Australian Securities and Investments Commission v Warrenmang Limited

• Jurisdiction: Australia Federal only
• Judgment Date: 29 June 2007
• Neutral Citation: [2007] FCA 973
• Court: Federal Court

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Warrenmang Limited [2007] FCA 973

CORPORATIONS – breach of directors’ duties relating to the holding and application of funds raised in anticipation of public listing of company – where application monies not refunded to subscribers – where application monies applied for personal benefit

DECLARATIONS – declarations of contravention under s 1317E of Corporations Act 2001 (Cth) – construction of Part 9.4B of Corporations Act 2001 (Cth) – intersection of provisions relating to civil and criminal process

Corporations Act 2001 (Cth) ss 180, 181, 182, 722, 723, 724, 1317E

Federal Court of Australia Act 1976 (Cth) ss 21, 23

Australian Securities and Investments Commission v Cash King Pty Ltd[2005] FCA 1429 referred to

Australian Securities and Investments Commission v Intertax Holdings Pty Ltd [2006] QSC 276 referred to

Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 referred to

BMI Ltd v Federated Clerks Union of Australia(1983) 51 ALR 401 cited

Maxwell v The Queen(1996) 184 CLR 501 cited

Pearce v The Queen(1998) 194 CLR 610 cited

Re One.Tel Ltd (in liq); Australian Securities and Investments Commission v Rich (2003) 21 ACLC 672 cited

Rogersv The Queen(1994) 181 CLR 251 cited

Williams v Spautz(1992) 174 CLR 509 cited

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v WARRENMANG LIMITED AND ROBERT GRAEME PRITCHARD

VID 1278 OF 2006

GORDON J

29 JUNE 2007

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIADISTRICT REGISTRY	VID 1278 OF 2006

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	WARRENMANG LIMITED First Defendant ROBERT GRAEME PRITCHARD Second Defendant

JUDGE:	GORDON J
DATE OF ORDER:	29 JUNE 2007
WHERE MADE:	MELBOURNE

THE COURT DECLARES PURSUANT TO SECTION 1317E OF THE CORPORATIONS ACT 2001(CTH) (“THE CORPORATIONS ACT”)THAT:

1. Robert Graeme Pritchard contravened ss 180, 181 and 182 of the Corporations Act in that:

(a) on and from 8 January 2004, he caused Warrenmang Limited (“Warrenmang”) to contravene s 722 of the Corporations Act, in that he failed to cause Warrenmang to hold the application money paid by persons for shares in Warrenmang on trust;

(b) by no later than 10 June 2004, he caused Warrenmang to contravene s 722 of the Corporations Act, in that he failed to cause Warrenmang to return application money paid by persons for shares in Warrenmang as soon as practicable, in circumstances where shares in Warrenmang had not been (and were not subsequently) issued to those persons;

(c) by no later than 10 June 2004, he caused Warrenmang to contravene s 723 of the Corporations Act, in that he failed to cause Warrenmang to refund application money paid to Warrenmang by persons for shares in Warrenmang, in circumstances where shares in Warrenmang had not been (and were not subsequently) issued to those persons; and

(d) of the application monies referred to in (a), on or about 19 January 2004 he as a director of Warrenmang authorised payment of $300,000 of that money to himself and used that money for his own personal benefit.

THE COURT ORDERS THAT:

1. The amended originating process otherwise is dismissed.

2. There is no order as to costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 1278 OF 2006

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
AND:	WARRENMANG LIMITED First Defendant ROBERT GRAEME PRITCHARD Second Defendant

JUDGE:	GORDON J
DATE:	29 JUNE 2007
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1 By an amended originating process dated 21 December 2006, the Australian Securities and Investments Commission (“ASIC”) sought declarations against the Second Defendant (“Mr Pritchard”), in relation to Warrenmang Limited (in liq) (“Warrenmang”), a company of which he was a director.

2 In support of the application, ASIC relied upon the following affidavits:

(1) an affidavit of Gregory Chi Fung Fok, a senior investigator with ASIC, sworn on 17 November 2006;

(2) an affidavit of Georgina Knight, a financial investigator with ASIC, sworn on 17 November 2006;

(3) an affidavit of Colin McIntosh Nicol, the liquidator of Warrenmang, sworn on 12 December 2006;

(4) a further affidavit of Colin McIntosh Nicol sworn on 14 December 2006;

(5) a second affidavit of Georgina Knight sworn on 9 February 2007; and

(6) a third affidavit of Georgina Knight sworn on 14 June 2007.

3 Mr Pritchard appeared at the hearing and was represented by Mr Horgan of Counsel, who acted and appeared pro bono.

4 These reasons are structured as follows:

(1) An outline of the facts which were said by ASIC to form the basis of the application for declaratory relief;

(2) The relevant provisions of the Corporations Act;

(3) The power of the Court to grant such declarations;

(4) The form and content of the declarations. (As will become apparent later in these reasons, although I am satisfied that Mr Pritchard, by specific and identified conduct as a director of Warrenmang, contravened ss 180, 181 and 182 of the Corporations Act, I amended the form and content of the declarations sought by ASIC to ensure that the conduct the subject of the declarations was sufficiently described.)

(1) FACTS

5 Warrenmang was registered as an unlisted public company on 1 September 2003. At that time, its directors were Mr Pritchard, Mr Van Assche and Mr Mealey and the company had in excess of 20.82 million ordinary shares issued fully paid in the sum of $50,000. Mr Pritchard held approximately 20 million of the 20.82 issued shares in Warrenmang, was at all times the person in charge of Warrenmang’s day to day activities including maintenance of its financial records and was its controlling mind. The evidence of one of the other directors, Mr Van Assche, was that neither he nor Mr Mealey were involved in the day to day running of Warrenmang.

6 Warrenmang sought to become listed on the Australian Stock Exchange (“ASX”). On 5 December 2003, Warrenmang issued an Initial Public Offer (“IPO”) of shares by lodging with ASIC a prospectus for equities. The prospectus recorded that Warrenmang intended to enter the wine export business and was seeking to raise in its IPO some $6 million through the sale of 17,142,857 fully paid ordinary shares at an issue price of $0.35 per share. The opening date was 12 December 2003 and the closing date was 30 January 2004. Warrenmang was unable to raise the minimum subscription under the IPO within the period specified by s 724 of the Corporations Act. About $2.5 million was paid to Warrenmang by 404 subscribers for approximately 7.34 million shares. This was less than half the amount sought to be raised by the IPO.

7 In relation to the IPO subscriptions, no shares were ultimately issued by Warrenmang and Warrenmang was not listed on the ASX. More significantly, some of the investors were not repaid their subscription monies. That course of events contravened ss 722 and 723 of the Corporations Act.

8 Sections 722 and 723 are in Division 5 of Chapter 6D of the Corporations Act and are concerned with fund raising. Section 722 is headed “Application money to be held on trust” and provides:

“(1) If a person offers securities for issue or sale under a disclosure document, the person must hold:

(a) all application money received from people applying for securities under the disclosure document; and

(b) all other money paid by them on account of the securities before they are issued or transferred;

in trust under this section for the applicants until:

(c) the securities are issued or transferred; or

(d) the money is returned to the applicants.

(2) If the application money needs to be returned to an applicant, the person must return the money as soon as practicable.”

9 Section 723 is concerned with the procedure to be adopted in accepting subscriptions for shares and s 723(3) provides, so far as is relevant:

“(3) If a disclosure document for an offer of securities states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and:

…

(b) the securities are not admitted to quotation within 3 months after the date of the disclosure document;

then:

…

(d) the person offering the securities must return the money received by the person from the applicants as soon as practicable.”

10 On 10 March 2004, consistent with s 724 of the Corporations Act, a Supplementary Prospectus was issued by Warrenmang notifying investors that they could participate in the IPO or withdraw their applications by notifying Warrenmang in writing by no later than 5.00 pm AEST on 13 April 2004 and have their applications monies refunded. At that time, it was anticipated that Warrenmang would list on the ASX by 19 April 2004. That did not occur. It failed to reach the minimum subscription level required for it to issue securities and accordingly, the IPO was unsuccessful. The second report provided by the provisional liquidator of Warrenmang estimated that $1,279,575 was still owed to subscribers as at 14 December 2006. Again, the failure to repay the funds as required by ss 722(1) and (2) and further or alternatively, s 723(3)(d) was a contravention of the Corporations Act.

11 In August 2005, ASIC received a complaint from an investor who had applied for shares and requested a refund following the unsuccessful IPO. As a result of that complaint, ASIC contacted Mr Pritchard and the application monies of that investor were refunded.

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