FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission v Tax Returns Australia Dot Com Pty Ltd [2010] FCA 715 Citation: Australian Securities & Investments Commission v Tax Returns Australia Dot Com Pty Ltd [2010] FCA 715 Parties: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v TAX RETURNS AUSTRALIA DOT COM PTY LTD and ONLINE RETURNS PTY LTD File number(s): VID 531 of 2010 Judge: DODDS-STREETON J Date of judgment: 8 July 2010 Catchwords: CORPORATIONS – application by Australian Securities and Investments Commission to appoint provisional liquidator – considerations relevant to appointment of provisional liquidator, including: apparent or probable insolvency of companies, risk of dissipation of companies' assets, public interest in a prompt independent examination of companies' accounts, financial records and transactions. Legislation: Corporations Act 2001 (Cth) ss 286(1), 459A, 459P, 461(1)(k), 462 and 472(2) Federal Court (Corporations) Rules 2000 (Cth) rule 1.10, 6.1(4) Federal Court Rules 1976 (Cth) O 4 r14(2) Cases cited: Australian Securities and Investments Commission v ACN 102 556 098 Pty Ltd (2003) 48 ACSR 350 Australian Securities and Investments Commission v Solomon (1996) 19 ACSR 73 Australian Securities and Investments Commission v Weerappah (No 2) [2009] FCA 249 Re JN Taylor Holdigns Ltd Zempilas v JN Taylor Holdings Ltd (1990) 3 ACSR 600 Silkearl Pty Ltd v Ainsworth Game Technology Ltd [2006] FCA 949 Terni-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241 Young v ICM Agriculture Pty Ltd (2009) 260 ALR 257 Austin & Ramsay, Ford's Principles of Corporations Law Date of hearing: 8 July 2010 Date of last submissions: 8 July 2010 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 88 Counsel for the Plaintiff: Mr P Liondas Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Defendant: The Defendant did not appear IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 531 of 2010 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: TAX RETURNS AUSTRALIA DOT COM PTY LTD First Defendant ONLINE RETURNS PTY LTD Second Defendant JUDGE: DODDS-STREETON J DATE OF ORDER: 8 JULY 2010 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Ross Andrew Blakeley and Quentin James Olde be appointed as joint provisional liquidators of the first and second defendants ("the companies") pursuant to section 472(2) of the Corporations Act 2001 (Cth) ("the Act"). 2. The provisional liquidators shall, by 5 August 2010, provide to the Court and to the plaintiff a report as to the provisional liquidation of the companies, including: (a) the identification of the assets and liabilities of the companies; (b) an opinion as to the solvency of the companies; (c) the likely return to creditors; (d) any other information necessary to enable the financial position of the companies to be assessed; and (e) any suspected contravention of the Act by the directors and officers of the companies. 3. The plaintiff has leave to apply to the court for an order that the first and second defendants be wound up in insolvency. 4. The time for service of the plaintiff's originating process and the supporting affidavits and exhibits thereto is abridged. 5. Costs be reserved. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 531 of 2010 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: TAX RETURNS AUSTRALIA DOT COM PTY LTD First Defendant ONLINE RETURNS PTY LTD Second Defendant JUDGE: DODDS-STREETON J DATE: 8 JULY 2010 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction 1 By originating process filed 2 July 2010, the plaintiff, the Australian Securities and Investment Commission ("ASIC"), seeks orders pursuant to ss 459A, 459P(2)(d), 461(1)(k) and 472(2) of the Corporations Act 2001 (Cth) ("the Act") that the defendant corporations, Tax Returns Australia Dot Com Pty Ltd ("TRADC") and Online Returns Pty Ltd ("Online Returns"), be wound up in insolvency and that a provisional liquidator be appointed pending the making of a winding up order. 2 At the first return of the originating process on 8 July 2010, ASIC sought the following orders: (1) Ross Blakeley and Quentin Olde be appointed joint provisional liquidators ("Provisional Liquidators") of TRADC and Online Returns pursuant to s 472(2) of the Act. (2) The Provisional Liquidators shall, by 5 August 2010, provide to the Court and to the plaintiff a report as to the provisional liquidation of the defendant companies, including: (i) the identification of the assets and liabilities of the companies; (ii) an opinion as to the solvency of the companies; (iii) the likely return to creditors; (iv) any other information necessary to enable the financial position of the companies to be assessed; (v) any suspected contravention of the Actby the directors and officers of the companies; (3) The plaintiff has leave pursuant to s 459P(2)(d) of the Act to apply to the Court for an order that the companies be wound up in insolvency; (4) The time for service of the plaintiff's originating process and supporting affidavits (and exhibits thereto) be abridged; and (5) Costs be reserved. 3 The application is supported by the affidavit of Martin Stockfeld sworn 2 July 2010, the affidavit of Jon Reid sworn 2 July 2010, the affidavit of Michael Brown sworn 5 July 2010, the affidavit of Philip Coulthart sworn 7 July 2010, the affidavit of Terence Haywood sworn 7 July 2010, the affidavit of Deloraine Lofts sworn 7 July 2010 and the supplementary affidavit of Martin Stockfeld sworn 8 July 2010. 4 A consent to appointment as joint and several liquidators of the defendant companies, executed by Ross Blakeley and Quentin Olde on 1 July 2010 (attaching a schedule of hourly rates and stating that the signatories were unaware of any conflict of interest or duty that would make it improper for them to act) was also filed with the Court. 5 Three affidavits, sworn on 5 July 2010, 5 July 2010 and 7 July 2010 respectively, were sworn by Robert Brown, the sole director of the defendant companies, in opposition to the application. Today, at the first return of the application, Mr Brown (who is not legally qualified) appeared in person and sought leave to represent the companies. Mr Brown stated that he had recently been absent interstate, had not retained legal representation for the companies and whether such representation would be retained in future depended upon how the application developed. 6 The present proceeding involves extensive evidence and complex legal and factual issues. In particular, the companies' sole director has conceded their insolvency and there is evidence of substantial outstanding creditor claims, including to alleged trust moneys. I therefore considered it inappropriate to grant Mr Brown leave to represent the companies pursuant to the discretion conferred pursuant to O 4 r14(2) of the Federal Court Rules 1979 (Cth),but heard his submissions. [Silkearl Pty Ltd v Ainsworth Game Technology Ltd [2006] FCA 949; Young v ICM Agriculture Pty Ltd (2009) 260 ALR 257; Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241.] 7 ASICacknowledged that the originating process and supporting affidavits were not formally served within the time prescribed by the Federal Court (Corporations) Rules 2000 (Cth) ("Corporations Rules"). In his supplementary affidavit, however, Mr Stockfeld deposed that ASIC electronically forwarded the originating process and principal affidavits in support to Robert Brown on 2 July 2010, as Mr Brown was then interstate. ASIC's attempts to serve the documents formally were impeded as the companies' registered office was not open until 7 July 2010 (that is, yesterday). Despite the late formal service, Mr Brown acknowledged that he had received the copies of the relevant documents electronically and had responded by swearing several affidavits. Mr Brown informed the Court that he was content that the hearing of the application should proceed. BACKGROUND AND EVIDENCE Evidence filed on behalf of ASIC 8 In his first affidavit, Mr Stockfeld, a solicitor employed by ASIC in the Deterrence Team, deposed that on 7 January 2010, ASIC commenced an investigation under s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") in relation to suspected contraventions of the following provisions: (a) section 588G of the Act (insolvent trading); (b) section 184 of the Act (director's duties); (c) section 180(1) of the Act (director's and officer's duties of care and diligence); (d) section 181(1) of the Act (director's and officer's duties of good faith); (e) section 182(1) of the Act (director's duties in relation to use of position); and (f) section 286(1) of the Act (obligation to keep financial records). 9 In his first affidavit, Mr Stockfeld set out the results of ASIC's investigations of the defendant companies through examinations of officers under s 19 of the ASIC Act and its examination of documents produced by the defendants in response to notices served under s 30 of the ASIC Act. 10 According to ASIC's records, Robert Brown is the current sole director and secretary of both TRADC and Online Returns. Robert Brown's daughter, Kimberley Brown, is the sole shareholder of TRADC. TRADC is the sole shareholder of Online Returns. 11 ASIC's records revealed that other members of Robert Brown's family had previously held office as director of the defendant companies. Prior to Robert Brown's appointment as sole director of TRADC on 11 December 2009, his son, Darren Brown, was sole director from 30 June 2008. Darren Brown succeeded Kimberly Brown, who was sole director from 8 September 2007. Kimberley Brown had succeeded Robert Brown's wife, Leona Brown, who was director from 10 January 2010. 12 Prior to Robert Brown's appointment as sole director of Online Returns, Darren Brown was a director from 17 December 2008, Kimberley Brown was a director from 26 June 2008 to 18 November 2009 and Michael Brown (who is unrelated to the abovementioned Browns), was a director from 26 June 2008 to 28 October 2008. 13 The defendant companies conducted a web based tax return business called Tax Returns Australia ("TRA") which, as at 2008, processed approximately 28,000 tax returns per annum. The companies ceased to operate in November 2009. Mr Stockfeld deposed that the TRA business operated: …in a similar manner to E-Tax (the Australian Taxation Office's ('ATO') free tax return preparation software that enables income tax returns to be lodged online). Tax payers log onto the website and submit specified information which enables TRA to complete and lodge a tax return on their behalf to the ATO. TRA charges tax payers (clients) a fee for this service, which has varied between $39 to $49 during the relevant period. 14 Mr Stockfeld deposed (omitting references to evidence) that: Online Returns presently owns and operates the business known as Tax Returns Australia. Prior to Online Returns, TRADC owned and operated the TRA business. The TRA business was transferred from TRADC to Online Returns around July 2008. As consideration for the transfer of the TRA business to Online Returns, TRADC became the sole shareholder of Online Returns. Despite the fact that Online Returns took over the TRA business around July 2008, TRADC's bank accounts continued to be used to receive client funds after Online Returns took over the TRA business. During his s19 examination, Robert Brown stated that the Companies have not traded since November 2009. As noted above, TRA is a web based tax returns business through which tax payers log onto the TRA website and submit specified information which enables TRA to complete and lodge a tax return on their behalf. …[I]t appears that as at 30 July 2009, tax payers who used the website and submitted their tax return via TRA were charged $49, plus a $6 service fee if the tax payer elected to pay the $49 fee from the proceeds of their refund. On 8 February 2010, I accessed a previous version of the TRA website at the following address: >. The website stated that the Terms and Conditions were last updated on 17 May 2006. Clause 3 of the Terms and Conditions states that tax payers who elected to use the website and submit their tax refund through TRA would be charged $39, plus a $6 service fee if the tax payer elected to pay the $39 fee from the proceeds of their refund. The Terms and Conditions states the following: "If you choose to pay the fee from your refund cheque then you authorise Tax Returns Australia to receive your refund from the Australian Tax Office, deposit your refund into an account operated by Tax Returns Australia, and then, after deducting the fee specified in clause 4 plus an additional $6 service fee, Tax Returns Australia will remit the balance of your refund to you via your preferred payment method..." During his s19 examination, Darren Brown stated that approximately two thirds of TRA clients elected to pay their fee in accordance with Paragraph 5 of the Terms and Conditions. The tax returns that TRA prepared for clients, to be submitted to the ATO, were prepared by registered tax agents who were contracted to TRADC and Online Returns. David Cole (through his company, TRA Tax Services Pty Ltd) was the relevant tax agent for Online Returns during the period that it owned and operated the TRA business. Prior to this, Stephen Moran had been the tax agent contract to TRADC. During his s19 examination, Robert Brown stated that TRADC is the trustee for the TRA Trust, and that the primary beneficiaries of that trust are his family. … Robert Brown also stated that he believed that a trust deed existed establishing this trust. During Robert Brown's s19 examination, I made a formal direction that Robert Brown produce such trust deed to ASIC by 18 March 2010. Robert Brown also stated during his s19 examination that: (a) over the last few years the TRA business has generated fee income of about $1,000,000 per year, and it has finished up with a net profit of about $500,000 per year; (b) all of these profits have been "distributed", such distributions being justified from "indicative accounts" that he had prepared; (c) these profits are "spread around the family"; and (d) given that substantial creditors remain, it is "probably" the case that too much profit has been distributed. 15 Mr Stockfeld deposed that from December 2009, ASIC received a number of complaints about TRA as follows: In December 2009, ASIC received a complaint alleging that clients' funds, in the form of tax refunds and stimulus payments received by TRA from the ATO had been used towards the purchase of a property in Andrews Close, Port Douglas, Queensland. … In addition, ASIC has received four direct complaints from clients of TRA who have not received their tax refund back from TRA. Further, I am advised by Frank Pietka of the Tax Practitioners Board, that as at 2 July 2010, the ATO has received 152 complaints from clients of TRA who have outstanding tax refund and/or stimulus payments owing to them. 16 On 22 January 2010, Mr Stockfeld obtained search results which recorded that a property situated at Villa 13, Andrews Close, Port Douglas, Queensland ("the Andrews Close property") was owned by Andrews Close Pty Ltd, a company of which Leona Brown is the director and secretary and Samantha Leona Brown the sole shareholder. 17 On 21 January 2010, Mr Stockfeld served s 30 notices on TRADC and Online Returns for the periods 1 July 2007 to 21 January 2010 and 26 June 2008 to 21 January 2010 respectively, requiring the production by 28 January 2010 of specified financial records, a duplicate of the accounting system database, banking records, financial and management accounts, and documents relevant to liabilities or obligations, dealings with the ATO, solvency, client complaints and any deficiency in bank accounts in the companies' names which held trust funds. 18 Mr Stockfeld deposed that the companies produced various documents in response to the s 30 notices on various dates between 29 January and 29 April 2010. 19 ASIC conducted s 19 examinations of Robert Brown on 12 March 2010, Darren Brown on 11 March 2010, Leona Brown on 11 March 2010, Kimberley Brown on 17 March 2010 and Peter Howse on 23 March 2010. 20 Mr Stockfeld deposed: As a result of ASIC's investigation into the affairs of Online Returns and TRADC, and based on the section 19 examinations referred to in paragraph 29 above, the documents received pursuant to requests under the Section 30 Notices and under notices issued to other parties pursuant to sections 30 and 33 of the ASIC Act, and the affidavits referred to in paragraph 30 above, I have the following concerns in relation to Online Returns and TRADC: (a) significant amounts of tax refunds and stimulus payments received by the TRA business on behalf of tax payers have not been paid to those clients; (b) a lack of adequate or proper documentation makes it difficult to establish precisely how much money is owed to clients of the TRA business; (c) that both TRADC and Online Returns are insolvent; (d) that the Companies have not kept proper financial records in accordance with section 286(1) of the Act; (e) that monies have been improperly paid by TRADC to Andrews Close Pty Ltd to purchase the Andrews Close Property. 21 The list of creditors prepared by Robert Brown and produced in response to the s 30 notices stated that TRADC owed tax clients $94,337.39, Online Returns owed tax clients $144,972.27, an amount of $5,159.59 was owed to tax clients by either company and a further $148,270.15 "may be" owed to tax clients by either company. 22 Mr Stockfeld deposed that, in his s 19 examination, Robert Brown acknowledged that there were TRA clients who had not received their refunds. He could not explain why and conceded that "we don't bloody know" where the money owed to clients had gone. 23 Mr Stockfeld deposed that Darren Brown, in his s 19 examination, conceded that although Online Returns took over the TRA business in 2008, TRADC's bank accounts continued to receive client funds. The account into which Australian Tax Office ("ATO") tax returns and stimulus packages were paid also served other purposes. Darren Brown conceded that the defendant companies did not have "nearly good enough" systems to ensure that refunds were forwarded to the clients, there was no money in the account to pay them and, from the end of 2008, lots ("probably hundreds") of clients had complained that they had not been paid. 24 Darren Brown stated that Robert Brown was the company's "accountancy guy" but "never got round to doing them [the accounts] properly" so that financial accounts were "hardly ever submitted". Darren Brown was not aware of whether a bank reconciliation had ever been done. Robert Brown, who was responsible for performing the reconciliations, asserted in his s 19 examination that they were unnecessary as they were "automatic – fixing themselves". 25 Darren Brown also stated in his s 19 examination that he assumed that the companies had not lodged any tax returns with the ATO, but he was not personally involved. He acknowledged concern that, as a director, he had not seen financial information, at least for Online Returns, as "we were trying to run that less as a family business and more as a proper company". 26 When questioned in their s 19 examinations, neither Darren Brown nor Robert Brown knew what had happened to the tax refunds and stimulus payments received from the ATO on behalf of clients, and according to Robert Brown, it was "just a bloody mystery at the moment". 27 Robert Brown acknowledged that TRADC had outstanding superannuation contributions and Online Returns owed outstanding wages to four employees who had not been paid because "the company didn't have any money". Mr Stockfeld deposed that one employee's outstanding wages totalled about $30,000. Online Returns also owed $47,000 to H&R Block (which had used the TRA website and had paid its own clients, who had not received the refunds which were due to them). 28 Mr Stockfeld deposed that the companies owed an undetermined amount of money to the ATO. Darren Brown acknowledged that he did not remit tax to the ATO, was not aware who was responsible for doing so and did not know whether PAYG tax had been properly remitted. 29 Mr Stockfeld deposed that both TRADC and Online Returns had outstanding trade creditors, including Google and the North Melbourne Football Club. 30 In his s 19 examination, Robert Brown acknowledged that both Online Returns and TRADC are insolvent. 31 The transcript of Robert Brown's s 19 examination stated: "Q. In light of these creditors, do you have any idea as to whether, firstly, Online Returns Proprietary Limited would be solvent at the moment? A. Privilege. We know it's not. Q. Okay, and what about Tax Returns Australia Dot Com Proprietary Limited? A. Yes, we know it's not. Q. They're both not solvent, okay. And how do you know they're not solvent? A. Well, privilege. They can't pay their bills." 32 John Reid, a Chartered Accountant employed by ASIC in the Forensic Accounting Services Team, reviewed the bank accounts of the defendant companies and relevant documentation with a view to: (a) identifying: (i) the balances in any bank accounts in their names and; (ii) the application of the following moneys withdrawn from accounts of TRADC: from TRADC account 25-8091: i. $100,000 on 22 July 2008; ii. $50,000 on 24 July 2008; iii. $50,000 on 11 August 2008; and iv. $214,000 on 23 September 2008. from TRADC account 25-8083: i. $45,000 on 24 July 2008; ii. $50,000 on 13 August 2008; iii. $50,000 on 14 August 2008; and iv. $213,955.69 on 23 September (b) examining the accounting records produced to ASIC in response to s 30 notices. 33 Mr Reid referred to the banking records produced, other financial statements and banking documents, and copies of the transcript of the s 19 examinations of Robert Brown and Darren Brown in relation to the various accounts, maintenance of ledgers, preparation of financial statements and whether distributions had been made. 34 In his affidavit, Mr Reid referred to Robert Brown's s 19 examination as follows: (a) In relation to banking for TRADC and Online Returns when asked: i. Whether TRADC account 25-8091 received funds from the ATO for clients, Robert Brown stated "it looks like it" (page 56, lines 30 to 31) and that "basically the majority of the transactions would have been people's tax refunds coming in, and this was a cash management account, and the people were paid out of another account. Money was transferred from this account to that other account"; ii. What TRADC account 25-8083 was used for, Robert Brown stated "I didn't have much to do with the banking at all, so, you know – but it's - it looks to me as if it's the account which we pay people out of"; iii. What TRADC Bendigo & Adelaide Bank account number 126896992 was used for, Robert Brown said "I think it was – it's the ordinary account" … and confirmed it was used to pay operating expenses … and "there's bits coming in"; iv. About Online Returns H&R Block Bendigo & Adelaide Bank account number 137328829, Robert Brown stated "[i]t looks like the clearing account for refunds that are coming for H&R Block"; v. What Online Returns Clearing Account Bendigo & Adelaide Bank account number 137342283 was used for, Robert Brown said "it looks like where the clients refunds are coming in"; vi. What Online Returns Bendigo & Adelaide Bank account number 1234226661 was used for, Robert Brown stated "it looks to me as if it's just the ordinary account" … "where we receive fees and pay wages"; vii. About BankLink records, Robert Brown said they were maintained for the "ordinary" accounts … by "one of the girls at work" … and that "this BankLink thing, that gives you a ledger report and trial balance and profit and loss"; (b) In relation to accounting information for TRADC and Online Returns when asked: i. Whether he maintained a ledger for creditors, Robert Brown said "[n]o, I didn't"; ii. Who prepares the financial statements for TRADC, Robert Brown stated "I don't think it's been finalised since 2007"; iii. Whether distributions had been made post 30 June 2007, Robert Brown said "[y]es"; iv. In respect of the Andrews Close Property when asked how was the property paid for, Robert Brown stated "out of the business" … that "[i]t would just be for - treated as a distribution or something" … and that "as I understand it, they stockpiled the fees to pay for Port Douglas"; v. How distributions were ascertained without finalised accounts, Robert Brown said "there's enough information to know what the profitability looks like"; and vi. In light of outstanding creditors whether too much profit was distributed, Robert Brown said "probably". 35 Mr Reid referred to a confidential complaint alleging that over $200,000 received by TRADC from the ATO was used towards the purchase of the Andrews Close property. He concluded that approximately $360,000 was withdrawn from the Tax Return account 25‑8083 and used towards the purchase of the Andrews Close property, which was handled by Williams Graham Carson, a Cairns law firm. 36 Robert Brown gave the following evidence in his s 19 examination: (a) the Andrews Close Property was purchased as a holiday home for the use of the Brown family; (b) that the monies used for the Andrews Close Payments were comprised of either fees generated by the TRA business, fees generated by Robert Brown & Co (an accountancy business run by Robert Brown), or money put into the TRA business by Cherry Hill Way Pty Ltd; (c) neither TRADC nor Online Returns have ever made a loan to Andrews Close Pty Ltd; (d) Andrews Close Pty Ltd has never made a loan to TRADC or Online Returns; and (e) that no precise calculation was made prior to the Andrews Close Payments being made to determine whether sufficient fees had been generated to fully meet the Andrews Close Payments. 37 Darren Brown gave the following evidence in his s 19 examination: Darren Brown stated during his s19 examination that: (a) he was requested by Robert Brown to process the Andrews Close Payments; (b) in relation to the Andrews Close Payments: "Q. So were the transfers made of your own volition or ---? A. Privilege, No, of course not, no. Q. Can you explain how those transactions come about? A. Well, privilege, I don't – I did the day to day banking of the companies but I don't move hundreds of thousands of dollars around without direction from Bob [Robert Brown] ..." (c) he knew that the Andrews Close Payments were for the purposes of purchasing the Andrews Close Property; (d) he was unsure of the basis on which the funds were advanced to Andrews Close Pty Ltd; and (e) it is possible that taxpayers' funds could have been used in the Andrews Close Payments. 38 During Darren Brown's s19 examination, the following exchange occurred: "Q. And considering that the payments have originated from the Westpac account into which refunds from the ATO were made, did you do anything to satisfy yourself that the payments weren't going to affect the ability of tax clients to get their refund back? A. Privilege. No I didn't." 39 Mr Stockfeld deposed that the companies had produced no evidence that: (a) that fees of the magnitude of the Andrews Close Payments were due to Online Returns or TRADC at the time the Andrews Close Payments were made; (b) that Cherry Hill Way Pty Ltd paid any money to Online Returns or TRADC and that such money was used to fund the Andrews Close Payments; (c) that Robert Brown & Co was the source of any monies paid in relation to the Andrews Close Property. 40 Mr Stockfeld concluded: Based on the information outlined … above, ASIC is concerned that tax refunds and stimulus payments deposited by the ATO into TRADC Account 25-8091, that were due to be returned to clients of TRA, have been improperly used to assist in the purchase of the Andrews Close Property on behalf of Andrews Close Pty Ltd. 41 Mr Stockfeld deposed that he had twice extended the time for compliance with the s 30 notices and on 4 March 2010 wrote to Robert Brown seeking either confirmation that all books within the scope of the notice had been produced or an explanation for why any relevant books had not yet been produced. At the date of swearing Mr Stockfeld's affidavit, ASIC had not received a response. Mr Stockfeld considered that on the basis of Robert Brown's responses to questions in the s 19 examination, the companies had not produced certain books and records because Robert Brown deemed them confidential or because they were being "edited" to facilitate the sale of the business. 42 On 18 March 2010, ASIC wrote to Robert Brown requiring him to address its concerns, and directing him under s 19(2)(a) of the ASIC Act to advise it of the whereabouts of the companies' computer servers and to provide ASIC staff with access to take images. 43 Mr Stockfeld deposed that Robert Brown advised ASIC that he would seek legal advice from Herbert Geer & Rundle, but ASIC's subsequent inquiries revealed that the law firm did not act for Mr Brown. Mr Brown failed to comply with the s 19(2)(a) direction, and ASIC received neither confirmation that all books and records had been produced nor the requested electronic duplicate of the companies' accounting system database for the full financial years during the period 1 July 2008 to 21 January 2010. 44 On 22 April 2010, Mr Stockfeld again wrote to Robert Brown seeking an electronic duplicate of the Bank Link system maintained by the companies. Mr Brown asserted that the companies did not possess such a duplicate and could not comply. 45 Mr Stockfeld deposed: I am concerned that the Companies have not fully complied with the Section 30 Notices and that their part-compliance has hindered ASIC's investigation. In particular, the fact that an electronic duplicate of the accounting system database maintained by the Companies has not been produced to ASIC has prevented ASIC from establishing an audit trail in relation to financial records produced by the Companies, leaving open the possibility that the financial records produced to ASIC may have been manipulated. This concern is heightened by evidence provided by Robert Brown …. Further, profit and loss statements produced to ASIC by the Companies stop at 30 June 2009, making it difficult to accurately gauge the true financial position of the Companies past this date. 46 Mr Stockfeld deposed that although the defendant companies had ceased to operate in November 2009, the TRA business had apparently recommenced trading under a different name and website, thereby exposing clients to considerable financial risk. Further, Online Returns may have sold the TRA client list and the purchase moneys might not be used for the benefit of existing creditors, including clients whose tax refunds are outstanding. 47 Those concerns were based on Mr Brown's advice on 21 June 2010 that "heads of agreement" had been signed in respect of TRA. In response to a notice to produce the relevant document, Mr Brown, by an email from Port Douglas on 30 June 2010, sought time to recuperate. 48 Mr Stockfeld deposed that on 23 June 2010, the TRA website was no longer shown as being closed. An email from Online Tax Australia to Philip Coulthart (forwarded to ASIC) stated that a new website had been created by a company known as "BMS Taxation Services Pty Ltd", which had acquired rights to use and develop the old TRA "solution package" to service the "loyal TRA customer base". 49 Mr Stockfeld deposed that Online Tax Australia is owned by Online Tax Australia Pty Ltd, a company of which Leona Brown is the owner, director and secretary. The address of its registered office is the Andrews Close property. 50 Mr Stockfeld deposed that, in the circumstances, ASIC is concerned that the TRA business has begun to trade again under a different name and website. 51 Terence Haywood, a former client of TRA, deposed that he used Online Returns, trading as TRA, to lodge his online tax return for the year ending 30 June 2008 on the assumption that he was using the ATO tax program. He did not receive his tax refund and, on attending the ATO in January 2009, realised that he had not used the ATO's program. Mr Haywood contacted TRA and first received a cheque for the refund of $12,606.13 which was subsequently dishonoured. In February 2009, he received a second cheque, which was cleared. 52 In September 2009, Mr Haywood used the ATO program to obtain his tax refund for the year ended 30 June 2009 but by August 2009 had not received the $900 stimulus package tax bonus due to him from April 2009. In September 2009, his enquiries revealed that the $900 bonus had been paid to TRA. Following attempts to contact TRA, he received a telephone message acknowledging that it had his money. 53 Mr Haywood never received payment, despite frequent attempts to contact TRA. He obtained a default judgment on 12 November 2009. Mr Haywood deposed that a summons for Darren Brown to attend for oral examination in relation to the judgment could not be served and the process server deposed: Robert Brown, the defendant's father, informed me that the defendant is no longer a director of this firm and that the firm "Online Returns" is in liquidation. He refused to provide any contact details for the defendant however, in light of the company being under administration, all enquiries should be directed to the firm Brooke Bird at 471 Riversdale Road, Hawthorn East, Vic, 3123, - (03) 9882-666 and the defendant cannot be served. 54 Deloraine Lofts, an international accounts manager employed by the Dunn & Bradstreet debt collection agency in Queensland, deposed to attempts from May to June 2009 to collect on behalf of Google a debt of $126,967.15 (inclusive of interest, losses on arrears and costs of address and solvency checks) from TRADC. In June 2009, Dunn & Bradstreet negotiated a payment plan with Peter Howse on behalf of TRADC. Between June and October 2009, TRADC paid a number of instalments. No further payments were made after October 2009, at which time the sum of $64,731 was outstanding. 55 On 5 February 2010, Robert Brown advised Ms Lofts that TRADC had gone into voluntary liquidation. Dunn & Bradstreet therefore closed its TRADC file, but in June 2010, Paul Pattison, the liquidator of ACN 095 534 197 (formerly TRADC) informed Ms Lofts that TRADC ACN 100 352 485 (the subject of the present application) was still registered and was not in voluntary administration. Mr Howse advised Ms Lofts that he no longer represented TRADC. The balance of the Google debt remains unpaid and attempts to contact Robert Brown proved unsuccessful. 56 Philip Coulthart deposed that in 2009, he used TRA to lodge his online tax return for the year ended June 2009. He believed that he was to pay the online service cost of $49 and the service fee of $6 from his refund. On being requested to contact TRA to satisfy a query, he made many unsuccessful attempts before making contact. 57 In late September 2009, as he had not received the tax refund, Mr Coulthart made unsuccessful attempts to contact TRA. The ATO informed him that the refund had been forwarded to TRA in September 2009. Mr Coulthart commenced a proceeding against Online Returns trading as TRA, and on 10 February 2010, obtained judgment for $6,021.24 plus interest and costs, totalling $6,303.10. On that day, Mr Coulthart presented a garnishee order to the Bendigo Bank and was informed that it could not fulfil the claim as there was less than $15 in TRA's account. Subsequently, TRA was unreachable by telephone. Mr Coulthart deposed that he did not receive his refund cheque and that the sum of $6,303.10 remains outstanding. 58 Michael Brown deposed that he was appointed Director of Online Returns for the period 26 June 2009 to 29 October 2009. Mr Brown signed a contract of employment with Online Returns on 1 July 2008 (which required him to attend one board meeting per month) and on 23 July 2008 was appointed Chairman. 59 When the TRA business was transferred from TRADC to Online Returns, Michael Brown requested Darren Brown, the Chief Executive Officer, establish new bank accounts in the name of Online Returns. 60 Michael Brown deposed that he regularly requested information from Robert Brown and Darren Brown but was increasingly dissatisfied. He deposed: Over time, I felt that my position as Chairman of Online Returns was becoming weak, largely as a result of my inability to get the management of TRA to provide me with sufficient financial information to enable me to determine the financial position of the TRA business. At board meetings, I directed Darren Brown and Robert Brown to provide me with more financial details about Online Returns creditors. Online Returns were applying a cash accounting method to record its financial transactions which resulted in the TRA's net position being understated as it did not make allowances for payments due but not paid. Further, some of my requests for financial information were ignored and I wasn't provided with requested financial information including Online Returns creditors, profit and loss statements and balance sheets. 61 Michael Brown deposed that TRA employed a staff of about 10 people. Darren Brown was the Chief Executive Officer in charge of the day‑to‑day running of the business, Robert Brown was a consultant whose directions "dictated the direction the TRA business took" and Kimberley Brown was the General Manager of Online Returns. 62 Michael Brown deposed that at each board meeting, Darren Brown read out bank account balances which he assumed were those of Online Returns but, in July 2009, Darren Brown acknowledged that he had not opened a bank account for Online Returns. By that time, Mr Brown was aware that clients were complaining that they had not received their refunds. He again directed Darren Brown to open a bank account for Online Returns. 63 At a board meeting on 29 October 2009, Stephen Moran, an accountant retained by Michael Brown, stated that accurate bank reconciliations could not be performed due to lack of information, and that there were missing cheques and a shortfall of between $150,000 to $190,000 in Online Returns' bank account. Michael Brown questioned Robert, Darren and Kimberley Brown about the whereabouts of the missing money. They responded that they did not know. 64 On 29 October 2009, Michael Brown resigned. He deposed that he did so: …because of my concerns with the lack of financial information being provided to me in relation to the TRA business, as well as the interim results of Stephen Moran's reconciliation and David Cole's allegations that trust monies transferred from the TRATS trust account to the Online Returns Trust account had been not been sent to TRA customers. I did not receive any explanation in relation to these matters from those who were managing the TRA business. Affidavits of Robert Brown 65 Robert Brown, by his affidavits sworn on 5 June 2010, corrected or added to details in the first affidavit of Mr Stockfeld. He did not deny that funds had been used to purchase the Andrews Close property as alleged by Mr Reid but denied that the application of funds was improper as they represented "fee entitlements". He denied that there was a lack of adequate documentation. Mr Brown stated the debts to the North Melbourne Football Club and Google were disputed, and submitted that the alleged application of clients funds to the purchase of the Andrews Close property could not be determined "without full auditing". Broadly speaking, Mr Brown did not otherwise deny most of the matters to which Mr Stockfeld deposed and did not retract the evidence given in his s 19 examination. 66 Robert Brown deposed that he had not provided records to ASIC because they were maintained by "an outside company" and he was concerned that ASIC would not keep the information secure. 67 In relation to the proposed transfer of the TRA business to BMS Taxation Pty Ltd, Robert Brown deposed: The transfer is to BMS Taxation Services Pty Ltd for the benefit of creditors. If this was not done when it was, the client list would be valueless if not acted upon in preparation for the current taxation season. It am of the view BMS Taxation Services Pty Ltd must have worked very hard to get the site up in the time available between entering Heads of Agreement and operational on 1st July, 2010. 68 Robert Brown exhibited a copy of the Heads of Agreement between BMS Taxation Services Pty Ltd (as licensee) and Online Holdings Australia Pty Ltd ("Holdings") Online Returns, TRADC, Robert Brown, Darren Brown, Cherry Hill Way Pty Ltd ("Cherry Hill") (of which Robert Brown is the sole director and secretary) and certain other parties, defined collectively as "the licensor group". The Heads of Agreement stated that Cherry Hill holds a mortgage debenture over Online Returns. 69 The Heads of Agreement was apparently executed by Brendan Moran as sole director of BMS, and Robert Brown and Kimberley Brown for Holdings and Cherry Hill respectively, in June 2010. 70 The Heads of Agreement provides that the licensor group agrees to sell to the licensee, at the expiration of the four year term of the agreement (commencing on 31 May 2010), its customer base for the sum of $100. 71 Broadly, the licensee agrees to pay Holdings for the use of software $7 per return lodged for the first 15,000 tax returns lodged per year and $5.00 for any additional returns lodged. It agrees to pay Online Returns $7 per return lodged per annum for use of the existing customer database. Relevant Legislation and Legal Principles Appointment of a provisional liquidator 72 Section 472(2) of the Act provides: The Court may appoint an official liquidator provisionally at any time after the filing of a winding up application and before the making of a winding up order or, if there is an appeal against a winding up order, before a decision in the appeal is made. 73 In Australian Securities and Investments Commission v Weerappah (No 2) [2009] FCA 249 at [7]-[9], Goldberg J summarised the principles relevant to the appointment of a provisional liquidator as follows: "[T]he Court has a wide and unfettered discretion whether to appoint a provisional liquidator, the only jurisdictional precondition being that a winding-up application in relation to the company has been filed. [8] The principles which apply where a court is considering whether to appoint a provisional liquidator are well established and the following propositions can be extracted from the authorities: (a) the applicant for the appointment must satisfy the Court that there is a reasonable prospect that a winding-up order will be made at the final hearing: Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80; (b) an applicant must establish that there is good reason for the Court intervening prior to the final hearing of the winding-up application on the basis that the appointment of a provisional liquidator is required in the public interest or to preserve the status quo or to protect the company's assets from dissipation: Allstate Explorations NL v Batepro Australia Pty Ltd [2004] NSWSC 261 at [30]; (c) the appointment of a provisional liquidator pending the determination of a winding-up application is a drastic intrusion into the affairs of a company and should not be made if other measures are adequate to preserve the status quo: Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103 at 107; Lubavitch Mazal Pty Ltd v Yeshiva Properties No1 Pty Ltd (2003) 47 ACSR 197 at [217]. 74 His Honour recognised that provisional liquidators were typically appointed in the following situations: [9] Although the power of the Court to appoint a provisional liquidator is unfettered by statute the factors which are often taken into account in determining whether to appoint a provisional liquidator typically include: (a) whether there is a real risk that the assets of the company will be dissipated prior to the time at which a winding-up order is to be made; (b) whether there is a prima facie case for a winding-up order to be made; (c) whether the company's affairs have been conducted in a manner without regard to legal requirements or accepted principles of corporate management: Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224; Australian Securities Commission v Solomon (above) at 80; (d) whether in the public interest there is a need for an independent examination of the accounts and financial transactions of the company which are in disarray: Australian Securities Commission v Solomon (above) at 80." 75 Goldberg J also reiterated at [10] the following summary of relevant principles set out by Tamberlin J in Australian Securities and Investments Commission v Solomon (1996) 19 ACSR 73 at [80]: "The relevant principles relating to the appointment of a provisional liquidator which require consideration include the following: (a) The court should only appoint a provisional liquidator where it is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made: see Debelle J in Re J N Taylor Holdings Ltd; Zempilas v J N Taylor Holdings Ltd (1991) 3 ACSR 516; 9 ACLC 1 at 12-3. (b) The fact that the assets of the corporation may be at risk is a relevant consideration. (c) The provisional liquidator's primary duty is to preserve the status quo to ensure the least possible harm to all concerned and to enable the court to decide, after a further examination, whether the company should be wound up: Re Carapark Industries Pty Ltd (in liq) (1996) 9 FLR 297; 86 WN (Pt 1) (NSW) 165 at 171. (d) The court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience: Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 at 484 per Bright J. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and various and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact. (e) It may be appropriate to appoint a provisional liquidator in the public interest where there is a need for an independent examination of the state of accounts of the corporation by someone other than the directors: Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493. (f) Where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company's affairs would be properly conducted with due regard for the interests of shareholders, it may be appropriate to appoint a provisional liquidator: see Montgomery Windsor (NSW) Pty Ltd v Illopa Pty Ltd (1984) 2 ACLC 224." 76 In contrast to a liquidator proper, a provisional liquidator is appointed for the purposes of preserving the company's assets and maintaining the status quo until the determination of a winding up application, in circumstances where an undertaking by the directors would not be adequate [Re JN Taylor Holdings Ltd; Zempilas v JN Taylor Holdings Ltd (1990) 3 ACSR 600 at 615; 9 ACLC 1. Ford's Principles of Corporations Law, para 27.102]. 77 While insolvency is not in itself a necessary or sufficient condition nor an inevitable consequence of the appointment of a provisional liquidator, apparent or probable insolvency frequently accompanies the problems typically invoking provisional liquidation and may significantly favour the exercise of the discretion conferred by s 472(2) of the Act. Undertaking as to damages 78 Rule 6.1(4) of the Corporations Rules provides: The Court may require the plaintiff to give an undertaking as to damages. 79 In Australian Securities and Investments Commission v ACN 102 556 098 Pty Ltd (2003) 48 ACSR 350, Barrett J did not require a provisional liquidator appointed on the application of ASIC in performance of its public function to provide an undertaking as to damages. 80 His Honour stated: When ASIC asserts the standing it is given … it does not act as a representative of any private interest and does not seek to enforce, directly or indirectly, the right of any creditor. It acts in aid of the community's interest in ensuring that limited liability companies do not remain operative when the capacity to pay their debts in full has been compromised. In these circumstances, I was satisfied that, in making application for the appointment of a provisional liquidator in this case, ASIC was performing a public function. That function was of such a kind that ASIC's failure to proffer an undertaking as to damages was not something that should have worked to its disadvantage upon the determination of the application. 81 By s 462(2)(e) of the Act, ASIC may apply for a winding up order pursuant to s 464. Section 462(1) relevantly provides: (1) Where ASIC is investigating, or has investigated, under Division 1 of Part 3 of the ASIC Act: (a) matters being, or connected with, affairs of a company; or (b) matters including such matters; ASIC may apply to the Court for the winding up of the company. 82 By s 459P(1)(f) of the Act, ASIC may apply for a company to be wound up in insolvency, but by s 459P(2)(d) may do so only with the leave of the Court. By s 459P(3), leave may be granted only if the Court is satisfied that there is a prima facie case that the company is insolvent, but not otherwise. Section 459P(4) provides that the Court may give leave subject to conditions. Abridgement of time 83 Rule 1.10 of the Corporations Rules states: Unless the Corporations Act, the ASIC Act, or these Rules otherwise provide, the rules of this Court that provide for the extension or abridgment of a period of time fixed for the doing of any act or thing in relation to a proceeding apply to a proceeding to which these Rules apply. Application 84 I am satisfied that there is cogent evidence to suggest that TRADC and Online Returns: (a) have failed to pay to clients or to account for substantial amounts of money received as tax returns and tax bonuses on their behalf; (b) owe substantial sums to other creditors; (c) failed to maintain proper financial records; (d) have failed to remit tax to the ATO; (e) were conceded by their principal officers, and appear, prima facie, by reference to numerous other circumstances and investigations, to be insolvent; (f) have failed to put in place adequate and appropriate mechanisms to ensure that their obligations to clients and creditors are duly discharged; (g) have failed to keep proper records in accordance with s 286(1) of the Act; (h) may have caused or permitted moneys, including tax refunds received on behalf of clients. to be applied without justification to the purchase of a holiday property by a company owned and controlled by a member of a director's family. Robert Brown denied that the relevant funds were misapplied, asserting that they constituted management or service fees due to the companies, but did not deny that the funds were used as alleged. The exhibits to Mr Reid's affidavits demonstrate, however, that the amounts were not recorded in the Ledger Report consistently with the recording of other fees. That circumstance may found an inference that the moneys did not constitute management fees, and at least demands a full explanation which is not apparent from the financial records produced by the companies and has not been otherwise provided; (i) may have permitted the TRA business to recommence operations through a company controlled by a member of the director's family; (j) have entered into an agreement to sell the TRA business on terms which entails uncertain benefit to their creditors; (k) have failed satisfactorily to explain a number of transactions and dealings; (l) have, through their agent or officer, incorrectly informed creditors that Online Returns is in liquidation or voluntary administration; and (m) have failed without adequate explanation fully to comply with the directions of ASIC to produce the duplicate accounting system database it requires. 85 An application to wind the companies up has been filed. I am satisfied that the companies' assets may be at risk of dissipation and that there is a reasonable prospect that a winding up order may ultimately be made. Many of the matters deposed to on behalf of ASIC, and conceded by the companies' sole director, suggest that the companies' affairs may have been conducted, and their records maintained, in such manner that the public interest requires a prompt, independent examination of their accounts, financial records and transactions. 86 A provisional liquidator should not be appointed if any less intrusive measure will satisfactorily address the circumstances of the case. Robert Brown asserted that the alternative courses of appointing a receiver (apparently in reliance on a debenture charge securing moneys advanced by Cherry Hill) or voluntary administration entailed advantages and the prospect of better returns to creditors. The appointment of a provisional liquidator is, however, uniquely apt and necessary to preserve effectively and expeditiously the status quo, prevent the dissipation of assets prior to the final hearing of the winding up application and to ensure, in the public interest, that an independent official liquidator investigates and identifies the companies' records, transactions, assets and liabilities. 87 The failure to serve the originating process and affidavits within the time prescribed by the Corporations Rules has entailed no prejudice in the circumstances of the case and, in my view, the time may be abridged. 88 In my opinion, the official liquidators who have consented to act should be appointed provisional liquidators of the defendant companies and the other preliminary orders sought by ASIC should be made. I certify that the preceding eighty eight (88) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton. Associate: Dated: 8 July 2010