FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission, in the matter of GDK Financial Solutions Pty Ltd (in liq) v GDK Financial Solutions Pty Ltd (in liq) [2007] FCA 1600 CORPORATIONS – unregistered managed investment scheme – promoter – winding up – just and equitable AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) and Others (according to the attached Schedule of Parties) VID 590 of 2006 FINKELSTEIN J 19 OCTOBER 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 590 of 2006 IN THE MATTER OF GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) AND OTHERS BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) and OTHERS (according to the attached Schedule of Parties) Defendants JUDGE: FINKELSTEIN J DATE: 19 OCTOBER 2007 PLACE: MELBOURNE THE COURT ORDERS THAT: 1. The Third Defendant, Western Retirement Village Management Pty Ltd, be wound up. 2. Mark Francis Xavier Mentha of Level 24, 333 Collins Street, Melbourne VIC and Brian Keith McMaster of Level 11, 37 St Georges Terrace, Perth WA, both of KordaMentha, be appointed joint and several liquidators of the Third Defendant (in that capacity referred to hereinafter as the "Western Liquidators"). 3. Notwithstanding the preceding orders, the Mews Land is to remain in the possession of the Mews Receivers pending the completion of the winding up of the Mews Scheme or until further order. 4. The Western Liquidators shall be entitled to reasonable remuneration and reasonable costs and expenses properly incurred in the performance of their duties and the exercise of their powers as liquidators of the Third Defendant, the remuneration to be calculated on the basis of time reasonably spent by them and their staff at the rates specified in the consent to act filed with the Court, such remuneration, costs and expenses to be paid out of the assets of the Third Defendant. 5. The Plaintiff's costs of the application to wind up the Third Defendant be costs in the winding up. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 590 of 2006 IN THE MATTER OF GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) AND OTHERS BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) and OTHERS (according to the attached Schedule of Parties) Defendants JUDGE: FINKELSTEIN J DATE: 19 OCTOBER 2007 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 A managed investment scheme known as the Mews Retirement Village was set up to operate a top quality retirement village on a 28 hectare parcel of land in Upper Swan, an area close to Perth. The scheme was not registered as required by s 601ED of the Corporations Act 2001 (Cth). Accordingly, on the application of Australian Securities and Investments Commission (ASIC) the scheme was wound up. So also were several companies involved in the scheme, including The Mews Village Nominees Pty Ltd (The Mews Village Nominees) (which had purchased the Mews land as nominee for those who had invested in the scheme) and GDK Financial Solutions Pty Ltd (GDK) (which had acted as manager for a series of partnerships in which the investors had organised themselves). ASIC now seeks an order that Western Retirement Village Management Pty Ltd (WRVM), another company involved in the scheme, also be wound up. 2 The starting point is to explain WRVM's role in the scheme. The general background is set out in my judgment in Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd (2006) 60 ACSR 447. The individuals who played a key role in setting up the scheme were Mr Brereton, a solicitor, and Mr McLeod who, through GDK, had established several retirement villages. Mr Brereton and Mr McLeod decided to set up a retirement village in Western Australia. They found the Mews land. In late 1999 or early 2000 a company called Mango Properties Pty Ltd (Mango) (which is controlled by Philip Clements and Luke Atkins) entered into a contract to purchase the Mews land for $2,850,000. Mr Brereton says that Mango entered into the contract as trustee for WRVM which in turn acted on behalf of two joint venturers, GDK and Young Turks Pty Ltd (Young Turks). Mr Clements recalls things differently. He says that Mango entered into the contract on its own account but on the basis that funding would be arranged by Mr Brereton. He also says that Mango gave up its interest in the Mews land in favour of WRVM when Mr Brereton told him that funding was not available. Mr Clements now contends that this advice was false and Mango claims an equitable interest in the Mews land. 3 WRVM paid the purchase price for the Mews land and became registered as the proprietor. Then WRVM entered into a contract to sell the Mews land to The Mews Village Nominees. The contract is dated 18 April 2000. Mr Brereton described the contract as a "turnkey contract for the development over time of [the Mews] [R]etirement [V]illage." This explains why the contract deals with two discrete transactions: the sale of the Mews land and the construction by WRVM of a retirement village. According to the contract WRVM was to apply to the relevant authority for a planning permit to develop the retirement village and then construct the village. The details of the construction are described in the contract. 4 The "purchase price" payable by The Mews Village Nominees under the sale contract was $93,425,000. It was agreed, however, that "$2,850,000 is attributed as the value of the [Mews] land on the day of sale." The purchase price was paid in full. Some part of the purchase price (approximately $6 million) came from money subscribed by the investors. The balance was "paid" by a loan from WRVM. The loan was provided under a separate agreement. 5 The sale contract permitted WRVM to borrow up to $74,740,000 on the security of the Mews land. In the event, two mortgages were granted. The first to National Australia Bank, was given to support a guarantee by WRVM of a loan from NAB to Salrest Pty Ltd. NAB claims that $7,819,000 plus interest is due under the guarantee. The second mortgage was in favour of AVS Property Pty Ltd. Under this mortgage AVS claims to be a secured creditor of WRVM in the sum of $4,347,038. Salrest and AVS are related, each being controlled by one Mario Salvo. 6 At or shortly before the time WRVM sold the Mews land to The Mews Village Nominees both WRVM and GDK began marketing the scheme to investors. For that purpose a prospectus was prepared, probably by WRVM. The evidence suggests that the instructions for the prospectus were given by Mr McLeod. At all events, approximately 43 investors put money into the scheme. The investors were grouped into partnerships and each partnership acquired an interest in the Mews land via The Mews Village Nominees, which had agreed to act as "bare nominee" for the partnerships. In aggregate investors contributed over $6 million to the venture. It was these contributions that formed part of the purchase price paid under the sale contract. 7 When the scheme was wound up, Messrs Mark Francis Xavier Mentha and Brian Keith McMaster were appointed receivers to take possession of the Mews land and find a purchaser. The receivers were directed to investigate aspects of the scheme, largely for two purposes: first, to locate scheme assets and calculate scheme liabilities and, second, to identify all investors and the amount each investor had put into the scheme. Messrs Mentha and McMaster were also appointed as the liquidators of The Mews Village Nominees. Their appointment as liquidators facilitated the investigation. 8 It has become clear that it is not possible to complete the winding up of the scheme without there being an investigation into the affairs of WRVM. For one thing, it is possible that The Mews Village Nominees has a claim on WRVM to recover some of the "purchase price" as a result of the failure by WRVM to construct the retirement village. What is not known is whether such a claim is worth pursuing. It will only be worth pursuing if WRVM has assets to meet the claim. At the moment the financial position of WRVM is unknown. Mr Brereton says that WRVM is solvent, but has provided little by way of detail. WRVM's capacity to meet a claim may not depend upon what assets it owns. As I have indicated, WRVM purchased the Mews land on behalf of GDK and Young Turks. If they were the beneficial owners of the Mews land they may be (indeed they probably are) liable to indemnify their trustee (WRVM) for all properly incurred debts in relation to the property. Thus if WRVM is required to repay any part of the "purchase price" it received from The Mews Nominees, GDK and Young Turks may be liable to satisfy that obligation. I suppose only Young Turks is likely to have the funds. 9 It is only with the appointment of a liquidator to WRVM that the capacity to recover the putative debt can be investigated. That is, a liquidator will be best placed to discover what are WRVM's assets and whether Young Turks is under any obligation to meet WRVM's liabilities. 10 This is not the only inquiry that would be carried out by a liquidator of WRVM. Unless Mango's claimed equitable interest has priority over the interests of the investors, the receivers will sell the Mews land. To pass title to a purchaser the mortgages in favour of NAB and AVS must be discharged. Ordinarily a mortgage is discharged upon payment to the mortgagee of the amount thereby secured. This may not be the case here. 11 The receivers have begun to investigate the validity of the NAB mortgage. There is a possibility (it is not put any higher than a possibility) that the NAB mortgage is vulnerable to attack. The issue here is whether the use to which the borrowed money was put conferred a benefit on WRVM. It appears to the receivers that no benefit was received by WRVM. It is not clear whether the joint venturers, GDK and Young Turks, received a benefit. If neither WRVM nor the joint venturers received a benefit and NAB knew that no benefit had been received perhaps the mortgage could be set aside. I note that the bank officer involved in obtaining the security from WRVM was also the officer who dealt with Salrest. 12 If a liquidator were appointed to WRVM he will be able to use his coercive powers to investigate whether the mortgage to NAB is capable of being set aside. This would be no idle investigation. Something in the order of $8 million is at stake. 13 What I have said thus far is sufficient, in my opinion, to order the winding up of WRVM on the just and equitable ground: Corporations Act s 461(1)(k). It is, therefore, not necessary to consider the other grounds upon which ASIC relied. In broad outline they are that: WRVM was guilty of misconduct in the establishment and implementation of the scheme; WRVM was guilty of misconduct by failing to keep proper records and failing to account to investors for the money they have contributed; WRVM was guilty of misconduct in relation to the winding up of the scheme by failing to produce to the receivers documents that related to the scheme; WRVM is insolvent; and it is necessary to discover how much of the investors' funds passed through WRVM and see whether the funds can be recovered. 14 Many of these additional grounds were contested by Mr Brereton during the course of a three day hearing. Resolving the contested issues will not serve any purpose, although it is hard to resist the conclusion that it is appropriate to wind up a company that promoted an illegal scheme and has no commercial or practical reason to continue to exist. 15 The only point that causes me any concern is the identity of the liquidator. It would be convenient for all concerned if I were to appoint Messrs Mentha and McMaster as liquidators. They are on top of the details of the scheme, having done a considerable amount of work in the course of the winding up of the scheme proper. If they were appointed the costs incurred would be significantly lower than would be the case if I appoint a liquidator who is unfamiliar with the territory. 16 There is, however, a difficulty. At some point there will be a contest between WRVM and The Mews Village Nominees concerning their respective rights under the sale contract. The Mews Village Nominees will claim that WRVM has been overpaid under the contract. If there is a claim for overpayment the quantum of the claim will be contested. The same person cannot manage both sides of this dispute. 17 There is a way around the problem. Messrs Mentha and McMaster could be appointed liquidators to take charge of the liquidation generally and a special liquidator could be appointed to deal with the dispute between WRVM and The Mews Village Nominees. There is also an alternative procedure. The alternative is to allow one of the beneficiaries for whom WRVM had acted to run the dispute with The Mews Village Nominees. The respective interests of the joint venturers have been transferred to ZMB Australia Pty Ltd (ZMB), a company controlled by Mr Brereton's wife. Perhaps ZMB would be in a position to run the claim. It sometimes happens that beneficiaries maintain or defend a claim that is more usually maintained by their trustee. This occurs when, for example, the trustee is unable or unwilling to act on the beneficiaries' behalf. If Young Turks or ZMB is willing to take up the cause I would make whatever orders were necessary (although none may be necessary) to permit that to occur. If neither Young Turks or ZMB is willing to act then I would appoint a special liquidator to take charge of the dispute. 18 In the circumstances, I will make orders for the winding up of WRVM. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 19 October 2007 Counsel for the Plaintiff: Ms F McLeod SC Mr A Pound Solicitor for the Plaintiff: Australian Securities & Investments Commission Counsel for the 3rd Defendant: Mr N Moshinsky QC Ms L Kinda Solicitor for the 3rd Defendant: Michael Brereton & Co Date of Hearing: 25, 26 & 27 September 2007 Date of Judgment: 19 October 2007 SCHEDULE OF PARTIES AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION) First Defendant WINDSOR VILLAGE MANGEMENT PTY LTD (IN LIQUIDATION) Second Defendant WESTERN RETIREMENT VILLAGE MANAGEMENT PTY LTD Third Defendant THE MEWS VILLAGE NOMINEES PTY LIMITED (IN LIQUIDATION) Fourth Defendant PERIDON MANGEMENT PTY LTD (IN LIQUIDATION) Fifth Defendant ROSEDALE VILLAGE NOMINEES PTY LTD (IN LIQUIDATION) Sixth Defendant PETER HASTINGS WARNE Seventh Defendant RENTAL FLEETS AUSTRALIA PTY LTD Eight Defendant JOHN MONTGOMERIE Ninth Defendant ANDREW YEO Tenth Defendant GUISEPPE DE SIMONE Eleventh Defendant SEACHANGE MANAGEMENT PTY LTD Twelfth Defendant