Australian Securities Commission v Farmer Johnson Ltd

[1991] FCA 636

Re: AUSTRALIAN SECURITIES COMMISSION
And: FARMER JOHNSON LIMITED; FARMER JOHNSON AQUACULTURE LIMITED; JOHNSON FARM
MANAGEMENT PTY. LTD.; WOODS AND JOHNSON DEVELOPMENTS PTY. LIMITED; CORINDI
BLUEBERRY GROWERS PTY. LTD.; GREGORY MORRIS JOHNSON; FRANCIS EDWARD JOHNSON;
ANTHONY JAMES JOHNSON and DAVID CHARLES JOHNSON
No. Q G3016 of 1991
FED No. 636
Corporations
6 ACSR 219

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Corporations - appointment of receiver and manager - evidence of financial difficulties - treating of assets of group of companies as a "pool".

Corporations Law, s.1323(1)

HEARING

BRISBANE

#DATE 17:10:1991

Counsel for the applicant: Mr A.M. Daubney

Solicitors for the applicant: Australian Securities Commission

Counsel for the first, second, Mr R.W. Gotterson QC with Mr P.L. O'Shea
third, fifth, eighth and ninth
respondents:

Solicitors for the first, second, Henderson Trout
third, fifth, eighth and ninth
respondents:

Counsel for the fourth and sixth Mr G.H. Brandis< d
respondents:

Solicitors for the fourth and Quinian, Miller and Treston
sixth respondents:

Counsel for the seventh Mr T.L. Kirk
respondent:

Solicitors for the seventh
respondent: Hopgood and Ganim

ORDER

The application for interim relief be refused.

The applicant pay the respondents' costs of the application for interim relief.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an application for interlocutory relief. On 3 October 1991, the applicant Commission filed an application in this Court seeking various relief against the "Farmer Johnson" group of companies, companies associated with that group and directors of the corporate respondents. The application asked that Mr J.J. Ebbage be appointed receiver and manager of all the corporate respondents and for other relief.

1. That other relief claimed included certain declarations, the effect of which should be briefly summarised. The applicant asked that the Court declare that the personal respondents failed to act honestly in the exercise of their powers and discharge of their duties as officers of the corporate respondents, that they failed "at all times" to exercise a reasonable degree of care and diligence, that they made improper use of information acquired as officers of the corporate respondents so as to gain an advantage for themselves, that they made improper use of their positions as officers of the corporate respondents so as to gain an advantage for themselves and that they failed to perform their fiduciary obligations as officers of the corporate respondents. Orders were sought that the personal respondents be prohibited from managing a corporation for such period as to the Court seems just, that they be prohibited from taking or sending money out of Australia and that they be prohibited from leaving Australia without the Court's leave.

2. The interlocutory relief sought in the application does not, of course, pursue the declaratory orders, but apart from the appointment of a receiver and manager, asks for orders against the personal respondents prohibiting their taking or sending money out of Australia and prohibiting their leaving Australia without the leave of the Court.

3. I am concerned at present only with part of the interlocutory relief sought in the application; the interlocutory claims against the personal respondents are presently pursued only so far as sending money out of the country is concerned.

4. The origin of the case was, so far as the evidence shows, a complaint made by a company called Agcol Limited, resulting in the issue of an approval to conduct an investigation on 25 July 1991. Although the initial concern appeared to be misappropriation of funds, the basis upon which interlocutory relief was ultimately sought was rather different. The claims of dishonest conduct on the part of the personal respondents suggested by the terms of the relief sought in the application seem not to have been seriously pursued.

5. The central figure on the respondents' side is the eighth respondent, Anthony James Johnson, who was cross-examined before me for some considerable time. The other personal respondents are his brothers, one of whom, Gregory Morris Johnson (the sixth respondent), while he has a connection with the Farmer Johnson group, is the controller of the fourth respondent (Woods and Johnson Developments Pty. Limited), which is said not to be in the group.

6. The business of the Farmer Johnson group is largely to promote horticultural and like enterprises to which, in general, the public is invited to subscribe. The chosen vehicle is currently the formation of limited partnerships, a type of enterprise which is able to be formed in some but not all Australian States. The general idea is that the public subscribes money for interests in these partnerships, which then undertake enterprises such as the growing of blueberries, cultivation of citrus trees or farming of crayfish. A.J. Johnson said that he and his brothers have been in business of this kind for about fifteen years.

7. One of the points of these enterprises is to gain tax deductions and for this reason, they feature "up front" payments to parties engaged to do work in the hope of accelerating the tax relief which the investments may bring. Further, investors expect to obtain the deductions without necessarily subscribing any of their own money; loans are offered. The structures created, at least in recent projects, appear to be rather complex and, in some respects, they have not, according to the evidence, conformed to A.J. Johnson's intentions.

8. Recently, for various reasons, there has been a substantial cash shortage in the Farmer Johnson group. A.J. Johnson attributes this, at least in large part, to the failure of a company not in the group, namely Equus Financial Services Ltd. ("Equus"), to perform what it had undertaken by way of supply of funds to the group. However, A.J. Johnson says, and it seems to me likely to be correct, that the value of the group's property as a going concern is in excess of its liabilities. He admits that there are significant financial problems at present and says, in effect, that he believes that the group will pull through. The impression I gained is that A.J. Johnson is an experienced and responsible person; he answered the questions he was asked without apparent evasiveness. I doubt if he is much interested in the legal intricacies which are likely to arise in the use of such complicated arrangements as are revealed by the evidence and, in that respect perhaps, the group may recently have suffered from the circumstance that A.J. Johnson has a dominant position in it.

9. The application for interlocutory relief is based upon s.1323(1) of the Corporations Law ("the Law") which reads, in part, as follows:
   

"Where:

(a) an investigation is being carried out under the ASC Law or this Law in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Law;"

I will not quote (b) and (c) -

"and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an 'aggrieved person') to whom the person referred to in paragraph (a),

(b) or (c), as the case may be, (in this section called the 'relevant person'), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for securities, futures contracts or other property, the Court may, on application by the Commission or by an aggrieved person, make one or more of the following orders:

...

(h) an order appointing:

(i) if the relevant person is a natural person - a receiver or trustee, having such powers as the Court orders, of the property or of part of the property of that person; or

(ii) if the relevant person is a body corporate - a receiver or receiver and manager, having such powers as the Court orders, of the property or of part of the property of that person".

There is also reference to the possibility of orders against personal respondents, but I do not propose to set that out.

1. Here, on the evidence, an investigation is being carried out, which is one of the conditions in para. (1)(a). The question whether there is any act or omission that constitutes or may constitute a contravention of the Law is discussed below.

2. It seems desirable to say at this stage something about the construction of the section. It may imply, but does not say, that the liability of the relevant person which the provision contemplates must arise out of the act or omission mentioned in paragraph (1)(a). Certainly it would be odd to require as a pre-condition that there be a prosecution (one of the three alternatives) if the subject matter of the prosecution has nothing to do with that liability which is, under the section, another condition. But I find it unnecessary to determine whether the necessary implication should be made.

3. Then, as was pointed out by Mr Gotterson QC, senior counsel for some of the respondents, it seems clear that the power to appoint a receiver mentioned in paragraph (h) can be exercised with respect to a body corporate only if it is liable or may become liable to pay money or to account. To justify the appointment of a receiver, it would not seem to be enough to show, for example, that the directors were or might be liable; this may be a significant limitation.

4. Lastly, it seems that the general intention of the provision is to preserve funds to meet the liability of which it speaks: see Corporate Affairs Commission v Walker and Ors. (1987) 5 ACLC 991 at 1001R, 1002 and Corporate Affairs Commission v United International Technologies Pty. Ltd. (1988) 6 ACLC 637 at 643L - cases on the corresponding provision in the previous Companies Code.

5. According to the written submissions made by Mr Daubney, who argued the case strongly on behalf of the applicant, a receiver should be appointed because the personal respondents treated the corporate respondents' assets as "no more and no less than a pool of assets for the Farmer Johnson Group". In addition, that submission said the group appeared to be insolvent.

6. It is convenient to deal first with the latter point. I have already mentioned that there is evidence of financial trouble. Companies in the group are claimed to be indebted, actually and contingently, in a sum in excess of $5 million to Equus. On 26 July 1991, that company caused a receiver and manager to be appointed in respect of Rural Finance Pty. Limited which has acted, on the evidence, as banker to the Farmer Johnson group. Rural Finance Pty. Limited was formerly part of that group but has latterly come under the control of G.M. Johnson, the sixth respondent. A.J. Johnson gave evidence that, because of disputes with Equus, the Farmer Johnson group was endeavouring to refinance its liabilities to that company. He said, in effect, that the group has difficulty raising money because its assets are mortgaged to Equus, although (according to his evidence) for a much lesser sum than the value of the security. The tactics being adopted are to endeavour to reduce the contingent liability of the group to Equus by inducing those persons (investors in Farmer Johnson group projects) who borrowed money from Equus to repay that money.

7. Whether these tactics are likely to succeed is not a matter on which one could express a worthwhile opinion. The impression I have gained, however, is that the present financial difficulties are likely to be exacerbated rather than helped by the appointment of a receiver. Whatever prospect there might have been to raise additional cash to carry on the projects with which the group is concerned would, I think, diminish if a receiver were appointed. The evidence is to the effect that the projects are quite large scale, that they are genuine and that there is an expectation that they will produce commercial profits; there is no suggestion that they are shams. A.J. Johnson said, and was not challenged on this, that similar projects with which the group had been associated in the past had been commercially successful.

8. In the result, I am unconvinced that the evidence of the financial difficulties which have been encountered suggests that the best thing to do would be to appoint a receiver; on the whole of the evidence that would seem to be a retrograde step.

9. I come now to the first ground put forward - the treating of assets as a pool.

10. No doubt it commonly happens in commercial life that a group of companies in common ownership is run as a single enterprise. Questions may arise whether, for example, taking money from one company in the group to lend to another, perhaps unsecured and without interest, renders those responsible for the loan liable in damages if the group collapses and the loan is not repaid. But the complaint here has a different focus. It is said - and there is a number of affidavits in which the complaint is voiced - that the Farmer Johnson group has the legal obligation to keep separate the funds associated with each distinct project: for example, to keep the citrus project funds separate from the crayfish project funds. As a general proposition, I think that to be incorrect. The point may be illustrated by reference to the prospectus for the citrus project, which is Exhibit NPCD2 to the affidavit of N.P.C. Driver; it is not submitted that the prospectus is, in this respect, inaccurate. It contemplates, as I have explained, the formation of a limited partnership and, to become one of the partners, investors have to subscribe $10,000 per unit. The prospectus explains that the farm manager receives a fixed fee per unit, being $7,443 per unit in the first year. The farm manager is Johnson Farm Management Pty. Limited, which is the third respondent and a member of the Farmer Johnson group. The idea is, of course, that these moneys will (so far as they do not consist of profit) be applied towards the establishment and management of the project. But the documents do not say, nor is it reasonably implicit, that the third respondent undertakes to keep the funds in trust to discharge its responsibilities. The money paid to the farm manager is, so far as I can discern from the papers, legally the property of the payee to do with as it wishes.

11. It may be that the investors expected that funds paid to the farm manager would, so far as necessary, be kept intact to discharge the farm manager's responsibilities, but the documents do not say that. One can understand an investor who appreciated this point from the outset now becoming apprehensive. Those who did not understand it may, perhaps with some justification, blame the circumstance that, on the evidence, the investment advisers, or some of them, who induced people to put money into these projects did so in consideration of a commission paid by the Farmer Johnson group.

12. It should be added that, in addition to the specific grounds for appointment of a receiver, the written submission makes reference to the possibility of actions for damages in deceit and matters of that kind. It seems to me unfortunate that these suggestions were included, as no such case was put to A.J. Johnson or pressed.

13. When oral submissions were made, the applicant made a specific and narrower complaint, only loosely related to the question of pooling. This was that the funds paid into the project just discussed - namely the Bundaberg Citrus Project - were, insofar as they were contributed by the fourth respondent, not "real money". The suggestion was that by a "round robin" moneys were taken out of Rural Finance Pty. Limited and ultimately returned to that company. That is so, on the evidence, but one could not find that there was anything improper about it. According to an accountant, H.J. Walker (who was not cross-examined) the fourth respondent had the money in question on deposit with Rural Finance Pty. Limited, together with other funds; that sum ($2.06 million) was withdrawn to pay for the fourth respondent's units, resulting in a reduction in the fourth respondent's credit account with Rural Finance Pty. Limited. Other evidence shows - and this appears not to be disputed - that the $2.06 million found its way back to Rural Finance Pty. Limited because that company was a repository of funds in the Farmer Johnson group. There appears to me to be no reasonable foundation on which one could, on this evidence, find that there was any irregularity involved in the transaction. It is true that to satisfy the requirements of s.1323(1)(a), all one needs is an act or omission that may constitute a contravention of the Law. But here the facts seem to me not to be in dispute, at the present stage at least, and I cannot see that there is any substance in the suggestion that the fourth respondent did not, in truth, pay for its share in the enterprise. That is the only one of the oral submissions which I propose to deal with.

14. There was some mention of a sum of $100,000 and a suggestion I should make a finding about that, but it does not seem to me to have any real substance and I do not intend to say anything about it. I should also mention that there was no evidence suggesting an intention or any likelihood of the personal respondents shipping money out of the country to evade their responsibilities.

15. The applicant submitted that investigations are still proceeding and the possibility cannot be denied that further inquiries might turn up something more promising than has presently been unearthed. Certainly, the affairs of the group are quite complex and one could not pretend that they have been, in any sense, untangled at present. But I respectfully agree with the distinction drawn in Walker's case (above) between the evidence necessary shortly after an investigation has begun and that which one would look for at a later stage: see p 995R of (1987) 5 A.C.L.C. 991. Here is an investigation which has been in progress for nearly three months. There is no evidence that the applicant has been obstructed or that any of the persons from whom information has been sought have declined co-operation. In that sort of case, it seems to me some fairly solid evidence of a likely breach of the law would ordinarily be required before the drastic step of appointing a receiver could be contemplated. The application for interim relief will be refused. Costs will be ordered against the applicant.