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The Long Arm of the Law

11 April 2013

In Australian Securities and Investments Commission v ActiveSuper Pty Ltd; ACN 143 832 053 Pty Ltd; Burrows and Gibson (No 1) [2012] FCA 1519, the Federal Court revisited the principles relating to the appointment of provisional liquidators over foreign corporations under the Corporations Act 2001 (the Act). The decision itself involved an interesting set of factual circumstances.

 

Factual Background 

Burrows and Gibson were the controllers of the first and second defendants respectively.

By originating process dated 27 June 2012, ASIC alleged that the defendants had offered securities and carried on a financial services business in breach of the Act. ASIC further alleged that Burrows and Gibson had personally provided financial product advice and products without a licence, and had also engaged in "hawking" financial products and misleading or deceptive conduct.

On 10 July 2012, asset preservation orders were made restraining the defendants from dealing with the assets and monies of US based LLCs. In essence, ASIC contended that the LLCs were investment vehicles used for purchasing distressed real estate in Arizona from monies raised from Australian SMSF investors in contravention of the Act.

Burrows had complied with these orders and was assisting ASIC with its continuing investigations.

Subsequent to the making of the preservation orders, it became apparent that Burrows had:

  1. "lost control" of the LLCs and their British Virgin Islands based shareholder company, SPG Ltd; and
  2. had been "replaced" by a Mr George.

Having regard to ASIC's attempts to obtain information in relation to this change of control, (which was not forthcoming despite substantial effort) the Court was of the opinion that "the lawful basis for the removal of Mr Burrows (who was subject to, and complying with, the asset preservation orders) was not apparent" and remained unexplained.

There was no apparent suggestion that Burrows was involved in the change of control.

ASIC subsequently became aware that the US property of the LLCs had been offered for sale. As George was not subject to asset preservation orders, ASIC was concerned that if such property was sold, the proceeds would be dissipated and not returned to the Australian investors.

 

Did the LLCs carry on business in Australia?

Part 5.7 of the Act establishes a regime for winding up foreign companies. However, this regime is limited to foreign entities registered under the Act, or whom otherwise carry on business in Australia. As the LLCs were not registered under the Act, the Court had to determine whether the LLCs were "carrying on business in Australia".

In this case, and after considering the available evidence, the Court found that the LLCs "carried on business in Australia both by their loan activities in Australia and their controller's debiting and transferring of Australian funds in Australia".

 

Should a provisional liquidator be appointed?

Having seeded itself with jurisdiction, and in light of the questionable circumstances surrounding the change of control, the Court concluded that "there was a reasonable prospect that a justifiable lack of confidence in the conduct and management of the LLCs' affairs and a case for winding up on the just and equitable ground would be made out at trial".  In so finding, the Court:

  1. noted that if Burrows had remained in control of the LLCs, "the appointment of provisional liquidators would, on one view, be an unnecessary drastic intrusion into the affairs of the LLCs";
  2. concluded that "the balance of convenience favoured the appointment of provisional liquidators in order to secure the LLCs' assets and to prevent their dissipation, given:

(a) the opacity of the developments leading to the asserted change in control;

(b) the impact of different legal systems;

(c) problems of communications;

(d) the lack of assured de facto control even if Mr Burrows remained in de jure control;

(e) the evidence of an attempted sale of one United States property and Mr George's inquiries about whether he could sell the properties without Mr Burrows' concurrence; and

(f) the relative urgency of the situation.

 

Timely reminder

This case demonstrates the complexity of issues that can be encountered in cross-border insolvency matters, particularly in circumstances where the operation of foreign corporate governance regimes can potentially have an adverse impact on the internal governance of such entities to the detriment of Australian investors.

 

For more information, please contact:

Adam Hamrey | Solicitor
Mullins Lawyers
t +61 7 3224 0383
f +61 7 3224 0333
ahamrey@mullinslaw.com.au

Mark Madsen | Partner
Mullins Lawyers
t +61 7 3224 0241
f +61 7 3224 0333
mmadsen@mullinslaw.com.au

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