Koromiko Pty Ltd v Asia Pacific International Pty Ltd

[1998] FCA 843

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 3008  of   1998

BETWEEN:

KOROMIKO PTY LTD
Applicant

AND:

ASIA PACIFIC INTERNATIONAL PTY LTD
First Respondent

JAMES LAWRENCE BROADBENT
Second Respondent

MAURICE BARRY RICE
Third Respondent

BRUCE HACKETT
Fourth Respondent

JUDITH MERLE CHAMBERS
Fifth Respondent

SIMON POOLE
Sixth Respondent

JUDGE:

SPENDER J

DATE OF ORDER:

23 JUNE 1998

WHERE MADE:

BRISBANE

THE COURT ORDERS THAT:

1. The application be adjourned to be brought on on five working days’ notice by the moving party to the other side.

2. The matter be listed for directions at 9.30 am on 7 August 1998.

3. The orders in relation to the grant of Mareva injunctions be discharged.

4. Costs of today be reserved.

THE COURT DIRECTS THAT:

1. Each of the respondents, other than the fifth respondent, make discovery on oath within fourteen days of today.

.../2

1. The applicant inspect and be at liberty to take copies, at its own cost, of discovered documents within a further seven days.

2. All sums received by or on behalf of the respondent Asia Pacific International Pty Ltd (API) be paid into the trust account of Messrs Brown & Fowler.

3. No payments are to be made by or on behalf of API from Messrs Brown & Fowler’s trust account unless there is forty-eight hours’ notice of such payment given to the solicitors for the applicant.

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	QG 3008 of 1998

BETWEEN:

KOROMIKO PTY LTD
Applicant

AND:

ASIA PACIFIC INTERNATIONAL PTY LTD
FIRST RESPONDENT

ASIA PACIFIC INTERNATIONAL PTY LTD
Second Respondent

JAMES LAWRENCE BROADBENT
Third Respondent

MAURICE BARRY RICE
Fourth Respondent

JUDITH MERLE CHAMBERS
Fifth Respondent

SIMON POOLE
Sixth Respondent

JUDGE:	SPENDER J
DATE:	23 JUNE 1998
PLACE:	BRISBANE

REASONS FOR JUDGMENT

Koromiko Proprietary Limited (‘Koromiko’) seeks by way of interlocutory order the appointment of a receiver, pursuant to s 1323 of the Corporations Law (‘the Law’) or, alternatively, a number of Mareva injunctions pending trial against all the respondents to its application, except the fifth. Section 1323 of the Law relatively provides:

“Where:

...

(c) a civil proceeding has been begun against a person under this Law;

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...(c),...(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.....an aggrieved person, make one or more of the following orders:

...

(h)   an order appointing:

...

(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;

...”

Section 1323(3) provides:

“Where an application is made to the Court for an order under subsection (1), the Court may, if in the opinion of the Court it is desirable to do so, before considering the application, grant an interim order, being an order of the kind applied for that is expressed to have effect pending the determination of the application.”

Section 1323(5) provides:

“Where the Court has made an order under this section on a person’s application, the Court may, on application by that person or by any person affected by the order, make a further order discharging or varying the first-mentioned order.”

Section 1005 of the Corporations Law provides relevantly:

“...a person who suffers loss or damage by conduct of another person that was engaged in contravention of a provision of this Part or Part 7.12 may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.”

It is alleged as part of the complaints by Koromiko that the first respondent has been guilty of contravention of ss 1064 and 1065 of the Law, and that the remaining respondents have been persons involved in those contraventions. The principles are not seriously in dispute. As von Doussa J observed in Beach Petroleum NL v Johnson (1993) 11 ACLC 75 at 77, speaking of the Mareva injunction power:

“The Mareva injunction power was considered by the Court of Appeal of New South Wales in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319. At p 321-322, Gleeson CJ said:

‘The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant’s absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.’.”

His Honour continued:

“The Mareva remedy is discretionary. So, too, is the remedy under s 1323 of the Corporations Law.  Under the statute the discretion is to be exercised having regard to the need or the desirability of protecting the interests of people to whom the company may be or become liable to pay moneys.  The discretion is a general one.  In the exercise of the discretion the Court may have regard to all the circumstances of the case:  see Lone Star Exploration NL v CAC (1988) 6 ACLC 1, 108; (1988) 50 SASR 24.

The appointment of a receiver or receiver and manager, whether in aid of a Mareva injunction or under para 1323(1)(h), is a drastic step not lightly to be taken.  The party seeking such a remedy must make out a clear case not only that the protection of the interests of people to whom the company may be or become liable require protection, but also that a lesser remedy which does not involve removing the administration of the company from the directors would not fit the circumstances of the case.”

It is clear that the parties seeking the remedy must make out "a clear case".  The case the applicant has to make out is that the interested people to whom the company may be or become liable require protection, and a lesser remedy which does not involve removing the company's administration from the directors would not fit the circumstances of the case.

The applicant must establish that in the absence of relief there is a danger that assets will be dealt with in a way which will prevent the aggrieved persons recovering the judgment.  Much of what I have said is reflected in the observations of R.D. Nicholson J in Australian Securities Commission v Cooke (1997) 15 ACLC 435 at 440 where his Honour said:

“The party seeking such a remedy must make out a clear case, not only that the interests of people to whom the company or person may be or become liable require protection, but also that a lesser remedy which does not involve removing the administration of the company and the directors would not fit the circumstances of the case: see Beach Petroleum NL v Johnson (1993) 11 ACLC 75 at 77; (1992) 9 ACSR 404 at 406. At ACLC 77; ACSR 406 the Court held it is not necessary for the applicant to show an active intention on the part of respondents to prevent the aggrieved persons from recovering judgment. It is enough if the applicant establishes that, in the absence of relief, there is a danger assets will be dealt with in a way which will prevent the aggrieved persons recovering the judgment.”

See also the observations by the Queensland Court of Appeal in Northcorp Limited v Allman Properties (Australia) Pty Ltd [1994] 2 QR 405. The purpose of the appointment of a receiver under s 1323 of the Law is the securing of the assets of the relevant person: see Corporate Affairs Commission v ASC Timber Pty Ltd (1989) 7 ACLC 599. Of course, as with any application for interim or interlocutory injunctive relief, it is necessary for the applicant to establish that there is a serious question to be tried and that the balance of convenience favours the making of the order: Castlemaine Tooheys Limited v The State of South Australia (1986) 161 CLR 148 at 153.

It is submitted by Mr Couper for Koromiko that there is owing by Australian Pacific International (‘API’) a capital sum of approximately $1.7 million and it is submitted that the total debt, including accumulated interest, is of the order of $2.1 million.  The first respondent says that it requested repayment of the sum of $950,000 which it had advanced to API, the request being made in November/December 1997.  That sum has not been repaid.  A written request for the repayment of the entire sum was made on 23 April 1998.  The payments that have been made by API to Koromiko in December 1997 and March 1998, described as interest payments, total $34,799, and on 1 April 1998 the first respondent paid to Koromiko $20,000.  No other sums have been repaid since November 1997.

According to the applicant, the relationship between the applicant and the first respondent is characterised by the respondents as being the management by API of bridging loan investments made by it on behalf of the applicant. It was submitted that the conduct of the respondents in promoting and running the scheme amounted to the offering or subscription and making available prescribed interests, being a participation interest defined in s 9 of the Corporations Law, and that what the applicant was offered by API was the right to participate in profits of a business undertaking or scheme conducted by API.

It is submitted that on that characterisation API is in breach of ss 1064 and 1065 of the Law and that, as a consequence, the applicant is entitled to damages pursuant to s 1005 or an order pursuant to s 1325. In addition, there is an allegation that the respondents have engaged in misleading and deceptive conduct contrary to the Trade Practices Act (1974). I will not dwell on the nature of that claim which has its very real difficulties because it seems to me that there is a serious question to be tried concerning the allegation of contravention of ss 1064 and 1065 of the Law.

It was submitted on behalf of Koromiko that there is a danger of dissipation of assets, and that danger can be inferred from a number of the factual circumstances that emerge from the unfortunately unsatisfactory evidence in this case.  It is said first that at the end of November 1997, loans totalling $2,606,651 were in default.  Secondly, it is said that prior to the institution of these proceedings, the respondents refused to let the applicants, and in particular Koromiko, inspect any relevant documents and refused to disclose the names of borrowers to whom funds had been on-lent.

Next, there is a claim concerning the documentation relating to the provision of bridging finance by the applicant to the effect that regular audits of accounts and pool funds are carried out by professional auditors.  The material from the respondents which, in my view, has been grudgingly offered in dribs and drabs, raises the clear suspicion that this claim is simply not true.  Next, it was represented in a number of letters from API that a contingency fund has been established to assist in providing some measure of back up in the event of a default by a borrower.  The solicitors for the respondents on 28 May 1998 in a letter said:

“As the fund is now being wound down, and there is no ongoing need for maintenance of a separate contingency fund, all monies are consolidated in the general fund pool.”

None of the material, on my understanding of it, identifies the existence at any time of a contingency fund, and one would have thought that if in fact that fund had been established and operated for some time, it would have been very easy to provide documentary proof of its operation.  Next, and significantly, there was an attempt by Mr Hackett to provide in an exhibit to his first affidavit, exhibit BH1, a purported history of all funds received from participants in the lending business, all moneys paid out, all interest received and distribution to participants.  BH1, on any view, is wildly inaccurate and so much has been acknowledged by his second affidavit which purports to meet the devastating criticisms that have been made of BH1 by counsel on behalf of Koromiko.

The further affidavit which I permitted to be filed by leave this morning from Mr Ian Keel, acknowledges further errors and misinformation in relation to BH2, being a further schedule provided by Mr Hackett and being the schedule referred to in his affidavit filed on 12 June 1998.  In addition, Mr Keel's affidavit acknowledges that two amounts of $15,000 and $20,000 appearing in BH2 were incorrectly included at the date of preparation of that document by his office.

Further, his affidavit exhibits a number of what is said to be “General Ledger [Detail]” schedules.  These documents seem to have been documents simply brought into existence in an argumentative way of meeting the criticisms that have been made of earlier documents that had been prepared and schedules compiled, on behalf of the respondents.  The effect of the material that was sought to be relied on this morning is simply in my view an acknowledgment of the material that had earlier been provided, and does not in my view go anywhere near to putting a satisfactory explanation of the operations of the scheme, whatever it be, before the court.

There is a further matter which concerns a loan to Midland Proprietary Limited.  A loan was in fact was made on 12 December 1997 in the sum of $276,816.  This loan was made after the request by Koromiko for the return of its funds.  The explanation for this loan occurring on 12 December 1997 is that there was an obligation by an earlier agreement of 17 October 1997 to advance the December moneys to Midland.  BH1 shows an advance of $300,000 followed by a repayment on 28 October 1997, and a repayment on 7 November 1997.

The most recent affidavit by the solicitors for the respondent, Mr Brown, indicates that $300,000 was deposited to the trust account of Messrs Brown and Fowler by API on 28 October 1997.  His affidavit says:

“It subsequently transpired that the advance did not proceed to settlement at that point as anticipated, and [as a consequence] I caused those monies to be re-deposited to the account of API.”

Again no explanation is offered as to why the advance did not proceed to settlement at that time.  It is at least arguable that in the light of the events that had occurred there was no obligation binding on API to advance the sum of $276,816 on 12 December 1997, and in particular for that to have occurred after a request by Mr Primi on behalf of Koromiko for the return of $950,000, which request was made in November prior to the execution of the loan to Midland on 12 December 1997.

The respondents contend in opposition to the interim application that the money which it received from investors was lent out on security; that the applicant's money is all accounted for and identifiable, reliance being placed on the various schedules, BH1, BH2, and BH3.  It is contended that there was no dishonesty on the part of any of the respondents and the applicant has not established any misappropriation of funds.  There is evidence of a report from Palmer Wilson in summary form suggesting that the accounts have been kept in a competent manner.

The claim by the respondents is that the arrangements between Koromiko and it amount to a joint venture between Mr Primi, the respondent directors, and other investors, being a short-term bridging finance provision to commercial borrowers.  It was submitted that this was conducted as a private joint venture because of the restrictions of the Corporations Law. The respondents rely, somewhat desperately it seems to me, on the exemption from the prescribed interest definition in s 9 of the Corporations Law that it is afforded in reg 7.12.04, which relevantly provides:

“For the purposes of the definition of ‘prescribed interest’ in section 9 of the Corporations Law, the following rights or interests are declared to be exempt rights or interests for the purposes of Chapter 7 of the Law:

(a)rights or interests in a retirement village scheme;

(b)rights or interests in a joint venture agreement or a proposed joint venture agreement:

(i)that relates to a scheme of a kind commonly known as a joint venture; and

(ii)any promoter of which is or will be a party to the agreement; and

(iii)that does not relate to a scheme promoted by or on behalf of a person, or an associate of a person, whose ordinary business is or includes the promotion of similar schemes; and

(iv)except in the case of an agreement that has been entered into when this provision commences, that provides, or will provide, for no more than 15 parties;

...".

If in fact this was a joint venture between Koromiko and API, or between Mr Primi, the moving force of Koromiko, and the directors of API, or, indeed, if it were a number of joint ventures, it is clear that each such joint venture was to be for a short duration.  The precise nature of the arrangement between the applicant and the respondent in relation to the provision of the funds, which were on-lent as bridging finance to the ultimate borrower, is not particularly clear.  The documentation which is in evidence before me includes, however, two letters, one of 13 December 1996, FP2, and a similar letter of 20 December 1996, FP4.

The letter of 13 December is addressed to Koromiko Pty Ltd for the attention of Mr Primi, and it is useful if in fact I set out the first four paragraphs of that letter:

“This letter is to acknowledge receipt of your deposit of $200,000 in the Bridging Finance Investment.

Your funds will be deposited in our Investment Pool in our cash management account at the Commonwealth Bank and will receive interest at the Commonwealth Bank’s normal cash management rate for funds at 24 hours call.  However, as soon as this money has been advanced by way of loan, it will earn interest at the rate of 5% per month.

Due to the short term nature of loans made - usually 30 or 60 days, but not more than 90 days - funds are moved in and out of the pool constantly.  This means that your money will only earn the higher rate whilst it is actually out on loan.  As a rule it is expected that this should not be less than 80% of the time although this cannot be guaranteed.  You will receive regular statements which will accurately track how your funds have been employed.

You are required to leave your funds on deposit for not less than 6 months after which you may withdraw all or a portion of them.  You are, however required to provide thirty one days written notice for any withdrawal.”

There is reference to features of bridging finance investment where a number of features are referred to.  It includes the statement that loan durations are 30 to 90 days only, regular audits of accounts and pool funds are carried out by professional auditors, contingency funds established to assist in providing some measure of back-up in the event of default by a borrower, for investments of less than $100,000 the interest payable during the currency of the loans is 4 per cent per month.  This rate is increased to 5 per cent per month for investments of $100,000 or more.  It will be obvious from the interest rate of 5 per cent per month that greed is a significant consideration in relation to the nature of the provision of finance which was to be on-lent by way of bridging finance.  The letter does note, however:

“We must point out, however, that particularly due to the very high returns offered, this investment should be regarded as being in the High Risk category and no guarantees as to capital or income are given or implied.  We further point out that this investment opportunity is not the subject of a public offer and is only available to our clients and close associates.”

It is also clear that if this be a joint venture or a number of joint ventures, the partners in the joint venture are in substantial dispute, and the directors of API have deliberately refused to disclose information to Koromiko, which failure extends not only to the identity of borrowers for fear that Mr Primi might harass borrowers in respect of whom recovery proceedings or negotiations were under way.  It is quite inconsistent with my understanding of a joint venture for API to have behaved as it has, particularly after requests by solicitors for Koromiko for information concerning the status of funds which Koromiko had advanced.

If this was truly a joint venture, or a number of joint ventures, it would, in my opinion, be just to make orders having the effect of winding up the joint venture forthwith, and if necessary for the efficient achievement of that object, the appointment of a receiver to the assets of API.  But in my opinion, it is unlikely that this is a joint venture between Primi, the respondent directors and other investors for the provision of short term bridging finance to commercial borrowers as is claimed in the submissions by Mr Carrigan on behalf of the respondents.

There are many features in the evidence which tend against that conclusion. The first and most obvious is the absence of records separately maintained for each joint venture.  Secondly, there is a lack of correspondence between moneys invested and moneys on lent to borrowers by way of bridging finance.  Thirdly, the intermingling of funds from other allegedly independent joint venturers into a common fund seems to suggest that there is not truly a joint venture between Koromiko and API in respect of the provision of funds by Koromiko for the purposes of the joint venture.

Next, the inability to precisely trace the origin of funds on lent by API strongly inclines me to the view that there is not in truth a joint venture of the kind claimed.  The way the business has been conducted suggests that the various investors have at different times and in different amounts and unknown to each other, and in ignorance of the amounts and identity in some cases of the other investors, placed funds with API, and that API has conducted a money lending business based on funds deposited with it by the investors.

It is, of course, important to note that none of my findings purport to be final in any sense. The evidence is by no means complete, and I am approaching this solely on the basis of the material put before me on this interlocutory application, and the findings that I have made have to be fully understood in that context. Having said that, in my opinion, there is a seriously arguable question of whether there has been a breach of ss 1064 and 1065 of the Law. It is seriously arguable at least that there is a debt owed to Koromiko by API, or debts owed to Koromiko from API, or, alternately, a claim for damages pursuant to s 1005 of the Law.

As I indicated at the outset, however, nonetheless, I will not appoint a receiver at this time, nor will I make any orders of a Mareva kind at this time.  What I propose to do is to adjourn the applications by Koromiko to be brought on on five working days’ notice.  I will make an order directing discovery by each of the respondents except the fifth. That discovery is to be made within 14 days of today.  It goes without saying that what I have already said indicates my concern that that discovery be complete and full.

The disclosure thus far, in my opinion, has been woefully inadequate errors and misinformation abound in what has so far been provided by the respondents.  And I am far from satisfied by the candour of the respondents and the completeness of the material that has been put before the court.  I must say that conclusion is exacerbated rather than relieved by the material which I permitted to be filed by leave this morning.

For the reasons then that I have indicated, I decline at this stage to make any orders as sought by the applicants.  I direct that each of the respondents, other than the fifth, make discovery on oath within 14 days of today, and that the applicants have inspection of those documents and be permitted to take copies at their expense of every such document within a further seven days.  I give liberty to apply to any party to re-list the application for interlocutory relief on five working days’ notice by that party to each of the other parties.  I propose to order that this matter simply be adjourned after the making of those orders to a directions hearing at 9.30 am on 7 August.  I propose simply to reserve costs at this stage.

I make these two further directions: all sums received by or on behalf of API be paid into the trust account of Messrs Brown and Fowler and that no payments by or on behalf of API be made except after 48 hours notice to the solicitors for Koromiko.

The orders that I earlier made I should discharge, and I do.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.

Associate:

Dated:            23 June 1998

Counsel for the Applicant:	Mr S S W Couper QC
Solicitor for the Applicant:	McLaughlins
Counsel for the Respondent:	Mr C J Carrigan
Solicitor for the Respondent:	Brown & Fowler
Date of Hearing:	19 June 1998
Date of Judgment:	23 June 1998