ASIC v A.B.C. Fund Managers Ltd

ASIC v A.B.C. Fund Managers Ltd - [2001] VSC 383 - VSC 2001 case summary — Zoe

[77]

Coghlan gave evidence that where investment contributions or loan funds were paid to another party at the direction of ABC FM as fund manager, Allied Securities as lender or Charter and Tax or Tye Nominees or ABC IM as the trustees of the relevant funds he would expect to see appropriate documentation. He said that he would expect to see documentation directing payment to the nominated party and bank statements in the name of the third party showing receipt of the investment contribution or loan funds. Coghlan said that the same practice would apply to funds received by the company acting as treasurer or cash box. Coghlan said that he would have expected to find accounting treatment for the sums paid to and by the treasury company as funds were passed from Allied Securities to the treasury company by ABC FM. He also said that he would have expected to see accounts for the work performed by the fund managers, trustees and Wharton Partners with respect to the unit trust funds and Allied Securities transactions. Furthermore, Coghlan was of the view that he expected to find accounting documentation and calculations to establish the increase in value of the units in each of the trusts. Furthermore, it was his evidence that every transaction, both the receipt and the payment of loans or investments funds, should have been entered into a cash book setting out the date of the transaction, the entity from whom the money was received, the particular fund to which the transaction related and details or the nature of the transaction. Coghlan gave evidence that each deposit should have been recorded in the general ledger of the particular entity. It was his view that such ledgers should have been maintained in complete and accurate form and in accordance with the cash book and bank statement deposits. It was the view of Coghlan that such accounting treatment would have applied to the rollover transactions. He considered that there should have been back up or original documentation to support the bank deposits, cash book entries and other accounting entries.

[105]

In the s.19 examination Wharton made a number of important admissions. He admitted that ABC FM had not lodged returns with ASIC for some time. He was uncertain whether accounts for each year for ABC IM had been prepared. He was similarly uncertain with respect to the accounts of Allied Securities. Wharton admitted during the s.19 examination that it was the business of ABC FM to manage a number of trusts for which it received management and advisory fees; he admitted, also, that Allied Securities was a lender of funds. Wharton admitted that he was aware that as of 1 July 1998 there were obligations consequential upon the changes made to managed investment schemes. With respect to the No Load Resource Trust and the No Load Fixed Interest Trust, during the s.19 examination Wharton admitted that none of Wharton Partners, ABC FM or any of its associated entities had any documents relating to those two trusts. He admitted that there were no loan agreements with respect to funds loaned to the No Load Resources Trust and the No Load Fixed Interest Trust. He admitted that no records were available with respect to deposits held by those trusts. During the s.19 examination Wharton was unable to explain why there were no records disclosing the investments relating to the two trusts and, further, he was uncertain as to whether there were any records containing the investment returns of those particular trusts. In addition, during the s.19 examination Wharton was uncertain as to whether investment registers were maintained for the MEG Trusts or the No Load Trusts. He admitted that there was no register of unit holders maintained for the ABC IG 1-9 trusts. He further admitted that there were no meetings of unit holders convened and that no financial statements, balance sheets or annual reports had been prepared. He admitted that no bank account had been opened for ABC IG, that it had not sought registration as a managed investment scheme and that no investment register or asset register was kept for that particular trust. In addition, Wharton was uncertain as to how various investors were allocated or divided between the various trust deeds.

[109]

Following an order by the court[7] Wharton was not required to file a witness statement in advance of the commencement of the trial. He was called for the defendants. He gave evidence-in-chief with respect to the corporate structure and the related trust structure of the defendants on a general basis. In general terms Wharton did not demur from the description of the round robin of the transaction described in the evidence of Broder and as set out in these reasons earlier. In cross-examination Wharton made a number of important admissions. He admitted that balance sheets and profit and loss statements had not been prepared for Allied Securities, ABC IM, Tye Nominees or Lingus. He was uncertain as to whether balance sheets and profit and loss statements had been kept for ABC FM. Wharton said in cross-examination that he was aware that Lingus was the trustee of a number of trusts but he was unable to identify those trusts. He was also unable to identify the trusts of which ABC FM was trustee. I considered that generally the evidence of Wharton was very vague about the corporate structure and commensurate trustee structure. I found Wharton to be an unreliable and evasive witness. Whilst the evidence given by Wharton essentially admitted the round robin transactions engaged in by the defendants, when asked for the finer details of those transactions Wharton claimed privilege. In the course of the initial cross-examination of Wharton he was requested to produce documents relating to the various entities. After an overnight adjournment he produced some documents of ABC FM consisting of a "set of financial statements" for the years 1995, 1996, 1997 and 1998. He produced, also, limited financial documents relating to Tye Nominees and Allied Securities. All these documents were incomplete and unsatisfactory in terms of the record keeping requirements of the Act. Notwithstanding the production of these documents it was apparent that the general financial record keeping with respect to the defendants and the related trusts was most unsatisfactory. There were persistent breaches throughout of the financial record keeping requirements of the Corporations Act previously adverted to.

[131]

Furthermore, loans or investments were purportedly made between the trustees of the 22 trusts and also between the trustees to Allied Securities. . The loans to Allied Securities by the "No Load Resources Trust" and the "No Load Fixed Interest Trust" totalled over $100,000,000. Each loan was apparently made pursuant to an oral agreement. Notwithstanding the evidence of Broder in relation to the apparent oral agreements no loan documents were produced for any of these loans. No re-payments of principal or interest had been made to the trusts by Allied Securities. Wharton in his evidence claimed that the "No Load Resources Trust" and the "No Load Fixed Interest Trust" were creditors of Allied Securities. However, he was unable to say when the trusts would ultimately be paid or, indeed, whether Allied Securities could pay the debt, the total interest accrued on the debt or whether Allied Securities was trading whilst insolvent. Furthermore, there was an unexplained inconsistency between the evidence that the loans were made to Allied Securities by the two "No Load" trusts and a statement by Gillies in his s.19 examination and in correspondence with ASIC that the "No Load Resources Trust" was consolidated into one of three trusts, that all units in the particular trusts were redeemed and that the trust was closed. Wharton said that the correspondence from Gillies to ASIC was written in response to a request by ASIC to ABC FM for information about what had transpired with respect to the "No Load" trusts. Ultimately, after caution from the Court, Wharton refused to answer questions regarding the correspondence or explain it on the grounds that it would incriminate him. In addition, the nature of the transactions between Allied Securities and the various trusts in 1998 were concealed from immediate discovery by the lack of documentary records summarising the transactions. So much was the evidence of Coughlan on behalf of ASIC. Again the evidence was not challenged or the subject of any rebuttal.

[171]

More recently, in ASIC v Chase Capital Management Pty Ltd [2001] WASC 27; (2001) 19 ACLC 476 Owen J was directly concerned with an application by the Commission to wind up managed investment schemes and the operating companies. One of the primary issues to be determined by the court was whether the relevant investments arrangements constituted "managed investment schemes" under the Corporations Law and whether the companies had operated or promoted the schemes in contravention of the Law. In that case the relevant respondent companies were registered in the Turks and Caicos Islands and neither was registered as a foreign company in Australia. One of those respondent companies was the trustee of a unit trust. The various respondents had a connection with a series of syndicated investments and moneys were obtained from various investors, pooled together and invested in turn in securities. The securities were not registered as managed investment schemes. The respondents contended that the schemes were not managed investment schemes for the purposes of the Corporations Law and, therefore, did not require registration. After considering the terms of ss.9 and 601ED of the Corporations Law and the relevant authorities,[9] Owen J held that there was consideration for the acquisition of rights or benefits in the scheme and the generation and earning of profits from the investment and the distribution of those profits to the investor and a delegation of management of the investment to the respondent company and, accordingly, the particular schemes were managed investment schemes. Having so found, Owen J in Chase Capital Management turned to consider whether the schemes and the company should be wound up. After considering the relevant authorities[10] Owen J in Chase Capital Management (at 488) concluded that there was a serious issue as to the conduct of the investments such as to warrant intervention, in particular as to whether information given to members of the investment was misleading and deceptive. The learned judge considered, also, that in light of continuing breaches of s.601ED of the Law, namely, the continued operation of an unregistered scheme, it was appropriate that the relevant companies be wound up and a liquidator be appointed. Further, Owen J held (at 491) that having decided that the investment scheme should be wound up the case for the company to be wound up became "compelling". The learned judge observed (at 491):

[175]

In ASIC v Austral Timber Pty Ltd & Anor (1999) 17 ACLC 1679, Byrne J of this court considered an application by the Commission for the winding up of a company on the just and equitable ground where the company was involved in a taxation minimisation scheme. ASIC described the relevant scheme as a fraud on the Australian Taxation Office and, furthermore, urged that the scheme was a sham since there was no effective money available. Ultimately Byrne J (at 1,686[27]) concluded that the relevant scheme was part of a sham entered into to defraud the Australian Taxation Office. In my view if the circumstances of a particular matter are sufficiently serious such as defrauding the Australian Taxation Office as occurred in Austral Timber it is entirely appropriate for the court to conclude that a transaction or arrangement is a "sham". I am satisfied for the present purposes that the arrangement entered into by the defendants with respect to the 22 schemes was similarly a "sham" in that it was entered into in order to defraud the Australian Taxation Office. It is entirely appropriate, therefore, to describe the whole transaction as a sham. Indeed, the nature of "sham" transactions have been considered by the courts on a number of occasions and the courts have not hesitated to find that the particular arrangement is a "sham" where it lies at the heart of the particular case: see Sharrment Pty Ltd and Ors v Official Trustee in Bankruptcy [1988] FCA 179; (1988) 18 FCR 449, 453; Scott v Commissioner of Taxation (No. 2) (1966) 40 ALJR 265, 279. Indeed, in Sharrment Pty Ltd the Full Court of the Federal Court considered an elaborate series of transactions that the official trustee in bankruptcy alleged constituted a "sham" for the purposes of avoiding the consequences of bankruptcy. Lockhart J held that an inference of a sham could not be drawn on the facts. Beaumont J for different reasons related to the facts held that the transactions were not a sham. Foster J, essentially adopting the judgments of Lockhart and Beaumont JJ held that the transactions could not be properly characterised as a sham. Usefully, Lockhart J after considering the authorities (at 453-454) defined a sham in the following terms:

At a glance

Court

Decision date

Before

Source

Judgment (218 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (9)