Almonds Investors Ltd v Emanouel [2012] VSC 413

CORPORATIONS - Managed Investment Scheme - Alleged failure to disclose commission fees and certain risks in Product Disclosure Statement - Corporations Act ss 1013C, 1013D, 1013E.

1 The plaintiff, Almond Investors Limited ("AIL"), is the Responsible Entity for the AIL Almond Grower Project - Swan Hill ("the Project").

2 The defendant ("Mr Emanouel") is an investor in the Project.

3 The Project was established by a constitution dated 30 October 2006 ("Constitution").

4 The Constitution was amended on 14 January 2008, 13 February 2008, 14 December 2010 and 1 March 2011.

5 The Project is registered as a managed investment scheme pursuant to Part 5C of the Corporations Act 2001 (Cth) ("Corporations Act"), bearing registration number ARSN 122 494 491.

6 During the period 1 March 2008 to 15 June 2008, AIL offered interests in the Project to investors pursuant to a product disclosure statement entitled "Product Disclosure Statement 2008 Release Stage 2 of the 2007 AIL Almond Orchard Project" (PDS).

7 On or about 13 June 2008, Mr Emanouel applied to AIL for 14 allotments in the Project ("the Allotments").

8 On or about 15 June 2008, Mr Emanouel executed, through his duly appointed attorney AIL, the:

(a) AIL Almond Grower Project - Swan Hill Allotment Management Agreement ("Management Agreement"); and

9 On or about 12 June 2008, Mr Emanouel applied to ABL Nominees Pty Ltd ("ABL") to fund his initial investment in the Project and to fund part of his annual growing, management and sub-lease fees for the first four years of the project.

10 In the finance application, Mr Emanouel appointed AIL as his attorney to enter into a loan agreement with ABL on his behalf.

11 On or about 24 June 2008, Mr Emanouel, through his attorney AIL, entered into a loan agreement with ABL, a subsidiary of Adelaide Bank Limited, for a total amount of $193, 059 ("Loan Agreement").

12 Mr Emanouel is in breach of the Management Agreement in that he has failed to pay the growing, management and sub-lease fees for the year ended 30 June 2011 in the sum of $27,300 and for the year ending 30 June 2012 in the sum of $32,837.84.

13 Mr Emanouel is in breach of the Loan Agreement as he has failed to make the monthly payments pursuant to the Loan Agreement.

14 On or about 30 August 2011, AIL issued proceedings against Mr Emanouel seeking, amongst other things, repayment of the amounts owing under the Management Agreement and the Sublease in respect of the year ended 30 June 2011 ("Recovery Proceedings"). Included in the recovery proceedings was a claim for breach by Mr Emanouel of the Loan Agreement entered into between Mr Emanouel and ABL. AIL was authorised to institute this claim on behalf of ABL.

15 On or about 21 September 2011, Mr Emanouel filed a defence in the Recovery Proceedings. The case has not been fixed for trial.

16 On or about 5 March 2012 and after filing his defence in the Recovery Proceedings, Mr Emanouel's solicitors (Taylor McDonald Lawyers) sent a letter to AIL's solicitors (HWL Ebsworth) enclosing notices to be served on AIL and ABL purportedly pursuant to ss 601MB(1) and 925A of the Corporations Act seeking to suspend any obligation of Mr Emanouel under the Loan Agreement, the Management Agreement and the Sublease ("the Notices").

17 Section 601MB(1) of the Corporations Act is in the following terms:

(a) a managed investment scheme is being operated in contravention of subsection 601ED(5) and a person (the offeror) offers an interest in the scheme for subscription, or issues an invitation to subscribe for an interest in the scheme; or

(b) a person (the offeror ) fails to comply with Division 2 of Part 7.9 when offering an interest in a registered scheme for subscription or issuing an invitation to subscribe for an interest in a registered scheme;

a contract entered into by a person (other than the offeror) to subscribe for the interest as a result of the person accepting the offer, or of the acceptance of an offer made by the person in response to the invitation, is voidable at the option of that person by notice in writing to the offeror.

18 Section 925A of the Corporations Act is in the following terms:

(1) Subject to this section, the client may, whether before or after completion of the agreement, give to the non-licensee a written notice stating that the client wishes to rescind the agreement.

(2) The client may only give a notice under this section within a reasonable period after becoming aware of the facts entitling the client to give the notice.

(3) The client is not entitled to give a notice under this section if the client engages in conduct by engaging in which the client would, if the entitlement so to give a notice were a right to rescind the agreement for misrepresentation by the non-licensee, be taken to have affirmed the agreement.

(4) The client is not entitled to give a notice under this section if, within a reasonable period before the agreement was entered into, the non-licensee informed the client (whether or not in writing) that the non-licensee did not hold an Australian financial services licence.

(5) If, at a time when an Australian financial services licence held by the non-licensee was suspended, the non-licensee informed the client that the licence was suspended, the non-licensee is to be taken for the purposes of subsection (4) to have informed the client at that time that the non-licensee did not hold the licence.

(6) None of subsections (2), (3) and (4) limits the generality of either of the others.

(7) Subject to this section, the client may give a notice under this section whether or not:

(a) the notice will result under section 925B in rescission of the agreement; or

(b) the Court will, if the notice so results, be empowered to make a particular order, or any order at all, under section 925D.

1"> 19 The Notices (which are in exactly the same form for each of AIL and ABL) contend that the Loan Agreement, the Management Agreement and the Sublease are void on the grounds that either:

(a) the Project was being operated in contravention of section 601ED(5) of the Corporations Act;

(b) either or both of ABL and AIL failed to comply with Division 2 of Part 7.9 of the Corporations Act when offering the interests in the Project; and/or

(c) under clause 8.12 of the Loan Agreement, risk is managed within the proper meaning of ss 763A and 763C of the Corporations Act and as a consequence, the Loan Agreement is a financial product issued by ABL without possessing an AFS licence contrary to s 911A of the Corporations Act.

20 Each of these grounds is made against both AIL and ABL without discrimination. It is suggested in the Notices that all of the agreements ("these agreements") constitute the managed investment scheme. The Notices also refer to "the integrated promotion of the scheme and related finance". This approach regards the Loan Agreement as part of the Project or Scheme.

21 AIL contends that the Notices are ineffective because the Project was not being operated in contravention of subsection 601ED(5) of the Corporations Act. This section requires a managed investment scheme to be registered when such registration is required. As pointed out, the Project is registered and this was properly conceded by Counsel for Mr Emanouel.

22 Further, AIL denies that it failed to comply with Division 2 of Part 7.9 of the Corporations Act when offering the interests in the Project.

23 AIL contends further that the Notices are invalid because they do not specify the basis upon which it alleges that either:

(a) the Project was being operated in contravention of subsection 601ED(5) of the Corporations Act; or

(b) AIL failed to comply with Division 2 of Part 7.9 of the Corporations Act.

24 Insofar as the Notices contend that under clause 8.12 of the Loan Agreement, risk is managed within the proper meaning of ss 763A and 763C of the Corporations Act and that, as a consequence, the Loan Agreement is a financial product issued by ABL without possessing an Australian Financial Services licence contrary to s 911A of the Corporations Act, ABL contends that it is ineffective because section 601MB only operates where:

(a) a managed investment scheme is being operated in contravention of section 601ED(5) of the Corporations Act; or

(b) the offeror fails to comply with Division 2 of Part 7.9 of the Corporations Act.

25 It is further contended that the Notices are void as against ABL because:

(a) ABL was not the offeror of the interests in the Project;

(b) the Loan Agreement is not a contract to subscribe for interests in a managed investment scheme; and/or

(c) the Loan Agreement was not part of the managed investment scheme known as the Project.

26 Further, it is contended that the Notices are invalid as against ABL because they do not specify the basis upon which it is alleged that either:

(a) the Project was being operated in contravention of section 601ED(5) of the Corporations Act; or

(b) ABL failed to comply with Division 2 of Part 7.9 of the Corporations Act.

The Notices should be declared void because they are unjust

27 AIL contends further and in the alternative that the Notices should be declared void because they are unjust and Mr Emanouel's conduct in sending the Notices makes it unjust to uphold the Notices because:

(a) Mr Emanouel voluntarily chose to finance his investment in the Project;

(b) Mr Emanouel has had the benefit of the Loan Agreement, the Management Agreement and the Sublease (including any tax deductions available to him) since June 2008;

(c) Mr Emanouel is attempting to void the Loan Agreement, the Management Agreement and the Sublease after he has breached those agreements; and

(d) Mr Emanouel is attempting to void the Loan Agreement, the Management Agreement and the Sublease after he has been sued for breach of those agreements.

28 Further and in the alternative, it is contended that Mr Emanouel's delay in sending the Notices makes it unjust to uphold the Notices because:

(a) The Loan Agreement, the Management Agreement and the Sublease were executed in June 2008, four years prior to the Notices being served;

(b) To the extent that AIL may have breached the Corporations Act in offering interests in the Project (which is denied), Mr Emanouel has acquiesced in that breach;

(c) Mr Emanouel has had the benefit of the Loan Agreement, the Management Agreement and the Sublease (including any tax deductions available to him) since June 2008;

(d) Mr Emanouel is attempting to void the Loan Agreement, the Management Agreement and the Sublease after he has breached those agreements; and

(e) Mr Emanouel is attempting to void the Loan Agreement, the Management Agreement and the Sublease after he has been sued for breach of those agreements.

29 The first issue in this case is whether AIL, as the Responsible Entity, failed to comply with Division 2 of Part 7.9 of the Corporations Act. As pointed out, the defendant no longer contends that the Project is a managed investment scheme being operated in contravention of section 601ED(5) of the Corporations Act and paragraph (c) of the Notices (Clause 8.12 of the Loan Agreement) is only relevant to ABL. Accordingly, it is necessary to assess, by reference to the allegations and the evidence, the extent to which, if at all, AIL was in breach of the Product Disclosure Statement provisions of the Corporations Act. The suggested non-compliance relates to the adequacy of disclosures in relation to fees, charges and expenses and other related matters, essentially the risk profile of the investment.

30 The second issue relates to the Notice addressed to ABL and in particular, the effect of Clause 8.12 of the Loan Agreement as referred to in paragraph 24 above.

31 The third issue to be determined in this proceeding is whether, notwithstanding any finding in relation to the first issue, it is nevertheless in the circumstances, appropriate that the Notices be set aside on the grounds that the conduct and delay on the part of Mr Emanouel in relation to service of the Notices, was unjust. A resolution of this issue requires a consideration of the conduct referred to by AIL. A further issue is whether the Notices are deficient as a matter of substance.

32 Other issues are minor and/or flow from the resolution of the three main identified issues.

33 Section 1013C of the Corporations Act is the general disclosure content requirement. The section provides that a PDS must contain statements and information required by s1013D and information required by s 1013E or any other provision of the subdivision. Other information may be included including information contained in another document.

34 Section 1013D of the Corporations Act lists specific types of information that is required. Additional statements and information may be required pursuant to permitted regulations.

35 Section 1013E of the Corporations Act is a general obligation to disclose any additional information that may be material to a decision to acquire a product.

36 The Corporations Regulations 2001 (Cth) ("Corporations Regulations") impose additional disclosure obligations in relation to a PDS relating to a managed investment scheme. These are set out in Part 7.9 Division 4C of the Corporations Regulations. Relevantly, Regulation 7.9.16L(1) requires (for the purpose of s 1013D(4)), details of fees and costs as 'set out in Part 2 of Schedule 10'. This part contains a table that must be used to disclose such fees and costs.

37 The practical effect of the PDS disclosure requirements of Part 7.9, Division 2 were considered by this Court in Woodcroft-Brown v Timbercorp Securities Ltd (in liq) & Ors[1].

38 In relation to the disclosure of risks in a PDS, Judd J held (at [126]) that:

"... s 1013D does not require disclosure of information concerning any and all possible risks. Had that been so, the section would have so stated. Instead, only risks which are relevant to the product, significant and which one would reasonably expect to see disclosed in the product disclosure statement need be included."

"I have already found that s 1013E is not limited in its operation by the categories requiring information under s 1013D. Where, however, a piece of information is not required to be disclosed under s 1013D, such as information identified by the plaintiff, it is difficult to imagine such information having the materiality requiring disclosure under s 1013E."

40 Following this reasoning, Judd J concluded at [270]), amongst other things, that it would not be reasonable for a retail investor to expect to find information in a scheme PDS that was not specifically required under s 1013D of the Corporations Act.

41 In relation to the nexus between disclosure under Part 7.9, Division 2 and the notion of retail client, it has been held (per Senior Member McCabe in Re Wright Patton Shakespeare Capital Limited and Australian Securities and Investments Commission[2] at [15]) that:

The "retail client" concept is central to the operation of s 1013D in particular. That person will typically be reasonably intelligent; at a minimum, the decision-maker should not assume the retail investor is obtuse, unusually stupid, or prone to behave like a "moron in a hurry". Morning Star Co-operative Society Ltd v Express Newspapers Ltd (1979) FSR 113 at 117 per Foster J; see also Re Pacific Hotels Pty Ltd v Asian Pacific International Ltd [1986] FCA 297 at [28] per Spender J. While not expert in matters of finance, the retail client will exercise ordinary common sense and be reasonably diligent and reflective when deciding whether to make an investment. He or she may be less interested in technical details than regulators sometimes assume. The retail client can read what is plainly explained without drawing unlikely or off-beat conclusions. He or she has a reasonable tolerance for risk, especially where the investment opportunity in question involves financing property development. I do not suggest the individual will be incautious, but he or she is unlikely to approach a document with the lawyer's forensic eye for nuance and heightened sensitivity to risks, both real and imagined.

42 It is alleged that, pursuant to clause 7.9(c) of the AIL Trusts Master Origination and Servicing Deed ("MOSD"), there was an undisclosed commission payable by ABL to AIL in respect of loans introduced by AIL.

43 By clause 7.9(c) of the MOSD, a commission of 2% on the value of the loan portfolio for the origination and/or servicing of loans made through AIL for and on behalf of ABL was payable to AIL. The Defendant contends that:

(b) the commission was a mandatory disclosure item under sections 1013C(a) and/or 1013D(1)(e) and/or 1013E of the Corporations Act;

(c) the commission was required to be disclosed in dollars or disclosed in a formula readily calculated in dollars under section 1013D(1)(m) of the Corporations Act.

44 AIL contends that neither the loans nor the MOSD are part of the Project and AIL did not enter into the MOSD in its capacity as Responsible Entity.

45 In my opinion, AIL's submission is correct. There was no obligation on the part of AIL under Part 7.9, Division 2 of the Corporations Act to disclose this commission in the PDS for the Project. It does not relate to the product the subject of the PDS. The means by which an investor chose to fund his or her investment in the Project is a separate matter and falls outside the PDS regime.

46 The relevant sections relied on are section 1013(D)(1)(e) and section 1013E of the Corporations Act. Section 1013(D)(1)(e) specifically refers to any commission or similar payment relating to the product. As pointed out, the loan and the product are different and this is specifically referred to in the PDS in more than one place.[3] Further, the general obligation referred to in s1013E relates to any such other information that might influence a decision to acquire the product. In my opinion, information about commission on the (optional) loans could not reasonably influence any decision as to whether to acquire the product.

III Alleged undisclosed commission on the Orchard Management Agreement

47 It is next alleged that, pursuant to clause 7.1(a) and Schedule 2 of the Orchard Management Agreement, there was an undisclosed commission of $92.66 to a related entity.

48 By clause 7.1(a) and Schedule 2 of the Orchard Management Agreement, a commission of $92.66 (increased by the CPI after year 4) was payable out of scheme assets to a Related Entity for each 0.125 hectare allotment. The Defendant contends that:

(a) the commission was not disclosed for the purposes of the Corporations Act adequately or at all;

(b) the commission was a mandatory disclosure item under sections 1013C(a) and/or 1013D(1)(e) and/or 1013E;

(c) the commission was required to be disclosed in dollars or disclosed in a formula readily calculated in dollars under section 1013D(1)(m).

(a) The $92.66 fee is not a commission but a management cost calculated per allotment provided for under the Orchard Management Agreement which was, in any event, disclosed in Schedule 2 of the Orchard Management Agreement.

(b) The existence of the Orchard Management Agreement was disclosed on page 47 of the PDS.

(c) The full terms of the Orchard Management Agreement are included, by reference, into the PDS by virtue of the operation of regulation 7.9.15DA of the Corporations Regulations.

(d) The management and growing fees payable are in any event set out in the PDS.

50 The fee of $92.66 was specifically referred to and disclosed in the Orchard Management Agreement (page 28) and the Orchard Management Agreement was specifically referred to in the PDS (page 47) as comprising one of the agreements relating to the AIL Almond Asset Trust 2007. As such, the fee, which I accept is not a commission but a management cost (although for the purpose of s 1013D(1)(e) it would not make a difference as it is clearly a 'similar payment'), was adequately disclosed to Mr Emanouel. Page 47 of the PDS specifically states that an investor "has the right to inspect and copy" any of the agreements referred to. In fact, upon request by his solicitors, Mr Emanouel obtained a copy of the agreement for the purpose of this proceeding. Further, management fees are specifically referred to by way of estimates on page 19 of the PDS, and key terms of the Orchard Management Agreement are in any event set out on pages 56-57 of the PDS.

51 Counsel for Mr Emanouel submitted that Regulation 7.9.15 DA did not apply because there were three impermissible conditions relating to inspection of the document. First, the document could only be inspected after the investment was made and not by a potential investor. Second, inspection required a confidentiality undertaking. Third, the PDS did not say that such inspection would be free. In my opinion, there is no substance in these points.

52 Although the words used are "Grower/Orchard Asset Owner", I do not read and construe the words in context as excluding a prospective investor. As a matter of construction, in view of the nature and purpose of the PDS, prospective investors are clearly intended to be included.[4] Second, there is nothing in Regulation 7.9.15DA that would preclude the signing of a suitable confidentiality undertaking. In fact, this requirement suggests that a prospective investor would be entitled to obtain a copy. Third, although there is no reference in the PDS to no charge, there is no indication or suggestion that any such charge would be levied. The failure to include the words, 'at no charge' is, in the circumstances, de minimus and I would have no hesitation in granting the required dispensation if necessary.[5]

53 In the circumstances, the relevant information is in writing in a document that is publicly available and was adequately and sufficiently stated in the PDS. Accordingly, Regulation 7.9.15DA is attracted and it was not necessary to attach the agreement or refer to it in any more detail.

1. Alleged undisclosed commission on the Orchard Establishment Agreement

54 It is alleged that, pursuant to clause 7.1(a) and Schedule 2 of the Orchard Establishment Agreement, there was an undisclosed commission of $40,000 to a related entity.[6]

55 Pursuant to clause 7.1 and Schedule 2 of the Orchard Establishment Agreement, a commission of $40,000 was payable out of scheme assets to a Related Entity. The Defendant contends that:

(a) the commission was not disclosed for the purposes of the Corporations Act adequately or at all;

(b) the commission was a mandatory disclosure item under sections 1013C(a) and/or 1013D(1)(e) and/or 1013E;

(c) the commission was required to be disclosed in dollars or disclosed in a formula readily calculated in dollars under section 1013D(1)(m).

56 AIL contends that the $40,000 fee is not a commission but a one-off establishment cost for the orchards provided for under the Orchard Establishment Agreement which was in any event, disclosed in the Orchard Establishment Agreement and the PDS.

57 Further, it was contended that like the Orchard Management Agreement, the full terms of the Orchard Establishment Agreement are included, by reference, into the PDS by virtue of the operation of regulation 7.9.15DA of the Corporations Regulations.

58 Finally, it is contended by AIL that in any event, this fee was not a fee which was directly payable by an investor - it was paid by the AIL Asset Trust to establish the orchard.

59 The $40,000 amount, to use a neutral word, was disclosed and specifically referred to in Schedule 2 (page 24) of the Orchard Establishment Agreement. It is called an 'establishment fee'. The agreement, like the Orchard Management Agreement, is specifically referred to on page 47 of the PDS. Mr Emanouel had the right to request and obtain a copy prior to making his investment. He did not do so. Further, establishment fees (which are not payable by investors) are also specifically referred to in the PDS on page 11, and key terms of the Orchard Management Agreement are in any event set out on pages 57-58 of the PDS.

60 The position is the same as the Orchard Management Agreement. The relevant information is in writing, in a document that is publicly available and was adequately and sufficiently stated in the PDS. Accordingly, regulation 7.9.15DA is attracted and it is not necessary to attach the agreement or refer to it in any more detail.

1. Alleged undisclosed risk on the Orchard Establishment Agreement Price Setting Mechanism

61 It is alleged by Mr Emanouel that under clause 4 of the Orchard Establishment Agreement, there were numerous risks that were not adequately disclosed.

62 By clause 4 of the Orchard Establishment Agreement, Horticultural Development Services Pty Ltd, ("the Manager") was to provide an establishment and Capital Management Plan and Budget for the financial year, which was to be provided to AIL as the Responsible Entity.

63 It is alleged that, the pricing for the Establishment and/or Capital Management Plan and/or Budget was left up to the Manager to set with no particular formula or mechanism on pricing, such as whether on a cost and materials basis, a set mark-up or how the pricing was to be agreed, nor was there any independent pricing control or external competition process for a non Related Entity to provide the services.

64 Furthermore, the pricing of the Establishment and/or Capital Management Plan and/or Budget could, it was alleged, increase at any time by notification under Clause 4.3 and AIL agreed not to unreasonably withhold consent to such price increases.

65 Finally, it was alleged that Mr Emanouel was "locked in" to the contract and gave exclusive rights to a related entity (the Manager) in circumstances where the cost of the Orchard Establishment Agreement was a significant cost component of carrying out the scheme.

66 Mr Emanouel alleges that the effect of these arrangements and provisions represented a significant risk and in particular:

(a) a significant risk of inefficient price setting and/or risk management over prices in a long term, captive contract with a related entity (the Manager) and AIL director within the meaning of section 1013D(1)(c) for which inadequate or no information was provided within the meaning of section 1013D(1);

(b) a significant risk of collusion with a related entity and AIL director within the meaning of section 1013D(1)(c) for which inadequate or no information was provided within the meaning of section 1013D(1);

(c) a significant risk of uncontrolled long term orchard servicing costs with a related entity and AIL director within the meaning of section 1013D(1)(c) for which inadequate or no information was provided within the meaning of section 1013D(1);

(d) by reason of the close connection of Mr Johns controlling the entity providing the Orchard Establishment Agreement services and also being a key director of AIL (and indeed the only director with qualifications and experience in horticulture) that AIL was dependent upon, there was a significant asymmetry of information and conflict on fair pricing that rendered the Orchard Establishment Agreement a significant characteristic and/or long term obligation attaching to the scheme within the meaning of section 1013D(1)(f) for which inadequate or no information was provided within the meaning of section 1013D(1);

(e) collectively and/or individually, the close, dependent relationship, the proportionality of costs charged under Orchard Establishment Agreement in creating a viable orchard, and lack of any pricing controls and/or independent tender, was information within the meaning of section 1013E that was not provided by AIL.

67 Further, and in the alternative, Mr Emanouel contends that these risks are the type of theoretical risks that are required to be fully disclosed to retail investors and preferably in one place so that the risks would be appreciated. As I understand the submission, the emphasis was on the disparate nature of the disclosure rather than the adequacy or existence thereof.

68 AIL contends that there was no significant risk of collusion in price setting and that this was simply an allegation made by Mr Emanouel unsupported by any evidence.

69 AIL contends further that there was no significant risk in having a single supplier of services and that it is simply an allegation made by Mr Emanouel unsupported by any evidence.

70 In relation to the submission that there was a risk to the scheme in that there was no formal mechanism to set limits on pricing, AIL contends that this is incorrect. Clause 4.2 of the Orchard Establishment Agreement provides that AIL, as the Responsible Entity, can notify the Manager as to whether it accepts, amongst other things, the pricing set by the Manager. If the Responsible Entity does not accept the pricing, the Manager must either accept the Responsible Entity's revised pricing or the dispute is then subject to a staged dispute resolution process.

71 In relation to the submission that there was no external competition or periodic tender process to generate competitive price tensions, AIL contends that this is misconceived as there is no requirement in the Corporations Act for such a mechanism in a managed investment scheme.

72 In relation to the submission that there was no long term agreement or mechanism in place to control the risk of price increases by the Manager, AIL contents by reference to the matters referred to above, that this is incorrect.

73 In relation to the allegation that the best horticultural practice was decided by a party who had a financial interest in providing the services, AIL contents that this is misconceived as this is not a breach of any requirements in the Corporations Act. Further, this is not a risk but simply an allegation made by Mr Emanouel unsupported by any evidence.

74 I agree with the submissions made by AIL. The dispute resolution process set out in the Orchard Management Agreement (Clauses 4 and 10) resolves much of the criticism suggested by Mr Emanouel. This mechanism provides for important checks and balances against any improper or arbitrary conduct of the Manager.[7] The other matters, including risks and reference to related parties were sufficiently disclosed in the PDS.[8] In my opinion, none of the matters referred to were required to be addressed any further or in a more cohesive or coherent manner.[9]

1. Alleged undisclosed risk on the Orchard Management Agreement Price Setting Mechanism

75 Mr Emanouel contends that the same undisclosed risks apply in relation to the Orchard Management Agreement.

76 In relation to the alleged risk to the scheme, namely, that there was no formal mechanism to set limits on pricing, AIL contends that this is incorrect. Clause 4.2 of the Orchard Management Agreement provides that AIL as the Responsible Entity can notify RMONPRO Developments ("the Orchard Manager") as to whether it accepts, amongst other things, the pricing set by the Orchard Manager. If the Responsible Entity does not accept the pricing, the Orchard Manager must either accept the Responsible Entity's revised pricing or the dispute is then subject to a staged dispute resolution process.

77 In relation to the other issues raised, both Mr Emanouel and AIL repeat their respective arguments.

78 In my opinion, the result is the same. All matters including related party interests, costs, fees, charges and expenses (and the extent duration and any variation thereof) were sufficiently disclosed.

VII Alleged undisclosed conflict of interest of AIL

79 Mr Emanouel alleges that, pursuant to AIL's obligations under the MOSD, it seriously and knowingly compromised its independence as a Responsible Entity and/or compromised the interests of scheme members to create significant risks. The following matters are relied on in support of the allegation:

(a) It was to act on the instructions of ABL (MOSD 8.5 (J) & (p));

(b) It was prevented from compromising claims with members without the consent of ABL (MOSD 8.5(p));

(c) It provided effectively unfettered access to its financial and operational records and/or practical participation by ABL in its affairs, including its legal affairs (MOSD 8.5(b) & (j));

(d) It was liable to pay for defaulted loans (MOSD 6.2) of scheme members and further placed itself in conflict by reason of sub-paragraph (b);

(e) It was liable for the cost of early pay-out of loans by members (MOSD definition of "Break Cost");

(f) It was at risk of unlimited liability for breaches of a long list of warranties in the course of originating loans and further risk of contravention of consumer protection laws thus undermining its financial viability as responsible entity (MOSD 5.1 and 5.1(y)).

80 Mr Emanouel contends that these matters in effect constituted information of the type required by section 1013D(1)(c) and/or 1013E that was not provided to him in breach of Part 7.9 Division 2.

81 AIL contends that this allegation is misconceived and incorrect in many respects.

82 AIL submits that the MOSD is not part of, and does not impact on, the Project. Therefore, there was no obligation under Part 7.9, Division 2 to disclose the terms of the MOSD in the PDS for the Project.

83 AIL submits that the alleged conflicts are put as alleged breaches of AIL's duties as Responsible Entity. A Responsible Entity's statutory duties are set out in s 601FC (including the duty to act in scheme members' interests: s 601FC(c)). An alleged breach of these duties does not found a contravention of Part 7.9, Division 2.

84 AIL submits that there is no evidence put forward to substantiate the allegation that there were actual conflicts of interest which, in turn, would have required disclosure pursuant to Part 7.9, Division 2.

85 AIL submits that these are not the type of theoretical risks that would be required to be disclosed to a retail investor.

86 I agree with the submissions made by AIL. In my opinion, there were no actual or potential conflicts which would have required disclosure pursuant to Part 7.9, Division 2 of the Corporations Act.

87 Accordingly, for the reasons given, there is no substance in the allegations that underpin the Notices so far as they related to part 7.9, Division 2 of the Corporations Act.

88 Paragraph (c) of the Notice addressed to ABL refers to the Loan Agreement and is in the following terms -

"(c) The Loan Agreement by clause 8.12 manages risk within the proper meaning of section 763A and 763C of the [Corporations Act] and is a financial product issued by ABL without possessing an AFS licence contrary to section 911A [Corporations Act].

89 In my opinion, this part of the Notice has no effect and should be set aside.

90 First, given the importance of the Notice and its far reaching effect and consequences, it should be clear and precise and contain sufficient particulars of the alleged contravention. The Notice does not do so. I refer to the analysis in paragraphs [99] - [104].

91 If I am wrong about the inadequate content and detail of the Notice, I consider this aspect of the Notice to be misconceived and it is not surprising that, despite being set out in the Notice, the matter was not adequately pleaded or argued.[10] The short answer is that the clause has nothing to do with the management of risk in the relevant sense and as a consequence, the sections referred to do not apply. The clause is headed 'Lender Capacity' and records, amongst other things, that ABL entered into the Loan Agreement as trustee of a trust.

92 So far as the other allegations in the Notice addressed to ABL are concerned, they are of no substances for the reasons given.

93 In view of the decision I have reached it is strictly not necessary to deal with this issue.

94 However, in the circumstances of this case, I do consider that service of the Notices was unjust.

95 A finding that service of a notice was unjust does not in any way disentitle the party serving the notice from raising and arguing the merits of the matters referred to in s601MB(1) as part of a proceeding where it is the plaintiff or defendant. Setting aside the notice usually relates to grounds not necessarily relating to the merits of the argument but rather the desirability of using the procedure contemplated by the section. However, in this case, the matter has been decided on its merits.

96 For the reasons given by AIL, I regard service of the Notices in the circumstances referred to, as unjust. The matters raised by Mr Emanouel should have been fully pleaded and dealt with as part of the Recovery Proceedings. There was no need to give the Notices. The Recovery Proceedings were on foot and a defence had been filed by Mr Emanouel at the time the Notices were given. To this extent, and where there was a proceeding on foot, that was clearly a convenient vehicle for the determination of the matters the subject of the Notices. Service of the Notices probably constitutes an abuse of process.[11]

97 It is the timing of the Notices, both in relation to the date of the original agreements and the Recovery Proceedings that makes service of them unjust.

98 Although I would have set the Notices aside on this ground alone, I have dealt with the Notices as a matter of substance.

99 It follows that it is not strictly necessary to deal with the content and adequacy of the Notices and their purported service. Nevertheless I should say that I have grave reservations about the efficacy and adequacy of the Notices so far as they contend that there was a failure to comply with Part 7.9, Division 2 of the Corporations Act. Given the importance and consequences of the Notices, sufficient particulars must be given. They were not in relation to this aspect.

100 Counsel for Mr Emanouel submitted that a notice need not be particularlised and that all that was required was a reference to Part 7.9, Division 7 of the Corporations Act. He relied on the text of the legislation and policy behind the legislation (a cheap and expedient consumer protection provision) and the decision of Drummond J in Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd[12] and Davies J in Re Willmott Forests Limited.[13] I am not persuaded by the submission.

101 The fact that the section does not specify what is required in terms of the content of the notice does not mean that a simple reference to a failure to comply with Division 2 of Part 7.9 is sufficient. It is this failure that renders a contract voidable. In my opinion, the failure must be identified at the very least in general terms. The notice should inform the party whose contract may become void of such failure so that the party receiving the notice can make an informed decision as to whether to set it aside within the 21 day period under s 601MB(4). The fact that on such application, the court considers whether it is just and equitable (s601MB(6)), does not affect the need and requirement that it identify the failure with sufficient precision.

102 The authorities referred to are not on point. In Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd[14], Drummond J decided that a notice given under the predecessor of s601MB, s1073(2) of the Corporations Law was invalid because it did not state that it was a notice under the prescribed section. His Honour stated that as a consequence, the respondents were unaware of the 21 day period within which they could apply to the Court to set aside the notice. This case is of no assistance in the present matter as each of the Notices specify that they are made pursuant to s 601MB of the Corporations Act. Re Willmott Forests Limited[15] relates to a summary judgment application where declarations were sought that the notice issued by the defendant under s 601MB was invalid. The issue before Davies J was whether the defendant was in fact a 'retail client' and consequently was required to have been provided with a PDS and hence entitled to use the notice procedure under s601MB. This case has no relevance to the current proceeding as there is no dispute that Mr Emamouel was a retail client.

103 In LSI Australia v LSI Holdings[16] Austin J, at [54] in the context of a statutory demand made the following, observation:

.."If the demand is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim, then there is a lack of something necessary for completeness, and therefore a defect in the demand..."

104 The similarity between notices given under s 601MB and a statutory demand under s459E is obvious. In both cases, it is open to the person or entity upon which the notice was served to challenge the validity of the notice and seek to have it set aside. It is obvious that such a right cannot be exercised if the notice does not adequately set out the allegations against the person or entity, be it the debt in the case of a statutory demand, or the alleged breaches of the Corporations Act under s601MB.

105 I propose to declare under section 601MB(4) of the Corporations Act that the Notices have no effect and should be set aside. I will also extend the time for making the application as sought by the Plaintiff in the Originating Process.

106 I will hear from the parties as to the appropriate form of order and costs.

I certify that this and the 23 preceding pages are a true copy of the reasons for Judgment of Sifris J of the Supreme Court of Victoria delivered on 12 September 2012.

[1] (2011) 85 ACSR 354.

[2] [2008] AATA 1068.

[3] Page 3 - "you are not required to obtain finance facilities to make an investment and can use your own funds or other loan funds". Page 28 - Finance is "optional" and will be based on "lending institutions normal commercial terms".

[4] It should be noted that on page 67 of the PDS there is also reference to "Grower Application" and "Orchard Asset Owner Application". The obvious intention was to include applicants or potential investors.

[5] Corporations Act 2001 (Cth) ss 1322(4)(a), 1322(6).

[6] See paragraph 7 of Amended Points of Defence.

[7] The appointment of an independent expert under clause 10 is critical.

[9] The investment was considered and stated to be a "long term investment" with "significant risks".

[10] Paragraphs 12 - 14 of Mr Emanouel's submissions of 23 June 2011 referred to this point.

[11] See for example Burbank Australia Pty Ltd v Luzinat [2000] VSC 128; Lifese Pty Limited v Lee Crane Hire Pty Limited [2012] FCA 302.

[13] [2011] VSC 348.

[15] [2011] VSC 348.

[16] [2007] NSWSC 1406.