FEDERAL COURT OF AUSTRALIA Australian Securities and Investments Commission v CME Capital Australia Pty Ltd, in the matter of CME Capital Australia Pty Ltd (No 2) [2016] FCA 544 File number: VID 762 of 2015 Judge: MOSHINSKY J Date of judgment: 16 May 2016 Catchwords: CORPORATIONS – application by Australian Securities and Investments Commission to wind up companies on just and equitable ground – considerations relevant to winding up companies – provisional liquidators expressed view that companies are insolvent – director accepts that companies are now insolvent – winding up order made Legislation: Corporations Act 2001 (Cth), ss 601ED(5), 113, 459A, 461(1)(k), 462(2), 464, 727, 911A and 1041H Cases cited: Australian Securities and Investments Commission v ABC Fund Managers (2001) 39 ACSR 443 Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189 Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371 Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 Australian Securities and Investments Commission v CME Capital Australia Pty Ltd [2015] FCA 1489 Australian Securities and Investments Commission v Finchley Central Funds Management Ltd [2009] FCA 1110 Australian Securities and Investments Commission v International Unity Insurance Pty Ltd [2004] FCA 1059 Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506 Australian Securities and Investments Commission v Planet Platinum [2015] VSC 682 Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 Galanopoulos v Moustafa [2010] VSC 380 Date of hearing: 16 May 2016 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 44 Counsel for the Plaintiff: M Pearce SC with C van Proctor Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Sixth and Ninth Defendants: D Williams QC with G Herbert Solicitor for the Sixth and Ninth Defendants: Kiatos and Co Solicitor for the Seventh Defendant: J Tobin, Mills Oakley Counsel for the Provisional Liquidators: R Strong Solicitor for the Provisional Liquidators: Clayton Utz Counsel for the Eighth, Tenth, Eleventh, Twelfth and Thirteenth Defendants: The Eighth, Tenth, Eleventh, Twelfth and Thirteenth Defendants did not appear ORDERS VID 762 of 2015 IN THE MATTER OF CME CAPITAL AUSTRALIA PTY LTD (ACN 006 054 995) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: CME CAPITAL AUSTRALIA PTY LTD (ACN 006 054 995) First Defendant BOSTON PACIFIC CAPITAL AUSTRALIA PTY LTD (ACN 006 594 396) Second Defendant GKN CAPITAL PTY LTD (ACN 006 582 887) (and others named in the Schedule) Third Defendant JUDGE: MOSHINSKY J DATE OF ORDER: 16 MAY 2016 THE COURT ORDERS THAT: 1. The first, second, third, fourth and fifth defendants be wound up pursuant to s 461(1)(k) of the Act on the ground that it is just and equitable that they be wound up. 2. Ross Andrew Blakeley and Quentin James Olde of FTI Consulting be appointed as joint and several liquidators of the first, second, third, fourth and fifth defendants. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MOSHINSKY J: 1 By its further amended originating process the Australian Securities and Investments Commission (ASIC) seeks (among other things) an order pursuant to ss 461(1)(k) and 464 of the Corporations Act 2001 (Cth) (the Act) that: (a) each of the first, second, third, fourth and fifth defendants (the Companies) be wound up; (b) a liquidator be appointed to each of the Companies with all relevant statutory powers given to liquidators under the Act. 2 ASIC seeks orders winding up each of the Companies on just and equitable grounds. The Companies are currently in provisional liquidation pursuant to orders made on 21 December 2015: see Australian Securities and Investments Commission v CME Capital Australia Pty Ltd [2015] FCA 1489. 3 ASIC seeks the appointment of Ross Andrew Blakeley and Quentin James Olde, who are currently the provisional liquidators, as the liquidators of the Companies. 4 The winding up of the Companies is not opposed by the sixth and ninth defendants, who appeared by counsel at the hearing today, but they do oppose the appointment of Mr Blakeley and Mr Olde as the liquidators. The seventh defendant also appeared, but did not make any substantive submissions. Background facts 5 The first to fourth defendants (the Fundraising Companies) raised approximately $13.55 million from investors. The sixth defendant (Mr Petrou) is the sole director of the Fundraising Companies. 6 The funds raised from investors by the Fundraising Companies were lent to three other entities: (a) The eighth Defendant (Loma). Mr Petrou has a long-standing relationship with the controller of Loma. (b) The ninth defendant (Berkshire). Berkshire is a foreign company controlled by Mr Petrou and of which he is the ultimate beneficiary. (c) The fifth defendant (IMCG). The seventh defendant (Mr Grujicic) is identified in the records lodged with ASIC as the sole director of IMCG, although the evidence suggests that he may have acted at the direction of Mr Petrou. 7 The evidence suggests that the funds were lent on unreasonable and uncommercial terms. 8 No funds have been repaid by Loma or Berkshire to the Fundraising Companies. Although IMCG had paid some money to the Fundraising Companies at Mr Petrou's direction, the repayments were recorded by IMCG as accrued expenses. 9 By interlocutory application filed on 8 December 2015, ASIC sought the appointment of provisional liquidators to the Companies, among other things, to investigate the affairs of the Companies. 10 On 11 December 2015, Mr Petrou appointed joint and several administrators to the Fundraising Companies. 11 On 21 December 2015, the Court appointed Mr Blakeley and Mr Olde as provisional liquidators of the Companies, replacing the administrators appointed by Mr Petrou. 12 The provisional liquidators have conducted an investigation in relation to concerns raised by ASIC and on 24 February 2016, the provisional liquidators provided a report of their investigations to the Court. Applicable principles 13 ASIC seeks the winding up of the Companies on just and equitable grounds under s 461(1)(k) of the Act. ASIC has standing to bring that application under s 462(2) and s 464 of the Act. 14 The classes of conduct which justify the winding up of a company on the just and equitable ground are not closed, and each application will depend upon the circumstances of the particular case: Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506 at [96]. 15 Generally speaking, a company may be wound up on just and equitable grounds where there is a justified lack of confidence in the conduct and management of the company's affairs such as to give rise to a real risk to the public interest that warrants protection: Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371 at [55]. 16 Warren J (as her Honour then was) identified three factors of central significance in Australian Securities and Investments Commission v ABC Fund Managers (2001) 39 ACSR 443 at 469-470: First, there needs to be a lack of confidence in the conduct and management of the affairs of the company. Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company. 17 The first principle was explained by Sifris J in Galanopoulos v Moustafa [2010] VSC 380 at [32]: If, after examining the entire conduct of the affairs of the company, the conclusion is that there is a lack of confidence in the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company, that is sufficient to conclude that it is just and equitable that the company be wound up. 18 In respect of the second principle (risk to the public interest warranting protection), Gordon J said in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189 at [23]: [A] risk to the public interest may take several forms. For example, a winding up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public. Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law. Again, there is an overlap between matters which would pose a risk to the public interest for the purpose of s 461(1)(k) and which are relevant to the appointment of a provisional liquidator. (Citations omitted.) 19 If a company is solvent, that may point against a winding up on the just and equitable ground, but it is not a bar. A case in which there have been numerous contraventions of the Act is one in which it is "precisely the situation where a solvent company should be wound up": Australian Securities and Investments Commission v Planet Platinum [2015] VSC 682 at [95]. 20 In Planet Platinum, Efthim AsJ observed that a director cannot rely passively on others to advise him or her of the company's obligations, and cannot abrogate his or her responsibility to manage the company by asserting that someone else has been requested to do so on behalf of the company: [104]-[105]. His Honour held that the manner in which a company has been managed may justify its winding up even where the company is solvent: [106]. 21 Conversely, if there is good reason to believe that a company is either cash flow insolvent or balance sheet insolvent, whether or not the formal elements of s 459A of the Act have been satisfied, such circumstances can be taken into account under the just and equitable ground in any event as one of the factors to consider: Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371 at [58]. 22 Justice Lander in Australian Securities and Investments Commission v International Unity Insurance Pty Ltd [2004] FCA 1059 at [135]-[139] identified other grounds which may justify a winding up order on just and equitable grounds: 135 The plaintiff is authorised to make an application for winding up on the just and equitable ground where it is in the public interest to do so. 136 There are a number of separate grounds which justify the making of a winding up order under this head. If mismanagement, misconduct, or lack of confidence in the conduct and management of the affairs of a company is established, it may be appropriate to wind up the company under this head. 137 If the plaintiff can establish that there have been breaches of the provisions of the Act, including, but not limited to, breaches of directors' duties, inadequacy of accounts and inadequacy of record keeping, it may be appropriate to make an order under this head. 138 If there is a need to ensure investor protection, a winding up order may be made under this head. 139 An order may be made if a company has not carried on its business candidly and in a straightforward manner with the public. Such an order would also be appropriate where the corporation has acted fraudulently or entered into sham transactions. (Citations omitted.) 23 There are important public interest considerations when ASIC applies for a winding up order. In Australian Securities and Investments Commission v Finchley Central Funds Management Ltd [2009] FCA 1110, Gilmour J said at [3]: The plaintiff stands in a somewhat different position to a private applicant for winding up on this ground because the public interest considerations attaching to ASIC as the corporate regulator are relevant to the application. Where companies are engaged in fund management and where there is evidence of serious mismanagement or repeated breaches of the Act so that there is a risk to the public, and in circumstances where ASIC has lost confidence in the company to comply with the relevant law, the court may act to wind up that company on the just and equitable ground. (Citations omitted.) 24 In Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504, Finn J said at 531, in relation to statutory bodies authorised to apply for winding up orders: [T]here seems to be no reason at all why a court entertaining such an application should not have regard to such actual public interest considerations as have … or may have induced the governmental body to seek a just and equitable winding up order. 25 His Honour also said (at 532) that "there is a distinct public interest in the ASC securing compliance with the Corporations Law as such. Its statutory object requires that of it". 26 In Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at 793, Owen J observed that public interest considerations may justify intervention for investor protection or where there have been regular or repeated breaches of the law. Application of principles to the present case 27 For the reasons set out below, in my view there is a justifiable lack of confidence in the management of the Companies. The evidence shows that the Companies are insolvent, that their books and records are in an unsatisfactory state, and that the Companies and their directors may have engaged, or been involved, in numerous contraventions of the Act. It is therefore in the public interest for the Companies to be wound up for investor protection and because there may have been regular and repeated breaches of the Act. Contraventions of the Act by or involving the Companies and their directors 28 The Companies have been operating an investment scheme which on the evidence currently before the Court involves a serious mismatch between short-term liabilities and long-term returns. As a result, earnings on the investments made by the Companies did not generate sufficient funds to pay interest owing to investors with the Fundraising Companies. The Fundraising Companies were reliant on new investments to meet those liabilities. 29 The evidence may also support a conclusion that the Companies are operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Act, but it is unnecessary to reach a concluded view on this. 30 The evidence suggests that the Fundraising Companies may have contravened ss 113, 911A and 1041H of the Act. It also appears, on the basis of the current evidence, that offers were made to persons who were not professional investors and thus there may have been contravention of s 727, as no prospectus has been lodged with ASIC. 31 The evidence also suggests that IMCG may have been involved in the Fundraising Companies' contraventions of ss 113, 727, 911A and 1041H. IMCG received the funds raised from investors. It appears that Mr Petrou (who may have been a de facto director of IMCG) had knowledge of the essential facts giving rise to any primary contraventions. Financial position and solvency 32 The provisional liquidators have calculated that the estimated value of the combined assets of the Fundraising Companies is between $4 and $13 million. The estimated value of their combined liabilities is between $14.3 and $15.1 million. The Fundraising Companies are insolvent on a balance sheet and cash flow analysis, according to the provisional liquidators. 33 The provisional liquidators have also concluded that IMCG is insolvent. 34 The sixth and ninth defendants accepted that the first to fifth defendants are now insolvent. Internal controls, books and records 35 The provisional liquidators consider that the Fundraising Companies had poor internal controls and made investment decisions without appropriate documentation and consideration of risk. 36 The evidence indicates that the Fundraising Companies failed (among other things) to undertake appropriate due diligence in relation to a number of matters, failed to obtain security to support loans made to other entities, failed to document investment decisions and lent funds in circumstances where there was a conflict of interest and on uncommercial terms. 37 The evidence indicates that the books and records of the Companies have not been kept in a satisfactory state. The Fundraising Companies failed to keep proper records and the financial accounts of the Fundraising Companies contained errors in their preparation. The books and records of IMCG are incomplete and are said by Mr Grujicic to be incorrect. IMCG has not been able to produce accurate financial information. Justifiable lack of confidence in the management of the Companies 38 In the circumstances outlined above, it appears that the affairs of the Companies may not have been carried out by the directors with due regard to legal requirements. Moreover, Mr Petrou and Mr Grujicic appear to lack the necessary expertise and experience to operate a securities trading business. These are matters of serious concern, particularly in light of the representations made to investors by the Fundraising Companies. 39 In the circumstances, a lack of confidence in the management of the Companies is made out, and it is in the public interest for the Companies to be wound up. Appointment of liquidators 40 The remaining issue concerns who is to be appointed as liquidators. 41 The sixth and ninth defendants raised concerns about the provisional liquidators' handling of certain matters, in particular in relation to the investments of IMCG. In response to those concerns, Mr Blakely filed an affidavit explaining the steps that were taken regarding those investments. 42 ASIC's position is that Mr Blakeley and Mr Olde are well qualified and it submits that their appointment is appropriate on the basis of continuity and efficiency. 43 In my view, considerations of continuity and efficiency strongly favour the appointment of Mr Blakeley and Mr Olde, and the matters raised by the sixth and ninth defendants do not raise concerns in my mind about their appointment. 44 For these reasons, I will make orders for the winding up of the Companies on the just and equitable ground and for the appointment of Mr Blakeley and Mr Olde as the liquidators. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky. Associate: Dated: 16 May 2016 SCHEDULE OF PARTIES VID 762 of 2015 Defendants Fourth Defendant: BOSTON PACIFIC CAPITAL PTY LTD (ACN 167 099 087) Fifth Defendant: IMCG PTY LTD (ACN 146 851 649) Sixth Defendant: MICHAEL PETROU Seventh Defendant: BRANISLAV GRUJICIC Eighth Defendant: LOMA ESTATE PTY LTD (ACN 157 892 950) Ninth Defendant: BERKSHIRE NWI INVEST LLC Tenth Defendant: AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (ACN 005 357 522) Eleventh Defendant: COMMONWEALTH BANK OF AUSTRALIA LIMITED (ACN 123 123 124) Twelfth Defendant: SAXO CAPITAL MARKETS (AUSTRALIA) PTY LTD (ACN 110 128 286) Thirteenth Defendant: IG MARKETS LIMITED (ABN 84 099 019 851)