application". The investor, Duc Thinh Nguyen, was the subject of one such application. It recited that the master application was addressed to Wharton Partners Pty Ltd and was "standard documentation ABC Income and Growth Trust". The application form recited that the manager was ABC FM and that the lender was Allied Securities of 537 Malvern Road, Toorak. The form recited the number of units, namely, 247,000, the principle of the loan being $247,000, the interest on the loan of $33,700, the pre‑paid interest in the sum of $39,298 and a loan application fee and legal fees each of $500. The master application form recorded that "client funds to be contributed" were the sum of $6,598. It transpired that in fact that was the amount paid by the investor. The latter amount was calculated from taking the total of interest, loan application and legal fees totalling $40,298 and subtracting the pre‑paid interest loan of $33,700 leaving the amount to be contributed by the client, namely, the sum of $6,598. The master application form for the investor was dated 24 June 1996.
The next step in the documents was a letter of the same date, 24 June 1996 from Wharton Partners Pty Ltd addressed to Khor in relation to the investor, Nguyen. The letter was signed by Wharton. It referred to a number of enclosed documents for execution being an application for units to ABC IM, a direction to trustee to register units in the name of Allied Securities, the lender, separate loan applications to Allied Securities, a short term facility referred to as an "IOU" and deduction authority, an authority for payment to Allied Securities to pay loan proceeds upon acceptance to ABC Funds, an authority for payment to ABC IM and an agreement being a security agreement giving title to Allied Securities over the units in the trust as security for the advance. The letter from Wharton to Khor in relation to the investor advised that once the cheque was received from the client Wharton Partners Pty Ltd would co‑ordinate with Allied Securities the advances to the investor to in turn be paid to "ABC No. 2 Clearing Account".
The next step in the transaction was a document entitled "Application for Units" in relation to the ABC Income and Growth Trust addressed to ABC IM. It was signed and dated 25 June 1996 (whilst the master application was dated 24 June 1996).
The next step in the documents was a loan application by the investor for the sum of $247,000. The loan application was dated 25 June 1996 and addressed to Allied Securities. Clause 9 of the loan application provided that the borrower, namely, the investor Nguyen would, if requested by the lender, namely, Allied Securities, transfer to the latter the investments, namely, the units. In effect, the loan proposed by the loan application was a non‑recourse loan.
The next step in the transaction was another loan application, this time for the sum of $33,700 and signed and dated 25 June 1996. It made provision for pre‑paid interest on pre‑paid interest. The next step was a promissory note given by the investor to Allied Securities. It recited that in consideration of Allied Securities advancing to the investor the sum of $6,100 the investor promised to repay the sum by 31 August 1996. The promissory note was signed and dated 25 June 1996. The significance of the promissory note becomes apparent in the next step in the documentary chain. The next step was an "authority and direction to pay moneys owing from income tax refund cheque". It was signed and dated 25 June 1996 and recited that the investor, Nguyen, authorised Wharton Partners Pty Ltd to deposit his income tax refund cheque into ABC Fund Managers Limited Clearing Account No. 2 and to apply the amount of $6,100 to repay moneys owing to Allied Securities. It further authorised that the balance of the income tax refund cheque, if any, was to be paid to the investor.
The chain of documents reveals that the basic transaction engaged in by the defendants with the assistance of accountants such as Khor was that a large principal sum was borrowed, the first year's interest was borrowed, an income tax deduction was created, the tax payer being a PAYE tax payer submitted a taxation return, the Taxation Office received too much by way of taxation deductions because the PAYE tax payer was entitled to a tax deduction as a result of the transaction, as a consequence moneys were owing by the Taxation Office to the tax payer and a refund was triggered, that refund in turn was directed to Allied Securities. In effect, the whole transaction was effectively funded by the Australian Taxation Office. The irresistible conclusion is reached that there was no income producing activity whatsoever.
Misconduct in Management of Companies
In order to determine whether there was misconduct on the part of the companies it is necessary to consider the obligations, if any, that lay with those companies.
As described already, s.286 of the Corporations Act provides that every company, including a trustee company, is obliged to maintain written financial records that record and explain transactions, financial position and performance and such that enable "true and fair" financial statements to be prepared and audited. As observed earlier, s.9 of the Act defines "Financial records" as including working papers and other documents needed to explain the methods and adjustments relating to financial statements. The courts have recognised that the requirements of s.286 constitute a basic accounting obligation. King CJ in Van Reesema v Flavel supra, observed (at 295):
"Transactions could only be explained by appropriate journal entries with clearly explanatory narratives. The financial position of the company could only be recorded and explained by the keeping of a ledger, organising entries regarding these transactions into proper accounts. These were clearly minimum requirements also to enable a profit and loss account and balance sheet to be prepared. The fact that the source materials were retained and that accounts could be written upon from those source materials does not discharge the company's obligation."
Furthermore, the courts have held that this basic accounting obligation is one that lies also upon a trustee: see ASC v A.S. Nominees Limited (1995) 62 FCR 504, 515. Wharton gave evidence for the defendants. He was cross‑examined on behalf of ASIC. In the course of cross‑examination Wharton admitted that a number of the companies did not keep or prepare records for certain periods. In relation to ABC FM, Wharton admitted that neither general ledgers nor cash books were kept for the past five years and no accounts were produced for the years 2000 and 2001. With respect to Allied Securities, Wharton admitted that no balance sheets or profit and loss statements had been kept for the past five years. It was acknowledged by Wharton that some journals were produced for the years ending 1995-1999 but I observe that no accounts were produced by the defendants for the years 2000 and 2001. Furthermore, Allied Securities has not filed a tax return since 1998. So much was admitted by Wharton. Further, he had no idea of the approximate amounts of moneys paid or received by Allied Securities in the past five years. Its loan agreements for over $100,000,000 with the two "No Load" Trusts were said to be "oral agreements". It is an extraordinary state of affairs to suggest that loan agreements for such an enormous sum of over $100,000,000 could be transacted in the course of the corporate context of these transactions without any recording or reference to such "oral agreements".
In relation to ABC IM, Wharton conceded that no balance sheets, profit and loss statements, general ledgers, journals or cash books were retained for the past five years. I observe that no tax returns were produced for this company. In relation to Tye Nominees, Wharton again conceded that no balance sheets or profit and loss statements had been kept for the last five years. However, some ledgers were produced for the years ending 30 June 1995‑1999 but no accounts were produced for the years 2000 and 2001. Further, I observe that Tye Nominees has not filed a tax return since 1998. With respect to Lingus, Wharton conceded that no balance sheets, profit and loss statements, general ledgers, journals or cash books had been kept for the past five years and, indeed, none were produced.
It is astounding that these companies, ABC FM, Allied Securities, ABC IM, Tye Nominees and Lingus acted as trustees for the various trusts engaged in substantial transactions and yet no or virtually no accounting records were kept pursuant to the obligations of those companies under s.286 of the Corporations Act. More significantly, Wharton was unable to inform the Court of the net assets of any of the trusts. Further, no accounts of the trusts were produced.
Significantly, none of the matters described by Coghlan as being appropriate by way of record keeping and creating an audit trail were done.
Misconduct in the Management of the 22 Trusts
The evidence of ASIC in relation to the trusts was provided in the affidavits of Broder. Again, I observe that the evidence of Broder was not challenged by the defendants.
The evidence in relation to the management of the trusts reveals substantial and serious misconduct and impropriety by the defendant companies. The mismanagement was made out by the evidence contained in the affidavit of Broder. Despite the requirements of the individual trustees and s.286 of the Corporations Law the defendants have not prepared any accounts, final accounts, formal accounts or balance sheets for the trusts or their affairs generally. This deficiency is clearly in breach of the principles explained by the Federal Court in ASC v A.S. Nominees Pty Ltd, supra at 514. Furthermore, none of the trusts have been audited on an annual basis despite the requirements of the individual trust deeds. The unit holders' registers for the trusts were only created shortly prior to October 2000. Again, despite the requirements of the trust deeds there are no investment registers for any of the trusts. The trusts held no identifiable assets and earned no identifiable income from which "distributions" could be made at the discretion of the trustees pursuant to the relevant trust deeds. It is apparent from the unchallenged evidence of Broder that the purchase of units in the 22 trusts by the borrowers was made using moneys allegedly borrowed from Allied Securities. These funds were allegedly paid to the trustees and then immediately allegedly paid to Allied Securities on the same day via a round robin of cheques. As a consequence, these investments were illusory transactions.
Furthermore, loans or investments were purportedly made between the trustees of the 22 trusts and also between the trustees to Allied Securities. . The loans to Allied Securities by the "No Load Resources Trust" and the "No Load Fixed Interest Trust" totalled over $100,000,000. Each loan was apparently made pursuant to an oral agreement. Notwithstanding the evidence of Broder in relation to the apparent oral agreements no loan documents were produced for any of these loans. No re‑payments of principal or interest had been made to the trusts by Allied Securities. Wharton in his evidence claimed that the "No Load Resources Trust" and the "No Load Fixed Interest Trust" were creditors of Allied Securities. However, he was unable to say when the trusts would ultimately be paid or, indeed, whether Allied Securities could pay the debt, the total interest accrued on the debt or whether Allied Securities was trading whilst insolvent. Furthermore, there was an unexplained inconsistency between the evidence that the loans were made to Allied Securities by the two "No Load" trusts and a statement by Gillies in his s.19 examination and in correspondence with ASIC that the "No Load Resources Trust" was consolidated into one of three trusts, that all units in the particular trusts were redeemed and that the trust was closed. Wharton said that the correspondence from Gillies to ASIC was written in response to a request by ASIC to ABC FM for information about what had transpired with respect to the "No Load" trusts. Ultimately, after caution from the Court, Wharton refused to answer questions regarding the correspondence or explain it on the grounds that it would incriminate him. In addition, the nature of the transactions between Allied Securities and the various trusts in 1998 were concealed from immediate discovery by the lack of documentary records summarising the transactions. So much was the evidence of Coughlan on behalf of ASIC. Again the evidence was not challenged or the subject of any rebuttal.
Ultimately, the position of the defendants was to admit that the units in the 22 trusts were offered and issued to investors contrary to the statutory provisions regulating "prescribed interests".
The Misleading of Investors in Relation to the 22 Trusts
ASIC produced various information documents circulated by ABC FM through Wharton. It appeared that the documents were prepared by Wharton so as to provide information in relation to the "Leveraged Equity Investment Program" of ABC FM. Essentially its purpose was to promote the products of ABC FM. The documents contained certain representations. First, that the ABC funds were established in 1985 as a series of "public investment trusts" with "various investment objectives" and "wide ranging authorised investments". Secondly, that the investment strategy of the ABC funds relied upon "identifying well managed businesses". Thirdly, that the ABC funds had an investment programme. Fourthly, that the "Leveraged Equity Investment Program", namely, the maxi trust of MEG 1‑MEG 4 had an aim "to make investments which provide above average earnings". Fifthly, that the investments concentrated on "interest income and also the potential for capital growth", and, sixthly, that the trusts invested in "other unit trusts and securities like convertible notes, preference shares and high yielding shares" to achieve this aim. Similar information documents were produced in respect of each of the 22 funds. It is apparent that the round robin transaction in which each of the 22 trust funds was engaged constituted nothing like the investment programme described in the document prepared by Wharton on behalf of ABC FM.
Furthermore, Wharton promoted the trusts on the basis that they provided tax deductions. He wrote a number of letters assuring investors of the tax deductability of the interest on loans from Allied Securities to invest in the funds. Samples of the correspondence were tendered. They were sent always at the end of the financial year, namely, 27 June 1996, 26 June 1996 and 24 June 1997 in each case.
It was the case of ASIC that Khor dealt regularly with Wharton and put many of his clients into the various trusts through Wharton. In his s.19 examination Khor said that he was told that the maxi funds, that is MEG 1 and MEG 2, would be "a long term investment" with "upside and no downside". He said that as a result of the representations to him he believed the interest expense was "tax deductable". Furthermore, in his s.19 examination Khor said that arising from discussions with Wharton he believed that his moneys were to earn a profit. He believed, also, that he would achieve growth or a benefit in the future from the investment. As a consequence, each year on rollover Khor advised that the value in the units had increased. Khor informed investors in the trust on rollover that the value of the units had increased. In 1996, representations were made about ABC funds similar to those made in 1995 regarding the MEG funds. So much was the subject of evidence of Broder. Again the evidence was unchallenged.
The evidence of Broder and Coughlan and consideration of the documents relating to the transactions concerning the 22 trusts as contained in the exhibits to the Broder affidavit and the investigation files of ASIC reveal in my view that the conduct of ABC FM, Allied Securities and the trustees was misleading and deceptive. It is abundantly clear that the trusts never operated as trusts. There was no economic activity whatsoever. The trust did not purchase assets of any kind. Rather, they were vehicles to a series of payments by Allied Securities to the trusts which were returned to Allied Securities on the same day late in June each year. There were no investment registers or books and records for the trusts detailing any investment of the kind set out in the promotional material.
The directors claimed that the trusts were established for taxation purposes, principally, to provide vehicles for tax deductions. The trusts were promoted by Wharton on behalf of the defendants as having "tax advantages" or "attractions". So much was apparent from the s.19 evidence of Khor. The trusts and associated loans were clearly designed to allow investors to deduct the amount of pre‑paid interest from their assessable income. These matters were contained in the evidence of Broder. Again, his evidence was unchallenged. However, the trust did not invest in any profit making ventures. Indeed, there were no investments. Gillies was unable to say in his s.19 examination how any of the funds were able to pay dividends as a result of the round robin transactions. It follows that the interest "expense" could not on any view be regarded as a loss or outgoing incurred for the purpose of gaining or producing assessable income.
In addition, the majority of interest pre‑paid by an investor to Allied Securities was borrowed from Allied Securities. A small cash amount was paid directly by the investor. However, the investor would often pay such cash amount from his or her income tax refund obtained as a result of investment in the scheme. These matters were apparent from the s.19 evidence of Khor. The round robin of payments was made by a series of cheques passing between Allied Securities to the trustee of the particular trust in which the investor produced units. The trustee would thereafter use the funds to invest in other trusts. Finally, an investment was allegedly made in the "No Load Resources Trust" and the "No Load Fixed Interest Trust". The trusts would immediately lend the funds back to Allied Securities to complete the circle of the transaction, all on the same day. Hence, the description "daylight credit facility". Gillies described the purpose of the round robin in his s.19 examination as being to create accounting entries to record liabilities and to create an interest expense that the investor could use for taxation purposes. Wharton, in the course of the s.19 examination, said that much of the money which had been loaned by the "No Load Trust" back to Allied Securities was not the subject of any loan documentation.
Arising from these events and transactions ASIC seeks the winding up of the First and Third to Sixth Defendants under sections 461 and 464 of the Corporations Act.
Inferences to be Drawn from Refusal of Wharton to Answer Questions
A number of questions were put to Mr Wharton. After due warning he declined to answer those questions on the grounds that the answer may, or would, incriminate him. However, Wharton did not adduce evidence on central issues on which he could be expected to give evidence. Clearly, as a fundamental legal principle, no adverse inference may be drawn from the refusal of a witness to answer a question on the ground that the answer may, or would, tend to incriminate the witness. Nevertheless, there may be circumstances where the failure to adduce evidence on central issues on which the witness may be expected to give evidence will allow a court to be satisfied that inference adverse to the case of that party may be properly drawn notwithstanding that the ground for refusal to answer or provide the evidence may be based in the privilege against self-incrimination: see Pappas and Anor v New World Oil Developments Pty Ltd and Ors (1993) 43 FCR 594. The general topic was considered by Young J of the New South Wales Supreme Court in "Taking the Fifth" (1991) 65 ALJ 412, 415. In C v T and Ors (1995) 58 FCR 1 Burchett J cited the judgment of Parke B in Boyle v Wiseman (1855) 10 Ex 647, 651; 156 ER 598, 600 who said:
"The protection given by the statute would be of no avail, if the refusal to answer was construed into evidence of guilt."
In Dolan v Australian and Overseas Telecommunications Corporation (1993) 42 FCR 206 Spender J after citing Boyle v Wiseman observed (at 215) that:
" … Since the privilege is able to be relied on if the answer might tend to incriminate, it is impermissible to draw any adverse inference, because the drawing of an adverse inference necessarily assumes that the answer would incriminate."
The views of Spender J in Dolan were followed by Burchett J in C v T (at 16-17). On behalf of ASIC the position was urged that because Wharton had asserted a claim of privilege against self-incrimination I should draw an adverse inference against his evidence. I consider that such approach would entirely defeat the purpose of the statute and its protection would be rendered useless if the refusal to answer was construed into evidence of guilt. I decline to draw any such inference against the invoking of the privilege of self-incrimination by Wharton.
I am bound by the statement of principle of the High Court in Reid v Howard and Ors (1995) 184 CLR 1 where Toohey, Gaudron, McHugh and Gummow JJ held (at 11) that a party is entitled to make and maintain a claim of privilege that is a "fundamental … bulwark of liberty" being recognised as a "basic and substantive common law right". In Reid v Howard the principle was described (at 12) as one that operates " … so that a person cannot be compelled 'to answer any question, or to produce any document or thing, if to do so 'may tend to bring him into the peril and possibility of being convicted as a criminal'." I observe in the present case that the Commission has not given an indication or proffered an undertaking that the disclosure of any incriminating information by Wharton would not be made use of in any subsequent prosecution: see Reid v Howard and Ors, supra, 15; also Istel Limited v Tully (1993) AC 45, 53, 55.
Inferences to be Drawn From Failure to Call a Witness
Mr Peters for ASIC urged that I draw an adverse inference from the fact that the defendants did not call Gillies, he being a material witness on many relevant issues. It followed that the same approach was urged with respect to Gianchino and other persons associated with the defendants. Mr Peters relied upon the principles in Jones v Dunkel (1959) 101 CLR 298. For the defendants it was urged that no inference adverse or otherwise should be drawn from the non‑calling of Gillies and others because evidence was given by Wharton, a principal who was able to give evidence on relevant matters on behalf of the defendants. This issue was considered by the Full Court of this Court in Earle v Castlemaine District Community Hospital (1974) VR 722. It was also urged that Gillies was not a party to the proceeding. Nevertheless, I observe that at all times he has been a director or office holder with respect to the defendants. In my view, applying the approach of the Full Court in Earle, it was open to the defendants to call Gillies to give evidence. The fact that Wharton gave evidence is not to the point. I am entitled, therefore, to draw an adverse inference and at least conclude that the evidence of ASIC against the defendants would not have been rebutted by Gillies. I decline to daw an adverse inference with respect to other potential witnesses.
In any event, for reasons already discussed, the s.19 examination of Gillies stands as evidence in the proceeding. It is unchallenged and unrebutted. I am entitled on any view, therefore, to accept the evidence of Gillies as set out in the transcript of the s.19 examination.
I was not provided with any explanation for the failure to call Gillies by the defendants. A similar circumstance arose in ASC v A.S. Nominees, supra, where Finn J (at 515) drew an adverse inference from the failure to call a relevant witness in circumstances analogous to the present matter.
Legal Principles with Respect to Winding Up on the Just and Equitable Ground
In Australian Securities Commission v A.S. Nominees Limited & Ors (1995) 62 FCR 504 the court considered applications by the Australian Securities Commission for the winding up of the respondents, two of which were trustee companies on the just and equitable ground under s.461(k) of the Corporations Law. The respondents were members of a group of companies, the A.S. Group, made up of ten companies bound together by way of interlocking shareholdings. The Commission gave evidence of a series of transactions over a number of years. The Commission urged a winding up order on the public interest ground essentially to ensure investor protection and to maintain confidence in the proper management of superannuation trusts and, also, to enforce compliance with the Corporations Law. One of the factors to be considered by the court was the conduct by the directors of the respondent companies with respect to their responsibilities as directors and the trusteeship obligations of the particular companies and the alleged repeated breaches of the Corporations Law.
In the course of his judgment, Finn J in ASC v A.S. Nominees Limited devoted specific attention to management practices. The learned judge observed that joint board meetings of companies were held when trust business was being conducted. He observed, also, (at 514) that notwithstanding the requirements of the Corporations Law, namely, ss.258 and 259 with respect to the keeping of minutes of board meetings and accounting records, many of the subject transactions involved the absence of any or any appropriate documentary records of meetings at which decisions were made or of the decisions themselves.
In A.S. Nominees the application was somewhat similar to that before the court on this occasion. The application was not founded on insolvency. Essentially the application was founded on the way in which the respondent companies had conducted their trust business from which they did not wish to withdraw. Finn J observed (at 526) that in these types of cases an application by the Commission based on the just and equitable ground is appropriate to these types of circumstances. I, with respect, agree.
There are general fundamental principles applied by the courts with respect to a winding up application on the just and equitable ground. First, there needs to be a lack of confidence in the conduct and management of the affairs of the company: see Loch v John Blackwood Limited (1924) AC 783, 788. Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company.
An analysis of the facts in the present matter reveals that there have been repeated breaches of ss.258 and 289 of the Corporations Law with respect to the keeping of records and accounts. Similar circumstances were found to have occurred in A.S. Nominees (at 529).
In A.S. Nominees Finn J considered whether or not the interests of the public is a concept encompassed in the just and equitable ground provided under s.461(k) of the Corporations Law: cf. s.461(h). The learned judge observed (at 530):
"As a matter of obligation in our system of government the ASC, like all other agencies of government, is required to act in the public interest within its sphere of responsibility … For this reason, when bringing an application under the Corporations Law, s.464 to wind up a company, the ASC cannot be seen quite in the same light as an ordinary creditor or contributory when so applying. Its powers and purposes are not those of the private applicant. And it does not, or at least should not, have a private self interest to pursue."
In Re Producer's Real Estate & Finance Co Limited (1936) VLR 235, 246 a company was wound up on the just and equitable ground because:
"It cannot be carried on consistently with candid and straightforward dealings with the public, from whom further capital must be obtained if its existence is to be prolonged".
More recently, the English Court of Appeal in Re Walter L. Jacob & Co Limited (1988) 5 BCC 244 considered the concept of the public interest and its impact on the just and equitable ground. The Court of Appeal said (at 251):
"Where the reasons put forward by the petitioner are founded on considerations of public interest, the court, if it is to discharge its obligation to carry out the balancing exercise, must itself evaluate those reasons to the extent necessary for it to form a view on whether they do afford sufficient reason for making up a winding-up order in the particular case." See also ASC v A.S. Nominees Limited, supra, at 531.
Of course, whilst insolvency is not a pre-condition to the making of an order for the winding up of a company, to make such an order with respect to a prosperous or at least solvent company is an extreme step requiring a strong case. I am satisfied that such a case is made out in the present circumstances. It was entirely appropriate for the Commission acting in the public interest to bring the application. As was observed by Finn J in A.S. Nominees (at 532) there is a statutory object governing the Commission requiring it to secure compliance with the Corporations Law. In this matter I observe that there has been regular and repeated breaches particularly of ss.232 and 258 of the Corporations Act. Equally, however, as occurred in A.S. Nominees the breaches in turn demonstrate a larger public interest concern, namely, investor protection. Whilst in A.S. Nominees the investors warranty and protection were the subject of superannuation it is not apparent that such an investment has occurred in the present matter. Nevertheless, the relevant companies involve trusts with commensurate duties at law, in particular fiduciary duties together with obligations under the Corporations Act. The latter obligations have not been complied with.
Similar to the circumstances as found by Finn J in A.S. Nominees I am satisfied that in the present matter there has been misconduct and mismanagement of the trust business to such a degree that it is inappropriate for the defendant companies to be permitted to continue to solicit, manage and handle investors' money. In some respects, it might be said that the circumstances of the present matter are worse than those as found by the learned judge in A.S. Nominees in that the round robin transaction in the present proceeding constituted no more than a sham to elicit a taxation advantage.
The defendant urged that rather than winding up those companies and appointing a liquidator, I should accept undertakings from them as to their future conduct. In A.S. Nominees Finn J rejected a similar proposal observing (at 533):
"The lack of confidence there must be in the management of these companies …, the degree to which the respondents have transgressed, and the need for effective external administration, provide reason enough for my refusal to entertain it."
Analysis of the just and equitable ground for winding up was provided in an article by McPherson JA of the Queensland Court of Appeal (when at the Bar) in "Winding up on the just and equitable grounds" (1964) 27 MLR 282. There McPherson JA considered the grounds of impossibility of achievement of objects and impossibility of carrying out the business of the company. The learned judge considered the third basis, namely, "Where there has been serious fraud, misconduct or oppression in regard to the affairs of the company".
In Loch v John Blackwood Limited, supra, at 788 Lord Shaw delivering the speech of the Privy Council said:
"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 statutes just and equitable that the company be wound up." See also International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No. 2) (1994) 13 ACSR 368, 371.
More recently, in ASIC v Chase Capital Management Pty Ltd (2001) 19 ACLC 476 Owen J was directly concerned with an application by the Commission to wind up managed investment schemes and the operating companies. One of the primary issues to be determined by the court was whether the relevant investments arrangements constituted "managed investment schemes" under the Corporations Law and whether the companies had operated or promoted the schemes in contravention of the Law. In that case the relevant respondent companies were registered in the Turks and Caicos Islands and neither was registered as a foreign company in Australia. One of those respondent companies was the trustee of a unit trust. The various respondents had a connection with a series of syndicated investments and moneys were obtained from various investors, pooled together and invested in turn in securities. The securities were not registered as managed investment schemes. The respondents contended that the schemes were not managed investment schemes for the purposes of the Corporations Law and, therefore, did not require registration. After considering the terms of ss.9 and 601ED of the Corporations Law and the relevant authorities,[9] Owen J held that there was consideration for the acquisition of rights or benefits in the scheme and the generation and earning of profits from the investment and the distribution of those profits to the investor and a delegation of management of the investment to the respondent company and, accordingly, the particular schemes were managed investment schemes. Having so found, Owen J in Chase Capital Management turned to consider whether the schemes and the company should be wound up. After considering the relevant authorities[10] Owen J in Chase Capital Management (at 488) concluded that there was a serious issue as to the conduct of the investments such as to warrant intervention, in particular as to whether information given to members of the investment was misleading and deceptive. The learned judge considered, also, that in light of continuing breaches of s.601ED of the Law, namely, the continued operation of an unregistered scheme, it was appropriate that the relevant companies be wound up and a liquidator be appointed. Further, Owen J held (at 491) that having decided that the investment scheme should be wound up the case for the company to be wound up became "compelling". The learned judge observed (at 491):
"93.Having decided that the schemes should be wound up, the case for the companies to be placed in liquidation becomes compelling. It would inject an air of unreality if the schemes were wound up without the corporate entities that had been part of the operation not also being made the subject of a formal administration. The great risk of taking that course would be to leave the administration open to sterile arguments about powers. That would increase the overall costs of the finalisation and would not be in the interests of the creditors."
[9]Australian Softwood Forests Pty Ltd v Attorney-General for New South Wales, ex rel Corporate Affairs Commission (1981) 148 CLR 121, 129.
[10]Australian Securities Commission v A.S. Nominees Limited, supra; Australian Securities and Investments Commission v Austimber Pty Ltd (1999) 17 ACLC 893; Re Walter L. Jacob Limited, supra.
Mr Crutchfield for the defendants urged that the circumstances in Chase could be distinguished from the present circumstances in that the companies in Chase had no assets other than those arising by reason of their involvement in the schemes. Mr Crutchfield drew my attention to observations of Owen J (at 491[91]) where the learned judge observed that there was no evidence that the relevant companies had businesses or any reason for existence outside the operation of the scheme. In the present matter it was urged that the defendants or some of them had other businesses and reasons for existence outside the operation of the subject scheme. Hence it was said I should not follow Chase on this ground at least. I cannot accept this submission. Having found that the public interest is invoked in the circumstances of this matter and given the serious ongoing breaches, indeed flagrant breaches of the requirements of the Corporations Act with respect to record and account keeping, I consider it entirely inappropriate that the defendants be allowed to continue. In the exercise of the discretion it would in my view be entirely contrary to the public interest to allow anything else.
Mr Peters on behalf of ASIC described the way in which the investment schemes were conducted as a "sham". Mr Crutchfield for the defendants urged that I resist describing the way in which the schemes were conducted as a "sham" because of the taint that would attach to such a finding and, in particular, the impact on any criminal proceedings that may subsequently be initiated by ASIC against any of the defendants or their directors.
In ASIC v Austral Timber Pty Ltd & Anor (1999) 17 ACLC 1679, Byrne J of this court considered an application by the Commission for the winding up of a company on the just and equitable ground where the company was involved in a taxation minimisation scheme. ASIC described the relevant scheme as a fraud on the Australian Taxation Office and, furthermore, urged that the scheme was a sham since there was no effective money available. Ultimately Byrne J (at 1,686[27]) concluded that the relevant scheme was part of a sham entered into to defraud the Australian Taxation Office. In my view if the circumstances of a particular matter are sufficiently serious such as defrauding the Australian Taxation Office as occurred in Austral Timber it is entirely appropriate for the court to conclude that a transaction or arrangement is a "sham". I am satisfied for the present purposes that the arrangement entered into by the defendants with respect to the 22 schemes was similarly a "sham" in that it was entered into in order to defraud the Australian Taxation Office. It is entirely appropriate, therefore, to describe the whole transaction as a sham. Indeed, the nature of "sham" transactions have been considered by the courts on a number of occasions and the courts have not hesitated to find that the particular arrangement is a "sham" where it lies at the heart of the particular case: see Sharrment Pty Ltd and Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449, 453; Scott v Commissioner of Taxation (No. 2) (1966) 40 ALJR 265, 279. Indeed, in Sharrment Pty Ltd the Full Court of the Federal Court considered an elaborate series of transactions that the official trustee in bankruptcy alleged constituted a "sham" for the purposes of avoiding the consequences of bankruptcy. Lockhart J held that an inference of a sham could not be drawn on the facts. Beaumont J for different reasons related to the facts held that the transactions were not a sham. Foster J, essentially adopting the judgments of Lockhart and Beaumont JJ held that the transactions could not be properly characterised as a sham. Usefully, Lockhart J after considering the authorities (at 453-454) defined a sham in the following terms:
"A 'sham' is therefore, for the purposes of Australian law something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive."
In Sharrment the transactions involved a round robin of cheques. Lockhart J held (at 454) that the fact of a round robin did not necessarily establish that the transaction was a sham, even when no party had funds to meet the cheques. There were other factors, also. In Miles v Bull (1969) 1 QB 258 Megarry J (at 264) said:
"A transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it. …
mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth."
In Sharrment Beaumont J (at 468) considered that there was not a sham for a number of reasons, including that there was no suggestion of any express arrangement that the transactions were "not to take effect according to their terms". The learned judge found, also, that there was no basis "for inferring that the parties intended something different from what they in fact did". Beaumont J held (at 469) that the evidence was consistent only with it being the genuine intention of the parties that they enter into a series of legal relationships and, accordingly, the transactions were not "shams" but rather legal transactions.
Notwithstanding the observations of the Full Court of the Federal Court in Sharrment, with which I respectfully agree, there is a critical factor in the present matter that distinguishes it from the facts before the Full Court of the Federal Court. The present transaction was clearly devised to achieve a taxation advantage to the investors and, doubtlessly, to elicit a profit to the managers of the scheme. The circumstances have all the hallmarks of the type of case considered by Byrne J in Austral Timber, namely, that it was a series of transactions intended to defraud the Australian Taxation Office. In my view the conclusion is irresistible that the transactions were a sham.
Opposition to Winding Up
Two forms of opposition were submitted against winding up. First, that Wharton does not control Allied Securities and Lingus. However, this assertion was contradicted by the evidence which shows he is company secretary and Gillies is a director. Secondly, the fact that the companies conduct "other businesses". This ground of objection is based on assumed prejudice which will be suffered by those persons' interest in the share capital of the defendants and joint ventures or business relationships with the defendants. Emphasis was placed by the defendants upon the ongoing business and interests of the defendants and their related entities, especially ABC FM, ABC IM, Tye Nominees, Bass Domino Wines, Veldara, Levart, Allied Securities, Lingus and Harcourt Ridge. I turn to consider each of these "other" interests. However, I consider any prejudice is outweighed by the public interest in a liquidation.
It was submitted on behalf of the defendants that ABC FM conducts business as a "funds manager". It no longer holds a dealers licence. It manages a number of trusts for which it receives management and advisory fees and promotes investments in those trusts. It has had control of day to day management of the ABC trusts for over eight years. However, ABC FM has not lodged financial returns with ASIC. It does, not produce management or working accounts for its affairs. It was unable to produce a register of investments for the 22 ABC funds it manages. It has not ensured that the trustees of the 22 ABC trusts kept financial records required under s.286 of the Corporations Act or the trust deeds. It does not have any written reports regarding the investments or investment strategies of the funds it manages. I am satisfied that ABC FM consciously decided to participate in the round robin transactions of 1995‑1998. Arising from the Coghlan evidence, the lack of an audit trail in respect of the round robin transactions of 1998 I am satisfied that the arrangement was devised to conceal the real nature of the transaction.
ABC FM is 100 per cent owned by Tye Nominees which, in turn, is 50 per cent owned by Wharton Partners Pty Ltd. Gianchino is the ultimate holder of 25 per cent of the shares in Wharton Partners. Gianchino did not to give evidence although he was available. He was not called to give evidence as to any concern or prejudice or objection he held as to a winding up of ABC FM. A mining licence of ABC Resources Ply Ltd is of little if any value. There is no financial record of its value. Tye Nominees is said to be an independent investment company and act as trustee of various trusts. Originally, Wharton could not identify those trusts other than the "No Load Fixed Interest Trust" and the "No Load Resources Trust".
These trusts did not keep separate financial records to explain their financial position. Wharton could not point to any current records to explain the financial position of each trust it controlled. I am satisfied that it is not appropriate for Tye Nominees to continue to act as trustee and control funds of unidentified beneficiaries in the circumstances.
Further, Tye Nominees is owned 50 per cent by Wharton and 50 per cent by Wharton Partners, which in turn is owned 25 per cent by Gianchino. Gianchino similarly did not give evidence as to his concern, objection or prejudice regarding a winding up of Tye Nominees.
Tye Nominees' other business interests (through subsidiaries) are unclear as to their nature or value. No satisfactory evidence was led for the defendants regarding prejudice from a liquidator's appointment. However, on the other hand, first, in relation to Bass Domino Wines Pty Ltd, it is a company of little or no substance and it is the subject of an oral joint venture which is unfinalised. Next, little appears to have been invested by Veldara save for $10 share capital. The persons who are interested in the joint venture were not called to give evidence of any concern they may have regarding the appointment of a liquidator to Tye Nominees despite their availability. Secondly, in relation to Veldara Pty Ltd, it is trustee of "Wharton Pooled Mortgages" trust. Wharton could not identify the beneficiaries, the assets or liabilities of these trusts. Eventually he claimed privilege against self incrimination in respect of this company.
ABC IM is said to act as trustee of at least one other trust which, in turn, is controlled by Tye Nominees. There are no records detailing the financial position of ABC IM or the trusts it controls. ABC IM is ultimately controlled by the same people as ABC FM and Tye Nominees. This company's position is the same as Tye Nominees.
Lingus was said to have acted as trustee of a number of trusts. However, the only asset it holds is a $20 investments in the NRI Trust. This company is owned by Levart (Vic) Pty Ltd, a company controlled by interests (Levbart (Vic)) controlled by one Hutchins. Hutchins was available but was not called to give evidence regarding any concern, objection or prejudice arising from the appointment of a liquidator. Lingus is in the same position as Tye Nominees.
Allied Securities was said to be a lender to the franchisee of a liquid engineering franchise. Other than the recovery of outstanding loans, it has no apparent business (although it may have made some loans to "other projects"). A liquidator may recover or realise the value of these loans on behalf of those persons interested in the company. Allied Securities is also owned by Levart (Vic) Pty Ltd. An alleged affected party, Hutchins, did not give evidence regarding any concern over the winding up of Allied Securities.
The current status of loans between Allied Securities and the investors in the 22 trusts demonstrates the need to appoint a liquidator. Wharton stated that in June 2000, Allied Securities made a decision not to continue to roll over the loan facilities, that the loans by investors remain due and, further, that Allied Securities retains any distributions from the trusts on trust for the investors.
In the near future, the interests and rights of investors in relation to Allied Securities ought be clarified. I am satisfied this would be facilitated by a liquidator who has powers to control assets and gather evidence exercising powers under the Corporations Act.[11]
[11]See ss.477, 483, 477(k), 479(3), 596A-B.
It seems that Harcourt Ridge Pty and the franchisees are merely debtors of Allied Securities. There is no evidence that they will be prejudiced by the appointment of a liquidator. In any event, Harcourt Ridge itself may have received part of the cash funds paid by investors in the 22 ABC trusts.
Ultimately, the question is asked: how is a winding up of the 22 trusts to occur without a liquidator appointed to the companies which controlled the trusts? There are no separate records for the trusts. The Court can have no confidence that they and the former trustees and managers of the trusts will cooperate in the winding up of the trusts. In my view, the public interest in winding up the defendants far outweighs any allegation of potential prejudice to third parties. In any event, the existence and interests of those parties has not been satisfactorily proved.
It is common ground that an order should be made for the winding up of the trusts under s 601EE. The section provides:
"If a person operates a managed investment scheme in contravention of subsection 601EB(S) [ASIC]... may apply to the Court to have the scheme wound up...".
Section 601EE(2) provides:‑
"The Court may make any orders it considers appropriate for the winding up of the scheme".
I am satisfied that it is appropriate to wind up these schemes and their trustees and managers on the same basis that the winding up was ordered by Owen J in ASIC v Chase Capital Management Pty Ltd. In particular, in this case there is an admission that offers were made and interests issued in respect of subscriptions and securities without a prospectus having been lodged and without the form being attached to a prospectus or an approved deed (see s 1018, 1064 and 1065 of the Corporations Act; ASIC v Chase at paragraphs 76‑77).
Further, for the reasons under which each of the first and third to sixth defendants should be wound up under the just and equitable ground set out above, the same defendants should be wound up under s 601EE(2) (see ASIC v Chase at para 74). Furthermore, by continuing to operate the schemes, the defendants would continue to breach s 601ED(5). In light of the evidence of a substantial number of intercompany transactions which are undocumented, I consider the defendants cannot deal with this issue without the appointment of a liquidator.
I am satisfied that the appointment of a liquidator will give control of the assets and undertakings of the companies and their books and records to the liquidator. The powers available to a liquidator to control the assets and books and records of the companies and to obtain evidence will aid and facilitate further investigations. The appointment of a liquidator is in the public interest. It outweighs any prejudice to the shareholders which could arise from appointment of the liquidator. In any event, the extent of that prejudice and the objections of the owners/shareholders of the group have not been established. Gianchino and various other persons whose interests may potentially be affected by the winding up of the defendants gave no evidence on these matters. Their absence was unexplained. I am entitled to assume that they could not give any such evidence (see AS Nominees at 515‑516).
The round robin transactions give rise to serious concerns about the propriety of the director and secretary of the trustees and managers of the schemes, Wharton and Gillies. For this reason alone I consider it is inappropriate that they not be left to deal with investors when winding up the schemes.
I am satisfied that a winding up order should be made. In the event it was necessary to do so I would have been satisfied such as to order the appointment of a provisional liquidator.
Injunctive Relief
ASIC seeks orders, pursuant to ss.601EE, 1323 and 1324 of the Law restraining the defendants or any of them parting with possession of funds received directly or indirectly from investors of subscribers and also for the taking on all necessary accounts. These orders will be unnecessary in respect of any defendant ordered to be wound up. I consider it unnecessary to order the winding up of the second defendant, Wharton Partners Pty Ltd. However, in all the circumstances it ought be appropriately restrained from dealing with any investment funds.
Conclusion
For these reasons I am satisfied that the relief sought by ASIC should be granted including that the 22 schemes be wound up. I consider it is appropriate that the defendant companies be wound up pursuant to s.461 of the Corporations Act. If it was necessary to do so I would be satisfied that winding up should be ordered pursuant to s.464.
Mr Crutchfield argued that the application to wind up the defendants was a nullity because of no advertising. Section 465A(c) of the Corporations Act requires an application for a company to be wound up to be advertised. The court is empowered to dispense with compliance: see Re Vaportec International Pty Ltd (1994) 12 ACLC 123, 125. I consider that in the circumstances of this case dispensation with compliance should be ordered and I will order accordingly. I observe that there is no indication or any evidence to demonstrate that the lack of advertising will cause any substantial injustice.
I will require the parties to prepare minutes of orders reflecting these reasons.
SCHEDULE A
|
SCHEDULE OF TRUSTS & BORROWINGS
|
1995 MEG 1 (Tye Nominees P/L: D5 MHB 68, MHB 46* 26 Investors borrowing: $ 23,000,000 (principal)
$ 3,128,400 (prepaid interest)
$ 26,128,400
1996 ABC IG 1-9 (ABC Investment Management P/L: D4) MHB 72-80 and 51-59* 123 Investors borrowing: $ 25,924,500 (principal
$ 3,774,500 (prepaid interest)
$ 29,699,000
MEG 2 (Tye NomineesP/L) MHB 69, MHB 47* 25 Investors borrowing: $ 26,375,000 (principal)
$ 3,587,400 (prepaid interest)
$ 29,587,775
1997 LEIT 1-5 (Chartered Tax & Management P/L) MHB 81-85, MHB 60-64* 53 Investors borrowing: $ 9,300,000 (principal)
$ 1,155,020 (prepaid interest)
$ 10,455,020
MEG 3 (Tye Nominees P/L) MHB 70, MHB 40* 4 Investors borrowing: $ 3,000,000 (principal)
$ 396,000 (prepaid interest)
$ 3,396,000
1998 LEIG 1-3 (Chartered Tax & Management P/L) MHB 86-88, MHB 65-67* 45 Investors borrowing: $ 6,950,000 (principal)
$ 894,050 (prepaid interest)
$ 7,844,050
MIGF (Tye Nominees P/L) MHB 50 1 Investor (Chartered Tax as trustee for LEIG 1-3) MEG 4 (Tye Nominees P/L) MHB 71,49* 9 Investors borrowing: $ 4,500,000 (principal)
$ 504,000 (prepaid interest)
$ 5,004,000
1995-1998 Total Loans $ 98,674,875 (principal)
$ 13,439,370 (prepaid interest)
$ 112,114,245
*References to exhibits to Broder affidavit of 17 November 2000.
129
7
0