Australian Securities & Investments Commission v Exotic Timbers of Australia Ltd [2003] FCA 348

FEDERAL COURT OF AUSTRALIA

Australian Securities & Investments Commission v Exotic Timbers of Australia Ltd [2003] FCA 348 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v EXOTIC TIMBERS OF AUSTRALIA LTD, JOSEPH PETER KARRA AND CHRISTINE CAROL KARRA D 3001 OF 2003 DOWSETT J 3 APRIL 2003 BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY D 3001 OF 2003

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

APPLICANT

AND: EXOTIC TIMBERS OF AUSTRALIA LTD

FIRST RESPONDENT

JOSEPH PETER KARRA

SECOND RESPONDENT

CHRISTINE CAROL KARRA

THIRD RESPONDENT

JUDGE: DOWSETT J

DATE: 3 APRIL 2003

PLACE: BRISBANE

REASONS FOR JUDGMENT 1 The relevant facts and issues in debate appear sufficiently from exhibit 3, which is a statement of facts filed on behalf of the applicant. The respondents do not necessarily accept all of those facts, but they accept that the document fairly identifies matters about which there is a serious question to be tried as between the applicant on the one hand and the respondents on the other. In these proceedings the applicant seeks a winding up order against the first respondent and also against certain investment schemes which it is conducting following the issue of prospectus offers to the public. The first respondent is the responsible entity in connection with each of those schemes for the purposes of the Corporations Act 2001 (Cth) (the "Act"). The applicant has been investigating the first respondent and its conduct in connection with those schemes. As a result, it has sought the orders to which I have referred and now also seeks the appointment of a receiver. The applicant is desirous of adopting the procedure prescribed by s 1323 in order to secure the position of investors in the schemes in the short term, that is pending trial which has been set down for June of this year. 2 The applicant is carrying out an investigation of the sort contemplated by par 1323(1)(a), the relevant person being the first respondent, and has formed the requisite opinion referred to in that subsection, that the first respondent is liable, or may become liable to pay money to other persons, namely those who have invested in one or other of the schemes. In those circumstances it seeks the appointment of a receiver and manager pursuant to par 1323(1)(h) and subs 1323(3). It seems that the interim relief contemplated by the latter subsection is only available where similar substantive relief is sought. For that reason the application has been amended to add a prayer for the appointment of a receiver. 3 The circumstances surrounding the first respondent's administration of the investment schemes appear in exhibit 3. It is not necessary that I set them out again in these reasons. The focus of the hearing today has been upon alternative regimes which may be put in place in order to avoid the appointment of a receiver. The first respondent fears that the appointment of a receiver will be more expensive and more likely to lead to its ultimate demise than would be other interim arrangements which might be made. 4 The most attractive of those other possible arrangements is the identification of a new responsible entity to take the place of the first respondent in connection with the various investment schemes. The second respondent has already made a substantial cash contribution to try to assist the first respondent and has offered to make further such contributions. Impliedly, the offer is conditional upon there being no receiver. It is also relevant, in my view, that the applicant cannot be required to offer an undertaking as to damages in the usual way. Where the usual price for interim relief is not to be paid, one must be more than usually sensitive to the possibilities which have been outlined by the respondents, namely that they will suffer substantial financial loss as a result of the making of any interim orders for which loss they may not be adequately compensated. 5 To my mind, the most important aspects of the conduct giving rise to the applicant's concern are firstly, the apparent doubts surrounding the solvency of the first respondent and secondly, the apparent failure to date to secure the position of the various investors. As to the question of solvency, the witness, Ann Yvonne Thoume, who has had some involvement in the affairs of the first respondent, demonstrates in par 11 of her affidavit, filed in court on 13 March 2003, an apparent excess of assets over liabilities of something in excess of $45,000. However, in so doing, she has excluded an amount of $189,000 owed to another company. Apparently the second respondent is owed money by that company and says that if he receives it, he will pay it to the first respondent who will then be able to discharge its debt. The equivocal nature of such an arrangement is obvious. It is said also that there is a dispute about the debt in question. Nonetheless it is difficult to have any confidence in the assets and liabilities position demonstrated by Ms Thoume's affidavit. 6 In any event it is a condition of the appropriate licence held by the first respondent that it have a net worth in excess of $50,000, a position which it seems unable to meet. The question of the solvency of the first respondent is further clouded by a letter dated 31 March 2003 from Mr Woodard to Ms Thoume in which, after a very careful description of the information available to him, he offers the opinion that, "… there is reasonable expectation that the company is able to pay its debts as and when they fall due." This opinion seems to have been largely dependent upon information derived from the second respondent, but the guarded nature of the letter suggests considerable doubt about solvency. A financial statement for the period ending 30 September 2002 has been prepared, and an audit report is about to issue in connection with it. The relevant statement was not produced at the beginning of the hearing today, but after I raised the matter with counsel prior to the luncheon adjournment, it has now been put in. It is difficult to understand in the absence of any further explanation but offers no real counter to the view that the company seems not to have any substantial assets of a durable nature. In the circumstances I find myself in serious doubt as to the company's solvency and for that reason alone, as to the appropriateness of leaving it in charge of assets which are, in effect, held for the benefit of members of the public who have invested in these schemes. 7 The second aspect of the matter is the conduct of the first respondent in its capacity as a responsible entity. The success or failure of this scheme depends substantially upon the continued availability of certain blocks of land upon which trees have been planted. One of these is owned by the first respondent as trustee of a unit trust, the units in which are apparently eventually intended to pass to the investors. No steps have been taken to ensure the availability of that property for the purposes of the scheme. A second block of land is leased by the first respondent from its registered proprietor, but to date the arrangement pursuant to which it is used for the purposes of the scheme has not been formalised in a way which would offer any protection to the scheme investors. These matters cause grave concern. In addition, it is alleged that the first respondent has offered units to some investors upon terms which are more favourable than terms offered to other investors in accordance with the relevant prospectus and in particular, upon terms which may have a serious long-term effect upon the capacity of the first respondent to continue to fund the work which it must perform in order to carry into effect the subject matter of the investment schemes. These matters all indicate to me that the continued involvement of the first respondent as the responsible entity cannot be in the best interests of the investors and at very best, would expose them to an unacceptable level of risk. 8 To some extent, too, I take into account the fact that the matter is to be tried in the relatively near future and that the likely duration of any interim order will not be unduly long. I accept the strength of Mr Savage's argument that the appointment of a receiver may lead to the incurrence of substantial additional expense and that is a particularly important factor where, as here, there is no undertaking as to damages. I also accept that there can be a tendency for such an appointment, itself, to cause the collapse of the relevant company or other entity. 9 I have given those matters such weight as I could but, in the end, I cannot see any real alternative to the appointment of a receiver. It is true that the respondents have suggested the appointment of a corporation, Managed Projects Australia Limited, in the place of the first respondent. A Mr Frank Cassells claims to be the managing director of that company. He has sworn two affidavits. However the first was, in many respects, equivocal and suggested something less than a full understanding of the circumstances in which the first respondent is presently placed or of the circumstances of the investment schemes. Some attempt has been made to clarify Mr Cassells' understanding of the position in his second affidavit. However I remain in some doubt as to the appropriateness of that course. I should say that this course was first raised when the matter was last before me some weeks ago, but it seems not to have proceeded much further in the meantime. The time to act has arrived. I cannot, in conscience, delay intervention to protect the interests of the investors. In those circumstances I am minded to appoint a receiver pending the hearing of this matter. 10 In the course of the hearing I was informed that a substantial body of investors have indicated that they are opposed to the appointment of a receiver. I am not entirely sure, however, that they were fully informed as to the nature of the issues in this case. Although I do not suggest that there was any deliberate attempt to mislead them, the circular that was sent to them appears to me to do rather less than explain fully the position. More importantly, nobody has appeared today. I would have thought that if the investors had a particular interest in the matter, some at least, would have sought to do so. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.