FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Reid [2005] FCA 1275

CORPORATIONS LAW – application for order that the first defendant be restrained from engaging in conduct that contravenes s 206A of the Corporations Act 2001 (Cth) – whether first defendant engaged in conduct that constituted the management of a corporation.

PRACTICE AND PROCEDURE – standard of proof in civil and criminal proceedings.

Corporations Act 2001 (Cth), s 206A(1)

Corporations Law

Briginshaw v Briginshaw (1938) 60 CLR 336 cited

Witham v Holloway (1995) 183 CLR 525 cited

Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd and Others (2003) 201 ALR 1 cited

Adler v ASIC; Williams v ASIC (2003) 46 ACSR 504 cited

RPS v The Queen (2000) 199 CLR 620 cited

Azzopardi v The Queen (2001) 205 CLR 50 cited

Commissioner for Corporate Affairs v Bracht (1989) VR 821 cited

Griggs v Australian Securities Commission (1999) 75 SASR 307 cited

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MAXWELL JOHN REID & ORS

SAD 3009 of 2003

LANDER J

13 SEPTEMBER 2005

ADELAIDE

IN THE MATTER OF MAXWELL JOHN REID

THE COURT ORDERS THAT:

1. The first defendant be restrained from engaging in conduct that contravenes a provision of section 206A of the Corporations Act 2001 and in particular that he be restrained from doing any act that forms part of the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation.

2. The first defendant to pay the plaintiff’s costs.

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

IN THE MATTER OF MAXWELL JOHN REID

REASONS FOR JUDGMENT

1                     These proceedings were commenced on 18 December 2003. They were heard at the same time as other proceedings brought by the plaintiff against the first defendant in these proceedings for contempt (the contempt proceedings). Those contempt proceedings had been commenced on 17 November 2003. These reasons relate only to these proceedings and not to the contempt proceedings. Separate reasons have been published in the contempt proceedings.

the history

2                     The course of these proceedings has been traced in the contempt proceedings and need not be repeated in these reasons, except so far as they are directly relevant to the decision in these proceedings.

3                     In its originating process, the plaintiff sought the following orders:

‘1. An order that the first defendant be restrained from engaging in conduct that contravenes a provision of section 206A of the Corporations Act 2001 and in particular that he be restrained from doing any act that forms part of the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation.

2. Orders that each of the second, third, fourth and fifth respondents be restrained from engaging in any conduct that amounts to aiding abetting counselling or procuring a contravention of section 206A of the Corporations Act 2001 by the first respondent within the meaning of section 11.2 of the Criminal Code and in particular that they each be restrained from doing any act or engaging in conduct that expressly or implicitly authorises or permits the first respondent to take part in or have any involvement in the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation of which they are a director.

3. Such further or other orders as the Court considers appropriate.

4. Costs.’

4                     On the same day, the plaintiff issued an interlocutory application seeking interlocutory relief in the same terms as sought in the originating process. Both the originating process and the interlocutory application were supported by affidavits. The matter first came on before me on 23 December 2003. The defendants were represented and, in due course, did not oppose, although they did not consent, to orders in the following terms:

‘1. Until 5.00 pm on 17 February 2004 the first defendant be restrained from engaging in conduct that contravenes section 206A of the Corporations Act 2001 and in particular that he be restrained from doing any act that forms part of the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation which:

1.1 affects the whole, or a substantial part, of the business of the corporation on behalf of which the negotiations are undertaken; or

1.2 affects significantly the financial standing of the corporation on whose behalf the negotiations are undertaken.

2. Until 5.00 pm on 17 February 2004 each of the second, third, fourth and fifth defendants be restrained from engaging in any conduct that amounts to aiding, abetting, counselling, or procuring a contravention of section 206A of the Corporations Act 2001 by the first defendant and in particular that they each be restrained from doing any act or engaging in conduct that expressly or implicitly authorises or permits the first defendant to engage in the conduct referred to in paragraph 1.

3. This matter be adjourned to 9.00 am on 17 February 2004 for further directions.

4. Costs in the cause.

5. All parties be at liberty to apply on 48 hours’ notice.’

5                     These proceedings then tracked the contempt proceedings because they were heard together.

6                     On 8 April 2004 I made orders by consent in the nature of permanent injunctions directed to the fourth and fifth defendants:

‘1. By consent the fourth and fifth defendants are permanently restrained from engaging in any conduct that amounts to aiding, abetting, counselling, or procuring a contravention of section 206A of the Corporations Act 2001 by the first defendant and in particular that they each be restrained from doing any act or engaging in conduct that expressly or implicitly authorises or permits the first defendant to perform any act that forms part of the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation which:

1.1 affects the whole, or a substantial part, of the business of the corporation on behalf of which the negotiations are undertaken; or

1.2 affects significantly the financial standing of the corporation on whose behalf the negotiations are undertaken.’

7                     On 25 June 2004 I made permanent injunctions directed to the second and third defendants in the following terms:

‘1. By consent the second and third defendants are permanently restrained from engaging in any conduct that amounts to aiding, abetting, counselling or procuring a contravention of section 206A of the Corporations Act 2001 (Cth) by the first defendant, Maxwell John Reid, and in particular that they each be restrained from doing any act or engaging in conduct that expressly or implicitly authorises or permits the first defendant to perform any act that forms part of the negotiations with respect to or in relation to the purchase of any business, company or asset by, for and on behalf of any corporation which:

1.1 affects the whole or a substantial part of the business of the corporation on behalf of which the negotiations are taken; or

1.2 affects significantly the financial standing of the corporation on whose behalf the negotiations are undertaken.

2. The applicant has liberty to apply on 12 hours notice.

3. Adjourn sine die.’

8                     After consent orders were entered against Mr Hyland and Ms Aronsen, those defendants cooperated with the plaintiff and provided the plaintiff with affidavits upon which the plaintiff relied in these proceedings. Their evidence was significant. It gave direct insight into the first defendant’s conduct. Although Mr Reid was highly critical of the second and third defendants who had once been his friends, I have no doubt that they were both truthful witnesses who did their very best to assist the Court. I accept their evidence.

9                     Because of the orders which had been made in June 2004, the only defendant who remained interested in these proceedings was the first defendant, Mr Reid.

10                  Between December 2003 and 22 November 2004 I made a number of directions in these proceedings directing Mr Reid to file any affidavit material upon which he intended to rely at the trial. He did not comply with any of those directions. I have treated his failure to respond to those directions as irrelevant in the trial of this action. I did not restrict him in the evidence which he might call. He did not give evidence in the trial but he did call two witnesses whose evidence I will later address.

11                  As my reasons in the contempt proceedings show, there was a significant delay in these and the contempt proceedings coming to trial. I will not repeat what I said about that delay in these proceedings.

12                  The matter eventually came on for trial on 22 November 2004. Mr Reid was unrepresented at trial. Mr Reid was represented by Mr Mancini in the contempt proceedings for part of the trial after the evidence completed, but Mr Mancini had no instructions in relation to these proceedings.

STANDARD OF PROOF

13                  The standard of proof, ordinarily, in civil proceedings, is on the balance of probabilities. That standard is somewhat less than is required in criminal proceedings where the standard is proof beyond reasonable doubt. The two standards recognise degrees of probability. There is no third standard, although the law does recognise that the state of the fact finder’s satisfaction must have regard to the seriousness of the allegations made and the gravity of the consequences which might follow: Briginshaw v Briginshaw (1938) 60 CLR 336 per Dixon J at 362.

14                  The standard of proof in the contempt proceedings, whether they be categorised as civil or criminal proceedings, is proof beyond reasonable doubt: Witham v Holloway (1995) 183 CLR 525 at 534. It was put in the contempt proceedings, because I heard both matters together, I should have declared a mistrial because of the risk that I might confuse the standard of proof required in these proceedings with the standard required in the contempt proceedings.

15                  Whilst there are some additional facts in these proceedings which are not relevant in the contempt proceedings most of the facts were common to the two proceedings. It was contended I would not be able to reach a state of satisfaction on the balance of probabilities in these proceedings and then, in respect of the same facts, reach a state of satisfaction beyond reasonable doubt in the contempt proceedings. Therefore, it was submitted I should avoid any possibility of confusing myself as to the appropriate standard of proof in the two different proceedings lest I reach a conclusion in the contempt proceedings based on the lesser standard. It was put in the contempt proceedings that I should desist hearing those proceedings.

16                  There are some allegations in these proceedings which are not relevant to the contempt proceedings because they are not particularised in the Statement of Charge in those proceedings. That is probably because they were not known to the plaintiff when it brought the contempt proceedings. Indeed, some of the events occurred after the contempt proceedings were brought. Those facts must be ignored in those proceedings. However, the important allegations in these proceedings are in fact the same allegations underlying the contempt proceedings.

17                  There is some logic therefore in the suggestion that there is a risk of some confusion if I were to approach the proof of those facts in these proceedings on the balance of probabilities and proof of the same facts in the contempt proceedings beyond reasonable doubt. There could be some risk that I would not consistently apply the right standard to the right proceedings. Because the lesser standard might apply to these proceedings there is no risk of these proceedings miscarrying, but there might be some risk of the contempt proceedings miscarrying.

18                  That risk can be overcome, however, by requiring the plaintiff in these proceedings to prove its case to the same level of satisfaction as is required in the contempt proceedings. That would be fair to the first defendant. It would also avoid the risk of the Court, whether the matters were heard together or not, reaching contrary findings or conclusions in the two separate proceedings. That, of course, should be avoided.

19                  In those circumstances, in order to avoid any possible prejudice to the first defendant, I will proceed on the basis that the plaintiff must establish its case beyond reasonable doubt in both proceedings. That is no hardship on the plaintiff. It was the plaintiff which brought the separate proceedings relying upon the same facts and it was the plaintiff which urged the Court to hear the two matters concurrently.

20                  There is another reason why it is appropriate to require the plaintiff to prove its case to the higher standard in these proceedings. The plaintiff seeks an order restraining the first defendant from engaging in conduct that contravenes s 206A of the Corporations Act 2001 (Cth) (the Act).

21                  Section 206A of the Act provides:

‘206A(1) A person who is disqualified from managing corporations under this Part commits an offence if:

(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(b) they exercise the capacity to affect significantly the corporation’s financial standing; or

(c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation:

(i) knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or

(ii) intending that the directors will act in accordance with those instructions or wishes.

206A(1A) For an offence based on subsection (1), strict liability applies to the circumstance, that the person is disqualified from managing corporations under this Part.

206A(1B) It is a defence to a contravention of subsection (1) if the person had permission to manage the corporation under either section 206F or 206G and their conduct was within the terms of that permission.

206A(2) A person ceases to be a director, alternate director or a secretary of a company if:

(a) the person becomes disqualified from managing corporations under this Part; and

(b) they are not given permission to manage the corporation under section 206F or 206G.’

22                  A person will have committed an offence if he conducts himself contrary to the prescriptions in s 206A(1).

23                  Whilst these are not ‘criminal proceedings’, the allegations in these proceedings are serious and the gravity of the consequences for the first defendant is obvious. In my view, at the very least, even if these proceedings were being heard alone, the Court would need to be satisfied in the Briginshaw sense.

24                  But it would be unrealistic to treat these simply as civil proceedings rather than criminal proceedings and so apply the civil standard. As Hayne J said in Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd and Others (2003) 201 ALR 1 at [114]:

‘Arguments founded on classification of the proceedings as “civil” or “criminal” as determinative of the standard of proof, must fail. As reference to the historical matters mentioned earlier reveals, the classification proposed is, at best, unstable. It seeks to divide the litigious world into only two parts when, in truth, that world is more complex and varied than such a classification acknowledges. There are proceedings with both civil and criminal characteristics: for example, proceedings for a civil penalty under companies and trade practices legislation. The purposes of those proceedings include purposes of deterrence, and the consequences can be large and punishing.’ (Footnotes omitted.)

25                  Because any findings in these proceedings could lead to a finding that the first defendant has committed an offence, that is further reason for my proceeding upon the basis that the plaintiff must satisfy the Court beyond reasonable doubt. Such an approach would ensure that the first defendant received a transparently fair trial.

26                  Therefore, so there be no misunderstanding, I have approached these proceedings, although they are civil, on the basis that the plaintiff must establish its case beyond reasonable doubt. In fact, the plaintiff was in no way disadvantaged because the plaintiff’s case is overwhelming.

THE PLAINTIFF’S WITNESSES

27                  A schedule of the affidavits which the plaintiff read is attached to these reasons. The first defendant required all of the plaintiff’s witnesses to be presented for cross-examination and they were cross-examined by the first defendant. None of the witnesses were in the slightest bit shaken in cross-examination. In fact, in most cases, their evidence became stronger in cross-examination. I am satisfied that all of the plaintiff’s witnesses were truthful and attempting to assist me in my task. I accept their evidence. Where I recount any evidence of any of the plaintiff’s witnesses it may be taken that I have found the facts contained in their evidence. For the reasons already given, it may be taken that I am satisfied of those facts beyond reasonable doubt.

JENKINSON J’S ORDER

28                  On 10 March 1992 Jenkinson J made the following order:

‘1. The respondent Maxwell John Reid be prohibited pursuant to s 230 of the Corporations Law until 10 August 2036 from managing a corporation.’

29                  That order has not been discharged. I find that the defendant is disqualified from managing a corporation under the Act.

Australian Marble Pty Ltd and Battstone Australia Pty Ltd

30                  In support of its case in these proceedings, the plaintiff relied upon the first defendant’s conduct in relation to Battstone Australia Pty Ltd (Battstone) between 3 March 2003 and 3 June 2003 and Australian Marble Pty Ltd (Australian Marble) between 1 February 2003 and 14 July 2003.

31                  In 1964 Mr Leone Battista commenced business as a concreter and terrazzo layer. The business was carried on under the name of ‘L & R Battista’. Gradually, the focus of the business changed and, by 1982, the business was importing granite and marble which was being cut and polished. Mr Battista was joined in partnership by his son Frank in 1988 and then by his youngest son, John in 1990. When John joined the firm the partnership name was changed to ‘L & R & J & F Battista’. Leone Battista retained the responsibility for the day-to-day management of the affairs of the partnership. Frank worked in the factory. Until 2001 the business premises were at Blair Athol. In 2001 the partnership agreed to purchase the plant and equipment of W H Martin Pty Ltd and to lease its premises at 9-17 London Road, Mile End. As a consequence, Battstone was incorporated. From October 2001 it conducted the business previously carried on by the partnership. The Blair Athol property was sold and the proceeds of sale were injected into Battstone. A further $140,000 was provided by the shareholders in cash.

32                  From about the middle of 2002, Quentin Blunden acted as general manager, Alby Trosi as accountant and Gina Battista as sales manager. Leone Battista assumed the role of quoting on kitchens and vanities, purchasing materials and consumables, and supervising individual jobs. Frank remained as factory manager.

33                  In early 2003, Mr Blunden and Mr Trosi told Leone Battista that Battstone was in financial difficulties. As a consequence, in January 2003 Joseph Cecere was retained as Battstone’s external accounting adviser. At the time of his appointment it was his view that the company was insolvent. It was unable to pay its debts as and when they fell due, in particular, it could not pay a debt owing to the Australian Tax Office (ATO) or WorkCover instalments. Mr Trosi said that Battstone was financially not in a good way.

34                  Mr Hyland worked for Mr and Mrs Reid who operated a business in partnership called ‘Gemstone Exploration’. Some time during 2002, Mr Reid requested the second defendant, Mr Smith, to incorporate five companies; one of which was known as ‘Opal Sales Vic Pty Ltd’ which changed its name to ‘Australian Marble Pty Ltd’. Originally, Mr Smith was the sole director of Australian Marble but, on 6 February 2003, Mr Hyland was also appointed director at Mr Reid’s instigation.

35                  Pay Now Pty Ltd (Pay Now), a Sydney based financier was in the business of providing debt factoring facilities by purchasing a business’ debtors at a discount and thereafter recovering payment from those debtors. On or about 5 February 2003 Mr Reid contacted Pay Now seeking debt factoring facilities.

36                  Pay Now provided Mr Reid with a standard application for finance form which was completed on 7 February 2003. It is not entirely clear who completed the application form, but I accept Mr Hyland’s evidence that he did not. Further inquiry need not be undertaken. These proceedings are not about Mr Reid’s dealings with Pay Now, except to the extent that Pay Now effectively, but unknowingly, became Mr Reid’s financier.

37                  Mr Reid, Mr Hyland and Mr Smith travelled to Sydney to meet with the representatives of Pay Now on 10 February 2003. The purpose of the meeting was to acquaint Pay Now with Australian Marble’s business so that Australian Marble could obtain a debt factoring facility of $1 million. In fact, at the time of this meeting, Australian Marble had no business and had never traded.

38                  In a second meeting on 11 February 2003, Mr Reid, Mr Hyland and Mr Smith met with Mr Cunnington, managing director of Pay Now. It was Mr Cunnington’s evidence:

‘Reid was the negotiator for Australian Marble, he did most of the talking and answered my questions. He was the one with ideas and the knowledge. He was the person going through the conditions and seeing if they were fair and reasonable. He played the lead role. He talked about a previous business he operated in Coober Pedy and he talked about the sales that Australian Marble planned to make to a company called Battstone Pty Ltd (“Battstone”) and to other customers.’

39                  Pay Now agreed to provide Australian Marble with a debt factoring facility of $1 million.

40                  Mr Blunden said that in February 2003 Mr Reid, in the company of another man whose name he could not recall, met with him. Mr Blunden understood the purpose of the meeting was to discuss Battstone purchasing blocks of granite from Australian Marble.

41                  During the meeting, Mr Reid enquired of Mr Blunden whether the proprietors of Battstone would be interested in selling Battstone. Mr Reid, Mr Blunden said, wanted to meet with the owners as soon as possible to discuss the question of a sale.

42                  As I have already said, Leone Battista knew that Battstone was in financial difficulties. So also did Frank Battista. There was an immediate obligation to pay an amount in excess of $60,000 to the Australian Tax Office and to WorkCover and, at this time, they were considering borrowing that sum from a third party. Mr Blunden advised them that he had spoken to Mr Reid who had expressed an interest in buying the business. He told both Leone and Frank Battista that the company may have been trading whilst insolvent and that the business of the company had no value. A few days later, Mr Reid arrived at Battstone’s premises unannounced. Mr Blunden introduced Mr Reid to Leone Battista and later, whilst walking through the factory, to Frank Battista. Mr Reid told Leone Battista that he owned several quarries and that he had made $11 million in the previous year. Mr Reid told him that money was no problem to Mr Reid. Near the end of the meeting he told Leone and Frank Battista that he wanted to purchase the business. They told him that they would only sell half.

43                  One or two days later, Mr Reid again attended Battstone’s premises and spoke with Leone Battista. When Mr Reid arrived, Leone Battista approached him immediately and said: ‘Either 50, 50 if you want to buy half, otherwise I am not interested’.

44                  It was Mr Leone Battista’s evidence that he was not prepared to part with more than 50 per cent of the business because otherwise he would have no say in the running of the business. He thought he had spent 45 years in the business ‘so why would we give away control of it to this guy who just comes along?’.

45                  Mr Battista said that Mr Reid accepted the 50 per cent offer. No price for the 50 per cent was ever discussed. Instead, there was a discussion about Mr Reid paying all of Battstone’s debts although Mr Reid did not ask what the debts were. Mr Battista did not inform him because he thought that Mr Reid had got that information from Mr Blunden.

46                  On 3 March 2003 Mr Reid returned with a document which purported to be an agreement between Australian Marble and Battstone where Australian Marble ‘agree to enter into a contract with (Battstone) where it purchase fifty (50%) percent of the business enumerated in Recital A’. The business in Recital A was:

‘BA is the registered owner of the marble and granite business at 9-17 London Road, Mile End, Adelaide, South Australia.’

47                  Clause 2 of the agreement provided:

‘2. That the contract will be that [Australian Marble] will pay out all accounts owed by BA to date for its half share in the total business. AM will also finance purchases of imported marble and granite products required for building of [Battstone] business until [Battstone] can pay for its own purchases.’

48                  The agreement contemplated that Australian Marble and Battstone would each appoint one person to be directors of Battstone but that Australian Marble would control the management of Battstone ‘with the help of the director from Battstone’.

49                  The agreement is, of course, a nonsense. It confuses the sale of a business with the sale of shares in a company. The agreement purports to have Battstone sell 50 per cent of its business to Australian Marble in return for Australian Marble paying all of the accounts owed by Battstone. That would be a simple enough deal. However, the agreement also provides that Australian Marble will appoint a director to Battstone and control the management of Battstone. Australian Marble, at least under this agreement, did not become a shareholder of Battstone. In those circumstances, it is difficult to understand why the agreement would have provided for Australian Marble to appoint a director to Battstone.

50                  Perhaps, more importantly, it was Mr Leone Battista’s evidence that when he read this agreement he learned for the first time of the existence of Australian Marble. He said, in his evidence that he asked Mr Reid: ‘Is this the name of your company?’ and Mr Reid said: ‘Yes’.

51                  When the agreement was presented to Mr Battista it had already been signed by Australian Marble. He could not read the signature but assumed that it had been signed by Mr Reid. There was no discussion about the consideration passing. Mr Leone Battista did not raise that matter because he knew that Mr Reid was well aware that the business needed money.

52                  I find that the negotiations which led to the agreement of 3 March 2003 were conducted on behalf of Australian Marble by Mr Smith alone. I accept Mr Hyland’s evidence that Mr Hyland gave Mr Reid no instructions in relation to the negotiations, nor was he aware of the terms and conditions of the agreement reached.

53                  I find that Mr Reid was solely responsible for Australian Marble entering into the agreement of 3 March 2003.

54                  Mr Reid commenced work within one or two days of the signing of the agreement of 3 March 2003. He took up occupancy of Mr Blunden’s office who, in turn, moved into the office occupied with Mr Trosi which they then shared. Mr Blunden introduced him to the Battstone employees ‘as a new partner of Battstone’. Mr Reid requested Mr Blunden to explain to him how Battstone operated and who performed what tasks.

55                  Mr Blunden said in his evidence:

‘(a) Reid told me that although he was not a director of Australian Marble Pty Ltd all instructions would come from him and that I was not to consult with the directors of Australian Marble whom he identified to me as Joy Aronsen and Noel Smith;

(b) I was not to concern myself with the accounting and that Alby Trosi would forthwith report directly to Reid.’

56                  Mr Blunden’s evidence was that he was told by Mr Reid that Joy Aronsen would be taking over Gina Battista’s job as receptionist and typist and that Mr Noel Smith and Greg Hyland would be undertaking maintenance work.

57                  Mr Hyland said that when he started work at Battstone he was sent to the factory by Mr Reid to look after the maintenance side of things. He said, and I find, that he had nothing to do with the management of Battstone during the period in which he was involved. He had nothing to do with any decision-making involving hiring or firing of staff in relation to the company’s finances.

58                  Mr Hyland said that when he commenced work Mr and Mrs Smith had already commenced work. Mr Smith was mainly doing construction and maintenance type work, and Mrs Smith was working as a cleaner.

59                  Mr Blunden said in paragraph 34 of his affidavit:

‘I also recall that soon after he started he explained to me that he, Craig Hyland and Noel Smith and their partners had several companies and that they shared costs and directorships, usually with the company having one of the mates and another mate’s partner as directors. Whilst it was never stated directly to me, I took this explanation as the reason why Reid was not a director of Australian Marble.’

60                  Within a few days of commencing, Mr Reid requested Mr Frank Battista to sign an invoice from Australian Marble to Battstone for materials supplied to Battstone by Australian Marble. Mr Battista initially refused to sign the invoice because no marble had been delivered. However, he was told by Mr Reid that if anyone did ask where the marble was he should tell them that it was for the blocks of Coober Pedy granite stored at the factory. These invoices were subsequently faxed to Pay Now and the ‘debts’ factored.

61                  Mr Peter Martin, who was Battstone’s landlord, attended Battstone’s premises in March 2003 when he met Mr Reid for the first time. Mr Martin’s evidence was that Mr Reid introduced himself to him and, during the conversation, said: ‘I have been banned from running a company but really I run it. I just can’t say that I run it. I am a salesman here’. Mr Martin said that Mr Reid told him that he (Mr Reid) was the person to be contacted for rent in the future. Mr Martin had a number of subsequent contacts with Mr Reid when he attempted to collect the rent. The rent was often late and Mr Reid would offer excuses as to why a cheque could not be given on a particular day.

62                  Shortly after Mr Reid commenced, he gave Mr Blunden a document entitled ‘QUENTIN THINGS TO BE DONE AS SOON AS POSSIBLE:’. I set that document out because it indicates the degree of control which was being exercised by Mr Reid:

‘1. Please change locks today on all doors and gates, office doors to be different to the rest.

2. I want a meeting with all factory staff excluding Battista’s as soon as possible.

3. Alby is to be shifted out to back office to work with Edna, you may require a new desk for one of them.

4. Maybe the desk beside the round table in back room can replace the one in Eric’s office, the one that John was using, the computer in back room can be shifted onto that table.

5. You can keep your place where you are and the new salesperson can table [sic] Alby’s place.

6. At present I want to use the one I am using.

7. Full concentration needs to be placed on finishing jobs that are unfinished and not paid for, and concentrate heavily on getting more kitchens out and paid for.

8. We need to have Frank work on making kitchens full time along with who can help him, there is no excuses for Frank to not be working on kitchens.

9. Maybe Scotty can look after the saws as well as doing his own job.

10. It is important now to introduce job cards.

11. We need to sit down with Frank, Johnny and Vince to discuss their pay and conditions; this has to be done once I have given Alby the form 304 to be handed into the ASIC.

12. The Battista’s can use a truck to go home but only for this week.

13. There is to be no keys given to the Battista’s.

14. Craig and Noel is to remove all the junk that they have been working on then they can go on cleaning rubbish away.

15. Quentin we need urgently a temporary shed not too far away, to put all good rubbish that is to be sold into it, then we will have a garage sale.

16. I suggest that we use Craig to go and buy a vehicle for Leone to use both at work and to go home.

17. Mother does not do the cleaning anymore, at present Barbara is to be used to clean the offices say three times per week, I have told her that she is not to remove or clean the office desks.’

63                  First, it demonstrates that Mr Reid exercised power over the general manager, Mr Blunden. Secondly, paragraphs 14 and 16 of the document shows the power which Mr Reid exercised over the directors of Australian Marble.

64                  Mr Trosi went overseas in February 2003 and returned to work some time in March 2003 when he learned from a conversation with Mr Blunden and Mr Reid that Australian Marble had taken a 50 per cent interest in Battstone. He knew that Mr Reid was not a director. However, he said that Mr Reid was clearly ‘the boss’ and appeared to make all the decisions on the running of Battstone. He observed that Mr Reid instructed staff as to their duties; chaired production meetings which set the order of production; negotiated with suppliers for the ordering of goods; negotiated with potential customers; collected payments from any substantial debtors which would have been greater than $10,000; interviewed and employed staff including determining their pay and conditions; and dealt with the bank, financiers and with creditors.

65                  On his return to work, Mr Trosi began reporting solely to Mr Reid. Previously, he had reported either to Leone or Frank Battista, or Mr Blunden.

66                  Whilst it was Mr Trosi’s understanding that Ms Arosen and Mr Smith were the directors of Battstone, he did not ever observe them performing any of the duties that he would have considered to be those of a director. He did not see them instruct staff as to their duties; chair any meetings; negotiate with suppliers for the ordering of goods; interview or employ staff; or deal with the bank or financiers.

67                  Mr Reid was the only person who ever asked him to provide any financial information after March 2003. The directors never sought financial information from him about the company.

68                  On 27 March 2003 Mr Blunden was told by Mr Trosi that the company had insufficient funds to meet the employees’ wages. Mr Reid met with Mr Frank Battista and then called Mr Blunden and Mr Trosi into his office. Mr Reid told Mr Blunden and Mr Trosi that there was not enough money to pay wages because Mr Frank Battista had failed to complete certain jobs and, as a result, Battstone had not been paid for them. He requested Mr Blunden and Mr Trosi to organise the employees to meet in the lunch room without the attendance of any of the Battista family. Mr Reid told Mr Blunden and Mr Trosi that he was going to send the men home after telling them that there was no money to pay their wages. However, he would see that they were paid for the day. He said that Mr Blunden and Mr Trosi’s jobs were secure and that they were the key people. He told them it was his intention ‘to buy’ the company and have total control. A meeting with the workers did take place in the lunch room. Mr Reid sent the Battstone staff home.

69                  On the same day, Mr Blunden telephoned Mr Cecere and asked him to attend the company’s premises urgently. Mr Blunden told him of the 50/50 agreement with Australian Marble and that Mr Reid had sent the Battstone employees home. Mr Cecere then met with Mr Leone and Frank Battista. He was shown the agreement of 3 March 2003. He telephoned Mr Reid and was told by Mr Reid ‘that he refused to deal with the Battistas and that Australian Marble wanted 100 per cent control of Battstone’.

70                  The next day, a meeting took place at Battstone’s premises. Present were Leone, Frank and John Battista, Mr Cecere, Mr Trosi, Mr Reid and Mr Noel Smith. Mr Hyland said that he did not attend the meeting because he had been instructed by Mr Reid not to do so. Mr Reid told Mr Hyland that he should stay away in case Mr Reid needed to say that he had to consult with him. Mr Smith was introduced as an associate of Mr Reid’s. During the meeting, Mr Reid said words to the effect ‘that he wanted 100 per cent control over the shareholdings and directorships’. During the meeting, Mr Leone Battista put to Mr Reid that in addition to the payment of all of the Battstone debts he wanted to have his $125,000 loan to Battstone repaid and the $350,000 the partnership put into Battstone also repaid. Mr Reid refused. Mr Reid said that the Battistas had until the end of the day to make up their mind whether to accept his offer. Mr Cecere said in his evidence that Mr Smith did not contribute anything at the meeting. Mr Cecere’s evidence was that Mr Reid did not consult with Mr Smith during the meeting or consult with any other person during the meeting.

71                  After Mr Smith left the meeting, Mr Cecere spoke to Mr Leone Battista and his two sons. He was told that their primary concern was their personal debts. He told them that the company would have to be put into voluntary administration or a deal made with Mr Reid. The Battistas said that they wanted their personal debts paid off and $50,000 cash, and they authorised Mr Cecere to ring Mr Reid with that proposal.

72                  Mr Cecere rang Mr Reid on his mobile telephone and put the offer which he had been instructed to put by the Battistas. Mr Reid said that he would agree to pay Mr Leone Battista’s personal debts but he would not pay the $50,000 cash requested. Mr Cecere’s evidence was that Mr Reid did not consult with anyone before he put that further counter-offer. Later that day, Mr Cecere rang Mr Reid asking whether Mr Reid would leave the offer open until Mr Leone Battista had had an opportunity to speak to his wife. Mr Reid refused and required an answer that day. Mr Reid’s counter-offer was accepted.

73                  On the same day, WorkCover commenced winding-up proceedings against Battstone. Mr Trosi found the advertisement for those proceedings in ‘The Advertiser’. He was surprised because when he had returned from holidays and met Mr Reid he presented the WorkCover file to Mr Reid. That file included a proposal that the WorkCover levies be paid over a period of 12 months.

74                  On 1 April 2003 a document entitled ‘Conditions of Intent to Purchase’ was executed which purportedly reflected the agreement reached on 28 March 2003. The parties were again Australian Marble and Battstone. The document identified the purpose of the agreement, which was for Australian Marble to acquire all of the shares in Battstone and for the current directors to resign and for the directors of Australian Marble to be appointed. Australian Marble was to assume all liabilities secured, unsecured and contingent of Battstone excluding any liability to the Battista family or to the partnership. The liabilities were estimated at approximately $125,000.

75                  The agreement was executed on behalf of Battstone by Mr Leone Battista and Mr Frank Battista, and on behalf of Australian Marble by Mr Smith and Mr Hyland who were the directors of that company. It was Mr Hyland’s evidence that he was not involved in the negotiations leading up to the agreement but signed the agreement because Mr Reid asked him to do so.

76                  Some time after the preparation and execution of the ‘Conditions of Intent to Purchase’ and before a final Deed of Agreement was executed on 17 April 2003, Mr Reid provided Mr Trosi with a document entitled ‘ALBY THINGS TO BE DONE AS SOON AS POSSIBLE:’. It is worthwhile setting out that document to show the degree of control that Mr Reid exercised over the Battstone employees, even before the final Deed of Agreement was executed whereby Australian Marble became entitled to all of the shareholding in Battstone:

‘1. Change power and water over to Australian Marble Pty Ltd (immediately before they cut the services off)

2. Please try and get share transfer forms.

3. Hand form 304 into ASIC today.

4. Work-cover to be setup under Australian Marble, this has not been setup as yet.

5. New superannuation to be under Australian Marble as of today, this has not been setup.

6. Please take Joy, Noel and Leone to bank to get the signatures changed on cheque book. Leone will have to have Joy and Noel added as signatures (either one to sign) Leone must take all other signature off including himself. Alby you better take a copy of signed form 304 with you to the bank.

7. Telstra to be changed over to Australian Marble.

8. I am getting an agent in to take over the organisation and payment of all past accounts so they will require a list of creditors and addresses.

9. All invoices are to be sent out under Battstone Australia and funds are to be banked in Battstone account and then transferred over to Australian Marble, but leave enough in Battstone account to pay monthly rent and bank transfers for payments.

10. All sales including other state offices that are being set up will be set up under the Battstone name.

11. All purchases will be made under Australian Marble; all staff is to be paid under Australian Marble along with all bills.

12. All Shell cards are to be collected or cancelled if they can not be collected.

13. Battstone mail is to be redirected from it’s [sic] present P O Box to P O BOX 186 Salisbury South, South Australia 5106.’

77                  On 1 April 2003 the Battistas resigned as directors of Battstone. They were replaced by Mr Smith’s wife, Barbara Smith and Ms Aronsen who was Mr Hyland’s partner.

78                  Mr Frank Battista said that shortly after the document was executed Mr Reid called a meeting of the staff. He said:

‘Reid introduced himself to everyone at the meeting and said words to the effect that Australian Marble was merging with Battstone. Reid said words to the effect, “I am your new boss and I am in charge. From now on you listen to me, not to Frank or Leone. If you have something to say you say it to me”. Reid told the meeting that there were going to be major changes, that new equipment would be brought in and plenty of material as well.’

79                  Mr Eliseo, the State Manager of Castle Tools Tyrolit Pty Ltd (Castle Tools) attended Battstone’s premises shortly after 1 April 2003 and spoke to Mr Reid. Mr Eliseo said that Mr Reid told him that he was the man in charge and that he represented Australian Marble, and it was taking over Battstone. Mr Reid offered a verbal guarantee that Australian Marble would pay Battstone’s debt.

80                  Mr Roger Metcalf of Gosford Quarries (Vic) Pty Ltd (Gosford Quarries) discussed with Mr Reid the purchase of blocks of granite. During that conversation, Mr Reid also said words to the effect that a new entity Australian Marble had been formed over which he had full control.

81                  Ms Aronsen said that on or about 8 April Mr Reid met with a chartered accountant, Maris Rudaks and instructed him in relation to negotiating with Battstone’s creditors.

82                  On 17 April 2003 a Deed of Agreement was executed evidencing the purchase by Australian Marble of all of the shareholding of Battstone from the Battistas. It was prepared by solicitors instructed by Mr Trosi.

83                  In my opinion, that Deed of Agreement, like the earlier agreement, confuses the sale of a business and the sale of shares. The Recital to the Deed of Agreement states:

‘The parties are desirous of entering into an agreement for the transfer from Battstone and Leone and Francesco, of the one part, to Marble, of the other, of all of their right, title and interest in any and all of the assets and liabilities of Battstone.

The intent of this agreement is to allow Marble to take over the ownership and management of Battstone and for the resignation of the current directors of Battstone, namely Leone and Francesco and for the release from all liabilities of Leone and Francesco.’

84                  In the end, nothing much turns on the way in which the transaction was constructed. However, it is an unusual agreement.

85                  Mr Trosi said that following upon the sale of Battstone’s interest in the business to Australian Marble, his role changed. A number of his responsibilities were taken over by Mr Reid’s wife, Mrs Edna Reid. On 21 April 2003 Mr Trosi wrote to Mr Reid expressing his concerns about Mr Trosi’s continued role in Battstone. He also questioned to whom he was responsible. He never received a reply.

86                  On or about 23 April 2003 Mr Reid presented Mr Blunden with a document entitled ‘QUENTIN JOB DESCRIPTION AS OF 23/04/03:’. It has to be remembered that Mr Blunden was ostensibly the general manager at the time and he was receiving instructions from Mr Reid. The document identified the tasks Mr Blunden was to perform:

‘1. SALES ON BOTH MONUMENTAL AND KITCHENS.

2. QUOTES ON BOTH MONUMENTAL AND KITCHENS, THESE ARE TO BE KEPT UP TO DATE DAILY.

3. ALBY TO CHECK EVERY QUOTE BEFORE IT IS SENT TO CLIENT.

4. RESPONSIBLE FOR ORDERING PARTS, MAINTENANCE OF EQUIPMENT ETC.

5. ALL PHONE MESSAGES ARE TO BE DEALT WITH IMMEDIATELY.

6. OVERSEE MONUMENTAL JOBS IN CONJUNCTION WITH MICK.

7. ORDERING OF BLOCKS AND SLABS AFTER LIAISING WITH MAX.

8. TO ATTEND A MEETING ON THE FIRST WORKING DAY OF EVERY WEEK AT 7AM WITH ALBY, JASON, MICK, JOHN AND MAX, TO REPORT ON SALES AND PREVIOUS WEEKS JOBS AND PERFORMANCES.

9. TO MAKE SURE THAT OUR ACCOUNTS DEPARTMENT HAS THE CORRECT INFORMATION ON JOBS SO THAT THEY CAN BE BOOKED OUT WITH DISPATCH OF GOODS.

10. OVERSEE THE WHOLE OPERATIONS OF BATTSTONE IN MAX’S ABSENCE BUT AFTER LIAISING WITH MAX.

NOT YOUR RESPONSIBILITY ANYMORE:

1. ADMINISTRATION OF THE BUSINES.

2. ACCOUNT PAYABLE OR RECEIVABLE.

3. NO CONNECTION WITH PETER MARTIN REGARDING THIS BUSINESS OR HIS RENT.

4. NO PASSING THINGS ONTO JOY OR GINA TO DO.

5. BOTH JASON AND MICK ARE TO ORGANISE THEIR OWN WEEK AFTER THE MEETINGS ON THE FIRST WORKING DAY OF EVERY WEEK.’

87                  Mr Craghan first met Mr Reid in about April 2003 when Mr Blunden and Mr Reid visited his workplace at Marble House of Australia. Mr Blunden introduced Mr Reid to Mr Craghan. He was also introduced to the other four defendants to these proceedings. The next Saturday Mr Craghan noticed there was an advertisement in the Adelaide ‘Advertiser’ for two jobs at Battstone and he applied for the job of sales coordinator. His first interview was with Mr Blunden.

88                  On Easter Thursday he was asked whether he could meet with Mr Reid for an interview. He was interviewed that afternoon for about an hour by Mr Reid and was offered the job of sales coordinator with a salary of $50,000 a year. He accepted that position on Easter Saturday. He commenced on 1 May 2003. Although his job was to report to Mr Blunden, he said that Mr Reid was clearly ‘Quentin’s boss’. Mr Reid chaired a weekly 8.00am production meeting each Monday which set out the production for the week ahead. Mr Reid met the key customers and suppliers when they visited the premises. On the other hand, he said the other four defendants seemed to sit around a lot and have lunch together. Mr Craghan never saw Mr Hyland or Mr Smith give any instruction to Mr Reid whatsoever. On the other hand, he did see Mr Reid give instruction to Ms Aronsen who, of course, was apparently a director of Battstone.

89                  In April and May 2003, Mr Reid made a number of approaches to Mr Martin (the landlord) to transfer the lease into the names of the new directors. Mr Martin refused because he understood that the sale of Battstone to Australian Marble had not been completed.

90                  On 20 May 2003 Mr Reid met with Paul Borgensen, who was the proprietor of ACE Granite. Mr Borgensen’s evidence was:

‘Early in the conversation I asked him, “So, is Australian Marble just your business?” Reid said, “There are three of us, me, Craig and Noel”. I cannot recall the surnames of either Craig or Noel. Whilst I cannot precisely recall the words spoken Reid said either “we are partners” or “we are in partnership”.’

91                  Mr Reid was asked: ‘What happened to the Battistas?’ and he replied: ‘their time was up there and he was going to take over the business’.

92                  Mr Borgensen said that Mr Reid also said during the conversation that ‘we own quarries in Western Australia’; ‘we are in the process of setting up a supply line to get granite blocks to Adelaide for processing’; and ‘our goal is to sell a lot of granite overseas’.

93                  ACE Granite agreed to be a supplier of granite to Australian Marble. However, in June 2003, a cheque which was proffered by Australian Marble was dishonoured and payment was never made although Mr Reid told Mr Borgensen that he did not know why it was dishonoured and that he would ‘get it taken care of’.

94                  On 22 May 2003 Mr Reid terminated Mr Blunden’s employment and, in doing so, handed him a letter under the heading of Australian Marble and written by Mr Reid. In that letter he wrote:

‘It has come to our attention over the past few weeks that you cannot cope with your position here at Australian Marble Pty Ltd …

Under the circumstances we have no alternative but to terminate your employment with the above company immediately.

Regards

Max Reid.’

95                  The next day he told Mr Craghan that he had ‘sacked [Blunden] last night’. He also told Mr Metcalf of Gosford Quarries that he had sacked Mr Blunden.

96                  On 3 June 2003 an order was made for the winding up of Battstone and Mr Anthony Broome was appointed liquidator. Between the date of his appointment and 19 June, Mr Broome attempted to obtain information as to the assets and liabilities of Battstone. It was not clear to him what assets were owned by Battstone or Australian Marble, or which of those companies had incurred particular liabilities. Mr Broome’s evidence was that Mr Reid provided some information to him.

97                  On 19 June 2003 Mr Reid met with a solicitor, Mr Neate of Lynch & Meyer Solicitors and advised him that he was a silent partner in Australian Marble. He provided Mr Neate with a letter signed by Mr Hyland authorising Mr Reid to speak on behalf of the company. Mr Reid sought advice regarding Australian Marble’s dealing with Battstone’s liquidator.

98                  Later, Mr Reid prepared a letter which Mr Hyland signed which was sent to Mr Neate. On 23 June 2003 Mr Neate, Mr Hyland and counsel met to discuss a possible claim by Australian Marble to set aside the acquisition of Battstone. Although Mr Hyland was present, it was Mr Reid who answered most of the solicitor’s questions.

99                  On 24 June 2003 Mr Reid wrote to the solicitor setting out in detail Mr Reid’s role in the negotiations with the Battistas. I set out the contents of that letter:

‘Further to our discussions yesterday afternoon re: Battstone and the liquidator and the breach of contract.

1. On the 26/02/03 at 1.30pm I met with Quenten [sic] Blunden at Battstone premises at 9-17 London Rd to ask if they would be interested in doing some cutting and polishing of granite for us from our own quarry because Australian Marble had it’s own customers. He advised me that Battstone should go into liquidation because it couldn’t pay it’s creditors and he asked if we would be interested in buying it out if the Battista’s would sell it. I said that we are always interested in talking about these things and he asked if I would be interested in talking to Leone Battista one of the directors who was away from work because he had had a slight stroke. Quenten [sic] made an appointment for me to be at the factory the next morning at 8am.

2. On the 27/02/03 I had a meeting with Leone Battista and his general manager Quenten [sic] Blunden at 8.00am at Battstone premises at 9-17 London Rd. One of the first things Leone said to me was do you understand that things take along [sic] time to do in the stone industry and a year goes by before you know where you are. At this meeting Quenten [sic] explained to Leone that he Leone needed to take in a partner to survive or sell out. Leone said that he would speak to his family and get back to me. Later that day Quenten [sic] phoned me and set up a meeting again for the 28/02/03 at 8.30am at Battstone premises.

3. At this meeting with Leone and Quenten [sic], they explained to me that they needed to do something about a partnership because Battstone could no longer survive without an injection of cash and Leone asked if we would be interested in talking with his family and I of course said yes. Later this day Edna my wife and I left for Coober Pedy and we had a phone call from Quenten [sic] Blunden the general Manager asking me when would we be coming back to Adelaide which I told him that we can come back anytime and so we agreed to a meeting with the Battista family on the Sunday 02/03/03 at 10.00am at the Battstone premises.

4. Myself, Noel Smith one of the directors of Australian Marble, Quenten Blunden the general manager for Battstone, Leone Battista and Frank Battista the two directors of Battstone attended this meeting. At this meeting the Battista’s [sic] pointed out that they required Australian Marble to take over paying the debts of Battstone and put in stock so that Battstone could operate this would in turn be for a half share in Battstone. All agreed and it was decided that an agreement would be put in place so that work could go on.

5. An agreement was signed by both parties the next day 03/03/03 at 5.30pm.

6. On the 27/03/03 at 11.30am after explaining to all the staff that they were not going to get paid because the Battista’s [sic] had not produced any kitchens for a week and after having a meeting with Frank Battista at 8.45am over money for wages and a meeting with the directors of Australian Marble, Australian Marble walked out of Battstone because nothing had changed to the way Battista’s [sic] had run Battstone. We received a phone call from Quenten [sic] Blunden later in the day asking if we would come to a meeting at Battstone premises the next morning at 8.30am and we agreed.

7. Myself, Noel Smith, Quenten [sic] Blunden, Leone, Frank and John Battista, Albi, Battstones internal accountant and Battstones external accountant Joe Cecere, attended this meeting. Joe Cecere done [sic] most of the talking for the Battista’s but an agreement couldn’t be reached over a total purchase of Battstone by Australian Marble because the Battista’s [sic] did not want to sell out completely, so Noel and I left the meeting and we took our computer equipment with us never to return again.

8. At 11.30am the same day 28/03/03 we received a phone call from Joe Cecere asking if we would reconsider a total purchase of Battstone and I asked him why and he told me that a friend of the Battista’s [sic] had been into Battstone office and told Battista’s [sic] that Battstone had a wind-up order placed on it and he said that it would be in our best interest if we came back. All the same people attended as earlier on in the day, it was agreed that Australian Marble would assign the lease on the building, pay out all the debts of Battstone and have all the equipment leases assigned to Australian Marble, it was agreed by all that everything else in the factor such as trucks, equipment, tools, a fork lift and some old stock that L&R Battista partnership owned and moved over to the Battstone premises when they shifted from Blair Athol would remain and we agreed to pay the Battista’s [sic] $125,000.00 for those. The Battista’s [sic] also agreed to pass over to Australian Marble an insurance claim for $20,000.00 which they had claimed from QBE for tools that had been stolen from their Blair Athol workshop some two years prior. The Battista’s [sic] and their external accountant told us that there was an $80,000.00 debt outstanding from a Mr Gaucci for work done by Battstone that we could collect. The Battista’s [sic] and their external accountant also told us that any work in progress would remain with Australian Marble; it was Australian Marble stock anyway. The Battista’s [sic] and their external accountant also told us that Australian Marble could collect any outstanding debts.

9. Joe Cecere Battstones external accountant put in place an interim contract until a solicitor could draw up a proper contract; a proper contract was eventually signed.

10. We eventually went to visit Mr Gaucci and to try and collect the $80,000.00 and to be told by Mr Gaucci solicitor that the work had in fact been carried out under the L&R Partnership and not Battstone and that his client was not going to pay.

11. The insurance cheque eventually arrived written out on the 02/06/03 to Battstone so the liquidator has taken control of that, this was a claim under L&R Battista Partnership but some how the cheque had been written out to Battstone, we assume because the general manager and the internal accountant had written to the insurance company on numerous occasions on Battstone letter head.

12. The Battista’s [sic] started taking tools, old stock and plant from the premises at 9-17 London Road, Mile End on the 05/04/03 at 10am, they took more plant and tools on the 06/04/03 at 9am. The next day 07/04/03 we engaged a security firm to secure the premises at all times and we changed the locks.

James we hope that this is enough information but please contact us if you require more.’

The letter corroborates the evidence of the plaintiff’s witnesses. It indicates Mr Reid’s involvement in Australian Marble’s acquisition of Battstone.

100               On 30 June 2003 Mr Neate spoke to Mr Reid and, during that conversation said: ‘In my view, they are potentially assisting a further contempt with the orders in allowing (you) to remain in the management of the company’. Mr Neate told Mr Reid that he would need to clarify these matters with the directors. Mr Reid told Mr Neate that he thought it likely that they would simply refer Mr Neate back to Mr Reid for instructions.

101               On 10 July 2003 Mr Neate wrote to the directors of Australian Marble regarding his concern about Mr Reid’s involvement in the management of the company. He wrote:

‘I refer to my long telephone conversation with Mr Hyland of 30^th June 2003 and write to clarify the terms of retainer arrangements for providing instructions to this firm in respect of this matter.

I note that these issues have arisen because it has come to our attention that Maxwell John Reid, an undischarged bankrupt, has also been convicted of various Corporations Law offences. Importantly and of more concern is that the directors may be allowing Mr Reid to play an active role in the management of the company. The directors should be aware that in February 2002 Mr Reid was sentenced to 12 months imprisonment, suspended for two years on condition that he have no involvement in directing, managing or administering a company. These orders arose following guilty pleas entered by Mr Reid in respect of breaches of an order of the Federal Court made on 10^th March 1992 which prohibited Mr Reid from managing a corporation until the year 2036.

We understand from our discussions with Mr Hyland that these matters are all known to the directors of the company. While these are ultimately matters for the directors of the company to consider and factor into the extent of any authority given to Mr Reid, we are nevertheless obliged to warn the company, via you its directors, that Mr Reid’s current involvement in the management of the business of the company may be sufficient to amount to further breach of his current sentence conditions.

It is therefore our recommendation that the directors structure affairs so that Mr Reid has no involvement in the administration of company matters and a much more limited role, if any, in the management of the business.

In order that there be no uncertainty, we are obliged to insist that our instructions are from the directors of the company. If you wish to discuss any of the matters we have raised in this letter then please do not hesitate to contact us.’

102               On 14 July 2003 Mr Broome was appointed provisional liquidator of Australian Marble. At or about the same time, Pay Now appointed receivers to Australian Marble.

103               On 17 July 2003 the employees of Battstone and Australian Marble met at Vili’s Café where Mr Reid told them that they were ‘working on a proposal to be back operating by the middle of next week’. A further meeting of employees took place the next day which Mr Reid again addressed.

104               On 26 August 2003 Mr Reid produced a letter dated 2 June 2003 from Mr Hyland to Mr Reid which included a statement that ‘your services are required for the position of export sales and mining’. The date of that letter was false. The letter was created by Mr Reid immediately prior to the other four defendants being examined by the plaintiff.

COTTAGE MEATS

105               Mr Nicholas Gyss is a director of Korda Mentha (SA & NT) which is an accounting firm specialising in corporate recovery, corporate advisory and real estate services.

106               On 8 October 2003 he and Mr Christopher Powell were appointed joint administrators of Cottage Meats Pty Ltd (Cottage Meats).

107               On 11 October 2003 Mr Gyss placed an advertisement in ‘The Advertiser’ newspaper seeking expressions of interest to purchase the business and assets of Cottage Meats. On 13 October 2003 he received a telephone call from a person who identified himself as ‘Max Reid’ who advised him that he was interested in acquiring the business and assets of Cottage Meats.

108               On 14 October 2003 Mr Gyss met with Mr Reid in his offices. During his oral evidence, Mr Gyss identified the first defendant as the person he met. He provided Mr Reid with details of the company’s assets and its businesses. Mr Reid told him that he was involved with a group of investors who were interested in the business of Cottage Meats. On 16 October 2003 there was a further meeting between Mr Gyss and Mr Reid in Mr Gyss’ offices when they discussed terms and conditions of an offer. On 17 October 2003 sent an e-mail to Mr Gyss making an offer to purchase that company. Mr Reid’s e-mail address was ‘miniracing@iprimus.com.au’.

109               I set out the offer:

‘1. The following offer is made on behalf of others & myself.

2. Purchase Price: nine hundred and fifty ($950,000.00) thousand dollars W.I.W.O.

3. Included in our offer is the whole property at 110 Fletcher Road, all plant, equipment & office equipment.

4. The above price includes any goodwill that may apply, business name (Cottage Meats) phone & fax numbers.

5. Upon this offer being accepted by you then we will give you one of our company names as the purchaser.

6. Deposit of fifty thousand ($50,000.00) paid to you on or before the 11/11/2003.’

110               On the same day, Mr Gyss replied to that offer summarising what he understood Mr Reid’s offer to be.

111               On 21 October 2003 Mr Gyss received a further e-mail from Mr Reid in which he said that the offer was acceptable to him subject to the deposit to be paid, being $10,000 on acceptance of the offer.

112               The e-mail completed:

‘Our solicitor is Nigel Winter & Associates, of Adelaide, we have notified him this morning of what is going on.’

113               On 31 October 2003 Mr Gyss received a draft Deed of Company Arrangement (DOCA) as a proposal for Cottage Meats from Nigel Winter & Associates. The DOCA identified the intended purchaser of Cottage Meats’ business and assets as International Meats Pty Ltd (International Meats) as trustee of the International Meats Discretionary Trust c/o Nigel Winter & Associates. The DOCA contemplated that International Meats would enter into possession of Cottage Meats’ business and assets after payment of a small deposit and before an extended settlement.

114               On 3 November 2003 a meeting was held at the offices of Nigel Winter & Associates, solicitors to discuss the proposed Deed of Company Arrangement for Cottage Meats. Present at that meeting, apart from Mr Nigel Winter, were Mr Gyss, Mr Reid, Mr Hyland and Mr Smith. Although present, Mr Hyland and Mr Smith did not participate in the meeting by saying anything.

115               Mr Gyss subsequently obtained an historical company extract in relation to International Meats which showed the company was incorporated on 3 November 2003 and its directors were Mr Smith and Mr Hyland. He carried out searches in relation to Mr Smith and Mr Hyland and ascertained that they were both directors of two companies which were subject to external administration. In telephone discussions with those external administrators, he was advised that Mr Reid had been banned from acting as a company director for 44 years.

116               On 10 November 2003 Mr Gyss received a letter from Nigel Winter & Associates advising that his clients were not in a position to satisfy the administrator’s requirement that all funds be paid prior to possession and control of the company.

RMS STONE

117               Mr Geoffrey Buchanan is a director of Corporate Business Brokers Pty Ltd (Corporate Business Brokers). RMS Natural Stone & Ceramics Pty Ltd (RMS Stone) was a client of Corporate Business Brokers and was engaged by a director of that company to offer RMS Stone for sale as a going concern.

118               On 11 November 2003 Mr Buchanan arranged for an advertisement to be included in the ‘Australian Financial Review’ which identified the business for sale as a stone importer; an importer of marble, granite, travertine and limestone; with sales revenue around $7 million; and with good leased premises on the East Coast.

119               On 11 November 2003 he spoke to a man on the telephone who said that his name was ‘Max Reid’ and he was interested in an advertisement placed in the Financial Review. Mr Buchanan gave some financial details to Mr Reid and then asked his interest. He said that Mr Reid responded with words to the effect of:

‘I have slabs of black granite in Western Australia and I need an outlet for the slabs on the East Coast.’

120               Mr Buchanan told Mr Reid that he would need to have a non-disclosure agreement signed before Mr Buchanan could divulge any further information about the business. Mr Reid provided him with contact details being, Adelaide Granites Pty Ltd (Adelaide Granites). Adelaide Granites was incorporated on 27 May 2002 under the name ‘Gem Marketers SA Pty Ltd’. David Hyland was its director. Ms Aronsen and Mrs Barbara Smith became directors on 24 March 2003. It changed its name on 29 April 2003. Mr Reid also gave Mr Buchanan a contact e-mail address ‘miniracing@iprimus.com.au’. That is the same e-mail address from which Mr Gyss received correspondence in relation to Cottage Meats. Mr Buchanan sent Mr Reid a non-disclosure agreement which was signed by Mr Reid on 11 November 2003 and returned to Mr Buchanan on 12 November 2003.

121               On the same day, Mr Reid telephoned Mr Buchanan and advised him that he was keen to get information about the business as soon as it was available. Mr Buchanan provided him with some further financial information and said that he would forward an information memorandum when the client had approved it, but that he expected that would take some 10 days.

122               Mr Reid telephoned again on 18 November 2003 enquiring as to the whereabouts of that information memorandum. At that time, Mr Reid told Mr Buchanan that he was applying for overseas funding for the purchase of RMS Stone. Mr Reid telephoned again on 25 November 2003 and said that he was keen to proceed with the purchase.

123               On 28 November 2003 Mr Buchanan forwarded an information memorandum to Mr Reid. On 5 December 2003 Mr Reid telephoned and said that he would look at the information over the weekend and put an offer on the Monday.

124               On Monday, 8 December 2003 Mr Buchanan received an offer via e-mail on the letterhead of Adelaide Granites to purchase RMS Stone for $2.4 million plus stock at valuation. Mr Buchanan said the stock had an estimated value of $4 million which was known to Mr Reid from an earlier conversation.

125               Mr Buchanan telephoned Mr Reid on 8 December 2003 to discuss the offer and to ensure that he understood the terms of it. During that conversation, in response to a question from Mr Buchanan as to why he was funding offshore, Mr Reid said:

‘I am also buying a granite business in Queensland, and that the total borrowing required was $US50 million to fund both purchases plus the cost of installing a treatment plant, using German equipment, to cut and polish his slab product. No-one in Australia would advance that amount of money.’

126               The amount of the deposit was discussed.

127               On Wednesday, 10 December 2003 Mr Reid telephoned again. Mr Buchanan told him that his client would accept his offer but was reluctant to allow the purchaser to operate the business as was proposed in Mr Reid’s offer before receiving full payment for that business.

128               On 11 December 2003 Mr Buchanan sent an offer to Mr Reid which did not allow for the purchaser to conduct the business prior to full payment of the purchase price. Mr Buchanan has not received a reply.

THE FIRST RESPONDENT’S EVIDENCE

129               Mr Reid did not give evidence. Although perhaps it may have been open, I have raised no inferences from Mr Reid’s absence from the witness box: Adler v ASIC; Williams v ASIC (2003) 46 ACSR 504. In my opinion, because this matter was heard at the same time as the contempt proceedings, it would be fairer to treat the absence of the first defendant from the witness box as no evidence against him: RPS v The Queen (2000) 199 CLR 620; Azzopardi v The Queen (2001) 205 CLR 50.

130               Mr Reid did call Mr Winter in relation to the dealings with Mr Gyss in relation to Cottage Meats. Mr Winter’s evidence was of no assistance to Mr Reid. In cross-examination, he said that he received his instructions in relation to the proposed purchase of the business and assets of Cottage Meats from Mr Reid. He received those instructions before ever meeting Mr Hyland or Mr Smith.

131               When he did meet with all three, Mr Reid spoke more than Mr Hyland or Mr Smith and it was his impression that Mr Reid had a better understanding of the transaction than the other gentlemen.

132               Mr Reid also called Mr Broome. It is not clear to me why he called Mr Broome who, at the relevant times, as I have already mentioned, was the liquidator of Battstone and the provisional liquidator of Australian Marble. Mr Reid cross-examined, rather than examined, Mr Broome in relation to Mr Broome’s conduct in those two offices. His evidence was largely irrelevant.

CONCLUSIONS

133               I have proceeded upon the basis that it is for the plaintiff to prove its case and, for the reasons given, beyond reasonable doubt. I have assumed that both the legal and evidential onus has at all times rested upon the plaintiff. No onus of any kind rests upon Mr Reid. He is entitled to require the plaintiff to prove its case.

134               The question of management of a corporation was considered by Ormiston J in Commissioner for Corporate Affairs v Bracht (1989) VR 821 (‘Bracht’). His honour said at 830:

‘It may be difficult to draw the line in particular cases, but in my opinion the concept of “management” for present purposes comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs.’

135               His Honour was there considering the question of management having regard to s 227(1) of the Companies (Victoria) Code which then provided:

‘A person who is an insolvent under administration shall not be a director or promoter of, or be in any way (whether directly or indirectly) concerned in or take part in the management of, a corporation without the leave of the Court.’

136               In Griggs v Australian Securities Commission (1999) 75 SASR 307, Bleby J considered s 91A(2) of the Corporations Law. That subsection read:

‘91A(2) A person manages a … corporation if the person … is a director or promoter of, or is in any way (whether directly or indirectly) concerned in or takes part in the management of, the corporation.’

137               After referring to Ormiston J’s reasons in Bracht, Bleby J said at 317:

‘Management of a company may take place at many levels. It is reasonably clear from the section that management is not confined to matters performed by the directors or a managing director of a company, nor is it limited to the formulation of policy and direction of the company. As Ormiston J pointed out in Bracht (at 829) there must be the exercise of some decision-making powers. The question is, how far down the management line does the definition extend?’

138               He said at 319:

‘One of the factors which must be borne in mind is that which constitutes an act of management in one company may well not do so in another. As Ormiston J recognised in Bracht, one of the variable factors will relate to the size of the company. The engagement of and negotiation with subcontractors according to pre-determined guidelines or subject to ratification by another in a large construction company, with many administrative employees, may well not constitute an act of management of such a company. However, for a company which is operated by one or two people, performing only the construction of residential dwellings, such engagement in negotiation completed on behalf of the company will have a much greater influence on the success or failure of the company, and may well constitute management of the company.’

139               Both those cases were concerned with different statutory provisions, but both are helpful in a general sense in understanding the concept of management.

140               Section 206A of the Act, however, identifies certain acts which constitute an offence if a person is disqualified from managing corporations. The section does not provide that each of the specific acts mentioned in s 206A(1) does amount to managing corporations. It merely says that those acts would constitute an offence.

141               However, that said, it is tolerably clear, in my opinion, that s 206A(1) contemplates that any of the acts in paragraphs (a), (b) or (c) do amount to managing the corporation. Indeed, the section is directed to deterring people who are disqualified from managing corporations from managing corporations.

142               Paragraphs (a) and (b) of s 206A(1) pick up Ormiston J’s dicta in Bracht. Paragraph (c) of s 206A(1) extends the circumstances in which a person might be thought to be managing a corporation.

143               In this case, Australian Marble did not trade or carry on any business before it acquired a 50 per cent interest in Battstone or Battstone’s business however one views the original transaction of 3 March 2003.

144               The evidence overwhelmingly establishes that the only person who made any decisions affecting Australian Marble’s business was Mr Reid. Whilst Australian Marble had directors, the evidence is that those directors took no part, either as directors or in the management of Australian Marble.

145               On 3 March 2003 Australian Marble either acquired a 50 per cent interest in Battstone’s business or its shareholding. It does not matter much for the purposes of the present inquiry. Battstone had a number of employees and it had persons who acted in management positions, such as Mr Leone Battista, Mr Quentin Blunden and Mr Alby Trosi.

146               However, again, the evidence is overwhelming that, after 3 March 2003, the person who mainly made decisions affecting the whole or a substantial part of the business of the corporation was Mr Reid. Moreover, the decisions which he made had the capacity to affect significantly the corporation’s financial standing.

147               In my opinion, the plaintiff has established that Australian Marble was managed and directed by Mr Reid over the period 1 February 2003 to 14 July 2003. It did not have to do so, but the evidence clearly established that Mr Reid was the controlling mind and manager of Australian Marble over that period.

148               I am satisfied, beyond doubt, that Mr Reid made decisions that affected if not the whole, a substantial part, of the business of Australian Marble. Mr Reid had the capacity, and exercised that capacity, to significantly affect Australian Marble’s financial standing. The directors of Australian Marble were accustomed to act in accordance with Mr Reid’s wishes. Indeed, they exercised no power of their own, but whatever power they ever exercised was at the direction of Mr Reid. He communicated instructions to the directors knowing they were accustomed to, or would act, at his direction.

149               Mr Reid involved himself in all of the decisions including those usually made by management and those usually made by the directors over the relevant period. He did so knowing and intending that the directors would act in accordance with his wishes.

150               The same may be said in relation to his conduct with Battstone. He made decisions that affected the whole or a substantial part of the business of Battstone over the period between early March and June 2003. The directions which he gave to Mr Blunden, both orally and in writing, established the general manager’s subservience to Mr Reid. The directions he gave to Mr Trosi also showed the chief financial officer’s subservience to Mr Reid. Those directions show that he made, or participated in making, decisions that affected the whole, or if not the whole a substantial part, of the business of Battstone. Moreover, those matters also establish that he exercised the capacity to significantly affect Battstone’s financial standing.

151               Prior to 1 April 2003, when Mr Leone and Mr Frank Battista resigned as directors of Battstone, at least Mr Frank Battista acted in accordance with his instructions in relation to the provision of an invoice which was used for the debt factoring.

152               After 1 April 2003 Mr Reid also communicated instructions or wishes to the directors of Battstone knowing that those directors were accustomed to act in accordance with his instructions or wishes. Moreover, he intended that they would act in accordance with those instructions or wishes. In fact, they did act in accordance with them.

153               I am also satisfied that Mr Reid made decisions which affected the substantial part of the business of International Meats in its attempt to purchase the business and assets of Cottage Meats. I also find that he communicated instructions or wishes to the directors of that company knowing that they were accustomed to act in accordance with his instructions or wishes, and intending that they would act in accordance those instructions or wishes.

154               I infer from Mr Reid’s conduct in making the offer under Adelaide Granites’ letterhead that at least he expected that that company would act in accordance with his wishes. I am not able to make any further findings relating to the conduct of the directors.

155               It is clear that the conduct of which the plaintiff has complained continued over a good part of 2003 and was continuing, as Mr Gyss’ affidavit shows, as late as December 2003, only a short time before these proceedings were brought.

156               In my opinion, the plaintiff has established that it is likely that Mr Reid, unless restrained, will contravene s 206A of the Act. In those circumstances, I am prepared to make the orders sought.

157               There is no reason why Mr Reid should not pay ASIC’s costs.

158               I make the following orders:

1. That the first defendant be restrained from engaging in conduct that contravenes a provision of section 206A of the Corporations Act 2001 and in particular that he be restrained from doing any act that forms part of the negotiations with respect to, or the purchase of, any business, company or asset by, for or on behalf of any corporation.

2. The first defendant to pay the plaintiff’s costs.

Associate:

Dated: 13 September 2005

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