Australian Securities and Investments Commission v Austimber Finance Pty Ltd
[1999] VSC 351
•8 October 1999
SUPREME COURT OF VICTORIA
CORPORATIONS LIST Do not Send for Reporting Not Restricted
IN THE MATTER of the Corporations Law of Victoria sections 472(2), 1323(3), 1324(4)
IN THE MATTER of AUSTRAL TIMBER PTY LTD
(ACN 086 660 382)
| No. 6480 of 1999 | |
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Applicant |
| v | |
| AUSTRAL TIMBER PTY LTD | Respondent |
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| IN THE MATTER of AUSTIMBER FINANCE PTY LTD | No. 6481 of 1999 | |
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Applicant | |
| v | ||
| AUSTIMBER FINANCE PTY LTD | Respondent | |
JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3, 10 September 1999 | |
DATE OF JUDGMENT: | 8 October 1999 | |
CASE MAY BE CITED AS: | ASIC v Austimber Finance Pty Ltd | |
MEDIA NEUTRAL CITATION: | [1999] VSC 351 | |
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Companies - provisional liquidator – investment scheme – information for investors – misleading and deceptive representations – scheme a fraud on Australian Taxation Office – scheme a sham – scheme a managed investment scheme – whether a franchise
Corporations Law ss.9, 601ED, 1018, 472.
APPEARANCES: | Counsel | Solicitors |
For the Applicant | Mr J.D. Merralls QC with Mr P. Crutchfield | Counsel for Victoria |
| For the Respondent (in each case) | Mr M.J.L. Dowling QC with Mr P.W. Murley | Paul P. Seddon |
HIS HONOUR:
The Australian Securities and Investments Commission (“ASIC”) applies to the court by notice of motion filed on 12 August 1999 for orders against each of Austral Timber Pty Ltd (“Austral Timber”) and Austimber Finance Pty Ltd (“Austimber Finance”). The applications in each case seek orders for the winding up of the company on the ground that it is just and equitable and orders for the appointment of a receiver or a receiver and manager of all or part of its property. The applications presently before the court are, in the case of each company, brought by summons filed on 12 August 1999 seeking the following substantive orders:
“1.An order pursuant to section 1323(3) of the Corporations Law appointing Christopher Thomas Daley of Pricewaterhouse Coopers as receiver and manager having such powers as the Court orders of the property of each of the property of the Respondent pending the determination of the application.
2.An order pursuant to section 1324(4) of the Corporations Law restraining the Respondent from offering interest in a managed investment scheme described in the document ‘Austral Timber Pty. Ltd. Information Memorandum’ pending the determination of the application.”
Before me, the case of ASIC was presented and resisted on the basis that what was primarily sought was an order pursuant to s. 472(2) of the Corporations Law for the appointment of a provisional liquidator. I am content to proceed on that basis.
The facts relied upon as warranting the relief sought concern the commercial activity of the two companies in offering to the public an investment scheme described in a document entitled “Information Memorandum”. This memorandum, it was said, contained material statements which were misleading and deceptive and false. The scheme itself, it was said, is a sham and a fraud upon the Australian Taxation Office and, possibly upon the investing public. Third, it was put that the scheme was a managed investment scheme within the meaning of Chapter 5C of the Law. Accordingly, the companies were in breach of s. 601ED since the scheme was not registered and in breach of s. 1018 for non-compliance with the prospectus requirements of Part 7.12. I shall deal with each of these matters and the further submission as to remedies, after I outline the scheme itself.
It is necessary that I say something at the outset about the evidence relied on by the parties and upon the burden of proof and the degree of satisfaction required. As will appear, a good deal of the material relied on by ASIC was obtained by examination of a number of persons including directors and officers of the companies pursuant to s. 19 of the Australian Securities and Investment Commission Act 1989. Complaint was made about this and about the fact that the powers were exercised, not as part of the investigative function of ASIC, but in aid of this litigation which had already been commenced. I do not understand that these complaints amounted to a submission that the evidence was inadmissible and I have received it subject to any other objection.
The applications are interlocutory in character. Nevertheless, I had the perception that, for practical purposes, the granting of the relief sought will put an end to the Austral Timber Scheme. This will have consequences, not only for the companies but also for the participants in the scheme and possibly other persons. I must therefore proceed with caution and only after careful consideration of the matters alleged and the evidence offered. See National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 at 539-41. This means, further, that where ASIC relies upon a fact to establish its entitlement for relief, it must satisfy me of its existence to a fairly high degree, notwithstanding that the order sought is interlocutory and that the standard of proof is the civil standard.
The Austral Timber Scheme
The scheme is described in the booklet entitled Information Memorandum, which comprises an introductory part containing information about the scheme and its promoters; an expert legal opinion of Mr S.P. McNamara dated 9 December 1998; a taxation opinion of Deloitte Touche Tohmatsu dated 11 March 1999; a form of memorandum of agreement between Austral Timber and the investor who is described as “the Franchisee”; franchise terms and conditions; and franchises regulations including 10 schedules. In the circumstances of this case, I shall adopt the more neutral term “participant” to describe those persons who joined the scheme, whether they be the investors, as ASIC would have it, or franchisees, as the companies would prefer.
As its name suggests, the Austral Timber scheme is concerned with the production and marketing of timber products, namely, products of eucalyptus globulus, that is, red gum. What is offered by Austral Timber is the right to rent one or more identified woodlots of approximately one hectare each, with the right to use the woodlot to grow and harvest timber and to process and market it. Participants who are not minded themselves to carry out these activities are permitted to appoint a manager to do so, provided the manager is approved by Austral Timber. Two approved managers are mentioned in the Information Memorandum, Marlo Forestry Services Pty Ltd and Australian Tree Farmers Pty Ltd. The Information Memorandum emphasises at page 17 that participation is not for a person seeking a totally passive investment; participation is itself a business requiring management, but there was the option of having the business run “under professional management by Approved Managers”.
The role of Austral Timber in this scheme is to acquire the land for the woodlots and to present the scheme to would-be participants. So far as the implementation of the scheme is concerned its role is limited. The following is the summary of its involvement as it appears in the introductory part of the Information Memorandum page 15.
“What Austral Timber provides
Austral Timber provides the framework, training and systems for the successful operation of your business.
From advice on selecting, planting, maintaining and harvesting to when and how to market your timber, Austral Timber is always on hand. This expertise gives you access to an investment opportunity with excellent medium and long term potential.
Individual reports containing all the information you need to make decisions about your business are issued by Austral Timber for each year of the project. These reports enable you to track the progress of your trees and the conditions in the market, allowing you to assess the right time to harvest and sell your timber. Each report contains information on –
· developments in the franchise system;
· new product research and commercialisation opportunities;
· the prevailing market conditions for various timber products; and
· the size and health of the trees in your woodlots as provided by the appointed manager, if applicable
Complementing the reports are periodic updates with news and information on developments at Austral Timber and in the industry generally.
Austral Timber does not participate in any partnership with franchisees, nor does it undertake any of the following activities on behalf of the franchisee.
· Silvicultural management
· Harvesting
· Processing
· Marketing
· Sales
PLEASE NOTE: The above listed activities and the cost of these activities are the full responsibility of the franchisee.”
These responsibilities are set out in greater detail in cl. 14 of the Franchise Terms and Conditions and in reg. 5 of the Franchises Regulations.
The participant is, first and foremost, required to pay for this a franchise fee of $12,000 per woodlot. This is payable upon acceptance into the scheme. In the Regulations, this is described as a $6,575 annual fee for the first two years, a total of $13,150: reg. 3.1, Sixth Schedule. In addition, it appears at page 13 of the introductory part that certain annual charges are also payable to Austral Timber: $300 for land rental; $75 for insurance and administration; and $50 for marketing and research and development. In addition, $150 per annum is payable to Austral Timber to be paid to the appointed manager and, if no manager be appointed, Austral Timber is entitled to retain this fee in any event as security for the due performance by the participant of his or her management functions: reg. 4.38.4. Surprisingly, these four annual payments which total $575 are included in the form of agreement, appearing on page 28, as part of the franchise fee. Furthermore, the $150 management fee is also expressed a little differently in the Sixth Schedule to the Regulations. As it there appears, Austral Timber is directed to pay, on behalf of the participant, $1,550 to the manager upon execution of the management agreement and $150 per annum thereafter: reg. 3.5, Sixth Schedule, Item 5. It seems likely that this first management fee of $1,550 is in truth the fee for plantation, preparation and establishment costs mentioned on page 14 of the introductory part as being payable to “the appointed silvicultural manager, if applicable”. Finally, cl. 29 of the Terms and Conditions provides that the franchise fee is to be increased annually by reference to movements in the consumer price index.
The Information Memorandum advises participants that further charges are assessable and payable at the time of the sale of timber from the woodlot, namely, a royalty of 12.5% of gross margin; a sales and marketing fee of 6% of gross margin; and a harvesting fee which is estimated at $1,650. Again, this does not quite reflect the obligations of the participant under the Regulations. Regulations 3.2, 3.3 and 3.6 provide that the harvest fee, the marketing fee and the royalty are payable on an annual basis, although, in the Sixth Schedule, Items 2, 3 and 6 have them payable at the time of the sale of the timber or, in the case of the harvest fee, upon each harvest. Item 3 of this schedule also provides that, in addition to the estimated $1,650, the harvest fee payable by the participant covers “cost of processing timber product to meet market demand, including cartage costs”. Finally, regulation 2 obliges the participant to use only the stock and supplies provided by Austral Timber as set out in the Third Schedule. These are seedlings, fertilisers, weedicides, pesticides and bags. Regulation 3.4 obliges the participant to pay for these on a monthly basis at a fee to be determined by actual purchase invoices. This obligation, which does not appear with the other costs and expenses in the introductory part of the Information Memorandum, is mentioned again in the Sixth Schedule, Item 4, but here the participant is to pay to Austral Timber its cost of these items plus a 10% handling fee. The other obligations of participants are set out in cl. 9 of the Terms and Conditions and in reg. 4 of the Regulations.
The financial aspects and advantages of participation in the scheme are set out in the introductory part of the Information Memorandum at pages 12 to 14. The projected returns per woodlot show a net profit, before tax, of $31,693, a little less than 50% of the estimated gross margin return. Gross margin return is defined in the First Schedule as the proceeds of sale of the timber products after deduction of all costs necessary to get them to market. In the introductory part of the memorandum at page 14 it is described as gross revenue less all costs and charges associated with processing the timber for sale. The net profit includes a component for interest and, even, the participant’s capital contribution. The finance model described in the introductory part at page 12 and in the First Schedule to the Regulations suggests that a participant may obtain a loan of up to $17,683 per woodlot to cover capitalised management fees and interest charges over a 10 year period. It is not clear, then, what amount in cash, if any, is required from participants upon entry. As will appear, it would seem that payment of the sum of $5,000 by way of deposit is contemplated in the finance model set out on page 14. For this relatively modest outlay, a participant may expect to receive a net return of $10,971 after five years and a further $25,722 at the end of 10 years, a total of $36,693. I shall return later at [26] to this outlay. Moreover, the scheme is said to have taxation benefits. A participant upon entry is said to be entitled to tax deductions equivalent to the full value of the franchise fees paid and the annual management and interest charges in the years that they are incurred. This is supported by the taxation opinion of Deloittes which is included in the brochure.
I have to this point made no mention of Austimber Finance. A significant feature of the scheme is the availability of finance for participants. The finance model suggests that the loan of up to $17,683 per woodlot will be provided and the documents provided to participants show that these loans were provided by Austimber Finance.
The two companies, Austral Timber and Austimber Finance, are related. Austral Timber was registered on 11 March 1999; Austimber Finance changed its name to that name on 8 September 1998. Austral Timber has one director Craig Hamilton; Austimber Finance has three directors Brendan Clune (appointed 1997), Kenneth Hamilton (appointed 7 September 1998) and Michael Walter Deitrich (appointed 7 September 1998). These three directors were directors of Austral Timber for a short time in March prior to 31 March 1999. The secretary of Austral Timber is Mr Craig Hamilton and that of Austral Finance Mr Clune. The registered address of Austral Timber is Suite C, Level 1, 140 Burwood Road, Burwood and that of Austral Finance is 26 Park Street, Moonee Ponds. Another company associated with the companies is Austimber Properties Pty Ltd (“Austimber Properties”) which changed its name to that name on 28 August 1998 and has as its directors Mr Ken Hamilton, Mr Deitrich and Mr Clune. Mr Ken Hamilton is its secretary and it shares the same registered office as Austral Finance.
False and Misleading Statements
Counsel for ASIC submitted that the Information Memorandum which was issued in or about April 1999 contains statements regarding the scheme which are false and misleading to potential participants. It was put that this demonstrated a lack of propriety in the management of the affairs of the companies to such degree as to make it unacceptable that they should be permitted to solicit, hold, manage and deal with investors’ money on a fiduciary basis: Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 533, per Finn J.
The land available
The material offered to applicants contains confident statements about the land available for the woodlots. They are told in the Information Memorandum which was published in April 1999, in effect, that Austral Timber has more than one central operation and that one of them, at Combienbar, had been enlarged and that further expansion was planned. Later in this document, the Combienbar land is said to be 1,000 hectares, held by long term registered lease. This holding is mentioned also in the promotional document “Join the Tall Timbers”. The evidence, including that of the s. 19 examination of Mr Deitrich shows that land was or was to be held by the associated company Austimber Properties, to which I have referred. As at July 1999 Austimber Properties owned one property only (volume 9508 folio 001), that at Combienbar, 90 kilometres north west of Orbust called Donchi’s. This land comprised 126 hectares suitable for plantation. Efforts had been or were being made to acquire other properties. The section 19 examination of Mr Ken Hamilton shows that Austimber Properties had placed a deposit to purchase or to obtain an option to purchase other properties, namely a property owned by one McDougal (volume 8210 folio 653,654) comprising 172 hectares, two properties owned by one Chester, totalling 539 acres (185 hectares), two properties owned by one Jonkers, totalling 1,240 acres (429 hectares) and a property owned by one Ken Heyne (volume 6977 folio 322, volume 5963 folio 599), totalling 158 useable hectares. These transactions were subject to the grant of a permit. The end result of all of this is that, in July 1999, Austimber Properties held only 126 hectares to satisfy the requirement of existing participants for 440 hectares and to support the representation that it held 1,000 hectares. Its caveat over Heyne’s shows that it was not until 21 July 1999 that it had entered into a contract of sale to purchase that property and this is confirmed by the contract which is in evidence. It does not appear what was its position in April 1999 when the Information Memorandum was published. There were produced also an executed lease from Austimber Properties to Austral Timber dated 26 April 1999 in respect of Donchi's and unexecuted leases in respect of McDougal's and Heyne's. In each case the term was ten years with two five year options commencing on 1 May 1999 (Donchi's) and 1 June 1999 (McDougal's and Heyne's). The matter is complicated by the fact that, in early June 1999 the companies and their promoters received very bad newspaper publicity. This led to the termination of negotiations to purchase McDougal’s. This makes it difficult to say at any particular moment whether the assertions as to the extent of the landholdings were true or represented the expectation of the promoters. In these circumstances, I am not satisfied, even to the extent required for an application of this kind, that the statement as to landholding was or is misleading or deceptive.
The statement on page 10 of the Information Memorandum to the effect that each project property had been cleared and subdivided into one hectare woodlots is, however, admitted to be false.
Expertise Available
The Information Memorandum makes much of the expertise of the officers of Austral Timber and its access to expertise in “forestry managers, consultants and specialists”. Advice is available to participants in selecting, planting, maintaining and harvesting and the time and manner of marketing their timber. This is mentioned in some detail in cl. 14 of the Franchise Terms and Conditions and in reg. 5.
On page 10 of the Information Memorandum it says that “Austral Timber uses independent scientific laboratories to provide analyses of soil and employ commercial companies to develop the appropriate treatment programs”. None of the evidence to which I was referred contradicts this assertion.
On page 8 of the Information Memorandum, Austral Timber proudly asserts that it has “its own research department – embracing sophisticated tree farming methods” and that “backed by CSIRO testing and currently undergoing commercialisation, we have developed a high value-added use for first growth timber”. This presumably refers to the timber products to be marketed and sold by participants which are described in the Fourth Schedule to the Franchise Regulations as “firewood in 20 kg bags, firewood bulk, fence posts, fence rails, saw logs, woodchips”. Whatever be the product, the examinations of Mr Deitrich, Mr Ken Hamilton and Mr Craig Hamilton, as well as the affidavits of Professor Peter Vinden and Professor Grigori Torgovnikov of Melbourne University and Kevin James McCarthy of CSIRO show that the statements referred to are false and misleading.
On page 11 of the Information Memorandum the following statement appears:
“PROPAGATION TECHNIQUES
In conjunction with leading seed companies Austral Timber has developed its own sophisticated propagation methods, bringing together the best industry knowledge in soil composition and germination techniques.”
Counsel for ASIC relied upon the s. 19 examination of Mr Ken Hamilton, pages 33 and 34, and paragraph 23 of his affidavit as showing the falsity of this statement. I am not satisfied that this material shows the statement to be false or misleading or deceptive.
The Scheme is a Sham and a Fraud
Counsel for ASIC said the scheme was a fraud on the Australian Tax Office. Further, the scheme was a sham since there was no finance money available. When pressed as to whether the applications were put on the basis that the investing public should be protected, counsel for ASIC said, “We didn’t present it that the investors were being gulled by the sham”, and later, that I should approach this aspect of the case on the basis that the sham is a fraud on the revenue and not on the investor.
I have already summarised the financial aspects of the scheme as these appear from the Information Memorandum. A principal benefit was the tax deductibility of franchise fees and annual management and interest charges paid or incurred. This benefit appears to have been prominent in the discussions which led to the decisions of four participants who provided affidavits for ASIC in this proceeding. These were George Brian Mitchelson who became a participant on 23 April 1999, Mark Andrew Akers who became a participant on 26 April 1999, Anton Leslie Maurer who became a participant probably on 27 April 1999 and Neil William Gray who became a participant on 20 April 1999. I shall now summarise the evidence as it affects the first of these, Mr Mitchelson.
Mr Mitchelson said that he signed a completed memorandum of agreement on 23 April 1999 which showed that he was to pay the $12,000 franchise fee as follows – by a loan of $7,000 and by cash as to $5,000 plus a loan establishment fee of $50. The business loan agreement which he signed shows that the loan obtained was, in fact, $8,800 plus capitalised fees and interest, and that it was obtained from Austimber Finance. Mr Mitchelson said that, of the $5,000, he was required to pay only $70 down and three monthly instalments each of $70. He chose to pay these sums, totalling $280, in advance. This was his total outlay apart from the $7,000 loan from Austimber Finance. He was told that the balance of $5,000 cash component, namely, $4,720, would be paid from the tax refund he would obtain from the Australian Tax Office. No further payment would be required from him before harvest.
In due course he received a letter from Austral Timber dated 13 July 1999 advising him that his total allowable tax deduction for the year ended 30 June 1999 was $13,850. He was provided with two invoices from Austral Timber and Austimber Finance respectively, each dated 23 April 1999 which he was advised to provide to his accountant for inclusion in his 1999 tax return. The Austimber Finance invoice was for a capital loan of $13,150 together with interest amounts and an application fee. The figure of $13,150 is also the amount shown in the Austral Timber invoice. It represents the annual fees of $6,575 payable to Austral Timber in each of the first two years of the scheme. The invoice is stamped “paid”. A number of things may be said about this invoice. First, no part of these sums other than $280 had in fact been paid by Mr Mitchelson. It was suggested on behalf of the companies that the invoice recorded payments made by Austimber Finance under the business loan agreement. The difficulty with this is that, under this agreement, the loan is only $8,800 and this sum was to be paid towards the “annual Franchise Licence Fee pursuant to a Franchise Agreement”: cl. 1. It may be that the loan was in fact $7,000 only but this is of little importance. Second, it will be recalled from my summary of the financial details of the scheme at [10] above, that the franchise licence fee is shown in the memorandum of agreement, but not elsewhere, as including, not only the $6,000 licence fee but also the annual payments totalling $575 for rental, maintenance of the woodlot, insurance and administration and for marketing, research and development. This fee for each of the first two years is included in the Austral Timber invoice as part of the franchise licence fee, shown as having been paid. As things appear from the affidavits and the documents before me, I conclude that this receipted invoice is false. Insofar as Mr Mitchelson was encouraged to include it in his tax return, he was being encouraged to submit a false tax return.
Mr Mitchelson’s evidence is that he was told that he would make his final cash payment of $4,720 to Austral Timber when he received his tax refund. This surprising evidence is confirmed by the document headed “Special Offer” which he received some time after April 1999. In it, he is encouraged to pay to Austral Timber his “short-term finance loan” soon and is offered an incentive to do so.
The evidence of the other three participants differed from this in detail only. Moreover, this account of the transaction is not challenged in the answering affidavit of Mr Deitrich, sworn on 1 September 1999. Mr Deitrich says that the initial payment of $12,000 per woodlot is usually provided by Austimber Finance, except for a small deposit of $70 with further instalments of up to $210 paid by 25 September 1999, which he describes as the “cut-off date”. The participant “must pay the total sum of $5,000 (which includes the deposit payments) to Austimber Finance by 25 September 1999 in order to comply with the finance agreement”. In fact the typical business finance agreement contains no such obligation. In Mr Mitchelson’s agreement the principal sum is, as I have mentioned, $8,800. By cl. 4 this is payable upon harvest which is after five years and 10 years respectively. There is, however, another Austimber Finance document which he received called “Special Funding Details”. This document shows the sum of $12,050 as having been borrowed and that it was repayable as to $5,050 by $70 payments and a further payment of the balance, $4,720, which is here called a “balloon payment”. As to the balance of $7,000 this is repayable “as per Austimber Finance Loan Agreement”. The Austral Timber cash flow forecast for the calendar year 1999 shows that by 30 June it was expected that 250 participants would have paid $280 each and in September they were expected to pay a further $4,720 each. This confirms the evidence of the four participants as to the arrangements they had made.
I return to the modest outlay of $5,000 which is contemplated in the finance model mentioned in paragraph [10]. The evidence shows that, as the scheme is implemented, this outlay is, in fact, only $280 or thereabouts. The applicant for one woodlot pays this sum in order to recover, not only a net return of $36,693 over 10 years, but also a tax refund based on a deduction of $13,850 from which he or she must make the balloon payment of $4,720. This is, indeed, a handsome return on a small investment, but one which should not cause the court to intervene unless some serious impropriety is involved.
I am satisfied that such impropriety exists. A substantial portion of the entry fee payable by participants is not paid to Austral Timber by them or by any person on their behalf until the September following their entry into the scheme. They are told, as is the intention of this scheme, that this should be paid from their tax refund receivable about that time. I am therefore satisfied that the financial arrangements entered into between Austral Timber and the participants were in part a sham and were in entered into to defraud the Australian Taxation Office.
A second aspect of the ASIC submission was based on the fact that the companies had no money to fund the operation of the scheme. The funding by Austimber Finance, it was said, was an illusion created by the circulating of book entries, none of which had any funds to support it.
The evidence shows that Austimber Finance had insufficient funds to make the required advances to participants. Mr Craig Hamilton said in his affidavit of 9 September 1999 that 436 woodlots had been purchased of which all but one were financed through Austimber Finance. Another 80 woodlots have been transferred from an earlier scheme. Assuming that all participants took, in respect of the 436 woodlots, loans, in accordance with the finance model, the funds required to be advanced to them by Austimber Finance were of the order of $7.7M. I put to one side the short-term loans said to have been made in respect of the cash component pending receipt of the participant’s tax refund. Mr Deitrich said that $5.6M was required and that this was obtained by loan from a New Zealand company, Anderson Securities Finance Ltd.
Anderson Securities Finance was incorporated in New Zealand on 11 May 1999. It has 100 paid up shares standing in the name of Anthony John Joseph Nolan. Evidence from Mr Nolan, who is also the sole director of that company, shows that it has no audited accounts, no internal management accounts and no bank account. Mr Nolan, a solicitor, maintains a trust account in the name of this company as trustee for the ASFL Trust. This trust account shows two circular transactions all occurring on 30 June 1999. First, a transfer of $A25,000 from Austral Timber to Anderson Securities and a transfer from that company to Austimber Finance in the same amount. Each is described as a loan. Second, a transfer of $A7,243,955 from Austral Timber to Anderson Securities Finance and a transfer from that company to Austimber Finance in the same amount. Each of these transactions is described as “a summary of loans”. Mr Craig Hamilton in his affidavit sworn 9 September 1999 produces a letter dated 1 June 1999 from Anderson Securities Finance confirming that there was then in place “a funding arrangement to facilitate loans to franchisees to the extent of $9M in conjunction with franchises being granted by Austral Timber”. There is no indication that any of the companies mentioned in these transactions had the funds to implement them. The Austral Timber draft balance sheet as at 30 September 1999 shows a loan of $5,830,910 from Anderson Securities Finance, presumably for the purposes of funding the scheme. Its current assets included as the major item, $6,072,425 as an account receivable. The balance, omitting these two major items, shows the deficiency of nearly $240,000.
I accept that Austimber Finance had no funds to make advances to participants. To the extent that they, like those whose evidence is before the court, were offered documentation suggesting the contrary, these representations were false. The loan arrangements made between Austimber Finance and them were a sham.
I accept, too, that Austral Timber had no sufficient funds available to it or any expectation that sufficient funds would be made available to it to carry out the work necessary to implement the scheme. Its cash flow forecast for the calendar year 1999 does little to dispel this conclusion. It appears to be predicated on the basis that participants would subscribe for a total of 1,000 woodlots. No income from Austimber Finance is shown. Furthermore, on 30 June 1999 when the cash flow was produced, only 440 of these woodlots had been taken up. Given the fact that the investment was tax driven, it is unlikely that this number would increase in the second half of the year as predicted in the cash flow.
A Managed Investment Scheme
Chapter 5C of the Corporations Law contains a regulatory regime required for managed investment schemes. These schemes are defined in s. 9 in the following terms:
“A ‘managed investment scheme’ means:
(a) a scheme that has the following features:
i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)
ii)any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders)
iii)the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or
…
but does not include the following:
c)…
d)…
e)…
f)a franchise;…”
Counsel for ASIC submitted that each of the factual requirements of paragraphs (a)(i) and (ii) was satisfied as well as those of paragraph (a)(iii), dealing with the “day-to-day control over the operation of the scheme”. It would seem that many of the provisions in the Information Memorandum were directed to this third requirement. Notwithstanding those assertions which warned participants that they were running their own business and must maintain an active involvement in the development of their woodlots, it is clear that the ultimate day-to-day control over the operation of the scheme, as a scheme, resided in Austral Timber. Whatever a participant was permitted to do was subject to stringent supervision and control by Austral Timber.
I am therefore satisfied, at least for the purposes of an interlocutory application such as this, that the Austral Timber scheme satisfied the requirements of paragraph (a) of the statutory definition of managed investment scheme.
The debate as to the applicability of the definition to the scheme then turned to the question whether it fell within the franchise exception contained in paragraph (f). On behalf of the companies, reliance was placed upon the recent decision of the Full Federal Court in Madison Pacific Property Management Pty Ltd v ASC (1999) 30 ACSR 218. This case, however, turned on a very different statutory definition of franchise. In s. 9 of the Law franchise is now defined in these terms:
“An arrangement under which a person earns profits or income by exploiting a right, conferred by the owner of the right, to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the supply of goods or services. An arrangement is not a franchise if the person engages the owner of the right, or an associate of the owner, to exploit the right on the person’s behalf.”
In his expert legal opinion contained in the Information Memorandum Mr McNamara sets out how the Austral Timber scheme meets this definition of franchise:
“It is an arrangement (the Franchise Agreement) under which a person (the Franchisee) earns profits or income by exploring a right (the right to use the System), conferred by the owner of the right (Austral Timber), to use a trade mark (Austral Timber Trade Mark) or design or other intellectual property (the System) or the goodwill attached to it in connection with the supply of goods (supply of timber products, including firewood, posts and rails, woodchips and saw logs) or services (delivery of timber products). An arrangement is not a franchise if the person engages the owner of the right, or an associate of the owner, to exploit the right on the person’s behalf.”
This analysis invites attention to the question whether the profits which a participant is to earn are derived from the exploiting of “a right to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the supply of goods or services”.
At first blush it appears that the profits or income of the participant are to be earned from the business of the participant as a participating timber merchant. This is what participants are told on page 6 of the introductory part of the Information Memorandum.
The Austral Timber trade mark referred to in the passages from Mr McNamara’s legal opinion which I have quoted may be those mentioned in cl. 2 of the Terms and Conditions, under which Austral Timber grants to the participant a licence “to use the Austral Timber System and the Marks in the operation of the said Franchise…”. "Marks" is not defined, but preamble B. contains a reference to the rights of Austral Timber: “to use and promote certain trade and business names, trade and service marks and commercial symbols in connection with the Austral Timber System including the mark Austral Timber and those marks and names more particularly described in the Regulations hereunder”. See, too, regs 1.1.30, 4.5 and 4.6 (where the reference apparently should be to the Fifth Schedule).
The evidence shows that on 13 May 1999 an application was lodged by Austral Timber to register Trade Mark No. 794057. The trade mark was a curl or spiral in disc in colours green and gold. This mark appears on the cover of the information memorandum. This application is, of course, very late for present purposes. In any event, it does not appear from the material before me that its use is likely to or is intended to contribute to the earning by participants of profits or income.
Next it was put on behalf of ASIC, presumably in the alternative, that the exploitation of the right is performed on the participant’s behalf by Austral Timber or an associate of that company. “Associate” is the subject of definition in Part 1.2 Division 2 of the Corporations Law. It was formally submitted on behalf of ASIC that the nominated manager is an associate of Austral Timber within this definition but the point was not pressed before me. I shall say nothing further about it.
I am, therefore, satisfied that the Austral Timber scheme is not a franchise; it is a managed investment scheme and is, therefore, subject to the Chapter 5C regime. It appears that it has not been registered and that its operation amounts to a breach of s. 601ED(5). No further submission to the contrary was advanced on its behalf.
Next, it was put that the interests in the scheme made available by Austral Timber to would‑be investors are securities in relation to that company within the meaning of s. 92(2) of the Law. Section 1018 prohibits a person “to offer for subscription, or issue invitations to subscribe for securities of a corporation” unless the prospectus requirements of Part 7.12 Division 2 are met. It was not in question that invitations to subscribe for interests in the scheme were offered without a prospectus. The companies contended that s. 1018 did not apply having regard to the definition of “securities” in s. 92. Notwithstanding that the point was not developed in argument, I have examined the definition in the light of the evidence. I am satisfied that the participants in this scheme were offered an interest in the scheme within the meaning of s. 9 and that such an interest is a security within the meaning of s. 92(1).
I conclude, therefore, that Austral Timber has breached s. 1018.
Relief
Many of the criticisms of ASIC regarding the Austral Timber scheme have been made out. The scheme itself, as it is operated, is a fraud on the Australian Taxation Office; its funding arrangements are an illusion and represent a sham. Participation is offered in an Information Memorandum which contains significant misleading and false statements. These falsities cannot be put to one side as mere puffery. Nor would I feel comfortable dismissing them as inconsequential on the basis that the would‑be investors were not in fact shown to have been misled. The promoters of the scheme have committed serious breaches of the Corporations Law and, as a result, have received from investors about $250,000.
It was suggested that, like Finn J in ASC v United Tree Farmers Pty Ltd (1997) 24 ACSR 94 at 103, I should give the companies the chance to regularise matters rather than granting the more drastic relief sought by ASIC. Counsel for ASIC submitted that, if I were satisfied about the breaches of the Corporations Law, this would warrant the relief sought because these matters were incurable; no purpose would be served by permitting the companies to attempt to regularise the scheme or its implementation. There are 137 participants in this scheme. Their position and the fees which they have paid and will soon pay must be addressed. If I grant injunctive relief restraining the companies from committing breaches of the Law or from implementing the scheme, the orders will have the consequence that contributions made and to be made would be placed in suspension pending the determination of this proceeding. This would seriously affect the cash flow of the scheme. The leases of the woodlots, or the purchase contracts as the case may be, may be lost and arrangements with suppliers and management companies placed in jeopardy. Furthermore, I must have regard to the disavowal by counsel for ASIC that the scheme has deceived the public or any portion of it.
On the other hand, I cannot put to one side the fact, which I have found, that this scheme is essentially a fraudulent one. The court should not stand by and permit the implementation of such scheme, even on an interlocutory basis. Mindful as I am, that the allegations of ASIC have not been tested in a full trial, I am sufficiently satisfied of their validity for the court to intervene. I will place the affairs of the two companies in the hands of some independent person under the direction of the court, a person who can make decisions in the short term in the interests of all involved.
I will, therefore, appoint a provisional liquidator. I have determined to adopt this course rather than to appoint a receiver or a receiver and manager because a liquidator will have greater powers to deal with the problems which I can foresee arising in the period until the determination of this proceeding. Such a person is better able to decide the proper course to be followed by the companies given the frauds which appear to exist. It seems likely, too, that given these matters and what little I know of the financial position of the companies, that if the findings I have made on an interlocutory basis are made finally after trial, winding up orders will be made as was the case with Austimber Pty Ltd, the company which promoted the predecessor of this scheme. Austimber Pty Ltd was wound up by the Federal Court on 16 March 1999.
I propose, therefore, the following orders in each of the two proceedings:
1.That the application be treated as a special application for the purposes of Chaper V Order 8 of the Rules.
2.That Christopher Thomas Daly be appointed provisionally to be liquidator of the company.
3.That the cost of this application including reserved costs be costs in the proceeding.
I will hear counsel further as to the functions and powers which such a liquidator may exercise and as to the details of the orders which should be made to give effect to these conclusions.
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