Akers as a joint foreign representative of Saad Investments Co Limited (in official liquidation) v Deputy Commissioner of Taxation

JP Melocco Pty Ltd (First Defendant) Lifesmart Trading Pty Limited (Second Defendant) Peter Caron & Anke Seiditz (Third Defendant) Ralph Del Vecchio (Fourth Defendant) Bentley Co Pty Ltd ATF Rafis Discretionary Trust (Fifth Defendant) Robert Nahas (Sixth Defendant) Luke Buxton (Seventh Defendant) Representation: Counsel: Mr R Scruby SC / Ms L Hulmes (Plaintiffs) No appearance (First, Second, Third, Fourth Defendants) Mr IR Pike SC (Fifth Defendant) Mr MA Izzo SC / Mr B Michael (Sixth Defendant) Mr D Barlin (Seventh Defendant) Ms N Girsa (Interested Party)

Solicitors: Colin Biggers Paisley (Plaintiffs) Johnson Winter Slattery (Fifth Defendant) Ashurst (Sixth Defendant) Diamond Conway (Seventh Defendant) File Number(s): 2017/269831

Judgment

1. HER HONOUR: This case concerns how the funds which remain from a Ponzi scheme should be shared amongst those who invested in it. I have described Ponzi schemes in general at [15]-[24] and this one in particular at [25]-[47]. Here, some 780 investors paid $250 million into National Australia Bank and Westpac bank accounts used by the promoters of the Ponzi scheme. After a distribution following the judgment of Brereton J in Re Courtenay House Capital Trading Group Pty Ltd (in liq) and Courtenay House Pty Ltd (in liq) (2018) 125 ACSR 149; [2018] NSWSC 404, some $20 million remains in Westpac bank accounts to be distributed amongst the remaining investors who outlaid $80 million.
2. Said Jahani and John McInerney, the liquidators of Courtenay House Pty Limited (in liquidation) and Courtenay House Capital Trading Group Pty Limited (in liquidation), seek directions, orders and advice pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations), Schedule 2 of the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW) as to how these funds should be distributed following a further judgment of Black J in In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) [2019] NSWSC 1113, from which a subset of nine investors successfully appealed: Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117. The main issue is whether principles of "hotchpot" should apply and, if so, how. I have described the equitable doctrine of hotchpot at [78] to [87] and different judicial approaches to this problem in common law jurisdictions at [89] to [109]. The liquidators also seek directions, orders and advice on how other amounts recovered during the liquidations should be distributed.
3. In respect of distribution of the remaining $20 million, there are three possibilities or scenarios, set out at [110]. Three defendants were joined to the proceedings to represent the classes of investors who would benefit under each scenario. Bentley Co Pty Limited as trustee for the Rafis Discretionary Trust was joined as the fifth defendant to represent investors who will be financially better off under "Scenario 1" and Mr Pike SC spoke in favour of this scenario. Robert Nahas was joined as the sixth defendant to represent investors who will be financially better off under "Scenario 2" and Mr Izzo SC and Mr Michael spoke in favour of this scenario. Luke Buxton was joined as the seventh defendant to represent investors who will be financially better off under "Scenario 3" and Mr Barlin spoke in favour of this scenario. Counsel comprehensively ventilated the positive attributes of their particular scenario and the frailties of other scenarios. The liquidators' counsel, Mr Scruby SC and Ms Hulmes, advanced the other issues on which directions were sought.
4. As to evidence, the liquidators relied on four affidavits by Mr Jahani, an affidavit by the liquidators' solicitor and two reports by the liquidators to the Court. The reports were admitted into evidence without limitation and stood, effectively, as evidence of the matters described in the reports. Documents were also tendered by an investor, Nina Girsa.

ADVICE AND DIRECTIONS

1. Section 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act 2001 (Cth), provides that the Court may make such orders as it thinks fit in relation to the external administration of a company, including determining any question arising in the external administration: section 90-15(3)(a). As liquidators, the plaintiffs have standing to bring this application as officers of the companies: section 9, Corporations Act; section 90-20(1)(d), Insolvency Practice Schedule.
2. The principles in relation to applications for directions were summarised by Black J in In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9] and Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) (2018) 125 ACSR 355; [2018] NSWSC 481. The Court may give directions where it will be "of advantage in the liquidation": Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81 per Young J. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision, when no legal issue is raised or where there is no attack on the propriety or reasonableness of the liquidator's decision but may do so where there is the prospect of such an attack: In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17]. A direction protects the liquidators from liability for breach of duty or unreasonable behaviour if full disclosure is made to the Court: Re Daniel Efrat Consulting Services Pty Ltd (receiver appointed) (in liq) (1999) 91 FCR 154; [1999] FCA 412 at [13]; Re Ansett Australia Ltd (2001) 39 ACSR 355; [2001] FCA 1439 at [59]-[62] per Goldberg J; In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218; [2017] NSWSC 1771 at [3] per Black J.
3. It is appropriate to give directions in this matter for two main reasons. First, legal issues of some complexity have arisen. Second, given the number of investors who have lost money by reason of the Ponzi scheme and the size of their losses, the prospect of an attack on the liquidators' actions might be thought to be higher than usual. Such a prospect is enhanced by the fact that the companies did not maintain proper books and records and those which the liquidators did secure have limited reliability: see [55]. Whilst the liquidators' assessment of the position may be sound based on the information which they have been able to obtain, there may be further material 'out there' which may entitle a creditor of either company to accuse them of having acted unreasonably: In the matter of Bevillesta Pty Ltd (in voluntary administration) (2011) 254 FLR 324; [2011] NSWSC 417 at [11] per Bergin CJ in Eq; Korda v Silkchime Pty Ltd (2010) 243 FLR 269; [2010] WASC 155 at [32] per Le Miere J; In the matter of MF Global Australia Ltd (in liquidation) (2012) 267 FLR 27; [2012] NSWSC 994 at [7]; In the matter of Direct Acceptance Corporation Ltd (receivers appointed) (in liquidation) (2019) 136 ACSR 245; [2019] NSWSC 395 at [36] per Ward CJ in Eq. Further, whilst representative defendants have been joined to these proceedings, there are many other creditors who will not necessarily be bound by the outcome of the proceedings. In the absence of directions, the liquidators may be exposed to a complaint or claim by one or more creditors in relation to the distribution of funds. Directions will permit the liquidators to adopt a course of conduct free from the risk of personal liability for breach of duty: Re MF Global Australia Limited (in liq) [2012] NSWSC 994 at [8].
4. Brereton J and Black J each held that funds which investors deposited with the companies are held on trust for the investors. Thus the liquidators also seek advice as trustees under section 63(1) of the Trustee Act, which provides: A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.
5. As Kiefel J observed in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [196]: The principal purpose of the section, and the opinion, advice or direction given under it, is the protection of the interests of the trust. Another purpose is the protection of a Trustee who is acting in that regard and upon advice. Securing the latter purpose may ensure the attainment of the principal purpose, by removing the concern of a Trustee about exposure beyond their usual indemnity.
6. Ordinarily, the Court would be provided with a comprehensive opinion by the trustees' counsel who, out of court, has studied the problem to be solved, examined the factual context critically, analysed competing contentions in a comprehensive legal context and worked out a solution that commends itself to his or her professional judgement, being a judgement upon which the Court can responsibly be invited to rely: Re Estate Late Chow Cho-Poon; Application for judicial advice (2013) 10 ASTLR 251; [2013] NSWSC 844 at [113] per Lindsay J. Here, whilst the liquidators initially expressed views on how the funds should be distributed - before representative defendants were joined - the liquidators' counsel left the matter to the representative defendants' counsel at the hearing, consistent with the approach described by Finkelstein J in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2006) 232 ALR 119; [2006] FCAFC 92 at [6]: (citations omitted) When a "trust dispute" has come about because there is a dispute between two beneficiaries … the duty of the trustee as the trustee for all beneficiaries is to treat the beneficiaries impartially and remain neutral. Thus, unless the trust instrument itself provides otherwise, the trustees should bring the dispute into court for resolution but in the proceeding they are not entitled to favour one party over another by advocating a party's cause. To do otherwise would be a breach of the trustees' duty to deal impartially with all beneficiaries and to protect their interests. Of course, if the case is not properly presented by the beneficiaries the trustees may, indeed probably should, provide the court with their views.
7. The liquidators were not entirely neutral. As to whether Ms Girsa and Zoja Gromova should be included in any distribution, the liquidators acknowledged that the directions sought involved an adversarial element but submitted it was appropriate to give judicial advice nonetheless: Macedonian Orthodox Community Church at St Petka at [59]-[60]; Re Plutus Payroll Australia Pty Ltd (in liq) (2019) 139 ACSR 536; [2019] NSWSC 1171 per Black J at [5]-[7].
8. As Gleeson JA explained in Hawden Property Group, section 90-15 of the Insolvency Practice Schedule accommodates the determination of substantive rights although the Court would not do so without affording potentially affected parties an opportunity to be heard: at [8] citing Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443, at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [45]-[46] (Davies J); In the matter of ICS Real Estate Pty Ltd (in liq); and In the matter of Independent Contractor Services (Aust) Pty Ltd (in liq) (2014) 14 ASTLR 382; [2014] NSWSC 479 at [25] (Brereton J). Here, Ms Girsa appeared in person on behalf of herself and Ms Gromova. Ms Girsa tendered documents and made submissions. Thus, those affected by the direction sought have been afforded an opportunity to be heard. Thus, I consider it appropriate to give directions in respect of Ms Girsa and Ms Gromova's proofs of debt so that the liquidators can complete the distribution of funds to all investors.
9. The particular task undertaken by the Court when giving directions was well described by Brereton J in Re BBY Limited (receivers and managers appointed) (in liq) (No 2) [2018] NSWSC 346; (2018) 363 ALR 492 at [40]: … in a liquidator's application for directions, courts often have to do "rough justice" by reason of the limitations of the available evidence, in the light of what is reasonably practical and economical, and judgments may be made on evidence much inferior to that which would be required to sustain a beneficiary's claim in adversarial proceedings. Further, "liquidators and Courts supervising them have to act on such evidence as is available, and the reasonably available inferences, without insisting on the proofs that would be required in a beneficiary's claim": at [67]. Thus, "[w]hile the Court's powers to give directions … do not generally permit orders that depart from proprietary rights, this principle yields in cases where it is not pragmatic to ascertain proprietary rights with precision": at [83].
10. Similarly, in Australian Securities and Investments Commission v Idylic Solutions Limited (2009) 76 ACSR 129; [2009] NSWSC 1306, albeit in the context of section 601EE(2) of the Corporations Act where the Court may make "any orders it considers appropriate" for the winding up of an unregistered managed investment scheme, Barrett J described the liquidator's role as identifying the rights and obligations of persons who had invested in the scheme by reference to available documents and the application of legal principles and, "If something more is then needed in order to effect the winding up (by way of clarification or refinement of the legal rights and obligations or by way of procedural facilitation), the Court is empowered … to supply that element": at [5]. Barrett J noted an overriding principle that such orders should not sanction the release of funds to persons who have no legal entitlement to them: at [6].

PONZI SCHEMES

1. A Ponzi scheme was described by Chesterman JA in R v Lovell [2012] QCA 43 at [30]: … a Ponzi scheme [is] a fraudulent investment operation that pays returns to investors from their own money or money paid into the scheme by subsequent investors rather than from any actual profit earned from money invested. The scheme entices new investors by offering returns legitimate investments cannot, returns that were both abnormally high and consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever increasing flow of money from subsequent investors to keep the scheme going.
2. This description was embraced by Campbell J, with whom Macfarlan JA and Barr AJ agreed, in Finnigan v R (2013) 233 A Crim R 381; [2013] NSWCCA 177 at [2], where Campbell J further explained at [3]: In one sense, … a Ponzi scheme consists of "robbing Peter to pay Paul". But there must be an endless, serial recruitment of Peters, each of whom, if he or she knew the truth, could hope for no better than to take a turn as Paul because the "entitlements" of previous investors must be paid out with the receipts obtained from the new. There is no investment. Similar definitions are used in the United States and Canada: Cunningham v Brown, 265 US 1 (1924); Titan Investments Ltd Partnership (Re) 2005 ABQB 637 per Hawco J at [8], followed in Boale Wood Ltd v Whitmore 2017 BCSC 1917 at [46]; Doyle Salewski Inc v Scott 2019 ONSC 5108 at [100]-[101]. See also Millard v North George Capital Management Ltd (2006), 26 BLR (4th) 231 (Ont Sup Ct) at [11] per Cumming J. In the United States and Canada, an intention to defraud creditors is inferred from the fact that the Ponzi scheme is being operated at all, as no other reasonable inference is possible: Merrill v Abbott (In re Independent Clearing House Co.), 77 BR 843 (Bankr. D. Utah 1987) at 860-861.
3. Ponzi schemes were named after American fraudster Charles Ponzi, an Italian immigrant living in Boston who went from obscure salesman with $150 in capital to a multimillionaire in less than six months by claiming to trade in international postal coupons and promising returns of 100%: Ponzi v Fessenden 258 US 254 (1922); Grant Christensen, 'Allocating Loss in Securities Fraud: time to adopt a uniform rule for the special case of Ponzi schemes' (2012) 3 William and Mary Business Law Review 309 at 311.
4. In Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Limited [2006] QSC 132, Atkinson J noted that such schemes continue to attract and dupe innocent members of the public: at [30], citing Zipside Pty Ltd v Anscor Pty Ltd [2004] QSC 33; Clout (Trustee) v Anscor Pty Ltd [2003] FCA 326; Chapel Road Pty Ltd v ASIC [2003] AATA 660; Bishop Mar Meelis Zaia v David Tiglath Chibo [2005] NSWSC 917; Karl Suleman Enterprizes v George [2003] NSWSC 544. To these examples may be added, more recently, Cook v Permanent Mortgages [2007] NSWCA 219; Idylic; White (Trustee), in the matter of Vlahos (Bankrupt) v Ljubicic [2017] FCA 717; Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842; and Kadam v MiiResorts Group 1 Pty Ltd (No 5) [2018] FCA 1086; (2018) 129 ACSR 74.
5. A Ponzi scheme which has generated much recent judicial and academic consideration is that operated by Bernard Madoff, who held himself out as an investment advisor on the stock market. From at least the 1990s, Mr Madoff did not buy a single share on behalf of his clients but sent them regular statements that reported market transactions and indicated an average growth of 12% said to be achieved by his unique trading strategy. Client redemptions were funded by money that other clients deposited with him. The US Securities and Exchange Commission investigated Mr Madoff but did not detect the Ponzi scheme. When the stock market crashed in 2008, an unexpected number of clients sought to redeem their investments and the scheme went bust. Mr Madoff's sons called the police. At the time of his arrest, Mr Madoff had 4,800 customers who had invested $20 billion and accumulated fictional investments of $65 billion. Mr Madoff was sentenced to 150 years in prison: United States v Madoff, 586 F.Supp 2d 240; Securities and Exchange Commission v Bernard Madoff and Bernard L Madoff Investment Securities LLC (S.D.N.Y. Civ. 08 CV 10791 (LLS)); Amy Sepinwall 'Righting Others' Wrongs: a critical look at clawbacks in Madoff-type Ponzi schemes and other frauds' (2012) 78 Brooklyn Law Review 1 at 10-12.
6. Law suits were brought by Mr Madoff's trustee in bankruptcy to 'claw back' money from investors who made money from the scheme. These 'claw back' suits prompted an outpouring of academic literature on how best to allocate what remains at the end of a Ponzi scheme amongst those affected, including: Caitlyn Crisp 'Ponzi Scheme Clawbacks: are they equitable?' (2013) 20(3) PIABA Bar Journal 317; Spencer A Winters 'The Law of Ponzi Payouts' (2012) 111 Michigan Law Review 119; Alex S Weiner 'Net equity only comes with net equality: an exploration of an alternative remedy for victims of Ponzi schemes' (2012) 84 Temple Law Review 423 at 424; and Paul W Bonapfel et al 'The Business Bankruptcy Panel: Ponzi Schemes - Bankruptcy Court v Federal Court Equity Receivership' (2010) 26 Emory Bankruptcy Developments Journal 207. A useful summary of the American and Canadian approach to 'claw back' claims can be found in McIntosh v Fisk [2016] 2 NZLR 783; (2016) 14 TCLR 307; [2016] NZCA 74 at [54]-[56]. An English example of 'claw back' litigation is O'Neil v Gale [2013] EWCA Civ 1554; [2013] CN 1871, discussed in Mat Campbell 'Change of position: retreating from Barros Mattos, then rocking the boat' (2014) 22 Restitution Law Review 105. The collapse of the Madoff Ponzi scheme also gave rise to several judgments by the Judicial Committee of the Privy Council as "feeder funds" for the Madoff scheme were located in the British Virgin Islands and Cayman Islands: Fairfield Sentry Limited (in liquidation) v Quilvest Finance Ltd [2014] UKPC 9; Pearson v Primeo Fund (No 1) [2017] UKPC 19; DD Growth Premium 2X Fund (in liquidation) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36; In the matter of Stanford International Bank Limited (in liquidation) [2019] UKPC 45; Pearson v Primeo Fund (No 2) [2020] UKPC 3.
7. Three features of Ponzi schemes should be noted at the outset. First, "profits" or "returns" paid by the promoters are, in truth, other investors' capital. The nature of such "profits" or "returns" was described by Barrett J in ASIC v Idylic at [49]: … "returns" were paid to certain investors … These were not distributions of profits. … Rather, "returns" entailed receipt by early investors of capital contributed by themselves and perhaps some later investors, in order to satisfy expectations of periodic returns generated by the promotional literature … See likewise Donell v Kowell, 533 F.3d 762 at 777-779; followed in Canada in Boale Wood Ltd v Whitmore at [60].
8. Second, Ponzi schemes have zero chance of success. Indeed, in the United States and Canada, Ponzi schemes are assumed to be insolvent from the moment that the first investment contract is entered into: Re Titan Investments at [16] citing Merrill v Abbott (In re Independent Clearing House Co); Martino v Edison Worldwide Capital (In re Randy), 187 BR 425 (Bankr ND Ill 1995) at 441; Scholes v Lehmann, 56 F 3d 750 (7th Cir 1995) and followed in Boale Wood Ltd v Whitmore at [49] and Doyle Salewski Inc v Scott at [104].
9. Third, the fact that some investors withdraw their principal in time or receive "returns" is due to "dumb luck" and the whims of the schemer: Crisp (2013) at 333-4. As Lord Sumption noted in Fairfield Sentry Limited v Quilvest at [3]: It is inherent in a Ponzi scheme that those who withdraw their funds before the scheme collapses escape without loss, and quite possibly with substantial fictitious profits. The loss falls entirely on those investors whose funds are still invested when the money runs out and the scheme fails.
10. The task for the Court in a case such as this is to determine how millions of dollars of lost value is to be allocated among creditors who are entitled to it and equally innocent. Should all investors bear the costs of fraud equally or, because Ponzi schemes rely on a constant influx of funds to keep the fraud going, should those who were induced to invest first be compensated differently from later investors: Crisp (2013) at 317. I have described different judicial approaches to this problem in common law jurisdictions at [89] to [109].

COURTENAY HOUSE PONZI SCHEME

1. Courtenay House was incorporated in 2008. Courtenay House Capital Trading Group was incorporated in 2011. Tony Iervasi was the director of both companies and treated the two companies as if they were one: external documents generated by the companies referred to the companies interchangeably.
2. Mr Iervasi's background was in property development. Mr Iervasi had little or likely no knowledge of the foreign exchange (FX) market. Mr Iervasi told the liquidators that he established the companies to pursue an interest in FX markets and taught himself how to trade by attending various seminars and conventions. Mr Iervasi said he began trading for himself and, over time, started to trade for friends and family at their request. The liquidators' forensic analysis of the companies' bank statements does not support Mr Iervasi's version of events but indicates that the companies were operating a Ponzi scheme from the beginning. There does not appear to be any funds transferred for FX trading after the receipt of investor capital but, instead, new investor capital appears to have been used to pay trading and personal expenses of Mr Iervasi.
3. Mr Iervasi knew David Sipina through property development. In 2013, Mr Sipina joined the companies as Business Development Manager or FX Trader, although it does not appear that Mr Sipina undertook any FX trading. Rather, Mr Sipina's role was to bring new investors into the companies. He received a base salary supplemented by commissions on any new funds which he brought into the companies. In 2015, Mr Sipina became a director of Courtenay House Capital Trading Group. In 2015, Anshul Gupta also joined the companies as a quasi-Chief Financial Officer and was responsible for keeping the companies' records and preparing investor statement positions.

What investors were told

1. Initially, investors were introduced to the companies through friends and acquaintances of Mr Iervasi, who met with clients and provided an overview of what the companies did, his purported success to date and answered any questions they had. These investors were not provided with any documentation.
2. From 2013, investors could meet with Mr Iervasi, Mr Sipina or Athan Papoulias, Senior Business Analyst, in the boardroom at the companies' Bondi Junction office. During such meetings, clients were given a 30 minute presentation. The presentation incorporated technical language and graphs which an unsophisticated investor would have had difficulty understanding. The aim was to portray that the companies had some form of insight or competitive advantage that allowed them to generate a stable and consistent monthly return. The companies went to considerable lengths to present an image of legitimacy regarding the nature of their investment activities. During these meetings, clients were sometimes given an "Investor Pack" or "Client Information Booklet". Sometimes investors preferred to skip straight to making the investment based on feedback or recommendations received from others; such investors typically were not provided with any formal documentation. Only about half of the investors had a formal meeting or received a presentation or any formal documentation. Thus, the companies did not issue consistent documentation to every investor and it is unclear which investors received what documentation.
3. During client meetings, investors were advised that there was a "slush fund" whereby, in months where the companies generated returns of 5%, only a return of 4% was paid with the remaining 1% put aside so that, in months where the companies only achieved a 3% return, the "slush fund" was used to top up returns to the advertised 4% per month. There was, in fact, no "slush fund". This was a marketing ploy to provide a rationale as to how the companies could pay stable and consistent returns each month.
4. Investors were also told that the companies' funds were pooled together and that there were no separate trading accounts for each individual. Investors were advised that this was done in order to reduce costs and allow the companies better opportunities for trading the funds. The notion of all clients' funds being "pooled" was heavily advertised to investors, including in emails located by the liquidators and the Client Information Booklet. The Investor Pack stated: Rather than dealing with individual accounts (which is fiddly and time-consuming) we pool the funds together. So when we make a trade on your account, we are doing the same for others. … Throughout the year we have little losses each month and then instead of taking these from investor's accounts, we pool the losses and every 6 months or twice a year in February and October we send out email advising investors that the losses will be paid out of the trust account, to clear this amount and then start with a clean slate. There were no details within the Investor Pack which advised investors how their funds would be held in the companies' bank accounts.
5. Investor Application Forms included terms and conditions which remained broadly similar over time and did not refer to how funds were held nor that funds were pooled. Later versions of Investor Application Forms did however, refer to the funds deposited by investors being held in the companies' "trading account held in trust"; these forms were used for the "Brexit Special", described at [35] and the subject of Brereton J's judgment.

The products

1. Until late 2016, the companies offered three different types of trading strategies to investors (referred to as Standard Products) being: 1. Swing Trading, with an estimated return of 1.5% per month (or 18% per annum) and potential capital risk advertised at 5% of funds invested; 2. Forex Extreme Trading, with an estimated return of 4% per month (or 48% per annum) and potential capital risk advertised at 10% of funds invested; and 3. Forex Live/Elite Trading, with an estimated return of 7.5% per month (or 90% per annum) and potential capital risk advertised at 15% of the funds invested.
2. There was a minimum investment of $25,000 in Standard Products, later increased to $50,000 due to the suggested need to reduce the administrative burden of smaller investments. In fact, the companies undertook little FX trading and that undertaken fared poorly: of $4 million paid by the companies into FX trading accounts, $1.2 million was lost. Rather, the Standard Products were a marketing ploy to deceive investors into believing that the companies were operating a legitimate FX trading business which generated profits sufficient to pay the advertised returns to investors.
3. In late 2016, the companies began to market "Special Products" to existing investors based upon current affairs around the world. The companies sought to rely on external geopolitical events to create the perception that there would be, for a very limited period of time, an opportunity to make a super return from FX trading due to increased volatility in FX markets. Three Special Products were offered by the companies in connection with: 1. the US Election in November 2016 (US Election Special); 2. the US Inauguration in January 2017 (Inauguration Day Special); and 3. Brexit in May 2017 (Brexit Special).
4. The companies marketed Special Products as one-off, short term investments of four to six weeks. The Special Products were advertised as available only to the first 100 investors. Investors were encouraged to return the form and the funds early before the offer closed, either on a set date or when there were 100 subscriptions. In reality, the companies never had a maximum amount of subscriptions and, indeed, there were 163 investors in the Brexit Special. The Special Products were a marketing strategy employed by the companies with a sense of urgency and exclusivity to deceive investors into "doubling down" on their existing investment.
5. The minimum investment for a Special Product was $50,000. Funds deposited by investors into Special Products had to be new capital; investors were not allowed to transfer funds they had in Standard Products into Special Products. The aim appeared to be to encourage an injection of funds into the companies with the potential that, at the end of the 30 day investment window, a number of investors would be willing to rollover their capital and thus continue to fund the Ponzi scheme. It had the desired effect: a large proportion of investors rolled their principal into a Standard Product or another Special Product. Due to these rollovers, the companies did not have to repay a large amount of capital invested in these products.
6. Funds invested in Special Products were never traded by the companies despite the companies paying returns of 22.87% on the US Election Special (or an annualised rate of return of 274.4%) and 13% on the Inauguration Day Special (or an annualised rate of return of 156%). The returns were paid from existing investor capital in Special Products. For the last-offered Special Product, the Brexit Special, investors funds remained intact when the Ponzi scheme was brought to an end.

The payments

1. From about 2014 on, the companies also paid existing investors who referred new investors a trail commission of 0.5% per month, later reduced to 0.25% per month. The companies did not maintain any commission payment summaries, but liquidators estimate that $1,552,871 was paid to investors as commissions.
2. Overall, of some $249.2 million deposited into the companies' bank accounts over the life of the Ponzi scheme, two-thirds was paid back as 'returns' to investors. More specifically, and putting Brexit Special investors to one side for the moment: 1. Some 17% of investors received more than the capital outlaid in the form of 'returns' or commissions. Indeed, overall this group of investors received 50% more than they outlaid. If the liquidators were minded to pursue 'claw back' actions against these 106 investors, then such claims would seek to pursue some $20 million or, on average, $190,000 per investor. 2. A further 75% of investors received some, but not all, of their capital back by 'returns' and commissions. 3. Some 8% of investors received no return at all. Consistent with the nature of Ponzi schemes, earlier investors received a much higher proportion of their initial capital back as they enjoyed the benefit of a stream of regular returns funded by subsequent investors. Later investors suffered larger losses.
3. In addition, $7.49 million was withdrawn from the companies' bank accounts by key individuals including Mr Iervasi, Mr Sipina and Mr Papoulias. After taking into account deposits made by these individuals, net withdrawals of $6,209,080 were made.

The bank accounts

1. The companies had six bank accounts: three with Westpac and three with National Australia Bank. By and large, investor deposits for Standard Products, and payments by the companies to investors for such products, were made through the Westpac bank accounts. More precisely, in May 2008, Courtenay House opened a bank account at Westpac (the Westpac 1 account). This account was the primary bank account used to receive deposits from investors until another account (the Westpac 2 account) was opened by Courtenay House Capital Trading Group in July 2011. After the Westpac 2 account opened, the Westpac 1 account received fewer deposits from investors and instead received funds from the Westpac 2 account. The companies had a third Westpac account (the Westpac 3 account) which had little deposit or withdrawal activity whilst the companies were operating.
2. From August 2012 on, the Westpac 2 account was the primary bank account used to receive capital deposits from investors for Standard Products. The majority of the funds deposited into the Westpac 2 account were transferred to the Westpac 1 account. Investors' funds were mixed within the Westpac accounts with newer deposits being used to pay capital returns to earlier investors as well as commissions and general operating expenses of the companies. Of the monies actually used for FX trading, $3.8 million came from the Westpac 1 account and $200,000 from the Westpac 2 account.
3. Turning to the National Australia Bank, the companies made it clear to investors that funds invested in Special Products had to be paid into the companies' National Australia Bank accounts and not into the companies' Westpac accounts and, by and large, that is what happened. More precisely, in September 2016, Courtenay House opened an account with the National Australia Bank for the US Election Special Product (US Election NAB account) and a National Australia Bank business cash maximiser account (NAB business account). In November 2016, Courtenay House opened an account to receive investor funds for the Inauguration Day Special and the Brexit Special (the Brexit NAB account).
4. The US Election Special was marketed to existing investors by email in September 2016 and, by 31 October 2016, investors had deposited $20.87 million into the US Election NAB account. Of this, $4.38 million was paid in returns to investors and $12.6 million was transferred to the Brexit NAB account for investors who "rolled over" their investment into the Brexit Special. Funds were also received in the US Election NAB account from the Brexit NAB account and used to pay returns on investment and capital to US Election Special investors. Between 14 and 17 February 2017, the NAB business account received $25 million from the Brexit NAB account and transferred it to the US Election NAB account.
5. There was also mixing of the companies' funds between the National Australia Bank accounts and Westpac accounts: 1. From the Westpac 1 account, $1.3 million was transferred to the Brexit NAB account and $1.2 million was transferred to the US Election NAB account. 2. From the US Election NAB account, $5 million was transferred to the Westpac 2 account after the US Election Special Product finished. It is not clear whether these transfers were because investors gave specific instructions or whether those promoting the Ponzi scheme just did it. The relevance of mixing funds between the National Australia Bank accounts and Westpac accounts will become clear in relation to application of the principle of hotchpot: at [128].
6. The companies did not segregate investors' funds into separate client accounts. Beyond holding funds in relation to Standard Products in Westpac accounts and funds in relation to Special Products in National Australia Bank accounts, there was no evidence that the companies treated or sought to treat the funds as client trust monies.

The game is up

1. In 2017, the Australian Securities and Investments Commission (ASIC) began investigations into the companies' affairs following reports that the companies were conducting an unregistered managed investment scheme. On 21 April 2017 at 3.11pm, ASIC obtained freezing orders over the companies' assets and assets of related parties including Mr Iervasi and Mr Sipina. Orders were made prohibiting Mr Iervasi from leaving the country and restraining the companies from carrying on business.
2. Nine investors deposited funds into the Westpac 2 account on or after the day that the freezing orders were made (Post 21 April Investors). The Court of Appeal's judgment (Caron v Jahani) is concerned with these investors. Their funds totalled $775,000. Four of these investors made deposits on 21 April 2017, following which $60,000 was withdrawn from the Westpac 2 account notwithstanding the freezing order. The $60,000 was transferred to the Westpac 1 account, from which it was withdrawn. The remaining five Post 21 Investors then deposited a further $300,000 into the Westpac 2 account and their funds are specifically identifiable by the liquidators.
3. On 16 May 2017, on the application of ASIC, the Court appointed Mr Jahani and Mr McInerney as joint and several liquidators of the companies. On the liquidators' appointment: 1. The Westpac 1 and Westpac 3 accounts each had a nil balance. 2. The Westpac 2 account had a balance of some $21 million. Black J held that these funds are held on trust for the investors who deposited them and it is the distribution of those monies with which this judgment is primarily concerned. 3. The US Election NAB account had a nil balance. 4. The Brexit NAB account held $28,949,978. The liquidators were able to trace substantially all the funds deposited for the Brexit Special to the 163 investors who deposited them. The funds in this account were the subject of Brereton J's judgment. 5. The NAB business account had a balance of $14,006.33. The liquidators seek orders as to how they should distribute these monies, which I have considered at [144].
4. In addition to the bank accounts, the liquidators also accessed FX trading accounts in the names of the companies or Mr Iervasi and recovered some $2 million. The liquidators seek directions as to how to distribute these funds, which I have considered at [162].
5. On 25 May 2017, Mr Iervasi's girlfriend, Ms Girsa, lodged a proof of debt for $150,000 for monies invested in the Ponzi scheme. Her mother, Ms Gromova, lodged a proof of debt for $100,000. Annexed to the proofs of debt were a collection of documents obtained from the companies, which were incomplete and unclear (given the state of the companies' documentation, this may not be the investors' fault). The liquidators' efforts to obtain further information in respect of these proofs of debt are described at [63] to [65], [68], [69], [74] to [75]. The liquidators seek directions as to whether to exclude Ms Girsa and Ms Gromova from any distribution, which I have considered at [165].
6. In September 2017, the liquidators commenced these proceedings seeking orders and directions as to how to distribute funds held in the companies' bank accounts to investors, with the issue being determined initially in respect of funds in the Brexit NAB account. On 18 September 2017, the Court made orders that the liquidators provide a report detailing the status of their investigations.

Liquidators' first report

1. In October 2017, the liquidators provided their report, in particular, in respect of funds invested in the Brexit Special. The liquidators' investigations in relation to the funds deposited in Westpac bank accounts for Standard Products was then ongoing. The liquidators described the forensic investigation being undertaken, the purpose of which was twofold: to understand from whom the companies received funds and how those funds were used or spent; and, to substantiate the position of each investor to enable the liquidators to form an opinion as to the amount owed to each investor for the purposes of calculating any dividend. Mr Jahani explained: 28 The forensic investigation has been large and complex. It has required me to collate, analyse and understand: a. 14,000 lines of bank statements … b. 44,000 additional lines of data relating to batch payments, where a single entry appeared on the bank statements … c. 16,000 lines of investor accounts information prepared by the Companies spread across separate documents for each investor for each month over a 4 year period; d. Over 800 investments included in Proof of Debt forms; and e. Other books and records of the Companies including those saved onto the Companies' computers, hard drives and emails. 29 The primary difficulty I have faced in undertaking the above tasks is the lack of reliable books and records of the Companies.
2. Mr Jahani noted that, on his appointment as liquidator with Mr McInerney, their staff attended at the companies' offices in Bondi Junction and secured all available books and records, which comprised 18 boxes of books and records, two laptops used by Mr Iervasi and a hard drive used by Mr Gupta. All IT equipment was forensically imaged. A review of the books and records revealed: 1. Signed Investor Application Forms were only available for 50% to 60% of investors. 2. There were no investor statements from 2011 to 2013, as none were created. Mr Gupta's hard drive contained Statements of Capital and Monthly Income for individual investors for 2014 to 2017. Mr Jahani used these statements to create a spreadsheet of investor accounts. The spreadsheet has approximately 24,500 lines of data. 3. The laptops and hard drive contained Excel spreadsheets with details of some 1,500 batch payments made to investors from January 2014 to April 2017. Mr Jahani combined the data from these spreadsheets into one spreadsheet containing 44,000 rows of data. 4. There were no bank reconciliations, profit and loss statements or balance sheets, as none had ever been prepared. 5. Commission schedules and statements were never created. The liquidators had only been able to locate two spreadsheets detailing commission payments made to investors in two months. Whilst Mr Iervasi advised that there were spreadsheets on his computer which detailed payments and deposits from 2011 to 2014, the liquidators were unable to locate any spreadsheets notwithstanding a thorough review of the laptops, hard drive and forensic backup. Of the available material, Mr Jahani observed, "there are significant errors and issues with the companies' documentation which limits the reliance which can be placed upon them".
3. The liquidators sought documents from all known accountants and solicitors for the companies, but all advised they held no books and records. Efforts to obtain the companies' emails from Google US were unsuccessful. Bank statements were obtained from Westpac and National Australia Bank. Statements of account were obtained from three FX brokers. Hard copy bank statements were scanned and converted into spreadsheets by a third party, as it was the most cost effective and time efficient method of doing so. There were 13,800 entries in the bank statements. The spreadsheet was checked for accuracy by sample-checking transactions and checking the input balance against a running balance formula utilising the input debit and credit amounts. In order to undertake a full reconciliation of the Westpac 1 and Westpac 2 accounts, a significant amount of bank trace documents were needed: liquidators were charged $36 per trace request with each request taking up to eight weeks. The liquidators had already requested over 500 key transactions to be traced by Westpac. At the time of the first report, the liquidators had insufficient information to determine who had deposited, or received, funds in respect of 3,147 transactions totalling approximately $69 million.
4. Mr Jahani's evidence brings to mind Bell P's observations in Caron v Jahani at [121]: ... Fraudsters are not renowned for their commitment to orderly and immaculate record keeping, and even if capable of it, the creation and maintenance of an accurate and meaningful paper trail is not generally part of their modus operandi.

Brereton J's judgment

1. In March 2018, Brereton J heard a separate question as to what should be done with the funds in the Brexit NAB account. If those funds were treated as the beneficial property of those who invested in the Brexit Special, then those investors would receive their money back in full whilst other investors would receive a dividend of some 13 cents in the dollar. If all funds were "pooled", then all investors would receive a dividend of some 26 cents in the dollar: Courtenay House [2018] NSWSC 404 per Brereton J at [14]. His Honour held that the Brexit investors were the beneficial owners of the funds in the Brexit NAB account and the liquidators were justified in distributing those funds to the Brexit investors only and not to any other creditors of the companies: at [42]. In so concluding, Brereton J had regard to the Client Information Booklet and Investor Pack, which specifically represented that monies invested in the Brexit Special would be held on trust for the investor. His Honour was satisfied that the companies' formal documents in respect of the Brexit Special contained unambiguous and explicit words indicating that the monies were held on trust: at [24]. The fact that the monies were to be pooled with those of other investors to trade in FX was not inconsistent with an intention to create a trust, nor that the bank account received funds from multiple beneficiaries: at [26]. His Honour was also satisfied that, even if an express trust had not been established, the funds were held on a Quistclose trust as recognised in Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567 or held on trust under the principles in Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58 as having been procured by fraud.
2. Important for current purposes, the investors who had deposited funds for non-Brexit products submitted that, if the Court were to conclude that the funds invested in the Brexit Special were held on trust for those investors, then likewise the funds invested by non-Brexit investors were also held on trust and the funds should be "pooled". Brereton J considered at [32]: The first limb of this proposition is in my judgment correct. The documentation for the other special products was relevantly indistinguishable from that used for the Brexit Special, and the documentation for standard products in more recent times was to similar effect. Although it is conceivable that Courtenay House still held some funds which had been invested under the earlier documentation which did not contain the explicit reference to being "held in trust", it is likely that the overwhelming proportion of the funds held as at the appointment date had been subscribed under documentation which did contain those words. Accordingly, I accept that Courtenay House held the funds subscribed by non-Brexit investors on trust for the clients who invested them.
3. However, Brereton J did not accept that it followed that the Brexit Special funds should be "pooled" with non-Brexit funds. Unlike Re BBY (No 2) [2018] NSWSC 346, there had been no mixing of Brexit Special trust funds with other trust funds; the Brexit Special trust fund was sufficient to meet the claims of all who had contributed to it; and, thus "the capital deposited by each investor was held on trust for that investor": at [33]-[36]. At [38]: Where there is no difficulty in identifying the beneficial entitlements to the Brexit funds, no deficiency in them, and they have not been mixed with any other money, there is no warrant for pooling, which would amount to no more than disregarding clear property interests in particular property on account of some notion of common misfortune.
4. Further, Brereton J held that there was no proper basis to set-off the returns derived by Brexit investors from their investments in non-Brexit products against their entitlement to recover their Brexit investments: at [41]. At [40]: … It might have been otherwise if Brexit funds had been used to repay earlier investments, but they were not. Moreover, a beneficiary's entitlement to recover its property from one fund is not affected by what the same beneficiary has received from another fund. Insofar as the argument is analogous to the rule in Cherry v Boultbee [1839] EngR 1099; 41 ER 171, that rule concerns set-off of claims and liabilities in respect of a single fund. And while, in the context of a deficient mixed fund, it may be appropriate that returns received by some beneficial owners be taken into account in order to do equity in distribution of what remains in the fund, [citing ASIC v Idylic Solutions Ltd (2009) 76 ACSR 129; [2009] NSWSC 1306 at [77]] the Brexit Investment fund is, as has been explained above, neither deficient, nor mixed with non-Brexit funds.
5. Brereton J made orders for funds in the Brexit NAB account to be paid to Brexit Special investors in such amount as each relevant Brexit investor's proportionate entitlement after the liquidators made reasonable provision for future costs and expenses. Most Brexit Special investors have since been paid 97.78 cents in the dollar, with the reduction of 2.22 cents referable to the liquidators' costs and expenses. Brereton J also ordered that the liquidators were justified, until further order, in withholding distribution to: 1. four investors in Brexit Special who mistakenly deposited a total of $300,000 into the Westpac 2 account rather than the Brexit NAB account, which was corrected by the transfer of $300,000 from the Westpac 1 account to the Brexit NAB account (the Mistaken Investors); and 2. investors who are related to or associated with the individuals who operated the Ponzi scheme, including Ms Girsa. The liquidators now seek directions in respect of these investors, which I have considered at [140], [149] and [165].

Proof of debt of Nina Girsa and Zoja Gromova

1. Returning to Ms Girsa's proof of debt, on 22 May 2018, the liquidators requested Ms Girsa provide evidence of the bank accounts that her and her mother's investment funds came from. Ms Girsa advised, "My payment was done by cash personal to Tony Iervasi and he transferred money into Brexit account". The only proof of Ms Girsa's investment was said to be her copy of the contract with the companies. On 24 May 2018, the liquidators sought evidence of the cash withdrawn from her bank account and deposited to Mr Iervasi's bank account. Ms Girsa advised that, in respect of the Brexit Special, "I paid Tony Iervasi cash from which i saved and accumulated over for last few years. I Belive the money was then transferred into the Brexit account". The liquidators advised that they needed evidence of Mr Iervasi depositing her cash into his bank account before transferring it on her behalf. A statutory declaration was sought from Ms Girsa.
2. On 5 June 2018, Ms Girsa provided a statutory declaration, declaring that the $50,000 she gave to Mr Iervasi for the purposes of investing in the Brexit Special was money that she had saved from her earnings and was in no way related to funds that may have come from the companies. Ms Girsa also explained in an email: Regarding evidence of Tony depositing $50,000 into his bank account. I repeat once again, I do not have this evidence due to me giving Tony Iervasi cash and him advising me that the transfer was done online from his account it to [sic] the Brexit account. Once i gave him cash, I had no control over what he was doing with the cash. The accounts department gave me a contract with a confirmation of my investment. The copy of the contract has already been provided.
3. On 13 June 2018, the liquidators requested further documentation to evidence the source of funds for Ms Girsa's investment as the liquidators' investigations indicated that Mr Iervasi had received substantial funds from the companies and, given her relationship with Mr Iervasi, further evidence was needed to substantiate that the funds which Ms Girsa invested into the Brexit Special came from her own resources. The evidence we require must demonstrate the original source of the funds you invested into the Companies. We request copies of your: 1. Earnings and payslips for the last 12 months and the last 3 annual income tax returns prior to the date of your investment; 2. A statement of your assets and liabilities in the form of a statutory declaration; 3. Copies of all your bank statements (without any details redacted) for the 12 months leading up to the date you made your Brexit investment; and 4. If the source of the funds was for example from a bank loan or a draw-down on equity in a property, sale of shares etc, then evidence of the underlying transaction. For example a copy of the sale agreement for a property if your Brexit investment funds were secured from this transaction. On 1 August 2018, the liquidators wrote to Ms Girsa again, following up their request.

Liquidators' second report

1. In October 2018, the liquidators filed an interlocutory process seeking directions concerning funds held in the Westpac bank accounts. In support of the application, the liquidators prepared a second report for the Court updating their investigations and providing further detail as to how funds in the Westpac bank accounts had been dealt with by the companies. Some 34,217 line items had now been analysed and compared with proofs of debt lodged by investors. Mr Jahani reported that Westpac bank statements did not contain sufficient information for a significant number of line items to accurately determine the source of deposits, the recipient of payments or the type of transaction.
2. The liquidators identified ten categories of investors potentially entitled to the Westpac funds. In addition, the liquidators described three scenarios by which the remaining funds might be distributed amongst some 600 investors. I will return to these scenarios at [110]. Initially, the liquidators proposed to seek directions from the Court without investor representatives being joined to agitate in favour of each scenario. However, on 23 November 2018, Parker J directed that the proceedings be re-constituted with investor representatives, which was attended to.
3. In respect of Ms Girsa, the liquidators recommended that the funds invested by Ms Girsa in Brexit Special be returned to the Westpac bank accounts and made available for distribution to non-Brexit investors, with Ms Girsa not permitted to prove as a creditor. On 8 November 2018, the liquidators advised Ms Girsa of the recommendations in their report. The liquidators also sent an email to Ms Gromova noting that, once Ms Gromova proved that her investment of $100,000 was from her own personal resources, then this money would be treated in the same way as other non-Brexit investors. On 9 November 2018, the liquidators' solicitors served Ms Girsa with the affidavit evidence on which the liquidators relied in respect of Ms Girsa's proof of debt. Ms Girsa was asked to advise whether she intended to appear at the hearing on 23 November 2018.
4. On 9 April 2019, the liquidators' solicitors wrote to Ms Girsa and Ms Gromova serving the orders made by Parker J to appoint representative investors together with the interlocutory processes filed by those representatives. The liquidators advised that the matter was listed for hearing on 24 and 25 July 2019. The liquidators also advised that they were of the view that Ms Girsa and Ms Gromova's investments were made using funds of the companies and, as a result, they were not entitled to prove in the liquidation of the companies. Ms Girsa and Ms Gromova were advised that they were entitled to seek leave to appear if they wished to be heard. On 11 July 2019, the liquidators' solicitors wrote again to Ms Girsa and Ms Gromova asking them to advise if they intended to appear at the upcoming hearing or whether they agreed to be bound by the orders of the Court. This elicited a telephone call from Ms Girsa, who advised that neither she or Ms Gromova would attend the hearing but they had further documentation they wished to provide regarding their investments. The liquidators' solicitor requested the documentation.

Black J's judgment

1. In July 2019, Black J heard the representatives' interlocutory processes. In August 2019, Black J held in Courtenay House [2019] NSWSC 1113 that, unlike the Brexit Special funds, the monies held in the Westpac Bank accounts are not held on express trust for the investors as the companies did not provide consistent information and documents to investors; it was unclear which investors received what documentation; and, the documents governing investments in Standard Products did not consistently refer to the investments being held in trust: at [6] and [25]. Whether an express trust existed would depend on an inquiry of the terms on which a particular investor had invested and establishing that the relevant documents referred to the funds being "held in trust": at [25]. However, his Honour was satisfied that the deposits into the Westpac Bank accounts are held on a Quistclose trust or held on trust under the principles in Black v S Freedman: at [33] and [38]. Black J noted "the essentially fraudulent character of a Ponzi scheme, or the fraud involved in their representation to investors that monies would be used for trading purposes, whereas they were in fact used to pay the returns to investors, exposing all investors in the scheme, and especially later investors, to the substantial risk of its ultimate collapse": at [38].
2. Black J determined that the beneficial owners of the funds deposited into the Westpac bank accounts are investors who deposited funds into those accounts to participate in investment opportunities other than the Brexit Special. At [47]: … each [investor] has the benefit of a separate trust or trusts in respect of their monies, over the funds in the Westpac Accounts which are, regrettably, insufficient to meet their claims in full. … that distribution would need to be deferred in respect of them until it can be determined whether "hotchpot" principles are applicable, where several of those investors were also investors at earlier times.
3. This general finding was not challenged nor criticised in Caron v Jahani: Bell P at [48]-[49]. However, Black J held that the Post 21 April Investors fell into the same class as other investors who had deposited funds into the Westpac bank accounts, and this finding was successfully appealed. Black J also held that the Mistaken Investors (and Ms Girsa and Ms Gromova if they satisfy the liquidators or the Court that the source of their deposits into the Westpac bank accounts was not the companies' funds) were also in the same class as other investors who had deposited funds into the Westpac bank accounts, and the Mistaken Investors did not appeal.

This application

1. By interlocutory process filed in October 2019, the liquidators seek directions as to whether to calculate the amount to be distributed from the Westpac bank accounts to each investor under one of the three scenarios identified, or some other method, and whether 'hotchpot' should apply. Further, the liquidators seek directions as to whether various other amounts held by the companies should be included in the amounts available for distribution.
2. On 13 November 2019, the liquidators' solicitors wrote again to Ms Girsa and her mother enclosing a copy of Black J's judgment and the further interlocutory process. Ms Girsa and her mother were invited to provide any information to assist the liquidators to determine whether they were entitled to receive a distribution of funds from the companies. Further: Based on the Justice Black's judgment, it is up to you to provide the Liquidators with any evidence of the funds used to invest, which to date you haven't. As a result, the Liquidators are proceeding on the assumption that you have no further evidence to provide. The Liquidators' current view is that the funds invested by you with the Companies were obtained from the Companies themselves, rather than from your own funds. Ms Girsa and her mother did not respond.
3. On 9 March 2020, the liquidators called Ms Girsa in respect of the imminent hearing and Ms Girsa sent an email providing various bank statements and withdrawal slips in respect of the funds invested. On 10 March 2020, Ms Girsa appeared in person. The liquidators needed some time to check the bank records produced by Ms Girsa against the companies' records and, at the conclusion of the hearing, I made directions for the liquidators to provide any further affidavits or written submissions in respect of the directions sought in respect of Ms Girsa or her mother and for Ms Girsa to provide any submissions in reply. After reviewing this material, the liquidators' position had not changed with regard to Ms Girsa's investment. The liquidators were not satisfied that the source of Ms Girsa's deposits into the companies' bank accounts for her investments were not the companies' funds. With respect to Ms Gromova's investment, the liquidators proposed to admit a portion of Ms Gromova's investment in light of the documents provided. This is dealt with at [165].

The appeal

1. In respect of Post 21 April Investors, Bell P (with whom Bathurst CJ and Macfarlan JA agreed) held that Post 21 April Investors were entitled to trace their equitable proprietary interest in the mixed or co-mingled fund using the "lowest intermediate balance rule" (also known as the North American approach or "rolling charge", see Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22): Caron v Jahani at [164]. A number of Post April 2017 Investors were existing investors in the Ponzi scheme and had previously received returns. President Bell observed at [181]: … the Appellants recognise that their claim is subject to an application of the principles of hotchpot. That may be because at least in the case of some of the Appellants, their "fresh" investments made on and after 21 April 2017 in substance, if not in form, represented a rolling over of an earlier "repaid" investment or re-investment of "dividends" received from earlier investments. … [A] separate hotchpot hearing took place earlier this year.
2. The hearing before me (which took place before Caron v Jahani was handed down) proceeded on the basis that Post 21 April Investors would not be prejudiced by my judgment and, if successful on appeal, the liquidators would reconsider the position of those investors.

HOTCHPOT

1. The origin of the word "hotchpot" arose in connection with a gift of land in frankmarriage. As Philp J explained in Re Blume [1959] Qd R 95 at [72]: A man desiring to advance a daughter could make a gift to her and her husband in frankmarriage. … If the donor died seised of other lands and leaving no male heir but another daughter or daughters the advanced daughter did not become a co-parcener in these lands unless she chose to bring into hotchpot the value of the land given to her in frankmarriage. If she did not so choose she was deemed to have a sufficient advancement. If she did so choose all the lands were valued and she had to account for the value of the land given in frankmarriage and her interest as co-parcener in the descended lands was proportionally reduced. She was not obliged to convey any of the land given in frankmarriage - she merely had to account. [citing] Coke's Institutes by Thomas, [vol. 1] p. 722.
2. The equitable doctrine of hotchpot originally applied to the wills of fathers and their children as beneficiaries: Holt v Frederick (1726) 2 P Wms 357; Re Blume at 111 per Mansfield CJ. It was based on the equitable doctrine that it is the universal desire of every father of a family to abstain from all favouritism between his children and to give all equal portions. Where a father, during his lifetime, made gifts to his children and, by his will, left his residuary estate to his children in equal shares, those gifts were, in the absence of directions to the contrary in the will, taken into account as part or full satisfaction of the shares given by the will to maintain the same equality with the other children, to endeavour as far as possible to make all the children's share equal as "equality is equity": Edwards v Freeman (1727) 2 P Wms 435 at 443; see also Re Tennant (1942) 65 CLR 473; [1942] HCA 3; at 482 per Rich J and at 487 per Dixon J; Johnson v Smith [2010] NSWCA 306 at [32]; Prichard v Prichard [2015] WASC 170. The law of hotchpot was extended to intestate estates by the Statute of Distributions 1670 22, 23 Charles II, section 5. Wills may also contain a hotchpot clause directing that advances made by the testator are to be brought into hotchpot. In this event, such advances are notionally added back into the fund and the fund as notionally increased then divided with the recipient giving credit for what they have already received. Thus, the recipient must put back into the pot what they have already received and the pot is then shared out: John G Ross Martyn et al, Theobald on Wills (18th ed, 2016, Sweet & Maxwell) at 34-035.
3. Hotchpot has been long been applied in cross-border insolvency. In Selkrig v Davies (1814) 2 Dow 230; 3 ER 848; 2 Rose 291, a Scottish creditor of an English bankrupt had sequestrated personal property in Scotland. Lord Chancellor Eldon observed that, if the Scottish creditor sought to participate in the distribution of assets in the English bankruptcy then he would have to bring into the common fund what he had received abroad. "If a man chuses to say, I would not bring into the common fund that sum which I have received, then let him retire": at 318. Similarly, in Ex parte Wilson (1872) 7 Ch App 490, Brazilian creditors sought to participate in an English bankruptcy having received a distribution in Brazil. James LJ held at 493, "if a particular creditor who is able to lay hold of assets of the bankrupt abroad comes here to share with the other creditors, he must bring into the estate here that which the law of the foreign country has given him over the other creditors". See also Re Oriental Inland Steam Company (1874) 9 Ch App 557.
4. In Banco de Portugal v Waddell (1880) 5 App Cas 161, the Lord Chancellor Earl Cairns noted that if Portuguese creditors sought to participate in the English bankruptcy "then, on the principle that he who asks for equity must do equity, he must bring into the common fund that which he had already received in respect of the obligations of the same debtors": at 167. Lord Selborne noted that such creditors "cannot be permitted to approbate and reprobate, to claim the benefit of that law, and at the same time insist on retaining, as against it, any preferential right inconsistent with the equality of distribution intended by that law, which he may have obtained either by the use of legal process in a foreign country, or otherwise": at 169-170. See also Re Standard Insurance Co Limited [1968] Qd R 118.
5. The Privy Council reviewed cross-border insolvency cases in Cleaver v Delta American Reinsurance Co (in liq) [2001] UKPC 6; [2001] 2 AC 328 at 338-340, noting that hotchpot does not require a secured creditor - who obtained its security before the commencement of the liquidation - to bring funds received on enforcing its security into hotchpot. Such monies would not have been part of the liquidation estate fund in any event and payment of the secured creditor could not be regarded as having been made out of assets of the liquidation estate: at 340-341. It was submitted by the liquidator in Cleaver that steps taken by the secured creditor to enforce its security after a liquidator was appointed had the result that the secured creditor obtained an unfair advantage vis a vis other unsecured creditors and ought, in equity, be required to bring the fruits of that unfair advantage into hotchpot. Lord Scott, delivering the judgment of their Lordships, held, "an extension of the hotchpot rule in order to cater for all classes of "unfair advantage" would be to introduce inherent uncertainty into what ought to be, and at present is, a rule easy to understand and to apply": at 342.
6. Cleaver has been followed in Australia including in Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation (2017) 253 FCR 46; [2017] FCA 953 at [149] per Derrington J. It was distinguished by Gordon J in Australian Securities and Investments Commission v Letten (No 20) (2012) 92 ACSR 630; [2012] FCA 1283, which concerned distributing funds to investors in 21 unregistered managed investment schemes. Her Honour noted that Cleaver concerned a company being wound up in liquidation where the date of the existence of the fund, as well as its components, was prescribed by a statutory framework. The situation in Letten (No 20) was factually and legally different: at [68].
7. The application of hotchpot in cross-border insolvency is now reflected in Article 32 of United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (1997) which provides that, without prejudice to secured claims, a creditor who has received part payment in respect of its claim in a proceeding pursuant to a law relating to insolvency in a foreign state may not receive a payment for the same claim in a proceeding under the laws of the enacting state regarding the same debtor, so long as the payment to the other creditors of the same class is proportionately less than the payment the creditor has already received. In Akers as a joint foreign representative of Saad Investments Co Limited (in official liquidation) v Deputy Commissioner of Taxation (2014) 223 FCR 8; (2014) 311 ALR 167; [2014] FCAFC 57, Allsop CJ noted that Article 32 enshrined the rule of equality or hotchpot to ensure that creditors are treated equally in circumstances of multiple funds against which access may be gained by different creditors: at [67]. As Bell P noted in Caron v Jahani at [55], Akers has been referred to with approval in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 368 ALR 390; [2019] HCA 20 at [163].
8. Perhaps the most cited recent consideration of the hotchpot principle is that of Campbell J in Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR 97; [2003] NSWSC 1008. His Honour was there concerned with the distribution of trust monies held by a travel agent which went into liquidation, leaving some $170,000 to be distributed amongst airlines, travellers and other travel agencies claiming $1.43 million. The travel agent received monies into a trust account, from which it made payments to providers of travel services. From time to time, the travel agent transferred money from the trust account to a cash deposit account to earn a higher rate of interest, and then transferred the money back to the trust account. Occasionally, the agent transferred money from the trust account to a general account. The transfers were in round sums. The books and records did not enable the liquidators to divine how the round sums were comprised. His Honour observed that it could not be said that, as a matter of law, a fund in which assets of several beneficiaries had become mixed should always be distributed amongst all beneficiaries pro rata to their claims. At [176]: The maxim "equality is equity" does not require that the available funds be divided between all people who can establish that, at one time, they had a claim on a bank account in which property held on trust for several people have been mixed. It can readily enough be accepted that if several people have an equal right to be paid from a particular fund, and the fund proves insufficient, their claims will abate rateably. … Rateable abatement does not automatically apply whenever there is a mixed fund because there is a preliminary question, the answer to which cannot be assumed, of whether all the claimants on the fund, in the form the fund takes at the time of trial, have claims which are equal.
9. Campbell J reviewed instances where claims may not be equal. Whilst contributors to a mixed fund may have a charge over the fund, their charge may be diminished over time as the fund depletes whilst later contributors charges may not be so depleted. An investor may have contributed $5,000 and have a charge on the fund for that amount at the beginning of February but, due to the depletion of the fund during February, their charge is reduced to, say, half of their contribution only. At the beginning of March, a new investor may contribute $5,000 and have a charge for that amount. Thus, whilst both investors have contributed $5,000, their charges over the fund at the beginning of March are not equal and thus their claims are not equal: at [177]. Another example where pari passu distribution may not be appropriate was where some contributors to the fund had withdrawn some monies and purchased an asset into which they could trace: at [184].
10. Further, equitable principles concerning priorities, or personal equities which exist between the contributors, may require the claims of some contributors to be postponed to others: at [178]. An example given was a fund described in Re Hobourn Aero Components Limited's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86 (at first instance) and [1946] Ch 194 (on appeal) where a company's employees agreed to deductions being made from their wages to set up a fund from which payments could be made to members of the fund. "As contributions are made week by … week, so the interest of each contributor increases; as the fund is expended, so the interest of each contributor is proportionately decreased": at [183]. As to personal equities which may affect the claims of employees to the fund, Campbell J observed at [183]: … the requirement to bring into hotchpot benefits received from the fund is an illustration of a personal equity which results in the charge which one contributor has being held to be of lower priority than the charge which another contributor has, though with the possibility of becoming of equal ranking if one of the chargees performed an action which he had no obligation to perform, but the performance of which was a precondition to his charge being accorded equal rank.
11. In the result, Campbell J ordered pari passu distribution as the funds available were comparatively small and, if the liquidator tried to carry out a more extensive analysis of the accounts, then the cost of such analysis would substantially deplete the funds available for distribution: at [193].

PONZI SCHEMES AND HOTCHPOT

1. Different judicial approaches to the current problem are instructive. Perhaps the most populous body of case law is in the United States, where courts typically order pro-rata distribution of the total amount recovered based on the net equity of each investor on the basis that 'equality is equity' between "equally innocent victims": Cunningham v Brown, 265 US 1 (1924); Alex Weiner (2012) at 539. Thus the claims of private investors are admitted to prove in the liquidation for the amount of their investment less amounts repaid, called the "the net investment method": see, for example, In Re Bernard L Madoff Inv Securities LLC 654 F 3d 229 (2d Cir 2011). The "net investment method" is broadly consistent with the equitable doctrine of hotchpot.
2. Speaking extra-judicially, Lady Arden observed on 3 February 2020 in 'The Judicial Committee of the Privy Council as an important source of financial services jurisprudence' (The 9th Annual P.R.I.M.E. Finance Conference, The Hague): [The "net investment method"] is not easy to achieve under insolvency laws similar to those of the UK. The starting point is that there is no immediately obvious cause of action available to the liquidator in this situation enabling him to claw back the amounts already lawfully paid to investors. Nor is it immediately obvious that there should be any such cause of action. Some might say that the net investment method amounts (as the saying goes) to robbing Peter to pay Paul. Robbing Peter to pay Paul means using monies that legitimately belong to one person to satisfy the needs of another. An even more serious objection is that it violates a fundamental principle of UK insolvency law that assets are distributed pari passu. That principle … means that, subject to certain established exceptions, creditors of the same rank receive distributions on an equal footing and in proportion to the amounts due to them respectively. And that is inconsistent with any robbing of Peter to pay Paul. On the other hand, if a way would be found through these issues, investors who had been repaid in full might have to repay to the liquidator sums paid to them.
3. Obviously enough, the distribution of funds in the statutory regime of a winding up may well depart from equitable principles. Equitable principles yield to statutory provisions but, where the statute does not specify what should happen, equitable principles may fill the gap: Gleeson JA in Hawden Property Group at [48]-[50] citing In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440 at [38]-[39] per Brereton J and In Re SSSL Realisations (2002) Limited [2006] Ch 610; EWCA Civ 7 at [99].
4. In New Zealand, in Re International Investment Unit Trust (2004) 9 NZCLC 263,678; [2005] 1 NZLR 270, Williams J considered three possible ways to distribute what remained at the end of a Ponzi scheme: pari passu distribution; distribution on a "first in, first out" basis according to Clayton's Case; or "the North American method" (also known as the "lowest intermediate balance rule" canvassed by Bell P in Caron v Jahani at [106]-[133]) which calculated the value of each investor's fund each time the promoters of the scheme undertook a transaction. The rule in Clayton's Case was rejected as it unfairly disadvantaged earlier investors at the expense of later investors, where all investors' common intentions did not change during the life of the scheme: at [56]. The "North American approach" was too complex, protracted and costly: at [69]. At [72]-[73]: [72] In standing back and looking at the position overall of these unfortunate investors, there is … considerable weight in the observations of Barker J in Re Registered Securities Ltd (in liq); National Australia Bank NZ Ltd v Tuck (1990) 5 NZCLC 66,248, at p 66,248 that: "Each collapse of a contributory mortgage operator inevitably creates varying degrees of hardship for the trusting investors as well as difficult legal problems; the resolution to these problems frequently involves a certain arbitrariness of result." [73] To meet, as far as it can now be met, their common misfortune, what is required is a search for the least unfair result for the investors, bearing in mind that, regrettably, no method of distribution will result in perfect justice for all.
5. In that case, the evidence indicated that payments by promoters of the scheme were in a "patternless manner" and selection of the accounts into which, and from which, the funds were paid was a matter of chance. This suggested that the remaining funds should be available to all investors as determination of ownership of the funds "should be unaffected by the happenstance that their money ended up in one account rather than another": at [76]. For this reason, application of the North American method was said to have "an air of unreality": at [77]. Williams J selected the pari passu method as the appropriate means of distributing the remaining fund. At [80]-[81]: [80] … complete fairness to all investors is unattainable. What method which, looked at broadly, is the method which is the fairest for the greatest number of investors is the method of distribution which should be adopted. [81] In all those circumstances, and taking account of all the issues discussed by counsel, the appropriate method must be pari passu. It is the method chosen in the other New Zealand cases cited earlier in this judgment. It is the method chosen in most of the comparable jurisdictions overseas. …
6. In ASIC v Idylic, Barrett J considered a Ponzi scheme in which investors were invited to contribute money to be "pooled" with other money and jointly invested. Barrett J considered that the intention of investors was that, by making a contribution that was to be pooled with those of others, they would obtain an interest in the whole fund made up of the totality of contributions together with accretions arising from deployment of the fund and diminished by any losses: at [45]. Barrett J considered that a common or collective investment pool was created to be held upon trust for the contributors: at [46]. The prima facie position was that the remaining fund should be allocated pro rata to the contributions of investors so that losses were borne pro rata: at [48]. The issue was whether the distribution should be made pari passu subject to investors bringing into hotchpot the returns paid to them. Barrett J reviewed the evolution of the principle of hotchpot and concluded at [60]: The hotchpot concept is a reflection of the maxim "equality is equity" (with "equality", in an appropriate case, understood as proportionate equality), supplemented by the maxim "he who seeks equity must do equity". The equality (or proportionate equality) that equity in general will promote can only be struck after a person seeking the benefit of it has, as a preliminary, borne whatever burden equity demands be borne in order to ensure that the ultimate equality (or proportionate equality) is not distorted by the effects of unconscientious retention of separately received benefit.
7. The liquidator in ASIC v Idylic submitted that hotchpot should apply as the payment of "returns" (being, in reality, capital rather than profits) depleted the pool of capital available for distribution on the scheme's winding up so that investors who did not receive returns would be unfairly disadvantaged as against investors who had received returns if those recipients were entitled both to keep the returns and also to participate in the remaining pool on the basis of proportionate equality with non-recipients: at [52]. The liquidator relied on French Caledonia whilst counsel for early investors in the Ponzi scheme relied on Cleaver, submitting that application of hotchpot involved an unprincipled elimination of the advantage enjoyed by early investors, particularly where returns were paid to such investors out of assets in which later investors had yet to make a contribution. It was submitted that the hotchpot principle was to be applied, if at all, successively to the fund as reconstituted from time to time. Barrett J considered that this submission failed to afford necessary weight to the nature of a common or collective pool. At [74]: … Once a contribution is made to the fund, the contribution ceases to have any identity linked to its contributor. The contributor's rights become proportionate rights in relation to the fund as it exists from time to time, as distinct from rights in respect of specifically traceable assets within it … A note of caution was expressed in respect of this passage in Caron v Jahani at [93], to the extent that Barrett J might have been suggesting that a contributor's charge over the fund survived depletion or exhaustion of the fund, or that the right to trace trust funds was lost. However, Bell P considered that the particular nature of the fund considered by Barrett J explained the observation.
8. In this regard, Barrett J considered that the Ponzi scheme was akin to the fund described in Re Hobourn Aero Components Limited's Air Raid Distress Fund referred to in French Caledonia. Thus, one could not view the common pool as a succession of separate "estates", each subsisting only until the receipt of a new contribution or the making of a disbursement caused it to be replaced by another "estate", with each separate "estate" at a particular point being subjected to a form of independent pari passu entitlement analysis without paying attention to the history of the fund as a whole: at [75]. It was "of particular relevance" that "returns" were not, in truth, distributions of profits and not paid in accordance with the basis on which the scheme had been promoted and established: at [76]. At [77]: Applying the rationale in the French Caledonia case, personal equities can be seen to exist between the recipients of "returns" and other contributors to a particular scheme causing those recipients to merit a lower priority as to participation in the fund, which relegation will, however, be eliminated if the "returns" are brought into hotchpot. In order to "carry out the strict rights to the fullest extent", to quote the words of Byrne J in Re Printers and Transferrers Amalgamated Protection Society [[1899] 2 Ch 184], there must be an account of the "returns" in order to ascertain the whole of each remaining fund to which the principle of division in proportion to contributions is to be applied. The recipients of the "returns" must, as against the other persons interested in the pooled fund as a whole, do equity by giving up the advantage of the "returns" before participating rateably in what remains of the fund. Barrett J held that the funds should be distributed to investors pari passu in proportion to their respective contributions subject to investors bringing into hotchpot the returns paid to them.
9. ASIC v Idylic was followed in Letten (No 20) which, as already mentioned, concerned 21 unregistered managed investment schemes. A mixed fund had been conducted for at least 12 years with more than 110,000 transactions through the bank accounts. Some of the unregistered schemes had been profitable whilst others had not: profitable schemes subsided unprofitable schemes. The relationship between the schemes and the promoters was far from clear and the accounts could not be traced. In an earlier judgment, Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 80 ACSR 401, a pooling order was made in respect of the remaining funds of all of the schemes where the cost of tracing individual investments exceeded the remaining funds for distribution: Letten (No 7) at [259]. In Letten (No 7), Gordon J held at [335]: … the investors suffered a "common misfortune", and any method of distribution should reflect that fact. Put simply, the alternative - distribution of Scheme property in a particular Scheme to those entitled to the property in proportion to their entitlements - is practically impossible at a number of levels. Given the manner in which these Schemes were operated and the difficulties identified in unscrambling the affairs of the Schemes, no rational person would undertake or engage in that task.
10. In Letten (No 20), the hotchpot principle was held to apply so that those investors who received distributions or returns did equity in order to rank equally with investors who had not received distributions. Gordon J held at [74]: Personal equities exist between those investors who received distributions and those investors who did not receive distributions such that the equitable charge held by those investors who received the distributions should only be afforded an equal priority to the equitable charge held by investors who have not received distributions once all distributions have been brought into hotchpot. Her Honour noted that investors who received distributions may elect not to share in the distribution of the common fund, in which case the distributions they had already received would not form part of that fund: at [75].
11. In Hong Kong, in In Re Performance Investment Products Corporation Limited [2014] HKCU 658; (2014) HKCFI 481, the Court approved a pari passu distribution as it was impossible for any individual investor to trace their funds given the manner in which the funds were paid into the company's bank account and mixed with other funds; any attempt to do so would be time consuming, prohibitively expensive and most likely produce inaccurate conclusions; and, in all the circumstances, this was the fairest way to deal with the sums recovered by the liquidators of the Ponzi scheme: at [4]-[6]. See likewise Re MF Global Hong Kong Limited [2012] 2 HKLRD 1; [2012] HKCU 276 at [26]-[30] per Harris J.
12. In Financial Conduct Authority v Anderson [2014] EWHC 3630 (Ch); [2014] CN 1983, the Financial Conduct Authority brought an application under section 382 of the Financial Services and Markets Act 2000 (UK) seeking directions for the distribution of the remaining funds in a Ponzi scheme to depositors. Section 382(3) of that Act provided that an amount paid to the Financial Conduct Authority must be paid and distributed among "such qualifying persons as the Court may direct". The section gave no guidance as to how the Court may exercise its discretion but Mr Halpern QC (sitting as a Deputy Judge of the Chancery) considered that the purpose of the payment was to compensate for losses suffered by depositors as a result of a contravention of the Act - not just those who were out of pocket but those who did not receive the profit which they were expecting - and whether the distribution among the class was fair: at [8]-[13]. As to the question of fairness, the enormous gap between the losses suffered by depositors and the sums available for distribution impressed the following upon his Honour, at [13]: This makes it imperative that any method of distribution is as simple as is possible, consistent with it being fair in a rough-and-ready way. There is a real risk that any attempt to achieve perfect justice would itself become a source of unfairness, firstly because it is likely to involve spending disproportionate costs in attempting to fine-tune the scheme, secondly because it is impossible to understand fully the divergent interests of each class of depositors when they are not separately represented, and thirdly because a complex scheme is likely to be disproportionately expensive to administer.
13. In a perfect scheme, Mr Halpern QC considered that each depositor should be able to claim their capital losses including interest as compensation for the time-value of money. Further, each depositor should give credit for interest actually received, thus reducing their overall loss. If the total available for distribution was less than the amount to which depositors were entitled, then the claims should be scaled down pro rata. If any depositor failed to make a claim, then their entitlement should be divided amongst those who had, so long as no one recovered more than 100%, at [14]. However it was not possible to give effect to such an arrangement as many depositors had rolled their money over from one contract into another and thus it was difficult to say precisely when each had suffered loss; those who invested at the outset sometimes made a profit and this was a reason for not compensating them for the time-value of money; and it was not possible to reconstruct the interest payments made to depositors: at [15].
14. Thus, the imperfect solution endorsed by his Honour was to allow each depositor to claim the capital sum recorded at the time the Financial Conduct Authority intervened less interest received in respect of all contracts which the depositor had with the promoters of the Ponzi scheme. "I accept that this is not a perfect solution, but I consider that the attempt to achieve a more perfect solution is likely to result in disproportionate expense without necessarily achieving a better result": at [16]. As the records permitted the Financial Conduct Authority to differentiate depositors in respect of each promoter of the Ponzi scheme, the funds were allocated to the depositors in respect of each promoter's scheme, unlike Re BCCI (No 3) [1993] BCLC 106 where the assets of two companies were pooled as their affairs were so hopelessly intertwined, that was the only sensible way to proceed: at [17]. Although his Honour was exercising a statutory power rather than applying equitable principles, Financial Conduct Authority v Anderson is nonetheless illustrative of the considerations affecting the distribution of funds to victims of a Ponzi scheme.
15. ASIC v Idylic was followed by Black J in Re Idylic Solutions Pty Ltd (as trustee for Super Save Superannuation Fund) (2016) 114 ACSR 230; [2016] NSWSC 907, which concerned different schemes in which the same promoter was involved as that considered by Barrett J. Black J adopted the analysis of Barrett J, approving the distribution of the funds pari passu subject to investors bringing any "returns" into hotchpot. Other approaches considered by the liquidators had the capacity to advantage earlier investors who received greater "returns" and disadvantaged later investors: Idylic Solutions at [47]. In the hearing before me, the liquidators' counsel referred to the following portion of Black J's judgment at [44]: [Counsel for the Applicants] points out that the effect of this proposed method is that any "returns" paid during the period of the operation of a scheme, which were in fact paid from capital, are treated as a preliminary distribution in the winding up of each scheme. … However, I think read in context, Black J was summarising the submissions of counsel and was not annunciating any different principle from that considered by Barrett J in ASIC v Idylic.
16. Two recent cases illustrate efforts by liquidators to utilise statutory powers to equalise distributions to investors in a Ponzi scheme. In In the matter of Stanford International Bank Ltd (in liquidation) [2019] UKPC 45, the liquidator unsuccessfully sought to bring an oppression suit under section 204 of the Antiguan International Business Corporations Act to 'claw back' profits made by investors in a Ponzi scheme in Antigua and Barbuda. The Court considered obiter that the liquidators' proposed claim to adjust distributions to creditors by requiring partly paid creditors to bring to account monies received before the appointment of the liquidators should not be authorised: at [72]. Lord Briggs (with whom Lord Wilson and Sir Andrew Longmore agreed) held at [73]-[74]: [73] The purpose of the proposed re-adjustment is to bring about an element of convergence between the misfortune suffered by partly paid depositors, and those who have received no payment at all prior to the cut-off date. … it requires him to give a form of credit for that which he has received as equity's darling [that is, a bona fide purchaser for value without notice], against that which the insolvency scheme applicable to [Stanford International Bank] would otherwise generate for him in the liquidation. [74] Furthermore, this proposed re-adjustment would operate in a strangely counter-­intuitive way as between depositors who have been partly paid, and those who have been paid in full, before the cut-off date. Those receiving payment in full escape scot-free. The inability to 'claw back' payments made before the liquidation was considered to render the application of hotchpot unappealing, even if conceptually available in a liquidation.
17. Nor did the Privy Council consider that the common misfortune principle should apply in the insolvent liquidation of a bank, being the vehicle through which the Ponzi scheme was conducted. At [78]: … The creditor debtor relationship which depositors have with a bank is, of course, to be resolved in accordance with the insolvency scheme if the bank goes into liquidation, and that produces a form of rough justice in which outstanding claims of equivalent priority are all dealt with pari passu. It would be a recipe for uncertainty in the law if that form of rough justice were liable to be supplanted by another form of, perhaps, less imperfect justice, wherever the liquidation in question can be said to have been a consequence of some form of unfair prejudice or oppression capable of being viewed as a common misfortune. Stanford International Bank does not attempt to distil or modify the application of equitable principles but rather, as in Cleaver, considers the extent to which such principles may be deployed in the statutory regime of a liquidation to modify the application of statutory rules.
18. Likewise, an attempt by the liquidator of a "feeder fund" to use a power conferred by the Companies Law of the Cayman Islands to rectify the company's register of members and thereby fairly distribute the remaining assets of a Ponzi scheme between investors failed in Pearson v Primeo Fund (No 2). The Privy Council held that the power could not be used to alter the legal rights of members noting that the construction of the statute contended for "would work a very large and unprecedented change in the law, by empowering liquidators to impose a scheme of fair distribution of their own devising in substitution for the members' legal rights, without providing liquidators with any principled guidance either about when it would be appropriate for them to do so, or as to the contents of such a scheme": at [53]. Further, such a power would run counter to the fundamental principle applicable to liquidation that the assets of the company are to be applied pari passu among the classes of stakeholders in accordance with their legal rights as at the commencement of the liquidation: at [55].
19. To this review must now be added the most learned exposition by Bell P in Caron v Jahani of the rule in Claytons Case, pari passu distribution and the lowest intermediate balance rule. Without detracting from the comprehensiveness of that review, in short, Bell P concluded that the rule in Clayton's Case will not apply where the funds of innocent contributions have been mixed in an account and there is a short fall (at [78]-[83]); the lowest intermediate balance rule should be applied where practicable (at [133]); or otherwise pari passu (at [122]).
20. This review of judicial approaches to the current problem indicates the difficulties applying statute, equitable principles and concepts of fairness to the ruins of a fraud. As it has been said, "The law reports are strewn with the bones of collapsed financial institutions. The law, if not the parties, has been enriched by legal contests attendant upon those collapses": David Partlett, 'The Right of Subrogation in Accommodation Bills of Exchange' (1979) 53 Australian Law Journal 694 at 699. Whilst this is no comfort to the investors in this Ponzi scheme, it emphasises that the method of distribution is not to be tested simply by whether an individual investor does better or worse than under another method.
21. What can also be seen is that the courts have been reluctant to embrace an approach which may be seen by liquidators or investors as fairer unless it is consistent with the statutory regime governing a liquidation or, in the absence of such rules, supported by established equitable principles. The most common result of the application of equitable principles is to distribute the remaining funds on a pari passu basis with investors to bring into hotchpot the "returns" already received. The doctrine of hotchpot has not been applied where it was too difficult to do so, by reason of inadequate records or the time and cost involved in the task. In the latter circumstances, reference is made to common misfortune and the search for a method of distribution with the least unfair result.

THE SCENARIOS

1. The liquidators proposed three alternative methods by which the funds in the Westpac bank accounts may be distributed following Black J's finding in Courtenay House [2019] NSWSC 1113 that the funds are held on trust. The scenarios assume that there is no 'claw back' of returns or commissions already paid to investors. The methods or scenarios are: 1. Scenario 1 Capital Only: The final dividend is calculated by distributing the net assets by reference to the Capital Outstanding amount for each investor. No consideration is given to the returns or commissions received by the investors through the period they were an investor. Scenario 1 is the equivalent of a pari passu distribution. 2. Scenario 2 Returns Included: Any returns or commissions paid are subtracted from Capital Outstanding, to provide a "Net Claim". The final dividend is calculated by distributing the net assets by reference to the Net Claim. If an investor reinvested their returns, the new investment is combined with the existing investment for the purposes of the calculation. 3. Scenario 3 Overall Rate of Return: The overall average return to each investor is calculated compared to their Outstanding Capital. The final dividend is equalised so that each investor who is due a portion of the final dividend receives the same overall return on their Capital Outstanding. The liquidators used a "goal seek function" to vary the rate of return which an investor would receive on their capital so that total payments to investors equated to the final dividend available for distribution. An overall dividend of 44 cents in the dollar was arrived at. The estimated dividend rate will vary for each investor in this scenario.
2. Capital Outstanding is defined in the liquidators' second report as follows: 1. Where a proof of debt is submitted, Capital Outstanding is the amount claimed (noting that proofs of debt have been verified by the liquidators against the companies' bank data and spreadsheets). 2. Where no proof of debt is submitted, Capital Outstanding is investor deposits less return of capital verified from bank statements. To determine whether a payment to an investor was a return of capital, return on investment or commission, the liquidators had regard to the size of a payment in comparison to other payments to the investor, the transaction description in the companies' records, and (where available) the net asset position claimed in the proof of debt.
3. Under Scenario 1, 611 investors would be admitted to participate and are estimated to receive 12 cents in the dollar by way of dividend. Returns received by the investors are not taken into account in Scenario 1, so even those investors whose returns exceeded the amount of their capital will receive a distribution.
4. In Scenario 2, only 505 investors would be admitted to participate as the remaining investors have already received more than their original capital back via returns and commissions. Those entitled to participate would receive 26 cents in the dollar by way of dividend.
5. In Scenario 3, only 384 investors would be entitled to participate. Each would receive an individually calculated final dividend such that, overall, they will receive 44 cents in the dollar including returns already received from the companies. If an investor has already received more than 44% by returns during their tenure as an investor, they will receive no further dividend. The aim of Scenario 3 is to distribute the final dividend in such a way that, after the dividend, investors would have each received the same proportion of their remaining capital in returns.

In favour of Scenario 1

1. The fifth defendant, who spoke in favour of Scenario 1, submitted that it involves the application of the ordinary pari passu principle, whereby each of the trust creditors is paid an amount proportionate to the amount which their debt compares to the totality of trust debts: see Jacobs Law of Trusts in Australia (8th ed, 2016, LexisNexis) at pg 523 [21-15]. There was no warrant to depart from this position. The fifth defendant accepted, however, that having regard to Idylic, Letten (No 20) and the facts as found by Brereton J and Black J, the Court may find it is appropriate for investors to bring into hotchpot the returns paid to them. The fifth defendant did not suggest that Idylic was so clearly wrong as not to be followed.
2. Those who spoke against this scenario submitted that Scenario 1 furthered the effects of the Ponzi scheme by distributing losses arbitrarily. By its nature, a Ponzi scheme typically rewards earlier investors and causes the losses to fall most heavily on later participants. As a result, where the losses fall depend on the happenstance of the time an innocent party was lured into the scheme. A result which accounts for the extent to which investors have already recovered their capital is preferable to one which simply entrenches an arbitrary distribution of loss.

In favour of Scenario 2

1. The sixth defendant, who spoke in favour of Scenario 2, submitted that the hotchpot principle requires that those investors for whom the Westpac funds are held on trust must do equity by taking into account any returns received during the period that they were an investor, including returns and commissions, in order to participate equally in what remains of the fund. Scenario 2 achieves this result and should be adopted. The comparative fairness of Scenario 2 relative to Scenario 1 was said to illustrate the rationale behind the hotchpot principle. It avoids the possibility that long-term investors who have already recovered more than their original capital by returns will be paid further returns on investment, prior to those who have not even recovered their capital being made whole.
2. Those who spoke against Scenario 2 submitted that it is not, in truth, the "net investment approach", measuring dollars in and dollars out (Christensen (2012) at 325-6) as each scenario begins with "Capital Outstanding" and to that extent partially legitimised the Ponzi scheme. "Capital Outstanding" seemed to be the closing balance of the investor's accounts as at the date of liquidation, which may include "capitalised profits" (or redistributed capital). I do not think that this is what "Capital Outstanding" records: see [111]. It was further submitted that a better starting point was the capital contribution of the Investors. It was submitted that Scenario 2 legitimised pre-liquidation returns as there was no claw back and investors retained such returns dollar-for-dollar. It was said that Scenario 2 failed to take into account the pre-liquidation returns were in fact capital of other investors. Scenario 2 favoured investors who most likely entered the scheme at an earlier date.
3. The inequality was said to be demonstrated by an example using three investors. Investor A invested $50,000 with no return pre-liquidation. Investor B invested $60,000 but received $10,000 prior to liquidation. Investor C invested $50,000 but received $10,000 prior to liquidation. Under Scenario 2, the investors would receive a final dividend of 26 cents in the dollar, which would be $12,806 for Investor A and Investor B, and $10,400 for Investor C. Both Investor A and Investor B have a "Net Claim" of $50,000 but Investor B receives a greater return of 38% when the "returns" already received under the Ponzi scheme are taken into account (($10,000+$12,806)/$60,000). The rate of return is even greater for Investor C (($10,000 + $10,400)/$50,000).
4. In reply, the sixth defendant submitted that there is nothing intrinsically unfair about the differing overall rates of return generated by Scenario 2. This was a perfectly orthodox way of distributing the remaining fund amongst those with outstanding net claims against it, similar to an insolvency set off under section 553C of the Corporations Act. It could not be suggested in such a context that a creditor's dividend should be reduced to reflect the fact that pre-insolvency payments are valued dollar for dollar. It was submitted that there was no basis for treating investors who have the same Net Claim differently, yet Scenario 3 would do this by paying a different final dividend to Investor A and Investor B. Finally, it was submitted that there was no need to claw back returns in order to apply Scenario 2 in a sensible fashion. The object of Scenario 2 is to require those who have already received returns to account for those returns prior to participating in the fund. If an investor has received returns greater than his or her Outstanding Capital, then that investor will receive nothing from the fund.
5. In further reply, those who spoke against Scenario 2 submitted that the problems with the methodology inherent in Scenario 2 (set out at [118]) provided a reason for treating investors with the same Net Claim differently, consistent with Idylic at [60], being that the rationale with respect to any distribution ought to be to "… ensure that the ultimate equality (or proportionate equality) is not distorted by the effects of unconscientious retention of separately received benefit …". Unless there is claw back, then there can never be "ultimate equality" in any of the scenarios. "Proportionate equality" must be the aim, which it was submitted was achieved under Scenario 3. Failure to account for the time value of money was said to be more pronounced in Scenario 2 where investors may have received "returns" at different times before liquidation. Investors who received their return earlier enjoyed the advantage of interest earned of the return in the meantime. To this, the sixth defendant submitted that the time value of money does not matter for Scenario 2, which simply ensures that returns already received are accounted for before an investor can participate in the fund.

In favour of Scenario 3

1. The seventh defendant, who spoke in favour of Scenario 3, submitted that the most appropriate method of distribution in a Ponzi scheme is using a pro rata mechanism which takes into account all returns (which are, in truth, returns of capital) and treats pre- and post-liquidation returns in the same way. As the liquidators stated in their second report to the Court: … Scenario 3 attempts to simulate what may in all likelihood be the fairest outcome by attempting to deliver a varying dividend to each investor to equalise their entire return over the investor's term relative to all other investors …
2. Given the insufficiency of the balance of funds to satisfy all claims, the correct approach was to select the rule which achieves equity as between the beneficiaries depending on context: Eaton v LDC Finance Ltd (in rec) [2012] BCL 241; [2012] NZHC 1105 at [59]-[61]. As between innocent beneficiaries, a division of assets based on the contribution of each investor is viewed as the "rational mode of distribution" so as to achieve substantial justice between the parties: Re Registered Securities Ltd (in liq) [1991] 1 NZLR 545 at 558; Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478 at [55]. When considering Ponzi schemes, whilst no method of distribution will provide perfect justice for all investors, in order to meet the common misfortune of investors, it is necessary to seek the least unfair result. The method of distribution ought to be a pragmatic and fair way to share common misfortune: Re International Investment Unit Trust [2005] 1 NZLR 270 at [55]-[56] and [73]. In order to carry out the strictest rights to the fullest extent, there ought to be an account for returns in order to ascertain the whole of the remaining fund to which the principle of division in proportion to the contributions is to be applied; those that have received pre-liquidation returns must "do equity" by having their returns accounted for prior to participating: Idylic at [77] (Barrett J). For example, in Re Idylic (2016) (Black J), returns paid during the scheme were treated as preliminary distributions: per Black J at [44]. Scenario 3 was said to be "more fair" than Scenario 2.
3. In their second report, the liquidators identified two shortcomings with Scenario 3. 1. First, investors who had already received more than 44% returns would not be equalised down to 44% due to the uneconomic prospect of clawing back payments. 2. Second, the approach ignored the time value of money. In seeking to simply equalise to a common dividend rate across all investors, the approach ignored the fact that some investors may have invested for a very short period of time whilst others invested much earlier in the life of the Ponzi scheme. If the amount of time invested was taken into account, the final dividend varied substantially having regard to the opportunity costs associated with making an investment over a period of time. To this, the seventh defendant said that all scenarios suffered from these limitations. The lack of claw back was said to cause greater problems for Scenario 2 where disproportionate pre-liquidation receipts were not taken into account when determining the final dividend. As to the time value of money, as all scenarios used "Capital Outstanding" as their starting point, all disregarded the time value of money. There is no variation to the "Capital Outstanding" depending upon when capital was contributed by the contributor. Scenario 2 also disregards the advantage that a contributor had from withdrawals, both in terms of the value of withdrawals and the time value of those withdrawals. As the liquidators' criticisms levelled at Scenario 3 applied equally to all scenarios, it was submitted that the general principles of "fairness" (or the "least unfair") and equality suggested that Scenario 3 ought be preferred.
4. Those who spoke against Scenario 3 embraced the matters initially raised by the liquidators. It was said that it made no sense to apply Scenario 3 without the ability to claw back returns as the purpose of Scenario 3 was to distribute the final dividend in such a way that, after the dividend, the investors will have each received the same proportion of their remaining capital in returns. That purpose could not be achieved unless returns which exceeded the equalisation return rate of 44% could be clawed back. It was submitted that failure to take into account the time value of money mattered for Scenario 3, because it seeks to equalise returns over time, which cannot be achieved without having regard to the time value of money. In reply, the seventh defendant submitted that failure to account for the time value of money is a bigger problem with Scenario 2 as the amount on which the interest is calculated for those with pre-liquidation returns is on the full amount of the return while Scenario 3 is only considered on a proportional amount.

Conclusion

1. Each scenario proceeds on the basis that each deposit into the Westpac bank accounts gave rise to a separate trust (Courtenay House [2019] NSWSC 1113 per Black J at [47]); it is not practicable to determine by tracing the entitlements of each investor to that fund; and, as such, the trusts should be pooled and distributed on the basis that each investor has a rateable interest in it subject, potentially, to the application of hotchpot.
2. I have earlier described what investors were told about how their monies would be used by the companies, and how the companies in fact used their monies: at [30]-[47]. The position accords with the collective investment funds described in ASIC v Idylic and Hobourn Aero Components Limited's Air Raid Distress Fund referred to in French Caledonia. Consistent with those authorities, all investors have an equal claim to the remaining fund subject to personal equities which exist between them which require investors to bring into hotchpot benefits received from the fund. Failure by an investor to bring into hotchpot the returns paid to that investor will have the consequence, in equity, that the investor's claim to the fund will be postponed to the claims of other investors: French Caledonia at [176]-[183]; ASIC v Idylic at [75]-[77]; Letten (No 20) at [74]. There is no suggestion that it is impossible or cost prohibitive to bring these payments into hotchpot. Whilst pari passu distribution may be the way to proceed if practical considerations are such that hotchpot cannot be applied, this is not such a case. Thus, Scenario 1 must be put to one side.
3. Scenarios 2 and 3 both account, in different ways, for the application of the principle of hotchpot. Both scenarios have been advanced in circumstances where the precise way in which hotchpot was applied in ASIC v Idlyic and Letten (No 20) was said by the liquidators to be somewhat ambiguous. In Letten (No 20), Gordon J's orders required a member's entitlement to receive a distribution from the common fund to be determined in accordance with the following formula: A x ((B + C)/D) - E where: (i) "A" means that member's total contributions …; (ii) "B" means the total of all funds in the Common Fund which are available for distribution; (iii) "C" means the total Payments Received by all members who have made Claims on the Common Fund (which have not been withdrawn or rejected in part or in full); (iv) "D" means the total of all Claims (which … represents members' total contributions to the Schemes …) which have not been withdrawn or rejected in part or in full; and (v) "E" means the Payments Received by that member.
4. The only difference between these orders and Barrett J's orders in ASIC v Idylic is that Gordon J recognised that a person entitled to make a claim on a common fund may choose not to do so if, by bringing into hotchpot an advance already received, the claimant may do better to simply hold on to what they have and make no further claim. That cannot be said to be controversial.
5. A second area of ambiguity was said to arise from Barrett J's reference in ASIC v Idylic to "an account of the 'returns' in order to ascertain the whole of each remaining fund to which the principle of division in proportion of contributions is to be applied": at [77]. It was submitted by the liquidators that Black J's judgment in Idylic Solutions suggested that the effect of this method was that any returns paid during the scheme were treated as preliminary distributions in the winding up of the company: Idylic Solutions at [44]. As already mentioned at [103], I think read in context, Black J was summarising the submissions of counsel and was not annunciating any different principle from that considered by Barrett J in ASIC v Idylic.
6. Returning then to Scenario 2 and Scenario 3, the case law reviewed, concluding at [109], indicates that the remaining funds in the Westpac accounts should be distributed pari passu with investors to bring into hotchpot the "returns" already received, being all funds paid by the companies to the investor whether described as return of capital, return on investment or commissions. Scenario 2 achieves this by accounting for any return of capital in calculation of the "Net Claim", and the return on investments and commission by applying the principle of hotchpot. The circumstances which may warrant the principle of hotchpot not applying - being where it is too difficult to do so by reason of inadequate records or the time and cost involved - do not apply here.
7. Whether the scenario aligns with the "net investment method" is not particularly relevant. Whether Scenario 2 is analogous to section 553C of the Corporations Act is also not relevant as, whilst the companies are in liquidation, Part 5.4 of the Corporations Act does not apply to the trust funds as the funds are, by definition, not the property of the companies.
8. The time value of money is not a concern recognised by the equitable principle of hotchpot, nor is there any compelling reason to compensate investors for the time value of money in a Ponzi scheme. It is the nature of a Ponzi scheme that earlier investors are likely to have received more of their money back than later investors, albeit that these monies are, in truth, the funds invested by others. As the returns ordinarily promised by Ponzi schemes greatly exceed market rates of return, early investors have likely enjoyed above-market rates of return. There seems little reason to further compensate earlier investors for the time value of money in addition to what they have already received where it is later investors who will suffer the greatest losses: Financial Conduct Authority v Anderson at [15]; Idylic Solutions at [47].
9. Whilst the methodology employed by the liquidators in Scenario 3 has some attractive features, it is novel and has no comparator in the authorities reviewed at [89] to [109]. I do not consider that the notion of "common misfortune" supports a novel calculation where hotchpot can apply, noting that this calculation is imperfect in any event as investors are not equalised to an overall rate of return of 44% in the absence of 'claw back'. As to whether Scenario 3 is fairer, individual ideas of fairness differ widely and frequently align with self-interest. Whilst the application of the equitable principle of hotchpot may not deliver a perfect remedy, it does deliver a predictable result supported by good reason developed over centuries of similar misfortunes. For these reasons, the funds in the Westpac bank accounts should be distributed in accordance with Scenario 2.

Another complication: payments in relation to Special Products

1. The liquidators raised for consideration whether, in applying the principle of hotchpot, it was appropriate for returns, commissions or partial redemptions in relation to Special Products to be taken into account in distributing the funds in the Westpac accounts, which were used for investments in Standard Products. That is, are the benefits obtained from investments in Special Products benefits available to the "common fund". The estimated final dividend in the liquidators' second report proceeds on the basis that the returns from Special Products are brought into hotchpot but the dividend can be recalculated if this approach is not appropriate. In particular, $8.27 million was withdrawn from the US Election NAB account to pay "returns" on the US Election Special. The liquidators submitted that these returns should be brought into hotchpot. As Mr Scruby SC put it: … there weren't really any special products, there weren't really any standard products, there really weren't any products at all, and so if investors are participating in a trust that's based on a fraud it does seem rather odd that hotchpot would be applied in a way that in effect allowed some investors to set up a part of that fraud and say, "Look, we had these separate products. They were different and we got returns on them, so they shouldn't be brought to account". I mean, the reality was that it was just one big fiction.
2. The fifth defendant submitted that, as a matter of principle, unless there has been a mixing of funds as between the Westpac accounts and the National Australia Bank accounts, it would be difficult to see how returns on Special Products are benefits available to the common fund. Investments in Special Products were intended to be separate investments made with new money as opposed to rolling over monies from Standard Products. If there was mixing, the fifth defendant accepted that returns on Special Products should be brought into hotchpot.
3. The sixth and seventh defendants agreed but added that, while the National Australia Bank accounts may have comprised a mixed fund between which several transfers were made, they were arguably a different mixed fund to that constituted by the Westpac accounts. On the other hand, substantial sums were rolled over from the National Australia Bank accounts into the Westpac accounts, presumably as returns which were reinvested into Standard Products. The rolled over sums have become mixed in the Westpac accounts, and what remains of them will be distributed according to the method approved by the Court. It would be incongruous that where returns were paid directly from the National Australia Bank accounts to investors, those returns (and any initial deposits made for investing in Special Products) are left out of account entirely. That is especially so where all investors in Special Products were required to have already invested in Standard Products so that there is a commonality in the identity of the two sets of investors. Investors who paid money into and received returns from the National Australia Bank accounts are a subset of those who paid money into and received returns from the Westpac accounts.
4. As mentioned at [46], there was mixing of the companies' funds between the National Australia Bank accounts and Westpac accounts. Mr Jahani gave evidence summarising the movement of funds between these accounts based on the liquidators' investigations. From the Westpac 1 account, $1.3 million was transferred to the Brexit NAB account and $1.2 million was transferred to the US Election NAB account. From the US Election NAB account, $5 million was transferred to the Westpac 2 account after the US Election Special Product finished. As I understand Mr Jahani's evidence, these fund movements were the composite of numerous transactions.
5. It is true that, although the companies advertised "products", there were in fact no products. The practical result of promoting "products" was, however, to direct investors to pay their money into different bank accounts. If there had been no mixing of the National Australia Bank funds with the Westpac funds, then investors in Special Products may be entitled to resist bringing those "returns" into hotchpot. But the evidence indicates that the funds held by both banks have been mixed. It is not possible to trace the funds of any particular investor in a Standard Product into funds transferred to the National Australia Bank accounts. It is not possible to trace the funds of any particular investor in a Special Product into funds transferred to the Westpac bank accounts. Thus, in calculating the distribution payable under Scenario 2, I consider that the liquidators would be justified to take returns, commissions and repayment of capital in relation to Special Products into account by: 1. classifying deposits made by investors to the National Australia Bank accounts for the purpose of investing in the US Election Special Product or the Inauguration Day Special Product as capital; and 2. classifying returns paid to investors on their investment in the US Election Special Product or the Inauguration Day Special Product and commissions as returns.

Mistaken Investors

1. As earlier mentioned at [62], four investors mistakenly deposited $300,000 for the Brexit Special into the Westpac 2 account rather than the Brexit NAB account. At least some of the Mistaken Investors were told by representatives of the companies that the companies would arrange to transfer these funds into the Brexit NAB account. Between 3 and 17 days later, equivalent amounts were transferred into the Brexit NAB account but from the Westpac 1 account: Courtenay House [2019] NSWSC 1113 per Black J at [49]. Thus, the $300,000 was mixed in the Westpac 2 account and subsequent transfers made from a different Westpac account.
2. When Brereton J made orders to distribute funds in the Brexit NAB account to investors in the Brexit Special, directions were also given that the liquidators were justified in withholding distribution of $300,000 from the Brexit NAB account pending further determination by the Court. It was then anticipated that the Mistaken Investors would contend that they had a claim over those funds. In Courtenay House [2019] NSWSC 1113, Black J considered the position of the Mistaken Investors at [48]-[59]. While the companies treated amounts transferred from the Westpac accounts to the Brexit NAB accounts as referrable to several of the Mistaken Investors, Black J held that those investors did not have a sufficient interest in the Westpac accounts to support that treatment as their funds had been deposited into an account that was deficient (the Westpac 2 account) having regard to the claims of other beneficial owners to those funds: at [54]. Thus, Black J held that the Mistaken Investors were in the same category as other investors with a claim to funds in the Westpac bank accounts. The Mistaken Investors had a beneficial interest in the funds in the Westpac bank accounts but no beneficial interest in the Brexit NAB account: at [59]. Black J did not make orders in respect of the Mistaken Investors and such orders are now sought.
3. The liquidators seek a direction as to whether the $300,000 retained in the Brexit NAB account should now be transferred back to the Westpac accounts and distributed to non-Brexit investors in accordance with Scenario 2. The liquidators submitted that it followed from Black J's judgment that the $300,000 should be treated in the same way as other money in the Westpac bank accounts. Black J found that, immediately before the monies were paid from the Westpac bank accounts, the monies were held on trust for all of the beneficial owners of the funds in the Westpac bank accounts. The funds were not held on trust for investors in the Brexit Special. The funds are specifically identifiable and should be treated in the same way as monies in the Westpac bank accounts. The fifth, sixth and seventh defendants supported the liquidators' submissions.
4. I accept the liquidators' submission. In light of Black J's findings in Courtenay House [2019] NSWSC 1113, the $300,000 should be returned to the Westpac bank accounts for distribution to the beneficial owners in accordance with Scenario 2. Essentially, the Mistaken Investors having failed before Black J and no appeal having been brought in respect of his Honour's findings, orders should now be made to give effect to his Honour's judgment.

Remaining funds in NAB business account

1. When the liquidators were appointed, the NAB business account had a balance of $14,006.33. The liquidators seek directions as to whether these funds should be pooled with the funds in the Westpac accounts for distribution to non-Brexit investors
2. Between 14 and 17 February 2017, $25 million was transferred from the Brexit NAB account to the US Election NAB account via the NAB business account. The $25 million was then used to pay commissions and repay capital to investors in the Inauguration Day Special. This was the only funds transfer in or out of the NAB business account. The liquidators formed the view that the purpose of the account was to act as an intermediary for the transfer of funds between the Brexit NAB Account and the US Election NAB Account.
3. The funds in question are small. The liquidators submitted that, although the court's statutory and inherent powers do not generally permit it to make orders that depart from the proprietary rights of the scheme participants, that general principle will be set aside in cases where it is not pragmatic to ascertain the proprietary rights of the scheme participants: Letten (No 7) at [259], [332]; Courtenay House [2018] NSWSC 404 per Brereton J at [34]. Whilst it is likely that the funds in question ultimately related to one of the Special Products which ceased prior to the opening of the Brexit Special, it is not practical to ascertain the precise nature of those proprietary rights given the small amount involved and the fact that those particular investments ceased prior to the liquidators' appointment. In these circumstances, the liquidators seek the Court's direction as to the appropriate treatment of these funds. One suggestion was that the Court direct, pursuant to section 601EE(2) of the Corporations Act, that the funds in the NAB business account be pooled with the funds in the Westpac bank accounts. Alternatively, the Court could direct, pursuant to section 90-15 of the Insolvency Practice Schedule or section 63 of the Trustee Act that the liquidators are justified in distributing the funds in the NAB business account to the beneficial owners of the Westpac funds in the same manner as Scenario 2.
4. The fifth defendant, having regard to the small amount of money involved, agreed with the liquidators' submissions that a pragmatic approach was warranted and was ambivalent as to which of the two courses proposed by the liquidators was adopted as each achieved the same result. The sixth and seventh defendants supported the liquidators' position.
5. I accept the liquidators' submissions. In Letten (No 7), Gordon J recognised that, in exceptional circumstances, the general principle that there should be no distribution other than to those entitled to assets in proportion to their relevant entitlements yielded to pragmatism as it was to no one's advantage that time and costs be spent in working out entitlements on the basis of each managed investment scheme: at [332]. I consider that the liquidators are justified in distributing the funds in the NAB business account to the beneficial owners of the funds in the Westpac bank accounts in the same manner as Scenario 2.

Distribution of funds recovered from promoters of the scheme

Iervasi, Sipina and Papoulias

1. The liquidators have taken steps to recover funds from Mr Iervasi, Mr Sipina and Mr Papoulias, who received payments from the companies during the life of the Ponzi scheme. On 13 August 2018, Brereton J gave directions approving entry into a deed of settlement with Mr Iervasi and his various entities. On 29 March 2019, a settlement was reached between the companies, the liquidators, Mr Sipina and his various entities as well as his sister Vanessa Relja and her husband Bozo Relja. On 12 April 2019, a settlement was reached between the companies, the liquidators, Mr Papoulias and his various entities. The liquidators seek directions as to whether monies recovered from the promotors and the balance of a bank account held in Mr Iervasi's name but which the liquidators' investigations showed had come from the companies' funds - together totalling $5,258,162.44 - should be included in the pool of funds from which distributions should be made to non-Brexit investors.
2. The liquidators submitted that treating the settlement monies in the same way as the funds in the Westpac bank accounts may be justified on the basis that, although the settlement monies are not the traceable proceeds of trust funds, the settlement monies replenish the trust funds. Alternatively, the settlement monies could be treated as assets of the companies to be dealt with by the liquidators accordingly by distributing the settlement monies pari passu amongst all creditors rather than those who paid monies into the Westpac bank accounts.
3. The fifth defendant submitted that payments were made to the promoters in breach of trust from funds deposited by investors in the Westpac bank accounts. In these circumstances, the appropriate order was for those monies to be treated in the same way as the funds in the Westpac bank accounts as the monies are, in substance, replenishing trust funds. Such a course is preferable to the alternative course proposed by the liquidators for the simple reason that the overwhelming inference is that the monies paid out in breach of trust were likely those of investors who deposited funds in the Westpac bank accounts. There was no warrant for giving general creditors the benefit of the return of these funds.
4. The sixth and seventh defendants agreed. The $7.49 million received by promoters comprised payments of trust funds made in breach of trust since, whether the trust arises under Quistclose or Black v S Freedman principles, the funds held in the Westpac bank accounts were held for the benefit of investors and not for the purpose of paying money to Mr Iervasi, Mr Sipina or Mr Papoulias. Irrespective of the basis on which the companies and the liquidators ultimately recovered those funds from the promoters - be it as knowing recipients of trust property liable to account as constructive trustees, in an action for money had and received, or pursuant to some equitable proprietary claim - the companies and the liquidators were obliged to hold those funds on the same trusts as the funds in the Westpac bank accounts were originally held. The companies' only title to recover the monies was as trustee and thus the fruits of any recovery were also held on trust for the beneficial owners of funds in the Westpac bank accounts. The result can be no different where the liquidators recovered the funds pursuant to a settlement of the companies' claim. In any event, at least $409,123.32, being the proceeds of a National Australia Bank account in the name of Mr Iervasi, should be distributed in accordance with Scenario 2 as this sum, which is part of the settlement sum contributed by Mr Iervasi, has been shown by the liquidators' investigations to have been sourced from the companies.
5. According to the liquidators' first report, some $10 million or 57% of the operating expenses of the companies were paid to key individuals. The bulk of these monies came from the Westpac bank accounts being $9.09 million from Westpac 1, $70,000 from Westpac 2 and $83,000 from the US Election NAB account. These amounts were thought to be commissions although the liquidators had not found any contracts detailing any right to commission.
6. By the liquidators' second report, the liquidators' investigation had progressed. Further information from Westpac had allowed Mr Jahani to identify additional amounts paid to Mr Sipina and Mr Papoulias. AUSTRAC had confirmed that $755,000 of unidentified cash withdrawals were made by Mr Iervasi. Overall, $23 million was paid by the companies to key individuals of which $21.32 million was paid from the Westpac 1 account, $40,000 was paid from the Westpac 2 account (overall 93% from the Westpac bank account) and $1.63 million (7%) from the US Election NAB account.
7. Self-evidently, none of the payments to the promoters came from funds deposited by investors in the Brexit Special as that fund remained whole at the time of the liquidators' appointment. A small proportion of the payments were made from the US Election NAB account although, as already mentioned, funds in this account were mixed with the Westpac bank accounts. Given Brereton J's finding in Courtenay House [2018] NSWSC 404 and Black J's finding in Courtenay House [2019] NSWSC 113 that the companies held the funds deposited by the investors into the bank accounts on trust, it follows that the payments were made to the promoters in breach of trust. Whilst it is not possible to specifically trace investors' funds, apart from $409,123.32, into the settlement monies, on the basis of the available evidence and reasonably available inferences, the settlement monies are the product of investors' funds and should be treated by the liquidators accordingly, by including the settlement monies in the pool of funds from which investors will be paid a final dividend calculated in accordance with Scenario 2. The vast bulk of the funds paid to the promoters came from the Westpac bank accounts and thus should be returned for distribution to the investors who deposited funds into those accounts. To the extent that a small portion of the monies paid to promoters came from the US Election NAB account, the funds in the Westpac and National Australia Bank accounts have been mixed, as described at [138]-[139].

Vanessa and Bozo Relja

1. Vanessa Relja is the sister of Mr Sipina. Bozo Relja is her husband. The Reljas deposited: 1. $500,000 for the purpose of investing in the Brexit Special; and 2. $950,000 for the purpose of investing in Standard Products.
2. When Brereton J made orders to distribute funds in the Brexit NAB Account, the liquidators were directed that they were justified in withholding distribution to the Reljas pending further determination of the Court. The liquidators withheld $488,884.64 from distribution, being the Reljas' notional distribution of $500,000 in the NAB Brexit account less the liquidators' costs and expenses. The liquidators were then investigating the source of the Reljas' investment in the companies as they were concerned that the investment had been funded by Mr Sipina who, in turn, had received payments from the companies.
3. The liquidators entered into a deed of settlement with Mr Sipina, which included provisions with respect to the Reljas' investment. Pursuant to that settlement, the Reljas were paid $100,000 on account of their investment in the Brexit Special and agreed to waive any right to participate in any dividends on investments in the companies. That settlement was approved by the Court in separate proceedings and paid to the Reljas. The $100,000 payment was made to the Reljas from the $488,884.64 which had been withheld, leaving a balance of $388,884.64. The Reljas will not be participating further in the distribution process.
4. The liquidators seek directions as to the appropriate treatment of the $388,884.64 which remains of the Reljas' deposit for investment in the Brexit Special. Those funds are not held on trust for investors in the Brexit Special as they were not deposited by or sourced from funds deposited by those investors. The fifth defendant submitted that these monies should be treated in the same manner as recoveries from the promoters and for the same reasons. The funds were likely sourced from the Westpac bank accounts and therefore, in substance, should be returned to them and distributed in accordance with Scenario 2. The sixth and seventh defendants submitted the monies should be treated as held on trust for those who deposited funds in the Westpac bank accounts. The reason the sum was withheld was because the liquidators were concerned that the deposit had been derived from Mr Sipina, who had received payments from the companies' own bank accounts. The payments to Mr Sipina came from the Westpac bank accounts.
5. On the available evidence, Reljas' $500,000 investment in the Brexit Special was likely funded by Mr Sipina, who had received trust monies from the companies and probably from the Westpac bank accounts. The claim advanced by the liquidators to retrieve those funds has now been realised: the Reljas have accepted a much smaller portion of their investment in the Brexit Special in settlement of their entitlement to a return of capital and any final dividend. The Reljas have abandoned their claim to the remaining monies. It is not possible to trace the funds from the Westpac bank accounts to Mr Sipina to the Reljas to the Brexit NAB Account but, doing "rough justice" by reason of the limitations of the available evidence, in light of what is reasonably practicable and economical (Re BBY at [40]), I consider that by reason of these matters the liquidators would be justified in returning those funds to the Westpac bank accounts for distribution to other investors in accordance with Scenario 2.
6. The liquidators seek directions as to the appropriate treatment of the $950,000 deposited for investment in Standard Products. The position is straightforward. That amount was deposited into the Westpac bank accounts for the purposes of investing in Standard Products and therefore, pursuant to the findings of Black J in Courtenay House [2019] NSWSC 1113, it forms part of the funds held on trust for investors who deposited monies into the Westpac bank accounts and should be distributed according to Scenario 2. No one suggested otherwise.

Distribution of funds in the FX trading accounts

1. The liquidators have recovered approximately $2 million which was held in FX accounts, either in the name of the companies or Mr Iervasi, at the time the companies were wound up. As earlier mentioned, deposits and withdrawals for FX trading were made from the Westpac bank accounts, not the National Australia Bank accounts. The liquidators seek the Court's directions as to the appropriate treatment of these funds. Again, there seem to be two possibilities: either the funds are to be treated on the same basis as the funds in the Westpac bank accounts or they are to be treated as being part of the general assets of the companies available for distribution in the ordinary course.
2. The fifth defendant submitted that the source of the funds was the Westpac bank accounts. There was no warrant for general creditors to have the benefit of those monies. The sixth and seventh defendants submitted that because the funds deposited into the FX trading accounts were sourced from the Westpac bank accounts, each of the beneficial owners of the funds deposited into the Westpac bank accounts had a rateably equal interest in the amounts recovered from the FX accounts. It was not pragmatic to ascertain the precise nature of the proprietary rights associated with the FX trading accounts in light of the small amount involved. In the circumstances, those funds should be pooled with the Westpac bank accounts, in accordance with Re BBY at [55]-[57], and distributed in accordance with Scenario 2.
3. I agree with these submissions. Of all the uses made of investors' funds, FX trading was actually authorised by investors, who entrusted their monies to the companies to be used in this manner with any gains and losses to be remitted to the investors, including by use of a 'slush fund'. The funds used in FX trading came from the Westpac bank accounts. The FX trading was not profitable but the remaining funds should be returned to the collective pool for distribution amongst contributors. Whilst it is not possible to trace any individual investor's deposits to those which were transferred to the FX trading accounts, there can be no doubt that whatever has been retrieved belongs to these investors. These funds should be pooled with the Westpac bank accounts and distributed in accordance with Scenario 2.

Distribution to Nina Girsa and Zoja Gromova

1. The liquidators seek directions, orders and advice as to whether the liquidators are justified in excluding Ms Girsa and Ms Gromova from any distributions. Whilst the companies' bank records roughly accord with the investments referred to in their proof of debts, the liquidators' concern is whether the funds deposited by Ms Girsa and Ms Gromova originated from the companies' own funds. As already detailed, the liquidators sought further information to substantiate that the funds invested came from Ms Girsa and Ms Gromova's own resources. The liquidators' numerous requests were largely ignored.
2. So far as Ms Girsa is concerned, the companies' records reveal that: 1. In 2015, $50,000 was deposited in the name of Ms Girsa in the Westpac bank accounts for investment in Standard Products. 2. On 15 February 2017, a further $50,000 was deposited in the name of Ms Girsa in the Westpac bank accounts for investment in Standard Products. 3. On 21 April 2017, $50,000 was deposited in the name of Ms Girsa for investment in the Brexit Special.
3. Ms Girsa has produced a bank statement for the period 11 September 2015 to 10 November 2015, which does not evidence the first investment. Ms Girsa has produced a Notice of Assessment for the financial year ending 30 June 2016, which reports that Ms Girsa had a taxable income of $19,850 in that year. That is all.
4. The liquidators remain concerned that Ms Girsa's deposits may have been sourced from the companies' funds. Pursuant to Black J's judgment, Ms Girsa and Ms Gromova are only entitled to participate in a distribution if they satisfy the liquidators or the Court that the source of their deposits into the Westpac bank accounts was not the companies' funds: Courtenay House [2019] NSWSC 1113 at [60]-[61]. In respect of Ms Girsa, the liquidators are not so satisfied. Nor am I. In circumstances where her boyfriend was the promoter of the Ponzi scheme and withdrew substantial monies from the Westpac bank accounts, and there is no reliable evidence to support a finding that Ms Girsa's investments were sourced from her own funds, the liquidators are justified in excluding Ms Girsa from any distribution of monies from the Westpac bank accounts.
5. How should the $50,000 from Ms Girsa's investment in the Brexit Special be treated? Assuming that the source of the deposit was the funds of the companies - there being no reliable evidence to the contrary - then those funds were most probably derived from funds deposited by investors in the Westpac bank accounts. The liquidators are justified in returning those funds to the Westpac bank accounts for distribution to other investors in accordance with Scenario 2. The $100,000 deposited into the Westpac bank accounts for the purposes of investing in Standard Products, pursuant to the findings of Black J in Courtenay House [2019] NSWSC 1113, forms part of the funds held on trust for investors who deposited monies into the Westpac bank accounts and should be distributed according to Scenario 2.
6. In respect of Ms Gromova, the liquidators propose to admit $81,814.86 and seek directions that they are justified in doing so and are justified in rejecting the balance of Ms Gromova's proof of debt, being $18,185.14. The records indicate: 1. On 1 November 2015, $40,000 was deposited in the name of Ms Gromova in the Westpac bank accounts for an investment in Standard Products. Ms Girsa says that the source of the investment was seven international transfers totalling $33,274.75, made between 5 October 2015 to 29 October 2015, as well as $6,725.25 of Ms Girsa's own funds in her National Australia Bank account. The liquidators propose to admit the $33,274.75 received by way of international transfers, which are corroborated by a bank statement. The source of Ms Girsa's own contribution of $6,725.25 is not clear from the bank statement or any other material, and the liquidators do not propose to admit that amount. I agree, for the reasons set out at [168]. 2. A further $10,000 was invested in 2016. The investment was made by re-investing returns from Ms Gromova's existing investment. Ms Girsa states that she has no records of this investment as they were held by Mr Gupta. The liquidators are satisfied from a review of the companies' records that this portion of Ms Gromova's investment ought to be admitted. Although the liquidators have been unable to completely reconcile the returns received by Ms Gromova on her investment, they are of the view that it is not commercial or in the best interests of the companies' creditors to engage in further investigation. 3. A further $10,000 was invested on 14 June 2016. Ms Girsa has provided a cash deposit slip in support of this deposit but the source of the funds is not clear from the any of the material provided by Ms Girsa. The liquidators do not propose to admit this amount. I agree, for the reasons set out at [168]. 4. Finally, a further $40,000 was said to be deposited on 1 November 2016. The companies' records indicate that $38,540.11 was received into the companies' bank account on or about that date. This investment was made using funds provided by Ms Girsa's brother. Ms Girsa has provided an Advice of Payment dated 26 October 2016 from the Bank of Ireland. The customer name is "Vitaljis Gromovs" and one of the companies is named as the beneficiary for €28,300. The liquidators propose to admit $38,540.11 only.
7. Having considered the documentation supplied by Ms Girsa in support of her and Ms Gromova's claim, and a further affidavit of Mr Jahani reviewing this material, I agree that the liquidators are justified in admitting $81,814.86 of Ms Gromova's claim only.

Whether liquidators justified in retaining $300,000 for future legal and investigation expenses

1. In April 2019, the committees of inspection of the companies unanimously resolved that the liquidators were authorised to pay up to $300,000 from the assets of the companies for additional legal costs and disbursements to conduct further investigations and pursue potential recovery actions. The liquidators seek directions as to whether they are justified in withholding this sum from distribution to the investors.
2. The liquidators' investigations into the affairs of the companies are continuing. They intend to conduct further public examinations of persons associated with the companies to determine whether additional recoveries may be pursued. The investigations and recovery actions conducted by the companies thus far have proved worthwhile: the liquidators have recovered more than $5 million from the promoters of the Ponzi scheme.
3. In circumstances where this Ponzi scheme has affected so many investors who, notwithstanding the distributions made and to be made by the liquidators, will have sustained substantial losses, continuation of the liquidators' investigations seems worthwhile so that viable means of recovering the companies' assets or pursuing other remedies under the Corporation Act losses may be identified. The representatives of those affected by this scheme, being the committees of inspection, have supported this course. I consider that the liquidators are justified in withholding $300,000 from distribution to investors for future legal and investigation expenses.
4. For these reasons, I make the following orders using the defined terms described in the annexure to the orders: Method of distributing funds in the Westpac Accounts (1) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that Said Jahani and John McInerney (the liquidators), in their capacity as joint and several liquidators of Courtenay House Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) (the companies), would be justified in calculating the distribution payable to the Beneficial Owners from the funds in the Westpac Accounts: (a) in accordance with Scenario 2 as described in the liquidators' report to the Court dated 1 November 2018 at [5.2]; (b) classifying deposits made by Beneficial Owners into the NAB Accounts (or any of them) for the purpose of investing in the US Election Special Product or the Inauguration Day Special Product as capital for the purpose of calculating the distribution payable pursuant to Scenario 2; and (c) classifying the following payments to Beneficial Owners as returns for the purpose of calculating the distribution payable pursuant to Scenario 2: (i) returns paid to Beneficial Owners which were attributable to their investment in the US Election special product and the Inauguration Day special product: and (ii) referral commissions paid to Beneficial Owners. Funds to be included in the distribution to Beneficial Owners (2) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the Liquidators would be justified in including the following funds in those to be distributed to the Beneficial Owners in accordance with the method described in Order 1: FX trading accounts (a) amounts recovered by the companies from foreign exchange trading accounts as described in the liquidators' report to the Court dated 1 November 2018 at [3.34]; Mistaken Investors (b) the $300,000 described in the liquidators' report to the Court dated 1 November 2018 at [4.45]-[4.53]; Remaining funds in NAB business account (c) the funds held in the National Australia Bank account BSB 082 973 Account 87-508-5764 in the name of Courtenay House Pty Ltd; Recoveries from promoters (d) amounts recovered by the Companies pursuant to the lervasi Settlement, Sipina Settlement and Papoulias Settlement; Investments by related parties (e) the remaining $388,884.64 of funds deposited by Vanessa and Bozo Relja in the NAB Brexit Account; and (f) the sum of $50,000 deposited by Nina Girsa in the NAB Brexit Account. (3) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the liquidators are justified in: (a) excluding Nina Girsa from any distribution of funds to the Beneficial Owners in accordance with Order 1; (b) admitting Zoja Gromovo's proof of debt in the amount of $81,814.86 and rejecting the balance of the proof of debt. Costs of liquidators' further investigations (4) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the liquidators are justified in withholding the sum of $300,000 from distribution to the Beneficial Owners, for future legal and investigation expenses. (5) Grant liberty to the parties within 28 days to notify any amendment sought to these orders to correct any errors or omissions. ANNEXURE Beneficial Owners means the investors who deposited funds into the Westpac Accounts to participate in investment opportunities excluding: 1. the Post 21 April 2017 Investors as defined in Categories E and F of the liquidators' report to the Court of 1 November 2018; 2. David Sipina and related entities; 3. Athan Papoulias and related entities; 4. Vanessa and Bozo Relja; and 5. Nina Girsa. lervasi Settlement means the settlement reached between the Companies, the Liquidators, Tony lervasi and entities related to Tony lervasi and documented in a deed of settlement and release dated 26 July 2018. NAB Accounts means, together, the following bank accounts: BSB Account Number Name of Account 082 973 87-501-9054 Courtenay House Pty Limited 082 973 80-565-6250 Courtenay House Pty Limited

NAB Brexit Account means the National Australia Bank account BSB 082-793 Number 80-565-6250 in the name of Courtenay House Pty Ltd. Papoulias Settlement means the settlement reached between the Companies, the Liquidators, Athan Papoulias and an entity related to Athan Papoulias and documented in a deed of settlement and release dated 12 April 2019. Sipina Settlement means the settlement reached between the Companies, the Liquidators, David Sipina, Vanessa and Bozo Relja and entities related to David Sipina and documented in a deed of settlement and release dated 29 March 2019. Westpac Accounts means, together, the following bank accounts: Bank Account Number Name of Account Westpac 490253 Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust Westpac 265692 Courtenay House Pty Limited (in liquidation) ATF lervasi Capital Trust Westpac 819577 Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 June 2020