FEDERAL COURT OF AUSTRALIA Australian Securities and Investments Commission v York Street Mezzanine Pty Ltd (Administrators Appointed) In the Matter of York Street Mezzanine Pty Ltd (Administrators Appointed) [2005] FCA 1921 CORPORATIONS – winding up application – insolvency – just and equitable ground – property development companies – raising funds by promissory notes issued to public – winding up proceedings commenced by ASIC – administrators appointed – proposed Deed of Company Arrangement – not recommended by administrators – whether application for winding up should be further adjourned – companies insolvent – serious questions raised about conduct of directors – winding up orders made on insolvency grounds Corporations Act 2001 (Cth) s 459P(2), s 467(3)(b), s 459A AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v YORK STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) WAD 342 OF 2005 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ANN STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) WAD 376 OF 2005 FRENCH J 20 DECEMBER 2005 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 342 OF 2005 IN THE MATTER OF YORK STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION PLAINTIFF AND: YORK STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) DEFENDANT JUDGE: FRENCH J DATE OF ORDER: 20 DECEMBER 2005 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The remuneration of the administrators to this date shall be fixed by the Court on the application of the administrators, which may be made at any time prior to 31 January 2006. 2. In accordance with s 459P(2) of the Corporations Act 2001 (Cth) (the Corporations Act), the plaintiff has leave to make this application. 3. In accordance with s 467(3)(b) of the Corporations Act, all outstanding formalities to the making of a winding-up order against the defendant in this action are dispensed with. 4. In accordance with s 459A of the Corporations Act, the defendant is to be wound up in insolvency. 5. Geoffrey Frank Totterdell and David Laurence McEvoy of PricewaterhouseCoopers as official liquidators, are appointed as liquidators for the purpose of winding up the defendant. 6. The plaintiff's costs are to be taxed and reimbursed out of the property of the defendant in accordance with s 466(2) of the Corporations Act. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 376 OF 2005 IN THE MATTER OF ANN STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION PLAINTIFF AND: ANN STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) DEFENDANT JUDGE: FRENCH J DATE OF ORDER: 20 DECEMBER 2005 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The remuneration of the administrators to this date shall be fixed by the Court on the application of the administrators, which may be made at any time prior to 31 January 2006. 2. In accordance with s 459P(2) of the Corporations Act 2001 (Cth) (the Corporations Act), the plaintiff has leave to make this application. 3. In accordance with s 467(3)(b) of the Corporations Act, all outstanding formalities to the making of a winding up order against the defendant in this action are dispensed with. 4. In accordance with s 459A of the Corporations Act, the defendant is to be wound up in insolvency. 5. Geoffrey Frank Totterdell and Ian Richard Hall of PricewaterhouseCoopers as official liquidators, are appointed as liquidators for the purpose of winding up the defendant. 6. The plaintiff's costs are to be taxed and reimbursed out of the property of the defendant in accordance with s 466(2) of the Corporations Act. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 342 OF 2005 IN THE MATTER OF YORK STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION PLAINTIFF AND: YORK STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) DEFENDANT IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 376 OF 2005 IN THE MATTER OF ANN STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION PLAINTIFF AND: ANN STREET MEZZANINE PTY LTD (ADMINISTRATORS APPOINTED) DEFENDANT JUDGE: FRENCH J DATE: 20 DECEMBER 2005 PLACE: PERTH REASONS FOR JUDGMENT 1 On 22 November 2005 the Australian Securities and Investment Commission (ASIC) commenced proceedings in this Court seeking an order for the winding up of York Street Mezzanine Pty Ltd (YSM) on the grounds of its insolvency and, alternatively, on the ground that it would be just and equitable for the company to be wound up. The company is one of a group of companies known as the Westpoint Group. By way of interlocutory application filed at the same time, ASIC sought the appointment of a provisional liquidator. 2 On the following day the directors of YSM appointed Geoffrey Frank Totterdell and David Laurence McEvoy, joint and several administrators of the company under s 436A of the Corporations Act 2001 (Cth) (the Act). 3 On 24 November 2005 a directions hearing and the interlocutory application in those proceedings were adjourned to 7 December 2005. 4 On 5 December 2005 ASIC filed an application seeking a winding up order against another of the Westpoint Group, Ann Street Mezzanine Pty Ltd (ASM), on the ground of its insolvency and, alternatively, on the ground that it would be just and equitable to make such an order. It also sought by way of interlocutory application an order for the appointment of provisional liquidators. 5 The following day, on 6 December 2005, Ian Hall, Geoffrey Totterdell and Derrick Vickers were appointed by the directors as joint and several administrators of ASM. Messrs McEvoy, Totterdell and Vickers were also appointed on that day as administrators of related companies, Bayshore Mezzanine Pty Ltd, Bayview Heritage Mezzanine Pty Ltd, Market Street Mezzanine Pty Ltd and Market Street No 2 Mezzanine Pty Ltd. Greg Hall, Geoffrey Totterdell and Derrick Vickers were appointed as administrators of Mount Street Mezzanine Pty Ltd at the same time. 6 On 7 December 2005 the applications in the YSM and ASM matters were adjourned to today. A first meeting of the YSM creditors was held on 30 November 2005. The convening period for the second meeting was extended to 15 December 2005. The second meeting was scheduled for 22 December 2005. An order was made that the administrators provide ASIC with a copy of the report to creditors required under s 439A(4) of the Act at the same time as sending the report to the creditors. In the ASM matter, orders were made that the application be adjourned to today with liberty to apply. The administrators were required to file and serve on ASIC, by 15 December 2005, an affidavit reporting on the result of their inquiries to that date and any proposal that would be put to creditors of the company. 7 On 19 December 2005 ASIC filed an application seeking an order that Westpoint Corporation Pty Ltd be wound up by the Court. The application came on for mention today and has been stood over for further directions. It was supported by an affidavit of an ASIC investigator, Mr Gomm, sworn 19 December 2005, which was relied upon in connection with the applications in relation to YSM and ASM respectively. That affidavit exhibited the transcript of an examination of Robert Charles Kelly, a partner in KPMG involved in conducting the current audit of companies within the Westpoint Group. 8 The adjournment of the application for the appointment of provisional liquidators until today was intended to allow the administrators to form a clearer picture of the finances of the two companies and any proposals for a Deed of Company Arrangement (DoCA). 9 The administrators in the YSM matter have provided a report to creditors, which is exhibited to the affidavit of Mr McEvoy, sworn on 19 December 2005. In the ASM matter, the Court has the benefit of an affidavit sworn by one of the company's administrators, Mr Vickers on 15 December 2005 pursuant to the Court's order made on 7 December 2005 and a later affidavit of 19 December 2005. These affidavits and the evidence filed by ASIC paint a disturbing picture of the finance of these companies and raise questions about the conduct of their directors. It is unnecessary for me at this stage to say more than that these are serious questions. Further inquiry is required and the opportunity for answers must be given, before any firm conclusions could be drawn for the purpose of any subsequent proceedings. Nevertheless the existence of these questions and their seriousness is a relevant consideration in the exercise of my discretion whether to allow the company to continue in administration. 10 Affidavit evidence filed by ASIC indicates that YSM was incorporated for the purpose of issuing promissory notes to, and borrowing funds from, members of the public and lending those funds to a company called Scots Church Development Pty Ltd (SCD) to assist in the funding of a property development at 2 York Street, Sydney. The funding proposal involved the creation of so-called mezzanine debt ranking behind other advances in relation to the property development. Information Memoranda issued to potential investors by YSM stated, inter alia, that: (a) YSM was seeking to raise up to $40 million by the issue of promissory notes to lend to SCD to assist in funding a development on the land. (b) The money raised would be secured by a second registered mortgage over the land and a second ranking fixed charge over the assets of the SCD. (c) Senior bank debt would be incurred that would have first ranking security; and (d) The repayment of the moneys paid would be guaranteed by certain related companies of YSM and the SCD. Promissory notes were issued at various times with repayment at specified dates and provision for early repayment. The promissory notes on issue by YSM as at the date of the proceedings instituted by ASIC had a maturity date of 30 November 2005. There was evidence that YSM has accepted subscriptions well above the amount of $40 million referred to in its Information Memoranda. A database maintained by the company showed total subscriptions received of the order of $117 million. As at 17 November 2005 the current balance for subscriptions, according to the finance manager of YSM in evidence given to an ASIC investigator, was about $78 million. There was some 950 investors. Investors had apparently not been informed of the fact that oversubscriptions had been accepted. 11 The balance sheet of YSM at 31 August 2005 showed the loan to SCD as $56,077,498.04. Under the heading 'Loan – Promissory Notes' there was shown an amount of $56,125,169. There were no other assets shown to account for the balance of the promissory note issue. 12 The development of the Scots Church land has proceeded. Investors have been informed by YSM that settlement is expected to occur in February/March 2006. 13 In its material ASIC referred to investor update documents sent out in April and May 2005. It noted that as at 31 May 2005 mezzanine debt was in the order of $88 million. The updates sent out in that month repeated a reference made in the April 2005 document to mezzanine debt as '$40 million' and senior debt as $71 million. It described the forecast debt as fully covered and the risk to capital significantly reduced. On each occasion investors were invited to rollover their investment into 'other Westpoint financial products'. On 21 September 2005 all investors in YSM were invited to reinvest their funds in the Westpoint Income Fund (the Fund). The letter enclosed a product disclosure statement and a document entitled 'Direction to Pay' to be signed by any investor wishing to rollover the investment into the Fund. It directed YSM to pay the face value of the promissory note to the Fund for investment for a two year period. There was a significant response to the invitation to rollover funds into the Fund. 14 The position as at the date of filing of ASIC's application was that YSM had promissory notes on issue for a total of $78 million. The accounts for SCD showed a loan account with YSM as at 31 August 2005 of $59,667,398 and a loan account with Westpoint Corporation of $9,935,940 representing a total debt of $69,603,338. SCD also owes $76,057,539.35 to the senior lenders for the development of the land. On that basis, as ASIC submits, the debt owed on the development of the land, is more than $145 million. A valuation of the development on an 'as if complete basis' carried out in February 2005 showed a figure of $123.7 million. In an April update the value of the development, including unsold apartments and retail space at completion, was said to be $119.1 million. In the event, it appears, SCD will not have sufficient funds to repay YSM. In addition, there is an amount of about $22 million, on the evidence of YSM's finance manager, received by the company from the issue of promissory notes which is not shown in the balance sheet. ASIC submits that the means being used by YSM to be in a position to cover its liabilities to investors is the rollover of $20 million to $30 million out of YSM without paying cash to investors. The rollover has been effected by journal entries with no cash paid to related entities. In the case of a rollover from YSM for the Fund, the Fund does not receive any cash. As ASIC put it in its submissions, prior to the rollover the investor had a promissory note for a particular value. After the rollover the investor had units in the Fund for the same value. There had been no cash received by the Fund and no cash injection to be invested in the Fund. 15 I am satisfied on the basis of the evidence put before the Court by ASIC that YSM is insolvent. The administrators' report lends support to that contention. The key findings in the administrators' report were summarised as follows: 1. YSM raised in excess of $100 million in promissory note funding, notwithstanding that the highest cap represented or inferred in the Information Memoranda was $40 million. 2. The development project encountered significant delays which led to major cost overruns, particularly in financing costs (interest and commissions). 3. Realisations from the pre-sales and sales yet to be achieved will not be sufficient to cover the claims of promissory note holders in full. 4. The guarantee and indemnity provided by Westpoint Corporation and various other group entities is unlikely to be of material value in a winding up scenario given the uncertain value of other projects and the prospect of competing claims from a number of other Mezzanine finance companies also in administration. 5. The inter-company loan accounts between SCD and Westpoint Group entities are unlikely to have a material recovery value in a winding up scenario for the reasons outlined above. 6. While there are other potential sources of recovery these are unlikely to have a material impact on the return to creditors. 16 The administrators have received a proposal for a DoCA and have met on several occasions with the company's advisers and Westpoint executives in respect of the DoCA to be tabled for consideration at the next meeting of creditors. The key features of the proposed DoCA, as it currently stands, are summarised by the administrators as follows: 1. Payment of all realisations recovered under the present security held over the development project. 2. A creditor fund to be set up to comprise the following: - net value of realisable assets of the guarantors or an amount of $20 million (whichever is greater) to be secured by assets with an estimated equity of $3 million - such sum to be paid to the Fund in four tranches over three years ending 1 January 2009 - an additional pool of funds to be created from moneys which may become available from any surplus realisations on the various Mezzanine projects. 3. The company's creditors to rank pari passu (after payment under the first point above) with the creditors of other Mezzanine companies in respect of the creditor fund. 4. The DoCA is contingent on similar DoCA's being approved for each of the Mezzanine companies in administration. 17 The administrators expressed the view that there is significant uncertainty regarding the ability of the Westpoint Group entities to generate the projected pool of funds contemplated by the DoCA. They see little information to corroborate the basis on which that pool of funds is to be generated. There is apparently no contribution to the DoCA from the directors of the company or the directors of other Westpoint Group entities. The administrators point out that if the creditors resolve to accept the DoCA the guarantors would be provided with a full and final release and discharge of any of their obligations to the company when the DoCA conditions are fulfilled. If the terms of the DoCA are not complied with, those obligations will remain. Should creditors vote in favour of the DoCA, liquidators will not be appointed to the company. A deed administrator will not have the powers to pursue recovery actions such as voidable transactions and insolvent trading. 18 The administrators are of the opinion that there is some evidence to support the proposition that YSM was insolvent in the period prior to their appointment, although further work would be required to determine the extent of recoveries potentially available to a liquidator. They point out that while a liquidator may not be able to pursue insolvent trading action if YSM executes a DoCA, ASIC would retain its ability to seek orders against directors for insolvent trading. In the administrators' opinion, given YSM's financial position there is no realistic prospect of it returning to solvency. If the creditors chose not to vote in favour of the proposed DoCA then, in the administrators' opinion, it would be appropriate for YSM to be wound up. The estimated funds available for creditors in a winding up is said to be $38 million before costs and assuming no recovery from individual loan accounts, guarantees or any other actions that might be available. 19 Because of the concerns and uncertainty that they have regarding the DoCA fund the administrators are unable to recommend that creditors vote in favour of it at the present time. They accepted, as at 19 December 2005, that it is feasible that further due diligence, undertaken over the next few days before the creditors' meeting, would assist them in forming a better view as to the prospects of the creditors' fund being achieved. They note, in any event, that YSM is unlikely to recover moneys that are otherwise due to flow into the creditor fund if a liquidation were to proceed. 20 In the event, for the purposes of s 439A(4)(b), the administrators being presently unable to recommend the DoCA proposal, state: '… (ii) In our opinion, it is not in the interests of creditors to end the administration because the Company is insolvent. If the administration ended, this would return control to the directors. (iii) In our opinion, it is presently in the interests of creditors for the Company to be wound up. However, we are engaged in ongoing discussions with the DOCA proponents and expect to receive further supporting documents. We may also receive revised payment terms. If this occurs, creditors will be notified at the meeting and we may recommend an adjournment of the meeting at that time.' 21 The administrators were unable to point to anything today from which it might be inferred that it would be in the interests of creditors not to proceed to either the appointment of a provisional liquidator or a winding up order. In the course of their report the administrators observed that the actions of the YSM directors in circulating up to eight separate Information Memoranda to generate mezzanine funding significantly in excess of its representation as to fund raising caps, raise serious concerns about their conduct. They noted, by way of illustration, that the most recent Information Memorandum which sought funding of $40 million, was issued after 30 June 2003, a date by which YSM had already raised $51 million. 22 Significantly the administrators, immediately upon their appointment, asked that the directors of YSM provide a statement about its business and assets in the form of a 'Report as to Affairs' pursuant to s 438B(2) of the Act. They have not received a signed 'Report as to Affairs' for YSM from either of its directors and, accordingly, have notified ASIC of what they regarded as the directors' failure to comply with their obligations under the Act. 23 ASIC submits that the proposed DoCA would involve the contribution of three things, namely the net realisable assets of the guarantors, $3 million in property interests and 50% of any surplus earned by the development companies in the Group. These would have to be shared with the creditors of seven Mezzanine companies in administration. ASIC submits that the guarantors are liable in any event. Their identified contribution is meaningless given that they are fully liable even without a DoCA. In any event the preliminary view of the administrators is that it is unlikely that they have sufficient assets to meet a potential claim from the perspective of YSM, let alone the other companies. As to the $3 million in property interests offered, the administrators have not identified any real value in the interests. As to 50% of any surplus earned by the development companies, the auditors of the Westpoint Group, according to Mr Kelly's evidence in the ASIC investigation deposed to by Mr Gomm, are of the view that the Market Street Trust, Bayshore Port Melbourne Trust and Bayview Port Melbourne Pty Ltd will not generate any surplus. The only debtor of YSM is SCD. YSM is a second ranking secured creditor behind approximately $76 million. The only assets of SCD are proceeds to be received from pre-sales of the development, some $93.3 million, the balance of the sales possibly $25 million and moneys owed by related entities to the order of $22 million. After payment out to the first ranking creditor, there is only $42.3 million plus moneys that can be collected from related entities to pay $80 million owed to promissory note holders and claims by rollover creditors. There is no proposal in the DoCA that would improve this recovery. 24 Section 440A(3) of the Act provides that the Court is not to appoint a provisional liquidator to a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed. On the material before me as to YSM's finances and the questions raised about the conduct of its directors, there is no basis for any satisfaction that the interests of YSM's creditors would be served by its continuance in administration. In my opinion, however, the appointment of a provisional liquidator would merely delay the inevitable. Neither ASIC nor the administrators were able to point to any reason why the Court should not proceed immediately to a winding up order. Section 440A(2) of the Act provides: 'The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.' 25 For the reasons to which I have already adverted, I cannot be satisfied that it is in the interests of YSM's creditors for it to continue under administration rather than be wound up. In my opinion a winding up order should be made and, their consent having been given, the current administrators of YSM be appointed as its liquidators. I have asked ASIC to submit a minute to deal with necessary procedural issues. 26 In respect of ASM, evidence relating to the affairs of the Westpoint Group, including the evidence of the KPMG auditor Mr Kelly, exhibited to Mr Gomm's affidavit of 19 December, was relevant. ASIC's evidence included transcript of an examination conducted by ASIC of Mr GJ Rundle who is the chief financial officer of Westpoint Corporation and the secretary of various companies in the Group, including ASM. The transcript of his examination was exhibited to an affidavit of Bruno Dallo, an ASIC investigator. ASM is concerned with the development of apartments at Ann Street in Brisbane. Photographs of the development site were exhibited to an affidavit of Milorad Radulovic, who is an ASIC investigator in its Queensland regional office. These showed a cleared vacant lot with some sign of excavation and apparent recent regrowth. 27 In an affidavit sworn on 7 December 2005 one of the administrators of ASM, Mr Totterdell, provided the following information which had been given to him by directors of ASM. It was as follows: (a) ASM is a member of the Westpoint Group. (b) The company issued promissory notes to investors between 2002 and mid 2004 pursuant to various Information Memoranda and raised approximately $60 million from those promissory notes. (c) The money raised from the promissory notes was on-loaned to Ann Street Brisbane Pty Ltd (ASB) to assist in the funding of a real estate development in Ann Street, Brisbane. (d) The money loaned to ASB is secured by: (i) a first ranking fixed and floating charge; (ii) a second ranking fixed and floating charge; (iii) a mortgage over the land. (e) The development has only partially commenced. (f) The loan to ASB is ASM's most significant asset. (g) Other than promissory note holders, ASM has no material creditors. (h) On 31 December 2005 promissory notes with a face value of $37 million mature and fall due for repayment. Mr Totterdell said that the directors of ASM have informed him that ASB and other companies in the Westpoint Group hope to propose a DoCA within the time contemplated by s 439A(5) of the Act. 28 In his affidavit of 15 December 2005, which necessarily reflected a preliminary position, Mr Vickers, another of the administrators of ASM, described the proposed Ann Street development as a residential and hotel development comprising 158 residential units and 190 hotel rooms. He had been informed by the directors of ASM that the estimate of the likely present sale value of the land, net of costs, is $30 million. ASM had issued promissory notes to investors pursuant to three Information Memoranda seeking to raise $25 million, $30 million and $40 million. Mr Vickers' review of ASM's books and records suggested that it had raised approximately $70 million. The final figure awaits confirmation. He also said that there needed to be consideration of the extent to which the $70 million represented investors' funds rolled over by journal entries following investors redeeming other promissory note investments from other companies within the Westpoint Group. 29 Mr Vickers' review of ASM's books and records suggested that its debts under the promissory notes are presently in the order of $70 million comprising approximately $36.875 million by way of current liabilities to fall due on 31 December 2005 and approximately $33.812 million in non-current liabilities. The funds lent by ASM to ASB are secured by a second ranking registered mortgage over the land and registered fixed and floating charges over ASB. In addition, various Westpoint Group entities have guaranteed the performance of ASB. The latter company has obtained additional funding from Perpetual Trustee Limited in connection with the development, secured by a first registered mortgage over the land. The directors of ASM have informed the administrators that ASB's debt to Perpetual Trustee Limited is not more than $2.5 million. The balance sheet position disclosed for ASM by its audited statements as at 30 June 2004 showed total assets of $62,603,836 against total liabilities of $62,603,831, leaving a net asset position of $5. 30 The administrators have been provided with management accounts for ASM as at 7 December 2005. They had not been audited and the administrators were unable to say that they represented ASM's financial position as at 7 December 2005. These showed total assets of $70,669,130, total liabilities of $70,689,408, resulting in a deficit of $20,278. Mr Vickers said it is obvious that the true financial position of ASM is dependent upon the extent to which the receivable, represented by its loan to ASB, is in fact recoverable. 31 As at 15 December 2005, Mr Vickers was of the opinion that it was in the interests of creditors that ASM's administration continue so that investigations could continue allowing creditors to obtain the administrators' report and be in an informed position to make a decision on ASM's future. He made the point that if a provisional liquidator were appointed and the guarantee and indemnity called up immediately this could cause companies in the Westpoint Group to default on their banking facilities. This could cause companies in the Group to cease trading and significantly impact on the value of the guarantee and indemnity. 32 In a supplementary affidavit sworn 19 December 2005 Mr Vickers referred to the affidavit of Mr McEvoy sworn 19 December 2005 filed in the YSM proceedings. He said he had now given due consideration to the DoCA proposal in relation to YSM as set out in the report to creditors of 15 December 2005. He expected that a DoCA in similar form would be proposed in respect of ASM. He and his fellow administrators had concluded that the DoCA could not be supported in its current terms. However their recommendation could change if there were a material increase in the payments being offered and if they were able to validate the projected returns through analysis and review of more complete documentation regarding the Westpoint Group's financial position and the projected outcomes for the various property developments currently underway or planned as detailed more fully in the report. He thought it possible that one or both of these concerns might be addressed to the administrators' satisfaction before their report to creditors was required to be prepared and sent out. He was therefore still of the view that it was in the best interests of creditors that the administration continue for the reasons set out in his previous affidavit. 33 In its submissions ASIC pointed out that the Information Memoranda issued by ASM stated initially that total funding required for the Ann Street project was $80 million. This was increased to $83 million and then $106 million in later versions. The Information Memoranda also stated that ASM was seeking, by the issue of promissory notes, to raise $25 million. This amount increased to $30 million and then $40 million in later versions. The lending risk, it was said, would be mitigated by ASM being a special project vehicle and holding second ranking security over ASB and the land. According to the initial Information Memorandum senior bank debt of $50 million (increased to $63 million in later versions) would be incurred and would have first ranking security. 34 The Information Memorandum also stated that ASB as trustee for the Ann Street Brisbane Trust would enter into a fixed price, lump sum building contract with a reputable tier one or tier two builder. 35 Promissory notes were issued with a three year maturity date. The evidence showed that ASM has accepted subscriptions for promissory notes well in excess of $30 million. Mr Rundle stated in the course of his examination by ASIC that the amount was in excess of $60 million. Mr Carey, a director of related entities, also stated that around $60 million had been raised. The extent of subscriptions recorded in an access database maintained by ASM showed over $90 million subscribed and over $71 million on issue as at September 2005. Mr Carey told ASIC that all of the money raised has been lent to ASB and spent on the development project. A significant amount was paid to Westpoint Constructions under a contract that provides for payments to be made in advance. Those moneys were paid without restrictions on what Westpoint Construction could do with them. 36 Two construction contracts had been entered into with Westpoint Construction relating to the development on the land. The first was expressed to have been made on 31 October 2002 although it refers to a development approval issued on 26 February 2003. The second contract was undated and was expressed to supersede the earlier. It specified a contract sum of $71,500,000. It provided for 730 working days to obtain approvals and provided for practical completion 'as per agreed construction program', with no agreed program in the contract. 37 The second construction contract contained a special condition that in consideration of Westpoint Construction entering into an amended fixed price, fixed time contract, and agreeing to a delayed commencement of up to 12 months without the ability to alter the contract price or the contract duration, it was permitted to pre-invoice the Principal, an amount equal to 65% of the value of the contract. Under the agreement the Principal agreed to pay the amounts invoiced within 10 days of the receipt of a tax invoice. The accounts for Westpoint Construction showed that well prior to the second contract and from as early as 2002, it received substantive prepayments. 38 A special update to investors was issued in June 2004 which referred to mezzanine debt of $30 million and senior debt of $50 million with equity/profit as $23.7 million. Another special update was sent in April 2005 which referred again to mezzanine debt of $30 million, senior debt of $50 million and equity/profit as $54.8 million. That included a construction update stating that main building works were at zero per cent and that major construction work would be let by Westpoint Construction via a tender process to a selected panel of subcontractors. A further update in May 2005 reiterated the last statement even though a lump sum contract had been entered into and all investors' funds drawn down. 39 ASM, on 30 September 2005, invited investors to reinvest for a further three years. Neither that letter nor any of the Information Memoranda contained any disclosure of over subscriptions, the fact that the building contract had been entered into with Westpoint Constructions or the nature and extent of prepayments made under the contract. 40 Westpoint Construction's accounts show that an amount of $32,789,000 was received as prepaid income in respect of the development on the land. Mr Rundle told ASIC that a sum in the order of $70 million had been spent on the project, of which $25 million had been billed by Westpoint Construction to ASB. The rest of the funds raised, namely about $45 million, had been spent to establish the project with design, buying the land, raising the funds etc. 41 The access database, according to ASIC, shows that funds under management by ASM have increased by $4,643,020 since 1 July 2005 and that there are over 700 investors in that company. On the basis of the Information Memoranda, promissory notes issued by ASM will commence falling due in December 2005. The access database shows that over $37 million in promissory notes on issue by ASM fall due for repayment on that date. 42 ASIC submits that ASM is insolvent. It makes the following points: 1. Promissory notes to the value of $37,340,000 fall due for repayment on 31 December 2005. 2. ASM's only claim is against ASB. 3. ASB has paid out all of its funds. The accounts of Westpoint Construction show that over $32 million of those payments are pre-payments under the construction contract. 4. The main building works have not commenced and there is no prospect of proceeds of sale of the building being received in the foreseeable future. 5. ASM has no other assets from which it can meet payments due to investors when the primary notes mature. It may be able to call on guarantees. I interpolate that in the circumstances the prospects of recovery from guarantees in the Westpoint Group appears somewhat speculative. 6. ASM has been trying to persuade the note holders to reinvest the moneys the subject of the promissory notes in ASM. 43 I am satisfied that ASM is insolvent and that no point would be served by delaying the making of a winding up order. I am not satisfied that it is in the interests of the creditors to continue in administration. I see no point in the appointment of a provisional liquidator. I propose therefore to make an order for the winding up of ASM. 44 I should add that I do not base the winding up orders which I make upon the just and equitable ground. That might involve findings which, in the light of the insolvency of these companies, it is unnecessary to make, and which might have significance in later proceedings involving the directors and other officers of the companies. There are obviously serious questions raised about their conduct and in exercising my discretion to order that the companies be wound up my discretion is informed by the existence and seriousness of those questions. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 20 January 2006 Counsel for the Plaintiff: Mr C Colvin SC and Ms P Cahill Solicitor for the Plaintiff: Australian Securities and Investment Commission Counsel for the Defendant: Mr K Martin QC and Mr J Vaughan Solicitor for the Defendant: Minter Ellison Counsel for Westpoint Corporation (by leave) Mr G Donaldson SC and Ms K Banks-Smith Solicitor for Westpoint Corporation (by leave) Freehills Date of Hearing: 20 December 2005 Date of Judgment: 20 December 2005