Australian Securities Commission v Woods and Johnson Developments Pty Ltd

[1991] FCA 617

Re: AUSTRALIAN SECURITIES COMMISSION
And: WOODS AND JOHNSON DEVELOPMENTS PTY. LIMITED and AGRICULTURAL SERVICES
PTY. LTD.
No. Q G3015 of 1991
FED No. 617
Corporations
9 ACLC 1491/6 ACSR 191/104 ALR 224
(1991) 31 FCR 560

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Corporations - participation interest - meaning of "promoter" - whether in the business of promotion when only one transaction.

Corporations Law, ss.9, 109R, 1064(1), 1324

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 respondent: Mr G.H. Brandis

Solicitors for the first respondent: Quinlan Miller and Treston

Counsel for the second respondent: Mr M.E. Eliadis

Solicitors for the second respondent: Bells

ORDER

The application for interim relief be refused.

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

JUDGE1

This is an application for an interim injunction under s.1324(4) of the Corporations Law ("the Law"), the purpose being to restrain the respondents from carrying forward a venture called the Burnett River Horticultural Project, in the promotion of which they are involved. Section 1324 empowers the Court, on the application of the Australian Securities Commission, to grant injunctions restraining breaches of the Law and sub-s.(4) permits the grant of an interim injunction. The applicant's contention is that the evidence shows a serious question to be tried with respect to an alleged breach of s.1064 of the Law and that it would be a proper exercise of discretion to grant such an injunction as is sought. The critical point in the case is rather a narrow one, and has to do with a part of the definition of "participation interest", set out below.

1. Section 1064(1) of the Law reads as follows:
   

"A person, other than a public corporation, must not make available, offer for subscription or purchase, or issue an invitation to subscribe for or buy, any prescribed interest".

The evidence shows that the first respondent has offered for subscription or purchase interests in an enterprise called the Burnett River Horticultural Project; the first respondent is not a public corporation.

1. The expression "prescribed interest" is defined in s.9 of the law, so far as relevant, to mean a "participation interest", which expression is also defined in s.9.

2. It is unnecessary to set that definition out in full. That is so because it is common ground that it applies to the circumstances of this case, unless the exclusion in paragraph (g) applies. That exclusion is, so far as relevant, of:
   "(g) an interest in a partnership agreement, unless the agreement or
   

proposed agreement:

(i) relates to an undertaking, scheme, enterprise or investment contract promoted by or on behalf of a person whose ordinary business is or includes the promotion of similar

undertakings, schemes, enterprises or investment contracts, whether or not that person is, or is to become, a party to the agreement or proposed agreement; or

..."

1. On the case as put on behalf of the applicant, the question becomes whether it appears that the scheme in question is one "promoted by or on behalf of a person whose ordinary business is or includes the promotion of similar undertakings, schemes, enterprises or investment contracts ...". If it is, then a breach of s.1064(1) of the Law is proved, in respect of the first respondent's having offered interests in the Burnett River Horticultural Project.

2. Because it affects the mode of exposition of the facts, it is convenient to mention a preliminary legal point which was raised by Mr Daubney of counsel for the applicant. He submitted that because the plural words "undertakings, schemes, enterprises or investment contracts" may include the singular, it can be enough that there is a business involving the promotion of one undertaking only. It is, of course, possible for a person who has engaged in one venture only to be in business, in that venture.

3. In my opinion, sub-paragraph (g)(i) could apply even in a case where the person in question has promoted only a single undertaking and in that limited sense Mr Daubney's submission is correct. However, whether the person in question has promoted one undertaking or more than one, the issue is whether that person can be described as one whose ordinary business is or includes the promotion of undertakings similar to that which is argued to bring the particular interest within sub-paragraph (g)(i).

4. There must be a first transaction in each business and if a person has started a business of promoting undertakings of a relevant kind, then the very first promotion would be within sub-paragraph (g)(i). But, in the absence of proof that the person had commenced a business of promoting such undertakings, proof of promotion of one would not be enough. The context in which the expression "undertakings, schemes, enterprises or investment contracts" occurs excludes the prima facie rule, set out in s.109R of the Law, that the plural includes the singular.

5. This becomes the main point, so far as concerns the issue whether there is a serious question to be tried: is there evidence that the first respondent was at relevant times in the business of promotion of undertakings similar to that, the pursuit of which is sought to be restrained, viz. the Burnett River Horticultural Project? The applicant's case was that the first respondent had become a promoter of one other such project; the argument appeared to assume that to show promotion of two projects would prove a prima facie case of the existence of a promotion business.

6. The evidence shows that members of the Johnson family, namely Messrs Francis E., Anthony J. and David C. Johnson, are interested in certain companies which promote agricultural projects. Their group of companies is called the "Farmer Johnson" group. They obtain money from subscribers for their projects and an important aspect of the whole business is the obtaining of income tax deductions. Mr Gregory M. Johnson, who controls the first respondent ("W. and J."), is a brother of Francis, Anthony and David. In 1986, he and P.L. Woods incorporated W. and J. to take over an earth-moving business formerly carried on in partnership by Woods and Gregory. In June 1989, according to Gregory's affidavit, W. and J. agreed to become involved in a project with which the "Farmer Johnson" group was concerned, called the "Red Claw" project, raising crayfish in ponds. At that stage, Woods was bought out and Francis and Gregory became the directors of W. and J.. According to Gregory, Francis' directorship was purely formal and Gregory became the sole controller of W. and J.. I shall proceed on the assumption made by counsel, that the Red Claw project is "similar" to the Burnett River Horticultural Project, for the purposes of the exclusion provision quoted above.

7. Gregory has given evidence that W. and J. undertook the capital works of the Red Claw project, and subsequently became involved in another way, namely as the production manager of the project.

8. So far, if these allegations be correct, there is nothing to suggest that W. and J. has taken part in the promotion of the Red Claw project. But according to Gregory's affidavit it acquired another connection with the project, namely that it bought from the "Farmer Johnson" group the shares in Rural Finance Pty. Ltd., a company which had acted as banker to the Red Claw and other projects. Gregory explained this purchase by W. and J. as being motivated by his desire to ensure that funds held on deposit with Rural Finance Pty. Ltd. were "committed first to discharging the Red Claw project's obligations to" W. and J. - i.e. to protect the interests of W. and J..

9. The contracts made by W. and J. for the earth-moving work and for the management of the project are in evidence and it is desirable to mention some of their provisions. Exhibit D to Gregory's affidavit is the earth-moving contract; under it W. and J. agrees with a member of the Farmer Johnson group, namely Johnson Farm Management Pty. Limited, to do the earthworks, and certain other works, in connection with the Red Claw project. The agreement recites that the directors of W. and J. "have wide ranging experience and expertise in the establishment and development of large scale agricultural and civil development projects, and in particular Gregory Morris Johnson". The agreement provides for payment of the price in certain stages but, by clause 7, gives Johnson Farm Management Pty. Limited a right to prepay the total consideration, subject to a discount. In an arms-length transaction, which Recital F says the agreement is, it appears to be unusual to have such a provision. The project management contract recites that W. and J. has, through its directors, "wide experience in the field of agricultural and horticultural construction and management", but there is no suggestion in the evidence that in fact Gregory has any expertise as to crayfish. Despite that, the contract provides for W. and J. to take over the management of the crayfish project, including such matters as disease control and the like, and to be paid monthly in advance for these services. There is, again, the curious provision that Johnson Farm Management Pty. Limited might prepay to W. and J. a discounted sum for work to be done - in this case nearly $11 million. If these prepayments were made, the risk to the investors in this project is, I suppose, obvious enough; the money for the work to be done would be gone, with no security. It is difficult to believe that any investor who appreciated that the funds would be dealt with in this way could have been interested in putting money in, unless he or she had great confidence and trust in W. and J. and in its sole controller, Gregory. But Gregory's evidence is quite inconsistent with his credit having been put forward as an inducement. He says that neither he nor W. and J. were involved in the promotion of the project.

10. Mr Daubney submitted that there is a serious question as to whether, in total, W. and J.'s involvement in the project was "promotion". He referred me to a number of authorities of which I think it necessary to refer to one only, namely Tracy v Mandalay Pty. Ltd. (1953) 88 CLR 215, in which a discussion of the meaning of the term "promoter" by Lindley L.J. in Emma Silver Mining Co. Ltd. v Lewis and Son (1879) 4 CPD 396 was approved. It is to the effect that persons who engaged in exertion for the purpose of getting up and starting a company, and those who assist them, may be promoters.

11. It appears to me that if Gregory's evidence is ultimately accepted, then W. and J. would not be held to have been a promoter in relation to the Red Claw project. The definition of "promoter" in s.9 of the Law is as follows:
    

"'promoter', in relation to a prospectus issued by or in connection with a body corporate, means a promoter of the body who was a party to the preparation of the prospectus or of any relevant portion of the

prospectus, but does not include a person merely because of the person acting in the proper performance of the functions attaching to the

person's professional capacity or to the person's business relationship with a promoter of the body".

1. This is an awkward definition which may be argued to imply that "promoter" is given an unusual meaning, so as to exclude anyone, however closely connected with the promotion, who is not a party to the preparation of any part of the prospectus of the body corporate. But the use of the expression "in relation to a prospectus" implies that the definition is to be used only if the question is solely one of responsibility for issue of a prospectus. Whatever be its true effect, the definition does not assist the applicant.

2. One can see that if the facts are more fully investigated, the applicant may have some chance of establishing that W. and J. was a promoter of the Red Claw project. It owned Rural Finance Pty. Ltd. at relevant times, as is admitted, and that company provides loans to persons who are investors in projects promoted by the Farmer Johnson group. It also has to do with the Farmer Johnson group in other ways. However, Rural Finance Pty. Ltd. is not sued and, unless one is free to impute its acts to W. and J., what it has done is irrelevant to the question of whether W. and J. is in the business of promoting projects of the relevant kind. The Court was invited to take that step and Mr Daubney urged upon me the course of "lifting the veil". There is nothing to justify that, except the mere fact that both the parent, W. and J., and the subsidiary, Rural Finance Pty. Ltd., are subject to the same control, namely Gregory's. The separate existence of Rural Finance Pty. Ltd. is not merely of a theoretical kind, nor are its affairs, in a practical sense, indistinguishable from those of that of its parent.

3. The applicant's case in support of the proposition that W. and J. has become a promoter of the Red Claw project is weak. If the evidence at the trial is similar in effect to that presently available, a conclusion adverse to the applicant on that point would surely be inevitable. One should, I think, consider the possibility that further investigation, discovery and the like might improve the applicant's case, but looking at the matter broadly, it would be surprising if the applicant ultimately succeeded in showing that W. and J. was a promoter of the Red Claw project.

4. To return to the central point, one must ask whether there is evidence in support of the proposition that W. and J., promoter of the Burnett River Horticultural Project, has been, at relevant times, in the business of promoting such projects. The promotion of a single project may be enough to enable the applicant to succeed in a case of this kind, but only if that undertaking is the first in a business of promoting similar undertakings. It appears from Gregory's evidence that his company, W. and J., having once been quite separate from the Farmer Johnson group, has become much closer to it, in the ways mentioned above. It may be that W. and J. will become part of the group ultimately and will participate in the promotion of future projects, if there are any. But there is, at present, no satisfactory evidence on which it could be found that W. and J. has commenced a business of promoting undertakings of this kind.

5. The relief sought is, in substance, to prevent the raising of money for the Burnett River Horticultural Project and to prevent the spending of money raised for that purpose. The relief depends entirely on the proposition that there has been a breach of s.1064; the evidence adduced neither establishes such a breach nor creates any substantial likelihood that one will ultimately be established. In those circumstances, I think I should refuse the application for interim relief. I shall hear counsel on costs.