Case: Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699
Outcome: cited
Western Retirement Village Management Pty Ltd ("WRVM") was formerly the registered proprietor of "the Mews" situated at Lot 4, 285 Railway Parade, Upper Swan, Western Australia, being the whole of the land in Certificate of Title Vol 1950 Folio 469 ("the Land"). The Land was the subject of an unregistered investment scheme referred to as "the Mews Village" or "the Mews Retirement Village Scheme" ("the Scheme"), which is in the process of being wound up. Messrs Brian McMaster and Mark Mentha of KordaMentha were appointed receivers of the Scheme to oversee its winding up and were appointed as liquidators of WRVM upon the winding up of WRVM: Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699. 2 The Scheme and its participants were described by Finkelstein J in Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699 at [4] to [10] in the following terms: 4. By way of background, the promoters of the [Scheme] described their purpose as being to establish and operate a top-quality resort style retirement village with facilities for respite care. The idea was to develop and sell self-contained and fully serviced units and townhouses to people over the age of 55 years. The village was to be located on land purchased from another company associated with the promoters. Investors would put up the deposit with the balance to be raised by loans from the vendor. A management company controlled by the promoters would operate the village. After payment of a management fee, the profit would go to the investors. The key attraction to investors was the expectation that they would be entitled to deduct from their assessable income not only the amount of their investment but also their proportionate share of the loan taken to pay the balance of the purchase price. 5 The Mews Village was to be established on [the Land]. The [L]and was registered in the name of [WRVM]. By a contract dated 18 April 2000, WRVM agreed to sell the [L]and to the fourth defendant, The Mews Village Nominees Pty Limited, for $93,425,000. Other agreements to which Mews Village Nominees is a party show that it entered into the contract as "bare nominee" for a group of investors described as "Investor Partners". The contract of sale provided for the payment of a deposit of $18,048,000 with the balance to be paid by a loan from the vendor secured by a mortgage over the [L]and. The purchase price was not the exchange value of the [L]and. The price far exceeded that value. This came about because under the contract the vendor was required to construct the village. The building work was to take place in two stages over several years. Most of the deposit was raised from the investors who were grouped into several partnerships. The balance was provided by the vendor under a non-recourse loan agreement. The agreement required the loan to be repaid out of the fees payable by residents of the village. In the event of default the vendor could only look to the [L]and for payment. 6 I indicated that the investors were grouped into several partnerships. The principal partnership is styled The Mews Village Partnership and has 14 "Investor Partners". It was established by a partnership agreement dated 18 April 2000. The parties to this agreement appear to be the Investor Partners (although no provision is made for them to execute the agreement) and two companies associated with the promoters, Mews Retirement Nominees Pty Ltd and the first defendant, GDK Financial Solutions Pty Ltd. The partnership business is described as "the development and operation of retirement village facilities at [the Land]". GDK was appointed to manage the partnership's business. Mews Retirement Nominees was appointed to hold the partnership property as "bare trustee for the partnership". ... 8 The Mews Retirement Village was to be managed by WRVM. To this end a Marketing Management and Profit Share Agreement was entered into between Mews Village Nominees (the purchaser of the [Land]) and WRVM. Only an unsigned copy of the agreement is in evidence. The copy does not indicate clearly the identity of the contracting parties. The front page suggests that the agreement is between WRVM and The Mews Retirement Nominees Pty Ltd which, it will be remembered, is the "bare nominee" of The Mews Village Partnership. A schedule records that the agreement is between WRVM and the Mews Retirement Village Nominees Pty Ltd. Notwithstanding those references, the body of the agreement shows that the agreement was between WRVM and Mews Village Nominees. The sealing clause is the latter company's name. A recital describes it as the purchaser of the [Land]. Moving on, the only substantive provision of the agreement to which reference should be made is the management fee which is set at 40 per cent of the profit derived by the village plus a commission of 1 per cent of the fees received from residents. This suggests that not much was to go to the investors, although one should not lose sight of the substantial tax advantage they derived from entering into the scheme. 9 Notwithstanding the complex series of agreements, and the subscription by investors of capital in the order of $8 million, The Mews Retirement Village did not get off the ground. All that has happened is that The Mews Retirement Nominees paid the purchase price for the [Land] using the investors' capital and loan funds obtained from the vendor. Despite receiving the purchase price, WRVM has not transferred the [L]and to the purchaser: [it] remains registered as the proprietor of the [L]and. Nor has WRVM carried out the building works which by the contract of sale it had promised to do. I assume it did not have the funds to undertake the work. There has been no accounting to investors for any of the money they contributed, despite many requests for information. The investors have simply been left in the dark. 10 There is no hope of the development going ahead, at least while it remains in the hands of its present controllers. GDK has been wound up. There is an unresolved dispute over the control of Mews Village Nominees. ... To be blunt, things are in a mess and it will take a good deal of time and great expense to sort them out. 3 What Finkelstein J referred to as a "mess" is made more complicated by a series of transactions that is an immediate cause of the present proceedings. At the risk of undue abbreviation (with consequent inaccuracy) that series of transactions was made by interests associated with a principal of WRVM (Mr Michael Brereton) and interests associated with one Mr Salvo (an investor in the Scheme both as an individual and through a number of related entities). Whether because the Scheme was not being implemented, or for some other reason (and it may not matter which), the Brereton interests agreed that the Salvo interests would advance money to WRVM, it is said secured against the Land, for the purpose of developing the Land in a manner contrary to that intended under the Scheme. Again at the risk of undue abbreviation, these proceedings are intended to decide whether these transactions created debts of WRVM that are secured by the Land. 4 On 12 March 2008, WRVM filed an interlocutory process. AVS Property Pty Ltd (ACN 094 311 645) ("AVS") and Rental Fleets Australia Proprietary Limited ("RFA"), members of the First Delta Group of Companies and entities associated with Mr Salvo, are the respondents. AVS and RFA were formerly the holders of a second ranking registered mortgage over the Land ("the AVS mortgage") and are presently the holders of a registered charge over the assets of WRVM ("the AVS charge"). National Australia Bank Limited ("NAB") was the holder of the first registered mortgage over the Land. 5 Pursuant to a contract of sale dated 6 December 2007, the Land was sold. The sale proceeded pursuant to orders made by Finkelstein J on 28 November 2006 and 6 December 2007. In substance, the orders required the mortgagees (NAB, AVS and RFA) to produce discharges of their respective mortgages so that the sale of the Land could proceed. The discharges occurred on the basis that NAB was paid the amount that it claimed was secured by its mortgage and a sum of approximately $400,000 was set aside in a separate bank account to cover certain contingencies. AVS and RFA were not paid out. Their discharges were ordered to be produced on the basis that there would be proceedings for the taking of accounts of what is secured by the AVS mortgage and the AVS charge and that, to assist that taking of accounts, interlocutory proceedings of the kind now under consideration would be instituted. 6 It is common ground that RFA does not have any claim against WRVM which is secured by either the AVS mortgage or the AVS charge. Accordingly, there is no need for an account to be taken in relation to what amount, if any, WRVM owes RFA. 7 The position of AVS is quite different. It contends that it has a claim against WRVM and that the amount claimed is secured by both the AVS mortgage and the AVS charge. The total amount claimed, about $14 million, exceeds the balance of the proceeds of sale of the Land after payment to NAB and of GST. That balance is about $13 million. 15 Against that statement of general position, it is necessary to set out the principal facts. Much of what is set out constitutes facts as found by Finkelstein J. No party in the present proceeding disputed those findings. Nor did any party in the present proceeding dispute the other facts set out below, though there was a lively dispute about the legal consequences that follow from those findings. 16 On 16 March 2000, WRVM contracted to purchase the Land for $2.85 million. It became the registered proprietor of the Land on 11 July 2000. Mr Michael Brereton was the sole director of WRVM. 17 Approximately one month later, on 18 April 2000, WRVM entered into a contract to sell the Land to The Mews Village Nominees Pty Ltd ("Mews") for $93,425,000 ("the Mews Sale Contract"). On 2 November 2006, Finkelstein J concluded, as a finding of fact, that although WRVM remained the registered proprietor of the Land, it held the Land as bare trustee for Mews: see also Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699 at [4] to [9]. In fact, it was not until 6 December 2007, when the Land was sold pursuant to the orders of Finkelstein J, that WRVM ceased to be the registered proprietor of the Land. 18 The Mews Sale Contract contained Special Conditions. By cl 6.1 of the Special Conditions, WRVM agreed that "Stage 1" would be constructed by WRVM in an expeditious manner. In general terms, WRVM was obliged to construct a number of three bedroom duplex and freestanding units, four bedroom duplex and freestanding units, and serviced apartments, including the necessary infrastructure. 19 Nothing of significance transpired between 2000 and September 2003. That was the problem. Significantly, the Land was not developed in accordance with the terms of the Mews Sale Contract. 49 On 28 November 2006, for the reasons dated 2 November 2006, Finkelstein J ordered the Scheme to be wound up: Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699. By paragraph 16 of those orders, his Honour directed the receivers of the Scheme to call for any person claiming any right, title or interest in Land to prove his or her claim by affidavit to be served by 22 December 2006. AVS responded to that direction. The substance of its response was relied upon by WRVM as providing a factual foundation for an estoppel claim in the event that I found each of the components as owing by WRVM to AVS and secured by the AVS mortgage or the AVS charge. In general terms, WRVM submitted that even if the debts were secured, the liquidators and receivers of WRVM had priority because of their reliance on representations made by, or attributable to, AVS. 50 AVS's response to the call for proofs was provided by way of affidavit sworn by Mario Salvo on 22 December 2006. Paragraph 2 confirmed that it was an "affidavit in support of the claims made by RFA, AVS and Statewide ... of their interests in the Land". Mr Salvo described himself as the director of RFA and the general manager of AVS. He went on to say that the sole director and secretary of AVS was a Mr Andrew Vito Salvo, but that nonetheless he was authorised to make the affidavit on behalf of RFA, Statewide and AVS. Significantly, the affidavit explained the background to and circumstances surrounding the events in and after early 2005. Mr Salvo deposed to the fact that in or about early 2005, he became concerned for "his investment". In the context, "his investment" could only refer to RFA's investment in the Scheme. (Strictly speaking, however, the documents record investment in the Scheme by Mario Salvo as an individual and by some of his related entities including DFX and CLA Holdings.) As a result of these concerns, Mr Salvo held discussions with Mr Brereton regarding whether RFA might assign its rights in the Scheme to WRVM for $2,696,296. A draft agreement was prepared, signed by WRVM but not signed by RFA. Salvo said that he chose not to sign the agreement for the sale of RFA's interests because he was not entirely sure he wanted RFA to assign its rights as an investor. In substance, he decided to hold the signed sale agreement and see how things in relation to the Land developed. 51 As at May 2005, the Land was subject to the Westpac mortgage. The Westpac facility had in fact expired on 29 October 2004 and penalty interest was being charged on an outstanding loan of $3.1 million. At this time two events crystallised. Mr Salvo spoke to Mr Brereton and was told by him that he was going to pay out the investors and intended winding up the Scheme. At the same time, Mr Salvo said he believed the Land had development potential with his property development expertise and capital base which provided him with an opportunity to recoup RFA's investment and make a profit from the development of the Land. 59 On 6 December 2007, Finkelstein J made orders that the court appointed receivers do all things necessary to progress and complete the sale of the Land in accordance with the Sale Agreement between WRVM and Clarendon Residential Group Pty Ltd. The sale of the Land was at arm's length. On 20 February 2008, Goldberg J made orders authorising the receivers to commence proceedings to prevent payment out of the proceeds of sale of the Land to AVS and RFA. On 13 March 2008, Finkelstein J noted the undertaking of WRVM to commence this interlocutory process and, on that undertaking, ordered the joinder of NAB to those proceedings, and effectively the discharge of the relevant mortgages so that completion of the sale of the Land could proceed. Completion of the sale took place on 17 March 2008. On completion, the NAB mortgage was discharged. The entitlement of AVS to the balance of the sale proceeds is the issue to be resolved in these proceedings. 60 Finally, on 3 March 2008, AVS's solicitors wrote to WRVM's solicitors. AVS asserted that the amount then due by WRVM to AVS under the AVS Facility Agreement was $5,857,286.36. WRVM submitted this was the first time that the AVS claim had included the five components identified earlier (see [8]). Although the profit share and management fee were said to be secured by the AVS mortgage or the AVS charge, the precise amounts owing were said to be incalculable. 61 On 17 March 2008, WRVM as guarantor paid to NAB the sum of $9,410,063.13 thereby discharging Salrest's liability to NAB.