Provisional liquidators – principles as to appointment – ASIC v ActiveSuper

Last month in ASIC v ActiveSuper Pty Ltd (No 2) [2013] FCA 234, Gordon J considered an application by ASIC brought pursuant to s 472(2) of the Corporations Act 2001 (Cth) (the Act) to have Michael McCann and Graham Killer of Grant Thornton in Brisbane appointed joint and several provisional liquidators to a company called MOGS Pty Ltd (MOGS). ASIC sought the appointment to secure and preserve MOGS’ assets pending the final hearing of ASIC’s winding up application against MOGS, and to empower an independent expert to investigate MOGS’ affairs and report back. The application was successful. The judgment provides a useful opportunity to review the principles governing when a provisional liquidator will be appointed.

MOGS was a company that rode the wave of Australian investor interest of recent years in the distressed real estate market in the United States. ASIC alleged that MOGS had received funds from investors (principally the trustees of self-managed superannuation funds) by two routes – funds raised pursuant to a so-called “US Realty Memorandum” for investment into distressed real estate in the USA but loaned, at least, by the 5th-8th defendants to MOGS; and funds raised pursuant to so-called “product placement memoranda” for investment with the 9th-10th defendants but loaned, at least in part, by entities associated with those defendants to MOGS.

ASIC submitted that there was substantial evidence that MOGS had committed, or been knowingly concerned in, a number of contraventions of the Act including breaches of s 1041H(1) (misleading and deceptive conduct in respect of a financial product or service), s 911A(1) (provision of financial services without a relevant licence) and s 727(1) (offering securities without a current disclosure document lodged with ASIC.

During the course of argument it became apparent – for the first time – that MOGS was, at least to some extent, acting as trustee of the MOGS Unit Trust. Up to that point, despite extensive affidavit evidence, there was no evidence of that fact. It was unclear whether the criticised transactions were undertaken by MOGS in its own right, or as trustee of the MOGS unit trust.

Gordon J expressed surprise that MOGS had failed to inform the Court that it was a trustee of the MOGS Unit Trust, provide the Court with a copy of the Trust or identify the unitholders, although her Honour noted that ASIC had been aware of MOGS’ status, but had apparently not turned its mind to these questions either until the issue was raised by the Court. Gordon J also raised the possibility of replacing the trustee under s 80 of the Trusts Act 1973 (Qld)Subsequently, ASIC sought leave to amend its interlocutory application to seek additional orders, including that the provisional liquidators also be appointed as replacement trustees of the MOGS Unit Trust pursuant to s 80 of the Trusts Act 1973 (Qld).

One of the affidavits filed for the defendants was sworn by one of the MOGS directors, the 14th defendant Mr Stonehouse. Her Honour made the telling remark that this affidavit was important both for what it did, and what it did not, say.

The Appointment of Provisional Liquidators 

As usual, her Honour provides an excellent distillation of the key principles – see the passages at [11]-[18] and the authorities there cited for each of the premises and principles below.

Section 472(2) gives the Court power to appoint a provisional liquidator at any time after the filing of a winding up application, before the making of the order. The Court has a wide and complete discretion as to whether or not to make the appointment; the grounds on which a provisional liquidator may be appointed are infinite.

On the other hand, such an appointment is a drastic intrusion into the affairs of the company. It will not be done if other measures would suffice to preserve the status quo. Therefore there must be good reason for this early intervention.

Her Honour sets out the six principles distilled by Tamberlin J in ASIC v Solomon (1996) 19 ACSR 73 at 80, often cited in this context (see [16] of this judgment to see the authorities Tamberlin J cites for these principles) –

1.  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;

2.  The fact that the assets of the corporation  may be at risk is a relevant consideration;

3.  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;

4.  The court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact;

5.  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;

6.  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.

Gordon J then set out 6 of the further 8 considerations listed by Tamberlin J as applicable in Solomon’s case that would also weigh in this case in favour of the appointment of a provisional liquidator (see [17]) –

(b)  There was on any view at present, a substantial deficiency of assets against liabilities which had not been contested. Not a case of marginal insolvency;

(c)  There was a demonstrated lack of control over the assets of several corporations arising from the intermingling of moneys between the corporate respondents. For practical purposes they have been administrateed as if comprising a single undertaking operated to suit the whims or purposes of Mr Solomon without due regard to their individual best interests;

(d)  No proper records had been kept of the moneys lent to or distributed between the corporate respondents which were received from investments made with Mr Solomon. For example, it appeared that investment moneys procured to be invested in taxis and share markets had been diverted to publishing ventures of Mr Solomon and his personal enterprises;

(e) Mr Solomon was the controlling mind and will of the corporate respondents and faced a conflict of interest. He was a debtor to the investors and liable to them in respect of moneys advanced and at the same time he was a creditor of the corporate respondents as a result of the on lending to them. They had no doubt received the funds with notice that they were placed by the investors with Mr Solomon for investment in nominated ventures. Mr Solomon proposed to engage in further commercial activities through the corporate respondents and to obtain further credit;

(f)  It was essential, in these circumstances, that an independent person be appointed who could ensure that any remaining funds ware not further diverted by Mr Solomon for other ventures or intermingled with additional moneys. An independent person would be in a position to realise the assets, determine the claims and administer the remaining funds evenly as between the investors free from any personal or pecuniary interest in the outcome;

(g)  There was cogent evidence that moneys may have been obtained illegally by offering prescribed interests in contravention of the Corporations Law. The corporate respondents were no doubt on notice of such illegality.

At [18] her Honour noted that there was, arguably, one qualification to these principles:  that where an application to appoint a provisional liquidator is made, and the relevant company appears, the onus is not as heavy on the applicant.

Prospects of Winding Up Application on Just and Equitable Ground

In order to make the assessment referred to in 1 above – whether there is a reasonable prospect of a winding up order being made – Gordon J considered the prospects of ASIC’s application to wind up MOGS on the just and equitable ground under s 461(1)(k) of the Act (see [19]-[24] and the authorities referred to). Her Honour noted it has long been established that a company may be wound up where there is ” a justifiable lack of confidence in the conduct and management of the company’s affairs” and thus a risk to the public interest that warrants protection. In ASIC v ABC Fund Managers Ltd (No 2) [2001] VSC 383; (2001) 39 ACSR 443 at [119] Warren J (as her Honour then was) set out three general fundamental principles –

(1)  There needs to be a (justifiable) lack of confidence in the conduct and management of the affairs of the company. This may arise where after examining the entire conduct of the affairs of the company the Court cannot have 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;

(2)  In these types of circumstances it needs to be demonstrated that there is a risk to the public that warrants protection. This may point to a winding up order being necessary to ensure investor protection; where a company has not carried on its business candidly and in a straightforward manner with the public; or where a winding up order may be justified in order to prevent and condemn repeated breaches of the law; and

(3)  There is a reluctance on the part of the courts to wind up a solvent company. A stronger case may be required where the company is prosperous, or at least solvent. Solvency, however, is not a bar to the appointment of a liquidator on the just and equitable ground, where there have been serious and ongoing breaches of the Act.

In regards to both (1) and (2), her Honour observed that there is significant overlap between matters relevant to this assessment and the just and equitable ground, and matters which weigh in favour of the exercise of the Court’s discretion to appoint a provisional liquidator.

Application to the Facts Here

In this case, briefly, ASIC pointed to the following grounds as justifying the appointment of a provisional liquidator to MOGS –

1.  In excess of $4 million raised from Australian investors and received by MOGS appeared to have been dissipated by MOGS. Both the receipt and dissipation of those funds required investigation;

2.  MOGS had engaged in transactions with no apparent commercial purposes, failed to comply with its obligations, and there were accounting inconsistencies and inaccuracies for which there was no or no satisfactory explanation;

3.  MOGS had contravened the law including by maintaining inadequate accounts and records;

4.  The information provided by one of the two directors, Marina Gore, lacked veracity; and

5.  MOGS appeared to be insolvent.

The evidence showed that it was likely that MOGS was no longer the trustee of the MOGS Unit Trust, as a result of ASIC having filed the wind up application, under the terms of the Unit Trust Deed providing for automatic removal. According to the other director Mr Stonehouse, acting as trustee of the Unit Trust was MOGS’ sole activity. MOGS’ own asset position was limited. As Gordon J neatly summarised MOGS’ position at [43] – its substratum was gone.

However there was another problem:  In spite of its position just outlined, the evidence showed that MOGS  continued to operate. Its accountant filed an affidavit reporting MOGS’ operating profit for the first fix months of the 2013 financial year at around $5 million and rising.The accountant in his affidavit asserted that as long as MOGS’ funding facility remained in place MOGS remained solvent, but that the directors had said that funding arrangement would be immediately terminated if a provisional liquidator was appointed, leaving it unable to fund and complete property developments that were underway. This funding facility was provided by third parties. However in the evidence the defendants put forward, those funding parties were not identified, the terms of the arrangements were not disclosed, nor the extent to which the facilities were drawn down, and the accountant’s assertion of the effect of the appointment of a provisional liquidator – which was mere hearsay evidence – was not addressed or explained by the directors in evidence.

It is apparent from the judgment that her Honour was alive to and dissatisfied with the gaps in the evidence for the defendants and the uncertainty as to the capacity in which MOGS was trading with “wholly innocent third parties”, including self-managed superannuation funds. Gordon J held that in the circumstances, it was appropriate and in the public interest that a provisional liquidator be appointed to MOGS (see [49]).

MOGS sought to argue that Corporations Acts remedies were not appropriate for trust companies, citing an oppression case in support. Her Honour gave this argument short shrift (see [52]-[53]).

Gordon J found that there was a reasonable prospect that a justifiable lack of confidence in the conduct and management of MOGS, and a case for winding up of MOGS on the just and equitable ground, would be made out at trial. It was therefore appropriate that a provisional liquidator be appointed to MOGS with specified powers, and for there to be a report back to the Court and ASIC.

2 thoughts on “Provisional liquidators – principles as to appointment – ASIC v ActiveSuper

  1. Carrie

    Thank you for the case update noted below. I had a quick question (and must confess to being too lazy to read the case myself)!

    In the outline of facts, you mentioned that ASIC sought leave to amend its application to seek additional orders that the provisional liquidators be appointed as replacement trustees. I was curious to know if these orders were made, in circumstances where the company had been automatically removed as trustee under the unit trust deed.


    Brendon Watkins Partner
    t +61 3 8608 2022 f +61 3 8608 1082
    Minter Ellison Lawyers Rialto Towers • 525 Collins Street • Melbourne • VIC 3000

    • Brendan,

      Interesting point. The short answer is no. Her Honour adjourned the hearing of ASIC’s application to amend its interlocutory application to seek these orders to a date to be fixed. However, she did make the following order in the interim –

      “4. Pending the final determination of the proceeding or until further order, the fourteenth and fifteenth defendants [Marina Gore and Graeme Stonehouse] (whether by themselves, their agents or howsoever otherwise) be restrained, directly or indirectly from exercising or purporting to exercise any power whether under cll 28 or 32 of the MOGS Unit Trust Deed…or otherwise to appoint a new trustee or a co-trustee of the MOGS Unit Trust, or to amend the Trust Deed.”


      To expand on this –

      The orders that ASIC sought leave to amend its interlocutory application to include were –

      “1. the appointment of those appointed as provisional liquidators as replacement trustees of the MOGS Unit Trust pursuant to s 80 of the Trusts Act 1973 (Qld); and
      2. orders restraining the defendants from seeking to remove or replace the Court appointed trustees or to appoint co-trustees of the MOGS Unit Trust.” (see [9])

      Gordon J noted that she understood the basis for ASIC’s application to be that the MOGS Unit Trust has no trustee. Her Honour considered it appropriate to defer the hearing of that application to a later date (at [38]).

      As noted previously, at [43] Gordon J observed that “there is a sufficient prospect that MOGS is no longer the trustee of the MOGS Unit Trust.” However that was as far as she took it. At [50] her Honour noted that: “The provisional liquidators will need to take control and preserve the assets MOGS holds whether as trustee or otherwise. The provisional liquidators will, of course, also need to form a view about ASIC’s application to appoint a substitute trustee to the MOGS Unit Trust.”

      At [54] her Honour remarked that until ASIC’s application for leave to appoint a new trustee is heard and determined, the best method of preserving the status quo would be to restrain the unitholder (Mash Investments PL) from exercising or purporting to exercise any power to appoint a new trustee, a co-trustee or to amend the Trust Deed. That company was not a party to the proceeding, thus the order was made as against Mr Stonehouse and Mrs Gore as directors of Mash Investments PL (they are also the directors of MOGS who filed affidavits on the prov liq application).

      Kind regards,

      Carrie Rome-Sievers
      Barrister at Law
      Lonsdale Chambers

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