Australian Securities and Investments Commission v Bridgecorp Finance Ltd [2006] NSWSC 836

Reported Decision : 58 ACSR 499 (2006) 24 ACLC 769

New South Wales Supreme Court

CITATION : Australian Securities and Investments Commission v Bridgecorp Finance Ltd [2006] NSWSC 836

HEARING DATE(S) : 16/08/06

JUDGMENT DATE : 17 August 2006

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Orders made by consent

CATCHWORDS : CORPORATIONS - debentures - statutory jurisdiction to make orders to protect interests of debenture holders - where ASIC and borrowing corporation agree on enhanced review and reporting arrangements - whether court should make orders

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.9, 283GA(3), 283HB, 657D(2), 1323(1)

CASES CITED : Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 20 ACLC 1530

PARTIES : Australian Securities and Investments Commission - Plaintiff Bridgecorp Finance Limited - Defendant

FILE NUMBER(S) : SC 4309/06

COUNSEL : Mr D.R. Stack - Plaintiff Mr G.C. Lindsay SC - Defendant

SOLICITORS : Kim Turner - Plaintiff Freehills - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

THURSDAY, 17 AUGUST 2006

4309/06 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v BRIDGECORP FINANCE LIMITED JUDGMENT 1 I have before me an application by Australian Securities and Investments Commission ("ASIC") for certain orders directed to the defendant, Bridgecorp Finance Limited ("BFL"). In seeking the orders, ASIC relies upon s.238HB of the Corporations Act 2001 (Cth). BFL consents to the making of the orders but, in light of the statutory requirement that the court have regard to certain matters in deciding whether to make an order under s.238HB (and come to a particular view about the effect of the order it makes), ASIC and BFL have placed certain factual material before the court in the form of a statement of agreed facts. 2 The orders sought will, if made, impose upon BFL certain requirements in respect of debentures issued by BFL which go beyond the requirements imposed by the Corporations Act and by the trust deed relating to the debentures. In circumstances to which I shall come, BFL is content to submit to the additional requirements. 3 BFL is a wholly owned subsidiary of a New Zealand company, Bridgecorp Holdings Limited ("BHL"). BFL was incorporated under the then Corporations Law in 2000. It is the vehicle by which the group's business of providing bridging and property finance is carried on in Australia. It obtains funds from various sources, principally the issue of securities which are "debentures", in terms of the definition in s.9 of the Corporations Act. Investment in those debentures has been solicited in such a way as to attract a need for disclosure in accordance with Chapter 6D, with the result that, in order to comply with s.283AA, a trust deed has been entered into and a trustee has been appointed. The trust deed is dated 22 March 2002. The trustee is Permanent Nominees (Aust) Limited. 4 Permanent Nominees, as trustee, holds a performance guarantee also dated 22 May 2002 from BHL. It is apparently accepted that BHL is thereby a "guarantor", as defined by s.9, in relation to the debentures of BFL. 5 ASIC's interest in BFL arose as a consequence of the issue of a prospectus in December 2005 and a supplementary prospectus in February 2006. On 17 February 2006, ASIC issued an interim stop order under s.739(3) in relation to these prospectuses. A final stop order was issued under s.739(1) on 3 April 2006. BFL consented to that order without admissions. BFL is not currently issuing new debentures or writing new loans. 6 Certain steps of an investigatory kind were subsequently taken by Permanent Nominees as trustee and by both BFL and BHL. The trustee retained Mr Brian Silvia, an experienced accountant, to undertake a review of the operations and records of BFL for the purpose of ensuring that BFL was in a position to meet its obligations to the holders of the debentures. Subsequently and separately, BFL and BHL engaged Deloitte Touche Tohmatsu ("Deloitte") to undertake an independent solvency review of BFL, including an assessment of the adequacy of loan provisioning. 7 Mr Silvia reported a number of conclusions, including weaknesses associated with heavy reliance on intra-group transactions and a need for significant additional provisioning. Certain steps by way of sale of some receivables and a capital injection were noted by Mr Silvia as having improved matters. Deloitte reported in May 2006 an opinion that BFL was able to pay its debts as and when they became due. Deloitte recommended that certain precautions be taken, including constant monitoring of the financial position to ensure that BFL remains solvent. Following receipt of the results of the investigations by Mr Silvia and Deloitte, BFL took further steps with respect to doubtful debt provisioning, improvement of the capital position (as well as liquidity and cash flow) and an enhanced regime of reporting to the trustee for debenture holders. The report as at 31 July 2006 showed gross assets of $122,937,000 (after recognition of the additional provisioning), liabilities to debenture holders of $91,776,000, net assets of $20,743,000 (compared with a minimum of $10 million recommended by Mr Silvia) and cash of $2,364,000. 8 It is with a view to putting on to a formal footing an enhanced monitoring and reporting regime agreed between BFL and the trustee (and an embargo on the rolling over of debenture investments) that ASIC now asks that the court make orders. As I have said, BFL consents to the making of those orders. There is no suggestion that BFL is in breach of the trust deed or the Corporations Act. It gives its consent as a reflection of its co-operation with ASIC in the discharge of ASIC's regulatory role. It accepts that the orders will provide a formal expression of what is otherwise an informal agreement between ASIC and BFL designed to facilitate ASIC's monitoring and supervision in the ordinary course. 9 The substantive orders sought by ASIC (and consented to by BFL) are as follows: "1. Unless and until the Defendant ('BFL') has lodged a Prospectus or a Replacement Prospectus in accordance with the requirements of Part 6D.2 of the Corporations Act , BFL, by itself, its servants, agents and employees is restrained from: (a) promoting, offering and issuing debentures; and/or (b) extending the redemption date of all unredeemed debentures issued by it; and/or (c) otherwise rolling over all unredeemed debentures issued by it, to one or more persons ('the Debenture Holders') who currently hold debentures issued pursuant to Prospectus' and Supplementary Prospectus' issued by BFL from time to time. 2. Until further order, BFL, in addition to the requirements presently imposed by Chapter 2L of the Corporations Act , is to provide Permanent Nominees (Aust) Limited ('the Trustee') each month with a written report which: (a) addresses each of the matters identified in the document annexed and marked 'A'; (b) identifies any material deterioration in BFL's: (i) actual net profit before tax, when compared to the director approved monthly budget/ forecast for the relevant financial year; (ii) actual cash flow, when compared to the director approved monthly budget/ forecast for the relevant financial year; and (iii) net asset position, when compared to the director approved monthly budget/ forecast for the relevant financial year; and otherwise opines on the solvency of BFL.