Australian Securities and Investments Commission v Green Pacific Energy Ltd

[2006] FCA 1254

FEDERAL COURT OF AUSTRALIA

ASIC v Green Pacific Energy Limited & Ors [2006] FCA 1254

CORPORATIONS – WINDING UP – application by ASIC to wind up a publicly listed company (and its subsidiary) on the ground of insolvency, the just and equitable ground and contended conduct by directors in the affairs of the company in their own interests rather than members as a whole (ss 461(1)(e) and (k), s 459P, s 459A, and s 462(2) of the Corporations Act 2001 (Cth)).

Corporations Act 2001 (Cth)
Australian Securities & Investments Commission Act 2001 (Cth)

Lewis (Doran Constructions in (Liq)) v Doran & Ors [2005] NSWCA 243 - cited
Re Producer’s Real Estate & Finance Co Ltd [1936] VLR 235 - cited
Loch v John Blackwood Ltd [1924] AC 783 - cited
Australian Securities Commission v A S Nominees Limited (1995 – 1996) 62 FCR 504 - cited
Re Producers’ Real Estate & Finance Co Ltd (1936) VLR 235 - cited
Re Chemical Plastics Ltd [1951] VLR 136 - cited
Re Walter L Jacob & Co Ltd (1988) 5 BCC 244 - cited
Australian Securities & Investments Commission v Aust Timber Pty Ltd (1999) 17 ACLC 893 - cited
Australian Securities & Investments Commission v Pegasus Leveraged Options Group Pty Ltd 41 ACSR 561 - cited
Australian Securities & Investments Commission v ABC Fund Managers & Ors 39 ACSR 443 - cited
Australian Securities & Investments Commission v Chase Capital Management Pty Ltd & Ors 36 ACSR 778 - cited
Sandell v Porter (1966) 115 CLR 666 - cited
Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609 - cited
Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 – cited

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v GREEN PACIFIC ENERGY LIMITED & ORS
QUD231 OF 2006

GREENWOOD J
20 SEPTEMBER 2006
BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QUD231 OF 2006

BETWEEN:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff

AND:

GREEN PACIFIC ENERGY LIMITED
First Defendant

GREEN PACIFIC ENERGY CAPITAL PTY LTD
Second Defendant

JUDGE:

GREENWOOD J

DATE OF ORDER:

20 SEPTEMBER 2006

WHERE MADE:

BRISBANE

THE COURT ORDERS THAT:

1.The further hearing of the application be adjourned to a date to be fixed to determine the question of costs. 

2.Green Pacific Energy Limited (ACN 004 119 304) be wound up in insolvency under the provisions of the Corporations Act 2004 (Cth).

3.Green Pacific Energy Limited (CAN 004 119 304) and Green Pacific Energy Capital Pty Ltd (CAN 106 553 691) be wound up under the provisions of the Corporations Act 2001 (Cth) on the ground that the Court is satisfied that it is just and equitable that each company be wound up and on the further ground contained in section 461(1)(e) of the Corporations Act 2001 (Cth).

4.Gregory Hall be appointed liquidator of Green Pacific Energy Limited and Green Pacific Energy Capital Pty Ltd for the purposes of the said winding up.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QUD231 OF 2006

BETWEEN:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff

AND:

GREEN PACIFIC ENERGY LIMITED
First Defendant

GREEN PACIFIC ENERGY CAPITAL PTY LTD
Second Defendant

JUDGE:

GREENWOOD J

DATE:

20 SEPTEMBER 2006

PLACE:

BRISBANE

REASONS FOR JUDGMENT

INTRODUCTION

1. I have before me an application made by the Australian Securities and Investments Commission (‘ASIC’) for an order that the Green Pacific Energy Limited (‘GPEL’) a Stock Exchange listed entity be wound up in insolvency on the ground that GPEL is insolvent as it has failed to discharge, on all the evidence, the onus it bears of proving that it is not insolvent (see: s 459C(3) of the Corporations Act 2001 (‘the Act’) having regard to the presumption arising by operation of s 459C(2)(a) of the Act arising out of GPEL’s failure on 6 June 2006 to comply with a statutory demand (meeting the requirements of s 459F of the Act) served upon it by TechComm Simulation Pty Ltd (‘TechComm’).

2. Further, ASIC seeks an order for the winding up of GPEL on the ground that the ‘directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any manner whatsoever that appears to be unfair or unjust to other members’ (s 461(1)(e) of the Act) and on the further ground that the court is of the opinion that ‘it is just and equitable that the company be wound up’ (s 461(1)(k)). 

3. The applicant plaintiff also seeks an order for the winding up of the second defendant, Green Pacific Energy Capital Pty Ltd (‘GPEC’) on the just and equitable ground. 

4. On the question of insolvency, the essential contention made by ASIC is that GPEL cannot pay its debts as and when they fall due either by reference to its own cash flows or by reference to a timely realisation of assets or by recourse to secured or unsecured funding facilities which can be demonstrated to be both available to meet the obligations of GPEL as and when they fall due and made available to GPEL by entities that have a demonstrated capacity to provide the necessary funds as and when required. 

5. GPEL contends that having regard to the essential character of the undertaking conducted by the company which involves the promotion and development of renewable energy power generation projects (through subsidiary entities) utilising green waste fuel to produce heat energy which can be converted into electricity through a process known as ‘Fluidised Bed Combustion’ (‘FBC’) technology and the development of a 5 megawatt (MW) pilot power plant at Staplyton in Queensland, the capital requirements of GPEL as to both debt and equity, necessarily varied according to the projects to be undertaken and, in part at least, depended upon GPEL establishing the optimised success of its pilot plant and particularly sustainable budgeted cash flows.  The contention is that once the success of the pilot plant, both in terms of the technology and economic efficiency could be established, the technology would then be deployed in conjunction with a further power generation project (13.5MW) at the Staplyton site thus generating economies of scale and positive budgeted cash flows.  The technology would also be deployed at other sites throughout Australia. 

6. GPEL contends that although proving up the optimisation of the pilot plant confronted a series of particular technical difficulties thus impacting upon cash flows, GPEL was at all material times additionally supported by the foundation shareholders and entities related to GPEL by the provision of debt finance.  Moreover, having regard to relevant terms and conditions of some of those facilities, the debt was capable of being converted to equity.  Those entities, it is said, continue to provide enduring financial support in terms of both debt and equity to GPEL.  Accordingly, GPEL contends that, at the date of the hearing of the application and looking forward as ‘a matter of commercial reality’ consistent with Lewis (Doran Constructions in (Liq)) v Doran & Ors [2005] NSWCA 243, GPEL can pay its debts as and when they fall due. In addition, particular financial arrangements relating to the entity promoting the pilot plant, namely, Green Pacific Energy Staplyton No. 1 Pty Ltd (‘GPES No 1’) were ‘project specific’ without recourse to GPEL and therefore do not bear upon the solvency of GPEL.

7. As to the just and equitable ground, ASIC contends that a director and chairman of GPEL, Mr Alfred Chi Wai Wong, who through companies related to him controls approximately 20% of the issued share capital of GPEL, engaged in misconduct which had the effect of prejudicing the interests of investors in and creditors of the company.  The foundation contention is that Mr Wong, without a resolution of the Board of Directors of GPEL, authorised the payment to entities related to him, namely, Richland Investment (Australia) Pty Limited (‘Richland’) and G P Energy Pty Ltd (‘G P Energy’) of approximately $5M in the period 19 November 2004 to 9 December 2004 out of capital ($6.3M) subscribed by J F Capital Partners Ltd (‘JFCP’).  That capital, 31.5 million shares in GPEL at $0.20 per share was subscribed, ASIC contends, by JFCP on or about 18 November 2004 as a result of a presentation made to JFCP by GPEL and was contributed expressly on the footing that the subscribed capital would be utilised by GPEL to enable it to secure the attraction of debt finance from Investec Bank (Australia) Limited (‘Investec’) for the acquisition and construction of new plant at the Staplyton site (Staplyton No. 2). 

8. The new site was to be the first economically efficient green power project promoted by GPEL and thus GPEL’s  foundation positive cash flows.  The use by Alfred Wong of the capital subscribed by JFCP to retire debt to entities related to him in the face of the representations made to JFCP is said by ASIC to demonstrate that the undertaking of GPEL ‘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’ (Re Producer’s Real Estate & Finance Co Ltd [1936] VLR 235 of 246) and to reflect a willingness on the part of Alfred Wong to prefer the interests of Richland (and thus his own interests) to that of the members and creditors of GPEL.

9. GPEL contends that capital subscribed by a shareholder can properly be used for the commercial purposes of GPEL and the application of the funds subscribed by JFCP to reduce debt and eliminate interest was both orthodox and prudential. 

10. A second contention which is said by ASIC to lead to a conclusion that the court ought to be satisfied that it is just and equitable that GPEL be wound up is that notwithstanding a decision on the part of the Board of GPEL on 11 May 2005 to place ‘a freeze’ upon raising money from the public by the issue of promissory notes, Alfred Wong caused a ‘Second Information Memorandum’ to be developed and published pursuant to which further promissory notes were issued by GPEC and monies raised from the public without the authority of the Board of Directors. 

11. Alfred Wong concedes that the Board did place a freeze upon taking steps to cause GPEC to issue further promissory notes.  However, in a process of introducing GPEL to the market as part of a high level ‘soft’ presentation of GPEL’s activities and those of GPEC, a number of participants at particular presentations conducted by Mr Andris Lielkajis ‘under the banner of Great Pacific Investment Services Pty Ltd’ (‘GPIS’), a company related to Alfred Wong, took up a ‘Second Information Memorandum’, completed an application form for the notes bearing a maturity date of 31 March 2007 or 30 September 2007 or two years from the issue date at an interest rate of 11.5% per annum and subscribed particular funds which were accepted by GPEC.  Alfred Wong contends that he elected not to return the monies raised through the issue of the notes on advice from Andris Lielkajis as it would have had, in his judgment, an adverse market impact upon GPEL to do so. 

12. In reliance upon these contentions, ASIC seeks a winding up order on the just and equitable ground in respect of both GPEL and GPEC. 

13. ASIC further contends that the application by Alfred Wong of the funds raised by the subscription from JFCP, to retire debt due to Richland in circumstances where, upon a proper construction of the terms and conditions of the facility, the debt was open to conversion to equity at the election of GPEL thus extinguishing the debt, was conduct contrary to the interests of the members of GPEL as a whole and had the effect of preferring the interests of Alfred Wong and entities related to him. Accordingly, ASIC seeks a winding up order in reliance upon s 461(1)(e). Alfred Wong contends that the application of the funds was orthodox and prudential and does not represent conduct in the affairs of the company on his part designed to serve his own interests rather than the interests of members as a whole.

14. A considerable body of affidavit evidence has been filed in the application.  The question of whether GPEL is at the date of the hearing insolvent is conditioned by the history of events from the date of acquisition of control of GPEL by the current shareholder group on 15 April 2003 and the various financial arrangements struck in order to enable the company to continue as a going concern.  Other questions going to the just and equitable ground and whether the directors have acted in the affairs of the company in their own interests rather than the interests of the members as a whole involves an examination of the governance of the company and the conduct of individuals. 

15. I find the facts to be these. 

    THE FACTUAL EVENTS

16. GPEL was previously known as Envirostar Energy Limited.  The company was placed in administration on 3 October 2002.  On 21 February 2003, Great Pacific Financial Group Pty Limited (‘GPFG’) entered into a Heads of Agreement with the administrators pursuant to which GPFG on behalf of a syndicate of investors agreed to contribute $1.76 million in exchange for the issue of shares representing 77% of the issued capital upon completion of the issue.  $1M was to be available to the administrators and creditors of the company under a proposed Deed of Company Arrangement (‘DOCA’) and $500,000 was to be applied as future working capital.  The deed proposal was approved by creditors on 27 February 2003 and the parties entered into the DOCA on 18 March 2003.  On 15 April 2003 the shareholders resolved to approve the issue of the relevant shares to the GPFG syndicate members, change the company name to GPEL and appoint Alfred Wong, Mr Richard Gerald Nott and Mr Danny Au‑Yeung as Directors of the company.  Mr Edwin Yeung was appointed company secretary on the same date. 

17. On 25 August 2003, upon performance of the terms of the DOCA, the Deed Administration came to an end. 

18. Alfred Wong is a Director and Chairman of the Board of GPEL.  Alfred Wong is also the Sole Director and Company Secretary of Richland which is the trustee of the Richland Property Trust.  Alfred Wong is a beneficiary of that trust and has complete authority to act on behalf of the Richland Property Trust.  Alfred Wong says that he has complete authority to deal with the trust and its assets.  Richland does not trade other than in its trustee capacity.  Alfred Wong is the Sole Director of GPEC which is a wholly owned subsidiary of GPEL and a Director and Shareholder in GPFG.  GPFG has a minimal shareholding in GPEL.  Alfred Wong concedes that although he does not have any direct shareholding in GPEL, he controls approximately 20% of the issued share capital in GPEL through companies related to him. 

19. Alfred Wong and Andris Lielkajis are Directors of GPIS.  Mr Ivan Wong is the other director of GPIS.  Both Alfred Wong and Andris Lielkajis are also directors of Great Pacific Securities (‘GPS’), a financial services licensee.  Alfred Wong controls 51% of GPS.  GPIS has a strong relationship with another company controlled by Andris Lielkajis (of which he is the Sole Director and Shareholder), namely, A.B.L Global Spectrum Pty Ltd (‘ABL’).  Andris Lielkajis says that GPIS ‘lends its name to ABL’. 

20. Other individuals who have had a role to play in GPEL include Peter Gan who was appointed Managing Director of GPEL on 14 May 2004 having commenced employment with GPEL as its chief operating officer in June 2003.  Peter Gan was formerly employed as the commercial development manager of Energy Australia where he was in charge of implementing that company’s green energy strategy.  He resigned in mid July 2005.  Robert Patterson was appointed a director of GPEL on 1 July 2004 and resigned in August 2005.  William Lamont was appointed as a director on 16 September 2005.  Richard Nott resigned as a director on 25 August 2005.  Mr Edwin Yeung has been the company secretary of GPEL since 15 April 2003 and the company secretary of GPEC since 21 December 2005.  Danny Kam Yun Au-Yeung has been a director of GPEL since 15 April 2003.  Heymala Eardley was the assistant company secretary of GPEL from 1 June 2004 to 30 December 2005. 

21. GPEL has had, since 15 April 2003, a number of power generation projects under consideration most of which were in the planning and development stage by Envirostar Energy Limited prior to the GPFG proposal.  Those projects include: 

    (a)The construction of a 5MW power plant at Staplyton which was completed and commissioned on 23 March 2004.  That project encountered a range of difficulties and the shares in the operating subsidiary GPES No. 1 were sold to BMI Group Pty Ltd on 5 July 2006;

    (b)A proposal to develop a 13.5MW power plant at Staplyton in Queensland.  In January 2006 GPEL purchased a second hand power plant located in Altona in Victoria through a wholly owned subsidiary;

    (c)A proposal to develop a 100MW clean coal power generation plant at Morwell in Victoria;

    (d)A proposal to develop a 20MW power plant at Kemerton in Western Australia;

    (e)A proposal to develop a power plant at Bell Bay in Tasmania;

    (f)A proposal to participate in a project in China called the ‘Dalian Environmental Coal Gasification Project’.

22. From 15 April 2003 when Alfred Wong became involved with GPEL, he accepted that it would be necessary for a company or companies related to him to financially stand behind GPEL and provide financial facilities to allow the company to function as a going concern and implement steps in the development of the projects under consideration.  Alfred Wong accepted that Richland would provide loan facilities to GPEL to enable it to meet cash flow demands.  In June 2003, Richland began providing financial assistance to GPEL.  No written loan facility agreement was brought into existence at that time to document the terms and conditions of the Richland GPEL financial facility. 

23. However, on 17 December 2003, a document was brought into existence (a ‘Term Sheet’) between GPEL and Richland which referred to a principal sum of $2.5M ‘to provide working capital for the Borrower’ with a maturity date of 30 June 2004.  The ‘credit facility’ was to be supported by a ‘registered fixed and floating charge over the borrower’s assets to be ranked behind the loan facility from Investec Bank (Australia)’ attracting an interest rate at 7% above the 30 day bank bill rate with an establishment fee of 3% of the facility.  Interest was to be capitalised.  The brief Term Sheet describes the repayment term in this way:

    ‘Principal Repayment

    The credit facility may be extended for a further term based on similar terms and conditions subject to mutual agreement.  In the event that the facility is not extended, the borrower has the discretion of repaying the principal sum and all accrued interest in cash or in  the form of fully paid ordinary shares in the Borrower.  The issue price of these shares will be calculated at a 15% discount of the weighted average trading price of the company shares over the five days prior to the Maturity Date. [30 June 2004]’

24. The reference in the Security Clause of the Term Sheet to the Investec loan facility was a reference to a facility dated 30 September 2003 by which Investec provided a loan facility of $3.5M in two tranches to GPES No. 1 to enable that company to develop a new 3.3MW renewable energy power plant at Staplyton in Queensland involving design, construction, testing and completion, defects rectification and operation and maintenance activities.  The facility involved a pre and post commissioning facility comprising structured senior debt of $2.9M and subordinated debt of $600,000 on particular terms and conditions.  The facility had to be supported by particular fixed and floating charges, step in rights to cure potential breaches in relation to a Power Purchase Agreement and Lease Agreement and 15 conditions precedent including confirmation from the sponsor (GPEL) and its directors that the Borrower was not subject to any outstanding claims, nor in default of any facilities and that no material adverse change had occurred since the formulation of the Term Sheet between Investec, the sponsor (GPEL) and the Borrower.  In addition, the Borrower was required to establish particular accounts from which the debt servicing costs were to be paid.  The Borrower was required to maintain particular defined ‘ratios’ described as the ratio of ‘Available Cash Flow to Debt Servicing Costs’ (called ‘DSCR’) and a ratio of ‘Forecast Available Cash Flow to Forecast Debt Servicing Costs’ (called ‘FDSCR’). 

1. On 9 January 2004, Investec issued a letter to GPEL submitting an ‘in principle’ offer to provide and syndicate construction and term finance for five power generation projects – Staplyton Stage 2, Nowra, Morwell, Bell Bay and Kemerton.  The Borrower would be GPEL.  The facility amount was to be $20.4M per project subject to financial modelling demonstrating that the facility could be fully repaid on commissioning by means of a ‘Senior Construction Facility’ by which particular coverage and debt servicing ratios could be maintained by the Borrower.  The purpose was to fund 60% of the construction cost of each project with the Borrower subscribing 40% although that proportion might partly be accommodated through draw down of a ‘Junior Construction Facility’ also provided by Investec.  The Senior Construction Facility contemplated a construction period of 24 months, capitalisation of interest, an elevated default interest rate, the provision of detailed securities, ‘step in rights’ upon default in relation to particular agreements, and 20 conditions precedent.  Some of those conditions precedent involved syndication of the facility by Investec to banks, Investec’s satisfaction with off‑take agreements and fuel supply contracts, Investec’s satisfaction with financial projections, the passing of a defined ‘completion test’ (and the meeting of operational targets) for the pilot project plant at Staplyton, project construction to be undertaken by an experienced Engineer, Procurement & Commission (‘EPC’) contractor satisfactory to Investec and approval of the EPC contract by Investec. 

2. The Junior Construction Facility contemplated a borrowing by GPEL of a facility amount of $3.2M subject to particular ‘loan life coverage ratios’ and ‘forward debt servicing ratios’ to fund a further 10% of the construction costs of any particular project which would leave the sponsor borrower GPEL to raise 30% of the proposed or anticipated total construction cost for each project.  Similar conditions applied to the Junior Construction Facility as those governing the Senior Construction Facility. 

3. Between June 2003 and June 2004, Richland provided financial facilities to GPEL by transfer of monies to the bank account of GPEL and direct payment of creditors.  At 30 June 2004, the principal sum owed to Richland by GPEL was $3,370,857.60.  On 30 June 2004, Alfred Wong on behalf of Richland wrote a letter confirming the extension of the existing facility for an additional term.  The extended or new principal facility was a $5M facility with a maturity date of 30 June 2005.  The remaining elements of the ‘Term Sheet’ are identical to the terms of the previous Term Sheet.  The principal repayment term provided that in the event the facility was not extended, GPEL had a discretion to repay the principal sum and all accrued interest either in cash or by issuing fully paid shares in GPEL at a discount price to market determined by the same methodology as the earlier Term Sheet. 

4. In June 2004, Alfred Wong had a conversation with Mr Edgar Yan Kai Hung.  Edgar Hung is a Director of Austcorp Group Limited (‘Austcorp’) and has held that position since 13 April 1992.  In June 2004, Alfred Wong asked Edgar Hung whether Richland could borrow $2.27M from Austcorp.  Edgar Hung agreed subject to the provision of security by Richland for the loan.  Alfred Wong suggested that Richland could assign to Austcorp the debt owed by GPEL to Richland.  Alfred Wong told Edgar Hung that the Richland loan to GPEL was secured by a fixed and floating charge over GPEL’s assets.  On 1 July 2004, Richland entered into a Deed of Assignment with Austcorp pursuant to which in consideration of the payment of $2.27M by Austcorp to Richland, Richland assigned to Austcorp ‘all of its rights, title and interest in the loan agreement between Richland and GPEL dated 17 December 2003’.  The funds were to be paid within 30 days.  Edgar Hung describes the assignment document as ‘security’ for the Austcorp–Richland loan of $2.27M.  The Deed of Assignment appears to be an out and out assignment to Austcorp of all of Richland’s rights and interests in the GPEL/Richland ‘Loan Agreement’.  If the assignment was simply an assignment by way of security, it was subject to defeasance upon discharge of the debt.  The assignment did not operate to cast an obligation upon Austcorp to provide further loan funds to GPEL.  Accordingly, at 30 June 2004, the Richland GPEL $2.5M facility had been extended by Richland as to both the term (30 June 2005) and the amount ($5M). 

5. On 22 July 2004, GPEL’s company secretary Edwin Yeung wrote to Austcorp and confirmed that Richland ‘has notified us of its intention to assign the loan to your company.  Effective immediately, all of Richland’s rights and obligations under the said loan agreement will be transferred to your company.  As at 30 June 2004, the outstanding loan amount (including accrued interest) is approximately $3.37M’. 

6. As to the possible defeasance of the security, or other reversion arrangement, Alfred Wong on 22 July 2004 wrote to Austcorp to set out the following arrangements:

   ‘I refer to the above loan agreement between Richland and GPEL and the subsequent assignment of loan to your company dated 1 July 2004.

   I hereby agree to grant your company a put option to be exercised from 30 September 2004 onwards.  The consideration price of this put option is the aggregate of $2.27M plus all interest accrued at 25% per annum from the date of the agreement less any interim payments paid by GPEL to your company in accordance with the loan assignment.

   Upon exercise of this put option I will be entitled to all loan proceeds received by your company from GPEL that are in excess of $2.27M plus the accrued interest (at 25% per annum).’          

   [abbreviations and emphasis added]

7. Upon Austcorp’s exercise of the put option, Richland would be entitled to all loan proceeds received by Austcorp from GPEL in excess of the debt due to Austcorp of $2.27M plus the accrued interest at 25% per annum. 

8. On 22 July 2004, Alfred Wong wrote to Austcorp referring to the Deed of Assignment of 1 July 2004 and instructed Austcorp to transmit $2M to the bank account of Ms Apiang Woong and the balance of the $2.27M to Richland’s account at National Australia Bank Limited.  Those transfers took place on 22 July 2004.  The balance funds paid to the Richland account constituted $27,637.77. 

9. On 7 May 2004, Alfred Wong had defaulted under the terms of a loan facility between Apiang Woong and Alfred Wong having a commencement date of 8 May 2003 pursuant to which Apiang Woong advanced $3M to Alfred Wong for 12 months with interest payable at a ‘Fixed Interest Lower Rate’ (‘FILR’) of 35% per annum to be paid on 7 November 2003 and 7 May 2004.  The Agreement provided that in the event of default, interest would be payable at a ‘Fixed Interest Higher Rate’ (‘FIHR’) of FILR plus 10% (45% per annum).  The principal was repayable on 7 May 2004.  The loan was secured by a fixed and floating charge over the assets of Pacific International Consolidated Pty Ltd (‘PICPL’), a wholly owned subsidiary of Richland in support of a guarantee of the loan by PICPL; a first ranking mortgage of land owned by G P Energy in support of G P Energy’s guarantee of the loan; and other mortgages over property.  Alfred Wong is the Sole Director and Secretary of G P Energy.  Lisa Wong is the sole shareholder.

10. On 13 October 2004, a further amount of $1,366,197.96 was paid to the account of Apiang Woong.  Alfred Wong conceded in giving evidence that most of the $2.27M raised by Richland was used to repay the debt to Apiang Woong and that Alfred Wong was the Borrower.  Although the debt was due for repayment in May 2004, Alfred Wong gave evidence that there was no demand for repayment of the loan from Apiang Woong at that date. 

11. At paragraph 34 of Alfred Wong’s affidavit filed 19 July 2006, Alfred Wong said that the purpose of assigning the debt to Austcorp, from Richland’s point of view, was ‘part of its treasury management’ and that it was Alfred Wong’s intention that ‘the facility provided by Richland being a related party be replaced by an arms length facility from Austcorp.  Also, I perceived there to be a potential for a long term strategic relationship between GPEL and Austcorp and I saw this as an opportunity to start to establish such a relationship’.  It seems much more likely that Richland entered into the relationship with Austcorp to raise funds to enable Alfred Wong to pay Apiang Woong (as occurred) a substantial amount of the monies that had become due by him on or about 8 May 2004. 

12. In October 2004, Edgar Hung asked Alfred Wong to provide him with a copy of the fixed and floating charge obtained by Richland over GPEL’s assets pursuant to the Richland GPEL Term Sheet.  Approximately 7 to 10 days after the request, Alfred Wong told Edgar Hung that there was no charge in place.  Edgar Hung told Alfred Wong that the GPEL debt to Richland was a key security in support of the Austcorp advance to Richland and that Austcorp expected the loan to be secured by a charge over GPEL’s assets.  Edgar Hung suggested to Alfred Wong that either a demand ought to be made upon Richland or GPEL of sufficient monies to reduce any substantial risk to Austcorp or, alternatively, Austcorp might step into Richland’s shoes and require GPEL to grant a fixed and floating charge over GPEL’s assets under the Richland GPEL loan facility. 

13. Some time after those discussions in October 2004, Alfred Wong told Edgar Hung that GPEL had funds available to repay the Austcorp Richland loan so as to ‘clean up the default of not having the charge in place’. 

14. The significance of these events is said to be this. 

15. Richard Nott, a Director independent of the GPFG syndicate, contends that the continuing financial support of Richland and Alfred Wong was fundamental to the status of GPEL as a ‘going concern’ because Richland was a friendly foundation shareholder and therefore unlikely to act, so far as the Richland GPEL debt facility was concerned, in a way that would prejudice GPEL’s ‘liquidity’, that is, access to needed cash flows.  The assignment of the debt to Austcorp introduced a third party unconstrained by those concerns and therefore the assignment was a material matter.  Moreover, Richard Nott and ASIC contend that although the assignment occurred in July 2004, the Board was not informed of the assignment until Peter Gan advised the directors at a Board meeting, in the absence of Alfred Wong, on 15 December 2004.  Richard Nott contends that his concern about the impact of the changed circumstances was compounded by Peter Gan’s advice at the same meeting of directors that a substantial part of the JFCP subscription of $6.3M had been applied to discharge debts due to Richland and Austcorp notwithstanding the Board’s view of 17 November 2004 that the Richland GPEL loan be converted to equity at the maturity date, or, alternatively, be restructured as ‘long term debt’ because GPEL did not have the capacity to repay the loan.

16. Alfred Wong contends that GPEL was told of the assignment, Richard Nott knew of it well before 15 December 2004, and, in any event, Richland continued to support GPEL with financial facilities thus ensuring GPEL’s access to required cash flows to meet its obligations. 

17. Accordingly, it is necessary to examine GPEL’s dependence upon Richland, the circumstances of payments to Richland and Austcorp, and the conditions of Richland’s continuing support. 

18. By the meeting of directors of GPEL on 20 May 2004 (attended by directors, Alfred Wong, Richard Nott and Danny Au Yeung; and others, Edwin Yeung, Ms Helen Ho (GPEL Management), and Peter Gan (Chief Operating Officer of GPEL at that time)) the second tranche of the Investec loan [$3.5M facility] had been drawn down, the pilot plant was exhibiting particular ‘sensitivity’ to diverse green waste fuel (thus requiring engineering changes) and a possible capital raising was under consideration.  The Board resolved to appoint Peter Gan as Managing Director.  At the Board meeting on 16 June 2004 (attended by the same individuals) the Chief Operating Officer reported that the pilot plant was experiencing problems and that the ‘five MW plant at Staplyton was never meant to be a stand-alone plant, and was designed to share the infrastructure and sophisticated processes of the second stage 20MW on site.  There are three key areas that need to be addressed – fuel handling system, sensitivity to fuel quality, and the plant’s general handling of ash’.  A capital raising of $10–15M was under consideration and because the delayed capital raising had affected GPEL’s ‘cash flow projections’ GPEL would proceed with a private placement of shares in the form of convertible notes.  Peter Gan was asked to prepare an analysis of projected capital requirements, an operating budget, an estimate of overhead expenses, etc, to 30 June 2005.  The Board Minutes of that meeting recognised that ‘a key perimeter of the loan facility from Investec Bank is the debt cover ratios.  This will be addressed in the quarterly review which is due shortly’.  The Minutes also note, ‘Alfred presented the possibility of acquiring three of the power plant sites (ie. Kemerton, Bell Bay and Nowra).  Taking into account the company’s current financial constraints, he would like the Board’s approval to purchase the properties through a related company.  No decision was made’.  

19. At the meeting of directors on 21 July 2004 (attended by the same individuals), Peter Gan reported that fuel quality for the pilot plant would remain a ‘standing agenda item until a long-term, cost effective solution could be found’.  As to the capital raising, the response had been lukewarm.  GPEL elected to consider a different form of convertible note issue and third party debt funding arrangements.  As to the financial issues, the Board assessed the cash flow projections and considered, assuming the convertible note issue raised $10M and TechComm took up an equity placement of $7-8M and funding was secured from LM Investment for the Staplyton No 2 project, GPEL was ‘financially sound’.  The financial projections were to be reviewed at the next Board Meeting. 

20. At the meeting of directors on 18 August 2004 (attended by the same individuals) Alfred Wong reported that investor interest in the convertible notes had waned.  Peter Gan reported that optimal revenue from the pilot plant had not been achieved and ash-handling costs had increased overheads.  As to the financial matters, the minutes record:

    ‘Financial Matters

    (a)The Company’s cashflow projections and operating budget were tabled.

    (b)Richard expressed concern over the Company’s liquidity.  The Company’s working capital is currently funded by a related company loan.  It was agreed that Alfred will review the loan terms, with the aim of increasing the principal amount.’

21. On 26 August 2004, the Audit & Risk Management Committee of the Board of Directors met.  Present were Richard Nott (Chairman), Alex Breen, (Consultant), Robert Patterson (Independent Director), three representatives of GPEL’s auditors, ‘BDO’ - Chartered Accountants (Ian Fergusson – Audit Engagement Partner, Ralph Goodman – Client Service Partner, and Henry Duggan – Audit Engagement Manager), Peter Gan, Edwin Yeung (Company Secretary), and Heymala Eardley (Assistant Company Secretary).   The Audit Committee considered the basis for a correction to the carrying value of the 5MW pilot plant having regard to the cash flows and the appropriate discount rate to be applied, as Ian Fergusson and Henry Duggan strongly felt that the pilot plant was over valued.  Richard Nott considered that the assets should be carried at values consistent with the methodology adopted by GPEL’s lenders.  The minutes record:

    ‘Edwin confirmed that the Board had approved the Cash Flow forecast at their last meeting when asked by Ian.  An extension of credit facility, for $5m maturing 30^th June 2005, from Richland Investment (Australia) Pty Ltd was also tabled at the meeting.  Henry also requested a copy of the original loan agreement that was assigned to Austcorp Group Limited from Richland Investment (Australia) Pty Ltd.’

22. At the meeting of the Board Audit & Risk Management Committee Meeting on 20 September 2004 (attended by the same individuals attending the meeting on 26 August 2004), the annual report for the year ending 30 June 2004 was reviewed.  The valuation of the ‘recoverable amount’ of the pilot plant was determined by discounting cash flows at the discount rate of  12.5% thus resulting in a write down of  $1.34M of the capitalised costs.  The auditors reported that a particular financial comment would be included in the report.  The minutes record:

    ‘(a)     Review of 2004 Annual Report

    The auditors have also included an ‘Emphasis of Matter’ with respect to the going concern of GPEL in the Independent Auditor’s Report.  The note explains that the company is dependent on the continuing support of its shareholders and lenders to raise sufficient finance to build more economically feasible power plants in the 20 MW range.

    (b)External Audit

    It does not mean the accounts are qualified, but Henry [Duggan – BDO] drew to the Committee’s attention to the Emphasis of Matter paragraph with respect to going concern in the BDO Report to the Board.’

23. The BDO Report to the Board considered by the Audit and Risk Management Committee on 20 September 2004 for the financial year ended 30 June 2004 contained the following comment:

    ‘Based on our work, we plan on issuing an unqualified audit report.

    However, given the current financial position of the Group, we consider it appropriate to include a paragraph regarding the inherent uncertainty regarding continuation as a going concern.  The following paragraph will be included in the audit report: 

    Inherent Uncertainty Regarding Continuation as a Going Concern

    Without qualification to the opinion expressed above, attention is drawn to the following matter.  As disclosed in Note 1 of the financial report and having regard to the extent of the consolidated entities excess of current liabilities over current assets at the reporting date, the ability of the company to continue as a going concern is dependent upon the director’s ability to attract further equity investment into the company; the ongoing financial support of its shareholders and lenders and its ability to derive sufficient future income from its existing and proposed Green Energy Power Plants. 

    In the event that the company becomes unable to continue as a going concern, it may be required to realise assets and extinguish its liabilities other than in the normal course of business and at amounts different from those currently stated in the financial report.’

24. BDO reported that the Group’s operating loss before income tax for the financial year was $5,836,067.  The Group incurred a gross margin loss due to the fact that the 5MW power plant was not running at full capacity although operating and maintenance costs were still being incurred at normal rates. 

25. The BDO Report also contains the following observations:

    ‘After discussions with management it was agreed that a discount rate of 12.5% should be applied to the cash flows of the 5MW plant.  This resulted in the capitalised costs relating to the 5MW plant of $9,475,906 being written down by $1,382,299 to $8,093.607.

    We considered it appropriate that the financial statements disclose that the recoverable amount of the projects under construction is dependent upon the group receiving the continued support of its shareholders and lenders and the successful raising of finance to fund the construction of the next phase of plants.

    Going Concern

    The Group has now built and conditioned the 5MW Staplyton Plant.  This resulted in the Group drawing the second tranche of financing of $3,5m from Investec.  The Group has secured a right to $100M debt to finance the construction of a number of 20M plants which is dependent upon the Group obtaining equity finance of 30% of project costs.  The Group has continued to be financially supported by Great Pacific Finance through Richland Investments.  The Group is dependent upon going to the market to raise finance to build a more economically feasible plant in the 20MW range.  Our audit report is not qualified but it does contain an ‘emphasis of matter’.

    With respect to going concern. 

    We believe that adequate disclosure of the facts has been given in Note 1 of the financial statements.  This note states that the Group is dependent upon the company being able to raise sufficient finance to fund construction of the 20MW plant and the ongoing financial support of the company’s shareholders and lenders.’

1. Note 1 to the BDO Report contains the ‘going concern’ comment.  Note 5 to the BDO Report notes the entities related to Alfred Wong namely, GPFG, Richland, G P Energy and Great Pacific Finance Pty Limited.  Note 5(iii) is in these terms:

   ‘GPEL obtained a loan facility from Richland for a working capital purpose.  The interest started to accrue from 1 July 2003 on the outstanding principal at 12% p.a. and an establishment fee of $75,000 was charged.  It is secured by a fixed and floating charge over GPEL’s assets.  As at 30 June 2004, GPEL owed Richland $3,370,858 (2003 $24,065) and $298,507 as loan principal and borrowing costs payable respectively. 

   After balance date Richland assigned all its right and obligations under the facility agreement to an unrelated party.  Richland has granted a put option exercisable from 30 September 2004 onwards to the unrelated party whereby Richland would acquire this loan including accrued interest for the amount the loan was stated at the date the option is exercised. 

   GPEL has secured a further $5 million loan facility from Richland, which has not been used as at balance date.  The interest charge is 7% per annum above the 30 days bank bill rate and the facility is secured by fixed and floating charge over GPEL’s assets.’

2. The accounts for the financial year ending 30 June 2004 were signed by Alfred Wong on 28 September 2004. 

3. At the meeting of directors on 22 September 2004 (attended by those individuals attending the meetings on 20 May 2004, 21 July 2004 and 18 August 2004), the Board considered in detail the operating cash flows available to GPEL and the requirement for additional capital.  The minutes of the meeting record these matters:

   ‘Operating Cashflows

   (i)Peter reported that accounts payable are ageing quickly.  The most substantial amount is the accumulated fees payable owing to TechComm, some of which date back to the commissioning period.

   (ii)Richard expressed his concern over the Company’s current gearing ratio (approximately 3:1), in particular its impact on the loan facility from Investec.  Alfred explained that the loan is project specific with recourse only to the project’s SPV (ie Green Pacific Energy Staplyton No 1 Pty Limited).  The loan should not be affected by the parent company’s balance sheet.  Of greater significance are the plant’s performance and revenue generation capacity.  It is vital for the plant to be able to operate at its optimal capacity and substantiate the cash flow projections.

   (iii)Peter explained that the 5MW plant is gradually overcoming its teething problems and should achieve 90% availability by the end of 2004.  By first quarter of 2005, the 5MW project is expected to achieve the required debt coverage ratio of 1:2 – 1:3.’ 

4. As to additional capital, the minutes record these matters:

   ‘5.       Additional Capital

   In addition to the $3-4 million capital required to construct each plant, the Company requires a few $million as working capital.  Peter reported that both Citigroup and Multiplex have now declined to participate in the project.  The Board discussed ways to improve the Company’s liquidity and to raise additional capital.’

5. The Board discussed the proposal of Viridis Energy Capital Pty Ltd (‘Viridis’) to acquire 100 % of each of the projects upon completion with the result that GPEL would, in effect, act as a project developer and receive a development profit.  The Board also discussed the possibility of Viridis acquiring the 5MW plant at Staplyton.  The Board discussed the in-principle proposal from Investec Bank to fund projects with GPEL providing a 30% equity contribution to the capital cost of each project, the possibility of issuing debentures to raise additional funds and the possibility of a rights issue. 

6. The following further matters are recorded in the minutes of that meeting:

   ‘5.       Additional Capital

   …

   (c)Richard emphasised the need to have a definitive plan to resolve the Company’s capital issues before the Annual General Meeting in November.  The plan should address the capitalisation of Richland’s inter-company loan, and ways of raising additional working capital and funds to roll out phase 2 projects.

   …

   (e)Alfred advised that Richland Investment will continue to provide funds to ensure that the Company has sufficient working capital.  He is also prepared to convert the inter-company loan into subordinated equity to improve GPEL’s gearing ratio.  This may be in the form of renounceable rights issue with an underwriting agreement from Richland for the amount of the loan.  Other shareholders would then have the opportunity to participate.

   (f)Edwin reminded the Board that the gearing ratio will inevitably be reduced with the issue of shares in payment of the EEA acquisition.  The final instalment is currently recorded as a liability in the Company’s balance sheet, but will be converted to equity when the shares are issued upon shareholder approval at the AGM. 

   Bob suggested that the Richland loan could be converted to subordinated equity at the same price as the share issue to James Kwok.’

7. At the meeting of directors on 18 October 2004 (attended by directors, Alfred Wong, Danny Au-Yeung, Peter Gan and Bob Patterson; and others, Edwin Yeung and Helen Ho), the Board discussed the augmentation to the pilot plant to render it ‘relatively stable’, the in‑principle agreement for Viridis to take over the pilot plant once a ‘steady operational state’ was achieved, and the range of potential EPC contractors that might participate in projects.  The directors agreed that securing an acceptable EPC contractor was of ‘utmost priority’ particularly in negotiations with Investec.  As to funding options, the minutes record that:

   ‘Great Pacific Securities, a related entity, would be able to arrange a promissory note issue of up to $6-7 million which would provide sufficient equity funds for one plant, or half equity for two 10MW plants.’ 

   The notes would be likely to incur interest between 12%-15% subject to the maturity date.  Most of the issue proceeds would not be available to GPEL until April 2005. 

8. On 17 November 2004, a meeting of Directors of GPEL occurred.  The directors present were Richard Nott (Acting Chairman), Robert Patterson and Peter Gan.  Ms Helen Ho, Edward Yeung and Heymala Eardley also attended.  The Board considered the capital augmentation expenditure ($400,000) required to solve problems at the pilot plant.  The Board also considered an in-principle proposal from Investec to lend GPEL $21M for the construction of a 10MW plant at Staplyton and the terms of the proposal.  The Board discussed the requirement to secure a contract for the acquisition of the new 10MW plant immediately upon completion as a condition of Investec’s participation.  The minutes note that the original offer from Investec of 70% debt funding with 30% equity contribution by GPEL remained available to finance further 10MW plants. 

9. The Board discussed the relationship between the Investec proposal and the potential contract with Viridis, in relation to both the pilot plant and the proposed Staplyton No 2 project.  The minutes note these matters:

   ‘Financing of the Staplyton Plants

   …

   (b)Ÿ       Investec will lend GPE $21 million in principal and charge us a set up fee of $2 million and a margin of 5.2% on BBSY (Bank Bill Rate) for the construction of the 10MW plant at Staplyton. 

   ŸViridis Energy has made an offer for both the 5MW and 10MW plants at Staplyton for $29 million.  The Investec loan is conditional on a take out, post construction. 

   ŸThe Viridis Energy offer is conditional on the 5MW plant operating at a steady satisfactory state (approximately three months at 90% availability).

   ŸJardine Fleming will be taking up an equity investment in the GPE parent company for about $6 million.’

10. The proposed subscription by JFCP in GPEL is noted in these minutes expressly in the context of a subscription directly related to the financing of the Staplyton Plants.  The discussion of the Investec proposal at the meeting on 17 November 2004 was consequent upon an email on 27 October 2004 from Peter Gan to the members of GPEL’s Board of Directors advising that Investec was formalising a proposal for an in‑principle offer to finance construction of a 13.5MW plant at Staplyton of $19M which in the letter of offer of 18 November 2004 was described as a $21M facility less $3M of ‘construction equity’ to be contributed either by GPEL or construction vendors. 

11. The minutes of 17 November 2004 further record these matters:

    ‘…

    (e)Robert raised the issue that after spending all this money on the 5MW plant, it still may not reach the desired level of availability and therefore was concerned that the future funding and sale of the 5MW and 10MW plants was dependent on an event that may not eventuate.  This may in turn jeopardise the Company’s ability to meet the Investec and Viridis’ funding prerequisites.

    …

    (i)Robert was concerned that even after spending $400,000 on the 5MW plant, the time frame it is going to take to prove a steady satisfactory state would mean that the conditions to satisfy Investec and Viridis Energy would not be met until April 2005.  And if the plant still does not achieve the notional availability level, it isn’t worth anything to GPE and we lose both contracts.

    (j)Peter agreed that his preference would be for equity funding from the likes of Jardine Fleming or the Malaysian Group as referred to by Robert rather than be tied to contracts from Investec and Viridis Energy that are conditional on the 5MW plant being on a steady satisfactory performance level.

    …

    (m)Robert also raised the issue of Alfred’s loan to the Company via Richland.  Presently, the Company does not have the finance to repay the loan, and it was suggested that the loan should either be converted to equity or recorded as a long-term debt.  Peter to discuss this arrangement with Alfred.

    (n)Peter confirmed that the Jardine Fleming’s Acceptance/Advice Form has already been signed and received by us and therefore approximately $6 million increase in equity is confirmed, which is expected to reach our account over the next 1-2 days.  Robert queried the items on the cash forecast and reiterated that an extra $3-5 million is still required to cover equity for the 10MW plant despite the extra injection of funding from Jardine Fleming.’

12. As to the financial matters, the minutes record:

    Financial Report (r)

    ‘It was agreed that the results for October were very disappointing due mainly to the plant problems mentioned earlier.

    …

    Comments were made on the budgeting and forecasting process and the lack of confidence that can currently be placed on this information, seeing as the budget is already $1 million out and in all likelihood it will end up being $2 million out by the end of the financial year.  Robert suggested that the projection should be recalculated in a more realistic forecast produced at least for the second half of the financial year.’

13. The terms upon which Investec would provide or alternatively procure construction finance for GPEL for a 10MW power generation plant at Staplyton are set out in Investec’s letter to Peter Gan dated 18 November 2004.  The proposal required Investec to be satisfied that the 5MW pilot plant had ‘reached “steady state” that is, it is performing in accordance with the project model and achieving the coverage ratio specified in the original loan facility’ and that ‘a key condition precedent will be the execution of a sale and purchase agreement with Viridis Energy Capital Pty Ltd for the acquisition by Viridis of both the pilot and the project … on the commissioning of the project.’   As to the earlier arrangements, Investec said, ‘The mandate previously given by GPEL to (Investec) to provide or syndicate finance for projects totalling 83 megawatts in aggregate [remains] in place notwithstanding that the project may now be separately funded as set out in this note.  We expect that the earlier mandate will still apply to the next 83MW of capacity developed by GPEL beyond the project itself.’  The terms and conditions of the offer of 18 November 2004 recited a facility amount of $21M including interest capitalisation less $3M of ‘construction equity’ to be contributed either by GPEL or construction vendors to enable GPEL to fund the construction (and Investec’s establishment fee of $2M) of a 10MW plant at Staplyton.  Investec required the securities, mortgages and step‑in rights and conditions precedent reflected in Investec’s terms and conditions for the earlier facilities and particular undertakings.  The events of default on the part of GPEL in respect of the new Staplyton facility included any event of default by GPES No. 1 as the Borrower in respect of the pilot plant. 

14. On 15 December 2004, the Directors of GPEL met.  Present were directors, Richard Nott (Acting Chairman), Robert Patterson, Danny Au-Yeung and Peter Gan and others, Helen Ho, Edwin Yeung and Heymala Eardley.  Alfred Wong was unable to attend.  The minutes record these matters:

    ‘3.       Matters arising from previous minutes

    Peter gave a quick update on the outstanding action items from the previous meeting:

    ·    Jardine Fleming purchased $6.3 million equity in the Company.

    ·    All outstanding debts with Richland and Austcorp have been settled.

    …

    5.Managing Director’s Report

    (a)Financial snapshot

    Peter explained that a substantial part of the Jardine Fleming investment was used to retire the debt with Richland and Austcorp. 

    Richard strongly expressed his disapproval of the debt repayment, especially since it was clearly stated at the last meeting that the debt with Richland be either converted to equity or long-term debt. 

    Peter explained that the debt to Austcorp was overdue and had to be repaid.  This was the original loan from Richland that was later assigned to Austcorp. 

    There is, however, a new line of credit available from Richland for $2 million. 

    Richard stressed that as long as there is another facility that is able to replace the retired debt such that the Company’s liquidity is not affected. 

    Richard also pointed to the balance of payables and queried where the company was going to get the finance to pay its other outstanding debts.  Peter responded that the balance amount owing to TechComm (approximately $1 million) would be converted to equity.

    Peter also has the option of issuing promissory notes for $4-5 million with 11.5% interest per annum for two years.  Danny suggested that if the company is still unable to obtain the finance needed, he would be able to organise bridging finance, however, this would be at a substantial cost to the company. 

    Peter acknowledged that the retirement of the debt to Richland and Austcorp has put more pressure on him to go to the market for additional financing, however, he was confident that the problem would be resolved as soon as the EPC contracts were crystallised.

15. Robert Patterson asked whether in the light of the ‘unsustainable pattern’ of diminished trading revenue and increasing costs, ‘it was worth persevering with the 5MW plant or would it be better to shut it down now and cut our losses?’  Peter Gan said such a step would send a ‘negative message to the market’.  Danny Au-Yeung recommended that once the EPC contract was signed, ‘the 5MW plant should be put on “Care and Management”’.  The action items arising from that meeting included further definition to be introduced into the status of the $2 million line of credit from Richland.  That matter was to be dealt with by Alfred Wong and Peter Gan.  In addition, updated financial forecasts for the second half of the financial year (including a cash flow budget, capital management plan and projected balance sheet) were to be prepared by Peter Gan and Edward Yeung. 

16. The reference in the Minutes of 15 December 2004 to a new line of credit from Richland is reflected in a letter from Alfred Wong to the directors of GPEL dated 8 December 2004 confirming that ‘a new overdraft facility has been granted to your company’.  The Term Sheet recites a loan of $2M available to GPEL ‘to provide working capital’ with a maturity date of 31 December 2005 at an interest margin of 7% above the 30 day bank bill rate.  The ‘principal repayment’ term is the same as the term at [23] except that the expression ‘overdraft facility’ is adopted in the 8 December 2004 document rather than the term ‘credit facility’. 

17. On 9 December 2004, Alfred Wong again wrote to the directors of GPEL referring to the letter of 8 December 2004 and ‘confirmed that the principal sum of the new overdraft facility has been increased to a total of $5 million’.  The Term Sheet recites the provision by Richland of a $5M overdraft facility to GPEL for working capital with a maturity date of 31 December 2005.  The ‘Principal Repayment’ clause is slightly different to the 8 December 2004 Term Sheet and is in these terms:

    ‘The overdraft facility may be extended for a further term based on similar terms and conditions subject to mutual agreement.  In the event that the facility is not extended, the Borrower has the discretion of repaying the principal sum and all accrued interest in cash or in the form of fully paid ordinary shares in the Borrower. 

    In the event that the Borrower chooses to repay in the form of shares, the Lender has the discretion of converting the shares in individual parcels of up to A$200,000 over every consecutive week after the Maturity Date until such time when the total amount outstanding has been fully repaid. 

    The issue of these shares will be calculated at a 15% discount of the weighted average trading price of the company shares over the five days prior to each conversion date.’

18. Neither facility was secured.

    JFCP ARRANGEMENTS

19. On 5 November 2004, Peter Gan attended the offices of JFCP and made a presentation to Paul Michael Willis and Pierre Rene Prentice.  Paul Willis held the position of Senior Research Analyst at JFCP from 4 January 1999 to 30 September 2005.  JFCP is a specialist wholesale Australian equities manager.  Paul Willis was, in his capacity as Senior Research Analyst, primarily responsible for the investment analysis of companies in the energy sector among other sectors.  Pierre Prentice is the ‘Head of Research’ at JFCP and was appointed to that position on 1 October 2003.  Pierre Prentice’s role involves the identification of new investment opportunities, the training and development of staff in terms of their technical skills and the selective review of valuations supporting new investments and investments that contribute materially to the risk inherent in JFCP’s portfolio of investments. 

20. On 5 November 2004, Peter Gan presented an overview of the activities of GPEL supported by PowerPoint slides entitled ‘Presentation to Jardine Fleming dated 4 November 2004’ and a booklet on GPEL letterhead entitled ‘Business Overview’.  Pierre Prentice deposes to these matters in an affidavit filed 5 July 2006:

    ‘7.At the presentation on 5 November 2004, Peter Gan informed my colleague Paul Willis (a Senior Analyst at JFCP) and me that any money received from JFCP by GPE would be used for the cost of construction to expand generating capacity, such as the expansion of the existing 5MW plant at Staplyton in the State of Queensland (the “5MW Staplyton Plant”) to a 10MW or 20MW plant, or new projects planned for Morwell (Victoria), Bell Bay (Tasmania) and Kemerton (Western Australia).

    8.Paul Willis and I were attracted to GPE as an investment prospect for three reasons, namely:

    (a)firstly, the increasing demand for “green power”;

    (b)secondly, the relatively low‑tech and pilot‑proven process used by GPE to generate electricity (high temperature, combustion green waste); and

    (c)thirdly, the existence of $120 million committed loan facility from Investec Bank (Australia) Limited for up to 70% of each project’s costs.’

1. On 7 November 2004, Peter Gan sent an email to the members of GPEL’s Board concerning the formal offer received from Viridis for purchase of the 5MW pilot plant and a future 10MW plant at Staplyton and construction finance from Investec.  Peter Gan’s email reported on aspects of the negotiations with Investec and concluded by saying ‘… We are currently in discussion with Jardine Fleming wrt a possible equity investment at the GPE level.  The Board will be kept abreast of any developments in the aspect.’ 

2. On 15 November 2004, JFCP agreed to subscribe for 31.5 million shares in GPEL at $0.20 per share constituting a total subscription value of $6.3M.  Paul Willis deposes in his affidavit filed 13 July 2006 to these matters:

   ’10.Prior to the Acceptance [completion of the Acceptance Advice Form attached to the placement offer], Peter Gan had informed me that any money received from JFCP by GPE would be used for the cost of construction to expand generating capacity such as the existing 5MW Staplyton Plant in the State of Queensland to a 10MW or 20MW plant or new projects planned for Morwell, Bell Bay and Kemerton. 

   11.On 18 November 2004, GPE released a statement to the Australian Stock Exchange announcing that GPE had completed an institutional placement of 31.5 million ordinary shares for a total consideration of $6.3 million and that those funds would be applied to the roll‑out of GPE’s pipeline of renewable energy projects. 

   12.On 26 November 2004, GPE released a statement to the ASX announcing that GPE had received terms for additional construction funding from Investec Bank under which Investec Bank would provide up to 90% of the plant construction costs.  When I read this announcement, I believed that the monies that GPE received from Investec Bank and the $6.3 Million Injection would be used in conjunction to expand the 5MW Staplyton Plant. 

3. The GPEL statement released to the Australian Stock Exchange on 18 November 2004 is in these terms:

   ‘New Shares Issue

   Green Pacific Energy Limited (GPE) today completed an institutional placement of 31.5 million ordinary shares for a total consideration of $6.3 million. 

   These funds will be applied to the roll‑out of GPE’s pipeline of renewable energy projects.

   Chairman Mr Wong and the Board of GPE welcome the addition of a major institution as one of the substantial shareholders of the company.

   Edwin Yeung
   Corporate Secretary’

4. On 26 November 2004 GPEL’s further statement to the Stock Exchange announced an acceptance of a proposal from Viridis in relation to the acquisition of GPEL’s current and planned green waste to energy plants and announced that GPEL had received terms for additional construction funding from Investec under which Investec would provide 90% of the plant construction costs.  The statement under the name of Edwin Yeung concludes with these two paragraphs:

   ‘With this combination of additional construction finance and subsequent ‘take‑out acquisition, GPE is now in a position to continue the roll‑out of its pipeline of green waste to energy plants with the benefit of preventing any significant dilution of shareholders’ equity for construction costs. 

   The company is delighted with the combination of strategic partners and institutional investors who have recently joined GPE, providing the platform to lead the renewable energy market locally and globally.’

5. On 18 November 2004, GPEL received deposits to its account from JFCP’s syndicate investors namely, $351,516.60 from ‘J P Morgan’, $2,948,483.40 from ‘National Custodian’ and $3M from ‘State Street’.  The deposits total $6.3M. 

6. Peter Gan in an affidavit sworn 31 July 2006 contends that at the meeting and presentation described by Paul Willis and Pierre Prentice, he said that:

   ‘(i)The next project in GPEL’s sights was the construction of the new Staplyton Plant;

   (ii)GPEL needed some equity funding to roll out its projects and also to pay some trade creditors; and

   (iii)Funds would also be made available by Investec Bank (by debt funding) for the roll out of GPE’s projects.’

7. Furthermore, Peter Gan says:  “I am almost certain that I told J F Capital that Alfred Wong would be converting the debt Richland was owed by GPE to equity’ and ‘… at the time I made these representations to J F Capital, I believed that Mr Wong would be converting the Richland loan to equity, and that the funds invested by J F Capital would be predominantly used by GPE for the construction of the new Staplyton Plant’.  Peter Gan also deposes to these matters:

   ’12(l)I accept that I drafted the announcement that was made by GPE to the ASX on 18 November 2004.  However, I am almost certain that I showed the announcement (in its final form) to Alfred Wong and Edward Yeung prior to its release to the ASX. 

   (m)Throughout 2004 and before November 2004, I had had numerous conversations and meetings with Mr Wong about raising equity funding for GPE’s proposed project.  In or about March to June 2004 GPE had been working with Patersons Securities Ltd (‘Patersons’), a stock broking firm, to develop an information memorandum and other material to assist GPE in its raising capital from public markets for the roll‑out of its planned projects.  During these discussions, GPE and Patersons created a PowerPoint presentation in relation to GPE and its business.  I had discussed all of this with Mr Wong and had shown him that PowerPoint presentation (in which respect I refer to the minutes of the Board meeting of GPE for 20 May 2004 and 16 June 2004). 

   (n)The presentation that I made to J F Capital on 4 November 2004 was generally similar to the PowerPoint slide presentations developed in conjunction with Patersons.’

   Use of the JFCP Subscription

8. From 19 November 2004 to 9 December 2004 a number of payments were made by GPEL to Richland and G P Energy and, it seems, Austcorp.  An examination of the primary source documents exhibited to the affidavit of Juliet Johnson filed 5 July 2006 does not reveal a precise reconciliation between debits to the account of GPEL, credits to the accounts of Richland, Austcorp and G P Energy and the general ledger of GPEL.  Juliet Johnson is a Financial Investigator employed by ASIC who has conducted an examination of information produced to ASIC either voluntarily or pursuant to procedures adopted under the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’) in relation to the accounts of Richland, Austcorp, GPEL and other entities.

9. The position seems to be this.  The capital subscribed by JFCP was credited to the account of GPEL (Account No. 552060079 – St. George Bank) on 18 November 2004.  On 19 November 2004, GPEL’s account was debited with a loan repayment to Richland of $500,000.  The Richland account (Account No. 53-873-0670 - National Australia Bank) does not reflect a corresponding credit of that amount.  On 22 November 2004, an amount of $500,000 was debited to the account of GPEL which is reflected in a credit in the Richland account on the same day. 

10. On 23 November 2004, GPEL’s account was debited with a loan repayment of $800,000 which is reflected in a credit in the Richland account on the same day.  On 29 November 2004, GPEL’s account was debited with an amount of $225,888.30 described as ‘Richland Investm’ which is reflected in a credit in the Richland account on the same day.  On 8 December 2004, GPEL’s account was debited with an amount of $300,000 described as a ‘loan repayment’ which is not reflected in a credit in either the account of Richland or in the account of Austcorp (ANZ Bank Account No. 257197099).  Also on 8 December 2004, GPEL’s account was debited with an amount of $1,482,022.35 described as a ‘loan repayment’ which is reflected in a credit in the Richland account.  On 9 December 2004, GPEL’s account was debited with an amount of $1M which is not reflected in the account of either Richland or Austcorp.  The general ledger of GPEL reflects a ‘loan repayment’ on 19 November 2004 of $500,000, two payments to Richland on 22 November 2004 of $286,998.41 and $213,001.59 which constitute $500,000, ‘a loan repayment’ on 23 November 2004 of $800,000, two payments to G P Energy on 29 November 2004 of $110,876.70 and $115,001.60 which constitute $225,888.30, a payment on 8 December 2004 described in the ledger as ‘Austcorp loan repayment +’ of $1,782,022.35 (which presumably represents the debits of $300,000 and $1,482,022.35 on 8 December 2004 to the GPEL account) and a payment on 9 December 2004 of $1M described as ‘Austcorp loan repayment’.  

11. At paragraph 53 of his affidavit filed 19 July 2006, Alfred Wong refers to the affidavit of Juliet Johnson and identifies the characterisation of the payments made between 19 November 2004 and 9 December 2004 by reference to a schedule annexed to his affidavit marked ‘AW11’.  Alfred Wong identifies the payments as these:

Date	Payment Description	Amount
19 November 2004	Loan Repayment – Ri	$500,000.00
22 November 2004	Loan Repayment to Ri	$500,000.00
23 November 2004	Loan Repayment	$800,000.00
29 November 2004	Richland Investm	$225,883.30
8 December 2004	Loan Repayment	$300,000.00
8 December 2004	Loan Repayment	$1,482,022.35
9 December 2004	Loan Repayment	$1,000,000.00
Total	$4,807,910.65

1. Alfred Wong breaks those payments down in this way:

   Repayment of Principal Sum to Richland

Date	Payment Description	Amount
19 November 2004	Principal Sum Repayment	$500,000.00
22 November 2004	Principal Sum Repayment	$76,000.00
Total	$576,000.00

Other Payments to Richland

Date	Payment Description	Amount
22 November 2004	Interest Accrued	$199,000.00
22 November 2004	Loan Establishment Fee	$225,000.00
Total	$424,000.00

Repayment of Principal Sum to Austcorp

Date	Payment Description	Amount
23 November 2004	Principal Sum Repayment	$603,393.07
8 December 2004	Principal Sum Repayment	$1,767,464.53
9 December 2004	Principal Sum Repayment	$1,000,000.00
Total	$3,370,857.60

Repayment of Interest Accrued to Austcorp

Date	Payment Description	Amount
23 November 2004	Interest Accrued	$196,606.93
8 December 2004	Interest Accrued	$14,557.82
Total	$211,164.75

Payment to G P Energy for Rental of Staplyton Site and Morwell Site

Date	Payment Description	Amount
29 November 2004	Site Rental at Morwell	$110,876.70
29 November 2004	Site Rental at Staplyton	$115,011.60
Total	$225,888.30

Summary

Payee	Payment Description	Amount
Richland	Principal Sum, Interest and Establishment Fee	$1,000,000.00
Austcorp	Principal Sum and Interest Repayment	$3,582,022.35
G P Energy	Site Rental	$225,888.30
Total	$4,807,910.65

1. In the period 18 November 2004 to 13 December 2004 payments were made to unrelated creditors constituting $1,480,511.41.  The list of creditors is identified at Annexure ‘AW14’ to Alfred Wong’s affidavit filed 19 July 2006.  Alfred Wong says at paragraph 56 of his affidavit that to the best of his knowledge, information and belief, those payments were authorised by Peter Gan. 

2. At paragraphs 58 to 61 of his affidavit filed 19 July 2006, Alfred Wong explains his rationale for authorising the payments identified at [77] to [81].  He says this:

   ’58.It is my recollection that at or about the time of authorising the first payment in respect of the Richland Austcorp debt, I spoke to Peter Gan about using the funds from J F Capital to retire existing debt.  I made Peter Gan aware of my rationale for the payments out to Richland and Austcorp.  I recall in that discussion Peter Gan did raise some concern about the intended payments in so far as he was concerned as to whether there would be funds available to progress GPE’s projects.  I informed him of the rationale of saving interest and I further reminded him and assured him that Richland would continue to act like a “banker” to GPE in that significant loan facilities from Richland would continue to be made available as necessary.  Peter Gan indicated to me that he was satisfied with my explanation. 

   59.Peter Gan was involved in causing some of the subsequent payments out to Richland and Austcorp to be made. 

   60.I did not try to keep the payment of the monies to Richland and Austcorp hidden.  While I cannot recall whether the other board members were aware of the payments at the time they were being made there can be no doubt that as and from 15 December 2004 they were aware of these payments as these matters were discussed at a board meeting on that day.  While I was not present at that board meeting I have read the minutes of that meeting. 

   61.Further, the offices of GPE are not particularly large and two of the other directors, Danny Au-Yeung and Richard Knott, had their offices very close to mine.  Richard Nott had the office next to mine and Danny Au-Yeung’s office was two doors up from that.  It was not the case that I was trying to keep anything hidden as it was my view that to pay out these debts was sensible and good treasury management.’

3. As to the explanation given to JFCP concerning the use of the subscribed capital and the subsequent application of those funds, Alfred Wong explains his business judgment concerning the use of the funds in this way in his affidavit filed 19 July 2006:

   ’47.I am aware that an announcement was made by GPE[L] on the ASX website on 18 November 2004 informing of J F Capital’s purchase of the shares.  However, I was not aware of the specific detail of the announcement at that time as, to the best of my knowledge, the announcement was drafted by Peter Gan.  To the best of my recollection I had seen an initial draft of the announcement but I remained unaware of the specific detail of the announcement and I was not specifically aware of the words “these funds will be applied to roll out GPE’s pipeline of renewable energy projects”.  However, the purpose of any injection of funds was, of course, to assist GPE in continuing to operate and to roll out the projects which were and remain the business of GPE. 

   48.At the time that the J F funds were received, GPE owed a considerable amount of money to numerous creditors, both unrelated parties and related parties.  Annexed hereto and marked “AW10” is a table setting out the creditors at that time. [It should be noted that Annexure “AW10” identifies 82 creditors that, according to paragraph 48 of Alfred Wong’s affidavit, represented both unrelated and related parties that were then “owed a considerable amount of money”.]

   49.With the funds having come from J F Capital it was my view that it was in GPE’s best interests to use that money to continue to pay for the operation of GPE and GPES1 [GPES No. 1] and also to retire some existing debt as that would result in savings to GPE. 

   50.My rationale for deciding to retire the existing debt in the short term was that the funds from J F Capital would otherwise be left in a bank account earning perhaps 3% to 4% interest.  However, at the same time, under the existing loan facilities, GPE was continuing to incur interest at the rate of at least 11% per annum.  That did not appear to me to be a good use of the money. 

   51.I had always made it clear to the board of GPE that I and Richland would stand behind GPE, much like a banker, to make funds available, within reason, as and when funds were needed for the operation of GPE and its subsidiaries and to assist in progressing the development of GPE’s projects.

   52.Accordingly, I authorised payment out of the funds from J F Capital to repay the indebtedness of GPE to Richland and Austcorp.’

4. Alfred Wong at paragraph 57 of his affidavit filed 19 July 2006 says that it is his recollection that Peter Gan authorised the payment of outstanding rent to G P Energy in respect of the Staplyton site for the months of July, August, September and October 2004 of $19,168.60 for each month. 

5. As to these matters, Peter Gan in his affidavit sworn 31 July 2006 and filed by leave says this:

   ’13(a)The Board of Directors of GPE never authorised the use of the J F Capital $6.3M Investment to make payments to Richland or Austcorp. 

   (b)I accept that I authorised the payment to the unrelated creditors referred to in the schedule marked as Annexure “AW14”.  I did not have an issue with using some of the J F Capital $6.3M Investment to make payments to those creditors because:

   (i)I had informed J F Capital, on or about 4 November 2004, prior to the J F Capital $6.3M Investment, that GPE needed some equity funding to pay trade creditors;

   (ii)most of those creditors were crucial to the construction and operation of the New Staplyton Plant; and

   (iii)GPE only needed $3 million for the equity portion of the funding for the construction of the New Staplyton Plant.

   (c)I accept that I approved the invoices..  However, I did not authorise the use of the J F Capital $6.3M Investment to make payments specifically to G P Energy Pty Ltd (G P Energy).  The practice of GPE was that Winda Prasidhi, GPE’s bookkeeper at the time, would provide to me invoices rendered by trade creditors for my approval.  I approved the payment of those invoices without knowing the exact date when GPE would actually make those payments or from which funds GPE would do so.  Indeed, I assumed that the J F Capital $6.3M Investment would not be used to pay G P Energy, because, so far as I was concerned, it was only to be used to pay important and non‑related creditors.

   (d)In paragraph 58 Mr Wong assets that I said I was satisfied with his explanation about the payments he made using the J F Capital $6.3M Investment.  I strongly disagree with that statement.  I was in fact very disgruntled and annoyed at Mr Wong’s explanation.  I thought Mr Wong’s use of these funds had destroyed GPE’s prospects of going ahead with the new Staplyton plant and I told him just that.’

6. As to paragraph 59 of Alfred Wong’s affidavit filed 19 July 2006, Peter Gan says he was never involved in causing any payments to be made out of the J F Capital subscription to Richland or Austcorp.  Peter Gan says at paragraph 14 of his affidavit:  ‘The debt which GPE owed Richland (in which respect I include as owing to Richland any debt that might have been owed whether by Richland or by GPE to Austcorp) should have been converted to equity as had been earlier discussed at Board level’. 

7. As to Alfred Wong’s perception of the need for Board approval in authorising payments to Austcorp and Richland, Alfred Wong said this at paragraph 19 of his affidavit filed 25 July 2006:

   ’19.It was not my belief at the time that I made the decision to repay monies owing to Austcorp and Richland in November and December 2004 that it was necessary to seek board approval to do so.  In any event, the matter was discussed at the first available board meeting following the repayment of such funds.  I note that the repayments occurred over a space of approximately one week after Peter Gan was aware of my intention to do so and were paid out together with payments to other significant creditors.’

8. As to the nature of the assignment to Austcorp of the GPEL debt to Richland, Alfred Wong said this at paragraph 18 of his affidavit filed 25 July 2006: ‘I reject any suggestion that the assignment of the obligations of GPE to Richland occurred on other than identical terms.  Richland did not have the capacity, and did not purport to, alter the terms upon GPE was required to repay funds to it when assigning that obligation to Austcorp’.  As to the approach to the payment of creditors, Alfred Wong said this at paragraph 15 of his affidavit filed 25 July 2006: 

   ‘To the extent that creditors’ payments have been delayed, this has not been because of an inability of Richland to make funds available to GPE.  Rather, because finance from Richland carries an interest cost, it is better for GPE to implement tight cash flow policies which include delayed payment of creditors so as to reduce its borrowings on which it bears interest at any given point in time.’ 

1. A further proposition put by the plaintiff is that even though it is open to conclude that Richland, Kwok and ABCL are willing to continue to provide financial support to GPEL, the defendants have not established that those entities have the capacity to provide funds when called upon to do so. 

2. The particular criticism is put in this way. 

3. While Richland has made significant loans in the past to GPEL, that, of itself, does no more than give rise to a basis for inferring that it might do so in the future.  The defendants tendered the financial accounts for the Richland Property Trust as evidence of the capacity of Richland to continue to provide financial support.  Alfred Wong gave evidence that Edwin Yeung, GPEL’s internal accountant, had prepared those accounts based upon information that: ‘… out of the system when we were requested by ASIC to get access to that information’.  The accounts are not audited accounts.  In cross examination by counsel for the plaintiff, Edwin Yeung said, having had the accounts for the Richland Property Trust put to him for examination, that he had not seen them before.  When asked again about the accounts he further confirmed that he had not seen the accounts before. 

4. The plaintiff says that the financial accounts for Richland in its trustee capacity fall well short of a persuasive demonstration of Richland’s substance in that the accounts are unaudited; no explanation has been given by GPEL of the failure to produce audited accounts particularly in circumstances where Alfred Wong controls the trustee of the Richland Trust; and, finally, the balance sheet of 31 March 2006 for the trust cannot be regarded as a reliable or accurate statement of the assets and liabilities of the trust because:

   (i)the balance sheet includes an asset at a value of $101,100.00 when the asset will not be available for realisation within 12 months;

   (ii)the balance sheet includes a variety of negative assets and liabilities;

   (iii)an item identified as ‘trade creditors’ of $666,000.00 described in the balance sheet as a current liability has not been updated since December 2005; and

   (iv)the balance sheet includes as an asset, a loan of $3,653,359.89 payable to Richland by a company described as Richfield Development PL and that company was deregistered in January 2006. 

5. Alfred Wong was asked why the balance sheet as at March 2006 incorporated an asset being a debt to Richland from a company deregistered in January 2006.  Alfred Wong said that the obligation would be assumed by other entities. 

6. At page 209 of the Transcript, Alfred Wong was asked a number of questions concerning the service upon him of a bankruptcy notice by Bridgecorp Finance Limited.  Alfred Wong accepted that the debt to Bridgecorp was a judgment debt obtained in the Supreme Court in New South Wales in circumstances where the debt was not defended.  When asked why the debt was not defended, Alfred Wong responded: ‘When it’s a genuine obligation, you do not defend.  We – I mean, initially, we defend the apparent hearing obligation of myself, because we think that their interest, all the things, the calculations were wrong, grossly overstated.  Later on they changed the claim to just on the principal, so, therefore we do not defend’.  Alfred Wong agreed that the judgment debt was approximately $1.2M concerning an obligation under a guarantee. 

7. Alfred Wong also agreed that he and Danny Au-Yeung are both defendants in a proceeding in the Equity Division of the New South Wales Supreme Court (No. 50023 of 2005) commenced by Greentown Bellambi Pty Ltd (‘GBPL’) and Greentown Real Estate Group Co. Ltd (‘GREG’) concerning claims made by the plaintiffs pursuant to guarantees signed by the defendants in the action.  The claim is for an amount of Chinese RMB 50,059,946 against both defendants which Alfred Wong says is approximately A$8M.  There is a separate claim against Alfred Wong for A$3,746,707M.  Alfred Wong says that he is defending the proceedings and the question in issue is whether the guarantee is a valid guarantee or not. 

8. As to the other financiers, the plaintiff says that Dr Osmond Kwok is Alfred Wong’s brother‑in‑law and there is no reason to believe that Osmond Kwok’s financial capacity could not have been demonstrated on the evidence with a statement of assets and liabilities.  The accounts of the Richland Property Trust show an asset described as ‘Loan – James Kwok $862,707.79’. 

9. As to ABCL, that company is registered in the British Virgin Isles and is controlled by Nels Tong.  Alfred Wong gave evidence that he has no interest in ABCL.  Nels Tong was one of the original investors represented by the GPFG Group when arrangements were made with the administrators of Envirostar.  The financial accounts for the Richland Property Trust show an asset described as ‘Loan – Nels Tong Loan A/C - $986,822.82’.  The basis upon which ABCL is said to have a demonstrated capacity to provide financial support of $3M to GPEL is that one of the company’s subsidiaries, GPHI, is owed a debt of $7.3M on 30 September 2006.  No financial accounts have been put in evidence concerning ABCL. 

10. As to ABCL, I am not willing to rely upon the evidence of the loan facility with that company as a basis for concluding that ABCL is in a position to support an apparent commitment to provide loan funds of $3M.  There is no credible evidence of that company’s capacity to provide draw downs upon the facility.  No accounts, either audited or unaudited, have been put in evidence.  Moreover, having regard to the participation by Nels Tong in the GPFG syndicate and the apparent relationship between Richland and Nels Tong reflected in the loan facility in the accounts of the Richland Property Trust, I am not satisfied that there is a demonstrated basis for relying upon that facility in assessing the solvency of GPEL. 

11. Moreover, I accept that having regard to the judgment debt obtained by Bridgecorp Finance Limited; the further claim reflected in the New South Wales Supreme Court proceedings; the circumstance that GPEL failed to comply with the statutory demand served upon it by TechComm; the acceptance by Alfred Wong that at the time that the JFCP funds were received, GPEL ‘owed a considerable amount of money to numerous creditors’ (82 in all – [84]); and the recognition that to the extent that creditors’ payments have been delayed, the delay was not a function of an inability of Richland to provide funds but rather ‘delayed payment of creditors’ was a function of implementing ‘tight cash flow policies’ so as to reduce borrowings:-  in other words, the policy of GPEL has been to delay paying debts as and when they are due as a cash flow management policy [89] – a serious question arises as to whether further funds will be available under the facilities. 

12. I accept that Richland has demonstrated a willingness to advance funds to GPEL and historically has done so.  However, once satisfied that there is a serious question of the capacity of Richland to provide the further advances, it seems to me that the onus has not been discharged by GPEL.  However, even if it can do so, it seems to me that the fundamental question is whether the advances themselves can be repaid. Further, I examine the question of GPEL’s solvency on the basis that I am not willing to infer or accept that all debt including future debt if advanced by Richland and Osmond Kwok will be converted to equity including the particular additional debts due to Richland such as rental payments [211]. In addition, the current proposal is that GPEL will enter into a new relationship with an infrastructure funder in respect of a $22M commitment in terms of a facilities management lease involving substantial future commitments to a third party.  In the absence of a statement of assets and liabilities on the part of Osmond Kwok and audited accounts on behalf of the Richland Property Trust, I am not satisfied that there is a demonstrated capacity to provide the proposed advances to GPEL through access to these facilities and accordingly, I am not satisfied that at the date of the hearing looking forward but also having regard to the history of GPEL’s financial condition, it can pay its debts as and when they fall due. 

13. The circumstances surrounding the claim made by TechComm are also important. On 26 August 2005, TechComm served a statutory demand upon both GPEL and GPES No. 1 demanding payment from both entities of an amount of $960,857.57. On 15 September 2005, GPEL made an application to the Supreme Court of New South Wales under s 459G of the Act to set aside the statutory demand. On 29 May 2006, Associate Justice MacGready determined that application and ordered that the statutory demand be varied pursuant to s 459H(4) by reducing the amount of the demand to $881,817.34. His Honour also declared the demand to have had effect as varied, as from the date of service upon GPEL, namely, 26 August 2005. No order was made for an extension of time to comply with the varied statutory demand. On 29 May 2006, TechComm’s lawyers wrote to GPEL’s lawyers demanding payment of the varied amount by 10.00am on Wednesday, 7 June 2006. The date for compliance with the demand expired on 6 June 2006. By that date, TechComm had not received payment of the varied amount or any part of it (that is, the undisputed part). 

14. On 13 June 2006, TechComm entered into a Deed of Assignment with Richland and GPEL by which TechComm assigned its right, title and interest in an Agreement which had given rise to the claim for the debt, and the debt itself, to Richland for the sum of $660,000.00 (including GST) in full and final settlement of all claims TechComm might have against either GPEL or GPES No. 1. On 19 June 2006, GPEL gave notice to the Australian Stock Exchange of the resolution of the matter; notice that Richland would release GPES No. 1 from any liability in respect of the assigned debt; Richland would fund the payment of the purchase price or assignment sum through an $1.2M loan facility granted to GPEL on 10 April 2006; and Richland would convert the amount equal to that purchase price into shares in GPEL at one cent per share, subject to shareholder approval. In an affidavit filed 26 June 2006, Germaine Mei Lin Kee deposes to a conversation with the Managing Director of TechComm, David Whan, on information and belief, that the compromise had been reached with TechComm and TechComm had accepted the assignment sum from a third party in satisfaction of GPEL’s obligation. Alfred Wong in his further affidavit filed 31 July 2006 deposes to the circumstances surrounding discussions with David Whan to resolve the matter. Alfred Wong says that he was unaware that if the time for compliance with a statutory demand was to be extended, an application had to be filed under the Act pursuant to s 459F(2)(a)(i) as a result of which the time for compliance elapsed. In any event, Alfred Wong says that GPEL was investigating, with its lawyers, whether grounds of appeal existed in respect of his Honour’s orders and whether an application for leave to appeal ought to be made.

15. Nevertheless, the position remains that a demand was made which resulted in a variation to the demand by application by GPEL and GPES No. 1 to the Supreme Court of New South Wales to reduce the demand to $881,817.34.  Whatever the measure or extent of that further dispute GPEL might have had with the reduced amount, no part, even the undisputed part of the debt, was paid by GPEL or Richland consequent upon his Honour’s variation until the total compromise amount was paid as part of an assignment of the debt.  GPEL commercially held TechComm out of the undisputed part of the debt until TechComm comprised the entire claim. 

16. One further matter should be mentioned in relation to the evidence relied upon by GPEL concerning the events generally.  An affidavit by Danny Kam Yun Au‑Yeung who became a director of GPEL on 15 April 2003 was filed and relied upon.  Danny Au‑Yeung deals with the topics which are addressed by Alfred Wong and adopts the position adopted by Alfred Wong.  In cross examination, Danny Au‑Yeung accepted that he had had the benefit of reading Alfred Wong’s affidavit material and throughout his affidavit he extensively refers to paragraphs of Alfred Wong’s primary affidavit sworn 18 July 2006 and filed on 19 July 2006.  Although it is understandable that Mr Au‑Yeung might have had regard to events and circumstances which would assist his independent recollection of events, I accept that Alfred Wong’s affidavit and other material has very substantially influenced the formulation of Danny Au‑Yeung’s views, his recollection of events and his evidence.  Accordingly, I do not rely upon the affidavit as probative of any fact in issue.  Mr Bain QC made it clear in his submissions that Danny Au‑Yeung’s affidavit was prepared and read in the application simply so as to avoid any adverse Jones v Dunkel inference. 

17. ASIC has applied pursuant to s 459P for an order that GPEL be wound up in insolvency pursuant to s 459A of the Act. GPEL seeks to rebut for the purposes of s 459C(3) the presumption arising pursuant to s 459C(2) by reason of GPEL’s failure to comply with TechComm’s statutory demand. Robert Elliott contends that GPEL is solvent because it can pay its debts as and when they fall due because it has access to unsecured funds from Richland, Kwok and ABCL. I propose to disregard recourse to funds promised by ABCL in determining whether GPEL is able to pay its debts as and when they fall due, for the reasons indicated at [244]. In addition, having regard to the matters mentioned at [223], I am not prepared to conclude that promises now made by Richland and Kwok that all funds payable to each of them will be converted to equity is a basis for a valid assumption made by Robert Elliott in determining whether GPEL is able to pay its debts as and when they fall due, looking forward. Substantial non-current debts will become current debts on 30 September 2006 and 10 October 2006 although it may be that those debts will be rendered non‑current by reason of an extension of the term of the facility on the assumption that the shareholders’ resolution to convert the debt to equity is either not passed or not sought. It seems to me in those circumstances that GPEL is necessarily insolvent having regard to all the circumstances confronting GPEL reflected in these reasons including those matters identified at [223] and a demonstrated failure to establish a plant generating sustainable operational positive cash flows.

18. It is, of course, commercially realistic to have regard to access to funds from third parties or related parties and there is ‘no compelling reason to exclude from consideration [such] funds’ (Lewis v Doran 54 ACSR 410 at [109] per Giles JA with whom Hodgson and McColl JJA agreed). That observation, however, is conditioned by the qualification that ‘provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable’ (Lewis v Doran at [109]) and further at [109]: ‘It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable’. 

19. Although in Sandell v Porter (1966) 115 CLR 666 at 670, Barwick CJ recognised that funds that could be gained from the use of the company’s assets either by realisation by sale or by mortgage or pledge of those assets within a reasonably short period of time relative to the debts in question, represent resources available to the company which might be deployed in paying debts as and when they fell due (and thus a factual matter aiding in the determination of solvency), the circumstances confronting GPEL do not involve the realisation of assets within a short period of time as, apart from the uninstalled Altona plant, there are no realisable assets and no asset which might be the subject of a charge which might convert, subject to redemption, the asset into cash. 

20. Putting to one side the conversion to equity contention, the debt facilities provided by (and proposed further facilities by Kwok and Richland) are substantial and relatively short term.  If those debts are rendered non‑current at 30 September 2006 and 10 October 2006 by extension for another term they will, within a period of 12 months at the latest, fall due for repayment or further extension or conversion, in the ordinary course.  The circumstances of GPEL do not fall into that class of case where a banker to the group might provide funds to meet a shortfall until, for example, completion of the sale of a major asset such as a ‘shopping centre’ (Re Adnot Pty Ltd (1982) 7 ACLR 212). The continued extension or suspension of the currency of accumulating debt which might in the immediacy of the date for payment be postponed to a later date does not suggest solvency if there are no actual operating revenues on the horizon or assets that might actually be realised to meet the automatic deferral. Such arrangements simply have the effect of postponing ‘the evil day’ for payment in an environment where there are no demonstrated revenues and no realisable assets.

21. On the question of the discharge of the evidential burden, the Court must be presented, unless otherwise explained, with the ‘fullest and best’ evidence of the financial position of the lenders: Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609. Clearly, ‘unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency.  Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared’ (Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 per Weinberg J relied upon by Santow JA in Expile v Jabbs Excavations (with whom Meagher and Handley JJA agreed) 45 ACSR 711 at 719.

22. If the solvency of GPEL ultimately relies upon access to financial facilities from Kwok and Richland (and ABCL), as Robert Elliott contends consistent with the views of Edwin Yeung, it is essential in the context of all of the circumstances GPEL has confronted and continues to confront described at [223] and in these reasons generally that persuasive and compelling evidence be adduced of the capacity of the lenders to provide continuing support.   I am satisfied there is a serious question that the lenders do not have that capacity.  In addition, the capacity of GPEL to retire that debt and future debt not only drawn down from those lenders but obligations established to meet new liabilities such as those arising under a facilities management infrastructure lease of the kind described by Eduard Alcordo, is not demonstrated. 

23. In all the circumstances, I am not satisfied that GPEL has discharged the onus of proving that it is not insolvent. I propose to make an order pursuant to s 459A of the Act that GPEL be wound up in insolvency.

24. Five objections have been made to sentences contained in paragraphs 18, 24, 28, 31 and 39 of the affidavit of Heymala Eardley filed on 5 July 2006.  The objection in each case is put on the basis that the relevant sentence is in the nature of a comment or a submission.  I propose to admit each of those sentences under challenge and treat those matters as simply contextual comment. 

25. Paragraph 16 of the affidavit of Pierre Rene Prentice filed 5 July 2006 is objected to in total on the ground that it represents inference or comment in the nature of a submission.  I propose to admit paragraph 16 of the affidavit as relevant to a fact in issue namely, the character of the representation made to JFCP.  The last sentence of paragraph 12 of the affidavit of Paul Willis filed 13 July 2006 is the subject of an objection on the ground that it is simply a matter of inference.  The sentence deals with the reaction of Paul Willis to GPEL’s press release to the Australian Stock Exchange on 26 November 2004.  I propose to admit the statement as it goes to the question of the understanding Paul Willis gained in relation to the use GPEL would make of the JFCP funds.

I certify that the preceding two hundred and fifty nine (259) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

Associate:

Dated:        20 September 2006

Counsel for the Applicant/Plaintiff:	Mr C Wilkins
Solicitor for the  Applicant/Plaintiff:	Special Counsel to ASIC
Counsel for the Respondent/Defendants:	Mr R Bain QC and Mr P Looney
Solicitor for the Respondent/Defendants:	Bennett & Philp
Date of Hearing:	31 July 2006 to 3 August 2006
Date of Judgment:	20 September 2006